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https://www.courtlistener.com/api/rest/v3/opinions/8501500/ | The Dietrich Law Firm (the "Firm") filed and served its First Application for Award of Attorney Fees (ECF No. 51, the "Fee Application") seeking $4.50 for legal services (beyond the $3,200.00 "no-look fee" approved at confirmation), and expenses in the amount of $120.84, for a total award of $125.34. Although no interested party filed an objection, an independent evaluation, coupled with a dollop of common sense, requires the court to deny the Fee Application. In re Copeland , 154 B.R. 693, 698 (Bankr. W.D. Mich. 1993) (explaining that because creditors have very little incentive to object to fee petitions the courts must be vigilant).
Filing a fee application that seeks an award of only $4.50 for services rendered (plus incidental expenses) strikes the court as premature and inefficient at best, and unprofessional at worst, given the transaction costs incurred by counsel, and imposed on the chapter 13 trustee and the court in reviewing any application. Here, the Fee Application includes $120.00 in paralegal and attorney time for preparing it, plus $23.22 for postage and copying associated with the filing.
Under the Code and local procedures, the court may award a reasonable fee for preparing the fee application,1 but when the cost of filing the request exceeds the request itself by more than 25 times, the preparation time is obviously unreasonable and there is no possible "benefit and necessity to the debtor." 11 U.S.C. § 330(a)(4)(B) (statutory prerequisite to *198chapter 13 fee award) and (a)(6) (contemplating cost of preparing fee application). Under circumstances, the only beneficiary of the services (beyond the no-look fee) is the Firm itself.
The rules, including Fed. R. Bankr. P. 2016 and LBR 2016-2(e), are to be construed and administered to secure the just, speedy and inexpensive resolution of all issues, see Fed. R. Bankr. P. 1001, and the same must be said for applicable statutes given the nature of bankruptcy proceedings. Filing a fee application that seeks approval of $4.50 in fees and $120.84 in expenses-at a cost of $143.22-contravenes the statute and the spirt of the rules. The fact that counsel filed the Fee Application under these circumstances is shocking; that no one objected, disappointing, but not surprising; and that the court will deny it, completely foreseeable.
NOW, THEREFORE, IT IS HEREBY ORDERED that the Fee Application (ECF No. 51) is DENIED and the Firm shall not in the future seek to recover the fees and expenses incurred in preparing and filing it.
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Memorandum of Decision and Order pursuant to Fed. R. Bankr. P. 9022 and LBR 5005-4 upon Michael Patrick Arens and Dena Marie Arens, Robert W. Dietrich, Esq., Barbara P. Foley, Esq., chapter 13 trustee, and the United States Trustee (by First Class U.S. Mail).
IT IS SO ORDERED.
See 11 U.S.C. § 330(a)(6) ; Memorandum Regarding Allowance of Compensation and Reimbursement of Expenses of Court Appointed Professionals (Oct. 1, 2013) at ¶ 11 (Exh. 5 to Local Bankruptcy Rules). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501501/ | Janet S. Baer, United States Bankruptcy Judge
Plaintiff City of Chicago (the "City") filed a two-count amended adversary complaint against debtor-defendant Ronald Spielman ("Spielman"), seeking a determination that a judgment debt owed to it by Spielman is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(7).1 The matter is now before the Court on the City's motion for summary judgment on both counts of the complaint. For the reasons set forth below, the Court finds that there are no genuine issues of material fact and that the City is entitled to judgment as a matter of law on both counts of the complaint. As such, the City's motion for summary judgment will be granted.
JURISDICTION
The Court has jurisdiction to determine the interests of the parties in this matter. That jurisdiction is conferred by 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States *202District Court for the Northern District of Illinois. The matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
BACKGROUND
The material facts in this case are gleaned from the docket, the pleadings, and the summary judgment statements and response, as well as the exhibits attached thereto. Many such facts are derived from the City's statement of facts in support of its motion ("PSOF") and have been admitted by Spielman in his response. Other facts come from Spielman's statement of additional facts ("DSOF") and are deemed admitted because the City failed to file a statement controverting those facts pursuant to Local Rule 7056-1(C).2
Spielman is the sole member and manager of Sound Solutions Windows & Doors, Inc. ("Sound Solutions"), which operated from January 2006 through June 2014. (DSOF ¶ 24.) On November 4, 2009, a qui tam relator3 filed a complaint4 in the U.S. District Court for the Northern District of Illinois (the "District Court") against Spielman, Sound Solutions, and others, alleging violations of the federal False Claims Act, 31 U.S.C. § 3720 et seq., and the City's False Claims Ordinance, Municipal Code of Chicago ("MCC") chapter 1-22. (PSOF ¶¶ 1 & 2.) The claims were based on contracts that Sound Solutions and the City executed in connection with work that Sound Solutions performed at O'Hare and Midway Airports in Chicago. (DSOF ¶ 27.) The contracts required Sound Solutions to comply with the City's construction programs aimed at benefitting minority- and women-owned businesses. (Id. ¶ 28.) According to the complaint, Spielman conspired to defraud the City through the submission of false claims for work purportedly performed by minority-owned businesses, when the work was, in fact, not performed by such businesses. (PSOF, Ex. A.)
The District Court complaint was unsealed on January 7, 2013 and thereafter served on Spielman on February 11, 2013. (Id. ¶ 3.) Spielman subsequently appeared by counsel in the District Court on February 13, 2013. (Id. ) During the litigation, Spielman and Sound Solutions engaged in settlement negotiations with the City until July 2014. (DSOF ¶ 35.) At no time did Spielman file an answer to the complaint, and, on September 9, 2014, nearly eighteen months after he was served with the complaint, Spielman was declared to be in default. (PSOF ¶ 5.) The District Court found that there was no good cause for Spielman's failure to file an answer. (Id. , Ex. B.)
On April 17, 2015, the City filed a motion for default judgment against Spielman and Sound Solutions. (DSOF ¶ 47.) That motion was granted as to Spielman on April 27, 2015; however, the amount of the judgment was not determined at that time. (PSOF ¶ 6.) The District Court docket reflects that Spielman requested a prove-up hearing in order to contest the amount of the default judgment. (N.D. Ill. Case 09-CV-06948 ("District Court Case"), Dkt. No. 108.) A prove-up hearing was thereafter scheduled for May 22, 2015. (PSOF ¶ 6.) Three days before the hearing, on May 19, 2015, Spielman filed his chapter 7 bankruptcy petition, which stayed the proceedings in the District Court. (Id. ¶¶ 6 & 7.)
On December 16, 2015, this Court entered an order modifying the stay which permitted the proceedings to resume in the District Court. Once the stay modification order became effective, Spielman filed a motion seeking vacation of the default judgment in the District Court and leave to file an answer. (DSOF ¶ 54.) After the motion was fully briefed, it was denied on April 18, 2016. (Id. ; PSOF ¶ 10.) In its order denying the motion, the District Court noted that Spielman had not presented a meritorious defense to the claims asserted against him. (PSOF, Ex. B.) Spielman later filed a motion to reconsider, which was also denied. (District Court Case, Dkt. Nos. 138 & 145.) On May 3, 2016, the City moved for entry of a final default judgment against Spielman in the amount of $13,554,832. (PSOF ¶ 11.) Spielman filed a response to the City's motion, and the City filed a reply. (District Court Case, Dkt. Nos. 149 & 152; PSOF ¶ 12.) The District Court referred the matter to a magistrate judge for a recommendation. (PSOF ¶ 12.)
On May 11, 2017, the magistrate judge issued a Report and Recommendation, which recommended that the City's motion for default judgment be entered against Spielman and ascertained the amount of damages. (Id. ¶ 14 & Ex. C.) The report shows that the magistrate judge considered the arguments of both parties before *203reaching a final decision. (Id. , Ex. C.) On December 18, 2017, the District Court issued an opinion and order adopting the magistrate judge's recommendation, over Spielman's objection, and entered judgment against Spielman in the amount of $13,554,508.01. (Id. ¶ 15 & Ex. D.) Spielman did not appeal the final order. (Id. ¶ 16.)
The District Court's opinion awarded damages as follows:
1) the City's actual damages resulting from the contracts between the City and Sound Solutions, in the amount of $4,454,836;
2) the City's treble damages pursuant to the False Claims Act and MCC § 1-22-020, less the amount representing actual damages, in the amount of $8,909,672; and
3) civil penalties pursuant to MCC § 1-22-020, in the amount of $190,000.
(Id. at Ex. D, pp. 10-11.) In this adversary proceeding, the City seeks a determination that the judgment award is nondischargeable pursuant to §§ 523(a)(2)(A) and (a)(7).
SUMMARY JUDGMENT
Summary judgment is appropriate when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a) (made applicable to adversary proceedings by Fed. R. Bankr. P. 7056 ). The primary purpose of the summary judgment procedure is to avoid unnecessary trials where no material facts are in dispute. See Trautvetter v. Quick , 916 F.2d 1140, 1147 (7th Cir. 1990) ; Farries v. Stanadyne/Chi. Div. , 832 F.2d 374, 378 (7th Cir. 1987) (quoting Wainwright Bank & Trust Co. v. Railroadmens Fed. Sav. & Loan Ass'n of Indianapolis , 806 F.2d 146, 149 (7th Cir. 1986) ). Thus, on a motion for summary judgment, the court must decide, based on the evidence, whether there is a material disputed fact that requires a trial. Kodish v. Oakbrook Terrace Fire Prot. Dist. , 604 F.3d 490, 507 (7th Cir. 2010) ; Payne v. Pauley , 337 F.3d 767, 770 (7th Cir. 2003). A genuine issue of material fact exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Where the material facts are not in dispute, the only issue is whether the moving party is entitled to judgment as a matter of law. ANR Advance Transp. Co. v. Int'l Bhd. of Teamsters, Local 710 , 153 F.3d 774, 777 (7th Cir. 1998).
The party seeking summary judgment always bears the burden of establishing that there are no genuine issues of material fact in dispute. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In determining whether the movant has met its burden, the Court must view all reasonable inferences drawn from the underlying facts in a light most favorable to the nonmoving party. Anderson , 477 U.S. at 261 n.2, 106 S.Ct. 2505 ; Smeigh v. Johns Manville, Inc. , 643 F.3d 554, 560 (7th Cir. 2011). Once the moving party satisfies its initial burden of production, the party opposing the motion may not rest on the mere allegations or denials in his pleadings; rather, his response must set forth specific facts showing that there is a genuine issue for trial. See Celotex , 477 U.S. at 324, 106 S.Ct. 2548 ; Anderson , 477 U.S. at 248, 106 S.Ct. 2505 ; Outlaw v. Newkirk , 259 F.3d 833, 837 (7th Cir. 2001).
A review of the documents filed by the parties in connection with the City's motion for summary judgment reveals that there are no material facts in dispute. Thus, the only question to be considered is whether the City is entitled to judgment as a matter of law.
*204DISCUSSION
In its complaint, the City seeks a determination that the debt owed to it by Spielman is nondischargeable pursuant to §§ 523(a)(2)(A) and (a)(7). These subsections provide specific exceptions to the dischargeability of debts. Exceptions to discharge must be construed strictly against a plaintiff and liberally in favor of the debtor. Stamat v. Neary , 635 F.3d 974, 979 (7th Cir. 2011). " Section 523(a) is to be narrowly construed so as not to undermine the Code's purpose of giving the honest but unfortunate debtor a fresh start." Shriners Hosp. for Children v. Bauman (In re Bauman) , 461 B.R. 34, 44 (Bankr. N.D. Ill. 2011) (internal quotations omitted). As the party seeking to establish an exception to discharge, the City bears the burden of proof on its claims by a preponderance of the evidence. Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; In re Bero , 110 F.3d 462, 465 (7th Cir. 1997).
A. Dischargeability Under § 523(a)(2)(A)
The City contends that it is entitled to judgment as a matter of law under § 523(a)(2)(A). This section excepts from discharge any debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]" 11 U.S.C. § 523(a)(2)(A). Three separate grounds for nondischargeability are included under § 523(a)(2)(A) : false pretenses, false representation, and actual fraud.
The City argues that the first portion of the judgment award representing its actual damages is nondischargeable under § 523(a)(2)(A) because Spielman defrauded the City in connection with the construction contracts. Accordingly, the City contends, it is entitled to judgment as a matter of law on Count I of the adversary complaint through the application of collateral estoppel. Because the District Court entered a default judgment on the City's claims that Spielman submitted false and fraudulent claims, the City argues that Spielman is estopped from relitigating the elements of fraud in this Court.
Bankruptcy courts ordinarily make independent decisions as to whether debts are nondischargeable under the provisions of § 523(a). See Meyer v. Rigdon , 36 F.3d 1375, 1378 (7th Cir. 1994). It is well-established, however, that the doctrine of collateral estoppel applies in bankruptcy discharge exception proceedings. Grogan , 498 U.S. at 284 n.11, 111 S.Ct. 654 ; Klingman v. Levinson , 831 F.2d 1292, 1294-95 (7th Cir. 1987). Accordingly, "if a court of competent jurisdiction has previously entered judgment against [a] debtor," collateral estoppel may bar the debtor from relitigating "the underlying facts in the bankruptcy court." Meyer , 36 F.3d at 1378. Indeed, a bankruptcy court can find that a debt is nondischargeable based solely on the evidence of the prior proceeding, as long as the judgment in that proceeding was obtained fairly, the defendant was accorded due process, the complaint and judgment order are unambiguous that the judgment debt is "of a non-dischargeable nature," and the record from the prior proceeding is before the bankruptcy court. U.S. Life Title Ins. Co. of N.Y. v. Wade (In re Wade ), 26 B.R. 477, 481 (Bankr. N.D. Ill. 1983).
As a federal court rendered the judgment sought to be used against Spielman, federal principles of collateral estoppel govern. Heiser v. Woodruff , 327 U.S. 726, 732-33, 66 S.Ct. 853, 90 L.Ed. 970 (1946). In order for collateral estoppel to *205apply to this matter, the following elements must be satisfied:
(1) [T]he issue sought to be precluded must be the same as the one involved in the prior action; (2) the issue must have been actually litigated; (3) the determination of the issue must have been essential to the final judgment; and (4) the party against whom estoppel is invoked must be fully represented in the prior action.
Herbstein v. Bruetman , 266 B.R. 676, 683 (N.D. Ill. 2001), aff'd , 32 F. App'x 158 (7th Cir. 2002) (citing Adair v. Sherman , 230 F.3d 890, 893 (7th Cir. 2000) ). Spielman concedes the first and third elements, that the same issue of fraud was involved in the District Court litigation and that the determination of fraud was essential to the District Court's final judgment. He disputes only the second and fourth elements.
As to the fourth element-that the party against whom collateral estoppel is invoked be represented in the prior action-Spielman argues that the counsel he hired to represent him in the District Court case was deficient and did not properly represent him in the litigation. To support his argument, Spielman cites to Choice Hotels Int'l, Inc. v. Grover , 792 F.3d 753, 754-56 (7th Cir. 2015), a Seventh Circuit decision which held that a client is bound to the acts of his attorney and affirmed the district court's denial of the client's motion for relief from judgment. Without citing any authority, Spielman attempts to distinguish this precedential rule by arguing that a different standard should apply in determining whether a default judgment arising from attorney negligence should be given preclusive effect.
In setting forth his arguments, Spielman misunderstands what it means to be "fully represented" in the prior action. This element of collateral estoppel comes into play when a party seeks to enforce a prior judgment against a person who was not a party to the prior litigation. See Taylor v. Sturgell , 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008). In such circumstances, the "adequately represented" exception can be applied to allow a party to enforce a judgment against a non-party whose interests were adequately represented in the prior action. Id. at 894-95, 128 S.Ct. 2161 ; Dexia Credit Local v. Rogan , 629 F.3d 612, 629 (7th Cir. 2010). Spielman, however, was a party to the District Court litigation and thus had a "full and fair opportunity to litigate the issues in that suit." Dexia Credit Local , 629 F.3d at 629. For purposes of the fourth element of collateral estoppel, Spielman was fully represented in the prior action.
As for the second element, Spielman argues that the issue sought to be precluded was not "actually litigated" in the prior suit because the District Court's judgment was a default judgment.5 Accordingly, Spielman says, collateral estoppel is not applicable to this matter.
It is true that, as a general rule, default judgments are not given preclusive effect. Arizona v. California , 530 U.S. 392, 414, 120 S.Ct. 2304, 147 L.Ed.2d 374 (2000). This is because, in most cases in which a default judgment is rendered, the issues have not been actually litigated. Id. In such cases, "a party may decide that the amount at stake does not justify the expense and vexation of putting up a fight." Bush v. Balfour Beatty Bah., Ltd. (In re Bush ), 62 F.3d 1319, 1324 (11th Cir. 1995) (internal quotations omitted).
Although it acknowledges that, ordinarily, default judgments are not entitled *206to preclusive effect, the City points to a burgeoning exception to this rule. Specifically, the City cites to several federal circuit and district court cases which have concluded that a default judgment may be used against a party with preclusive effect when the party actively participated in the prior litigation. Cornwell v. Loesch (In re Cornwell ), 109 F. App'x 682, 684 (5th Cir. 2004) ; Wolstein v. Docteroff (In re Docteroff ), 133 F.3d 210, 215 (3d Cir. 1997) ; Fed. Deposit Ins. Corp. v. Daily (In re Daily ), 47 F.3d 365, 368-69 (9th Cir. 1995) ; Bush , 62 F.3d at 1323-25 ; Seibert v. Cedar Rapids Lodge & Suites, LLC , 583 B.R. 214, 222-23 (D. Minn. 2018) ; Herbstein , 266 B.R. at 683-85 ; Claybar v. Huffman (In re Huffman ), Ch. 7 Case No. 16-10344, Adv. No. 16-1009, 2017 WL 4621703, at *7 (Bankr. E.D. Tex. Oct. 13, 2017) ; Int'l Strategies Grp., Ltd. v. Pomeroy (In re Pomeroy ), 353 B.R. 371, 377-83 (Bankr. D. Mass. 2006). These courts have recognized the exception as such: "[I]f a party substantially participates in litigation prior to the entry of a default judgment, a federal court can apply collateral estoppel and prevent that party from relitigating the issues decided by the judgment." Pomeroy , 353 B.R. at 377.
In Daily , the Ninth Circuit considered the prior litigation in which the party "did not simply give up but actively participated in the adversary process for almost two years" before a default judgment was entered. 47 F.3d at 366-68. The court held that the default judgment could preclude relitigation of the issues because the "actually litigated" requirement is satisfied when "the party is afforded a reasonable opportunity to defend himself on the merits but chooses not to do so." Id. at 368. Similarly, in Herbstein , the court found that a debtor "participated extensively [but] then failed to comply with an express court order issued multiple times at a risk of incurring default." Herbstein , 266 B.R. at 685. The court held that the debtor could not "sidestep" the collateral estoppel issue due to his own decisions in the prior litigation. Id.
The Court accepts this well-settled exception to the default judgment rule. Thus, the Court must now determine whether Spielman participated to a sufficient degree in the District Court litigation to satisfy the "actually litigated" element and warrant the application of collateral estoppel.
Spielman was served the District Court complaint in February 2013, and two days later he retained counsel to represent him in that litigation. Although Spielman never filed an answer to the District Court complaint, his counsel continued to appear on his behalf and file motions to extend the time to answer. In April 2015, more than two years after Spielman was served with the complaint and appeared via counsel, the City moved for summary judgment. The District Court granted the motion, which was unopposed, but allowed Spielman a prove-up hearing to determine the amount owed. Before the hearing could be held, Spielman filed his chapter 7 petition. Once the District Court litigation resumed after this Court modified the automatic stay, Spielman participated extensively by filing a motion to vacate the default judgment, which was fully briefed and denied, and then another motion to reconsider the denial. When the City filed its final motion for default judgment, Spielman filed a response, the City a reply, and the motion was referred to a magistrate judge for consideration.
Based on the recommendation of the magistrate judge and the opinion of the District Court, the City's final motion for default judgment was considered on its merits. (PSOF, Exs. C & D.) In her Report and Recommendation, the magistrate judge clearly considered Spielman's arguments *207before ruling in the City's favor. This is not a situation in which Spielman did not have his day in court.
Based on the foregoing, the Court concludes that all elements of collateral estoppel have been satisfied. As such, Spielman is estopped from relitigating the fraud claims relating to the False Claims Ordinance which were previously decided by the District Court.
The Court further concludes that the facts presented demonstrate that all of the elements required for nondischargeability pursuant to the fraud prong of § 523(a)(2)(A) have been satisfied. Accordingly, the City's motion as to Count I will be granted under that statutory exception to discharge, and judgment will be entered declaring that damages in the amount of $4,454,836, which represent the actual damages suffered by the City, are nondischargeable.
B. Dischargeability Under § 523(a)(7)
Next, the City contends that it is entitled to judgment as a matter of law on Count II of the adversary complaint pursuant to § 523(a)(7). This provision excepts from discharge any debt "to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss[.]" 11 U.S.C. § 523(a)(7). See also In re Towers , 162 F.3d 952, 953 (7th Cir. 1998) (" § 523(a)(7) precludes discharge of fines, penalties, and forfeitures."). Section 523(a)(7)"creates a broad exception for all penal sanctions, whether they be denominated fines, penalties, or forfeitures. Congress included two qualifying phrases; the fines must be both 'to and for the benefit of a governmental unit,' and 'not compensation for actual pecuniary loss.' " Kelly v. Robinson , 479 U.S. 36, 51, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986) (quoting 11 U.S.C. § 523(a)(7) ).
The City argues that the second and third components of the judgment award, representing treble damages and civil penalties, are nondischargeable pursuant to § 523(a)(7). Spielman does not argue that these portions of the judgment are dischargeable; in fact, he argues merely that collateral estoppel does not apply to default judgments. As that argument addresses only Count I of the adversary complaint, Spielman has not mounted a defense as to Count II.
As an initial matter, in regard to both components of the judgment award that the City argues are nondischargeable pursuant to § 523(a)(7), the City is undoubtedly a "governmental unit" as that term is used in the Bankruptcy Code. In particular, the Code defines "governmental unit" as including a municipality. 11 U.S.C. § 101(27).
The third component of the judgment award represents $190,000 for civil penalties awarded by the District Court to the City for Spielman's violation of the False Claims Ordinance. MCC § 1-22-020(7); PSOF, Ex. C, p. 1 (adopted by the District Court, PSOF, Ex. D, p. 1). Such penalties are precisely the type of debt that is nondischargeable under § 523(a)(7). The penalties are unrelated to the City's "actual pecuniary loss"; rather, they are imposed by statute. Thus, there is no doubt that the civil penalties awarded by the District Court in the amount of $190,000 are nondischargeable. See also Winters v. United States (In re Winters ), Ch. 7 Case No. 03-40517-L, Adv. No. 04-00692, 2006 WL 3833921, at *6 (W.D. Tenn. Dec. 28, 2006), vacated due to death of debtor , 2007 WL 1149952 (Bankr. W.D. Tenn. Feb. 16, 2007) (holding that a civil penalty imposed by the False Claims Act was nondischargeable under § 523(a)(7) ).
The second component of the judgment award represents treble actual damages, less the amount representing actual damages. The District Court awarded treble damages pursuant to the False *208Claims Ordinance, adopting the magistrate judge's recommendation that "[t]he [federal] Act, and the City's Ordinance, authorize[ ] penalties of $5,000 to $10,000 per false claim plus three times the amount of actual damages sustained by the City."6 (PSOF, Ex. C, p. 4.) As the City argues, some courts that have addressed the issue have held that the treble damages imposed by the False Claims Act are nondischargeable under § 523(a)(7). See United States v. Custodio , No. CIV.A. 94-Z-2390, 1995 WL 670137, at *1 (D. Colo. Nov. 1, 1995) ; McFarland v.United States (In re McFarland ), 399 B.R. 549, 553 (Bankr. M.D. Fla. 2009) ; United States v. Cassidy (In re Cassidy ), 213 B.R. 673, 679 (Bankr. W.D. Ky. 1997). These courts have concluded that "[t]he treble damages imposed by [the False Claims Act] are penal in nature, as opposed to being compensation for actual pecuniary loss." Cassidy , 213 B.R. at 679.
Since the issuance of several of these decisions, the U.S. Supreme Court has provided additional guidance as to the dischargeability of treble damages in fraud cases. Cohen v. de la Cruz , 523 U.S. 213, 218, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). In Cohen , the Court held that "[t]he most straightforward reading of § 523(a)(2)(A) is that it prevents discharge of 'any debt' respecting 'money, property, services, or ... credit' that the debtor has fraudulently obtained, including treble damages assessed on account of the fraud ." Id. (emphasis added) (citing Field v. Mans , 516 U.S. 59, 61, 64, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ). Cohen suggests that the damages trebled pursuant to the False Claims Ordinance are more appropriately found nondischargeable under § 523(a)(2)(A), rather than § 523(a)(7).
The court in Winters reached the same result based on both the Cohen decision and the statutory language. Winters , 2006 WL 3833921, at *6-7. The Winters court noted that "treble damages [are] distinguished from, and [are] not, a civil penalty." Id. at *7. Looking at the statutory language, the MCC dictates that when a party is found to have committed fraud, he is "liable to the city for a civil penalty ... plus three times the amount of damages which the city sustains because of the act of that person." MCC 1-22-020(7) (emphasis added). The plain language of the statute separates the civil penalty portion of the award from the treble damages portion, which indicates that, under the statute, treble damages are not considered a penalty.
Additionally, in its opinion, the magistrate judge cited to Morse Diesel Int'l, Inc. v. United States , 79 Fed.Cl. 116, 125 (2007), which examines the legislative history of the False Claims Act and the division of the civil penalties and treble damages awards. (PSOF, Ex. C, p. 4.) The Morse Diesel court recognized that "the civil penalty component and separate damage component of the False Claims Act were meant to provide for restitution to the government of money taken from it by fraud, and that the device of [treble] damages ... plus a specific sum was chosen to make sure that the government would be made completely whole." 79 Fed.Cl. at 125 (internal quotation omitted) (citing United States ex rel. Marcus v. Hess , 317 U.S. 537, 551, 63 S.Ct. 379, 87 L.Ed. 443 (1943) ). "While it is true that the treble damage provision of the [False Claims Act] is intended to punish, this does not, however, *209transform an award of punitive damages into a civil penalty for purposes of section 523(a)(7)." Winters , 2006 WL 3833921, at *7.
Although the City argues in Count II that both the treble damages and civil penalties are nondischargeable under § 523(a)(7), the Court concludes that the treble damages are more appropriately found to be nondischargeable under § 523(a)(2)(A) in connection with the fraud claim in Count I. Therefore, Count I of the City's motion will be granted as to actual damages in the amount of $4,454,836, as discussed above, and as to treble damages in the amount of $8,909,672; Count II of the City's motion will be granted as to the civil penalties in the amount of $190,000.
CONCLUSION
For the foregoing reasons, the Court finds that, as a matter of law, the debt at issue is excepted from discharge pursuant to §§ 523(a)(2)(A) and (a)(7). Accordingly, the City's motion for summary judgment will be granted on both counts. A separate order will be entered consistent with this Memorandum Opinion.
Unless otherwise noted, all statutory and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101 to 1532, and the Federal Rules of Bankruptcy Procedure.
Local Rule 7056-1(C) provides, in relevant part, as follows: "All additional material facts set forth in the opposing party's statement filed under section A(2)(b) of Rule 7056-2 will be deemed admitted unless controverted by a statement of the moving party filed in reply."
"[T]he False Claims Act (FCA) is the most frequently used of a handful of extant laws creating a form of civil action known as qui tam .... [A] private person (the relator) may bring a qui tam civil action 'for the person and for the United States Government' against the alleged false claimant, 'in the name of the Government.' " Vt. Agency of Nat. Res. v. United States ex rel. Stevens , 529 U.S. 765, 768-69, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000) (citing 31 U.S.C. § 3730(b)(1) ).
Plaintiffs in the prior litigation included the United States of America ex rel. Chicago Regional Council of Carpenters, the State of Illinois, the United Brotherhood of Carpenters and Joiners of America, and later, upon intervention, the City of Chicago. (PSOF ¶ 4 & Ex. A.)
The general rule regarding default judgments is the only argument that Spielman sets forth in defense of Count I of the adversary complaint.
The magistrate judge applied the MCC False Claims Ordinance in her opinion: "The parties agree that the Chicago False Claims Ordinance is modeled upon, and provides the same manner of relief[ ] as[,] the federal False Claims Act .... Thus, case law interpreting the Act may be used to interpret the Chicago False Claims Ordinance." (PSOF, Ex. C, p. 4; see also PSOF, Ex. D, pp. 2-3.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501502/ | TIMOTHY A. BARNES, Judge
This matter comes before the court on the Creditor's First Amended Complaint for Determination of Dischargeability and Objecting to Debtor's Discharge Pursuant to Section 727 of the Bankruptcy Code [Adv. Dkt. No. 12] (the "Complaint") filed by Hector Vallecillos (the "Plaintiff") in the above-captioned adversary proceeding (the "Adversary"). Despite the title of the Complaint, the Complaint seeks only the denial of the discharge of Adan Salgado (the "Debtor") under section 727 of title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code").
Each of the two counts of the Complaint is promulgated under section 727(a)(4)(A) of the Bankruptcy Code, the provision regarding false oaths or accounts. Count I alleges that the Debtor misrepresented under oath his previous ownership of three pieces of real property. Count II alleges that the Debtor made false statements under oath regarding his possession of tools and employment status.
The matter was tried before the court in a two-day trial that began on July 17, 2018 and concluded on July 18, 2018 (the "Trial"). Having considered all the evidence and arguments and for the reasons set forth herein, the court finds that the Plaintiff fails to satisfy the statutory requirements of Count II. The Plaintiff has, however, carried his burden with respect to Count I. Accordingly, the Debtor's discharge will be denied.
JURISDICTION
The federal district courts have "original and exclusive jurisdiction" of all cases under the Bankruptcy Code. 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy *213judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 23 U.S.C. §§ 157(b)(1), (c). Instead, the bankruptcy court must "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." 28 U.S.C. § 157(c)(1).
In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or where the matter is either one that falls within the public rights exception, id. at 493, 131 S.Ct. 2594, or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g. , Wellness Int'l Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").
An adversary proceeding to deny the debtor's discharge may only arise in a case under the Bankruptcy Code and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J). Kontrick v. Ryan , 540 U.S. 443, 452, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) ; Steege v. Johnsson (In re Johnsson ), 551 B.R. 384, 389 (Bankr. N.D. Ill. 2016) (Barnes, J.) (" Section 727 is unequivocally a bankruptcy cause of action."). The matter is therefore core and within the court's jurisdiction, as each of the parties agree. See Compl., at ¶¶ 6, 7; Debtor's Answer to Creditor's First Amended Complaint [Adv. Dkt. No. 40] (the "Answer"), at ¶¶ 6, 7. In light of these admissions and as neither party has raised a challenge to the court's constitutional authority, the court concludes that it either has constitutional authority directly or through the parties' consent.
Accordingly, the court has the jurisdiction, statutory authority and the constitutional authority to hear and determine this Adversary.
PROCEDURAL HISTORY
In considering the relief sought by the Plaintiff, the court has considered the evidence and arguments presented by the parties at the Trial, has reviewed the Complaint, the attached exhibits submitted in conjunction therewith, and has reviewed and found each of the following of particular relevance:
(1) Answer;
(2) Plaintiff-Creditor's Answer to Defendant-Debtor's Affirmative Defenses [Adv. Dkt. No. 43];
*214(3) Order Granting and Denying Plaintiff-Creditor's Motion for Summary Judgment [Adv. Dkt. No. 78];
(4) Order Granting and Denying Debtor/Defendant's Motion for Summary Judgment [Adv. Dkt. No. 79] (together with Adv. Dkt. No. 78, the "Partial Summary Judgment Orders");
(5) Final Pretrial Order Governing Creditor's Complaint for Determination of Dischargeability and Objecting to Debtor's Discharge Pursuant to Section 727 of the Bankruptcy Code [Adv. Dkt. No. 112] (the "Final Pretrial Order");
(6) Joint Pretrial Memorandum [Adv. Dkt. No. 125] (the "Pretrial Statement"); and
(7) Stipulations [Adv. Dkt. No. 126] (the "Stipulations").
The court has also taken into consideration any and all exhibits submitted in conjunction with the foregoing. Though these items do not constitute an exhaustive list of the filings in the Adversary, the court has taken judicial notice of the contents of the docket in this matter and in the underlying bankruptcy case, In re Adan Salgado , Case No. 15bk33812 (Bankr. N.D. Ill. filed Oct. 10, 2015) (Barnes, J.). See Levine v. Egidi , Case No. 93C188, 1993 WL 69146, at *2 (N.D. Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent , 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 2011) (Goldgar, J.) (recognizing same).
Prior to proceeding to the Trial, each of the parties sought summary judgment in the matter. See Joint Motion for Summary JudgmentAgainst [sic] Defendant-Debtor and in favor of Plaintiff-Creditor Hector Vallecillos [Adv. Dkt. No. 61]; Debtor's Motion for Summary Judgment [Adv. Dkt. No. 62]. On October 10, 2017, the court conducted a hearing on the crossing motions. At that hearing, the court determined that there was no material dispute regarding three of the elements of Count I: (1) the statements being made under oath; (2) the statements being false; and (3) the statements being materially related to the bankruptcy case. The court found the facts and applicable law favored the Plaintiff, thus finding the Plaintiff satisfied these three elements required under section 727(a)(4)(A) of the Bankruptcy Code.
The court found there to be a material dispute regarding the Debtor knowingly and fraudulently making the false statements, however. Summary judgment will almost never be available when fraudulent intent is a part of the cause of action. This is because intent is a factual issue that is ordinarily a subjective inquiry, making the Debtor's testimony and credibility germane to this determination.
Through the motions for summary judgment, the court was also able to resolve the Debtor's affirmative defenses. The court determined that English as a second language is not an affirmative defense, but rather is part of the analysis when determining fraudulent intent. The court also determined that unclean hands is not an applicable defense under section 727 as a violation of section 727 is an offense against the bankruptcy estate, not any individual creditor. As a result, the court entered orders granting in part and denying in part each of the respective motions. See Partial Summ. J. Orders.
EVIDENTIARY RULINGS
On February 27, 2018, the court entered the Final Pretrial Order in the Adversary. The Final Pretrial Order states that:
No motion in limine is necessary for any objection raised in the Pretrial Statement. Any other motions in limine *215will be due with the Pretrial Statement unless the court orders otherwise. Any exhibit to which an objection is not raised in the Pretrial Statement will be received in evidence without the need to establish foundation. Any objection to an exhibit (other than weight/relevance) which is not raised in the Pretrial Statement will be waived. Whether evidence is considered by the court and what weight the court gives the evidence depends upon the party relying on such evidence to demonstrate at the trial the relevance and reliability of that evidence in relation to the party's case. If an exhibit is not mentioned by the parties at the trial, it will not be considered to be relevant by the court.
Final Pretrial Order, at p. 1.
On June 29, 2018, the parties jointly submitted the Pretrial Statement. On that same date, in addition to the stipulations in the Pretrial Statement, the parties separately submitted the Stipulations. Each of the parties' stipulations, those in the Pretrial Statement and those in the Stipulations, bind the parties. To the extent they differ in a way material to the outcome of this matter, that difference will be resolved herein.
In the Pretrial Statement, each of the parties raised numerous objections to the other party's exhibits. Among those objections are numerous objections on the basis of relevance. While it is true that Federal Rule of Evidence 403 affords the court the authority to "exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence," Fed. R. Evid. 403, the purpose of the Final Pretrial Order's statement regarding weight and relevance is for parties not to file such objections. As this court has stated numerous times in the past:
'In the bankruptcy court, the bankruptcy judge is the fact-finder.' In re Kenneth Leventhal & Co. , 19 F.3d 1174, 1178 (7th Cir. 1994). In that role, the court is more than capable of determining the weight of any judicially noticed fact, In re Hood , 449 Fed. Appx. 507, 510 (7th Cir. 2011) ('the bankruptcy court was entitled as the trier of fact to decide how to weigh the evidence before it'), and in that role Judge Posner has instructed that the court in a bench trial may 'admit evidence of borderline admissibility and give it the (slight) weight to which it is entitled.' SmithKline Beecham Corp. v. Apotex Corp. , 247 F.Supp.2d 1011, 1042 (N.D. Ill. 2003), aff'd, 365 F.3d 1306 (Fed. Cir. 2004), opinion vacated on reh'g en banc and aff'd on other grounds, 403 F.3d 1331 (Fed. Cir. 2005).
In re Tabor , 583 B.R. 155, 166 (Bankr. N.D. Ill. 2018) (Barnes, J.). For the same reasons, prejudice and confusion are not effective objections in a bench trial. Schaumberg Bank & Trust Co. v. Hartford (In re Hartford ), 525 B.R. 895, 900 n.1 (Bankr. N.D. Ill. 2015) (Barnes, J.).
As a result, all relevance, weight, prejudice and confusion objections raised by the parties were overruled.
In addition, a number of objections were raised regarding hearsay. Unless an exception applies, hearsay as defined in Federal Rule of Evidence 801 is inadmissible. See Fed. R. Evid. 802. The rule against hearsay, however, makes clear that hearsay is defined by its use. Fed. R. Evid. 801(c)(2) (hearsay is a statement that "a party offers in evidence to prove the truth of the matter asserted in the statement"). Given that hearsay is difficult to determine until a party actually attempts to use a *216statement in trial, all hearsay objections were preserved for the Trial.
One objection of particular importance was to the admissibility of a letter from the Debtor's counsel to the chapter 7 trustee assigned to the Debtor's bankruptcy case (the "Trustee"). See PX No. I.2 While, on its face, the letter appears more helpful to the Debtor in establishing an immediate attempt to rectify the alleged misstatements than it was harmful, the Debtor objected to the admission and use of the letter under Federal Rule of Evidence 408. Rule 408 provides that evidence is "not admissible-on behalf of any party- ... to impeach by a prior inconsistent statement or a contradiction ... conduct or a statement made during compromise negotiations about the claim ...." Fed. R. Evid. 408(a)(2). The Debtor argued that the letter to the Trustee was in the nature of a compromise and thus could not be used for any purpose, including impeachment. At the time of the objection, the court was convinced that the letter, though it makes no mention of settlement or compromise, was contextually in the nature of a compromise and sustained the objection. The letter, PX No. I, has not therefore factored into the court's analysis herein.
Finally, two evidentiary rulings were taken under advisement at the Trial. The court allowed use of the exhibits at the Trial while reserving ruling on the objections to both.
The first was labeled Plaintiff's Exhibit No. CC at the Trial.3 The Exhibit is a sworn affidavit provided by an employee of Visio Limited, the company that sold all three of the Properties (defined infra ) to the Plaintiff. The Plaintiff sought to admit the Exhibit to establish the dates that the Debtor entered into the contracts to purchase the Properties. The Debtor objected to the Exhibit as hearsay. That objection is well taken. E.g. , Oto v. Metro. Life Ins. Co ., 224 F.3d 601, 604 (7th Cir. 2000) ("Certainly, the [plaintiff's] affidavit would not be admissible at trial unless [defendant] were able to cross-examine [the affiant] as to its contents."). The Exhibit is also clearly not the best evidence of the closing dates. As the Plaintiff failed to use the Exhibit during the Trial, the court would have assigned it a weight of zero even if it were admitted. As a result, the objection to Plaintiff's Exhibit No. CC is sustained.
The second objection was to Plaintiff's Exhibit No. K. This Exhibit is the interrogatory answers of the Debtor. The Debtor objected to the Exhibit's admission, except for the purposes of impeachment. During the Trial, the Plaintiff used the Exhibit to impeach the witness, but did not otherwise use the Exhibit. As result, the court has been given no reason to consider this Exhibit beyond the impeachment use, to which the Debtor did not object. Plaintiff's Exhibit No. K is therefore excluded, except as it was used for impeachment purposes.
BACKGROUND4
The Debtor purchased and took title to three pieces of real property in 2010, *2172011 and 2012, respectively: (1) 1143 N. Keystone Avenue, Chicago, Illinois (the "Keystone Property"); (2) 843 N. Hamlin Avenue, Chicago, Illinois (the "Hamlin Property"); and (3) 8223 45th Street, Lyons, Illinois (the "Lyons Property") (collectively, the "Properties"). In March 2013, the Debtor transferred the Properties into a trust for his mother's, Maria Chavez-Espinoza ("Chavez"), benefit. Chavez has been the landlord for all of the leases entered into for the Properties since the transfer.
In April 2015, the Plaintiff obtained two default judgments against the Debtor from the Circuit Court of Cook County. The judgments were for breach of contract relating to the Properties and unpaid wages relating to a tire shop the Debtor and the Plaintiff previously operated together. The Debtor subsequently filed for bankruptcy under chapter 7 in October 2015 and listed the Plaintiff as a creditor.
On December 18, 2015, the Debtor attended the meeting of creditors required under 11 U.S.C. § 341 (the "341 Meeting"). A translator was not present at the 341 Meeting even though English is the Debtor's second language and he is better able to communicate in Spanish. During the 341 Meeting, the Plaintiff's counsel asked the Debtor if he ever owned the Properties. The Debtor replied "no" to ever owning each of the Properties. The Debtor subsequently testified at an examination authorized by Bankruptcy Rule 2004 in June 2016 (the "2004 Examination"), where he clarified that he had in fact owned the Properties and transferred the Properties, but alleged he purchased the Properties with Chavez's money that Chavez had received from an insurance check, and transferred the Properties to her in replace of returning the money to her.
FINDINGS OF FACT5
From the review and consideration of the procedural history, as well as the evidence presented at the Trial, the court determines the salient facts to be as follows, and so finds that:
(1) The Debtor is originally from Mexico. He moved to the United States when he was a teenager and has lived in the United States for more than twenty years. Tr. at p. 107, July 17, 2018; Tr. at p. 216, July 18, 2018.
(2) The Debtor's first language is Spanish. Although he reads and understands English, he is better able to communicate in Spanish. Pretrial Stmt., at p. 6, ¶ 17.
A. The Properties:
(3) The Debtor and the Plaintiff are former brother-in-laws and business partners who made a plan to purchase properties, rehab them and "flip them" for a profit. Id. , at p. 4, ¶ 1; Tr. at pp. 62, 73-74, July 17, 2018.
(4) In April 2010, the Debtor entered into an installment contract to purchase the Keystone Property for $20,273.00. Stipulations, at ¶ 2.
(5) In August 2010, Chavez received an insurance check for $70,759.00. Chavez and the Plaintiff went to a bank together and deposited the check into *218a bank account in the Plaintiff's name. Pretrial Stmt., at p. 4, ¶ 2; JX. No. F, at p. 54. Chavez, however, was under the impression the check was deposited into an account under her name. Tr. at p. 148, July 17, 2018. The money from the insurance check was soon thereafter transferred into an account held by the Debtor. Id. at p. 162.
(6) The Debtor took title to the Keystone Property in November 2010. Id. at pp. 72, 97; Pretrial Stmt., at p. 4, ¶ 3.
(7) The Debtor entered into the contract to purchase the Hamlin Property in April 2011 for $27,595.00 and took title to the Hamlin Property in September 2011. Stipulations, at ¶ 3; Pretrial Stmt., at p. 5, ¶ 4.
(8) The Debtor purchased the Lyons Property for $33,052.00 and took title to the Lyons Property in February 2012. Stipulations, at ¶ 4; Pretrial Stmt., at p. 5, ¶ 6.
(9) The Debtor used the money from Chavez's insurance check in part to purchase the Properties. Tr. at p. 73, July 17, 2018. Chavez did not give permission to the Debtor to purchase the Properties with her money. Id. at p. 148. The Debtor never discussed with Chavez about purchasing the Properties and the Debtor purchased the Properties without Chavez's knowledge. Id. at p. 149. The Debtor and Chavez were not on speaking terms with one another at the Properties' purchase dates. Id.
(10) The Debtor had tenants in the Properties during the time he held title to the Properties and collected rent from them. Id. at p. 65. He used the rent proceeds to help fund the tire shop he owned and operated with the Plaintiff. Id. at pp. 101-02. The Debtor spent time rehabbing the Properties but was ultimately unable to "flip them" and sell them for a profit as planned. Id. at p. 62.
(11) In March 2010, the Debtor transferred the Properties to Chavez through a land trust with Chavez as the beneficiary of the trust. The Debtor transferred the Properties to Chavez in replace of returning her money to her. Id. at p. 64.
(12) In December 2015, the Debtor attended the 341 Meeting where a translator was not present. The Debtor never asked for a translator and at no point said he did not understand the questions. Id. at p. 91; Pretrial Stmt., at p. 6, ¶ 18.
(13) At the 341 Meeting, the Trustee asked the Debtor if he had owned any real property in the past four years. The Debtor replied "well, a house," referring to a house that was foreclosed on. When the Trustee asked the Debtor if he had owned any other properties in the past four years, the Debtor replied "no." JX. No. A, at pp. 2-3.
(14) At the 341 Meeting, the Plaintiff's counsel asked the Debtor if he ever owned the Lyons Property. The Debtor replied "no." The Plaintiff's counsel asked the Debtor if he ever owned the *219Keystone Property. The Debtor replied "no." The Plaintiff's counsel asked the Debtor if he transferred the Keystone property in 2013. The Debtor replied "no." The Plaintiff's counsel asked the Debtor if he ever owned the Hamlin Property. The Debtor replied "no." The Plaintiff's counsel asked the Debtor if he transferred the Hamlin Property in 2013. The Debtor replied "no." Id. , at p. 4.
B. Tools and Employment Status:
(15) The Trustee asked the Debtor at the 341 Meeting if he was unemployed. The Debtor replied that he was. The Trustee also asked the Debtor what happened to the equipment and other assets from the tire shop. The Debtor replied saying he had left everything at the shop for the landlord. Id.
(16) Chavez allowed Carlos Mora to store tools in the garage located at 2741 N. Merrimac Avenue, Chicago, Illinois 60639 (the "Merrimac Property"). Tr. at p. 172, July 17, 2018.
DISCUSSION
The "central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt ....' " Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt , 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) ).
In short, a chapter 7 discharge gives a "fresh start." Id. at 286-87, 111 S.Ct. 654. However, a discharge in bankruptcy is not a fundamental right and the fresh start policy is limited to the honest but unfortunate debtor. Grogan , 498 U.S. at 286, 111 S.Ct. 654 ; In re Juzwiak , 89 F.3d 424, 427 (7th Cir. 1996). "The denial of a discharge is a harsh remedy to be reserved for a truly pernicious debtor." Soft Sheen Prods., Inc. v. Johnson (In re Johnson ), 98 B.R. 359, 367 (Bankr. N.D. Ill. 1988) (Squires, J.). To promote these policies, courts construe requests to deny a debtor's discharge strictly against the creditor and liberally in favor of the debtor. Juzwiak , 89 F.3d at 427.
With these overriding principles in mind, the court will first consider the standards before it under section 727(a)(4)(A) of the Bankruptcy Code. Following, before analyzing the elements of the section 727(a)(4)(A) standards in relation to the Complaint's two Counts, the court will consider the Defendant's credibility as a witness in this matter. The court will then analyze the two Counts of the Complaint, beginning first with the less complicated of the two Counts, Count II.
A. 11 U.S.C. § 727(a)(4)(A)
Section 727 of the Bankruptcy Code provides that the court may not grant a debtor a discharge if "the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account." 11 U.S.C. § 727(a)(4)(A).
Section 727(a)(4)(A) enforces the debtor's duty of disclosure and ensures the debtor provides reliable information to the parties interested in the administration of the bankruptcy estate. Clean Cut Tree Serv., Inc. v. Costello (In re Costello ), 299 B.R. 882, 889 (Bankr. N.D. Ill. 2003) (Schmetterer, J.); Urological Grp., Ltd. v. Petersen (In re Petersen ), 296 B.R. 766, 790 (Bankr. C.D. Ill. 2003). It places a duty *220on debtors to report the interests they have held in property even if the debtors believe the property to be unavailable to the bankruptcy estate. In re Yonikus , 974 F.2d 901, 904 (7th Cir. 1992). After all, it is the court's determination, not the debtor's, what property is part of the bankruptcy estate. Id. at 905.
In order to succeed under 727(a)(4)(A) the plaintiff must prove: "(1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case." Stamat v. Neary , 635 F.3d 974, 978 (7th Cir. 2011) ; see also In re Hudgens, 149 Fed. Appx. 480, 487 (7th Cir. 2005) ; Molfese v. Bonomi (In re Bonomi ), Case No. 11bk26652, Adv. No. 13ap00119, 2014 WL 640982, at *4 (Bankr. N.D. Ill. Feb. 18, 2014) (Barnes, J.). The plaintiff must prove all of these so-called Stamat factors by a preponderance of the evidence. Hudgens, 149 Fed. Appx. at 487 ; Peterson v. Scott (In re Scott ), 172 F.3d 959, 966-67 (7th Cir. 1999).
Many of the Stamat factors may be determined objectively. As previously discussed, the court has already determined that the first, second and fifth of the Stamat factors have been satisfied with respect to the Debtor's denial of previous ownership and transfer of the Properties. See Partial Summ. J. Orders.
Even if a false oath has been established, as it has been here, the plaintiff must still show that such false oath relates to a material matter. Lee Supply Corp. v. Agnew (In re Agnew ), 818 F.2d 1284, 1290 (7th Cir. 1987). A statement is material "if it bears a relationship to the debtor's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor's property." Costello , 299 B.R. at 900. The false oath does not need to result in any prejudice to the creditors to be deemed material. Bensenville Comm. Ctr. Union v. Bailey (In re Bailey ), 147 B.R. 157, 163 (Bankr. N.D. Ill. 1992) (Schmetterer, J.); Richardson v. Von Behren (In re Von Behren ), 314 B.R. 169, 180 (Bankr. C.D. Ill. 2004).
More difficult to objectively determine is the fourth Stamat factor-intent. This is why so many of these types of matters proceed to trial on the issue of intent. Layng v. Garcia (In re Garcia ), 569 B.R. 480, 491 (Bankr. N.D. Ill. 2017) (Barnes, J.) ("the testimony of a [d]ebtor as to intent is the most frequent material fact preventing section 727 matters from being resolved in summary judgment").
"To find the requisite degree of fraudulent intent, a court must find that the debtor knowingly intended to defraud or engaged in behavior that displayed a reckless disregard for the truth." Yonikus , 974 F.2d at 905. "Intent to defraud involves a material representation that you know to be false, or, what amounts to the same thing, an omission that you know will create an erroneous impression." In re Chavin , 150 F.3d 726, 728 (7th Cir. 1998). Reckless disregard is the state of mind of not caring whether some representation is true or false. Id. Direct evidence of intent to defraud may not be available. Costello , 299 B.R. at 900. "Thus the requisite intent under section 727(a)(4)(A) may be inferred from circumstantial evidence or by inference based on a course of conduct." Structured Asset Servs., L.L.C. v. Self (In re Self ), 325 B.R. 224, 248 (Bankr. N.D. Ill. 2005) (Squires, J.). "Intent may properly be inferred from the totality of the circumstances and the conduct of the person accused." Kaye v. Rose (In re Rose ), 934 F.2d 901, 904 (7th Cir. 1991).
*221Intent may also be inferred if a debtor's bankruptcy schedules reflect a "reckless indifference to the truth." Calisoff v. Calisoff (In re Calisoff ), 92 B.R. 346, 355 (Bankr. N.D. Ill. 1988) (Barliant, J.). However, discharge should not be denied where the untruth was the result of mistake or inadvertence. Cole Taylor Bank v. Yonkers (In re Yonkers ), 219 B.R. 227, 233 (Bankr. N.D. Ill. 1997) (Squires, J.); Lanker v. Wheeler (In re Wheeler ), 101 B.R. 39, 49 (Bankr. N.D. Ind. 1989).
With these issues in mind, before proceeding to the Counts of the Complaint, the court must first consider the credibility of the Debtor as a witness.
B. The Debtor's Credibility
As is not uncommon with questions of a debtor's intent, the Debtor was the most important witness at the Trial. For the reasons discussed here, however, the court does not find the Debtor to be a credible witness.
The Debtor displayed a cavalier attitude throughout his testimony by evading questions posed by the Plaintiff and displaying a general lack of interest in attempting to answer said questions. For example, the Debtor was highly evasive when being asked about the purchase price and dates of the Properties. Tr. at pp. 68-72, 98-99, July 17, 2018. The Debtor was also combative, at one point threatening to fight opposing counsel. Id. at p. 104. This sort of behavior does not lend itself to a finding of credibility. Fosco v. Fosco (In re Fosco ), 289 B.R. 78, 87 (Bankr. N.D. Ill. 2002) (Black, J.) (" '[T]he carriage, behavior, bearing, manner, and appearance of a witness-in short, his 'demeanor'-is a part of the evidence.' ") (quoting Dyer v. MacDougall , 201 F.2d 265, 268 (2d Cir. 1952) ). Further, a court may take into account the interest the witnesses may have in the outcome of the case. Id. (citing Welch v. Tenn. Valley Auth. , 108 F.2d 95, 101 (6th Cir. 1939) ).
It should be noted that, in addition to suffering credibility issues, the Debtor's testimony was inconsistent with his previous testimony and filings with this court and, in some cases, implausible.
For example, as discussed below, the Debtor's explanation of why he denied ownership and transfer of the Properties has evolved throughout the case. First he argued that he had denied ownership as he had purchased the Properties with Chavez's money and considered them to be hers. Debtor's Motion to Dismiss Pursuant to Rule 7012 of the Rules of Bankruptcy Procedure, at ¶ 18 [Adv. Dkt. No. 17-1] (the "Debtor's Motion to Dismiss"); Debtor's Motion for Summary Judgment, at ¶ 24; Pretrial Stmt., at pp. 2-3, ¶ 1. Then he argued and testified at the Trial that he did not understand the questions because of his lack of proficiency with English. Tr. at pp. 91-93, July 17, 2018; Tr. at pp. 218-19, July 18, 2018. Last, at the Trial, the Debtor seemed to adopt a new explanation that while he owned the Properties, his transfer of the Properties was done to correct his misuse of Chavez's money, so he did not believe it required disclosure. Tr. at p. 214, 234, 239, July 18, 2018.
Similarly, the Debtor denied in his Answer having entered into the contracts to purchase the Properties for his personal benefit. Answer, at ¶¶ 17, 19, 21, 47. At the Trial, however, his testimony demonstrated that his own personal funds were included in those used to purchase the Properties, tr. at p. 89, July 17, 2018, that he managed the Properties as his own until they were transferred, id. at pp. 62-65, and that he took the income from the Properties and used them for his own personal benefit. Id. at p. 102. With respect to the Elston Tire Shop, prior to the Trial, the *222Debtor admitted to having an ownership interest. Answer, at ¶ 47; Debtor's Motion to Dismiss, Affid. [Adv. Dkt. No. 17-4]. At the Trial, he was adamant that he had nothing to do with the Elston Tire Shop. Tr. at pp. 75-76, July 17, 2018.
In summary, the court finds the testimony of the Debtor to be of limited probative value in his defense.
C. The Complaint
As previously noted, the Complaint is organized into two Counts, each under section 727(a)(4)(A). The more straightforward of the Counts is Count II, the allegations regarding the Debtor's employment and tools. The court will therefore consider Count II before looking to Count I.
1. Count II: Employment and Tools
Count II alleges that the Debtor, under oath, misrepresented his unemployment status and failed to disclose his ownership of tools he was storing in the garage at the Merrimac Property.
These statements were made both as part of the Debtor's schedules filed with the court and later at the 341 Meeting. JX. No. A, at p. 4. As such, these statements are under oath for the purposes of satisfying the Stamat factors. Hartford , 525 B.R. at 907-08 ("A debtor's petition, schedules, statement of financial affairs, statements made at a section 341 meeting, testimony given at a Bankruptcy Rule 2004 examination, and answers to interrogatories all constitute statements under oath for purposes of section 727(a)(4)(A)."). The first Stamat factor is satisfied.
The fifth factor is also satisfied, as both the tools and the Debtor's employment status "bear a relationship to the debtor's business transactions or estate, or concern the discovery of assets ...." Costello , 299 B.R. at 900.
The second factor has not, however, been satisfied. Not unsurprisingly, the Debtor at the Trial denied owning the tools or operating a tire shop out of the garage. Tr. at pp. 115-16, July 17, 2018; Tr. at p. 207, July 18, 2018. That testimony is questionable given the Debtor's inconsistent statements concerning his role at the Elston Tire Shop, his self-interest in the matter and his general credibility issues. However, the Debtor's testimony was corroborated by Chavez, who the court found to be forthright and credible. Chavez testified that the Debtor neither stored tools in the garage at the Merrimac Property nor operated a tire shop from said garage. Tr. at pp. 172-73, July 17, 2018.
No other evidence offered by the Plaintiff went to the Plaintiff's burden on this matter. As a result, the court cannot conclude on the record before it that the statements and alleged omissions denying ownership of the tools and claiming unemployment are false. The Plaintiff has failed to establish an essential element of section 727(a)(4)(A) on Count II of the Complaint. As a result, the Debtor need not defend and the court need not discuss the third and fourth elements. Judgment on this Count will be rendered in favor of the Debtor.
2. Count I: The Properties
Given the court's earlier narrowing of the issues on this Count, what remains is whether the Debtor made the false statements regarding the Properties knowingly and with fraudulent intent. For the reasons set forth below, the court finds that he did.
Beginning with this: There was no equivocation in the statements made by the Debtor at the 341 Meeting. The questions by the Trustee and the Plaintiff's counsel were direct and clear. The Debtor *223showed no signs of confusion, nor did he ask for clarification, or request the translation assistance he now argues that he needed.
With respect to that latter issue, it should be tautological that court proceedings in the United States are conducted in English. United States v. Rivera-Rosario , 300 F.3d 1, 5 (1st Cir. 2002) ("It is clear, to the point of perfect transparency, that federal court proceedings must be conducted in English."). A meeting under section 341 of the Bankruptcy Code is just such a proceeding.
It would be fundamentally unfair, however, to deny a debtor the ability to participate meaningfully in his or her bankruptcy proceedings because the debtor does not speak English. As a result, in accordance with Exec. Order No. 13166, 65 Fed. Reg. 50121 (Aug. 11, 2000) (Improving Access to Services for Persons with Limited English Proficiency), the United States Trustee's Program makes interpreters available for free upon request. As the handbook for chapter 7 trustees states, "[i]ndividuals with limited English proficiency (LEP) may seek assistance in order to participate in the meeting of creditors. The trustee must advise LEP individuals of free telephone and interpreter services offered by the program for the purposes of the meeting or that they may choose, at their expense, a qualified interpreter to assist them. 28 U.S.C. § 586." Handbook for Chapter 7 Trustees, at p. 3-6.
There was, therefore, the ability to receive free translation assistance at the 341 Meeting. The Debtor, who was represented by counsel who could and should have advised him of his ability to avail himself of the same by claiming limited English proficiency, made no request for an interpreter. Thus, the Debtor, who professed at the Trial that in all his meetings with his attorneys he had the assistance of his wife as an interpreter, tr. at pp. 91-92, July 17, 2018, and who arranged an interpreter for the Trial itself, chose to attend the 341 Meeting without any such assistance. While the court is sympathetic to the Debtor's claims, his actions do not lend credence to his claim of language issues. The Debtor has lived in the United States for more than twenty years and agreed in the Pretrial Statement that he "speaks English when necessary, and understands and reads English." Pretrial Stmt., at p. 6, ¶ 17. Further, on at least one occasion at the Trial, the Debtor answered the question posed to him in English before the interpreter could translate. Tr. at p. 163, July 17, 2018.
The questions before the Debtor at the 341 Meeting should not have come as a surprise. As noted above, the Debtor commenced his underlying bankruptcy case after having received an adverse judgment in state court litigation with the Plaintiff here. The court finds it difficult to believe that the Debtor did not understand that, when he was questioned at the 341 Meeting by an attorney for the Plaintiff, the very same issues were in play. His denial of an interest in or transfer of the Properties under those circumstances strikes more as an intentional tactic to obstruct the Plaintiff's attempts to see these issues fully aired before the court.
The court therefore concludes that the Debtor's statements at the 341 Meeting regarding his ownership and transfer of the Properties were knowingly false. As to whether these statements were made with fraudulent intent, as just noted, the court finds it likely that the Plaintiff's denials at the 341 Meeting were an intentional obstruction of the Plaintiff. As such, the statements were made with fraudulent intent. Even absent that, as noted above, the court may infer intent from the totality of the circumstances. For the totality of the *224circumstances discussed herein, the court makes such an inference here.
The Debtor has also shown a pattern of reckless disregard for the truth starting at the 341 Meeting and continuing through the Trial. See Yonikus , 974 F.2d at 906 (finding the debtor's evasive responses to questions to be of significance in finding a pattern of fraudulent deception); Dilbay v. Demir (In re Demir ), 500 B.R. 913, 923 (Bankr. N.D. Ill. 2013) (Schmetterer, J.) (taking the debtor's inconsistent statements at trial into account in determining a pattern of reckless disregard). The multiple inconsistencies in the Debtor's testimony, lack of credibility at the Trial and false statements at the 341 Meeting demonstrate at the very least a pattern of reckless disregard for the truth.
The Plaintiff has, therefore, established his prima facie case under section 727(a)(4)(A). The Debtor, in response, defends with the language issues, his belief regarding the ownership of the Properties and his belief regarding the transfers. None of these theories are convincing.
As previously noted, the Debtor's language proficiency is in question. Even if he is of limited English proficiency, however, he chose not to avail himself of an interpreter at the 341 Meeting when one was available for free. He made no indication in his answers of any difficulty understanding the questions put to him. Rather than support his defense, his argument bolsters the case for recklessness. See, e.g. , Layng v. Urbonas (In re Urbonas ), 539 B.R. 533, 551 (Bankr. N.D. Ill. 2015) (Lynch, J.) (" 'it be [speaks] a reckless indifference to truth' for a non-native speaker not to seek advice of counsel if the debtor does not understand the legal meaning of a term necessary to accurately complete schedules.") (quoting Skavysh v. Katsman (In re Katsman ), 771 F.3d 1048, 1050 (7th Cir. 2014) ). It also speaks to willful ignorance.6 The Debtor's argument regarding English proficiency does not defeat the Plaintiff's prima facie case.
The Debtor's argument that he believed the Properties were owned by Chavez is also unconvincing. While it appears true that a large portion of the purchase price for the Properties came from Chavez (without her knowledge), the evidence does not support a conclusion that the Properties were therefore hers. Not only did the Debtor use a portion of his own money to purchase the Properties, but he contracted to purchase and titled the Properties in his name. The Debtor admitted to purchasing the Properties without Chavez's knowledge and with the business purpose of rehabbing them and "flipping them" for a profit. During the time that he held title to the Properties, the Debtor had tenants who he collected rent from and used the rent proceeds to help fund his tire shop. He also eventually transferred the Properties into *225a land trust for Chavez's benefit. All of these actions are inconsistent with a belief that the Properties were somehow Chavez's before the transfer.
Finally, the Debtor touched on the defense of not being an educated businessman. Bankruptcy courts have used the debtor's education and business experience in determining fraudulent intent. See Stamat , 635 F.3d at 982 (finding debtor's education and business experience factored into a showing of reckless disregard); Chavin , 150 F.3d at 729 (debtor was a mature and experienced businessman making it unbelievable he did not understand to disclose certain assets).
While the Debtor is not a highly educated man, his experience in business and testimony demonstrate he knew his past ownership of the Properties should have been disclosed. See Wilson , 290 B.R. at 333, n.2 (finding a debtor with below level of sophistication and understanding clearly understood the transfer of a property should have been disclosed at a creditor's meeting). The Debtor owned real property before he purchased the Properties and was involved in litigation regarding that property. Tr. at p. 207, July 18, 2018. The Debtor purchased the Properties as a business investment, intending to renovate and "flip them." Further, the Debtor was at one point the part owner of a business. Finally, when the Debtor transferred the Properties to Chavez, it was not by way of a simple conveyance, but by a land trust. All of these factors speak to the Debtor's ability to understand his business dealings and some modicum of legalities regarding real property and title held thereto.
The court therefore finds the Plaintiff has proven by a preponderance of the evidence that the Debtor made the statements denying past ownership and transfer of the Properties knowingly and with fraudulent intent. Accordingly, the Plaintiff has satisfied all of the elements required under section 727(a)(4)(A) for the court to enter judgment in favor of the Plaintiff regarding Count I.
CONCLUSION
The Plaintiff has shown that the Debtor acted with fraudulent intent when he denied his previous ownership and transfer of the Properties at the 341 Meeting thus satisfying the burden under Count I. The Plaintiff has not, however, satisfied his burden regarding Count II of the Complaint.
For the foregoing reasons, judgment will be entered in favor of the Plaintiff under section 727(a)(4)(A) on Count I of the Complaint. Judgment will be entered in favor of the Defendant on Count II of the Complaint. A separate judgment will be issued with this Memorandum Decision.
JUDGMENT ORDER
This matter comes before the court on the Creditor's First Amended Complaint for Determination of Dischargeability and Objecting to Debtor's Discharge Pursuant to Section 727 of the Bankruptcy Code [Adv. Dkt. No. 12] (the "Complaint") filed by Hector Vallecillos (the "Plaintiff"), seeking denial of the discharge under 11 U.S.C. § 727(a)(4)(A) of the debtor, Adan Salgado (the "Debtor"); the court having jurisdiction over the subject matter; all necessary parties appearing at the trial that took place on July 17, 2018 and July 18, 2018 (the "Trial"); the court having considered the testimony and the evidence presented by and the arguments of all parties in their filings and at the Trial; and in accordance with the Memorandum Decision of the court in this matter issued concurrently herewith wherein the court found that the Plaintiff satisfied his burden regarding Count I of the Complaint, but not regarding Count II of the Complaint, *226NOW, THEREFORE, IT IS HEREBY ORDERED THAT:
1. Judgment is entered in favor of the Plaintiff on Count I of the Complaint. The Debtor's discharge is thereby denied.
2. Judgment is entered in favor of the Defendant on Count II of the Complaint.
3. This Judgment Order concludes the above captioned adversary proceeding.
In this case, the Plaintiff and the Debtor submitted individual and joint exhibits with consecutive letter designations. See Pretrial Stmt., Exh. 1. The court will use the designations DX, PX and JX for Defendant's Exhibit, Plaintiff's Exhibit and Joint Exhibit, respectively.
This exhibit was not included in the Pretrial Statement due to an error, but was submitted in court and assigned an exhibit number at that time.
The background facts are derived from the facts agreed upon by both parties, as presented in the Pretrial Statement.
To the extent that any of the findings of fact constitute conclusions of law, they are adopted as such, and to the extent that any of the conclusions of law constitute findings of fact, they are adopted as such. Adjudicative facts may also be found and determined later in this Memorandum Decision.
Bankruptcy courts have held that debtors may not plead willful ignorance in defense of their false statements. "A debtor cannot, merely by playing ostrich and burying his head deeply enough in the sand, disclaim all responsibility for statements which he has made under oath." Boroff v. Tully (In re Tully ), 818 F.2d 106, 111 (1st Cir. 1987). "The Debtor has the ultimate responsibility for the accuracy of the information contained in their schedules, which cannot be avoided by playing ostrich." Rafool v. Wilson (In re Wilson ), 290 B.R. 333, 340 (Bankr. C.D. Ill. 2002). A debtor must consider the questions posed at a 341 meeting carefully and answer them accurately and completely. Armstrong v. Lunday (In re Lunday ), 100 B.R. 502, 508 (Bankr. D.N.D. 1989) ; Stathopoulos v. Bostrom (In re Bostrom ), 286 B.R. 352, 361 (Bankr. N.D. Ill. 2002) (Squires, J.). If taken as true, the Debtor's testimony of not understanding the questions at the 341 Meeting while never asking for an interpreter or expressing misunderstanding is willful ignorance. This is unacceptable for section 727(a)(4)(A) purposes. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501504/ | GARY SPRAKER, United States Bankruptcy Judge
The court previously approved the chapter 7 trustee's (Trustee) sale of a beverage dispensary license (License) for $175,000.1 The Trustee is holding the proceeds from the sale, and filed his Application to Disburse Proceeds from Sale of Liquor License (Application) seeking authorization to distribute the sale proceeds pro-rata to various creditors asserting "holds" against the License.2 The Application originally drew several objections.3 The Trustee has resolved all but the debtor's objection.4
A fundamental problem remains: no holds were filed prior to the sale of the License. Valid holds against an Alaska liquor license have traditionally been treated akin to a perfected secured interest in that license, such that those holds are paid directly from the sale proceeds. It appears that confusion arose as a result of the efforts of the prior owner to recover the License, which process was ultimately co-opted by the Trustees's voluntary sale to Gene Minden, the sole shareholder of the prior owner of the License. Regardless of the reason, the court cannot approve a distribution to creditors that may have held valid holds against the License, but who never actually filed the holds. For this reason the court must deny the Application.
A. BACKGROUND
1. Pre-petition Events.
On April 27, 2012, the debtor purchased a restaurant and bar business located in Seward, Alaska from Fam Alaska, Inc. (Fam). As part of the sale, the debtor acquired the associated License from *244Fam,5 and entered into a lease agreement with Fam for the real property where the restaurant was located (Lease).6 To secure repayment, Fam took a security interest in certain property purchased by the debtor, including the License.7 The debtor executed a Security Agreement that provided that in the event of default, including delinquent Lease payments exceeding one month's rent, the License would be "immediately" transferred back to Fam.8 Fam recorded a UCC Financing Statement in the central recorders' office to perfect its security interest in the License and other property.9
The debtor defaulted under the terms of its agreements with Fam in September 2016, and ceased operations in January 2017. Fam terminated the Lease and repossessed the real property.10 On February 27, 2017, the debtor commenced this voluntary chapter 7 bankruptcy case.
2. Fam's Post-Petition Collection Efforts.
On February 18, 2017, Gene Minden, owner of Fam, signed a Form AB-01 Transfer License Application (Transfer Application) in preparation of initiating an involuntary transfer of the License back to FAM.11 Under 3 AAC 304.107, an unpaid seller holding a security interest in a liquor license may recover the liquor license by way of an involuntary transfer if (1) the sale contract was "recorded in the manner provided for recordation of real estate conveyances" and the seller, at the time of transfer, made a UCC filing statement claiming a security interest in the liquor license; (2) all documents pertaining to the transfer of the liquor license were filed with AMCO at the time of transfer; and (3) notice of the transfer was made in writing and published "once a week for three weeks in a newspaper of general circulation before the transfer."12
While Minden signed the Transfer Application pre-petition, the document reflects that AMCO did not receive the Transfer Application until after Aqua Pesca filed its bankruptcy.13 Minden undertook a number of actions required by AMCO to recover the License from Aqua Pesca. As a result of Minden's efforts, AMCO sent written notices to the debtor's creditors that it had received an application for transfer of the License, and asking whether the creditors objected to the transfer.14
3. The Motion to Sell the License.
On May 31, 2017, well after filing its Transfer Application, Fam filed a motion *245for relief from the automatic stay to pursue the retransfer of the License (Stay Relief Motion).15 In its motion, Fam stated that it was "now seeking relief from stay as to the License so that it can apply to the Alcoholic Beverage Control Board for retransfer of the License."16 Fam attached a letter from AMCO dated May 25, 2017, acknowledging receipt of Fam's transfer application and advising that the application was complete.17 The Stay Relief Motion did not disclose that Fam had been attempting to procure the transfer since March.18
Both the debtor and the Trustee opposed the Stay Relief Motion, challenging the validity of Fam's security interest based upon Fam's failure to record the lease or purchase agreement.19 The Trustee further argued that the May 25, 2017 letter Fam received from AMCO confirming completion of the Transfer Application "says nothing, and means nothing, with respect to the perfection issue; all it shows is that Fam may itself be violating the automatic stay by continuing to pursue retransfer of the [L]icense."20 The debtor attached to its opposition a March 30, 2017 letter sent by its counsel to Shilo Senquiz at AMCO, notifying Senquiz of the debtor's pending bankruptcy and pointing out that Fam did not record the lease.21 The debtor further asserted that "[a]ny further effort by [Fam] to obtain...retransfer [of the License] without first obtaining an order for relief from the stay could be considered an intentional violation of § 362."22 The Kenai Peninsula Borough also objected to the Stay Relief Motion, requesting that any transfer of the License be conditioned upon payment of delinquent taxes and interest owed.23 A hearing on the Stay Relief Motion was set for June 28, 2017.24
On June 27, 2017, the day before the hearing on the Stay Relief Motion, the Trustee filed his Motion to Sell Liquor License, and Other Business Assets, Free and Clear of Liens (Sale Motion).25 The Trustee proposed to sell the License to Gene Minden, Fam's president, for $175,000, "in large part to avoid the time, risk, and expense associated with litigating the issue of perfection of the License before this [c]ourt and/or [AMCO]."26 The purchase and sale agreement attached to the Sale Motion as Exhibit A (PSA) provided, at paragraph 4, that it was subject to approval of the Bankruptcy Court.27 The PSA also provided that transfer of the License to Fam was subject to AMCO's approval, and that upon deposit of the purchase funds, the Trustee would "support or seek immediate [AMCO] conveyance to Fam of a temporary license."28 The signatures of the parties to the PSA
*246were dated June 26 and 27, 2017.29
The PSA expressly did not address the amount of Fam's hold within the meaning of AS 04.11.360(4).30 In the Sale Motion, the Trustee explained that the amount of Fam's hold was not addressed by the PSA because "the [d]ebtor...is not a party to the PSA, and the Trustee did not wish to have the hold issue slow down the sale of the License itself."31 Instead, the proposed order attached to the Sale Motion provided that either this court or AMCO would determine the amount of creditor holds on the License, analogizing the determination to the claims allowance process in bankruptcy.32
Finally, the Sale Motion pointed out that per AS 04.11.340(4), a transfer of a liquor license will be denied unless all holds are paid or security arrangements satisfactory to the creditors are made.33 The Trustee represented that "[long] established practice is that this requirement is met when all taxing authorities, and other creditors, received the same pro-rata distribution on their hold amounts, net of a carveout for administrative costs related to the sale."34 The PSA included a carveout of $25,000 for administrative expenses, and Fam's consent to receipt of its pro-rata share of its to-be-determined hold amount.35
The Trustee moved to have the Sale Motion heard on shortened time.36 The day after the Trustee filed his Sale Motion, June 28, 2017, the court held the preliminary hearing on the Stay Relief Motion. In light of the pending Sale Motion, the court continued the hearing on relief from stay until July 14, 2017, granted the motion to shorten time to consider the Sale Motion, and set the hearing on the Sale Motion for July 14, 2017.37
Despite these actions in this court, Fam's involuntary transfer process continued. By the time the Trustee discovered Fam's post-petition efforts to recover the License, AMCO had already sent out its letters to Aqua Pesca's creditors asking if the creditors objected to the transfer. No creditors filed any opposition to Fam's Transfer Application with AMCO.38 On June 28, 2017, the same day as the relief from stay hearing and a day after the Trustee filed his Sale Motion, AMCO temporarily approved the Transfer Application, pending final approval.39
*247On July 11, 2017, AMCO approved the transfer of the License to Fam.40
Three days after AMCO approved the transfer to FAM, this court held a continued hearing on the Stay Relief Motion and Sale Motion. The court entered its order approving the sale of the License to Minden (Sale Order) that same day.41 The Sale Order expressly stated that the sale was subject to AMCO's approval, and directed that "[b]oth parties shall take such steps as are necessary or appropriate to obtain that approval."42 The Sale Order further provided that the court: (1) retained jurisdiction to determine the amount of a "hold" on the liquor license allegedly held by Fam; and (2) deemed AS 04.11.360(4) satisfied by the pro-rata distribution scheme (net of a $25,000 carveout for administrative expenses) proposed in the Sale Motion.43 Both of these provisions were contingent upon AMCO's consent to this court's determination of those issues when AMCO approved the sale.44
4. The Application to Disburse Sale Proceeds
On December 1, 2017, the Trustee filed the Application, seeking to distribute the $150,000 in post-carveout sale proceeds (Sale Proceeds) to the debtor's creditors pro-rata.45 The Trustee references AMCO's approval of the sale of the License in the Application but no evidence of AMCO's approval of the sale was provided.46 In the Application the Trustee revealed that no holds were filed by any creditors prior to the transfer of the License to Fam.47 After the transfer, Fam allegedly filed a hold in the amount of $1,525,831. The debtor is said to also have filed a hold after the sale on behalf of the Internal Revenue Service (IRS) in the amount of $424,225.69.48 In his Application, the Trustee proposed a pro-rata distribution to the debtor's creditors based upon an unsigned affidavit filed by Minden with AMCO detailing the names of the creditors holding accounts payable and outstanding taxes and the amounts owed.49
Multiple objections to the Application were filed. Fam and the KPB objected only to the calculation of the amounts they were to be paid under the Trustee's proposed distribution.50 The objection filed by the IRS was more complicated; it asserted that its federal tax liens are superior to the claims of any unsecured creditors and argued that it should be paid prior to any pro-rata distributions to unsecured creditors.51
The debtor also opposed the Application, arguing that because the License was *248transferred to Fam via AMCO's involuntary retransfer process any holds were extinguished when the transfer was approved.52 The debtor emphasized that no holds were filed prior to the transfer taking place.53 Thus, the debtor concluded, the Sale Proceeds should be distributed pursuant to their priorities under the Bankruptcy Code and the Perishable Agricultural Commodities Act rather than pro-rata amongst those creditor now being designated as holds.54
The hearing on the Application was noticed for January 10, 2018.55 The Trustee filed a supplemental memorandum in support of his Application on January 8, 2018.56 In the supplement the Trustee first addressed the discrepancies regarding the amounts owed Fam and the KPB as part of a revised statement of total amounts owed.57
The Trustee then countered the IRS's arguments regarding the priority of its liens with a copy of a March 8, 2017 letter addressed to Minden from the IRS, in which the agency proposed to issue a certificate discharging the License from the tax liens upon the IRS's receipt of evidence demonstrating that the debtor was "divested of rights, title, or interest" in the License.58 The "conditional commitment" to discharge the IRS liens provided that it was valid for 30 days, and would be automatically revoked if the evidence requested was not received prior to expiration of the 30-day period (or another agreed date).59
The Trustee further "adhere[d] to his position that the expectations of the parties in this case, as well as the standard of practice in this jurisdiction generally, is that the [Sale Proceeds] would be distributed pro-rata to the taxing authorities and creditors with allowed holds."60
At the January 10, 2018 hearing on the Application, the IRS agreed on the record to the pro-rata distribution proposed by the Trustee, effectively withdrawing its opposition.61 The court raised its concern that the Trustee was attempting to adjudicate claims via a proposed distribution outside the regular distribution process for chapter 7 estates. At Fam's request, the court granted the parties an opportunity to submit further briefing on the proposed distribution.
On January 22, 2018, Fam filed its supplemental memorandum in support of the Application (Supplement).62 For the first time Fam objected to the debtor's standing to challenge the Application. It encouraged the court to view the Trustee's proposed distribution as a compromise.63 Minden's declaration attached to Fam's Supplement included evidence demonstrating that he began advertising for the involuntary transfer pre-petition. Fam argued that this evidence demonstrated that *249Minden did not refrain from recording Fam's hold with AMCO to avoid interference with the Transfer Application.64
On January 25, 2018, the debtor's owners, Katherine Lemaster and Daniel Butts, entered their appearance in the bankruptcy case.65 The same day, the debtor filed its opposition to Fam's Supplement. The debtor noted that Lemaster and Butts joined in opposition to the Application and argued that they had standing to object to the Application in light of its impact on the nondischargeable debt owed to the IRS.66 The debtor also pressed its arguments that Minden and Fam willfully failed to record a hold on the License. The debtor contends that contrary to Minden's allegations the Transfer Application was never converted from an involuntary transfer to a voluntary one and believes that the failure to record a hold was not an "oversight."67
Finally, on January 26, 2018, Fam filed its Motion for Leave to File Supplemental Affidavit,68 attaching an email exchange between Minden and AMCO director Erika McConnell. The debtor did not oppose the filing of the supplemental affidavit, but challenged the evidentiary significance of the email.69 On March 22, 2018, this court entered its order granting the Motion for Leave to File Supplemental Affidavit, and took this matter under submission as of February 6, 2018.70
B. ANALYSIS
1. The Debtor and its Owners Have Standing to Challenge the Distribution Proposed by the Trustee.
Fam has argued that the debtor and its owners have no standing to challenge the relief requested in the Application, citing cases in the claim objection context in support. Generally, one has standing where he or she "meets constitutional and prudential standing requirements."71 To prove constitutional standing, there must be "an injury in fact which is caused by or fairly traceable to some conduct or some statutory prohibition, and which the requested relief will likely redress."72 "Prudential standing embodies judicially self-imposed limits on the exercise of federal jurisdiction."73
The initial objection to the Application was filed by the debtor alone.74 On January 25, 2018 the debtor's owners, Katherine Lemaster and Daniel Butts, filed their notice of appearance in this matter,75 and joined the debtor in its opposition to the Application.76 The distribution proposed by the Trustee in the Application, and now agreed to by the IRS, would pay the IRS on a pro-rata basis with the other creditors deemed to have holds against the License. Such distribution would not discharge the debtor's outstanding federal tax debt in this bankruptcy *250case.77 The debtor, and its owners, argue that the debt owed to the IRS must be treated as priority debt, and paid in accordance with § 507(a)(8) rather than pro-rata, and such treatment would pay a significant portion of the tax debt. The Trustee's proposed distribution sufficiently implicates the debtor's and its owner's interests to confer constitutional and prudential standing to challenge the proposed distribution.78
2. Procedural Problems with the Sale and Distribution.
The instant motion is the latest attempt in this district to reconcile the State of Alaska's regulation of liquor licenses and the transfer of such liquor licenses held by a bankrupt debtor.79 Alaska provides for the involuntary or voluntary transfer of liquor licenses.80 Either process requires an application to AMCO,81 notice to the debtor's creditors,82 and approval from AMCO's board.83 Those creditors holding debts arising from the operation of the liquor license may place a "hold" against the liquor license by filing a written statement that they are owed money from the holder of the liquor license arising from the conduct of the licensed business. AMCO will not approve a voluntary transfer of a liquor license unless these holds are paid.84
*251In theory, the transfer of a liquor license held by a bankruptcy debtor is no different than a transfer of a license outside of bankruptcy. However, not all creditors of the debtor may qualify for a hold against the liquor license, thereby altering the distribution otherwise required in a chapter 7 by § 726(a). Those creditors having a valid hold against a liquor license stand in a position equivalent to a secured creditor, as AMCO will not approve the transfer of the license absent resolution of those creditors' debts. Still, only those creditors that respond to AMCO's notice of a transfer, or have previously filed a written claim against the license, are entitled to a hold.
This court has long approved sales of liquor licenses recognizing creditors asserting holds against a liquor license and permitting payment of such holds from proceeds of the sale of the license. The Ninth Circuit examined a substantially similar version of AS 04.11.360(a)(4) in In re Anchorage International Inn, Inc.85 Concluding that Alaska's statutory preference of certain creditors with holds did not violate federal bankruptcy law, the Ninth Circuit observed:
The creditor of an owner of an Alaska liquor license, unlike the holder of a security interest or a mechanic's lien, cannot enforce the lien by self-help or by execution on the license. See C.Y., Inc. v. Brown, 574 P.2d 1274, 1277 (Alaska 1978). Nevertheless, the creditor's interest in the license is an encumbrance superior to the rights of others. The Alaska statute assures the liquor-related creditor that the sale of the license will not occur until his debt is paid or security satisfactory to him is provided. Other creditors whose debts are not related to the licensed business receive no similar assurances. Under Alaska law, the creditors of the liquor business do have a superior right to payment from the license sale proceeds. [footnote omitted]
Although the lien interest created by Alaska Stat. § 04.11.360(4) differs in form from other more typical creditor-protection devices such as a security interest or a materialman's lien, all serve the same function. Regardless of its label, each encourages the extension of credit by providing that, upon the occurrence of certain conditions, the creditor has a priority right to payment from a particular asset.86
The distribution of proceeds from the sale of a liquor license, however, remain governed by the Bankruptcy Code, subject to the creditors' property rights created under Alaska law. Accordingly, a trustee administering a liquor license may disburse the proceeds from a sale of a liquor license approved by AMCO to creditors *252with valid holds against the license as they would to secured creditors. Such treatment recognizes the statutory priority imposed by AS 04.11.360(4), and upheld by the Ninth Circuit in In re Anchorage International Inn, Inc. Nonetheless, distribution to a specific creditor still depends upon the existence of a valid hold filed against the license being sold, or an order from AMCO under AS 04.11.360 conditioning the transfer of the liquor license upon payment to that creditor in recognition of such a hold.
In this instance there were no valid holds filed against the license at the time of the sale.87 The Trustee attached Minden's unsigned AMCO affidavit to the Application to show those creditors with potential holds against the liquor license.88 But, as part of Minden's involuntary transfer application AMCO sent notification to Aqua Pesca's creditors under AS 04.11.280(b) on May 25, 2017. The debtor's creditors could have placed holds on the License by returning the notification letter to AMCO with an asserted outstanding claim and/or objection to the License Transfer. None of the creditors to whom the Trustee proposes to distribute the Sale Proceeds returned the May 25, 2017 letters to AMCO, though one creditor stated that it did not place a hold on the License because it feared that such action would violate the automatic stay.
The only holds actually filed with AMCO were received from Fam and the IRS on October 25, 2017, and November 14, 2017, respectively.89 Both were made well after the transfer of the License was approved by AMCO, and this court had approved the sale. The Sale Order provided that "[t]he sale of the License is free and clear of the claims and liens of all creditors or other interested persons who received notice of the Motion. Those claims and interests shall attach to the proceeds from the sale of the License to the same extent and in the same order of priority as in the underlying License. "90 Because no holds were filed before the License was transferred from the debtor to Fam, no holds attached to the proceeds from the sale of the License.
The Trustee proposes to distribute the net proceeds of the sale of the License to various creditors who have not filed holds, or who filed holds well after the sale. Neither the Trustee, nor Fam, offer any analysis or argument to explain how unfiled potential holds, or those filed post-sale, attached to the sale proceeds. For these reasons, the proposed distribution is not supported by § 726(a) because there is no evidence that the creditors identified in the Application had valid holds under Alaska law at the time of the sale of the License. Therefore, the court must deny the Application. A separate order shall be entered concurrently with this memorandum denying the Trustee's Application to Distribute Proceeds from Sale of Liquor License (ECF No. 38).
ECF No. 34.
ECF No. 38.
See ECF Nos. 39; 41-43.
ECF No. 44.
ECF No. 21-1 at p. 1.
ECF No. 17-2.
ECF No. 21-2 at p. 1.
Id.
ECF No. 21-3.
ECF No. 21 at p. 2.
ECF No. 43-1 at p. 2.
3 AAC 304.107.
Id. The notary block indicates that the document was notarized in Arizona. While the record demonstrates when Minden signed the Transfer Application and when AMCO received the Transfer Application, it is unclear when the Transfer Application was submitted. Fam contends that the Transfer Application was submitted pre-petition, i.e. , before February 27, 2017. Although the majority of the actual Transfer Application has not been submitted, the submission letter addressed to Shilo Senquiz at AMCO is dated March 7, 2017, and both the letter and the single page of the Transfer Application included in ECF No. 43-1 bear AMCO's receipt stamp dated March 10, 2017.
ECF No. 43-1 at pp. 4-9; 11; 13; 15.
ECF No. 21.
Id. at 2.
ECF No. 21-4.
The Stay Relief Motion did, however, disclose that "Before the filing of this bankruptcy case Fam Alaska applied for retransfer of the license." ECF No. 21 at p. 3.
See ECF Nos. 23, 27.
ECF No. 27 at p. 3.
ECF No. 23-1.
Id. at p. 1.
ECF No. 26.
ECF No. 24.
ECF No. 28.
ECF No. 28 at p. 3.
Id. at p. 9, para. 4.
Id. at p. 9, para. 6.
Id. at p. 10.
Id. at p. 9, para. 7. A "hold" within the meaning of AS 04.11.360(4) is a debt or tax "arising from the conduct of the business licensed under this title."
Id. at p. 4.
Id. at p. 4, n.2 ("Determination of a creditor's hold amount does not appear, to the Trustee, to be an issue that the Board is likely to desire to adjudicate...whereas determination of a hold amount is similar to the claims allowance process that this [c]ourt engages in on a regular basis.").
Id. at p. 5.
Id.
Id. at p. 9, para. 8.
ECF No. 29.
ECF No. 31.
ECF No. 43-1 at p. 15. Only one creditor, Precision Construction, responded to AMCO. Kenai Peninsula Borough (KPB) (ECF No. 26) filed a limited opposition to Fam's motion for relief from the automatic stay (ECF No. 21), in which the Borough expressed its view that filing a protest of the license transfer with AMCO could be an action prohibited by 11 U.S.C. § 362(a)(6). Thus, the Borough filed its opposition to the transfer with this court rather than with AMCO.
ECF No. 43-1 at p. 17. The temporary approval stated that "[a]ll statutory requirements have been fulfilled, there is no protest under AS 04.11.480, and no objections under AS 04.11.470 have been received."
ECF No. 43-1 at p. 18. Minden did disclose on the record at the hearing on the Sale Motion that the transfer was approved on July 11, 2017.
ECF No. 34.
ECF No. 34 at p. 1, para. 1.
Id. at p. 2, paras. 3, 5.
Id. ("[U ]nless [AMCO] indicates, when it approves the sale of the License, that the board desires to adjudicate the hold issues....unless [AMCO] indicates to the contrary when it approves the sale of the License.").
ECF No. 38.
Id. at p. 2 ("When [AMCO] approved the sale of the License, the board did not indicate that it desired to adjudicate the hold issues....").
Id.
Id. at p. 3.
Id. at pp. 3, 8.
ECF Nos. 39, 42.
See ECF No. 41.
ECF No. 43.
Id. at p. 8.
Id. at p. 10.
ECF No. 40.
ECF No. 44.
Id. at p.3.
Id. at pp. 4, 15-16.
Id. at p. 16.
Id. at p. 4.
January 10, 2018 Hearing at 2:44-2:56, ECF No. 46.
ECF No. 47.
Id. at pp. 1-2.
ECF No. 47-1.
ECF No. 48.
ECF No. 49.
Id. at pp. 1-2.
ECF No. 50.
ECF No. 51.
ECF No. 52.
Veal v. American Home Mortgage Servicing, Inc., et al. (In re Veal) , 450 B.R. 897, 906 (9th Cir. BAP 2011).
Id. (citations omitted).
Id. (internal quotations omitted).
ECF No. 43.
ECF No. 48.
ECF No. 49.
See 11 U.S.C. §§ 523(a)(1) and 727(a)(1). More importantly, Lemaster and Butts presumably would be personally responsible for any of the debtor's unpaid trust fund taxes under 26 U.S.C. § 6672(a). See In re Cherne , 514 B.R. 616, 621 (Bankr. D. Idaho 2014), aff'd , 2015 WL 5611586 (D. Idaho Sept. 23, 2015), aff'd sub nom. Matter of Cherne, 700 F. App'x 716 (9th Cir. 2017).
See Gilliam v. Speier (In re KRSM Properties, LLC) , 318 B.R. 712, 716 n.3 (9th Cir. BAP 2004) (citations omitted) ("The standing of owners to object to claims in a corporate chapter 7 case, like the standing of chapter 7 debtors to object to claims in their own cases, depends upon whether they would be 'injured in fact' by the allowance of the claim. This requirement is satisfied by cognizable prospects of receiving a distribution or of a nondischargeable debt being affected."); In re I & F Corporation , 219 B.R. 483, 485 (Bankr. W.D. Ohio 1998) (discussing Mulligan v. Sobiech , 131 B.R. 917, 919 (S.D.N.Y. 1991), where a chapter 7 debtor was found to have standing to object to a creditor's proof of claim in part because sustaining the objection "would make funds available to pay certain non-dischargeable claims").
Artus v. Alaska Dept. of Labor, Employment Sec. Div. (In re Anchorage International Inn, Inc.) , 718 F.2d 1446, 1449 (9th Cir.1983) ; Stone v. State of Alaska Dep't of Rev. , subsequently aff'd in part, rev'd in part, 6 F.3d 581 (9th Cir. 1993), and overruled by United States of America v. Battley (In re Kimura) , 969 F.2d 806 (9th Cir. 1992).
AS 04.11.360 provides the terms and conditions that shall result in the denial of transfer of a license to another person. Under AS 04.11.360(4)(A) a request to transfer a liquor license shall be denied if the transferor has not paid all debts or taxes arising from the conduct of the business licensed under this title unless "(A) the transferor gives security for the payment of the debts or taxes satisfactory to the creditor or taxing authority; or (B) the transfer is under a promise given as collateral by the transferor to the transferee in the course of an earlier transfer of the license back to the transferee in the event of default in payment for property conveyed as part of the earlier transfer of the license." The retransfer of a license upon default of the terms of the transfer of that license is generally referred to as an involuntary transfer governed by AS 04.11.670 and 3 AAC 304.107 as well. See also Alaska Alcoholic Beverage Control Board Form AB-01 Transfer License Application (including "involuntary transfer" as designated type of transfer).
See 3 AAC 304.105.
See AS 04.11.280(b) ; 3 AAC 304.125.
See AS 04.11.040(a).
See AS 04.11.360(4)(A). Although the court is unaware of any reported decision that has considered an unpaid creditor's ability to prevent an involuntary transfer, a 1994 informal opinion of the Alaska Attorney General suggests that a local governing body may protest an involuntary transfer under AS 04.11.180(a) to achieve the same result. 1994 Alaska Op. Att'y Gen. (Inf.) 335 (1994). The right to protest under AS 04.11.180(a) is limited to local governing bodies and does not provide a similar right to protest a transfer to other creditors.
718 F.2d 1446, 1449 (9th Cir.1983).
The Ninth Circuit subsequently re-examined the same statutory scheme and the transfer of Alaskan liquor licenses in In re Kimura, 969 F.2d at 812, but held that "Alaska's statutory conditions for the transferability of a liquor license invalidly establish a property interest in trade creditors that violates the supremacy of a federal tax lien under federal law." In reaching its conclusion the Ninth Circuit noted that its decision in In re Anchorage Int'l Inn, Inc., was limited to whether bankruptcy policy forbid Alaska from favoring one class of creditors from another and did not address a federal tax lien. Id. at 813.
ECF No. 38 at 2 ("Surprisingly, no creditor filed a hold, with respect to the transfer of the License from the Trustee to Minden, prior to the transfer.").
ECF No. 38 at p. 8.
ECF No. 43 at p. 8. Neither of those holds have been submitted into evidence.
ECF No. 34 at para. 4 [emphasis added]. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501505/ | Debtors' case was converted to Chapter 7 of the Bankruptcy Code on April 24, 2017. The Bank filed its complaint on July 31, 2017, seeking to except $24,000 attributable to the August barley proceeds spent by Jeremy on other expenses from Debtors'
*257discharge under 11 U.S.C. § 523(a)(6). The Bank alleges that "Defendants converted the Plaintiff's collateral in the amount of approximately $24,000 through the sale of Plaintiff's collateral and retention of the sales proceeds." 22, Amended Complaint, ECF No. 11. Trial in this matter was held May 30, 2018. Wang, Walker, Stephanie and Jeremy testified. Exhibits 1, 2, 6, 7, 8 and 9 were admitted into evidence without objection.
DISCUSSION
The purpose of the Bankruptcy Code is to grant a "fresh start" to the "honest but unfortunate debtor." Marrama v. Citizens Bank of Mass. , 549 U.S. 365, 127 S.Ct. 1105, 1107, 166 L.Ed. 2d 956 (2007). A bankruptcy debtor is assumed to be "poor, but honest" and debts are presumed to be dischargeable unless a party proves otherwise with competent evidence. Albarran v. New Form, Inc. (In Re Albarran) , 347 B.R. 369, 379 (9th Cir. BAP 2006). The Bank bears the burden of proving their claim against the Debtors is exempt from discharge under 11 U.S.C. § 523 (a)(6), by a preponderance of the evidence. Grogan v. Garner , 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
I. § 523(a)(6)
Section 523(a)(6) excepts from discharge debts resulting from "willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. 523(a)(6). The willful and malicious requirements are conjunctive. However, the court considers the "willful" and "malicious" prongs of § 523(a)(6) separately. Barboza v. New Form, Inc. (In re Barboza) , 545 F.3d 702, 706 (9th Cir. 2008) (citation omitted). "The willful injury requirement of § 523(a)(6) is met when it is shown either that the debtor had a subjective motive to inflict the injury or that the debtor believed that injury was substantially certain to occur as a result of his conduct." Petralia v. Jercich (In re Jercich) , 238 F.3d 1202, 1208 (9th Cir.2001), cert. denied, 533 U.S. 930, 121 S.Ct. 2552, 150 L.Ed.2d 718 (2001). The injury itself must be deliberate or intentional, "not merely a deliberate or intentional act that leads to injury." Sparks v. King (In re King) , 258 B.R. 786, 795 (Bankr. D.Mont. 2001). Thus, negligent or reckless acts which inflict consequential injury do not fall within the ambit of § 523(a)(6). Kawaauhau v. Geiger , 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).
An injury is malicious if it "involves '(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.' " Barboza v. New Form, Inc. (In re Barboza) , 545 F.3d 702, 706 (9th Cir. 2008) (citation omitted).9 As a threshold matter, the Court finds that the Bank has not satisfied any of the § 523(a)(6) elements as to Stephanie. Stephanie was not involved in the delivery of the barley to Muggli Brothers and Stephanie did not cash the checks for the barley. The evidence shows that she had nothing to do with the Muggli transaction that resulted in the barley proceeds Jeremy used to pay other expenses. Thus, the Court does not have any evidence before it that supports excepting $24,000 from Stephanie's discharge under § 523(a)(6).
Solely at issue is the Bank's claim against Jeremy. There is no dispute that: (i) the Bank had a perfected security interest in the barley; (ii) the Bank's lien extended to the proceeds that resulted from the sale of that barley; and, (iii) Jeremy cashed various checks from the sale of the *258barley, and used the proceeds to fund Debtors' continuing operating expenses in 2016. However, the Court has concluded, after careful consideration of the testimony, that the Bank has failed to show that Jeremy had a subjective motive to inflict injury on the Bank, or that Jeremy believed that injury was substantially certain to occur as a result of cashing the checks from Muggli Brothers and using the barley sales proceeds to further fund the farming operation.
At the time Jeremy cashed the checks and used the barley proceeds, Debtors were still anticipating proceeds from the harvest of their millet and corn crops. Debtors expected that the funds from these crops would be available to pay the Bank. Debtors did not anticipate diminished yields from their millet crop. Debtors also did not anticipate the complete loss of their corn corp. Finally, Debtors did not anticipate that their crop insurance claim would be denied. On this record the Court cannot conclude that Jeremy acted with the requisite mental state required under § 523(a)(6). The Bank has failed to demonstrate by a preponderance of the evidence that Jeremy either had a subjective motive to inflict injury on the Bank, or believed that injury was substantially certain to occur.
If the evidence is viewed in the light most favorable to the Bank, one might conclude Jeremy acted negligently or recklessly, but that is insufficient to prevail on a claim under § 523(a)(6). The Supreme Court instructs that Jeremy's negligent or reckless acts simply do not fall within the ambit of § 523(a)(6). Kawaauhau v. Geiger , 523 U.S. 57, 118 S.Ct. 974. Because the Bank failed to satisfy the willful injury prong of § 523(a)(6), consideration of whether Jeremy's acts were malicious is not necessary. The Bank's claims against Debtors under § 523(a)(6) are dismissed with prejudice.
II. § 523(d)
Having prevailed, Debtors seek attorney's fees and costs as permitted under § 523(d). Fees and costs to a prevailing debtor are provided for in § 523(a)(2) proceedings pursuant to § 523(d) which provides:
If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
"The purpose of § 523(d) is to deter creditors from bringing frivolous challenges to the discharge of consumer debts. See S.Rep. No. 98-65, at 9-10 (1983)." First Card v. Hunt (In re Hunt) , 238 F.3d 1098,1103-04 (9th Cir.2001) ; Sparks v. King (In re King) , 258 B.R. 786, 797-98 (Bankr.D.Mont.2001).
To recover attorney's fees under § 523(d), a debtor must prove: (1) the creditor requested a determination of the dischargeability of the debt under § 523(a)(2) ; (2) the debt is a consumer debt; and (3) the debt was discharged. In re Stine , 254 B.R. 244, 249 (9th Cir. BAP 2000), aff'd, 19 F. App'x 626 (9th Cir. 2001). Debtors have satisfied factors 1 and 3, but they have not met their burden with respect to factor 2. "Consumer debt" is defined in § 101(8) as "debt incurred by an individual primarily for a personal, family or household purpose." "It is settled in this circuit that the purpose for which the debt was incurred affects whether it falls within the statutory definition of 'consumer debt' and that debt incurred for business ventures or other profit-seeking activities does *259not qualify." Meyer v. Hill (In re Hill) , 268 B.R. 548, 552-53 (9th Cir. BAP 2001). In this case, Debtors secured the loan from the Bank to primarily fund their farming operation, with the hopes of making a profit on their crops. Additionally, Jeremy testified that he used the $24,000 proceeds from the sale of barley to further fund his farming operations. "[B]ecause the debt was incurred with a profit motive, it is not consumer debt." In re Bushkin , 2016 WL 4040679 (9th Cir. BAP 2016). Debtors have failed to meet their burden of showing that the loan proceeds from the Bank were consumer debts. Therefore, Debtors' request for fees under § 523(d) is denied. In accordance with the foregoing,
IT IS ORDERED that the Court will enter a separate judgment in favor of the Debtor/Defendants, Jeremy Wayne Robertus and Stephanie Rae Robertus; Plaintiff Bank of Baker's complaint against Defendants is dismissed with prejudice; and Defendants' request for attorney's fees and costs under § 523(d) is denied.
Whether an injury is "malicious" requires a separate inquiry, which is reviewed for clear error. Id. at 1209 & n. 36 ; Su v. Carrillo (In re Su) , 259 B.R. 909, 914 (9th Cir. BAP 2001), aff'd, 290 F.3d 1140 (9th Cir.2002). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501506/ | Catherine Peek McEwen, U.S. Bankruptcy Court Judge
THIS PROCEEDING comes before the Court on the United States Trustee's Complaint Under 11 U.S.C. §§ 110 and 526 - 28 against the Defendants, Kirkland D. Carnegie and Carnegie Tax Service, Inc. The United States Trustee alleges that the Defendants have been providing bankruptcy assistance services as a bankruptcy petition preparer and a debt relief agency all in violation of 11 U.S.C. §§ 110 and 526 - 28. Upon the consent of the Defendants, as evidenced by their signatures attached hereto, this Court will enter judgment in favor of the United States Trustee and accord relief largely consistent with that requested in the Complaint.
*261Jurisdiction
Under 28 U.S.C. §§ 157, 1334, and 11 U.S.C. §§ 110 and 526(c), this Court has jurisdiction. The statutory predicates for the Complaint are 11 U.S.C. §§ 110, 526(c), and Federal Rules of Bankruptcy Procedure 7001(7), 7001(9), and 9011(b)(3). The Complaint constitutes a core proceeding to which the parties all have consented to having this Court enter final order and judgments. As this Consent Judgment provides for sanctions, future injunctive, and prospective relief, this Court must describe the conduct determined to constitute a violation and explain the basis for the sanction imposed, even if by stipulation and consent.
Stipulated Facts
Defendants have operated a business in the State of Florida. At times, the Defendants have provided their client-customers with bankruptcy assistance services by preparing the necessary forms and materials to file for bankruptcy relief in return for money or other valuable consideration. Mr. Carnegie is not an attorney, nor does he put himself out as being an attorney or offering legal services only authorized to be provided by an attorney admitted to practice law.
Specific to the bankruptcy case of Mr. and Mrs. Williams, the Defendants offered to provide bankruptcy assistance to the Debtors by preparing the bankruptcy petition, schedules, and statements. The Williams constitute assisted persons as defined under the Bankruptcy Code and Rules. The Defendants did not enter into or provide the Williams' with any fully executed written contract for bankruptcy assistance services. The Defendants drafted and prepared the bankruptcy petition for Mr. and Mrs. Williams for payment of $300.00. The Defendants constitute bankruptcy petition preparers and thereby a debt relief agency as defined under the Bankruptcy Code and Rules.
The Defendants did not disclose that they provided bankruptcy petition preparation services to the Williams. The Defendants did not sign the bankruptcy petition. The Defendants did not disclose the social security number.
On the petition that the Defendants prepared for Mr. and Mrs. Williams, the Defendants checked "No" for the Williams' answer to the question:
Did you pay or agree to pay someone who is not an attorney to help you fill out your bankruptcy forms?
On the Williams' Statement of Financial Affairs, the Defendants checked "No" for the Williams' answer to the question:
Within 1 year before you filed for bankruptcy, did you or anyone acting on your behalf pay or transfer any property to anyone you consulted about seeking bankruptcy or preparing a bankruptcy petition? Include any attorneys, bankruptcy petition preparers, or credit counseling agencies for services required in your bankruptcy.
The Defendants did not prepare an Official Form 119 - Bankruptcy Petition Preparer's Notice, Declaration, and Signature. The Defendants did not prepare or file a Bankruptcy Form 2800 - Disclosure of Compensation of Bankruptcy Petition Preparer.
The above stated facts arise in every case that the Defendants provided bankruptcy assistance services as a bankruptcy petition preparer-one need only change the names of the Defendants' client-customers.
Discussion
Congress amended the Bankruptcy Code in 1994 to address perceived abuses by non-attorney petition preparers. Courts applying § 110 since its enactment have *262construed it relatively broadly in order to give effect to its remedial mandate.
Courts have rejected attempts to evade the statute by persons who claims they were not compensated for preparing documents, but merely were collecting money for other services.1
In many ways, Bankruptcy Code § 110 is a model of clarity for those non-attorney individuals who want to provide bankruptcy assistance services and prepare bankruptcy papers for filing. It describes in detail conduct forbidden by statute, identifies a range of remedies, and punishments for violations of the statute.
Almost a decade later, Congress again amended the Bankruptcy Code in 2005 to address more perceived abuses by entities that provide bankruptcy assistance services to consumer debtors. And like § 110, §§ 526 -28 provide clarity for those entities wanting to provide bankruptcy assistance services to consumer debtors. Sections 526-28 describe in detail conduct forbidden by statute and identify a range of remedies and punishments for violations.
Based upon the foregoing, this Court finds and concludes that the Defendants have provided services to debtors and assisted persons in this Court in violation of Bankruptcy Code §§ 110, 526, 527, and 528. This Court finds and concludes that the Defendants had no actual intent to violate §§ 110, 526, 527, or 528 ; however, intent to violate is not a prerequisite finding for ordering disgorgement, refund, reimbursement, civil penalties, or prospective relief.
Accordingly, upon the foregoing and for good cause found, IT IS ORDERED that:
1. The Defendants, jointly and severally, constituted a debt relief agency and bankruptcy petition preparers as defined under 11 U.S.C. §§ 110(a) and 101(12A).
2. The Defendants, jointly and severally, provided services as a bankruptcy petition preparer and debt relief agency to client-customers in this Court that violated 11 U.S.C. §§ 110, 526, 527, and 528.
3. In the bankruptcy case, In re Williams , 8:17-bk-09062-CPM, the Defendants, jointly and severally, negligently violated 11 U.S.C. §§ 110, 526, 527, and 528.
4. The Defendants, jointly and severally, must disgorge, reimburse, and refund all fees, costs, and expenses of Mr. and Mrs. Williams, in the total amount of $635.00. The Defendants shall remit this payment within thirty days of the entry of this Consent Judgment directly to Mr. and Mrs. Williams by check and provide proof of remittance to J. Steven Wilkes, Trial Attorney, U.S. Department of Justice, Office of the U.S. Trustee for Region 21, 501 E. Polk St., Ste. 1200, Tampa, Florida 33602.
5. In accordance with 11 U.S.C. § 526(c)(5), the Defendants, jointly and severally, shall pay civil penalties of $365.00 to the United States Trustee. That payment shall be made within thirty days of the entry of this Consent Judgment and be made payable to the United States Treasury. The Defendants shall remit this payment to J. Steven Wilkes, Trial Attorney, U.S. Department of Justice, Office of the U.S. Trustee for Region 21, 501 E. Polk St., Ste. 1200, Tampa, Florida 33602.
6. As the Defendants are consensually, immediately, and indefinitely ceasing all bankruptcy petition preparation and bankruptcy assistance services, this Court will not order the payment of $2,000.00, the per-violation sanctions of $500.00, or the trebling of sanctions.
*2637. Under 11 U.S.C. §§ 105, 110, and 526 and by consent, the Defendants, jointly and severally, are permanently and indefinitely ENJOINED and SHALL NOT :
a. Counsel, represent, or provide any other means of assistance or representation of any person or entity in any potential matter governed under the jurisdiction of the Bankruptcy Code and Rules;
b. Prepare, draft, assist in the preparation or drafting, or file any papers, pleadings, or petitions to be used or filed in any bankruptcy court, except for any filings made by and for Mr. Kirkland D. Carnegie, acting in propria persona ;
c. Engage in any conduct constituting bankruptcy assistance as defined under the Bankruptcy Code and Rules; and
d. Act or engage in any conduct as a bankruptcy petition preparer or a debt relief agency as defined and as governed under the Bankruptcy Code and Rules.
8. The Clerk of this Bankruptcy Court shall record this Consent Judgment in her judgment log maintained in accordance with Federal Rule of Bankruptcy Procedure 5003(c).
9. This Consent Judgment shall be effectively immediately upon its entry. The monetary judgments are effective thirty days after entry of this Consent Judgment and for which sum let execution issue without further action.
10. This Court retains jurisdiction over all matters arising from or relating to the implementation of this Consent Judgment. But this shall not construed as any limitation on any reciprocal jurisdiction of any court or bar association in that jurisdiction or before that tribunal.
2 Collier of Bankruptcy ¶ 110.02[1](Alan. N. Resnick & Henry J. Sommers, eds., 16th ed.). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501508/ | HONORABLE ELIZABETH S. STONG, UNITED STATES BANKRUPTCY JUDGE
*318Introduction
Robert L. Geltzer, the Chapter 7 Trustee of the Estate of Estella Brizinova and Edward Soshkin, aka Eduard Soshkin (together, the "Debtors"), commenced this adversary proceeding by filing a complaint (the "Complaint") against defendant Zlata Soshkin, aka Zlata Polukhina. Ms. Soshkin is the Debtors' daughter-in-law, and is married to the Debtors' son Nick Soshkin. The Trustee seeks to recover alleged estate property that, he asserts, the Defendant has improperly refused to turn over, in violation of Bankruptcy Code Section 542. The Trustee also seeks an award of compensatory and punitive damages based on a theory of common law conversion. And the Trustee seeks declaratory relief, injunctive relief, and compensatory and punitive damages pursuant to Bankruptcy Code Sections 362(a) and 362(k), based on Ms. Soshkin's alleged transfer of estate property in violation of the automatic stay. This is the second time that the Trustee has sought to recover the property at issue, although it is the first time that he has sought such a recovery from Ms. Soshkin.
The Trustee alleges that pursuant to Section 542, Ms. Soshkin is required to turn over post-petition sale proceeds in the amount of at least $42,431.66 (the "Post-Petition Sale Proceeds"), from ENSI Consulting, Inc. ("ENSI"), an auto supply parts company listed by the Debtors on Schedule B - Personal Property as owned one hundred percent by Debtor Brizinova. The Trustee also alleges that Ms. Soshkin willfully and knowingly converted estate property, namely the estate's one hundred percent interest in ENSI and the Post-Petition Sale Proceeds, damaging the estate in the amount of at least $42,431.66, and seeks an award of punitive damages in an amount to be determined by this Court. And the Trustee alleges that the estate is entitled to recover damages in the amount of at least $42,431.66, under Bankruptcy Code Sections 362(a)(3) and 362(k), for violations of the automatic stay arising from Ms. Soshkin effectuating post-petition sales of ENSI auto parts, depositing the proceeds into her PayPal account, and using certain of the Post-Petition Sale Proceeds for her own, her husband's, and her brother-in-law Igor Soshkin's purchases.
Ms. Soshkin seeks the dismissal of this action pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable here by Federal Rule of Bankruptcy Procedure 7012(b), on grounds of "lack of cause of action," that this Court lacks jurisdiction to hear this proceeding, that the statute of limitations has expired, and pursuant to the common law doctrine of laches. Mot. to Dismiss at 19, ECF No. 5. Ms. Soshkin also invites the Court to revisit its decision in Robert L. Geltzer, Chapter 7 Trustee v. Estella Brizinova and Edward Soshkin (In re Brizinova), 554 B.R. 64 (Bankr. E.D.N.Y. 2016), which upheld in part the Trustee's similar claims to recover the Post-Petition Sale Proceeds from the Debtors, and to "correct its prior ruling in [the] other matter," with respect to the Post-Petition Sale Proceeds and property of the estate. Reply at 9, ECF No. 11.
*319The questions posed by this motion are whether in this action, the Trustee adequately pleads claims for turnover of property of the estate, conversion of estate property, and violations of the automatic stay, as well as for actual and punitive damages and injunctive relief. For the reasons set forth below, Ms. Soshkin's motion to dismiss is granted and leave to replead is allowed.
Jurisdiction
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E). And as a core matter, this Court has constitutional authority to enter a final judgment, because the Trustee's claims stem "from the bankruptcy itself." Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). For these reasons, this Court has jurisdiction and the authority to consider and enter judgment on these claims under 28 U.S.C. § 1334(b) and the Standing Order of Reference dated August 28, 1986, as amended by Order dated December 5, 2012, of the United States District Court for the Eastern District of New York.
Background
Selected Procedural History
The Debtors are husband and wife who filed this joint bankruptcy petition on April 24, 2012. The Trustee was appointed on that date. On Schedule B, the Debtors indicate that as of the petition date, Debtor Brizinova owned one hundred percent of the stock of ENSI, a New York corporation. According to Schedule B, the value of Debtor Brizinova's interest in the ENSI shares as of the petition date was zero.
On October 4, 2012, the Court entered an order pursuant to Bankruptcy Rule 2004 directing the Debtors to produce certain documents "as owners of NC Consulting, Inc., as well as any other businesses in which they have an ownership interest," for a period of six years before the petition date, and to appear for an examination by the Trustee. Order Auth. Rule 2004 Exam, at 1, Case No. 12-42935, ECF No. 25. The Trustee alleges that the Debtors each testified at their Rule 2004 examinations, and Debtor Edward Soshkin testified at his deposition, that the business of ENSI was the sale of auto parts through the internet and eBay.
On March 13, 2014, the Trustee commenced an adversary proceeding against Nick Soshkin and Igor Soshkin, the Debtors' sons, seeking to recover allegedly fraudulent transfers by the Debtors to their sons of certain interests in real and personal property located in Florida. The parties resolved the Trustee's claims by entering into a stipulation of settlement, which was approved by this Court on December 12, 2014.
On June 23, 2015, the Trustee commenced an adversary proceeding against the Debtors (the "Brizinova Adversary"), seeking turnover of property of the estate, declaratory and related relief, including compensatory and punitive damages for their knowing and willful violation of the automatic stay, and compensatory and punitive damages based on the Debtors' knowing and willful conversion of property of the estate. Compl., Adv. Pro. No. 15-01073, ECF No. 1. The Debtors moved to dismiss that complaint, and on July 20, 2016, this Court entered an order denying in part and granting in part the Debtors' motion to dismiss. There, the Court concluded that with respect to the Trustee's claims for turnover of post-petition sale proceeds pursuant to Section 542(a), stay relief pursuant to Section 362(a), and conversion of Debtor Brizinova's ownership interest in ENSI, the Trustee had adequately alleged those claims, and denied *320the motion to dismiss. But with respect to the Trustee's claim for conversion of the sale proceeds attributable to Debtor Brizinova's ownership interest in ENSI, the Court granted the motion to dismiss, and allowed leave to replead that claim. The Trustee did not replead his conversion claim, and that adversary proceeding is still pending.1
On November 9, 2017, the Trustee commenced this adversary proceeding against Ms. Soshkin. On April 2, 2018, the Court heard argument on the Motion to Dismiss, at which the Trustee and Ms. Soshkin, each by counsel, appeared and were heard, and reserved decision.
The Allegations of the Complaint
Here, as in the Brizinova Adversary, the Trustee alleges that as of the petition date, Debtor Briznova held a one hundred percent ownership interest in ENSI, and that upon the filing of the petition that interest became an asset of the estate.
In addition, the Trustee alleges that based on documents produced by eBay and PayPal during discovery, "and additional information and documents obtained from the internet," ENSI continued to sell auto parts post-petition beginning on the petition date of April 24, 2012, and ending no earlier than July 18, 2015. Compl. ¶ 12, ECF No. 1. The Trustee alleges that an eBay user identification account, "buydashtrims," was "used by ENSI pre-petition to effectuate sales of auto parts via eBay," and that " 'buydashtrims' ... was and is registered to Zlata Polukhina," which is Ms. Soshkin's maiden name, and that the registration indicates her address as 288 Timber Ridge Drive, Staten Island, NY 10306, where she and Nick Soshkin reside. Compl. ¶ 12.
The Trustee asserts that post-petition, purchasers from "buydashtrims" made their payments to a PayPal account registered in Ms. Soshkin's name and address. He alleges that additional records produced by PayPal show that Ms. Soshkin used some of the funds from that PayPal account for personal purchases. The Trustee linked the PayPal account to bank accounts at JPMorgan Chase and TD Bank in the name of Zlata Polukhina.
The Trustee alleges that "unauthorized" ENSI sales during this time generated the Post-Petition Sale Proceeds of approximately $42,431.66, which are property of the Debtors' estate and must be turned over to him. And the Trustee alleges that notwithstanding his repeated demands, Ms. Soshkin has not turned over the Post-Petition Sale Proceeds.
In his First Claim for Relief, seeking turnover pursuant to Section 542, the Trustee alleges that the Post-Petition Sale Proceeds are estate property in Ms. Soshkin's possession, custody and/or control, and that notwithstanding demand, Ms. Soshkin has failed to turn over the Post-Petition Sale Proceeds of at least $42,431.66, plus interest. The Trustee seeks an order directing Ms. Soshkin to turn over to him the Post-Petition Sale Proceeds.
In his Second Claim for Relief, for conversion of estate property, the Trustee alleges that Ms. Soshkin willfully, knowingly, and wrongly converted property of the estate in the form of the Post-Petition Sale Proceeds. The Trustee seeks an order *321awarding damages in the amount of at least $42,431.66, plus interest, and punitive damages in an amount to be determined by the Court.
In his Third Claim for Relief, for violations of the automatic stay pursuant to Section 362(a) and (k), the Trustee alleges that despite her knowledge of the Debtors' bankruptcy filing, and that the Trustee had become the owner of their interest in ENSI, Ms. Soshkin made post-petition sales of ENSI auto parts on eBay, deposited those proceeds into her PayPal account, and used certain of the Post-Petition Sale Proceeds for her personal expenses. The Trustee seeks a declaratory judgment that Ms. Soshkin violated the automatic stay, an order enforcing the stay and enjoining Ms. Soshkin from making further transfers of the Post-Petition Sale Proceeds, damages of at least $42,431.66, plus interest, and punitive damages.
This Motion to Dismiss
On December 14, 2017, Ms. Soshkin filed a motion to dismiss the Complaint, and a memorandum of law in support of the motion (the "Def's Mem."). She makes several arguments in support of her request that the Complaint be dismissed.
Ms. Soshkin seeks to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), on grounds that it fails to state a claim, is untimely and barred by laches, and that this Court lacks jurisdiction to hear it. Ms. Soshkin argues that the Complaint does not satisfy the pleading standards established by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). She asserts that the Complaint is neither "factually plausible" nor "legally viable," and that Debtor Brizinova's ownership interest in ENSI, and thus the Trustee's, "does not create property of the estate in the assets of ENSI." Mot. to Dismiss at 6, ECF No. 5. That is, she argues, the Trustee's ownership interest in ENSI is property of the estate, but the assets of ENSI, a non-debtor entity, are not.
More specifically, as to the First Claim for Relief, seeking turnover, Ms. Soshkin argues that since there is no estate property here, the claim for turnover of estate property fails. She argues that while the Trustee may sell the Debtors' shares in ENSI, he may not sell the corporate assets of ENSI, and for these reasons, he is not entitled to turnover of the Post-Petition Sale Proceeds.
As to the Second Claim for Relief, for conversion, Ms. Soshkin states that since there was never any estate property to be the subject of the conversion claim, there can be no conversion. And because the estate does not have a possessory right in the assets of ENSI, Ms. Soshkin could not have exercised dominion over that property or interfered with it in derogation of the Trustee's rights.
Ms. Soshkin also notes that here, the Trustee seeks to apply the law of the case doctrine to different parties, and a different case, and where there has been no controversy determined by the Court, only a ruling on a motion to dismiss. Ms. Soshkin asserts that the law of the case doctrine does not apply beyond the parties to the case in which the ruling was rendered, and that to apply law of the case here would deprive her of due process. She argues that the issues addressed in the Brizinova Adversary differ from the issue raised here - whether the Post-Petition Sale Proceeds are property of the estate. Ms. Soshkin states that this Court "previously proceeded under the impression that the property [was] property of the estate," and suggests that this is incorrect, is dicta, and is not controlling. Reply at 15. And *322she argues that in all events, this claim is barred by the three-year statute of limitations for conversion, because although the Trustee alleges that the conversion began in 2012, he did not commence this action until 2017, more than three years after he discovered the alleged conversion. She also argues that the doctrine of equitable tolling does not apply because the Trustee has not "established" that any fraudulent conduct concealed the cause of action during the period that the Trustee seeks to have tolled. Reply at 18.
With respect to the Third Claim for Relief, for stay violations, Ms. Soshkin states that there was no stay in place with respect to ENSI, a non-debtor, and so selling ENSI assets did not violate the automatic stay. And she argues that because no acts were taken with respect to property of the estate, the estate has not been damaged.
The Trustee's Opposition
The Trustee opposes the Motion to Dismiss. He responds that the Post-Petition Sale Proceeds at issue here are the same estate assets that are the subject of the Brizinova Adversary. He further responds that the Complaint states claims that are substantially similar to those asserted in the Brizinova Adversary, and that much of that complaint survived a motion to dismiss, as set forth in the Court's memorandum decision (the "Brizinova Decision").
The Trustee also responds that Ms. Soshkin is barred by the law of the case doctrine from arguing that the Post-Petition Sale Proceeds are not property of the estate. He argues that in the Brizinova Adversary, "Dahiya did not argue in the dismissal motion ... that the [Post-Petition Sale Proceeds] were not property of the bankruptcy estate," and that this Court held that the Trustee had adequately alleged that the Post-Petition Sale Proceeds were property of the estate. Opp. Mem. at 2, ECF No. 8. That is, he points out that in the Brizinova Adversary, the defendants did not make that argument even though they were represented by the same counsel, and there, the Court sustained similar claims.
With respect to his turnover claim under Bankruptcy Code Section 542, the Trustee responds that the Complaint states a claim for turnover against Ms. Soshkin that is plausible on its face, because the allegations set forth the elements of that claim, and are "in most instances virtually identical" to the allegations of the turnover claim that was sustained in the Brizinova Adversary. Opp. Mem. at 9-10.
Addressing the adequacy of his conversion claim, the Trustee responds that here again, the allegations of the Complaint are "substantially similar to those alleged" in the Brizinova Adversary, with respect to the conversion of the one hundred percent interest of ENSI. Opp. Mem. at 10. And under both the law of the case doctrine and applicable case law, the Trustee contends that he adequately pleads this claim.
With respect to the laches and statute of limitations issues, the Trustee asserts, among other things, that he did not discover, and could not have discovered, Ms. Soshkin's conversion of estate assets until July 25, 2017. For this reason alone, he asserts, Ms. Soshkin should be precluded from asserting a laches defense to the conversion claim. Alternatively, the Trustee responds that even if the Court applies the three-year limitations period to the conversion claim, it should encompass "at the very least" Post-Petition Sale Proceeds for the three-year period from November 9, 2014, to November 9, 2017. Opp. Mem. at 12.
With respect to the allegations of stay violations, the Trustee responds that here as well, the allegations in the Complaint *323are "substantially similar to those contained in the Trustee's complaint" in the Brizinova Adversary, and the Court has determined that the stay violations claim is adequately pleaded there. Opp. Mem. at 13.
Finally, with respect to the allegations that the Court lacks jurisdiction to hear the Complaint, the Trustee responds that the Court determined that the substantially similar Brizinova Adversary is a core proceeding, and that for the same reasons, the Court has constitutional authority to enter a final judgment here.
Discussion
The Law of the Case
At the outset, the Court considers the Trustee's argument that, based on the Brizinova Decision, and the law of the case doctrine, this Court must conclude that here, the Trustee's claims for turnover and conversion of estate property are adequately pleaded, and that the Motion to Dismiss must be denied.
As the Supreme Court has explained, the law of the case doctrine "generally provides that 'when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.' " Musacchio v. U.S., --- U.S. ----, 136 S.Ct. 709, 716, 193 L.Ed.2d 639 (2016) (quoting Pepper v. United States , 562 U.S. 476, 506, 131 S.Ct. 1229, 179 L.Ed.2d 196 (2011) ). As the Court also observed, "[t]he doctrine 'expresses the practice of courts generally to refuse to reopen what has been decided,' but it does not 'limit [courts'] power.' " Musacchio , 136 S.Ct. at 716 (quoting Messenger v. Anderson , 225 U.S. 436, 444, 32 S.Ct. 739, 56 L.Ed. 1152 (1912) ).
The law of the case doctrine is discretionary in nature, and pragmatic in application. It "is a judicial doctrine that promotes finality and efficiency in the judicial process by encouraging courts to follow their own decisions within any given case." In re Pilgrim's Pride Corp., 442 B.R. 522, 529 (Bankr. N.D. Tex. 2010). And as one authority explains, "the law of the case doctrine expresses the general rule that courts will not reopen issues that have already been decided." 18 J. Moore, J. Lucas & T. Currier, Moore's Federal Practice - Civil § 134.21[1] (2018). To similar effect, "although a court has the power to revisit its own decisions ...it should not do so absent extraordinary circumstances showing that the prior decision was clearly wrong and would work a manifest injustice. These principles must be applied with common sense." Id.
A range of circumstances have been cited by courts seeking to determine whether to apply the law of the case doctrine. Two considerations stand out as fundamental: whether there is identity of parties between the prior and subsequent matters; and whether the prior decision is a final one.
As to the question of identity of the parties, courts consistently find that this is necessary for the doctrine to apply. For example, in Hosking v. TPG Cap. Mgmt, L.P. (In re Hellas Comm'ns (Luxembourg) II SCA), 555 B.R. 323 (Bankr. S.D.N.Y. 2016), the bankruptcy court recognized that " 'where litigants have once battled for the court's decision, they should neither be required, nor without good reason permitted, to battle for it again.' " In re Hellas Comm'ns, 555 B.R. at 342 (quoting Zdanok v. Glidden Co., Durkee Famous Foods Div., 327 F.2d 944, 953 (2d Cir. 1964) ). And as one court has explained:
The "law of the case" doctrine is that a decision at one stage of a litigation can in the Court's discretion be determined to be binding precedent in following *324stages of the same litigation or to different lawsuits between the parties. See In re PCH Associates, 949 F.2d 585, 592 (2d Cir. 1991). However, the law of the case doctrine is inapplicable to the instant action. This is not the same litigation or a different litigation between the same parties.
Ackerman v. Schultz (In re Schultz), 250 B.R. 22, 29 (Bankr. E.D.N.Y. 2000).
As to the question of entry of a final order, the Supreme Court long ago noted that "[w]e think that [the law of the case doctrine] requires a final judgment to sustain the application of the rule ... just as it does for the kindred rule of res judicata." United States v. U.S. Smelting Co., 339 U.S. 186, 198-99, 70 S.Ct. 537, 94 L.Ed. 750 (1950) ). For these reasons, courts have declined to apply the doctrine when the prior order denied a motion to dismiss and "refus[ed] to grant summary judgment." GAF Corp. v. Circle Floor Co., 329 F.Supp. 823, 826-27 (S.D.N.Y. 1971). As one court explained, "the deni[al of a] motion to dismiss ... by definition is not a final order. The decision allowed the case to continue to trial - it was not a final order ending the case." Datiz v. Int'l Recovery Assocs., 2017 WL 59085, at *2, 2017 U.S. Dist. LEXIS 2477, at *5 (E.D.N.Y. Jan. 4, 2017).
In a bankruptcy setting, the law of the case doctrine may apply to different adversary proceedings brought in the same bankruptcy case, provided that all of the requirements of the doctrine - including identity of the parties - are met. See Bourdeau Bros., Inc. v. Montagne (In re Montagne), 2010 WL 271347, at *6 (Bankr. D. Vt. Jan. 22, 2010) (stating that " '[a]dversary proceedings in bankruptcy are not distinct pieces of litigation; they are components of a single bankruptcy case.' ") (quoting Cohen v. Bucci, 905 F.2d 1111, 1112 (7th Cir. 1990) ); Artra Grp., Inc. v. Salomon Bros. Holding Co., 1996 WL 637595 at *5 (N.D. Ill. Oct. 31, 1996) (holding that law of the case doctrine encompasses litigation in both main case and adversary proceeding). See also In re Terrestar Corp., 2017 WL 1040448, at *4 (S.D.N.Y. Mar. 16, 2017) (same); Moise v. Ocwen Loan Serv. LLC (In re Moise), 575 B.R. 191, 205 (Bankr. E.D.N.Y. 2017) (same).
Here, it is plain from these considerations that the Brizinova Decision does not supply the law of the case for this adversary proceeding. First, identity of parties is lacking, because the parties to the Brizinova Adversary are the Trustee and the Debtors, Estella Brizinova and Edward Soshkin, but the parties to this Adversary Proceeding are the Trustee and Ms. Soshkin. Applying the doctrine to this proceeding would deprive Ms. Soshkin of the most fundamental component of due process, the opportunity to be heard, because she was not a party to the Brizinova Adversary. And the right to an opportunity to be heard is hers, not her counsel's.
And second, there is no final judgment, because the Brizinova Decision determined the Debtors' motion to dismiss by granting leave to replead with respect to one claim, and denying it in all other respects. As previously noted, "the deni[al of a] motion to dismiss ... by definition is not a final order" because "[t]he decision allowed the case to continue to trial - it was not a final order ending the case." Datiz , 2017 WL 59085, at *2, 2017 U.S. Dist. LEXIS 2477, at *5. That is, in the Brizinova Adversary, the Court's decision was not a final order ending the case, and that decision "allowed the case to continue to trial."
For these reasons, neither the Brizinova Decision, nor the law of the case doctrine, requires this Court to conclude that the Motion to Dismiss must be denied.
*325Pleading Requirements Under Federal Rule of Civil Procedure 8(a)
As this Court has noted, Federal Rule of Civil Procedure 8(a) requires that a pleading contain " 'a short and plain statement of the claim showing that the pleader is entitled to relief.' " In re Brizinova , 554 B.R. at 74 (quoting Fed. R. Civ. P. 8(a)(2) ). In Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), the Supreme Court stated that under this rule, "a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly , 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).
Thereafter, in Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), the Supreme Court set forth a two-step approach for courts to follow when deciding a motion to dismiss. First, a court should "identify[ ] pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. "While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Id. Thus, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ).
Second, "[w]hen 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." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ). "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.' " Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955 ).
Pleading Requirements Under Federal Rule of Civil Procedure 12(b)(6)
Federal Rule of Civil Procedure 12(b)(6) permits a party to seek dismissal of a claim at the pleading stage if it does not state a claim upon which relief may be granted. In Twombly, the Supreme Court held that for a complaint to survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570, 127 S.Ct. 1955. The Court explained that "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).
When considering a motion to dismiss under Rule 12(b)(6), the court should " 'accept[ ] all factual allegations as true, and draw[ ] all reasonable inferences in the plaintiff's favor.' " DiFolco v. MSNBC Cable, L.L.C., 622 F.3d 104, 110-11 (2d Cir. 2010) (quoting Shomo v. City of New York, 579 F.3d 176, 183 (2d Cir. 2009) ); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). But a court is not required to accept as true those allegations that amount to no more than legal conclusions. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ; Twombly, 550 U.S. at 555, 127 S.Ct. 1955.
In deciding a Rule 12(b)(6) motion, a court may look to the facts alleged in the complaint, and also to those "[d]ocuments that are attached to the complaint or incorporated in it by reference." Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007). See Gillingham v. Geico Direct, 2008 WL 189671, at *2 (E.D.N.Y. Jan. 18, 2008)
*326(stating that when considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), a court may look to the complaint, its exhibits, and documents incorporated by reference in the complaint).
Property of the Estate and Proceeds Under the Bankruptcy Code
Bankruptcy Code Section 541(a) provides that the bankruptcy estate consists of "[a]ll legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). Bankruptcy Code Section 541(a)(6) further states that property of the estate includes the "[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor." 11 U.S.C. § 541(a)(6).
The definition of property of the estate is interpreted broadly, and "every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of [ Section] 541." Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116, 122 (2d Cir. 2008) (citation omitted). And "[t]he broad definition of property of the estate clearly encompasses a debtor's interest in another corporation's stock." In re Arcapita Bank B.S.C.(c), 2014 WL 2109931, at *2 (Bankr. S.D.N.Y. May 20, 2014). But the Bankruptcy Code does not define "proceeds," few courts have addressed the question in reported decisions, and some of those that have, define "proceeds" simply by using the term itself.
"Proceeds" of estate property are also property of the estate. As the Collier treatise notes, "if the estate sells ... inventory or other property, the revenue will become property of the estate as 'proceeds, product, offspring, rent, or profits of or from property of the estate,' as provided under section 541(a)(6)." 5 Collier on Bankruptcy ¶ 541.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2018). That is, "revenue" from the sale of estate property is also estate property. This makes sense, because the change in an asset's form from one type, such as real estate or shares of a corporation, to another, such as cash, should not lead to a change in whether it is a part of a debtor's bankruptcy estate.
To this effect, courts have found proceeds to include " 'whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds,' " including a right to payment under a contract entered into before the bankruptcy case was filed. In re Saxton, 1988 WL 1571475, at *2 (Bankr. D. Iowa 1988) (quoting Iowa Code § 554.9306(a) ). There, the bankruptcy court concluded that payments owed under a contract entered into pre-petition were proceeds because they were received as part of the contract. In re Saxton, 1988 WL 1571475, at *2.
Other courts have found proceeds to include:
• residual commissions earned pre-petition but paid post-petition, see In re Bosack, 454 B.R. 625 (Bankr. W.D. Pa. 2011) ;
• proceeds from the post-petition sale of the debtor's real property, see In re Steel Wheels Transp., LLC , 2011 Bankr. LEXIS 4582, 2011 WL 5900958 (Bankr. D.N.J. Oct. 28, 2011) ;
• stock options not exercisable until post-petition, see In re Michener, 342 B.R. 428, 429 (Bankr. D. Del. 2006), and In re Taronji, 174 B.R. 964, 967 (Bankr. N.D. Ill. 1994) ; and
• life insurance policy proceeds where the insured dies after the bankruptcy case is filed, see In re No. 1 Con-Struct Corp., 88 B.R. 452, 453 (Bankr. S.D. Fla. 1988).
*327Whether the Trustee States a Claim for Turnover Under Bankruptcy Code Section 542(a)
The Trustee's First Claim for Relief is for turnover of property under Bankruptcy Code Section 542(a). By this claim, the Trustee seeks to recover the Post-Petition Sale Proceeds from Ms. Soshkin. 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).
The Trustee must allege three elements to state a claim under Section 542(a). These are: " '(1) the property is in the possession, custody or control of another entity; (2) the property can be used in accordance with the provisions of section 363; and (3) the property has more than inconsequential value to the debtor's estate.' " Kramer v. Mahia (In re Khan), 2014 WL 4956676, at *22 (Bankr. E.D.N.Y. Sept. 30, 2014) (quoting Zazzali v. Minert (In re DBSI, Inc. ), 468 B.R. 663, 669 (Bankr. D. Del. 2011) ). The Court considers each of these elements in turn.
Whether the Trustee Adequately Alleges that the Property Is in the Possession, Custody, or Control of Ms. Soshkin
The first element that the Trustee must allege to state a Section 542(a) claim is that the property at issue is in the possession, custody, or control of another entity.
Ms. Soshkin argues, in substance, that the Trustee does not - and cannot - adequately allege this element of his turnover claim because the property at issue is not property of the estate. She does not dispute the Trustee's allegations that the bankruptcy estate owns a one hundred percent interest in the ENSI shares, and notes that the Trustee may sell the shares of ENSI. But she argues that he may not "reach the assets of a non-debtor corporation." Mot. to Dismiss at 13. And she argues, in substance, that the Post-Petition Sale Proceeds are proceeds from the sale of ENSI assets, rather than proceeds of the ENSI shares. And for that reason, she argues, the Post-Petition Sale Proceeds are not property of the estate.
The Trustee responds, among other things, that the Post-Petition Sale Proceeds are in Ms. Soshkin's possession, custody, or control, and supports this assertion with allegations that set forth his efforts to trace the path of the Post-Petition Sale Proceeds from internet transactions undertaken on the "buydashtrims" website, to eBay, PayPal, and bank accounts in Ms. Soshkin's name.
The Trustee also notes that the allegations that comprise his turnover claim here are "substantially similar, and in most instances virtually identical," to the allegations in his turnover claim in the Brizinova Adversary. Opp. Mem. at 10. According to the Trustee, because the Court held in its Brizinova Decision that these allegations adequately set forth each of the required elements of a turnover claim, under the law of the case doctrine, those same allegations should be sufficient here to withstand Ms. Soshkin's motion to dismiss.
To allege adequately this element of a turnover claim, the Complaint must state that the property at issue is in the possession, custody, or control of an entity other than the Debtors. Here, the Trustee *328alleges that the eBay user account "buydashtrims" was linked to ENSI and is registered to Ms. Soshkin, and that "sale proceeds derived from ENSI's ... post-Petition Date sales ... were deposited [to a] PayPal account registered to [Ms. Soshkin]." Compl. ¶ 12.
For these reasons, and based on the entire record, the Court concludes that the Trustee adequately alleges the first element of a claim under Bankruptcy Code Section 542 for turnover of the Post-Petition Sale Proceeds, that the property at issue is in the possession, custody, or control of another entity, here, Ms. Soshkin.
Whether the Trustee Adequately Alleges that the Property at Issue Is Property that He May Use, Sell, or Lease
The second element that the Trustee must allege to state a Section 542(a) claim is that the property at issue is property that the Trustee may use, sell, or lease under Bankruptcy Code Section 363. Such property is defined broadly by Section 541 and includes "all legal or equitable interests of the debtor in property as of the commencement of the case" as well as "[p]roceeds, product, offspring, rents, or profits of or from property of the estate." 11 U.S.C. § 541(a)(1), (a)(6). And as this Court has found, this element is adequately pleaded where the plaintiff seeks the turnover of property of the estate that can be put to use in connection with the administration of the estate , including paying the claims of creditors and the costs of administration of the estate. In re Brizinova, 554 B.R. at 77.
Ms. Soshkin argues that the Trustee's turnover claim is not viable because in defining the scope of the Debtors' estate, the Trustee "blurs the boundaries of estate and make[s] it all encompassing," resulting in an improper construction of the term "estate." Mot. to Dismiss at 5-6. She argues, in substance, that the Post-Petition Sale Proceeds belong to ENSI, which is not in bankruptcy, not to the Debtors, and that they are simply not property of the estate. For these reasons, she concludes, the Trustee does not adequately allege this element of his turnover claim.
The Trustee responds that the Post-Petition Sale Proceeds are property of the Debtors' estate as provided for in Bankruptcy Code Section 541. He argues that they are "proceeds and profits from the same entity, ENSI, as to which the Debtors' estate holds the 100% ownership interest," and constitute property of the estate as set forth in Bankruptcy Code Section 541(a)(6). Opp. Mem. at 7. And here too, he argues that the Complaint adequately states a turnover claim because it is substantially the same claim that he asserted in the Brizinova Adversary, and it survived a motion to dismiss there.
As noted above, Bankruptcy Code Section 541 provides the framework to determine whether property is "property of the estate." With these concepts in mind, whether the second element of the Trustee's claim is adequately alleged turns on whether proceeds from the sale of ENSI assets - the Post-Petition Sale Proceeds - are "proceeds" of property of the estate as contemplated by Section 541(a)(6).
It is beyond doubt that where a debtor owns the shares of a corporation, a sale of those shares for cash or other consideration results in "proceeds." In such a transaction, all that has occurred is that property of the estate has changed from one form - shares of stock - to another form - cash or other consideration. But the parties have not cited, and the Court has not found, controlling or persuasive authority to support the Trustee's assertion that in these circumstances, the proceeds of a sale of a non-debtor corporation's *329assets should be afforded the same treatment as the proceeds of a sale of its shares.
This is consistent with principles that are long and well established. Courts in New York recognize that there is a difference between ownership of a corporation's shares and ownership of its assets. Long ago, the New York Court of Appeals observed:
[T]he corporation in respect of corporate property and rights is entirely distinct from the stockholders who are the ultimate or equitable owners of its assets ... even complete ownership of capital stock does not operate to transfer the title to corporate property and ... ownership of capital stock is by no means identical with or equivalent to ownership of corporate property.
Brock v. Poor, 216 N.Y. 387, 401, 111 N.E. 229 (1915).
To similar effect, the Second Circuit found that under New York law, "shareholders do not hold legal title to any of the corporation's assets. Instead, the corporation - the entity itself - is vested with the title." U.S. v. Wallach, 935 F.2d 445, 462 (2d Cir. 1991) (citing 5A Fletcher Cyclopedia of the Law of Private Corps. § 2213, at 323 (Perm. ed. 1990) ).
And as Chief Judge Craig noted:
A corporation has a separate identity from its owners and, therefore, assets held by corporate entities are not property of an individual shareholder's bankruptcy estate. Rather, the ownership interest is property of the shareholder's bankruptcy estate.
Pereira v. Dieffenbacher (In re Dieffenbacher) , 556 B.R. 79, 85 (Bankr. E.D.N.Y. 2016) (quotation and internal citation omitted).
Applying these principles here, Debtor Brizinova's ownership of ENSI's shares does not give her legal title to, or an ownership interest in, ENSI's assets, because ENSI has legal title to, and owns, those assets. And if she does not have a "legal or equitable interest[ ]" in ENSI's assets, then they are not property of her estate under Bankruptcy Code Section 541(a), and the Trustee is not entitled to their turnover under Bankruptcy Code Sections 542 and 541(a)(6).
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the second element of a claim under Bankruptcy Code Section 542 for turnover of the Post-Petition Sale Proceeds, that the property at issue is property that the Trustee may use under Bankruptcy Code Section 363 as "proceeds of or from property of the estate."
Whether the Trustee Adequately Alleges that the Property at Issue Is of More than Inconsequential Value to the Estate
The third element that the Trustee must allege to state a Section 542(a) claim is that the property at issue is of greater than inconsequential value to the bankruptcy estate.
Ms. Soshkin argues, in substance, that the Post-Petition Sale Proceeds are of inconsequential value to this bankruptcy estate because they are not property of the estate, and that "no assets of ENSI have been removed." Mot. to Dismiss at 10.
The Trustee responds, in substance, that the Post-Petition Sale Proceeds are of consequence to the estate because he values them in an amount of at least $42,431.66, plus interest.
There is no single test to determine whether property is of greater than inconsequential value to a debtor's Chapter 7 estate. One method noted by courts is to compare the amount of claims filed in *330a debtor's bankruptcy case to the value of the property that the trustee seeks to recover. Calvin v. Wells Fargo Bank, N.A. (In re Calvin), 329 B.R. 589, 598 (Bankr. S.D. Tex. 2005) (concluding that where the value of the property sought to be turned over represented seven percent of all claims, that was "not an insignificant portion" and the property was not of inconsequential value to the estate). Another is to show that "some method of sale holds a reasonable prospect of a meaningful recovery in excess of" the debtor's exemption in the asset. In re Burgio, 441 B.R. 218, 221 (Bankr. W.D.N.Y. 2010).
Here, a review of the Complaint shows that the Trustee alleges, among other things, that the Post-Petition Sale Proceeds are estimated to be at least $42,431.66. And the claims register shows that some $92,000 in unsecured claims have been filed. That is, the Post-Petition Sale Proceeds that the Trustee seeks to recover have an alleged value that would be sufficient to pay a meaningful dividend to unsecured creditors. This is sufficient to allege that the property at issue would be of greater than inconsequential value to the estate.2
For these reasons, and based on the entire record, the Court concludes that the Trustee adequately alleges the third element of a claim under Bankruptcy Code Section 542 for turnover of the Post-Petition Sale Proceeds, that the property at issue - if it were property of the estate - has more than inconsequential value to the debtor's estate.
Whether Laches Bars the Trustee's Section 542(a) Claim
Ms. Soshkin argues that even if the Trustee has asserted a colorable claim under Section 542, this claim should be dismissed because the Trustee brought this action more than five years after the Debtors commenced their bankruptcy case. Ms. Soshkin acknowledges that there is no statute of limitations for turnover actions, but that "does not mean the Court is powerless" to require that a turnover action be commenced within a reasonable time. Reply at 19. And she notes that because turnover is an equitable remedy, it is "subject to laches." Id.
The Trustee responds that his claim is timely because it could not have been discovered until recently, and alternatively, that he states a claim for at least the three-year period before he commenced this adversary proceeding.
Courts have found that Bankruptcy Code Section 542 addresses equitable relief and as such, is not subject to an explicit statute of limitations. See Ball v. Soundview Composite Ltd. (In re Soundview Elite Ltd.), 2014 WL 2998529, at *3, 2014 U.S. Dist. LEXIS 91267, at *18 (S.D.N.Y. 2014) (stating that "turnover proceedings are inherently equitable in nature."). See Krohn v. Burton (In re Swift), 496 B.R. 89, 99 (Bankr. E.D.N.Y. 2014) (stating that "[w]hile a turnover action is not subject to a statute of limitations," such an action must "be commenced within a reasonable time.").
But turnover actions under Section 542 are "subject to equitable defenses, such as laches, equitable estoppel, waiver, and acquiescence." In re Swift, 496 B.R. at 99. Accordingly, a plaintiff in a Section 542 action must assert the claim *331within "a reasonable period of time." De Berry v. Schmukler (In re De Berry), 59 B.R. 891, 898 (Bankr. E.D.N.Y. 1986). What is reasonable depends on the facts and circumstances of each case, and at least one court has held that a trustee should be barred from bringing a claim under Section 542 after a delay of more than four years. Id.
Laches is an affirmative defense, and it is Ms. Soshkin's burden to show that laches should serve as a bar to the Trustee's turnover claim. When considering a defense of laches, courts may consider factors including "(1) proof of delay in asserting a claim despite the opportunity to do so (2) lack of knowledge on the part of the defendants that a claim would be asserted, and (3) prejudice to the defendants by the allowance of the claim." In re Cutillo, 181 B.R. 13, 15 (Bankr. N.D.N.Y. 1995). To similar effect, courts agree that the "mere passage of time is insufficient to constitute laches." Id.
Here, the record shows that the Debtors commenced their Chapter 7 bankruptcy case on April 24, 2012, and the Trustee filed this Complaint on November 9, 2017, more than five years later. While Ms. Soshkin has shown that a considerable period of time passed from the Debtors' commencement of their bankruptcy case to the filing of this action, at this stage in these proceedings, she has not established that the Trustee delayed in asserting this claim "despite the opportunity to do so." Id. Nor has Ms. Soshkin shown, at this juncture, that she did not know that this claim would be asserted, or that she has been prejudiced by the delay. The question of laches may be raised and adjudged at some future point in these proceedings.
For these reasons, and based on the entire record, the Court concludes that Ms. Soshkin has not established at this stage in these proceedings that the Trustee's turnover claim is barred by laches.
* * *
In sum, the Court has carefully considered each of the arguments advanced by Ms. Soshkin with respect to whether the Trustee adequately alleges the First Claim for Relief, for turnover of the Post-Petition Sale Proceeds under Bankruptcy Code Section 542(a). The Court concludes that the Trustee adequately alleges the first element of this claim, that the property is in the possession, custody, or control of Ms. Soshkin. And the Trustee adequately alleges the third element of his claim, that the Post-Petition Sale Proceeds have value to the estate.
But the Trustee does not adequately allege the second element of his turnover claim, that the Post-Petition Sale Proceeds are property of the estate that the Trustee may use, because he does not adequately allege that the Post-Petition Sale Proceeds are property of the estate, and the Trustee is entitled to use only such property. And separately, Ms. Soshkin has not established, at this stage in these proceedings, that the Trustee's claim is barred by laches.
For these reasons, and based on the entire record, the Defendant's Motion to Dismiss the Trustee's First Claim for Relief, for turnover of the Post-Petition Sale Proceeds, is granted.
Whether the Trustee States a Claim for Conversion
The Trustee's Second Claim for Relief is for conversion of estate property under New York common law. By this claim, the Trustee seeks to recover the Post-Petition Sale Proceeds from Ms. Soshkin.
The Trustee must allege two elements to state a conversion claim under New York law. These are: "first ... legal *332ownership or an immediate superior right of possession to a specific identifiable thing (i.e., specific money); and, second ... that the defendant exercised unauthorized dominion over the thing in question, to the exclusion of the plaintiff's rights." AMF Inc. v. Algo Distribs., Ltd., 48 A.D.2d 352, 356-57, 369 N.Y.S.2d 460 (N.Y. App. Div. 2d Dep't 1975) (citation omitted).
Whether the Trustee Adequately Alleges that the Estate Had Title to a Specific Identifiable Thing or a Right to Its Possession
The first element that the Trustee must allege to state a conversion claim is that the estate had legal ownership of, or a right to possess, a specific identifiable thing, here, the Post-Petition Sale Proceeds. This element has two parts: a plaintiff must allege (1) title or a right to possess (2) a specifically identifiable thing.
Ms. Soshkin argues that the Trustee does not - and cannot - allege this element with respect to the Post-Petition Sale Proceeds. She argues that the Trustee's allegations fall short because "the estate did not have a possessory right" in the assets of ENSI, so that Ms. Soshkin could not have exercised dominion over any such assets in derogation of the Trustee's rights. Mot. to Dismiss at 11.
The Trustee responds that in the Brizinova Decision, this Court sustained the adequacy of the conversion claim set forth in the Brizinova Adversary. Citing the law of the case doctrine, he states that because his conversion claim here is "substantially similar" to the claim in the Brizinova Adversary, he adequately alleges a claim "for conversion of the Post-Petition Sale Proceeds." Opp. Mem. at 10.
It is plain that "in a Chapter 7 bankruptcy, a trustee has the general duties of gathering the estate assets, liquidating them, distributing the proceeds to creditors, and closing the estate." In re Smith, 426 B.R. 435, 440-41 (E.D.N.Y. 2010) (citing United States v. Shadduck, 112 F.3d 523, 531 (1st Cir. 1997) ), aff'd, 645 F.3d 186( 2d Cir. 2011). And as this Court has previously stated, "[t]he Bankruptcy Code provides tools for trustees to marshal the assets of an estate." In re Khan, 2014 WL 4956676, at *22 (Bankr. E.D.N.Y. Sept. 30, 2014). But first, the property at issue must be property of the estate.
Under New York law, "[i]t is well-settled ... that an action for the conversion of monies is 'insufficient as a matter of law unless it is alleged that the money converted was in specific tangible funds of which claimant was the owner and entitled to immediate possession.' " Buena Vista Home Ent., Inc. v. Wachovia Bank, N.A. (In re Musicland Holding Corp.), 386 B.R. 428, 440 (S.D.N.Y. 2008) (quoting Ehrlich v. Howe, 848 F.Supp. 482, 492 (S.D.N.Y. 1994) ), aff'd, 318 F. App'x 36 (2d Cir. 2009). As one court explained, "the money must be 'described or identified in the same manner as a specific chattel.' " Global View Ltd. Venture Capital v. Great Cent. Basin Expl., L.L.C., 288 F.Supp.2d 473, 480 (S.D.N.Y. 2003) (quoting 9310 Third Ave. Assocs., Inc. v. Schaeffer Food, 210 A.D.2d 207, 208, 620 N.Y.S.2d 255 (N.Y. App. Div. 2nd Dep't 1994) ). Dismissal may be appropriate where the funds at issue were not "a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question." Mfrs. Hanover Tr. Co. v. Chem. Bank, 160 A.D.2d 113, 124, 559 N.Y.S.2d 704 (N.Y. App. Div. 1st Dep't 1990) (citations omitted).
Here, with respect to the question of the estate's ownership interest in specifically identified property - the Post-Petition Sale Proceeds - a review of the Complaint *333shows that the Trustee alleges that Ms. Soshkin converted "the estate's 100% interest ... in the Post-Petition Sale Proceeds ... in an amount to be determined at trial, currently estimated to be at least $42,431.66." Compl. ¶¶ 21, 22. The Trustee identifies generally how ENSI assets became the Post-Petition Sale Proceeds, the accounts where the Post-Petition Sale Proceeds were deposited, how the sale proceeds were transferred to Ms. Soshkin, and other information to identify the funds constituting the Post-Petition Sale Proceeds as those that she converted. For these reasons, the Trustee adequately alleges a specifically identifiable thing, the $42,431.66 in Post-Petition Sale Proceeds. But as noted above, because the Trustee does not adequately allege that the Post-Petition Sale Proceeds are "proceeds of or from property of the estate," he also does not adequately allege that he has title or a right to possess the Post-Petition Sale Proceeds.
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the first element of his conversion claim, that the Trustee had title to or a right to possess the Post-Petition Sale Proceeds.
Whether the Trustee Adequately Alleges that the Defendant Exercised Unauthorized Dominion over the Identified Property
The second element that the Trustee must allege to state a conversion claim is that Ms. Soshkin exercised unauthorized dominion over the property at issue.
Here too, Ms. Soshkin argues, in substance, that this element is not satisfied with respect to the Post-Petition Sale Proceeds because this property either is not in her possession or does not exist as property of the estate, so that Ms. Soshkin cannot exercise unauthorized dominion over it sufficient to give rise to a conversion claim.
And here too, the Trustee responds that in the Brizinova Decision, this Court ruled that his conversion claim in the Brizinova Adversary was adequately pleaded, that his conversion claim here is "substantially similar" to his conversion claim in the Brizinova Adversary, and so under the law of the case doctrine and relevant case law, he has set forth a legally sufficient claim for conversion.
Here, a review of the Complaint shows that the Trustee alleges, among other things, that Ms. Soshkin "willfully, knowingly and wrongly has exercised dominion and control over" property at issue, namely the Post-Petition Sale Proceeds. Compl. ¶ 21. But as noted above, because the Trustee does not adequately allege that the Post-Petition Sale Proceeds are property of the estate or "proceeds of or from property of the estate," as opposed to property of ENSI, he does not adequately allege that Ms. Soshkin exercised unauthorized dominion over estate assets.
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the second element of his conversion claim, that Ms. Soshkin exercised unauthorized dominion over the Post-Petition Sale Proceeds.
* * *
In sum, the Court has carefully considered each of the arguments advanced by Ms. Soshkin with respect to whether the Trustee adequately alleges the Second Claim for Relief, for conversion. The Court concludes that the Trustee does not adequately allege the first element of his conversion claim, that he had title to or a right to possess the Post-Petition Sale Proceeds. The Court also concludes that the Trustee does not adequately allege the second element of his conversion claim, *334that Ms. Soshkin exercised unauthorized dominion over the Post-Petition Sale Proceeds.
For these reasons, and based on the entire record, the Defendant's Motion to Dismiss the Trustee's Second Claim for Relief, for conversion of the Post-Petition Sale Proceeds, is granted.
Whether the Trustee States a Claim for Violation of the Automatic Stay Under Bankruptcy Code Section 362(a)
The Trustee's Third Claim for Relief seeks a declaratory judgment, an injunction, and actual and punitive damages arising from Ms. Soshkin's alleged violations of the automatic stay pursuant to Section 362(a). That Section provides that "a [bankruptcy] petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities ... of any act to... exercise control over property of the estate." 11 U.S.C. § 362(a)(3). Actions in violation of the automatic stay may trigger serious consequences, including an award of "actual damages, including costs and attorneys' fees, and, in appropriate circumstances ... punitive damages." 11 U.S.C. § 362(k).
The Trustee must allege three elements to state a claim based upon a violation of the automatic stay. These are first, that the automatic stay was in effect at the time of the alleged violation; second, that the property at issue was property of the estate; and third, that the conduct in question constitutes a violation of the automatic stay.
Whether the Trustee Adequately Alleges that the Automatic Stay Was In Effect at the Time of the Alleged Violation
The first element that the Trustee must allege to state a claim based upon a violation of the automatic stay is that a stay was in effect at the time of the alleged violation.
Ms. Soshkin asserts that the Post-Petition Sale Proceeds are not estate property, and that the "[e]state can only be damaged if something is take[n] away from the estate." Mot. to Dismiss at 13. She argues, in substance, that she did not violate the automatic stay because the property at issue - the Post-Petition Sale Proceeds - was property of ENSI, not the Debtor Brizinova, and "[t]here was no stay regarding ENSI." Reply at 20. And Ms. Soshkin asks, since there was no stay with respect to ENSI, "where is the violation of the stay?" Reply at 20.
The Trustee responds, in substance, that he adequately alleges this claim for many of the same reasons that he adequately asserts his Section 542(a) turnover claim, and concludes that based on this Court's ruling sustaining his stay violation claim in the Brizinova Adversary, and pursuant to the law of the case doctrine, the motion to dismiss should be denied. Opp. Mem. at 13.
The starting point for any claim for relief arising from a stay violation is the language of the Bankruptcy Code. Section 362(a) provides that a "petition filed under ... this title ... operates as a stay, applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3).
The automatic stay "is effective immediately upon the filing of the petition ... and any proceedings or actions described in section 362(a)(1) are void and without vitality if they occur after the automatic stay takes effect." Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527 (2d Cir. 1994) (citing *33548th St. Steakhouse, Inc. v. Rockefeller Grp., Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 431 (2d Cir. 1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988) ) (internal citations omitted).
Here, the Complaint states, among other things, that after the Debtors filed their bankruptcy case - and therefore after the automatic stay was in effect - Ms. Soshkin, with knowledge that the Trustee had become the owner of Debtor Brizinova's one hundred percent interest in ENSI, violated the automatic stay by causing post-petition sales of ENSI auto parts, depositing the sale proceeds into her PayPal account, and using the Post-Petition Sale Proceeds for her own or her family's use, which damaged the estate. That is, the Trustee alleges that Ms. Soshkin took steps to exercise control over and transfer the property at issue, in the form of the Post-Petition Sale Proceeds, after the Debtors filed their bankruptcy case, when the automatic stay was in effect.
For these reasons, and based on the entire record, the Court concludes that the Trustee adequately alleges the first element of his Bankruptcy Code Section 362 stay violation claim, that the automatic stay was in effect at the time of the alleged violation.
Whether the Trustee Adequately Alleges that the Property at Issue Was Property of the Estate
The second element that the Trustee must allege to state a claim based upon a violation of the automatic stay is that the property at issue was property of the estate.
Here again, Ms. Soshkin argues, in substance, that the Trustee cannot state a plausible claim for violation of the automatic stay because this element requires the Trustee to allege that the property at issue - the Post-Petition Sale Proceeds - is property of the estate, and here, ENSI is not a debtor, and its assets are not property of the estate.
And here again, the Trustee responds, in substance, that he adequately alleges this claim for many of the same reasons that he adequately asserts his Section 542(a) turnover claim, and that the Complaint adequately identifies the Post-Petition Sale Proceeds as property of the estate.
The Complaint states, among other things, that after the Debtors filed their bankruptcy case, Ms. Soshkin violated the automatic stay by causing the post-petition sale of ENSI auto parts, and converting the sales proceeds, which were estate property. But because ENSI is not a debtor, and because the Trustee does not adequately allege that the Post-Petition Sale Proceeds are "proceeds of or from property of the estate," he does not adequately allege the second element of his stay violation claim, that the Post-Petition Proceeds are property of the estate.
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the second element of his Bankruptcy Code Section 362 stay violation claim, that the property at issue was property of the estate.
Whether the Trustee Adequately Alleges that the Conduct in Question Violates the Automatic Stay
The third element that the Trustee must allege to state a claim based upon a violation of the automatic stay is that the conduct in question violates the automatic stay.
Ms. Soshkin argues, in substance, that the Trustee cannot state a plausible claim for violation of the automatic stay because ENSI is not a debtor, and that "there was no stay regarding ENSI." Reply at 20.
The Trustee responds, in substance, that he adequately alleges this claim for many *336of the same reasons that he adequately asserts his Section 542(a) turnover claim, and that the Complaint adequately identifies conduct, including retention and transfers of the Post-Petition Sale Proceeds, that violate the automatic stay.
Here, the Complaint states that Ms. Soshkin violated the automatic stay by causing the post-petition sale of ENSI auto parts, depositing the proceeds derived from those sales into her PayPal account, and using certain of the Post-Petition Sale Proceeds for personal purchases for herself and her family.
But here too, because ENSI is not a debtor, and because the Trustee does not adequately allege that the Post-Petition Sale Proceeds are "proceeds of or from property of the estate," he does not adequately allege the third element of his claim under Bankruptcy Code Section 362 for a stay violation, that the conduct in question violates the automatic stay, because actions with respect to property that is not property of the estate simply do not violate the automatic stay.
* * *
In sum, the Court has carefully considered each of the arguments advanced by Ms. Soshkin with respect to whether the Trustee adequately alleges the Third Claim for Relief, for a declaratory judgment that she violated the automatic stay, an order enforcing the stay and enjoining further transfers of the Post-Petition Proceeds, damages in the amount of at least $42,431.66, plus interest, and punitive damages. The Court concludes that the Trustee adequately alleges the first element of his stay violation claim, that the automatic stay was in effect at the time of the alleged violation. But the Trustee does not adequately allege the second element of this claim, that the property at issue was property of the estate, or the third element of this claim, that the conduct in question violates the automatic stay.
For these reasons, and based on the entire record, the Defendants' Motion to Dismiss the Trustee's Third Claim for Relief, for violations of the automatic stay, is granted.
The Question of Leave To Replead
Federal Rule of Civil Procedure 15, made applicable here by Bankruptcy Rule 7015, states that permission to amend a complaint should be freely granted "when justice so requires." Fed. R. Civ. P. 15(a)(2). As the Supreme Court observed more than fifty years ago, "[i]f the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Foman v. Davis , 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).
And as this Court has noted, "[w]here a plaintiff has made a single attempt to state a claim, and the prospect of a plausible claim is suggested, but not established, by the allegations, then it may be that a court's discretion should tip in favor of allowing an amendment." Ridley v. Deutsche Bank Nat'l Tr. Co. (In re Ridley), 453 B.R. 58, 77 (Bankr. E.D.N.Y. 2011). At the same time, this Court has also noted that "where a proposed amended pleading would not survive a motion to dismiss, it is within a trial court's discretion to deny leave to replead." In re Ridley, 453 B.R. at 77.
Ultimately, the question of leave to replead is committed to the sound discretion of the court. As one court has stated, "it is well-established in the Second Circuit that leave to amend should be granted freely though the district court may exercise its discretion to deny a motion to amend if there is a good reason for it."
*337In re Ashanti Goldfields Sec. Litig., 2004 WL 626810, at *2 (E.D.N.Y. Mar. 30, 2004) (citation omitted).
The Court notes that this is the Trustee's first attempt to state these claims against Ms. Soshkin. The Court also recognizes that each of the Trustee's claims falls short for substantially the same reason - that the Trustee does not adequately allege that the Post-Petition Sale Proceeds are property of the Debtors' estate. Based on the entire record, and noting that the question is a close one, the Court is satisfied that the "the prospect of a plausible claim is suggested," but not established, in the Complaint. In re Ridley , 453 B.R. at 77.
For these reasons, and based on the entire record, leave to replead is granted with respect to each of the claims in the Complaint.
Conclusion
For the reasons stated herein, the Motion to Dismiss is granted, and leave to replead is allowed. An order in accordance with this Memorandum Decision shall be entered simultaneously herewith.
Ms. Soshkin invites the Court to revisit its determination of the Motion to Dismiss in that action. Though that adversary proceeding and this one arise in connection with the same Chapter 7 bankruptcy case, they are different actions, against different parties, and Ms. Soshkin has advanced different arguments here than were made by the Defendants in the Brizinova Adversary. For these reasons, among others, the Court declines Ms. Soshkin's invitation.
Another consideration, in the appropriate circumstances, may be the extent of the administrative costs likely to be associated with recovery of the property at issue. This Court leaves for another day the question of whether this element or claim may be alleged adequately where the record shows that the cost of obtaining the asset approaches or even exceeds the value of the asset. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501509/ | STUART M. BERNSTEIN, United States Bankruptcy Judge:
The confirmed Plan in these cases2 included a third-party release in favor of the Debtors' employees and independent contractors (collectively, the "Providers") who provided content for publication on the Debtors' websites (the "Provider Release"). However, the Provider Release only barred lawsuits brought by an entity "that has received or is deemed to have received distributions made under the Plan."3 In a subsequent state court lawsuit described in In re Gawker Media LLC , 581 B.R. 754 (Bankr. S.D.N.Y. 2017) (" Gawker "), Pregame LLC and Randall James Busack (collectively, the "Plaintiffs") sued Gizmodo Media Group LLC ("Gizmodo"), the purchaser of substantially all of the Debtors' assets, and Ryan Goldberg, a Provider, for defamation and *339related claims based on the Debtors' publication of an article Goldberg had authored. The Plaintiffs did not file claims in the Debtors' cases and did not receive distributions under the Plan.
Relying on the Provider Release, Gizmodo and Goldberg filed separate motions in this Court to enjoin the Plaintiffs from prosecuting the state court lawsuit, but this opinion only concerns Goldberg's motion. (See Motion of Ryan Goldberg (I) to Enforce Order Confirming Amended Joint Chapter 11 Plan of Liquidation and (II) to Bar and Enjoin Creditors from Prosecuting Their State Court Action, dated Aug. 21, 2017 ("Motion") (ECF Doc. # 981-1).) Finding the scope of the Provider Release to be ambiguous with respect to the Plaintiffs' claims, the Court held a trial. Based upon the trial record, the Court concludes that Goldberg failed to carry his burden of demonstrating that the Provider Release covers the Plaintiffs' state court claims, and accordingly, the Motion is denied.
FINDINGS OF FACT4
A. Introduction
On June 10, 2016 (the "Petition Date"), Debtor Gawker Media LLC ("Gawker Media") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. (Stipulated Facts ¶ A.)5 On June 12, 2016, Debtors Gawker Media Group, Inc. and Gawker Hungary Kft. filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. (Stipulated Facts ¶ A.)
Goldberg authored an article that was published on Gawker Media's Deadspin.com website after the Petition Date on June 23, 2016 (the "Article"). (Stipulated Facts ¶ C.) On June 27, 2016, the Plaintiffs' counsel Charles Harder of the firm Harder LLP sent a letter to Gawker Media demanding the retraction of the Article.6 (Stipulated Facts ¶ D.) On July 1, 2016, Gawker Media's president and general counsel, Heather Dietrick, responded that Gawker Media would not retract the Article. (Stipulated Facts ¶ E.) On August 22, 2016, Harder sent another letter, this time to Gizmodo, demanding the removal of the Article prior to the closing of the sale, but Gizmodo also informed Harder that it would not remove the Article. (Stipulated Facts ¶ J.)
In the meantime, on August 11, 2016, the Court entered an order setting September 29, 2016 as the deadline for filing pre-petition claims or requests for payment for claims arising between the Petition Date and July 31, 2016. (Stipulated Facts ¶ G.) The Claims Bar Date Order, notice of the Claims Bar Date, a Proof of Claim Form and the Administrative Claim Form (as those terms are defined in the Claims Bar Date Order) were served on the Plaintiffs' counsel, Charles Harder (Stipulated Facts ¶ I), but the Plaintiffs did not file proofs of claim or requests for payment prior to the Claims Bar Date. (Stipulated Facts ¶ K.)
B. The Provider Release and Injunction
1. The November Plan
The Debtors filed their original plan and disclosure statement on September 30, *3402016. (ECF Doc. # 308.) The original plan did not contain any third-party releases in favor of the Providers or anyone else. The attorneys for the Providers filed a reservation of rights without any specific objection to the disclosure statement on October 31, 2016, (ECF Doc. # 390), and one day before the November 3, 2016 hearing to approve the disclosure statement, the Debtors filed an amended plan and disclosure statement at 11:58 a.m.
Article IX of the amended plan, filed November 2, 2016 (the "November Plan"), included third-party releases and an injunction to protect the Providers.7 Section 9.05 provided, in pertinent part, that "each holder of a claim or equity interest that has received or is deemed to have received distribution(s) made under the Plan" released the "Released Employee Parties"8 from claims arising prior to or on the Petition Date (essentially, pre-petition claims) except for claims resulting from gross negligence or willful misconduct.
The modified injunction in section 9.02 was much broader. It prohibited "all entities who have held, hold or may hold Claims against or Equity Interests in any or all of the Debtors and other parties in interest (whether proof of such Claims or Equity Interests has been filed or not)" from commencing or continuing any action against the "Released Employee Parties." (November Plan § 9.02.) Thus, the injunction expressly barred lawsuits against the "Released Employee Parties" by creditors, whether or not they had filed claims, regardless of when their claims arose and notwithstanding that the claims were based on willful misconduct or gross negligence and expressly which were excluded from the third-party release. The broad injunction was designed to cast the Court in the role of gatekeeper. The Debtors' counsel testified at trial that it would force entities whose claims were not released under section 9.02 to nonetheless seek relief from the injunction in this Court before proceeding against a Provider on an unreleased claim. (See Tr. 18:8-19:10.)
The Debtors' desire to release the Providers was motivated by their need to confirm a plan prior to year-end for tax reasons and to expedite distributions. (Tr. 14:6-15:1.) Gawker Media generally indemnified its content providers for any claims, including claims for defamation, arising from the content provided to and for the benefit of Gawker Media. (Stipulated Facts ¶ B.) Providers, including Goldberg, had filed contingent indemnification claims. Absent the Providers' withdrawal of their contingent indemnification claims, the Debtors would have to resolve the claims prior to confirmation or set up reserves to pay them should they be allowed at a future date. (Tr. 15:11-24.) This would delay confirmation possibly into the next year. Furthermore, the Providers might vote to reject the proposed plan if they did not receive releases. A third-party release was intended as a quid pro quo for the elimination of the Debtors' indemnification *341obligations and the Providers' support for the plan. (Tr. 26:1-6.)
2. The Negotiations
The third-party release and injunction in favor of the Providers included in the November Plan resulted from negotiations between the Debtors' attorney, Gregg Galardi, and the Providers' attorney, Dipesh Patel, beginning in October 2016, that were conducted entirely through the exchange of emails. (See Tr. 35:9-12.) Counsel initially focused on the injunction in section 9.02. As then drafted, it did not expressly refer to the Providers. Mr. Patel requested certain specific language that provided protection to the Providers, and also asked Mr. Galardi to modify the definition of "Released Party" to expressly include the Providers. (PX B (10/18/16 email sent at 4:28 p.m.).)9 Mr. Patel subsequently expressed a concern that under the release language, as drafted, only the Debtors were giving a release. In that case, the Providers might not be willing to give up their indemnification claims. (PX C (10/28/16 email sent at 11:53 a.m.).) Mr. Galardi responded that the Debtors would add third-party release language to protect the Providers based on the Providers voting to accept the plan and waive their indemnification claims. (PX C (10/28/16 email sent at 4:05:11 p.m.).)
After the November Plan and accompanying disclosure statement were filed, Mr. Patel emailed Mr. Galardi regarding the language in section 9.05. He questioned what "deemed to have received a distribution(s)" meant, and asked if a third party who had not filed a lawsuit or a claim was "deemed to have received a distribution" for the purposes of the section. (PX G (11/2/16 email sent at 3:57 p.m.).) Mr. Galardi responded that "I cannot say that third parties received a distribution if not [sic] proof of claim." (PX G (11/2/16 email sent at 10:06:40 p.m.).) He suggested three options, and asked Mr. Patel how he wanted to address the issue. First, the language could be re-drafted to bind everyone, but the Court "will likely not approve" the release of claims by entities that did not receive consideration, and Mr. Galardi did not want to face an argument by the Providers that their votes, based on consideration they did not receive, had to be resolicited. Second, the Debtors could retain the present language but he predicted that the Providers would likely not vote for a plan "because of the release of indemnity rights and claims that only partially protect them." Third, the Debtors could drop the third-party releases altogether, but this was undesirable because the Debtors would then have to object to the Providers' indemnification claims. (Id. )
While awaiting Mr. Patel's answer, Mr. Galardi sent an email to the attorneys for the Committee at Simpson Thacher. It read:
Heads Up - we are going to modify to include a release from not only people who receive distributions under the plan but also from those that do not. I understand fully the likelihood that they will not be approved, but anything short of a full third party release will be a problem.
*342(DX 3 (11/2/16 email sent at 10:14:09 p.m.).)
The need to modify the third-party release was mooted by Mr. Patel's response sent approximately twenty minutes later. He side-stepped the issue he had raised regarding the ambiguous "deemed to have received" language. After asking whether section 9.02 was subject to the third-party release set forth in section 9.05 (at the time, it was not), he stated that he read the injunction language in section 9.02 to bar actions by any entity that held a claim whether or not a proof of claim had been filed. "If the injunction in 9.02 extends to the 'released employees and independent contractors,' we may be fine with the language of 9.05." (PX H (11/2/16 email sent at 10:36:28 p.m.).) Mr. Galardi replied that "[i]f that solves the problem, I can make that change." (PX I (11/2/2016 email sent at 10:38:28 p.m.).)
Mr. Galardi's associate, Joshua Sturm, wrote to Mr. Patel several minutes later confirming that the Debtors' lawyers read section 9.02 the same as Mr. Patel. (PX J (11/2/16 email sent 10:46:09 p.m.).) In other words, the injunction barred claims by creditors against the Providers even if they did not file claims and receive distributions. He added "[w]e'd also prefer not to make a change to 9.05 to draw further attention to the issue reduce the likelihood of getting that section approved." (Id. ) The email included a re-drafted section 9.02 that expressly referred to the "Released Employees and Independent Contractors" as beneficiaries of the injunction. (Id. ) Mr. Patel replied that "[w]ith the change to 9.02, we are good with the language of 9.05." (PX K (11/2/16 email sent at 7:05 p.m.).) A subsequent email exchange in the same exhibit clarified that the change Mr. Patel referred to was the substitution of "Released Employees and Independent Contractors," a defined term under the November Plan, for "Released Employees," an undefined term, in section 9.02. The November Plan incorporated the changes agreed to between the lawyers for the Debtors and the Providers.
3. The Disclosure Statement and Confirmation Hearings
The hearing to approve the disclosure statement took place on November 3, 2016. During the hearing, the Court questioned Mr. Galardi about the third party releases and whether they released a creditor's cause of action against a Provider if the creditor had not filed a proof of claim. Mr. Galardi did not answer the question, and instead, stated that the creditors were giving the Provider Release in exchange for their distributions in the case:
THE COURT: What happens to those claims10 if they're not filed or liquidated by the time of confirmation?
MR. GALARDI: Exactly why we have put in the plan a third-party release. We are saying to those people who have gotten a benefit under our bankruptcy case that they are being asked to waive the claims against those individuals [the Providers]. So they would be barred from bringing any new claims against those individuals, i.e., the writers, the employees, and the independent contractors. We believe they are getting consideration for that because they are going to be able to get distributions.
(Transcript of Hr'g, held Nov. 3, 2016, at 25:8-16 (ECF Doc. # 447).) Following the hearing, the Court approved the proposed disclosure statement with some irrelevant modifications and scheduled the confirmation hearing. (See Stipulated Facts ¶ M.) The Plaintiffs received notice that the *343disclosure statement had been approved together with copies of the approved disclosure statement and proposed plan, (Stipulated Facts ¶ O), and did not object to the plan, the third-party release or the injunction.11 (Stipulated Facts ¶ P.)
The Court conducted the confirmation hearing on December 13, 2016. Through an offer of proof, the Debtors emphasized that the Provider Release in section 9.05 was necessary because the Providers had written articles for the Debtors up through the closing date of the asset sale, and the Debtors had received threats or requests to take down the content from their websites. (Transcript of Hr'g, held Dec. 13, 2016, at 67:20-25.)12 Mr. Galardi further stated that the Debtors did not include an option in the ballot allowing a creditor to opt out of the third-party release because that procedure only worked with creditors that had filed claims. (Id. at 74:19-23.) The Court asked whether there were creditors who had not filed claims or settled and did not vote. Mr. Galardi identified one specifically, and explained that all such claims would also be released:
THE COURT: Let me ask you a question. Are there any creditors who have not filed a claim, did not vote and have not settled, to your knowledge?
....
MR. GALARDI: Well, Your Honor, yes, in the following way and I want to be clear. As I mentioned and Mr. Holden mentioned, maybe I'm not getting it right, but I hate to use the President-elect's name, but we have received from one of -- from a law firm, you wrote an article about the President-elect, now that claim never got filed in this case. One of the reasons we're concerned about that is because the statute of limitations on that article has not run.
THE COURT: Okay.
MR. GALARDI: So that's the kind of creditor why we wanted the third-party release.
(Id. at 82:16-83:8.)
The Court confirmed the Plan at the conclusion of the hearing, expressly approving the Provider Release, but suggesting that the injunction in favor of the Providers be made co-extensive with the Provider Release. (Id. at 87:6-88:10.) The Plan subsequently presented by the Debtors and confirmed by the Court included a change to section 9.02 that limited the injunction in favor of the Providers "to the extent such actions are released pursuant to section 9.05 of the Plan." The post-hearing revised plan did not change section 9.05 or the language that limited the release to the holder of a claim or equity interest that received or "is deemed to have received" a distribution under the Plan.
The Court signed the Confirmation Order on December 22, 2016. Two findings are relevant to the issues that the Court *344subsequently tried. First, the Court found that the Provider Release covered conduct for which the Debtors might be obligated to indemnify the Providers, (Confirmation Order ¶ 21), and the Providers' waiver of their indemnification claims and acceptance of the Plan constituted consideration for the release. (Id. ¶ 24.) Second, the creditors and interest holders who received or were deemed to have received a distribution under the Plan also benefited from the Provider Release because the settlement with the Providers and the withdrawal of their indemnification claims allowed the Debtors to confirm the Plan and immediately pay them their distributions. (Id. ) ("Each holder of a Claim or Equity Interest that has received or is deemed to have received distributions made under the Plan in turn benefits from an immediate distribution ." (emphasis added).)
C. The State Court Litigation
On June 22, 2017, the Plaintiffs sued Gizmodo and Goldberg in New York state court based on state law claims arising from the publication (and in Gizmodo's case, the alleged republication) of the Article, including defamation, intentional interference with prospective economic advantage and tortious interference with contractual relations.13 Gizmodo sought an injunction against the Plaintiffs in this Court arguing that their claims were barred by the Court's order approving the sale of the Debtors' assets. Goldberg filed the separate Motion contending that the claims the Plaintiffs asserted against him were barred by the Plan and the Confirmation Order. The Court dealt with the two motions separately.
The Gizmodo motion raised purely legal issues. In Gawker , the Court ruled that the defamation and related claims asserted against Gizmodo arising from the pre-sale publication of the Article were barred by the "free and clear" provisions of the sale order, 581 B.R. at 761, and left to the state court the question of whether the complaint asserted a post-sale republication claim against Gizmodo under New York law. Id. at 762.
The Goldberg Motion required a trial. The Court had identified two ambiguities regarding whether the Provider Release covered the Plaintiffs' causes of action. First, it only reached as far as creditors who "were deemed to have received distribution(s) made under the plan." The Plaintiffs had not filed claims and had not received distributions. It was unclear whether they were deemed to have received distributions within the meaning of the Plan. Second, the Plan carved out claims for gross negligence and willful misconduct. The Plaintiffs' state court claims alleged intentional misconduct, and it was similarly uncertain whether the Provider Release excluded these claims.
After the parties had the opportunity to conduct discovery, the Court heard testimony and received numerous documents in evidence, particularly the emails discussed above. At the conclusion of the hearing, the Court ruled that based upon the stipulated fact that the Debtors indemnified their Providers against defamation liability and the finding in the Confirmation Order that the claims covered by the Provider Release were based on the conduct for which the Debtors might be liable for indemnification, the exclusion for willful and grossly negligent conduct was not intended to exclude the defamation claims from the Provider Release. (Tr. 82:18-83.10.) Although not expressly addressed, the Provider Release would also cover the Plaintiffs' other tort claims arising from the *345publication of the Article. Turning to the other ambiguity, the Court invited proposed findings of fact and conclusions of law regarding what the parties meant by the phrase "deemed to have received distributions made under the Plan."
DISCUSSION
The Plan designates New York law as controlling, (Plan § 1.07), and both sides agree that the meaning of the ambiguous phrase must be decided in accordance with New York's principles of contract interpretation. Under New York law, the fundamental objective of contract interpretation is to give effect to the intentions of the parties. See Hunt Ltd. v. Lifschultz Fast Freight, Inc. , 889 F.2d 1274, 1277 (2d Cir. 1989) ; Hartford Accident & Indemnity Co. v. Wesolowski , 33 N.Y.2d 169, 350 N.Y.S.2d 895, 305 N.E.2d 907, 909 (1973). If "the parties' intent is not plain from the language they used, a court may look to the objective manifestations of intent gathered from the parties' words and deeds." See In re M. Fabrikant & Sons, Inc. , 385 B.R. 87, 95 (Bankr. S.D.N.Y. 2008) (citing Brown Bros. Elec. Contractors, Inc. v. Beam Constr. Corp. , 41 N.Y.2d 397, 393 N.Y.S.2d 350, 361 N.E.2d 999, 1001 (1977) ); accord Nycal Corp. v. Inoco PLC , 988 F.Supp. 296, 301 (S.D.N.Y. 1997), aff'd , 166 F.3d 1201 (2d Cir. 1998) (relying on testimony regarding what was objectively expressed between the parties during negotiations); cf. Wells v. Shearson Lehman/Am. Exp., Inc. , 72 N.Y.2d 11, 530 N.Y.S.2d 517, 526 N.E.2d 8, 15 (1988) (stating that uncommunicated subjective intent is irrelevant). "In doing so, disproportionate emphasis is not to be put on any single act, phrase or other expression, but, instead, on the totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain." Brown Bros. , 393 N.Y.S.2d 350, 361 N.E.2d at 1001. A contract must be read as a whole to determine its purpose and intent, and "single clauses cannot be construed by taking them out of their context and giving them an interpretation apart from the contract of which they are a part." Analisa Salon, Ltd. v. Elide Properties, LLC , 30 A.D.3d 448, 818 N.Y.S.2d 130, 131 (2006) (internal quotation marks and ellipses omitted). Furthermore, a court should not adopt a "construction which would render a contractual provision meaningless or without force or effect." Valle v. Rosen , 138 A.D.3d 1107, 30 N.Y.S.3d 285, 287 (2016) (internal quotation marks omitted).
Although Goldberg is seeking an injunction, he is, in essence, asserting the Provider Release as a defense to the Plaintiffs' claims and as a bar under the co-extensive provisions of section 9.02. A party asserting the affirmative defense of release has the initial burden of showing that the release covers the plaintiff's claims; the burden then shifts to the plaintiff to show facts that would void the release. Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V. , 17 N.Y.3d 269, 929 N.Y.S.2d 3, 952 N.E.2d 995, 1000 (2011) ; see also Gerszberg v. Iconix Brand Grp., Inc. , No. 17-CV-8421 (KBF), 2018 WL 2108239, at *4 (S.D.N.Y. May 7, 2018) (under New York law, "a defendant has the initial burden of establishing that it has been released from any claims.").
Goldberg has failed to carry his burden. Mr. Galardi and Mr. Patel, the persons who negotiated the Provider Release, understood that the "deemed to have received" language in the third-party release in the November Plan only "partially protected" the Providers and did not cover creditors who did not receive consideration under the Plan. At trial, Mr. Galardi attempted to explain what was intended, but his testimony was not particularly *346helpful.14 The Court noted that the typical third-party release language, which actually appeared in section 9.02, binds creditors whether or not they filed claims, and asked Mr. Galardi why he didn't use that phraseology. Mr. Galardi responded that he was not comfortable with using the same language in the Provider Release for fear that the Court would not approve. (Tr. 36:11-37:1.) This testimony was consistent with the concerns he expressed to Mr. Patel and his representation to the Court at the hearing to approve the disclosure statement that the Provider Release only extended to creditors who had received a benefit from the case through a distribution.15
In fact, Mr. Galardi could not provide a cogent meaning to the phrase "deemed to have received" except that it was narrower than section 9.02. Admitting that he was concerned that the Court might not approve a broad third-party release, he instead strove for ambiguity. He had been practicing bankruptcy for twenty years, (Tr. 31:20-21), and selected a phrase "deemed to have received" that he had never used before and never used again. (Tr. 36:11-37:1.) He acknowledged at trial that he could have been more direct. (Tr. 37:11-12.)
Although Mr. Patel raised an issue about the meaning of "deemed to have received" a distribution, he dropped it, satisfied that the injunction in section 9.02 was broad enough to bar claims by creditors who did not file claims. This resolution satisfied the Debtors' lawyers who did not want to draw attention to section 9.05 by amending it.16 However, the Plan confirmed by the Court cut back the injunction and limited it to the scope of the Provider Release; if the claim was not released, it was not enjoined.
At the confirmation hearing, quoted earlier, Mr. Galardi had stated that the Debtors and the Providers wanted the third-party release to cut off the claims of creditors who had not filed claims. That was what they wanted but it was not what they asked for as was evident from the views Mr. Galardi expressed when negotiating the language of the Provider Release with Mr. Patel, the "heads up" he gave the Committee's counsel that he planned to modify the release (which he never did) to cover claims by creditors who do not receive distributions, and his testimony at trial that he did not use the broader language of section 9.02, which expressly barred creditors who had not filed proofs of claim from suing the Providers, because he was concerned that the Court would not approve such a release. Moreover, the Confirmation Order, drafted by the Debtors' counsel and submitted after the confirmation hearing, included an express finding that tied the Provider Release to an actual distribution, stating the each creditor "that has received or is deemed to have received distributions made under the Plan in turn benefits from an immediate distribution." (Confirmation Order ¶ 24.) Creditors that did not file claims did not receive any distribution or any benefit. I therefore disregard his contrary statements at the *347confirmation hearing as indicative of the parties' understanding that the "deemed to have received" language covered creditors who did not file claims and receive a distribution.17
Nor does the Court's interpretation that the Provider Release does not cover the Plaintiffs' claims render it meaningless. According to Goldberg's counsel, limiting the Provider Release to creditors who filed claims is meaningless because the Debtors' confirmed a 100% Plan that paid the creditors holding allowed claims in full. (See Tr. 96:4-9.) However, when the Provider Release was being negotiated, the Debtors were not proposing a 100% plan. The November Plan impaired virtually every class, meaning the creditors were not receiving 100% of their claims.
Finally, there are other reasonable interpretations of the phrase "deemed to have received distributions made under the Plan." At the Debtors' request, the Court approved the payment of certain pre-petition claims immediately and outside of a plan, including to "critical vendors." Ordinarily, pre-petition claims are paid under a confirmed plan. Despite their pre-payment, payments to unsecured creditors prior to confirmation could be deemed to have been paid under the plan. In addition, creditors who assigned their bankruptcy claims against the Debtors could be deemed to have received the distribution paid to their assignees, and hence, barred from suing on any claims they retained against Providers. Furthermore, creditors who filed claims that were disallowed could nevertheless be deemed to have received a distribution based on their participation in the case.
I recognize that the Court's conclusion does not effectuate the bargain Goldberg thought he struck when he waived his indemnity claims and voted in favor of the Plan. However, it is clear for the reasons stated that the Providers' counsel and Debtors' counsel understood that the Provider Release did not cover claims by creditors who did not participate in or receive a benefit from the bankruptcy cases. Counsel tried to "finesse" the limitation with ambiguous language by relying on the broader injunction, but the injunction was subsequently cut back to be co-extensive with the Provider Release. In the end, the third-party release that would have released the Plaintiffs' claims is not the one they agreed to, and the Court cannot rewrite the Plan.
Accordingly, the Motion is denied. The Court has considered Goldberg's other arguments and concludes that they are without merit. Settle order on notice.
The confirmed Plan (Amended Joint Chapter 11 Plan of Liquidation for Gawker Media Group, Inc., Gawker Media LLC, and Gawker Hungary Kft , dated Dec. 11, 2016) is attached as Exhibit 1 to the Findings of Fact, Conclusions of Law, and Order Confirming Amended Joint Chapter 11 Plan of Liquidation for Gawker Media Group, Inc., Gawker Media LLC, and Gawker Hungary Kft, dated Dec. 22, 2016 (the "Confirmation Order") (ECF Doc. # 638).
The Providers had to meet other conditions under the Provider Release, but they are not in dispute.
In this decision, "PX" refers to the Plaintiffs' trial exhibits, "DX" refers to the Debtors' trial exhibits, and "Tr." refers to the trial transcript, a copy of which can be found at ECF Doc. # 1103.
The Stipulated Facts are set forth in Section III of the Joint Pretrial Order, dated Mar. 15, 2018 (ECF Doc. # 1089).
Harder LLP also represented the three members of the unsecured creditors' committee (the "Committee"), Terry Gene Bollea, Shiva Ayyadurai and Ashley Terrill, individually, but the Committee was represented by Simpson Thacher & Bartlett LLP.
A copy of the November Plan is attached as Exhibit A to the corresponding amended disclosure statement filed on November 2, 2016. (ECF Doc. # 403.)
"Released Employee Parties" was not defined in the November Plan. The November Plan defined a different term, "Released Employees and Independent Contractors" as "each current and former employee, writer, editor, and independent contractor that was employed by, or paid to contribute articles to, the Debtors including, without limitation, current and former 1099 employees and current and former independent contractors, that filed a Proof of Claim in the Bankruptcy Cases." (November Plan at 12.) A subsequent amendment dropped the phrase "Released Employee Parties" and substituted the defined term.
The clocks that timed the emails passing between Ropes & Gray, the Debtors' counsel, and Saul Ewing LLP, the Providers' counsel, were not in sync. For example, the email appearing at the top of PX C that begins "not really," indicates that it was sent by Mr. Galardi on October 28, 2016 at 4:05:11 p.m. The same email, which is part of the email chain included in PX D, indicates that it was sent (or more likely, received by Saul Ewing) at 9:05 a.m., seven hours before it was sent. When identifying an email, I will use the time indicated on the referenced trial exhibit.
"Those claims" referred to the Providers' indemnification claims.
The Plaintiffs had little reason to object to the Provider Release because it did not cover their post-petition claims. On December 11, 2016, however, only two days before the confirmation hearing, the Debtors filed a revised plan that modified section 9.05 to cover claims that were existing or arose prior to the closing of the sale of substantially all of the Debtor's assets to Gizmodo. (See Notice of Filing of Revised Version of Debtors' Amended Joint Chapter 11 Plan of Liquidation for Gawker Media Group, Inc., Gawker Media LLC, and Gawker Hungary Kft. and Proposed Form of Order Approving Such Joint Chapter 11 Plan , dated Dec. 11, 2016, Ex. B, at 46 (ECF Doc. # 576-2).) The sale closed after the publication of the Article, and the revised third-party release now covered the Plaintiffs' claims. On the other hand, section 9.02 in the November Plan enjoined their claims.
A copy of the transcript of the confirmation hearing was received in evidence as DX 2.
A copy of the complaint is attached as Exhibit A to the Motion.
Mr. Patel did not testify.
Mr. Galardi also testified in response to further questioning by the Court that a creditor could be deemed to receive a distribution if the creditor didn't "prosecute" its proof of claim. (Tr. 38:14-39:6.) It was not clear what he meant by "prosecute," and whether he was intending to refer to a creditor that filed a proof of claim and abandoned it, or a creditor who did not file a proof of claim.
Nevertheless, the Debtors slipped in an amendment two days before the confirmation hearing that extended the Provider Release beyond pre-petition claims to cover post-petition, pre-sale closing claims.
Goldberg cites United States v. Pantelidis , No. CRIM. 01-00694, 2004 WL 2188089 (E.D. Pa. Sept. 7, 2004) to support the proposition that the Court can rely on counsel's statements to interpret an ambiguous contract. There, the Court determined the meaning of an ambiguous contract based on the affidavits of counsel and statements made during oral argument because there was "no dispute about the accuracy of the affidavits, nor as to the credibility of statements made at oral argument. Id. at *2. Here, the evidence of the contemporaneous negotiations belies Mr. Galardi's testimony and oral statements. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501510/ | MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE
*350I want to start by commending the parties' counsel on their excellent and very thoughtful submissions and on the streamlined and professional way in which the exhibits and the testimony were presented. It was a great help as well as a great pleasure to the Court to have experienced advocates present a case in such a high-quality manner.
Before the Court are disputes that relate to three proofs of claim filed in the chapter 11 case of Westinghouse Electric Company LLC, et al. The proofs of claim were filed by Landstar Global Logistics, Inc., Landstar Inway, Inc., and Landstar Express America, Inc. For convenience I will refer to those three entities collectively today as "Landstar," as for purposes of today's rulings it is not necessary to distinguish among them.
On February 6, 2018, notices of the partial transfers of the three claims were filed. Collectively, the notices contemplated a full transfer of each claim but each notice was denominated as a partial transfer because there were multiple transferees who were involved with respect to individual claims. The transfer notices are filed at Docket Numbers 2427 through 2432; a corrected version of Docket Number 2427 was filed on February 7, 2018 to correct an inadvertent error in the attachments to the notice, and that corrected notice is at Docket Number 2433.
The filed transfer notices included attachments that explained the bases for the transfers. The attachments asserted that the Landstar entities had offered to sell the claims and that the offers had been accepted by Seaport Global Holdings, LLC, which was acting on behalf of an entity named Whitebox Advisors, LLC, which, in turn, was acting for affiliated entities named Whitebox Multi-Strategy Partners, LP and Whitebox Asymmetric Partners, LP. During the remainder of this opinion I will refer to Seaport Global Holdings, LLC as "Seaport." I will also refer to the various Whitebox entities collectively as "Whitebox," just as the parties did throughout the trial, because for today's rulings it is not necessary to distinguish among the various Whitebox entities.
Transfers of claims are subject to the terms of Rule 3001 of the Federal Rules of Bankruptcy Procedure. On February 26, 2018, the Court approved a stipulation among the parties that extended the Landstar parties' deadline for the filing of objections to the claim transfers to and including March 15, 2018. Landstar then filed a timely objection to the transfer notices on March 15, 2018. (See Dkt. No. 2857.)
Nature of the Issues and the Court's Jurisdiction
Section 502 of the Bankruptcy Code gives me jurisdiction over claims against an estate, and the Federal Rules of Bankruptcy Procedure give me power to resolve disputes over claim transfers. The parties agreed, at least with respect to the validity of the transfer notices, that I had jurisdiction and that I could and should render a *351final decision on the merits of their dispute. However, there have been some changes during the course of these proceedings in the legal theories advanced by the parties, or more particularly, in the legal theories advanced by Whitebox, which resulted in some additional questions at the outset of the trial. As background to those questions I need to set forth a somewhat more detailed procedural history than might otherwise have been needed.
Whitebox contended in its February 6 transfer notices that a series of email exchanges gave rise to a "qualified financial contract" under Section 5-701.b.2(i) of the New York General Obligations Law. Whitebox argued that the alleged transfer agreement was fully binding and enforceable based on the email exchanges and without regard to whether further documentation was signed.
Landstar made a number of arguments in the objection that it filed on March 15, 2018. Dkt. No. 2857. First, Landstar contended that there had not been an offer and an unequivocal acceptance. It contended that the sale offer identified by Whitebox had not been accepted, but instead that a counteroffer had been made. Landstar further argued that the counteroffer substantially altered the economics of the proposed deal, that it was rejected by Landstar, and that no contract was formed.
Second, Landstar contended that the parties had made clear in their discussions that no contract of sale could or would be formed until the execution of definitive written agreements, and that absent such written agreements, there was no intent to be bound.
Third, Landstar argued that material terms of a contract, such as the identities of the actual purchasers and certain economic terms, had never been agreed upon. Landstar, therefore, objected to the transfer notices in their entirety and asked the Court to order Whitebox to withdraw them and to direct the claims agent to recognize Landstar as the holder of the claims.
After the filing of the objection, certain discovery disputes arose between the parties and were the subject of a telephone conference with the Court. The Court also directed the parties to make further submissions regarding the relevant legal issues, and the parties did so on May 24, 2018. The Whitebox submission is at Docket Number 3266, and the Landstar submission is at Docket Number 3263.
In its May 24 submission, Whitebox continued to argue that the parties' email exchanges created an enforceable contract that was binding without execution of a written agreement. However, Whitebox also argued in the alternative that the exchanges produced a binding preliminary commitment that obligated the parties to negotiate in good faith as to other open terms. Whitebox described this as a contention that the parties had entered into a so-called "Type II" agreement, as that term is used in the Second Circuit Court of Appeals decision in Brown v. Cara , 420 F.3d 148 (2d Cir. 2005). In Cara , the Second Circuit described such a contract as one in which parties enter into a binding agreement as to certain terms and a binding agreement to negotiate in good faith as to other open issues. Id. at 153. We often see examples of such contracts in the form of commitment letters to negotiate financing or, as in the Cara decision, in the form of a memorandum of understanding in which parties contractually commit that they will work together to accomplish a particular project.
The parties appeared before the Court to discuss Landstar's objection to the transfers on May 30, 2018. At that time, *352counsel for Landstar urged the Court to resolve the matter based on the written materials that had been submitted. Counsel for Whitebox contended that further discovery was needed and that a trial should be held to resolve disputes as to the parties' intent. I ruled that discovery should be completed and that the matter should be scheduled for trial.
The parties completed discovery and submitted a pretrial order that was entered by the Court on July 16, 2018, with a corrected version entered July 18, 2018. (See Dkt. Nos. 3586 and 3597.) Trial was held on July 18, 2018.
In the pretrial order, Whitebox continued to argue that the parties' exchanges created a fully binding agreement or, alternatively, that they created a Type II agreement in which the parties had legally agreed to bind themselves to certain terms and to negotiate other terms in good faith. When I asked about this at the outset of trial, however, one of Whitebox's attorneys stated that Whitebox's only contention was that the parties had reached a binding Type II contract. There was some considerable confusion over this, at least in my mind, as two different attorneys for Whitebox made statements about Whitebox's contentions that I had trouble reconciling. It was made emphatically clear by the end of the trial, however, that Whitebox was contending only that a partial Type II contract had been reached, and was not contending that a fully enforceable agreement on all relevant terms had been reached.
These exchanges at the outset of the trial raised other issues. In the pretrial order and at the outset of the trial, Landstar took the position that the so-called Type II contract issue should not be considered by the Court. Landstar argued that the only relevant issue before the Court was whether transfers had actually occurred. Landstar contended at the outset of the trial that it was plain from Whitebox's changed position that transfers of the claims had not actually occurred and that the only contention was that Landstar had breached a commitment to discuss a possible transfer, and so there was nothing more that I should do.
The Court pointed out, however, that Whitebox's reliance on the Type II contract issue did not involve any element of unfair surprise. Whitebox's attorney referred to this contention in an email dated January 30, 2018, a copy of which had previously been sent to the Court and had been pre-marked as an agreed exhibit for the trial. Plaintiff's Exhibit ("PX") 19 ("... Landstar must work in good faith to document the agreed-upon trade, starting by providing comments to the draft trade confirmation. Landstar cannot just abandon the deal and stop discussions because it has changed its mind about the deal economics agreed to just a few days ago."). As I have noted here, Whitebox had also addressed the issue in its May 24 submissions and in the pretrial order. (Dkt. Nos. 3266 and 3597.) It was also plain, and the parties acknowledged, that the parties were prepared to go to trial on the issue. After discussion, Landstar agreed that the matter should proceed to trial on all issues.
These exchanges also raised questions in my mind as to my jurisdiction over the parties' dispute. Plainly, the parties agreed that I had jurisdiction to resolve the issues that were framed by the filing of the Notices of Transfer and the objection thereto. The parties conceded my jurisdiction over these issues in their pre-trial order. At trial I raised a question as to whether I still had jurisdiction to consider the Type II contract theory in the absence of other contentions. I pointed out that I have jurisdiction over disputes that relate to Chapter 11 cases and that this has been *353widely interpreted to apply to cases that affect an estate. However, if Whitebox were merely to be entitled to seek money damages from Landstar, it was hard to see how the matter would affect the bankruptcy estate.
Whitebox's counsel argued in response that if it succeeded on its claim, it believed it would be entitled to seek specific performance, and that I had jurisdiction to resolve that issue and to resolve all of the related disputes between the parties. Whitebox insisted that I had jurisdiction over all aspects of the parties' dispute from the outset and should render a final decision. Landstar argued initially that I should not reach the Type II contract issue for the reasons that I have stated, but ultimately it conceded that this was not a jurisdictional issue, and after discussion, Landstar explicitly agreed on the record that the Court should make a final decision on the matter and that Landstar consented to a final resolution of the matter by the Court.
It is clear that the parties' entire dispute over these alleged transfers has revolved from the start around the question of whether they had entered into enforceable and binding contracts of any kind. The parties agreed that I had clear and admitted original jurisdiction over their disputes at the outset. Section 1367 of Title 28 of the United States Code provides that if a District Court has original jurisdiction over a matter, it also has "supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367. The Bankruptcy Court is a unit of the District Court that exercises the District Court's jurisdiction under Section 1334 of Title 28 of the United States Code. There is some disagreement in prior decisions as to whether a bankruptcy court may exercise supplemental jurisdiction under Section 1367. See, e.g. , 16 Moore's Federal Practice - Civil § 106.05[10] (2018). However, the Second Circuit Court of Appeals has held that bankruptcy courts do have jurisdiction under the principles of supplemental jurisdiction set forth in Section 1367. See Klein v. Civale & Trovato, Inc. (In re Lionel Corp.) , 29 F.3d 88, 92 (2d Cir. 1994).
Furthermore, as I noted, the parties agreed that I had jurisdiction at the outset of these disputes. Even if the issues narrowed once the trial was completed, my jurisdiction was not lost. See Dery v. Wyer , 265 F.2d 804, 808 (2d Cir. 1959) (noting the general principle that the "sufficiency of [a court's] jurisdiction should be determined once and for all at the threshold and if found to be present then should continue until final disposition of the action"). I concluded for these reasons, and I reaffirm here, that it was appropriate for me to hear and resolve all of the parties' disputes regardless of whether the nature of the issues might have changed somewhat as the case progressed, and regardless of whether the issues might have narrowed as the case progressed. As noted, the parties agreed with that approach and agreed to my entry of a final and binding ruling.
Relevant Legal Principles
As to the issues: Whitebox contends that there was a so-called Type II contract between the parties, pursuant to which they agreed to be legally bound to a price and to negotiate in good faith to complete agreement as to other terms of sale. It also claims that Landstar breached this agreement by abandoning the deal rather than engaging in good faith negotiations.
As the party who claims a breach of contract, it is Whitebox's burden to prove the existence of the contract by a fair preponderance of the evidence. See *354Angelo, Gordon & Co., LP v. Dycom Industries , 04 Civ. 1570, 2006 WL 870453, at *2, 2006 U.S. Dist. LEXIS 15784, at *5 (S.D.N.Y. March 31, 2006). This is true regardless of the type of contract that is alleged. It is also Whitebox's burden to prove that any such contract was breached, which again is subject to a preponderance of the evidence standard. See Diesel Props. SRL v. Greystone Bus. Credit II LLC , 631 F.3d 42, 52 (2d Cir. 2011) ; Mercury Partners, LLC v. Pac. Med. Bldgs., LP , No. 02 CIV 6005, 2007 WL 2197830 at *8 (S.D.N.Y. July 31, 2007).
Several other principles of New York law also are relevant to the parties' disputes.
First, it is a basic tenet of contract law that no contract exists unless there is an offer, an acceptance of the offer, consideration, mutual assent, and an intent to be bound. See Kowalchuk v. Stroup , 61 A.D.3d 118, 873 N.Y.S.2d 43, 46 (1st Dep't 2009). An offer and acceptance occur if a definitive offer is made and if there is an "unequivocal" acceptance of that offer. See Kolchins v. Evolution Mkts., Inc. , 31 N.Y.3d 100, 106, 96 N.E.3d 784 (N.Y. 2018) ("The first step is to determine whether there is a sufficiently definite offer such that its unequivocal acceptance will give rise to an enforceable contract." (quoting Matter of Express Indus. & Term. Corp. v. New York State Dep't of Transp. , 93 N.Y.2d 584, 589-590, 693 N.Y.S.2d 857, 715 N.E.2d 1050 (N.Y. 1999) ) ); Roer v. Cross Cty. Med. Ctr. Corp. , 83 A.D.2d 861, 861, 441 N.Y.S.2d 844 (N.Y. App. Div. 2d Dep't 1981) ("It is a fundamental principle of contract law that a valid acceptance must comply with the terms of the offer.").
If a response to an offer is conditioned on additional or different terms, then it is not an acceptance of an offer. "To enter a contract, a party must clearly and unequivocally accept the offeror's terms. If, instead, the offeree responds by conditioning acceptance on new or modified terms, that response constitutes both a rejection and a counteroffer which extinguishes the original offer." Thor Props., LLC v. Willspring Holdings , 118 A.D.3d 505, 507-08, 988 N.Y.S.2d 47 (N.Y. App. Div. 1st Dep't 2014) (internal citations omitted). As a result, if a purported acceptance is "qualified with conditions," it is "equivalent to a rejection and counteroffer." Robison v. Sweeney , 301 A.D.2d 815, 818, 753 N.Y.S.2d 583 (N.Y. App. Div. 3d Dep't 2003). This is a fundamental principle of contract law. Id. ; see also Jericho Group, Ltd. v. Midtown Dev., LP , 32 A.D.3d 294, 299, 820 N.Y.S.2d 241 (N.Y. App. Div. 1st Dep't 2006) ; Commerce Funding Corp. v. Comprehensive Habilitation Svcs., Inc. , 2005 WL 447377 at *11, *12-13, 2005 U.S. District Lexis 2832 at *33, *37-38, (S.D.N.Y. Feb. 24, 2005) ("A communication that purports to accept an offer cannot be subject to additional or different terms. Such a communication is no acceptance at all, but is an absolute rejection of the offer and a proposed counteroffer." (citing Krumme v. WestPoint Stevens Inc. , 143 F.3d 71, 83 (2d Cir. 1998) ) ).
Whitebox has filed papers asserting that there are certain exceptions to this rule that ought to be applicable to this case, but I will discuss those after I have made my factual findings and when I discuss the application of the law to the facts as I have found them.
Second, the creation of a contract requires more than a conceptual agreement on terms. It requires in addition an agreement to be legally bound to those terms, such that an enforceable obligation is created. Contracts are obligations that are undertaken by agreement rather than *355obligations that are imposed by law, and parties can impose limits and conditions as to when an agreement will become binding.
Under New York law, therefore, it is well settled that if the parties to an agreement do not intend it to be binding upon them unless and until it is reduced to writing and signed by both of them, they are not bound and may not be held liable until it has been written out and signed. Scheck v. Francis , 26 N.Y.2d 466, 311 N.Y.S.2d 841, 843, 260 N.E.2d 493 (1970). This is true even if the parties have orally agreed upon all the terms of a transaction. Schwartz v. Greenberg , 304 N.Y. 250, 254, 107 N.E.2d 65 (N.Y. 1952) ; Lost CR Assoc. v. Marine Midland Bank , 293 A.D.2d 719, 741 N.Y.S.2d 115, 116 (2d Dep't 2002).
Courts have identified a number of factors that aid in determining in a particular case whether a binding contract has been formed in the absence of a document executed by both sides. These factors are: (1) whether there is an expressed reservation of the right not to be bound in the absence of a writing; (2) whether there has been a partial performance of the contract; (3) whether all terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract usually committed to writing. See Winston v. Mediafare Ent. Corp. , 777 F.2d 78, 80 (2d Cir. 1986). These circumstances may be shown by oral testimony or by correspondence or other preliminary or partially complete writings. Id. at 81 (citing Restatement (Second) of Contracts § 27, Comment C (1981) ). No single one of these factors is decisive, but each can provide significant guidance in a particular case. However, "considerable weight is put on a party's explicit statement that it reserves the right to be bound only whenever an agreement is signed." RG Group, Inc. v. Horn & Hardart Co. , 751 F.2d 69, 75 (2d Cir. 1984). "In the event there is a writing between the parties showing that [one party] did not intend to be bound ... a court need look no further than the first [ Winston ] factor." RKG Holdings Inc. v. Simon , 182 F.3d 901, 901 (2d Cir. 1999) (unpublished opinion) (internal quotation marks omitted) (citing Arcadian Phosphates Inc. v. Arcadian Corp. , 884 F.2d 69, 72 (2d Cir. 1989) ).
Third, there usually is no binding contract unless there is a full agreement on all important terms. "Ordinarily, preliminary manifestations of assent that require further negotiation and further contracts do not create binding obligations." Shann v. Dunk , 84 F.3d 73, 77 (2d Cir. 1996) (collecting cases); see also Brown v. Cara , 420 F.3d 148, 153 (2d Cir. 2005) (noting that "[o]rdinarily, where the parties contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract") (quoting and citing Adjustrite Sys., Inc., v. GAB Bus. Servs., Inc. , 145 F.3d 543, 548 (2d Cir. 1998) ). However, parties can make preliminary agreements that only cover certain terms and that do bind the parties to engage in further discussions about open terms. See Teachers Ins. & Annuity Ass'n v. Tribune Co. , 670 F.Supp. 491, 499 (S.D.N.Y. 1987) (" Tribune "). Judge Leval set forth a thoughtful discussion of these types of contracts in his decision in Tribune , which is often cited as one of the leading decisions on this point. In that decision, Judge Leval observed that:
In seeking to determine whether such a preliminary commitment should be considered binding, a court's task is, once again, to determine the intentions of the parties at the time of their entry into the understanding, as well as their manifestations to one another by which the understanding was reached. Courts must *356be particularly careful to avoid imposing liability where binding obligation was not intended. There is a strong presumption against finding binding obligation in agreements which include open terms, call for future approvals and expressly anticipate future preparation and execution of contract documents. Nonetheless, if that is what the parties intended, courts should not frustrate their achieving that objective or disappoint legitimately bargained contract expectations.
Tribune , 670 F.Supp. at 499.
Similar cautions have been expressed by the New York State courts. For example, in Kaplan v. Continuum Health Partners, Inc. , No. 107226/2010, 2011 WL 11049975, at *3, 2011 N.Y. Misc. LEXIS 6796, at * 6 (N.Y. Sup. Ct. January 11, 2011), the court stated that:
As a general matter, courts express reluctance about the binding nature of "letters of intent." Preliminary agreements, such as a letter of intent or memorandum of understanding are not intended to bind either party to the contemplated transaction, except in rare circumstances where the agreement clearly manifests the intent to be bound.
As with contracts generally, the determination of whether a binding preliminary or Type II agreement has been reached involves a determination as to the intent of the parties. If, as noted above, the parties have clearly reserved the right not to be bound at all, unless and until a written agreement is signed, then that also precludes contentions that there is a Type II contract, and there is no contract at all unless and until a written agreement is signed.
The Evidence at Trial
I will now turn to the evidence at trial. At trial on July 18, each party submitted a binder of exhibits and the full contents of the binders were admitted into evidence by agreement. Landstar offered an additional binder, Landstar Exhibit 21, containing copies of other transfer notices that Whitebox had submitted in the Westinghouse case. I ruled that these could be submitted in evidence, but that Whitebox would be granted additional time through 5:00 PM on July 19 to state whether it had any objections to the authenticity of the documents included in the binder. Whitebox has confirmed that it has no authenticity objections, and so Landstar Exhibit 21 is part of the record and the record was deemed to be closed at 5:00 PM on July 19.
Four witnesses testified at the trial. The first witness was Mr. James Belardo of Seaport. Mr. Belardo is the individual who engaged in the relevant communications with Landstar about this matter. The second witness was Mr. Peter Lupoff. Mr. Lupoff was presented as an expert witness as to the claims trading process. The third witness was Ms. Dawn Bowers. Ms. Bowers is an employee of Landstar who had communications with Mr. Belardo and who allegedly committed Landstar to an enforceable Type II contract with Whitebox. The fourth witness was Mr. Amit Patel. Mr. Patel works for Whitebox Advisors and testified about his role in the transaction.
Findings of Fact
I have read and carefully considered all of the exhibits. I note that multiple copies of email chains were offered in evidence, but there are some differences in the email chains, and some exhibits include copies of emails that do not appear in other exhibits. So with the assistance of my law clerk, Svetlana Eisenberg, I have carefully combed through the exhibits to identify and chronologize all of the emails for the purpose of these findings. I have also carefully *357listened to the witnesses' testimony at trial, and I have made assessments of their credibility.
I find the following facts based on the trial record.
Mr. Belardo testified that he reviewed filed proofs of claim to identify parties who had filed claims, and then contacted them to determine if they would be willing to sell their claims. Mr. Belardo contacted Ms. Bowers for this purpose by email on January 10, 2018. The witnesses acknowledged that Mr. Belardo and Ms. Bowers did not know each other, had had no prior business dealings, and had not engaged in prior discussions with each other.
In all of the discussions that followed, Mr. Belardo was acting on behalf of his client, Whitebox. There is no contention that Mr. Belardo ever was an agent of Landstar or that he represented Landstar, and there was no evidence at trial that would have been sufficient to support a contention that Seaport acted for anyone other than Whitebox.
Mr. Belardo sent a follow-up email to Ms. Bowers on January 23, 2018, stating that he had a client, "interested in buying the unsecured claims in the 70s," meaning at a price equal to more than seventy percent of the stated amounts of the claims. See Defendant's Exhibit ("DX") 1. He asked if that "sparks any interest." Id. Ms. Bowers responded that same day by saying, "Yes," and by asking which claims the client might be interested in. Mr. Belardo responded that the client would be interested in all of Landstar's claims, and the parties arranged a call in order to have a further discussion. Id.
Ms. Bowers testified credibly that during their phone call she told Mr. Belardo that she had authority to negotiate a price at which the Landstar claims might be sold, but that all other terms had to be reviewed and approved by legal counsel. Mr. Belardo testified that he did not believe that Ms. Bowers made such a statement, but he also acknowledged that he did not have a full recollection of the details of their calls. I find that Ms. Bowers' testimony on this point is credible, and I find that she did make the statement.
Mr. Belardo then gave Ms. Bowers advice as to how she could initiate a potential sale. By email on January 24, 2018, he advised Ms. Bowers that, "[i]n order to engage my client" he would need a " 'sell order' or offer (via email)." DX-1. He also sent her the text of a typical sell order. Id. The language that Mr. Belardo suggested stated that, "Landstar agrees to sell its unsecured claims against Westinghouse," with the amounts of the claims and the percentage sale price to be filled in by Ms. Bowers. Id. The form suggested by Mr. Belardo also said that "[t]his offer shall be subject to agreement of terms and conditions and execution of documentation by both Buyer and Landstar." Id. It also included language pursuant to which the offer would expire if not accepted by a particular time. Id.
Ms. Bowers talked to her supervisor about the form of the proposed sell order that Mr. Belardo had sent. Ms. Bowers testified credibly that she and her supervisor were comfortable that the language that Mr. Belardo had sent - including, in particular, the statement that the offer was subject to an agreement on terms and the execution of documentation - meant that Landstar would not be bound unless and until a written contract was executed that, among other things, met with the approval of Landstar's internal counsel.
Based on Mr. Belardo's answers to my own questions at trial, I find that he, too, understood the "subject to" language to have this meaning and effect. Whitebox elicited general testimony from Mr. Belardo *358that he felt that parties should negotiate in good faith once they reach conceptual agreement on price. However, he acknowledged he did not know if there was such a legal obligation. More importantly, when I asked him specifically about the fact that the offer language he had sent to Ms. Bowers was "subject to" execution of a written agreement, he acknowledged that the words "subject to" meant that there was no deal unless and until a written agreement was signed.
After her discussion with her supervisor, Ms. Bowers sent an email to Mr. Belardo that stated in full as follows:
Landstar agrees to sell its unsecured claims against Westinghouse in the total amount of $754,470.56 at 78%; this offer shall be subject to agreement of terms and execution of documentation by both Buyer and Landstar. This offer shall be exclusive to Seaport and its client, but shall expire at 3:00 PM on 1/24/18.
DX-2. Ms. Bowers sent this email on January 24, 2018 at 10:46 AM. See DX-2.
Mr. Belardo then sent Ms. Bowers an email at 11:00 AM, stating that he had "a few quick questions on the claim amount," and asking Ms. Bowers to give him a call. DX-3. Ms. Bowers testified that she believes that she and Mr. Belardo discussed the sizes of the Landstar claims, and that she believes there were some questions about the amount of the Landstar Logistics claim and whether that filed claim differed from the amount that Westinghouse had listed on its schedules of assets and liabilities. She also testified that Mr. Belardo asked if Landstar could support the amount of the filed claims, and Ms. Bowers testified that she told him that Landstar could do so.
I should note that the record was not crystal clear as to whether these particular points were discussed during a phone call that occurred prior to sending the offer or whether they occurred after Mr. Belardo sent his request for a further call about the claims themselves. The emails suggest that there were two calls, but the witnesses did not appear to recall for certain how many calls they had or when each statement was made. In context, however, it makes sense that the conversation about the claims happened after Mr. Belardo sent his email at 11:00 AM stating that he had questions on the claim amount. If the discussion had already happened before the sell offer was sent, then presumably Mr. Belardo would not still have had questions.
I find that these parts of Mr. Belardo's and Ms. Bowers' discussions took place after the "sell order" had been sent.
During their second call, after the sell order had been sent, Mr. Belardo noted that the Landstar claims had been filed in an amount that exceeded $700,000, but that the Debtors' schedules of assets and liabilities had listed a lesser amount. Ms. Bowers explained the reasons why she thought the filed claims were valid. She testified that she believes Mr. Belardo asked her whether Landstar could support the claims and that she told him that she thought Landstar could do so.
Mr. Belardo then spoke to others at Seaport about the potential sale. The record shows that at 11:28:17 AM on January 24, Rick Feinstein, another Seaport employee, sent a Bloomberg instant message to representatives of Whitebox, noting the potential sale of a "754k Westinghouse claim" for which, "my cost" - that is, the cost without Seaport's commission - would be 78%. DX 14 at SPGH0029877.
The record shows that Mr. Feinstein did not participate in any of the phone calls with Ms. Bowers. He said in his instant message, though, that there was potential "counterparty risk" since the scheduled *359amount of the debt differed from the amount stated in the proofs of claims, and he described the explanation that had been provided by Landstar. Id. Mr. Feinstein also stated in his instant message that "They [meaning Landstar] are willing to provide recourse as to the $754k as they are very confident. They would not want funding based on $80k. It is a public company, so should be easy to review financials." Id.
It is difficult to know exactly where Mr. Feinstein got the information that he gave to Whitebox. Mr. Feinstein did not participate in the calls between Ms. Bowers and Mr. Belardo. Ms. Bowers testified that there was a discussion about the claim amount, but that there was never any discussion of an agreement pursuant to which Landstar would provide recourse as to the notional amount of the claim. In addition, she testified that there was never any discussion as to whether Landstar would pay interest on any recourse payment.
Mr. Belardo testified that he believed he had told Ms. Bowers that Landstar would have to make representations about the validity of the claims, but he said he did not have a clear recollection of the conversation. More importantly, no testimony was offered from Mr. Belardo to the effect that Ms. Bowers, or anyone else at Landstar, had actually made the statement that appears in Mr. Feinstein's instant message to Whitebox about a willingness to provide recourse as to the claims. To the contrary, Ms. Bowers testified that she never had a conversation with Mr. Belardo about Landstar providing recourse for the claims. I find that Ms. Bowers' testimony on this point was credible. There is nothing in the testimony of Mr. Belardo or Ms. Bowers that would support a contrary finding. Ms. Bowers testified consistently that she was only willing and able to discuss the price at which claims might be sold, and that she had no authority and could not enter into negotiations as to any other terms.
I find, therefore, that in their conversations, Ms. Bowers did not state that Landstar would provide recourse of the claims. Instead, as she acknowledged, she only expressed confidence that the claims were good. Mr. Feinstein may have assumed otherwise, but "recourse" terms were not discussed or agreed upon by Mr. Belardo and Ms. Bowers.
After receiving Mr. Feinstein's message, Mr. Patel of Whitebox asked for copies of the relevant proofs of claim. At 11:33:33 AM on January 24, he also asked: "How much interest on disallowance can they live with?" DX 14 at SPGH0029878. Mr. Friedberg, another Seaport employee, responded, "dunno - 5-6%?" Mr. Patel responded: "thats fine," and "lets lock it up." Id.
One thing on which the parties do agree is that Mr. Belardo and Ms. Bowers had not had any discussions about the possibility that Landstar would pay interest on a recourse claim. Both Mr. Belardo and Ms. Bowers so testified.
In some way that is not clear from the record, Mr. Patel's interest in pursuing a purchase of the claims was communicated to Mr. Belardo. At this point, Mr. Belardo responded by email to the sell offer that Ms. Bowers had sent. He did not simply accept the deal on the precise terms that Ms. Bowers had listed in the email form that he himself had previously provided to her. Instead, he sent an email at 11:42 AM that said, in its entirety, the following:
This email confirms that we are "done"; Seaport's client "Buyer" buys, and Landstar "Seller" sells, $754,470.56 of unsecured claims against Westinghouse at 78%, subject to:
*360* Agreement of terms and execution of documentation agreeable to both Buyer and Seller
* Buyer's satisfactory due diligence on the claims being sold
* Landstar providing recourse as to the notional amount of the claims; any repayment under such provision shall include 5% interest
See DX 5. The message continued: "Please respond to this email in the affirmative confirming the above, after which I will provide a Trade Confirmation for your review. We very much look forward to working with you on this." See DX 5.
As I noted, Mr. Belardo himself had drafted the sell order that Ms. Bowers had sent. That sell order included no reference to any protection as to the notional amounts of the claims and no reference to any requirement that a recourse payment would include interest on any amount. These were new terms that Seaport included in the email that it sent on behalf of Whitebox, after it had conversations with Landstar about the disparity between the filed amount and the scheduled amount and after different personnel at Seaport had discussion with Mr. Patel about potential interest to be paid.
Furthermore, Mr. Belardo made quite clear in his email that the 78% purchase price was only acceptable "subject to" the other listed terms, including the requirement that Landstar provide recourse and agree to pay interest on any recourse payment. There was no unequivocal acceptance of the sale offer as set forth by Ms. Bowers. Instead, there was only a conditional response, which included new terms, and which clearly communicated that an agreement on the purchase price was "subject to" these other terms.
Ms. Bowers did not respond in the affirmative to Mr. Belardo's email. Instead, within six minutes, she responded with a statement of concern and a request for reassurance. More particularly, she said the following in an email at 11:48 AM:
James, I just want to get some clarity here. Why am I agreeing to the terms below? Does this commit Landstar to the deal before we see the actual trade confirmation? My legal department will need to review any documents that need to be signed.
See DX 6. The parties disagree as to the significance of this statement and what it meant. I find, after considering the evidence and the credibility of the witnesses, that this was a plain statement by Ms. Bowers that Landstar did not wish to be bound right away and did not wish to be bound unless and until there was a written agreement that had also been reviewed and approved by counsel and then signed. I find that Ms. Bowers intended the message in this way, that the message fairly communicates that intent, and that Mr. Belardo understood the message in this way. The statement was a forthright, reasonable and clear notice to Seaport that Landstar did not intend to be bound unless and until a signed written agreement had been presented, the language and all of the terms had been approved by counsel, and the writing had been executed.
Mr. Belardo responded in an email at 12:06 PM on January 24. (DX 6.) He stated:
This commits both you (and my client) to the 78% Purchase Price, subject to agreement of terms and execution of documentation . We just want to make sure we are all conceptually on the same page regarding terms before spending additional efforts (including time/money on attorneys) reviewing/negotiating the Trade Confirm. Of course you will need to agree to, and ultimately execute, both *361a Trade Confirmation and then an Assignment of Claim document.
See DX 6 (emphasis in the original). Whitebox argues that this statement was intended to convey that a legally binding agreement was now in place as to a sale at the stated price, coupled with a binding agreement that the parties would negotiate the rest of the terms. Certainly, the statement that the email "commits" the parties to a purchase price provides some support for this contention. In context, however, I find that Whitebox's argument is not a credible or reasonable explanation of the email exchange.
What Landstar plainly asked, and what it plainly wanted to confirm, was that Landstar was not bound to a deal unless and until a written confirmation was reviewed and signed. Seaport's reassurance, in response to Landstar's expression of concern, was that the concept of a deal had been discussed and that Seaport wanted to be sure the parties were "conceptually" on the same page before working out the full terms. Seaport also reassured Ms. Bowers in an italicized statement that any commitment to a price was "subject to agreement of terms and execution of documentation ." Saying that a deal is subject to documentation may not always mean that the parties agree that they are not bound and unless and until a written agreement is signed, but in this case, I find that that is exactly what the statement conveyed, and that is exactly what the statement was intended to convey to Ms. Bowers.
Landstar expressed its concern, and the response was that there was only a conceptual understanding that was subject to further discussion, documentation, and agreement. Whitebox's contention that somehow this statement confirmed the actual existence of a binding agreement is belied by the full context and the wording of the exchanges. In fact, the statement was intended to, and it did, convey to Ms. Bowers that there was no binding agreement of any kind at that time.
After receiving Mr. Belardo's email, Ms. Bowers responded by an email at 12:11 PM. She stated: "Sounds good. Please send the documents so I can get the review process started." DX 7. There was some contention at trial that the "sounds good" statement was an acceptance of Mr. Belardo's proposal; in context, it very plainly was not. The thing that "sounded good" to Ms. Bowers was that this was just a conceptual set of terms that were not yet binding. She made quite clear that she did not have authority to agree to the additional terms that had been proposed, that she would not be the one who would negotiate them, and that such terms required review and discussion by counsel.
In addition, Whitebox also acknowledged at trial that there never was an agreement on the recourse provision. Plainly, it cannot contend that the "sounds good" statement was an acceptance of the proposed recourse provision, because Whitebox itself acknowledges that that term was never agreed to.
A draft confirmation was then circulated by Seaport. The confirmation itself said it would be effective and would be binding after it had been executed by the parties. At that point, Landstar's internal counsel got involved to discuss the confirmation and, more particularly, the proposed recourse provisions. Ms. Bowers testified that she had no further involvement in the discussions and that counsel was in charge of those items.
The emails reflect that there were discussions and that Seaport pressed Landstar for comments on the draft confirmation. Instead, however, Michael Woodruff, an internal counsel at Landstar, informed Mr. Belardo via email on January 26 at 2:31 PM that "Landstar is going to have to *362remove itself from this offering at this time." DX 27. The email was somewhat cryptic as to the reasons. It stated only that "We [Landstar] did a risk analysis and the figures and calculations didn't work for us." DX 27. However, at trial, Whitebox's counsel elicited testimony from Ms. Bowers about her conversations with counsel, and she stated that counsel had explained that the proposed recourse and interest provisions were the reasons why Landstar had decided not to go forward.
I should note that, at various times during the trial, Whitebox speculated that Landstar might have backed out of the deal for another reason, such as the possibility that claims values were going up in the trading market. But no evidence was offered that claims values actually changed or that Landstar was aware of any change in claims values, and there was absolutely no evidence that concerns over the 78% price were the reasons why the deal fell apart. The only evidence presented to me was that Landstar did not wish to agree to the proposed recourse terms and to the proposed agreement to pay interest on any recourse payment. I find that these reasons, and not any speculative alternative reasons, were the reasons why Landstar decided not to go forward.
Whitebox also offered testimony as to what it believed are certain customs in the claims trading business. But rather than review that evidence here, I will discuss it in the context of my application of the governing law to the facts as I have found them.
Application of the Law to the Facts
Turning to the application of the law to the facts: first, I conclude that there never was a binding offer and acceptance sufficient to create a contract of any kind. Mr. Belardo himself drafted the offer to be sent by Ms. Bowers. It mentioned only a price at which the relevant claims would be sold. Mr. Belardo then realized that there might be some risk as to allowance of the full stated amount of the claims, and so, when he responded on behalf of Whitebox, he inserted a new term that he himself had never included in the offer form that he had drafted. That term was a requirement that Landstar provide recourse as to the notional amount of the claims. In addition, Mr. Belardo's response stated that Whitebox's willingness to buy the claims was subject to an agreement that 5% interest be paid on any recourse payment. The parties agree that there was never any prior discussion of that notion.
In context, this was a counteroffer, not an unequivocal acceptance of the offer that Ms. Bowers had made. It introduced new terms and expressly conditioned an agreement on price to an agreement on these other terms.
At the conclusion of the trial on July 18, I asked the parties to make further submissions to the Court on the issue of whether Mr. Belardo's email should be considered a counteroffer rather than an acceptance, and the parties made those submissions at approximately 5:00 PM the next day. In its submission, Whitebox did not dispute the general rules that I have cited above. However, Whitebox argued that the "recourse" provisions were not really "new" conditions and that, instead, they were merely terms that "would otherwise be implied in fact or in law from the offer." See Dkt. No. 3603 (citing Richard A. Lord, Williston on Contracts , § 6:15 (4th Ed. 2002) ). Whitebox's theory is that the recourse provision was not a new term at all, but that a recourse provision was necessarily implicit in the offer that Ms. Bowers had sent. Whitebox also argued, in the alternative, that the recourse language was inconsequential and not significant enough to turn its alleged acceptance into a counteroffer.
*363However, the evidence at trial simply does not support Whitebox's contentions.
First, the parties made clear at trial that buyers of claims often ask for recourse provisions, but Ms. Bowers plainly was not a professional buyer or seller of claims. There is no evidence that she understood the concept of a recourse provision at all. The idea of providing recourse may not have seemed unusual to Whitebox or Seaport, but it certainly was unusual to Ms. Bowers and to Landstar, and there had not even been any discussion of the point at the time Ms. Bowers sent her sell order. Under those circumstances, the facts simply would not support a finding that a recourse term was implied in fact or implied in law in the offer that Ms. Bowers had sent.
The witnesses at trial also made clear that while recourse provisions are usually negotiated, there are many occasions in which parties do not include recourse provisions in their deals. Such terms cannot therefore be automatically implicit in an offer to sell claims. Furthermore, the interest provision had never been discussed. Certainly, there is nothing in the offer to sell that implicitly suggests that interest will be paid on a recourse obligation, let alone as to a particular interest rate.
I should also note that although Whitebox initially took the position that there was a full agreement on terms, at trial it agreed that there never was an actual agreement as to the recourse provision. Its contention was that Landstar had breached an obligation to have further discussions about the point. Whitebox went so far as to admit that if the parties had not reached agreement on the recourse issue after good faith discussions, then there would have been no deal and that Landstar could have walked away. Whitebox cannot reconcile those concessions at trial with its current post-trial contention that the recourse provision was merely a point that was already clear and implicit in the sell order as either an implied in fact or an implied in law term.
Whitebox, in its own contentions about the alleged Type II contract, has acknowledged and agreed that the recourse items were open terms that had not been agreed upon and that required further negotiation and agreement. If I were to accept Whitebox's new contention that these terms were already implicit and necessarily had already been included in the sell order itself, that would contradict Whitebox's own arguments and admissions about the alleged Type II agreement and about the consequences of the parties' exchanges. Whitebox has clearly acknowledged that the recourse items were open points about which no agreement was reached; it cannot now turn around and argue after trial that they were implied points that were already necessarily resolved and already agreed upon back when the original offer was sent.
Nor is there any factual support for Whitebox's alternative contention that these new terms were not important conditions or qualifications. Whitebox's own witnesses, including its expert witness, testified that a recourse provision is of key importance to a buyer. The expert testified that he would usually recommend against doing a deal without such a provision. I, therefore, find and hold that Seaport's response to Ms. Bowers' email was a counteroffer, not an acceptance.
As I noted earlier, at trial there was some suggestion that Ms. Bowers had accepted the counteroffer when she responded by email "sounds good." But in context, as I have found, what she actually sought to confirm, and what was actually communicated by her to Mr. Belardo, was that there was no legal commitment at that time and that further terms were to be *364discussed. And Whitebox, as I have noted in making its own Type II contract argument, contends only that there was an agreement on price and not an agreement on other terms.
As a counteroffer, Mr. Belardo's email cancelled and nullified the original offer sent by Ms. Bowers. Landstar was free either to accept or reject the counteroffer. It never accepted it, and after two days of discussions, it made clear that it rejected the counteroffer. As a result, there was no contract.
Whitebox, in arguing that a Type II contract was formed, also asks me, in effect, to deconstruct the counteroffer into separate pieces. It says that since the price was the same in both the offer and the counteroffer, I should treat the counteroffer as an acceptance of the proposed price and as a preliminary agreement to negotiate other terms. However, it is often the case that there is an overlap between an offer and a counteroffer. I could offer to sell my car for $3,000, and I might receive a counteroffer that says the buyer is willing to pay $3,000, so long as I agree to pay any repair expenses that the buyer incurs over the next year. Plainly, that is a counteroffer, not an acceptance. The price mentioned in the two communications is the same, but the law does not treat that as an acceptance or as a preliminary agreement that obligates the parties to have further discussions.
The notion that a Type II contract was formed depends on a contention that the parties actually agreed (1) to be legally bound by certain terms, and (2) to work together in good faith on other open items. The email message sent by Mr. Belardo cannot reasonably be interpreted as an offer to form such a contract. It did not say, for example, that the buyer agrees to pay the price Ms. Bowers suggest, so long as the parties commit themselves in good faith to negotiate other terms. Even that would have been a counteroffer, though it would have been one that, if accepted, might have created a Type II contract.
Here, the actual wording of the email message sent by Mr. Belardo defies Whitebox's contention that a Type II contract was even offered, let alone reached. The email stated that Whitebox's agreement to pay a particular price was subject to other terms that were set forth. It was not an offer to be bound by a price term, coupled with a commitment to negotiate other provisions. By its express terms, it was an offer to accept the price if -- and only if -- another particular term were included in the deal. By its terms, the deal was presented as a package, not as a partial agreement to one term, to be followed by a negotiation of other terms.
Whitebox also argues that the custom and practice in the claims trading business is that when parties have reached an agreement on price, they understand that they should negotiate in good faith on other terms. This testimony was extremely vague and self-serving. It described the general practices of traders who regularly deal with each other in this field, but it stopped far short of showing that parties customarily understand that they have made legally binding Type II contracts whenever they agree on price and regardless of whether other terms have been proposed.
I am particularly concerned about this contention because, in other reported cases, parties in this same industry have taken very different positions as to what the alleged prevailing customs are in the industry and as to whether people in the industry believe that any agreement of any kind is formed in the absence of a signed contract. In fact, an affiliate of Seaport has itself successfully argued in New York State Court that a stock trade had no *365binding effect of any kind because the trade confirmations said that the deal was "subject to" the execution of written documents. The State Court case is Luxor Capital Group, L.P. v. Seaport Group, LLC ; the trial court decision is reported at 2016 WL 1558847, 2016 N.Y. Misc. Lexis 1454 (April 15, 2016), and the decision on appeal is reported at 148 A.D.3d 590, 50 N.Y.S.3d 70 (2017). I will have more to say about that decision in a few minutes.
I reject the contention that there is a custom in the industry to the effect that communications of the type that occurred here purportedly give rise to enforceable obligations or to partial binding agreements on terms. The vague testimony at trial did not support the existence of any such custom. Furthermore, custom is relevant to the extent that it provides evidence of what a party intends. There is no evidence that Ms. Bowers or anyone else at Landstar had any familiarity with the alleged customs of people who more regularly deal with each other in the trading of claims.
If claims traders want their customs to be binding when they deal with non-professionals like Ms. Bowers, it is incumbent on them to set forth the terms in a clear and unequivocal way. Contracts are supposed to be matters of voluntary agreement. They are not supposed to be traps for the innocent and unwary.
Accordingly, if Seaport had intended that there be a binding Type II contract, it could and should have clearly and explicitly asked Landstar to confirm that the parties had an enforceable agreement as to price and that the parties were entering into a binding and enforceable agreement to negotiate other terms in good faith. Perhaps Seaport does not use such language because it thinks sellers, such as Landstar, would be scared off by it. But if a party would not have agreed to an explicit agreement of the kind alleged, then a court certainly should not impose such terms after the fact.
In any event, I find that the alleged customs are not sufficient to override the plain meaning and effect of the communications that the parties actually had in this case. Seaport's response was a counteroffer and the counteroffer was never accepted. There is nothing in the purported customs in the industry that supports giving the communications a different legal effect.
Second, and as an independent reason why no binding contract was formed, I find, based on the evidence, that no contract of any kind could have been formed because Landstar, through Ms. Bowers, had clearly indicated its intention not to be bound to any term, unless and until a full written agreement on all terms was signed and executed.
As I mentioned earlier, courts have identified four factors to be considered in determining whether a party has expressed an intention not to be bound in the absence of a written agreement. The factors are: (1) whether there is an expressed reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract usually committed to writing. See, e.g. , Winston v. Mediafare Entertainment Corp. , 777 F.2d 78, 80 (2d Cir. 1986).
These factors differ slightly when parties contend that a Type II contract had been reached. In such a case, the third factor listed in Winston , i.e., whether all terms have been agreed upon, will always involve a situation in which open terms exist. But, otherwise, the factors are quite similar. A court should consider: (1) whether the intent to be bound on a partial or *366preliminary basis is revealed by the language of the agreement; (2) the context of the negotiations; (3) the existence of open terms; (4) partial performance; and (5) the necessity of putting the agreement in final form, as indicated by the customary form of such a transaction. See Brown v. Cara , 420 F.3d 148, 157 (2d Cir. 2005).
As to the first factor: I find that there was a clearly expressed reservation of a right not to be bound, either in full or to a partial set of terms, in the absence of the execution of a written contract. As I have noted, I find that the whole purpose and the understood intent of Ms. Bowers' emails to Mr. Belardo after receiving his counteroffer was to reconfirm what she had previously said orally; namely, that the completion of a deal required the approval of other people, including internal lawyers, and that there would be no agreement unless and until a written contract was signed.
I find that this position was communicated orally to Mr. Belardo prior to the time when Ms. Bowers sent the sell order that Mr. Belardo had drafted. I find that Ms. Bowers clearly confirmed it in the email exchanges with Mr. Belardo, in which she asked him to clarify that Landstar would not be bound, and in which he responded that there was just "conceptually" an agreement on price that "of course" was subject to further agreements on terms and entry into written agreements. I also find that in this particular case, both parties understood that the language in the offer that Mr. Belardo drafted, to the effect that the offer and any agreement would be "subject to" an agreement on terms and execution of a written contract, was an explicit reservation of a right not to be bound at all, unless and until a written agreement was signed.
On this particular point, Whitebox has argued that, as a matter of law, I should treat the "subject to" language as though it had no particular effect, or at least only limited effect. In support of that proposition, Whitebox has cited to the decision by the New York Court of Appeals in Stonehill Capital Management, LLC v. Bank of the West , 28 N.Y.3d 439, 68 N.E.3d 683 (N.Y. 2016). In that case, a party conducted an auction sale of a syndicated loan. The auction terms stated that a buyer would be required to execute a purchase agreement in a form that was provided with the auction terms. The auction terms also stated that bids would be fully binding offers and would be fully binding when accepted. A bid was submitted and then accepted. However, the written acceptance said that the bid was accepted "subject to mutual execution" of an acceptable sale agreement. The seller then later sought to back out of the deal.
In Stonehill , the New York Court of Appeals held that the acceptance of an auction bid usually forms a binding contract, and that the offering memorandum for the auction said explicitly that bids were non-contingent, final and binding offers and told bidders they would be required to execute a sale agreement in a specified previously disclosed form. Id. at 449, 68 N.E.3d 683. It also found that the parties' correspondence indicated that they understood that a binding deal was in place after the auction was finished. In light of these facts, the court held that under the "totality of the circumstances" of that particular case, the seller's reference to the "mutual execution" of an agreement was not enough to avoid the contract. Id. Given that the terms of the sale had been pre-set and that parties had effectively been told that a binding contract would be formed when a bid was accepted, the court held that the use of the "subject to" language in that particular case was not enough to show that the *367parties did not intend to be bound. Importantly, accepting the seller's view of the significance of that language would have contradicted other terms of the auction; it would have meant that the auction was not final and binding, whereas the auction terms had explicitly said otherwise.
In Stonehill , the Court of Appeals cited favorably to three other decisions. The first was Emigrant Bank v. UBS Real Estate Securities, Inc. , 49 A.D.3d 382, 854 N.Y.S.2d 39 (N.Y. App. Div. 1st Dep't 2008). Emigrant Bank also involved an accepted auction bid on the sale of a mortgage loan portfolio. The bid form that was submitted said that a sale was "subject to a mutually acceptable Purchase and Sale agreement, which will be subject to negotiation, but substantially in the form of the agreement posted to the [bidding Web] site." Id. at 383, 854 N.Y.S.2d 39 (bracketed language in original). The buyer added as a condition that "a mutually acceptable mortgage loan sale and servicing agreement will be negotiated in good faith." Id. The court in Emigrant held that a motion to dismiss should have been denied as, in the context of that particular case, the "subject to" language did not unmistakably and automatically and as a matter of law condition an agreement on the execution of a definitive contract. Id.
The second decision cited in Stonehill was Bed Bath & Beyond, Inc. v. Ibex Construction, LLC , 52 A.D.3d 413, 860 N.Y.S.2d 107 (N.Y. App. Div. 1st Dep't 2008). In Bed Bath & Beyond , the court held that a letter of intent in connection with a construction project was a binding agreement. While the language of the letter of intent was not quoted in the opinion, the court held that the plain language of the letter of intent "manifests the parties' intent to be bound by its terms." Id. at 414, 860 N.Y.S.2d 107. Since other terms plainly manifested that intent, the use of "subject to language" elsewhere in the agreement did not, in that particular case, "amount to an express reservation of a right not to be bound or a condition precedent to the formation of a binding contract." Id.
The third cited decision in Stonehill was Eastern Consolidated Properties, Inc. v. Morrie Golick Living Trust , 83 A.D.3d 534, 922 N.Y.S.2d 301 (N.Y. App. Div. 1st Dep't 2011). In that case, a broker contended that it had obtained a buyer who was ready, willing and able to buy a property. However, the deal memorandum between parties stated that it was subject to the signing of a mutually agreeable contract of sale. Id. at 534, 922 N.Y.S.2d 301. The court held, on the strength of this language, that the deal memo was "a classic example of an agreement to agree" that did not constitute a binding contract of any kind and that did not trigger any duty of good faith negotiation and that, in light of the language, there was no triable issue of fact. Id. at 534-35, 922 N.Y.S.2d 301.
Given these three cases cited with approval in Stonehill , and in particular, Stonehill 's citation to the Eastern Consolidated Properties decision, the Stonehill decision simply cannot reasonably be read as a general ruling that the "subject to" language is either meaningless or of no import. In fact, there is an extremely long line of decisions in both the state courts and the Federal courts that have relied on such "subject to" language as clearly indicating that parties have reserved a right not to be bound in the absence of a fully negotiated and executed written contract. Just a partial list of these cases includes the following:
• Tebbutt v. Niagara Mohawk Power Corp. , 124 A.D.2d 266, 508 N.Y.S.2d 69, 70-71 (3d Dep't 1986) (acceptance of a purchase offer "subject to agreement on the terms of this sale," coupled *368with a statement that if the terms were satisfactory, "we can proceed to prepare whatever contract documents may be required," indicated without room for dispute that the parties only intended to be bound if and when a written agreement was executed);
• Reprosystem, BV v. SCM Corp. , 727 F.2d 257, 262 (2d Cir. 1984) (an intent not to be bound in the absence of a written agreement was "conclusively established" when the proposed contracts stated that agreements would be binding "when executed and delivered");
• R.G. Group, Inc. v. Horn & Hardart Co. , 751 F.2d 69, 76 (2d Cir. 1984) (no written agreement where a draft contract said it would be binding "when duly executed");
• Adjustrite Systems v. GAB Business Services , 145 F.3d 543, 551 (2d Cir. 1997) (where the parties signed a two-page agreement regarding a sale of assets, which provided for the execution of a "sales agreement contract," as well as other agreements that never were executed, the two-page agreement was not a binding agreement but was just an unenforceable agreement to agree);
• Missigman v. USI Northeast, Inc. , 131 F.Supp.2d 495, 510 (S.D.N.Y. 2001) (finding no contract where an agreement was "subject to the execution of an employment agreement");
• Angelo Gordon & Company, L.P. v. Dycom Industries , 2006 WL 870453, *8, 2006 US Dist. Lexis 15784, *20 (S.D.N.Y. March 31, 2006) (where a trade confirmation stated that it would be binding "upon execution" by both buyer and seller, the court concluded that the parties did not intend to be bound without a signed written agreement);
• DCR Mtge. VI Sub 1, LLC v. People's United Fin., Inc. , 148 A.D.3d 986, 987, 50 N.Y.S.3d 144 (N.Y. App. Div. 2d Dept. 2017) (no contract where an agreement was "subject to ... negotiation of the mutually agreed upon [l]oan [s]ale [a]greement"); and
• Hawkins v. MedApproach Holdings , 2018 WL 1384502, *1, 2018 U.S. Dist. Lexis 43500, *3-4 (S.D.N.Y. March 15, 2018) (finding no intent to be bound where a proposed agreement stated that it was "subject to attorney review and discussion").
Perhaps most remarkable of all in this particular regard are the decisions in the New York State Courts in 2017 in the lawsuit involving an affiliate of Seaport that I have referred to earlier. The case name is Luxor Capital Group, L.P. v. Seaport Group, LLC . The trial court decision is reported at 2016 WL 1558847, 2016 New York Misc. Lexis 1454 (April 15, 2016), and the decision on appeal is reported at 148 A.D.3d 590, 50 N.Y.S.3d 70 (N.Y. App. Div. 1st Dep't 2017). The decision on appeal was issued after the Stonehill decision.
In the Luxor case, Luxor argued that Seaport had breached a contract to sell Twitter common stock. Seaport argued that there had only been an unenforceable agreement to agree and not an enforceable contract. The trial court decision noted that
Seaport contends that the parties did not enter into an enforceable agreement because the purported agreement was explicitly subject to mutually satisfactory documentation. Seaport urges that the parties did not intend those instant messages to be binding until their agreement was reduced to writing and signed, which never happened. Seaport *369maintains Luxor requested that the trade be subject to documentation, and Luxor's internal emails demonstrate that it knew and intended that the "subject to" language meant there was an "out."
Luxor Capital Group, L.P. v. Seaport Group, LLC , 2016 WL 1558847, *4, 2016 New York Misc. Lexis 1454, *12. The trial court agreed and held that instant messages saying that a deal was "subject to mutually satisfactory documentation" constituted a reservation of a right not to be bound absent a written agreement. The trial court also accepted Seaport's argument that, "to ignore these expressions of the parties' intent would violate the fundamental principle that the court must interpret the agreement to give every provision meaning." It therefore granted summary judgment in favor of Seaport.
The Appellate Division affirmed, holding that the "subject to" language had the effect that the lower court had found. Luxor Capital Group, L.P. , 148 A.D.3d at 590-91, 50 N.Y.S.3d 70. It confirmed that the Stonehill decision did not require a different result, and that, "unlike in Stonehill , the totality of the circumstances here does not reflect any certainty as to the existence of an enforceable contract." Id.
It certainly is true after Stonehill that a statement that an agreement is subject to further documentation and execution of a written contract does not automatically indicate an intent not to be bound, at least where there are other explicit statements in the parties' dealings that plainly and unequivocally confirm an intent to be bound. But the "subject to" language does have meaning, and it frequently is understood and used to convey the notion that a party does not intend to be bound at all unless and until a written agreement is signed. I find that that is what the parties understood the language to mean in this particular case.
Whitebox urges me to find the contrary and places strong reliance on Chief Judge McMahon's decision in Bear Stearns Investments Products v. Hitachi Auto Products USA , 401 B.R. 598 (S.D.N.Y. 2009). I should first note that all of Judge McMahon's discussions of the relevant case law and her findings about the absence of a full agreement in that case are fully consistent with what I have held and with what I have found in this case. Id. at 598-624. The only difference in the outcomes is that in Bear Stearns , Judge McMahon found that an enforceable Type II contract had been reached. Id. at 624-28. She declined to reach such a conclusion based solely on contentions about industry custom where there was no evidence that the seller was familiar with those customs. Id. at 627. However, she found that there was other evidence, primarily in the form of an internal communication that the seller had sent, that showed a clear intent by the seller to be bound by a preliminary agreement and to negotiate the rest of the terms in good faith. Id. at 606-07, 626.
Here, in contrast, I find that the evidence shows the opposite, for all of the reasons that I have explained in detail and that I need not repeat.
As the Court of Appeals noted in its decision in RG Group, Inc. v. Horn & Hardart Co. :
It is important to commerce that the law make clear what force will be given to various expressions of intent, for otherwise parties could never be assured that they were, in fact, channeling their negotiations toward an oral contract or toward a written one. Hard and fast requirements of form are out of place, of course. But when a party gives forthright, reasonable signals that it means to *370be bound only by a written agreements, courts should not frustrate that intent.
751 F.2d 69, 74-75 (2d Cir. 1984) (internal citation omitted). I find that Landstar gave such forthright reasonable signals in this case and, therefore, that no binding contract of any kind-whether a fully formed contract or a so-called Type II contract-could have been formed in the absence of a signed written agreement, whether this is stated as a reservation of the right not to be bound for purposes of the first factor in the Winston decision, or as what the evidence shows as to the parties' intent and as to the context of the negotiation, which are the first and second factors listed in Cara . I find the evidence clearly shows an intent not to be bound to any agreement at all, including any preliminary agreement, unless and until a full written agreement on all terms had been signed.
It is not really clear that I need to consider the other factors in light of this finding. See Kaczmarcysk v. Dutton , 414 Fed. App'x 354, 355 (2d Cir. 2011) ("While no single factor is decisive, ... where there is a writing between the parties showing that [one party] did not intend to be bound ... a court need look no further than the first [ Winston ] factor." (internal citations and quotation marks omitted) ). But I will do so for the sake of completeness.
The second factor to be considered under Winston , and the fourth factor listed under Cara , is whether there has been partial performance of the contract. This is relevant, of course, because partial performance is good evidence the parties believed they had an actual deal. The parties concede that there was no partial performance in this case.
The third factor to be considered under Winston , and the third factor under Cara , is "whether all terms of the alleged contract had been agreed upon" or whether there were "open terms." By the end of trial, both parties conceded that there was never a full agreement on all terms. That itself does not bar a finding that a Type II contract existed if there was an agreement to be bound by some terms, coupled with a binding agreement to negotiate in good faith as to other terms. But there was no such binding partial agreement or binding agreement to negotiate in this case.
The final factor to be considered is whether the agreement at issue is the type of contract usually committed to writing or, as stated in Cara , the customary form of the transaction. I find based on the record that it is customary for parties in this industry to execute written documentation in connection with the trading of claims. The witnesses at trial confirmed that this is the usual practice, though Whitebox contended it was not necessarily a legal requirement.
As I noted earlier, Whitebox argued that there are customs in the claims trading field that they believe call for a different result in this case. Whitebox argues that it is important that traders be able to make deals based on emails exchanges and important that parties be bound by those deals before written documents are signed because otherwise, according to Whitebox, parties would be free to pull out of deals just because prices have changed. But if this is truly the case, the right answer is that Seaport and other parties in this industry ought to be clear and direct in setting forth their agreements in the emails they exchange. If Seaport wishes to enter into partial Type II contracts, it can and should say so explicitly. If that is its intent, there is no reason why it cannot say in its emails that "we consider this to be a legally binding preliminary contract with price already agreed upon and with the parties obligated legally in good faith to negotiate other terms."
*371What seems to be happening instead is that the participants in this industry use language that reassures sellers that nothing is binding until the whole deal is done, and that permits the people in the industry to take different positions in different cases as to what the language means and what the customs allegedly are, depending upon the participants' self-interest in those individual cases. To see this disparity, one need only contrast the positions taken by Whitebox here with the positions taken by Seaport in the New York State Court. No court should endorse such a practice.
Similarly, much of what Whitebox argues, in terms of custom, is not so much a request that I find that there was an actual preliminary agreement here; rather, Whitebox asks me, due to the needs of the industry, to impose one upon Landstar, even in the absence of proof that Landstar itself (which is not a participant in the industry) actually understood that it had entered into a preliminary agreement. That is not the proper role of a court. The role of a court is to determine what parties have agreed to, and if they have made an agreement, to enforce it. It is not the role of the court-whether to serve the interests of an industry or for other purposes-to impose contracts on parties to which the parties themselves have not agreed.
Courts have correctly urged caution in finding an intent to form a preliminary or Type II contract. I find, based on the evidence, that it is quite clear that there was no intent by either party to form such a contract in this case. There was a conceptual agreement as to a purchase price, but there was never a binding agreement between the parties. I therefore find in favor of Landstar. The transfer notices should be canceled and withdrawn, and the claims and noticing agent should recognize that Landstar entities as the proper owners of the claims.
A separate order will be issued to this effect. Thank you very much. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501511/ | Sontchi, C.J.
INTRODUCTION 2
Before the Court is the Joint Motion of UMB Bank, N.A., as Indenture Trustee, and Elliott to (i) Dismiss Application of NextEra Energy, Inc. for Allowance and Payment of Administrative Expense, or, *375in the Alternative, (ii) Grant Summary Judgement Denying and Disallowing Such Administrative Expense3 (the "Motion to Dismiss"). Elliott seeks denial of NextEra's $60 million administrative expense claim related to NextEra's fees and expenses incurred attempting to close the transaction with the Debtors for control of the Debtors' economic interest in Oncor. The Debtors and NextEra sought Bankruptcy Court approval of the Merger Agreement, which contained a Termination Fee provision. The Merger Agreement was approved; thereafter, NextEra sought approval of the transaction from the PUCT, which ultimately denied regulatory approval. After NextEra began the appellate process and it became readily apparent to the Debtors that such appeals would be fruitless, the Debtors terminated the Merger Agreement. Thereafter, Elliott sought reconsideration of the Termination Fee provision of the Merger Agreement in the limited scenario that NextEra did not receive regulatory approval and the Debtors were forced to terminate the Merger Agreement. The Court ultimately decided to reconsider the Termination Fee in such limited circumstance. NextEra then brought its application for approximately $60 million in administrative expense claim related to its fees and expenses in pursuing regulatory approval of the Merger Agreement, which Elliott is seeking dismissal of herein.
Based on the provisions of the Merger Agreement, and for the reason set forth below, the Court will grant the Motion to Dismiss and disallow NextEra's $60 million administrative expense claim related to its efforts in seeking regulatory approval of the transaction. Furthermore, even if the plain language of the Merger Agreement did not prevent such a claim, which it does, NextEra has not provided a substantial contribution to the Debtors estates and, thus, does not qualify for an administrative expense claim under section 503(b) of the Bankruptcy Code.
JURISDICTION
The Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. Venue in the United States Bankruptcy Court for the District of Delaware is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 11 U.S.C. § 157(b)(2)(A), (B), (N), and (O). The Court has the judicial power to enter a final order.
BACKGROUND
In April 2016, after an extensive and strategic marketing process and various other efforts, the Debtors engaged in discussions with NextEra Energy, Inc. ("NextEra") for the sale of the Debtors' approximately 80% economic interest in Oncor Electric Delivery Company LLC ("Oncor").
On July 29, 2016, certain of the Debtors, NextEra, and EFH Merger Co., LLC ("Merger Sub")-a newly formed subsidiary of NextEra-executed definitive documentation to govern this transaction, including an Agreement and Plan of Merger among Energy Future Holdings Corp. ("EFH"), Energy Future Intermediate Holding Company LLC ("EFIH"), NextEra, and Merger Sub, dated July 29, 2016 (the "Merger Agreement"). The Merger Agreement, as amended, contemplated a merger of EFH with and into Merger Sub, whereby EFH would have become a wholly-owned subsidiary of NextEra with an approximately $18.7 billion implied Oncor total enterprise value. Included in the Merger Agreement was a "Termination Fee" in the amount of $275 million in favor *376of NextEra (the "Termination Fee"). More specifically, the Merger Agreement provides:
"Termination Fee" shall mean an amount equal to $275,000,000, inclusive of all expense reimbursements, including reasonable and documented professional fees of Parent and Merger Sub; provided that , in no event shall such claim be senior or pari passu with the superpriority administrative claims granted to the secured parties pursuant to the DIP Facility (as in effect on the date hereof).4
Section 8.5(b) of the Merger Agreement also states:
In the event the Company and EFIH pay the Termination Fee pursuant to this Section 8.5(b), such payment shall be the sole and exclusive remedy of Parent and Merger Sub against the Company, EFIH and their respective Affiliates, Representatives, creditors or shareholders with respect to any breach of this Agreement prior to such termination.5
Also on July 29, 2016, EFH, EFIH, EFIH Finance Inc., certain direct and indirect subsidiaries of EFH, and NextEra entered into a Plan Support Agreement in support of the Amended Joint Plan of Reorganization of Energy Future Holdings Corp. et al. , pursuant to Chapter 11 of the Bankruptcy Code, as modified and filed with the Bankruptcy Court on August 5, 2016.6 By motion dated August 3, 2016, the Debtors sought approval of their entry into the Plan Support Agreement and the Merger Agreement (collectively, the "NextEra Transaction").7
On October 31, 2016, NextEra and Oncor submitted their joint change of control application for the PUCT's approval ("Joint Application"). The Joint Application asked that the PUCT drop two key features of a "ring-fence" the regulator had erected around Oncor in connection with the 2007 leveraged buyout: first, the requirement that Oncor maintain an independent board of directors; and second, certain minority shareholders' ability to veto dividends. NextEra was unwilling to concede the governance terms, going so far as to call them "deal killers."
On March 30, 2017, the PUCT held an open meeting on the NextEra Transaction. During the meeting, the Commissioners expressed significant concerns about the transaction's terms and its impact on the public interest. As Commissioner Anderson explained in a memorandum he filed the same day,
From the earliest contacts, well before the sale merger transfer application was filed, NextEra's representatives have been very clear and consistent about the conditions that they could not accept and the reasons why those conditions were unacceptable. As the Chairman noted perceptively toward the end of the Hearing on the Merits, among the core issues in this case is whether "our deal[-]killers are [NextEra's] deal-killers." At least for this Commissioner, I fear that they do indeed correlate negatively.8
On April 13, 2017, the PUCT denied the Joint Application, citing, among other things, the impasse between the PUCT
*377and NextEra over the critical "deal-killer" terms, as well as a number of other fundamental defects in the Joint Application.9 On May 8, 2017, NextEra filed a rehearing request, without Oncor joining, simply rearguing the same contentions the PUCT had rejected after months of debate.10 The deadline for a decision was set at June 7, 2017, but NextEra sought to prolong the process, requesting an extension to "the maximum extent allowed by law"-effectively July 22, 2017. The PUCT denied that request and again rejected the Joint Application on June 7, 2017 for the same reasons cited in its April 13 decision.11 NextEra promptly filed a second rehearing request, again refusing to budge on the "deal-killer" conditions. The PUCT again rejected NextEra's rehearing request, issuing a one-sentence order on June 29, 2017.12
With the deal now clearly dead, NextEra still took no action to terminate the Merger Agreement. Indeed, it was clear that NextEra would appeal the PUCT's decision to all levels of review, leaving the Debtors no choice but to terminate the Merger Agreement and risk triggering the Termination Fee or else incur months or years of continued interest and fee obligations.
On July 7, 2017, the Debtors terminated the Merger Agreement and entered into a merger agreement with Berkshire Hathaway Energy Company and related entities (collectively, "Berkshire"). The Debtors terminated the NextEra Merger Agreement based on both NextEra's failure to obtain regulatory approval and breach of the Merger Agreement, while reserving their rights to assert other grounds for termination.13 Thereafter, the Debtors focused on closing a competing transaction with Berkshire.
On July 29, 2017, Elliott Associates, L.P., Elliott International, L.P., and The Liverpool Limited Partnership (collectively, "Elliott") filed The Elliott Funds' Motion to Reconsider in Part the September 19, 2016 Order [D.I. 9584] Approving the NextEra Termination Fee (the "Motion to Reconsider").14 The Debtors and NextEra objected to the Motion to Reconsider.15
On August 23, 2017, the Debtors abandoned the proposed transaction with Berkshire and pivoted to a reorganization plan in which Sempra Energy ("Sempra") would acquire Oncor for approximately $9.45 billion. The PUCT eventually approved the Sempra merger. Subsequent to the PUCT approval of the transaction, the Bankruptcy Court approved the Sempra merger pursuant to a confirmed plan.16
*378On September 19, 2017 (one year to the day from entry of the Termination Fee Order), the Court held a hearing on the Motion to Reconsider on a stipulated record.17 Thereafter, the Court issued its Opinion and Order (collectively, the "Reconsideration Decision") granting the Motion to Reconsider.18 The Reconsideration Decision is currently on appeal before the United States Circuit Court of Appeals for the Third Circuit.19
While the Reconsideration Decision was pending before the Third Circuit, NextEra filed the Application of NextEra Energy, Inc. For Allowance and Payment of Administrative Claim (the "Application"),20 seeking approximately $60 million pursuant to section 503(b) of the Bankruptcy Code for NextEra's costs and expenses incurred in attempting to close the Merger Agreement. In the Application, NextEra identifies several categories of expenses for which it seeks administrative expense status, including PUCT approval expenses, other regulatory expenses, financing expenses, professional fees, integration expenses, and marketing and communications expenses (collectively, the "NextEra Expenses").
Thereafter, Elliott filed the Motion to Dismiss21 seeking dismissal or, in the alternative, entry of summary judgment denying and disallowing NextEra's $60 million administrative expense claim for the NextEra Expenses (the "Administrative Expense Claim").
ANALYSIS
A. Standard of Review
Elliott's motion seeks dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable to these proceedings pursuant to Federal Rule of Bankruptcy Procedure 7012. "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim [for] relief that is plausible on its face.' "22 At this stage in the proceeding, it is not the question of "whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims."23 Since the Twombly and Iqbal decisions, "pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading."24 This new standard requires "a plaintiff to plead more than the possibility of relief to survive a motion to dismiss."25 It is insufficient to provide "[t]hreadbare recitals of the elements of a cause of action, supported by *379mere conclusory statements ...."26 Under the heightened standard, a complaint "must contain either direct or indirect allegations respecting all the material elements necessary to sustain recovery under some viable legal theory."27 The Court, in order to determine whether a claim meets this requirement, must "draw on its judicial experience and common sense."28 In Fowler , the Third Circuit articulated a two-part analysis to be applied in evaluating a complaint.29 First, the court "must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions."30 Second, the court must determine "whether the facts alleged in the complaint are sufficient to show that the plaintiff has a 'plausible claim for relief.' "31
In the alternative, Elliott seeks partial summary judgment on these issues. Federal Rule of Civil Procedure 56 is made applicable to these adversary proceedings by Federal Rule of Bankruptcy Procedure 7056 and directs that summary judgment should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits "show that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law."32 Summary judgment is designed "to avoid trial or extensive discovery if facts are settled and the dispute turns on an issue of law."33
B. The Merger Agreement Bars NextEra's Recovery of An Administrative Expense Claim
Section 6.7 of the Merger Agreement provides in full that:
Expenses. The Surviving Company shall pay all charges and expenses, including those of the Exchange Agent, in connection with the transactions contemplated in Article IV. Except as otherwise provided in Section 6.3, Section 6.18, Section 6.19, Section 6.20 and Section 6.22 or any administrative expenses of the Debtors' estates addressed in the Plan of Reorganization, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the Closing Date Transactions and the other transactions contemplated by this Agreement shall be paid by the party incurring such expense.34
*380Further, Section 8.5(b) of the Merger Agreement defines the "Termination Fee" as "an amount equal to $275,000,000, inclusive of all expense reimbursements, including all reasonable and documented professional fees of [NextEra] and [EFH Merger Co., LLC]."35
NextEra asserts that Section 6.7 differentiates between expenses that qualify as administrative expenses, which are recoverable, and those which do not qualify as administrative expenses, which must be paid by the party who incurs them. NextEra further asserts that, if NextEra recovers its Termination Fee, then that amount will be deemed inclusive of NextEra's expenses pursuant to Section 8.5 of the Merger Agreement; but absent such recovery, it is entitled, under Section 6.7, to recover administrative expenses.
The Court disagrees and finds as a matter of law that Section 6.7 of the Merger Agreement bars NextEra from asserting an administrative expense claim against the Debtors' estates. The Merger Agreement provides for interpretation of the contract under Delaware Law.36
Under Delaware law, contract interpretation is a question of law. A court applying Delaware law to interpret a contract is to effectuate the intent of the parties. Accordingly, the Court must first determine whether a contract is unambiguous as a matter of law. If the language of the contract is unambiguous, the Court interprets the contract based on the plain meaning of the language contained on the face of the document. A contract is ambiguous only if it is fairly or reasonably susceptible to different interpretations.37
The Court finds that the Merger Agreement is unambiguous. Nothing in the Reconsideration Decision makes the Merger Agreement ambiguous, rather the Court specifically held that the "record," including colloquy with the Debtors' counsel and financial advisor, was confusing.38
*381In Madison Equities ,39 a potential purchaser sought an administrative expense for costs incurred in pursuing a sale transaction with the debtor notwithstanding that the debtor did not have any postpetition contractual obligation to reimburse the potential purchaser for its costs.40 The court held that a claim under section 503(b)(1) must have factual validity as well as a satisfactorily basis "such as contract or tort."41 The court further found that
[t]he Debtor never agreed with Madison to pay or reimburse Madison for any of its expenses in pursuing a deal for the Property. Nor could the Debtor have agreed to do so without court approval since any such contract would not have been in the ordinary course of business.42
Here, the court is faced with much of the same facts. The Debtors never agreed to pay NextEra's expenses that related to obtaining regulatory approval before the PUCT; in fact, the Merger Agreement expressly provides that each party must carry its own expenses in connection with the merger transaction.43 Thus NextEra can point to no contractual language on which the court may impose liability.
The plain language of Section 6.7 of the Merger Agreement creates two exceptions: (i) specifically enumerated sections of the Merger Agreement or (ii) are administrative expenses of the Debtors. NextEra's Administrative Expense Claim does not fall into either of these exceptions. Consequently, per the language of the Merger Agreement all costs and expenses incurred in connection with the Merger Agreement shall be paid by the party incurring such expenses. As a result, NextEra is barred by the terms of Merger Agreement from seeking section 503(b) claim in connection with NextEra's efforts to obtain approval of the Merger Agreement.
C. Court's Retroactive Reconsideration of the Termination Fee Does Not Affect NextEra's Legal and Economic Interests
NextEra contends that if the Court determines that Section 6.7 requires parties to otherwise bear their on expenses (which it does) then NextEra should not be bound by the expense limitation because of the Court's reconsideration of the Termination Fee provisions in the Reconsideration Decision. NextEra asserts that under the express terms of Section 8.5 of the Merger Agreement (before the Reconsideration Decision), the Termination Fee would have been payable upon termination by the Debtors following regulatory disapproval.44 The crux of NextEra's argument is that the Court's retroactive disapproval of the Termination Fee was "materially *382inconsistent" with the legal and economic effect of the Merger Agreement as entered into by the parties.
NextEra's argument that the Court rewrote and materially altered the Merger Agreement fails. The Reconsideration Decision did not eviscerate the Merger Agreement, rather, the Court carved out one specific instance where, if the record had been clear, the Court would not approve the Termination Fee in the Merger Agreement.45 Again, it is imperative to reiterate that the Court had a fundamental misunderstanding of the critical facts regarding when the Termination Fee would be paid. As held in the Reconsideration Decision:
The Court had a fundamental misunderstanding of the critical facts when it approved the Termination Fee. Despite the Court's direct question as to whether the Termination Fee would be payable if the PUCT declined to approve the NextEra Transaction, the record is incomplete and confusing on that fundamental point. The Court simply did not understand that if the PUCT declined to approve the NextEra Transaction and the Debtors (as opposed to NextEra) terminated the Merger Agreement the Termination Fee would be payable to NextEra. Despite the obvious confusion on this point neither the Debtors nor NextEra sought to clarify the record and affirmatively state that NextEra would receive the Termination Fee if the Debtors terminated the Merger Agreement.46
*383Furthermore, Section 8.5(b) of the Merger Agreement states that if the Merger Agreement was terminated "then , subject to the approval of the Bankruptcy Court" the Termination Fee would be paid.47 Furthermore, as the Court held: "NextEra cannot reasonably have relied on the Termination Fee Order when it knew the order was premised on an incomplete and confusing record."48
NextEra's purported reliance on the initial approval of the Merger Agreement has already been rejected by the Court and, the Court's reconsideration of a small portion of the Merger Agreement does not affect the plain language of Section 6.7 of the Merger Agreement. Thus, the Court must reject NextEra's renewed plea to disregard additional provisions of the Merger Agreement.
D. The Reconsideration Decision Does Not Prevent NextEra from Seeking an Administrative Expense Claim
In the Reconsideration Decision, the Court held that the Termination Fee under the limited circumstances of denial of regulatory approval by the PUCT and the need for the Debtors to terminate the Merger Agreement in the face of NextEra's fruitless appeals of the PUCT determination because it "cannot provide an actual benefit to the debtor's estate sufficient to satisfy the O'Brien standard."49 Elliott asserts in its reply brief that this ruling precludes reimbursement of NextEra's administrative expense claim.50 The Court disagrees. In the Reconsideration Decision, the Court limited its ruling to the payment of the Termination Fee in the limited circumstances where the PUCT denied regulatory approval and when the Debtors were forced to terminate the Merger Agreement.
Here, the Termination Fee was payable to NextEra even if the PUCT declined to approve the NextEra Transaction and the Debtors (as opposed to NextEra) terminated the Merger Agreement. As discussed above, this was a critical point. Payment of a termination or break-up fee when a court (or regulatory body) declines to approve the related transaction cannot provide an actual benefit to a debtor's estate sufficient to satisfy the O'Brien standard.... This issue was exacerbated in this case by the fact that the Merger Agreement did not have a time limit for approval and the Termination Fee was payable if the Debtors terminated the Merger Agreement. This incentivized NextEra to pursue multiple motions for reconsideration and a fruitless appeal strategy to force the Debtors to terminate the Merger Agreement to pursue an alternative transaction. Allowance *384of a termination or break-up fee when a debtor chooses to pursue a higher and better offer is appropriate. In this case, the Debtors were forced to terminate the Merger Agreement to pursue a lower offer because NextEra had the Debtors in a corner. Payment of a termination fee under those circumstances, which would have been predictable had the Court properly understood the facts, could not provide an actual benefit to a debtor's estate sufficient to satisfy the O'Brien standard.51
Here, the Court is not considering NextEra's claim to the Termination Fee, it is considering NextEra's administrative expense claims related to the work performed in seeking regulatory approval of the Merger Agreement. The ruling in the Reconsideration Decision does not stretch to apply to any claim that NextEra may have; as such, the Court summarily dismisses this argument and limits the Reconsideration Decision to the facts and circumstances as discussed and ruled upon therein.
E. Even if NextEra Had a Contractual or Equitable Basis to Obtain an Administrative Expense, NextEra Does Not Meet the Legal Burden Under Section 503(b)(1)
Assuming arguendo that the express terms of the Merger Agreement did not bar the relief sought in the Application, NextEra's expenses do not qualify as administrative expenses under section 503(b)(1) of the Bankruptcy Code.52 Section 503(b)(1) allows as administrative expenses the "actual, necessary costs and expenses of preserving the estate."53 NextEra, as applicant, carries the " 'heavy burden of demonstrating that the costs and fees for which it seeks payment provided an actual benefit to the estate and that such costs and expenses were necessary to preserve the value of the estate assets.' "54
In In re Women First Healthcare, Inc. ,55 Judge Walrath considered whether Sun Pharmaceuticals Industries, Ltd. ("Sun") would be entitled to an administrative expense claim. Therein, Sun was the stalking horse and successful (and only) bidder for an asset of the debtor. After the sale order approving the sale of the asset to Sun was entered by the Court, another bidder, Mutual Pharmaceutical Company, Inc. ("Mutual") contacted the debtors and Sun regarding the purchase of the asset. Mutual filed a motion for reconsideration of the Sun sale order, alleging that the sale motion had not been properly served and claiming an interest in the inventory and intellectual property related to the asset. Judge Walrath ultimately held that the sale motion had not been properly served, granted the motion for reconsideration, vacated the Sun sale order, and authorized Sun to file a motion, subject to the rights of all parties to object, for administrative expenses for Sun's expenses. The debtors *385held another auction and Mutual was the highest and best bidder for the debtors' asset. Sun filed its motion for the allowance and payment of an administrative expense for the costs it incurred in reliance on the Sun sale order, which was contested by Mutual and the United States Trustee. Sun pursued its alleged administrative claim under section 503(b)(1) based on the tort of negligent misrepresentation (alleging that the debtors negligently misrepresented to it that the debtors had provided proper notice of the bid procedures order and the sale motion). Judge Walrath held an evidentiary hearing on Sun's administrative expense motion.56
At trial, Sun presented evidence seeking to establish that it conferred a benefit on the estate from the time the Sun sale order was entered until it was vacated. During this time, Sun completed its due diligence and performed other activities necessary to close the transaction. Judge Walrath held that "[t]he relevant inquiry is not the motivation of the actor, but whether the estate benefitted by the actions taken. Thus, in the event the Court finds Sun's actions benefitted the estate, the costs of those actions will be allowed despite any self-interest."57 Judge Walrath also concluded that Sun's actions in opposing Mutual's motion for reconsideration and reopening the auction did not confer a benefit on the estate; but yet, Sun's actions in trying to expeditiously close the transaction did, indeed, benefit the debtors' estate because it was very important for the debtors to close the sale of the asset as soon as possible.58
This case is distinguishable from Women First . First, after the PUCT denied approval of the merger between Oncor and NextEra, unlike Sun who was ready, willing, and able to close the transaction in Women First , NextEra was unable (due to lack of regulatory approval) to consummate the transaction contemplated in the Merger Agreement. NextEra argues that it is akin to Sun because NextEra was willing to close the merger. However, this has nothing to do with NextEra's willingness to close the NextEra Transaction, because without regulatory approval NextEra would never be able to close the NextEra Transaction.
Second, Judge Walrath awarded administrative expenses due to the procedural deficiency in the notice of the sale motion because the claims resulted from a post-petition tort committed by the debtor.59 NextEra suggests that its misapprehension of fact and law is akin to the deficient sale notice in Women First . However, there are no alleged procedural defects nor any tort allegations in this case. The only defect here, was the Court's misunderstanding of the facts at the time of its original approval of the Termination Fee.
Third, in Women First , there was a competitive bidding process wherein Mutual made the highest and best offer for the debtor's asset; here, there was no competitive bidding process and the Debtors eventually closed a transaction with Sempra for substantially less value. As the Court found in the Reconsideration Decision and again finds here, if the Debtors could have closed the NextEra Transaction they would have; but regulatory approval was necessary and not received;60 the Debtors *386were left with no choice but to investigate an alternative transaction for less value.61 In Women First , the debtor was able to pursue a high and better offer for its asset, here, the Debtors were stuck with NextEra's "fruitless appeal strategy" and had to terminate in order to pursue a "lower offer" for its Oncor assets.
NextEra argues that its efforts to close the merger served as a "roadmap" for structuring and obtaining approval of the Sempra deal. As Judge Walrath stated in Women First , "[t]he relevant inquiry is not the motivation of the actor, but whether the estate benefitted by the actions taken."62 Similarly, NextEra's motivation is not in question; thus, the inquiry is limited to whether the estate benefitted by NextEra's action. Here, NextEra failed to satisfy a closing condition of obtaining regulatory approval from the PUCT, which forced the Debtors to find an alternative transaction at far less value;63 thus, there was no benefit to the estate. Furthermore, there are no allegations of "unique circumstances" of a postpetition tort committed by the Debtors that would call into play the fundamental fairness doctrine relied on in Women First .64
As a result, NextEra cannot meet its heavy burden of demonstrating that the costs and fees for which it seeks payment provided an actual benefit to the estate and that such costs and expenses were necessary to preserve the value of the estate assets. Furthermore, there are no unique circumstances in the case sub judice akin to those in Women First . As a result, NextEra does not have a claim pursuant to section 503(b)(1)(A) of the Bankruptcy Code.
F. NextEra Does Not have An Administrative Claim Pursuant to Section 503(b)(3)(D)
In its Application and again in its objection to the Motion to Dismiss, NextEra asserts, as an alternative ground, that it is entitled to an administrative claim under section 503(b)(3)(D) for making a substantial contribution to the Debtors' Chapter 11 cases.65 NextEra asserts that, through one of its subsidiaries, it was a creditor of EFIH from the time it entered into the Merger Agreement through the end of the period for which NextEra seeks allowance of its expenses.66
*387Section 11 U.S.C. § 503(b)(3)(D) provides as follows:
(b) After notice and a hearing, there shall be allowed, administrative expenses ... including-
...
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by ...
(D) a creditor, an indenture trustee, an equity security holder, or committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title; ...67
Thus, "[t]he services engaged by creditors, creditor committees and other parties interested in a reorganization are presumed to be incurred for the benefit of the engaging party and are reimbursable if, but only if, the services 'directly and materially contributed' to the reorganization."68 The Third Circuit has described section 503(b)(3)(D) as follows:
Subsection 503(b)(3)(D) represents an accommodation between the twin objectives of encouraging "meaningful creditor participation in the reorganization process," and "keeping fees and administrative expenses at a minimum so as to preserve as much of the estate as possible for the creditors." Inherent in the term "substantial" is the concept that the benefit received by the estate must be more than an incidental one arising from activities the applicant has pursued in protecting his or her own interests. Creditors are presumed to be acting in their own interests until they satisfy the court that their efforts have transcended self-protection. Most activities of an interested party that contribute to the estate will also, of course, benefit that party to some degree, and the existence of a self-interest cannot in and of itself preclude reimbursement. Nevertheless, the purpose of § 503(b)(3)(D) is to encourage activities that will benefit the estate as a whole, and in line with the twin objectives of § 503(b)(3)(D), "substantial contribution" should be applied in a manner that excludes reimbursement in connection with activities of creditors and other interested parties which are designed primarily to serve their own interests and which, accordingly, would have been undertaken absent an expectation of reimbursement from the estate.69
It is important to note that in this case, NextEra was not undertaking regulatory approval of the Merger Agreement as a creditor, rather it was undertaking the potential merger as the "purchaser." NextEra's actions were wholly related to its desire to own the Oncor assets.
"As a general proposition, expenses incurred by a creditor with respect to participating in the purchase of a chapter 11 debtor's assets are not "incurred by a creditor in making a substantial contribution" to a chapter 11 case within the meaning of section 503(b)(3)(D). Creditors' actions that may benefit the estate are not substantial for purposes of this section unless *388they also directly, materially, and demonstrably benefit the creditors generally, foster and enhance, rather than retard or interrupt the progress of reorganization, and are considerable in amount, value, or worth."70
There are two reasons why NextEra's claim under section 503(b)(3)(D) fails. First, NextEra asserts that it is a creditor through one of its subsidiaries .71 NextEra is not a "creditor." Section 101(10) of the Bankruptcy Code defines "creditor" as:
(10) The term "creditor" means-
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;
(B) entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of this title; or
(C) entity that has a community claim.72
Here, NextEra has made no claim or showing that NextEra itself is a creditor of the Debtors' estates.
Second, even if NextEra were a creditor, NextEra cannot show a substantial contribution to the estates. Here the work performed by NextEra was solely related to NextEra's efforts to close on the transaction in the Merger Agreement, there was no competitive bidding process nor was any transaction consummated. In In re S.N.A. Nut Co. ,73 the debtor filed a motion to sell substantially all of its assets with a stalking horse bidder. The sale procedures order contained provisions for a break-up fee and an expense reimbursement. The bid procedures also contemplated the stalking horses' ability to seek reimbursement as an administrative expense of the court did not authorize the debtor to sell its assets. At least two other bids were filed with the court but none of the bids received, including the stalking horse's bid, were adequate, thus, no sale occurred and the debtor withdrew its sale motion. The stalking horse then applied for reimbursement of costs and expenses. The S.N.A. Nut court held that as any money a bidder received through a bidding incentive comes out of the pockets of the creditors of the estate, there must be a direct relationship between the reimbursement an unsuccessful buyer receives and the benefit to the estate from the unsuccessful buyer's bid.74 The court continued that an "opportunity for other bidders to bid higher than [the stalking horse] without a subsequent sale is of no benefit to the estate."75 NextEra was not a stalking horse and did not induce other bidders to give higher and better offers. Although NextEra's proposed merger was approved by the Bankruptcy Court, the merger transaction did not obtain regulatory approval from the PUCT. NextEra was unable to close on the transaction to obtain ownership of the Debtors' Oncor assets. As a result, the Debtors were forced to find an alternative transaction at a much lower purchase price. NextEra's proposed merger offered no benefit to the estate, and in fact, cost the estate time and money while NextEra sought *389approval, had the transaction denied by the PUCT, and embarked on its appeals process.
As a result, NextEra's claim under section 503(b)(3)(D) must fail.
CONCLUSION
For the reasons set forth above, the Court will GRANT summary judgement and finds that, pursuant to the plain language of the Merger Agreement Section 6.7, NextEra is barred, as a matter of law, from seeking an administrative expense claim related to the work performed seeking approval of the failed NextEra Transaction. The Court will further GRANT Elliott's Motion to Dismiss and finds that even if NextEra could seek an administrative expense claim under the Merger Agreement, NextEra is not entitled to an administrative expense claim under either 11 U.S.C. § 503(b)(1)(A) or (b)(3)(D). The Court will issue an order.
This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
Capitalized terms not defined herein shall have the meaning ascribed to them below.
D.I. 12844.
Merger Agreement § 8.5(b).
Merger Agreement § 8.5(b).
D.I. 9199.
See Motion Of The EFH/EFIH Debtors For Order (A) Authorizing Entry Into Merger Agreement, (B) Approving Termination Fee, And (C) Authorizing Entry Into And Performance Under Plan Support Agreement (D.I. 9190).
See Mem. from Commissioner Kenneth W. Anderson, Jr. on Open Meeting of Mar. 30, 2017 (PUCT D.I. 46238).
Notice of Order Entered by the Pub. Util. Comm'n of Tex. Related to the Change of Control Appl. of Oncor (D.I. 11152).
NextEra Energy, Inc.'s Mot. for Reh'g Filed Before the Pub. Util. Comm'n of Tex., Adv. Pro. No. 17-50479-CSS (D.I. 6-7).
Notice of Order Entered by the Pub. Util. Comm'n of Tex. in the Admin. Proceeding Related to the Change of Control Appl. of Oncor (D.I. 11325).
Notice of Order Entered by the Pub. Util. Comm'n of Tex. in the Admin. Proceeding Related to Change of Control Appl. of Oncor Elec. Delivery Co. (D.I. 11398).
See Notice of Filing of Termination Ltrs. (D.I. 11424).
D.I. 11636.
D.I. 11879 and 11876, respectively.
Order Confirming the First Amended Joint Plan of Reorganization of Energy Future Holdings Corp., Energy Future Intermediate Holding Company LLC, and the EFH/EFIH Debtors Pursuant to Chapter 1 of the Bankruptcy Code (D.I. 12763, Feb. 27, 2018).
See D.I. 11716.
In re Energy Future Holdings Corp. , 575 B.R. 616 (Bankr. D. Del. 2017) (the "Reconsideration Opinion") and Order Granting the Motion to Reconsider of Elliott Associates, L.P and Denying the Application of NextEra Energy Inc. for Payment of Administrative Claim (D.I. 12075) (the "Reconsideration Order," and together with the Reconsideration Opinion, the "Reconsideration Decision").
3d. Cir. Case No. 18-1109.
D.I. 12671.
D.I. 12935.
Ashcroft v. Iqbal , 556 U.S. 662, 678, 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) ).
Scheuer v. Rhodes , 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), abrogated on other grounds by, Harlow v. Fitzgerald , 457 U.S. 800, 814-15, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982) ; see also Rosener v. Majestic Mgmt., Inc. (In re OODC, LLC ), 321 B.R. 128, 134 (Bankr. D. Del. 2005).
Fowler v. UPMC Shadyside , 578 F.3d 203, 210 (3d Cir. 2009).
Id.
Ashcroft v. Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (citing Bell Atlantic v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).
Twombly , 550 U.S. at 562, 127 S.Ct. 1955.
Burtch v. Huston (In re USDigital, Inc.) , 443 B.R. 22, 34 (Bankr. D. Del. 2011).
Fowler v. UPMC Shadyside , 578 F.3d 203, 210-11 (3d Cir. 2009).
Id.
Id. at 211.
Fed. R. Civ. P. 56(a) ; see also In re Delta Mills, Inc. , 404 B.R. 95, 103 (Bankr. D. Del. 2009).
Delta Mills , 404 B.R. at 104.
See D.I. 9190, Merger Agreement § 6.7(c). Section 6.3 of the Merger Agreement provides that in the event EFH and NextEra agree in writing on the use of common counsel or consultants with respect to the negotiation, preparation, or filing of any necessary consent, registration, approval, permit, or authorization under Section 6.3(a), EFH and NextEra will share equally the fees and expenses of such counsel and consultants. See Merger Agreement § 6.3(a)(ix). Sections 6.18, 6.19, 6.20, and 6.22 of the Merger Agreement provide that NextEra will reimburse, indemnify, and/or hold EFH and certain of its affiliates and subsidiaries harmless with respect to costs and expenses incurred by EFH or any affiliates and subsidiaries thereof in connection with certain actions taken in connection with the merger transaction. Id. §§ 6.18(c), 6.19(g), 6.20(b) and (c), and 6.22(c). These provisions do not create any right of NextEra to be reimbursed by the Debtors or the estates for costs and expenses incurred by NextEra.
Merger Agreement § 8.5.
Merger Agreement § 9.5.
JFE Steel Corp. v. ICI Americas, Inc. , 797 F.Supp.2d 452, 469 (D. Del. 2011) (internal citations omitted). See also In re Tribune Co. , 472 B.R. 223, 246 (Bankr. D. Del. 2012), aff'd in part, vacated in part , No. 12-CV-1072 GMS, 2014 WL 2797042 (D. Del. June 18, 2014), aff'd in part, rev'd in part sub nom. In re Tribune Media Co. , 799 F.3d 272 (3d Cir. 2015) ; In re NextMedia Grp., Inc. , 440 B.R. 76, 79-80 (Bankr. D. Del. 2010), aff'd sub nom. In re NextMedia Grp. Inc. , No. BR 09-14463 PJW, 2011 WL 4711997 (D. Del. Oct. 6, 2011) ("If the ordinary meaning of the contract language is clear and unequivocal, a party will be bound by its plain meaning because creating an ambiguity where none exists could, in effect, create a new contract with rights, liabilities and duties to which the parties did not assent." (citations and internal modifications omitted) ).
Energy Future Holdings Corp. , 575 B.R. at 632 ("In one instance a witness clearly stated that the Debtors would be liable for the Termination Fee if the PUCT declined to approve the NextEra Transaction and the Debtors terminated the Merger Agreement. But that testimony is countered with a contrary statement by counsel on the issue. Moreover, at no point did anyone bring forward the critical fact that NextEra had no economic incentive to terminate the Merger Agreement. Indeed, no facts were sufficiently drawn to the Court's attention such that the Court might have realized the point on its own accord."). The Court further held:
The Court does not believe the Debtors acted improperly or with malice. The reality is that the NextEra Transaction was extraordinarily complicated and the Debtors focused their attention on whether the Termination Fee was market not on when the Termination Fee might be payable in what the Debtors viewed was the unlikely event the PUCT declined to approve the NextEra Transaction. As for NextEra, the record indicates it was happy to remain silent. Whether NextEra realized the Court misapprehended the facts to NextEra's benefit is unknown but, if it did, it certainly made no effort to clarify the record.
Id. at 636 n. 79.
Madison Equities, LLC v. Condres (In re Theatre Row Phase II Assocs.) , 385 B.R. 511( Bankr. S.D.N.Y. 2008).
Id. at 519-522.
Id. at 521 (holding that the claim "fails because it cannot show the necessary contractual (or tort) basis on which to impose liability").
Id. at 525.
Merger Agreement § 6.7(c).
The Debtors filed an adversary proceeding seeking a declaration that the Termination Fee would not be due and payable. See Debtors' First Amended Adversary Complaint, Adv. No. 17-50942, D.I. 41. The Debtors' asserted basis for that relief is NextEra's alleged breach of its obligations under the Merger Agreement. This adversary proceeding (Adv. No. 17-50942) was stayed pending further order of the Court. See Reconsideration Order at ¶ 7.
The Reconsideration Decision specifically states that the Termination Fee is authorized in all circumstances except that the PUCT declines to approve the transaction contemplated in the Merger Agreement :
5. The Termination Fee Order is hereby amended to delete in its entirety the language at paragraph 4 of such order and to replace it with the following:
The Termination Fee, upon the terms and conditions of the Merger Agreement, is approved in part and disallowed in part. The Termination Fee is disallowed in the event that the PUCT declines to approve the transaction contemplated in the Merger Agreement and, as a result, the Merger Agreement is terminated, regardless of whether the Debtors or NextEra subsequently terminates the Merger Agreement. In those circumstances, the EFH/EFIH Debtors are not authorized to pay the Termination Fee as a qualified administrative expense or otherwise. The Termination Fee is otherwise approved. Subject to the forgoing ruling, the EFH/EFIH Debtors are authorized and directed to pay the Termination Fee as an allowed administrative expense to the extent it becomes due and payable pursuant to those terms and conditions of the Merger Agreement that are approved in this Order, at the time and in the manner provided for in the Merger Agreement and this Order , without any further proceedings before, or order of, the Court; provided, however, that in the event that the Termination Fee becomes payable in accordance with section 8.5(b) of the Merger Agreement and with this Order, ....
Reconsideration Order at ¶ 5 (D.I. 12075) (emphasis added).
Energy Future Holdings Corp. , 575 B.R. at 632. The Court further held:
The confusing record was critical because in combination with another fact that was not mentioned, i.e., the Merger Agreement had no time limit, the reality was that under no foreseeable circumstances would NextEra terminate the Merger Agreement if the PUCT declined to approve the NextEra Transaction. Why? Because NextEra had the ability to hold out and to pursue numerous motions for reconsideration and a fruitless appeal until the Debtors were forced by economic circumstances to terminate the Merger Agreement, which is exactly what occurred. If the Court had understood these critical facts it would not have approved this provision of the Termination Fee.
Id. at 632-33 (footnote omitted) (emphasis supplied).
Merger Agreement § 8.5(b) (emphasis added). Section 8.5(b) of the Merger Agreement states in relevant part:
If this Agreement is terminated pursuant to this Article VIII and any alternative transaction is consummated (including any transaction or proceeding that permits the E-Side Debtors that are the direct or indirect owners of Oncor Holdings to emerge from the Chapter 11 Cases) pursuant to which neither Parent nor any of its Affiliates will obtain direct or indirect ownership of 100% of Oncor Holdings and Oncor Holdings' approximately 80% equity interest in Oncor, then, subject to the approval of the Bankruptcy Court , no later than five (5) days following the consummation of such alternative transaction, the Company and EFIH shall pay to Parent the Termination Fee (as defined below) .....
Merger Agreement § 8.5(b) (emphasis added).
Energy Future Holdings Corp. , 575 B.R. at 631.
Id. at 635 (citing Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl. Energy, Inc. ), 181 F.3d 527, 528 (3d Cir. 1999) ).
D.I. 12970 at pp. 12-15.
Energy Future Holdings Corp. , 575 B.R. at 634-35 (footnote omitted).
"To establish an administrative claim under this section, there must be (1) a post-petition transaction between the claimant and the estate and (2) a benefit to the estate." In re Women First Healthcare, Inc. , 332 B.R. 115, 121 (Bankr. D. Del. 2005) (citations omitted). In the case sub judice , there is no question that there was a post-petition transaction between NextEra and the estates.
11 U.S.C. § 503(b)(1).
O'Brien Envtl. Energy , 181 F.3d at 533 (quoting In re O'Brien Environmental Energy, Inc. , No. 94-26723, slip op. at 30 (Bankr. D.N.J. Nov. 8, 1996) ).
Women First Healthcare, Inc. , 332 B.R. 115.
Id. at 118-121.
Id. at 122.
Id. at 122-23.
Id. at 129 (awarding administrative claim "due to the unique circumstances warranting the reconsideration of the Sun Sale Order").
Energy Future Holdings Corp. , 575 B.R. at 626 ("With the deal now clearly dead, NextEra still took no action to terminate the Merger Agreement. Indeed, it was clear that NextEra would appeal the PUCT's decision to all levels of review, leaving the Debtors no choice but to terminate the Merger Agreement and risk triggering the Termination Fee or else incur months or years of continued interest and fee obligations.").
Id. at 635 ("[T]he Merger Agreement did not have a time limit for approval and the Termination Fee was payable if the Debtors terminated the Merger Agreement. This incentivized NextEra to pursue multiple motions for reconsideration and a fruitless appeal strategy to force the Debtors to terminate the Merger Agreement to pursue an alternative transaction. Allowance of a termination or break-up fee when a debtor chooses to pursue a higher and better offer is appropriate. In this case, the Debtors were forced to terminate the Merger Agreement to pursue a lower offer because NextEra had the Debtors in a corner.").
In re Women First Healthcare, Inc. , 332 B.R. at 122.
Id. ("reopening the auction did benefit the estate (by increasing the price the Debtor received for the assets by more than $2.5 million).").
Id. at 123 (citing Reading Co. v. Brown , 391 U.S. 471, 479, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) ).
See Application (D.I. 12671) at p. 19, n. 91 and Objection (D.I. 12935) at p. 12, n. 21.
See Declaration of Mark Hickson in Support of Objection of NextEra Energy, Inc. to Joint Motion of UMB Bank, N.A., as Indenture Trustee, and Elliott Funds to (i) Dismiss Application of NextEra for Allowance and Payment of Administrative Expense, or, in the Alternative, (ii) Grant Summary Judgment Denying and Disallowing Such Administrative Expense (D.I. 12937) at pp. 4-5.
11 U.S.C. § 503(b)(3)(D).
Lebron v. Mechem Fin. Inc. , 27 F.3d 937, 943-44 (3d Cir. 1994) (citations omitted).
Id. at 944 (citations and parentheticals omitted).
In re Kidron, Inc. , 278 B.R. 626, 634 (Bankr. M.D. Fla. 2002) (but allowing a substantial contribution claim for an unsuccessful bidder due to the need to "level the playing field" between the stalking horse bidder and the claimant-unsuccessful bidder).
Objection at p. 12, n. 21.
11 U.S.C.A. § 101(10).
In re S.N.A. Nut Co. , 186 B.R. 98, 100 (Bankr. N.D. Ill. 1995).
Id. at 105 (footnote and citation omitted).
Id. at 105-06. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501512/ | Brendan Linehan Shannon, United States Bankruptcy Judge
Before the Court is a motion (the "Motion") filed by the Debtors for a determination that certain insurance proceeds currently held by the Chapter 7 Trustee are not property of the bankruptcy estate and should therefore be returned to the Debtors [Docket No. 189]. The Debtors contend that the proceeds are controlled by their mortgage lender under a "loss payee" provision within the insurance policy, and thus were never property of the estate. The Trustee argues that the insurance proceeds are indeed property of the estate under 11 U.S.C. § 541(a)(6). For the reasons that follow, the Court concludes that the insurance proceeds constitute property of the estate.
I. Factual and Procedural History
The facts of this case date back over a decade. The Debtors owned a mixed-use real property known as 30680 Cedar Neck Road in Ocean View, Delaware (the "Property"). The Property was the Debtors' primary residence, and included a bed and breakfast operated by the Debtors. In 2005, the Debtors executed a promissory note (the "Note") in the amount of $309,000. To secure their obligations under the Note, they executed a mortgage encumbering the Property. In 2013, the Note and mortgage were assigned to Green Tree Servicing, LLC ("Green Tree"), which is the most recent mortgagee on the Property.
In 2010, the Property sustained significant fire damage, requiring substantial repair and restoration. The Debtors submitted a claim for benefits under a homeowners' insurance policy issued to them by Great Lakes Reinsurance Company. The record reflects that the policy contained a "loss payee" clause that allowed the mortgagee (viz. , Green Tree) to control any proceeds or payments received on account of any damage caused to the Property, which of course was Green Tree's collateral. Great Lakes initially paid approximately $332,962.63 for a portion of the Debtors' fire-related losses. The insurance proceeds paid under the *391policy were paid directly to the Debtors through a series of checks. Trustee's Objection, Exhibit A. The Debtors later filed a declaratory judgment action in federal court seeking additional payments under the policy.
The Debtors filed a joint Chapter 7 petition in 2014. They filed a schedule of assets and liabilities along with their petition, and the schedules did not reflect an exemption taken with respect to the Property or the insurance proceeds [Docket No. 1]. Following the petition date, the Trustee, the Debtors, and Great Lakes resolved the dispute regarding the declaratory judgment action, and Great Lakes agreed to pay the bankruptcy estate an additional $242,660.26 in proceeds in exchange for a release of liability for any further claims against the policy. This Court approved the insurance settlement agreement in 2015 [Docket No. 36] and Great Lakes delivered the additional proceeds to the Trustee.
The Debtors filed this Motion on May 3, 2016. However, other disputes came to occupy the parties' attention. Specifically, the Trustee filed a motion to sell the Property (the "Sale Motion") [Docket No. 47] for $290,000. The Debtors objected to the sale and, on the eve of the sale hearing they filed a motion seeking to convert their Chapter 7 case into one under Chapter 13 [Docket No. 80]. After two separate hearings, this Court ultimately denied the Debtors' motion to convert and granted the Trustee's motion to sell the Property [Docket Nos. 100 and 119]. The Debtors appealed each of those rulings first to the District Court, which affirmed this Court's rulings on both the Trustee's motion to sell and the Debtors' conversion motion.2 Culp v. Stanziale, Jr. (In re Culp) , 545 B.R. 827 (D. Del. 2016). The Debtors then appealed those rulings to the Court of Appeals, which also affirmed the rulings on the two motions. In re Culp , 681 F. App'x 140 (3d Cir. 2017). The Culp's request for review by the United States Supreme Court was denied shortly thereafter. Culp v. Stanziale , --- U.S. ----, 138 S.Ct. 170, 199 L.Ed.2d 41 (2017). During this whole time period, as noted above, the Court held this Motion in abeyance at the request of the parties.
With the resolution of the appeals, the parties have advised the Court that the Motion is now ripe for consideration and disposition. This Motion asks the Court to decide whether the insurance proceeds currently held by the Trustee are property of the estate or whether they are not and should be returned to the Debtors. The Trustee stated currently has approximately $197,306.54 on hand, with approximately $94,147.74 of known administrative expenses remaining,3 and allowed unsecured claims totaling $131,210.33.4
II. Discussion5
a. The Parties' Arguments
The Debtors contend that the proceeds cannot be property of their estate because *392they were not property of the estate pre-petition. They argue that the "loss payee" clause under the insurance policy granted Green Tree contractual benefits in and rights to the proceeds, allowing Green Tree to determine their use, and thus limiting their rights in them. The Debtors reference three email communications between counsel for the Trustee and Green Tree [Docket Nos. 189-4, 89-5, and 89-6]. In the emails, Green Tree stated that it would permit use of the proceeds for repairs to the Property. That, according to the Debtors, demonstrates that Green Tree held control of the proceeds under the "loss payee" clause, precluding the estate's control over them and removing them from property of the estate. The Debtors cite to a series of cases to substantiate their argument. See, e.g. , First Fid. Bank v. McAteer , 985 F.2d 114, 117 (3d Cir. 1993) ("the estate's legal and equitable interests in property rise no higher than those of the debtor.") (internal quotation omitted). On that background, the Debtors argue that since the proceeds were never property of the estate, thus they did not claim (and did not have to claim) an exemption in them. Therefore, the proceeds should be returned to the Debtors and would not be available for distribution in the Chapter 7 case.
The Trustee argues that the proceeds are indeed property of the estate. Under § 541, estate property includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). It also includes "[p]roceeds ... of or from property of the estate ...." Id. at (a)(6). Furthermore, the Trustee points to case law showing that a contingent right of recovery constitutes estate property. See, e.g. , In re Howley , 446 B.R. 506, 510-11 (Bankr. D. Kan. 2011) ("An interest may be property of the estate even if it is novel or contingent. Every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of 11 U.S.C. § 541") (internal quotations omitted). The Trustee notes that "[t]he conversion in form of property of the estate does not change its character as property of the estate." Bradt v. Woodlawn Auto Workers, F.C.U. (In re Bradt) , 757 F.2d 512, 515 (2d Cir. 1985) (internal quotation omitted). In that light, the Trustee contends that the proceeds at issue are property of the estate because the Debtors were named beneficiaries under the policy and certain payments were made directly to the Debtors (as payees).
The Trustee further argues that the Debtors' reliance on the "loss payee" clause is misplaced. Green Tree's interest in the insurance proceeds was based on the mortgage and Note, which have already been satisfied in full and therefore are of no continuing legal effect. Even so, the mortgage only afforded Green Tree a security interest in the Property, which means, at best, that Green Tree could have claimed a lien on the insurance proceeds only to the extent of its security interest in the Property. Having been paid in full during this case, Green Tree's remaining claim is $0. Thus, Green Tree has no legal interest in the proceeds held by the Trustee.
b. Analysis
This case presents an issue that frequently arises in bankruptcy: whether proceeds of an insurance policy are property of a debtor's estate. Section 541, as previously discussed, broadly provides that estate property includes "all legal or equitable interests of the debtor in property as of the commencement of the case." It also *393includes "[p]roceeds ... of or from property of the estate ...." Id. "It has long been the rule in this Circuit that insurance policies are considered part of the property of the bankruptcy estate." ACandS, Inc. v. Travelers Cas. and Sur. Co. , 435 F.3d 252, 260 (3d Cir. 2006) (citation omitted). Proceeds under an insurance policy are property of the estate when the policy provides the debtor with direct coverage. See In re Allied Digital Techs. , 306 B.R. 505, 511 (Bankr. D. Del. 2004) ("when a liability insurance policy provides direct coverage to a debtor the proceeds of the policy are property of the bankruptcy estate." Thus, the debtor is entitled to payment of the proceeds and those proceeds should be protected as property of the estate.").6 "In fact, every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of section 541." In re Conex Holdings, LLC , 518 B.R. 792, 802 (Bankr. D. Del. 2014) (citation omitted). "Examples of insurance policies whose proceeds are property of the estate include ... fire insurance policies in which the debtor is a beneficiary." Houston v. Edgeworth, M.D. (In re Edgeworth) , 993 F.2d 51, 56 (5th Cir. 1993).
A bankruptcy filing cannot create an interest in proceeds where one did not exist prior to filing. First Fid. Bank , 985 F.2d at 117. "[T]he estate's legal and equitable interest in property rise[s] no higher than those of the debtor." Id. (internal quotation omitted). Furthermore, "[t]he estate in bankruptcy only includes property to which the debtor would have had a right if the debtor were solvent." Id. (citation omitted). But, "[p]roceeds of [a fire insurance policy], if made payable to the debtor rather than a third party such as a creditor, [is] property of the estate and may inure to all bankruptcy creditors." Edgeworth , 993 F.2d at 56.
The facts here clearly demonstrate that the proceeds received under the insurance policy are property of the estate. The Debtors were owners of the Property and the insurance policy pre-petition. They were also beneficiaries under the policy. The record reflects that payment was made directly to the Debtors rather than the mortgagee. Those facts demonstrate that the Debtors owned an interest in the Property before filing, and that interest extended to the proceeds after the insurance payout on the Property.
The Court is not convinced by the Debtors' "loss payee" argument. While the correspondence shows some form of approval given by Green Tree regarding the use of the proceeds by the Debtors, those exchanges are not conclusive in showing that Green Tree had exclusive control and ownership over the proceeds. In any event, the Debtors at all times held at least a contingent and residual interest in the proceeds.
Even if the "loss payee" clause grants control to Green Tree over the insurance proceeds, the Court agrees with the Trustee that Green Tree's interest in the Property is currently zero. The uncontroverted record demonstrates that Green Tree's mortgage lien was paid in full after the sale of the Property. Simply put, Green Tree has no additional control over the insurance proceeds on account of its satisfied security interest. As such, the insurance proceeds are not subject exclusively to Green Tree's desired disposition.
*394III. Conclusion
For the foregoing reasons, the Court finds that the proceeds received by the Debtors constitutes property of the estate. The parties are to confer regarding an appropriate form of order and to submit that proposed order under certification of counsel within 14 days of the date hereof.
This Opinion constitutes the findings of fact and conclusions of law under Rule 52 of the Federal Rules of Civil Procedure, made applicable to this case by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The Trustee closed the sale of the Property on December 16, 2016, resulting in payment of $273,975 to Green Tree in full satisfaction of the mortgage.
Per the Trustee's most recent accounting report, the Trustee anticipates additional administrative expenses, but is unable to estimate those expenses before the case is ready to close.
The Trustee is also in possession of certain funds previously held in a money market by the Debtors in the amount of $46,553.05. Finally, Green Tree also delivered $74,027.17 of excess insurance proceeds that it had held in escrow prior to the insurance settlement agreement. The $74,027.17 in proceeds is held in escrow pursuant to the Court's order [Docket No. 177].
Jurisdiction and venue are not in dispute in this case. The Court has jurisdiction over this case pursuant to 28 U.S.C. §§ 1334 and 157(b). Venue is proper in this Court under 28 U.S.C. § 1408. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (E).
"The overriding question when determining whether insurance proceeds are property of the estate is whether the debtor would have a right to receive and keep those proceeds when the insurer paid on a claim." Houston v. Edgeworth, M.D. (In re Edgeworth) , 993 F.2d 51, 55 (5th Cir. 1993) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501513/ | Andrew B. Altenburg, Jr., United States Bankruptcy Judge
I. INTRODUCTION
This court previously determined that a transfer of property to a municipality pursuant to a tax sale and foreclosure, where there was no competitive bidding, can constitute a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B), not barred by the United States Supreme Court's holding in BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). In re GGI Properties, LLC, 568 B.R. 231 (Bankr. D.N.J. 2017). The court additionally concluded that the transfer could constitute an avoidable preference under 11 U.S.C. § 547(b). It thus denied the Motion for Summary Judgment filed by City of Millville ("City") on those grounds. But as it further found that there was a genuine issue of material fact regarding the value of the property transferred on December 31, 2015 (the time of the transfer via foreclosure) and March 8, 2016 (the petition date) (together, the "Relevant Dates"), it set trial on that issue. The trial having concluded and the parties having submitted memoranda of law, the court now values the property at $530,000. It finds that the debtor, GGI Properties, LLC ("GGI"), did not receive reasonably equivalent value for the transfer, therefore the transfer can be avoided as constructively fraudulent.
II. JURISDICTION AND VENUE
The court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 23, 1984, as amended September 12, 2012, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(F), (H). Venue is proper in this court pursuant to 28 U.S.C. § 1408. The statutory predicates for the relief sought herein are 11 U.S.C. §§ 548(a)(1)(B), 547(b), and 550(a).
III. HISTORY OF THE PROPERTY
Glass-making has American roots in South Jersey, an area rich in the sand and iron used in glass, as well as in trees for *405fuel.1 In 1779, several glassblowers from Wistarburgh Glass Manufactory, which had opened in 1739 in Alloway, New Jersey, established their own "glass works" in what became Glassboro, New Jersey.2 Then in 1888, Dr. Theodor Corson Wheaton, a pharmacist, began making his own pill bottles in Millville, New Jersey in a company that became Wheaton USA.3 In 2002, GGI's predecessor bought Wheaton.
Kenneth Rock, 75 years old, spent his career in the glass industry. T1, p. 116.4 He worked for the Coming Glass Works out of college, then Sylvania to build a glass factory in Kentucky and serve as General Manager for 19 years, and finally for Wheaton Industries in Millville. Id. , pp. 116-17. Wheaton hired Mr. Rock in the 1990s as vice president of its glass tubing operations, and later promoted him to president and put him on its board, T1, pp. 116-17. Wheaton had its corporate headquarters, two glass factories, a research facility and a plastics division in Millville. Id. , p. 117. It also had operations in Elmer, Mays Landing, and Williamstown, New Jersey; a large glass factory in Flat River, Missouri; and a joint venture in China with Beijing General Glass Company. Id. , p. 117; see pp. 120-21.
At some point, Wheaton was purchased by Alusuisse, which was acquired by Alcan (and which later became part of Rio Tinto). Id. , p. 118. Mr. Rock was Senior Vice President of Global Glass Operations. Id. , p. 119. Under Alcan, the factory began to struggle. Id. , p. 119. Mr. Rock formed The Glass Group Inc. with Leonard Nave and some other investors to buy, inter alia, the subject property at 200-300 G. Street, Millville, also known as Lot 1, on September 20, 2002. Id. , pp. 120, 184; In re GGI Properties, LLC , 568 B.R. at 238. Mr. Rock became Chairman and CEO of the new company. Id. , p. 120. It is not known what The Glass Group paid for Wheaton. According to Mr. Rock, the company was losing money when The Glass Group bought it, and though he was able to bring it up to break-even condition, in 2005 it filed chapter 11 in Delaware. Id. , p. 121; see Bankr. No. 05-10532KG.5
While in bankruptcy, The Glass Group sold some pieces of its property to Gerresheimer Glass Inc. and Kimble Glass Inc., and other pieces to a foreign company, and on September 7, 2006, Lot 1 to GGI, again formed for this purpose, for one dollar. T1, pp. 132-33; In re GGI Properties, LLC, 568 B.R. at 236. GGI is owned by in equal halves by the Leonard Nave Revocable Trust, trustee Leonard Nave, and the Kenneth C. Rock Revocable Trust, trustee Mr. Rock. Id. , p. 162 and Ex. D-16. It is not known who the beneficiaries of these trusts are.
At the time of GGIs purchase of Lot 1 in 2006, the property was assessed at $2,650,000, with $365,100 allocated to the land and $2,285,000 to the improvements.
*406Ex. P-20. In 2008, GGI successfully appealed that assessment, lowering the assessment to $1,676,400 as of October 1, 2007, reflecting the same $365,100 Value for the land while reducing the amount allocated to the improvements to $ 1,311,000. Id.
In 2009, GGI stopped paying its real estate taxes. T1, p. 137-38. In September 2009, it listed the property for sale for $1,649,000 but it did not sell. In re GGI Properties, LLC, 568 B.R. at 238. Mr. Rock testified that in 2009, GGI had terminated two leases on the property at the City's request due to its concern that they were creating a hazard to the community. T1, p. 171. However, an appraisal created for GGI in 2012 (the "Kay Appraisal") referenced a month-to-month lease existing in 2012. Id. , pp. 120, 172. In any case, after the leases were terminated, GGI did not re-let any of the premises. Id. p. 138. In August 2010, the City purchased the tax certificate for the unpaid taxes of 2009 and 2010. In re GGI Properties, LLC, 568 B.R. at 236.
In 2012, still not paying its taxes, GGI again appealed its assessment. T1, p. 83. The Kay Appraisal estimated the fair market value of the property from between $300,000 and $600,000. Id. , pp. 83-84; T2, p. 94. GGI and the City eventually settled on an assessed value of $600,000 as of October 1, 20116 based on this appraisal, again reflecting an assessed value of $365,100 for the land, but now only $234,900 for the improvements. Id. , pp. 82-83, 94; T2, p. 94. The County Tax Board entered judgment on the settlement thereafter. Id. , p. 113. GGI argues that the property is worth "at least $600,000" based on this assessment remaining in place as of the Relevant Dates.
Despite the reduction in the assessment, GGI did not resume paying its taxes. The City filed a complaint for an in rem foreclosure on October 21, 2014 and obtained a final judgment on December 31, 2015, reflecting unpaid taxes at that time of $427,767.45. Ex. P-15; In re GGI Properties, LLC, 568 B.R. at 236.
After that complaint had been filed but before judgment on it was entered, GGI entered into a contract for sale of the property. On January 9, 2015, Community Development, LLC ("CDL"), a company created by Richard Brooks for this purpose, signed an agreement to purchase the property for $700,000. T2, p. 34; Ex. P-4 (the "CDL Agreement"). Mr. Brooks, whose former business was demolition and liquidation, testified that he anticipated several types of businesses operating at the property, including a truck and auto auction site; an R & D lab; residential boiler manufacturing; food court backed by a microbrewery; UPS distribution/warehousing and equipment surplus as needed by local food companies such as Campbell's Soup and Progresso; resurrection of Money Talks Magazine (for which he'd been a founder and publisher in New York). T2, pp. 21-23. He would also demolish one and a half buildings to harvest the steel, which he estimated was worth between $800,000 and $1 million, at only a $250,000 cost to demolish, Id. , p. 23.
The CDL Agreement set the purchase price at $700,000 with a down payment of $25,000 to be held in escrow with CDL's title insurance company. Ex. P-4, ¶¶ 2, 3(a). At closing, CDL would pay $275,000, plus, if it so chose, assumption of the property taxes outstanding at the time of closing, with a credit against the purchase price of the outstanding property taxes as *407of January 1, 2014.7 Id. , ¶ 3(b), (c). Any remainder owed would be included in a note and a mortgage on the property and paid semi-annually over three years with interest at 5 percent per annum. Id. , ¶ 3(d). The CDL Agreement disclosed existing liens and encumbrances as the property taxes and a mortgage in favor of Mr. Rock, which had been disclosed as in the amount of $332,429. Id. , ¶ 3(j); Ex, D-16. Despite this disclosure, the contract did not provide either for the assumption or the payment of the mortgage.
Closing on the CDL Agreement was to be held no later than 45 days from the execution of the agreement, "or at any other date as may be selected by the mutual agreement of Seller and Purchaser ...," id. , ¶ 3(k), though time was also made "of the essence." Id. , ¶ 4(d). Forty-five days would have been on or around February 23, 2015, but according to Mr. Brooks, the parties did not close on account of the "reluctance" of one of his funders regarding the back taxes. T2, pp. 15-16. Mr. Brooks had asked the City to allow him to pay the back taxes over 12 months, id. , p. 16, a request the City rejected via email on April 17, 2015. Id. , p. 25.
Nevertheless, on June 1, 2015, GGI and CDL amended the CDL Agreement. Ex. D-17 (the "First Amended CDL Agreement"). This amendment ratified the original agreement and added indemnification by GGI against any and all claims arising from any hazardous substances discharged "at any time up until the date of the Closing." Id. , ¶ 2. The First Amended CDL Agreement provided that to the extent GGI failed to so indemnify CDL, then CDL could deduct such costs against the mortgage payments owed by CDL. Id. , ¶ 3. The First Amended CDL Agreement also stated that the due diligence period had expired and would not be extended, and that the closing would be June 15, 2015 or earlier, at the buyer's discretion. Id. , ¶¶ 5, 6. That CDL further contracted with GGI and the amendment only concerned environmental issues suggests that the failure of the CDL Agreement to close had more to do with the remediation issues and nothing to do with the property taxes.
But the parties still did not close on the transaction. Rather, on August 15, 2015, GGI and CDL ratified the CDL Agreement and entered into another amendment. Ex. D-22 (the "Second Amended CDL Agreement"). The Second Amended CDL Agreement replaced the First Amended CDL Agreement, but included an environmental indemnification provision. Id. , ¶¶ 6-7. Under this agreement, CDL would pay at closing $25,000, plus an amount to pay the real estate taxes in full. Id. In addition, CDL was to pay half of GGI's legal and filing fees to GGI's bankruptcy counsel, estimated to be $6,776, and half of "fees paid to Kinney [sic "Kenny"] Environmental Services, estimated to be $3,000." Id. CDL was also to execute a note and second mortgage (after Mr. Rock's) on the property, for the balance of the purchase price less $100,000, payable semi-annually and due one year from closing with interest at 5 percent per annum. Id. CDL would execute yet another note and third mortgage in the amount of $100,000, payable three years from closing with interest at 5 percent per annum. Id. (A requirement to pay the third mortgage semi-annually was crossed out and initialed. Id. ) The closing date was changed to September 30, 2015. Id. Thus, using the $429,767 figure for the taxes, CDL would *408be allowed to stretch approximately $136,000 over the first year and pay $ 100,000 in the third year after closing.
Regarding the payment of GGI's bankruptcy counsel, this related to a chapter 11 bankruptcy case filed by GGI in this court through the Law Offices of Seymour Wasserstrum on June 25, 2015-after the First Amended CDL Agreement and before its June 15th closing date. See Bankr. No. 15-21939-ABA (the "2015 Bankruptcy"). This clause may have been drafted in haste, as the provision had the parties reversed: it stated that Seller (GGI) would make these payments on the Buyer's (CDL's) behalf. Ex. D-22. But Mr. Brooks testified that it was indeed the buyer's responsibility. T2, pp. 33-34. And in this instant chapter 11 case, GGI disclosed that it paid its prior bankruptcy counsel $6,717 on June 25, 2016 and a debt for "environmental services" payable to Kenny Environmental Services, LLC in the amount of $4,000, Ex. D-16 (SOFA and Schedule E/F).
Thus the list of errors/oddities in the various CDL agreements include: "time of the essence" despite moving the closing date several times; crediting taxes as of January 1, 2014; no provision for payment or assumption of Mr. Rock's mortgage; and the seller paying attorney and Kinney fees rather than the buyer. None of the agreements appeared to be drafted by an attorney, and all were signed by Mr. Nave. In addition, at 81 years old, T2, p. 21, Mr. Brooks had some difficult testifying. He did not recognize the First Amended CDL Agreement or the Second Amended CDL Agreement, id. , p, 26; and could not remember whether he knew that the City had filed a foreclosure action, id. , p. 28; or what attorney Wasserstrum's involvement was, id. , pp. 33-34.
Two weeks before entry of the City's foreclosure judgment, on December 15, 2015, GGI entered into a contract with Anthony DeSantis of Brooklyn, New York, "as agent for an entity to be formed" for $530,000. Ex. P-6 (the "$530,000 Contract"). Mr. DeSantis testified that his main business is recycling plastic for other customers. T1, p. 26. He was interested in this property for its location near prospective workers and an existing bus stop, industrial water and sewer, heavy power supply, and rail access. Id. , pp. 26, 28-29, 40-41, 66. His immediate plan was to remodel some offices immediately and set them as a local headquarter for the entity. Id. , p. 32. He would remodel the nurses' station for a place for engineers to stay, and then work "around the clock" to get a couple of buildings up and secured to have a safe, secure place for storage. Id. , p. 32.
The contract called for a down payment of $50,000 with the balance of the $530,000 purchase price paid at closing. Ex. P-6, ¶ 5. It also provided for GGI to
[p]rovide for payment of all outstanding liens, mortgages or other monetary encumbrance which are liens against the Property, including all real estate taxes or other amount levied upon the Property by any governmental agency which create or may create if unpaid a lien upon the Property, which payment may be made out of the Purchase Price to be paid at closing.
Id. , ¶ 14.2. Mr. DeSantis was granted a due diligence period until February 5, 2016. Id. , ¶ 8.1.
There was no explanation provided at trial for the fact that $530,000 would not cover both the real estate taxes and Mr. Rock's $332,429 mortgage. Possibly the provision was poorly drafted and was not intended to include the mortgage, or Mr. Rock agreed to take a loss.
GGI agreed as a condition of closing to comply with its ISRA obligations, including, prior to closing, obtaining a Remediation *409Certification, approval of a Remedial Action Workplan, or a waiver or other approval from the NJ DEP, as well as obtaining and maintaining a "Remediation Funding Source" approvable by a Licensed Site Remediation Professional or NJ DEP. Ex. P-6, ¶ 9.12. It also would assign to the purchaser the Glass Group Indemnification Agreement (to be discussed below). Id. , ¶ 9.13.
GGI did not inform Mr. DeSantis that it had outstanding property taxes or that the City had filed a complaint in foreclosure against it. This appears to be in breach of GGI's representation in the $530,000 Contract that it "represents that it has no knowledge of any pending or threatened litigation affecting the Property or Seller's interest in the Property and that Seller is not a party to any litigation affecting the Property." Id. , ¶ 9.9. Rather, Mr. DeSantis learned about the tax issue through his own due diligence. T1, p. 28. But before he could meet with the City, the City had foreclosed on the property. Id. While walking the property in January 2016, Mr. DeSantis ran into Joseph Sooy, one of the City's commissioners, and "... that's when [the City] became aware [of us] and we became aware of everything that was - what type of fiasco was going on." Id. , p. 42.
On March 17, 2016, after GGI had filed this bankruptcy case and this adversary proceeding, the $530,000 Contract apparently was mutually cancelled and Mr. DeSantis and Linda Salamon, "as agents for an entity to be formed," entered into a contract of sale with GGI to purchase the property for $690,000. Ex. P-7 (the "$690,000 Agreement").8 Mr. Rock testified that the increased purchase price reflected the amount GGI owed in taxes, the $200,000 cost of an indemnification agreement, and administrative costs that GGI incurred in connection with the property. T1, p. 147. The court rejects this reason because GGI had already agreed to sell for $530,000-that Mr. Rock wanted more money is not grounds to void that contract in order to force a price increase, and Mr. DeSantis could have added Ms. Salamon as a member of the original "entity to be formed" rather than enter into a new agreement.
More credibly, Mr. DeSantis testified that he offered more to close quickly. "The increased price was our perception of the weights and balances where we would pay a higher price to close the property sooner" which would keep Ms. Salamon in the deal. T1, p. 38. Mr. DeSantis's "group" later-around July 2017-purchased the adjacent 27.56-acre property, a working glass factory known as Gerresheimer Glass, for $1.7 million (approx., $61,683 per acre); at the time of the hearing, he had posted it for rent. T1, pp. 56, 58, 71, 85. Mr. DeSantis testified that the two properties share an internal fence and a rail line, and Gerresheimer has an easement to discharge water into Ada Pond, located on GGI's property. T1, p. 57. At the time of the trial, Mr. DeSantis appeared to still be interested in purchasing GGI's property, so likely the higher price also reflected the desire to own both parcels.
The $690,000 Agreement recited that "Upon execution of this agreement the amounts currently on deposit and held in escrow by Lincoln Land Services, LLC in the amount of $50,000 shall be deemed the earnest money deposit under this agreement." Ex. P-7, ¶ 5.1(a). GGI did not disclose in this bankruptcy any interest in funds held in escrow, and there was no testimony regarding whether the $50,000 was paid. Ex. D-16.
*410The $690,000 Agreement required a cash payment of $100,000 at closing, plus an amount equal to the amount owed in taxes to the City prior to its foreclosure judgment, "and any other outstanding liens upon the Property including amounts owed for real estate taxes [,] water and sewer charges, etc., provided the aggregate amount does not exceed the Purchase Price...." Ex. P-7, ¶¶ 5.1 (a), (c). Any remainder owed would be paid pursuant to a promissory note payable three years from the date of closing at the rate of three percent per annum. Id. , ¶ 5.1(d). The agreement provided that the buyer could "withhold payment of principal and interest from the Seller in the event the Seller, its successor and or assigns (which shall include Buyer) are deemed liable for any environmental remediation relating to the Property. The Seller shall be allowed an offset directly against the principal and interest for any environmental remediation that the Seller, its successors and/or assigns are liable." Id. But with the City owed at least $400,000, Mr. Rock $332,429, and the $50,000 down payment and $100,000 cash due at closing totaling over $690,000, it seems that there would be no need for a promissory note, unless, again, the "liens" were not intended to include Mr. Rock's mortgage, in which case the closing price approximates $530,000.
The $690,000 Agreement provided for a closing date of April 15, 2016 "or such earlier date as Buyer and Seller may determine," ex. P-7, ¶ 7.1, even though GGI did not own the property at the time it executed this contract. Due diligence was to end March 31, 2016. Ex. P-7, ¶ 8.1.
The parties amended the $690,000 Agreement on May 13, 2016. Ex. P-11. The amendment added as conditions precedent the entry of an order of this court in this case approving the sale and the revesting of title to the property in GGI. Id. , ¶ 21.1. It extended due diligence to 15 days after satisfaction of the conditions precedent, and closing to 30 days after satisfaction of the conditions precedent. Id. , ¶¶ 7.1, 8.1.
Mr. Rock testified to one other possible sale of the property, but with little detail. He stated that at some time certain Chinese investors were told by the City that the City could sell the property to them cheaper than GGI could. T1, pp. 138-39. But the investors purchased property in North Jersey instead. Id. Mr. Rock stated that the price with the Chinese investors was whatever the taxes were plus $ 100,000. Id. , p. 139. Mr. Rock could not remember the names of these Chinese investors, Id. , p. 138, and did not produce any contract with them.
The Condition of the Property
As previously stated, the Relevant Dates for valuation are December 31, 2015 and March 8, 2016 (though the parties ultimately did not differentiate their proffered values). Mr. Rock, Mr. DeSantis and Mr. Sooy testified regarding the condition of the property at various dates: Mr. Rock in November 2015, T1, p. 151; Messrs. DeSantis and Sooy in early January 2016, T1, pp. 42, 51-52; T2, p. 141; and Mr. DeSantis again around April 2016. T1, p. 52. Mr. Sooy had worked at Wheaton from 1986 to 1989, so as with Mr. Rock, he had some familiarity with the property. T2, p. 140.
In general, the court gained the sense that the 18-acre property has been continually deteriorating since the closing of the plant due both to age and vandalism. As industrial buildings, none sounded especially appealing in their current state, and any intact buildings would need restoration-new drywall, painting, flooring, possibly window replacement-to be usable by a new owner.
According to the property record cards, T1, p. 91, the bulk of the buildings were built in the 1930s and 1940s, with one as *411early as 1924 and the most recent in 1977. Ex. P-20. The biggest example of the effects of age was the observation that the roof on a metal building was deteriorating prior to December 2015 and finally collapsed sometime after January 2016. See T1, pp. 30, 155; T2, p. 171. This was a building that Mr. Rock testified he had intended to take down to salvage the steel. T1, p. 155. Mr. Rock testified about steel being worth $820,000 as of the trial. T1, p. 156. He did not disclose it in the 2015 Bankruptcy because, he claimed, it is an "intangible asset" that would not be recorded on a balance sheet. Id. , pp. 176, 181.
Mr. Rock admitted that graffiti existed prior to December 2015, and he and other witnesses testified that it increased substantially after. See T1, pp. 31 (less graffiti before than after), 61-62 (no graffiti in the nurse's station); T2, pp. 150 (more graffiti between January 2016 and March 2016), 160 (more graffiti since December 2015). Similarly, testimony regarding windows noted them intact in certain buildings prior to December 2015 and January 2016, see T1, pp. 55, 61-62 (windows in nurse's station intact), 151 (windows in office building intact), but broken between January 2016 and March 2016. See T2, p. 150. Mr. Sooy also found the administrative building unlocked and "ransacked." Id. , p. 147.
Mr. Rock also testified that during GGI's ownership "There's been vandalism going on around those facilities for years, that's why all the fences have been around them.... There's constant vandalizing." T2, p. 178. That vandalism "for years" included theft of copper and transformers. T2, p. 176. See T2, p. 142 (testimony of Mr. Sooy that in January 2016, "large copper wires ... they were all gone."). Messrs. DeSantis and Sooy were in agreement that all or most transformers were missing in January 2016. T1, p. 55; T2, p. 148.
Testimony was conflicting regarding water damage in the main administrative building. Mr. Rock testified that all water except for fire hydrants had been shut off long before 2015, T2, p. 177, but Mr. Sooy noticed a broken water pipe on his site visit in January 2016, and had the water department shut the water off. T2, pp. 147-48.
Mr. Rock testified positively about the quality of many of the buildings on site in November 2015. An office building had all of its windows, T1, p. 151; a finishing building built in 19899 and a so-called "quality" building in good condition, Id. , pp. 152-53, a maintenance shop in "move-in" condition. T1, p. 154. As industrial buildings, they mostly had concrete floors, See Id. , pp. 151-55 (maintenance building), 157 (small storage building); T2, p. 171 (metal building with roof collapse). The flooring in the office building had been removed for asbestos remediation, thus according to Mr. Rock needed carpeting, as well as the bathrooms "spruced up" and the ceiling tile removed. T1, pp 151-52.
Mr. DeSantis testified that "Some of the buildings were - the site was poor, but some of them were salvageable." Id. , p. 30. For example, he believed the nurses' station could "easily" be remodeled. Id. , p. 30. But regarding the condition one week after the City foreclosed, he stated "it was, obviously, not being maintained...." Id. , p. 31. He also stated that he had had theft on the Gerresheimer property. Id. , p. 54.
In "Plant 1," Mr. Sooy, again, visiting in early January, described missing electrical bus, wires and cables; a deteriorating metal *412roof with holes in it; water in floor pits; holes in metal railings. T2, pp. 142-143. One side of the concrete batch house was cracked. T2, p. 144. Another building had mold, pigeon droppings and broken glass on the floor. T2, p. 144. It appeared to him that people had been living there, as he saw clothing, human feces, and glassine envelopes typical of drugs. T2, p. 144. The bathrooms there were destroyed. T2, p. 144. A building where glass had been molded was "wrecked," with parts of the metal ceiling falling in, no electrical bus, "holes and just a general state of disrepair." T2, p. 145. Another building had a homemade skateboard park with ramp made with plywood and other found material. T2, p. 147.
The City did some clean-up work on the property, e.g. cutting down trees in the alleyways to facilitate access to Rio Tinto for its environmental remediation work, putting steel plates over several floor pits at an alleged cost of $25,000430,000, and patching fences. T2, pp. 149-150. Regarding the fence patching, Mr. Sooy stated "We - we patched the fences where they were cut. Of course, they cut them again and we patch them again. It's an ongoing problem." T2, pp. 150-151. Mr. DeSantis confirmed this clean-up effort. T1, p. 55. The City did not repair roofs because, Mr. Sooy testified, "this stuffs shot.... Why would we spend the money to do it, and, second, we wouldn't know if we were investing to repair a roof in a property that we didn't own." T2, p. 169. As for the roof that had collapsed, he believed that it would have had to be replaced anyway; the building otherwise was "block and concrete." T2, p. 171.
History of Environmental Issues
During The Glass Group, Inc.'s chapter 11 case, it entered into a Settlement Agreement and Release with Alcan Corporation. Ex. P-1. Its recitations provide some history of the environmental issues at the property. It states that through the September 5, 2002 asset purchase agreement ("APA") between Alcan and The Glass Group, Wheaton (later Alcan) had affirmed its sole responsibility for complying with legal obligations under the Industrial Site Recovery Act ("ISRA") to the satisfaction of the New Jersey Department of Environmental Protection ("NJ DEP"), and agreed in the APA to indemnify The Glass Group. Id. , p. 1.
On September 29, 2002, pursuant to the ISRA, Wheaton entered into a Remediation Agreement with the NJ DEP to remediate the property. Id. On October 7, 2005, pursuant to ISRA, The Glass Group entered into a remediation agreement with NJ DEP in connection with a sale by it of Lots 5 and 7 to Kimble Glass, Inc., whereby The Glass Group agreed to complete all applicable ISRA program requirements to remediate the "Millville industrial establishment." Id. On November 7, 2005, The Glass Group established a trust fund of $100,000 as a remediation funding source. Id.
Then on July 14, 2006, The Glass Group asked for a Remediation in Progress Waiver (RIPW"). Id. , p. 2. The NJ DEP had alleged that hazardous substances were discharged into Ada Pond and into soil during Alcan's and The Glass Group's periods of ownership. Id. The Glass Group entered into an amendment to its remediation agreement with the NJ DEP, effective August 30, 2006, in connection with its sale to GGI of Lot 1, where The Glass Group agreed to complete all of its ISRA requirements under the October 7, 2005 remediation agreement. Id. , p. 1.
On February 8, 2011, The Glass Group's chapter 11 plan administrator entered into a Settlement Agreement and Release with Alcan wherein, "to avoid the expense of adversarial proceedings to determine the *413timing of certain 'Escapes' and the extent to which such pollution or contamination at the Millville Glass Plant was caused before or after the Closing Date [of the sale,]" Alcan agreed to take over The Glass Group's obligations under certain ISRA cases. Ex. P-1 ("Glass Group Indemnification Agreement"). In consideration, The Glass Group would ask the NJ DEP to release the $100,000 trust fund to The Glass Group and approve its RIPW. Id. , ¶ 2, and would pay Alcan $200,000. Id. , ¶ 3. Alcan then agreed to defend, indemnify and hold harmless The Glass Group and successors, from all liabilities in connection with The Glass Group's remediation agreement, any natural resource damages related to the Millville Glass Plant, and Alcan's assumption of The Glass Group's ISRA obligations. Id. , ¶ 5, Assignment by either party of the obligations would require the prior written consent of the other party, "which consent shall not be unreasonably withheld." ¶ 16.
That the Glass Group Indemnification Agreement is limited in scope is evident by review of an Administrative Order and Notice of Civil Administrative Penalty Assessment issued by the NJ DEP against GGI, signed by Mr. Nave on August 4, 2011, regarding violations of the Solid Waste Management Act. See ex. D-16. This agreement states that GGI "failed to determine if numerous containers (drums, sacks, pails, bottles, etc.) of solid waste were hazardous. Many of these containers were storing unknown and/or unlabeled contents at the time of the investigation. Several containers of poor condition (missing bung caps and/or lids, severely corroded, etc.) were also observed at the former glass manufacturing facility." Id. , ¶ 2, The NJ DEP concluded that GGI corrected the violation and imposed a penalty of $5,000. Id. , ¶ 3(a).
Interestingly, GGI only had to pay half of the penalty, claiming hardship. "Co-Owners of GGI Properties provided hardship documentation that they continue to pay property taxes but yet No [sic] income is being generated from the property in question. And, with the current economic climate being what it is, the co-owners are also having problems in selling said property." Id. Part of this statement is false, as in 2011 GGI did not pay property taxes, as it had not since 2009.
By yet another agreement made August 20, 2014, between Alcan and GGI, Alcan reaffirmed its ISRA obligations in connection with Lot 1, including agreeing to indemnify GGI, while GGI agreed to provide access to the property for the remediation. Ex. P-2 ("GGI Access Agreement"). The agreement was limited to the ISRA obligations of the Glass Group Indemnification Agreement, excluding "any obligations pertaining to releases of hazardous substances that may have occurred after GGI took title to the Property." Id. , ¶ 1. In addition, GGI agreed to comply with any reasonable restrictions to the property necessary for Alcan to comply with its ISRA obligations. Id. , ¶ 6. GGI further agreed, following issuance of an RAO ("Response Action Outcome") to "... not disturb any remedial action implemented by Alcan ...." Also, Alcan "shall perform ... (iv) any and all investigation, mitigation, and/or remedial obligations, to the extent such obligations arise from a change in the use and/or the development of the Property, including but not limited to obligations pertaining to vapor intrusion, not previously required, if buildings are constructed or substantially renovated on the Property." Id. , ¶ 13.
The GGI Access Agreement further provided that if GGI sold the property, its buyer must assume and comply with GGI's obligations under the agreement and that *414Alcan could enforce the agreement against that party. Id. , ¶ 15. But "Neither the delivery of such undertaking from the third party, nor the conveyance, transfer, or assignment by GGI of a property right or interest in the Property shall relieve GGI of its obligations under this Agreement." Id. , ¶ 15.
Finally, GGI was required to record Exhibit A to the agreement, a Notice of Environmental Conditions and Release, as a covenant that would run with the land. Id. , ¶ 16. That notice provided, inter alia:
POST REMEDIATION MAINTENANCE AND REPORTING. GGI has assumed responsibility to perform all post Remedial Action Outcome requirements necessary to maintain the remedial action implemented by Alcan, including without limitation post remediation maintenance and reporting obligations associated with any Remedial Action Permits or similar authorizations issued or required by any governmental entity.
AGREEMENT. This document provides notice to all subsequent owners and lessees of the Property of the existence of the Agreement between GGI and Alcan, and the obligation of GGI to require as part of any sale and/or transfer of ownership of other rights to use the Property that each buyer and/or transferee provide Alcan with a written agreement to assume the obligations of GGI under the Agreement and that Alcan shall be entitled to enforce the Agreement against such buyer and/or transferee.
Id. , ex. A.
On March 13, 2015 GGI notified the NJ DEP of a release of hazardous material at Ada Pond, Ex. D-16 (SOFA ¶¶ 23-24). Note that this release occurred after GGI entered into the CDL Agreement and before it entered into the First Amended CDL Agreement, further supporting that environmental issues were the cause of the failure to close the CDL Agreement.
On February 21, 2017, the City and Rio Tinto entered into an Environmental Obligations and Access Agreement similar to the GGI Access Agreement. Ex. D-19 (the "City's Environmental Agreement"). This agreement reaffirmed Rio Tinto's obligations and granted access to the property by the City. Id. It similarly excluded releases of hazardous substances that may have occurred after GGI took title. Id. , ¶ 1.
The City's appraiser, J. Paul Bainbridge, testified that there are still 14 areas of concern as far as environmental contamination on the property. T2, p. 50. The remediation work on Ada Pond has continued into 2017, so it is still an issue. T2, p. 125. Mr. Sooy at trial also stated that a contractor for Rio Tinto was at the property almost every day, working on dredging the bottom of Ada Pond. T2, p. 148.
Mr. Magazzu, attorney for Mr. DeSantis to effectuate the purchase of the property, signaled that the environmental issues might be a concern by testifying that while he anticipated his clients' project being up and running three years after getting construction approvals, "... the property has some environmental issues that have to be - would have to be taken into consideration. I don't know how much that would lengthen the time to get approvals and to move forward." T1, p. 12.
The City's Appraisal
The City argued that the property is worth less than $0, based on its appraisal valuing the property as of July 27, 2016 as nominal. T2, p 64. In coming to that conclusion, Mr. Bainbridge reviewed the Kay Appraisal, and on July 27, 2016, inspected the property with the City's engineer. Id. , pp. 47, 74. He described the improvements on the property as in dilapidated condition, and therefore determined that the highest and best use for the property was tear *415down and redevelopment. Id. , pp. 48, 56-57. Accordingly, he only valued the property as vacant land. Because Mr. Bainbridge found no sales of comparable vacant land, he instead applied what he conceded is a less-preferred market extraction method of appraisal, looking at seven improved industrial properties and subtracting out the value of the improvements. Id. , pp. 58, 70, 117. He considered sales made from 2012 to 2016, and did not make any adjustment in value for time because, the market having been so depressed, if anything, the value would be lower at the Relevant Dates. Id. , pp. 62-63. He estimated the unimpaired land value at $200,000. Id. , pp. 63-64. But because of an estimated cost of demolition of just under $1 million, the property's value was nominal. Id. , pp. 61, 64.
Significant to Mr. Bainbridge was the environmental issues of the property.10 He stated that "... what is common for a contaminated property is that it really becomes unsaleable until there's a no-further action letter [from the DEP]." T2, p. 52. "A bank would not finance a purchase without a no-further-action letter." Id. While he conceded that Rio Tinto is paying for certain clean-up, he stated that he was concerned about the time to complete the remediation. T2, p. 50. He believes that the easement to Gerresheimer to dump into Ada Pond, a potential future liability, and the requirement that the property receive a no-further-action letter from the DEP, represent environmental stigmas pushing the property value down. T2, p. 68. He noted that the Kay Appraisal had stated that a $500,000 contract failed in part on concern about that easement, referring to Ada Pond as a "deal killer" because of the easement's potential for future contamination. T2, p. 125. As Rio Tinto is still working on the pond in 2017, he believes it is still a concern. T2, p. 125.
Mr. Bainbridge also criticized the Kay Appraisal as valuing the 90,000 square feet of salvageable improvements at $2-$5 per square foot without accounting for the cost to renovate. T2, pp. 76, 94, 120-21. Mr. Bainbridge did not consider any salvageable steel value because the estimated $1 million cost of demolition and asbestos removal that the City provided him would dwarf the value of any steel. T2, p. 64. He did not use the lower demolition cost estimate included in the Kay Appraisal because it was dated and did not quantify the salvageable steel value. T2, pp. 108-109. He testified that the Kay Appraisal "made a strong argument that the property was in bad shape." T2, pp. 113-14.
This bankruptcy case
GGI filed its second bankruptcy case on March 8, 2016 (Bankr. No. 16-14323-ABA, the "2016 Bankruptcy") and this adversary proceeding on March 15, 2016. GGI owns no real property and conducts no business. Ex. D-16. This lawsuit is its only asset, although the Statement of Financial Affairs disclosed that GGI sold $10,000 worth of assets in 2014 and had $51.97 in a bank account around the time of the transfer. Id.
GGI disclosed $372,537 in unsecured claims. Id. Giordano Vineland Scrap Material, LLC was disclosed as being owed $879, and Kenny Environmental Services, LLC as owed $4,000. Id. In addition, the State of New Jersey filed a proof of claim alleging a $1,078 claim, and the United States Trustee will have a claim for quarterly trustee assessments. The remainder of the creditors' claims are disclosed as being based on loans to GGI: Mr. Rock, $7,000; Mr. Rock, $332,429; Mr. Nave, *416$19,717; Linda L. Nave (Mr. Nave's wife, T2, p. 8), $2,700; NARO Properties, LLC (owned by the Nave Family Revocable Trust and Mr. Rock, T2, p. 8), $5,590; and RONA Group, LLC (same, Id. , p. 8), $222. Id. Mr. Rock lists an address of 218 Elm Street, Versailles, Kentucky, while the others list the 1041 Cedar Ridge Lane, Versailles, Kentucky that is the mailing address of GGI. Id. Mr. Rock has declared that he will subordinate his $332,429 note and mortgage to all administrative fees, legal fees and unsecured claims filed or arising in this case. Doc. 19-1, ¶ 4. The City alleged that as of March 1, 2017, $514,875 would be owed on its claim. Doc. No. 18-1, ¶ 7.
After a trial held November 15 and 16, 2017, and submissions by both parties, the matter is ripe for adjudication.
IV. DISCUSSION
Count One - Section 548
As stated in the prior opinion in this case, for the purposes of 11 U.S.C. § 548(a) there has been a transfer to the City of an interest of GGI in property within 2 years before the date of the filing of the petition. In re GGI Properties, LLC , 568 B.R. at 241. As also stated in that opinion, to prove a constructively fraudulent transfer under section 548, GGI also needs to prove that it did not receive reasonably equivalent value to the $429,767 debt extinguished by the transfer and that GGI was or became insolvent as a result of the transfer. In determining reasonably equivalent value, the Third Circuit has considered the totality of the circumstances, including the fair market value of the benefit received, the existence of an arm's-length relationship between GGI and the City (previously determined to exist, id. at 250 ) and the City's good faith Id. (citing In re Fruehauf Trailer Corp., 444 F.3d 203, 213 (3d Cir. 2006) ). These factors were more important in Fruehauf where the subject transfer was an amendment to a pension plan and "[c]alculating 'direct' benefits (such as an investment of cash that yields a cash return) is typically easy, but becomes more difficult when benefits are 'indirect.' " Fruehauf, at 213.
Fair market value "is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts," United States v. Cartwright, 411 U.S. 546, 551, 93 S.Ct. 1713, 36 L.Ed.2d 528 (1973). See In re Greater Se. Cmty. Hosp. Corp. I, 02-02250, 2008 WL 2037592, at *8 (Bankr. D.D.C. May 12, 2008) (same); Estate of Theodore Warshaw v. Director, Div. of Taxation, 26 N.J. Tax 358, 368-69 (2012) (same); Dworman v. Borough of Tinton Falls, 1 N.J. Tax 445, 454 n. 4 (1980) (same); In re Mocco, 222 B.R. 440, 456 (Bankr. D.N.J. 1998) (value is determined by ascertaining "the price which would be obtained at a fair sale between a willing buyer and seller.").
In determining fair market value, this court also appreciates that the New Jersey Tax Court maintains that a sale may be "a reliable indicator of fair market value" if:
1) buyer and seller are typically motivated and neither is under duress;
2) buyer and seller are well informed or well advised and are acting prudently, knowledgeably and in their respective self-interests;
3) the property has been reasonably exposed to an open, relevant and competitive market for a reasonable period of time;
4) the purchase price is paid in cash or its equivalent; and *4175) the purchase price is unaffected by special or creative financing or by other special factors, agreements or considerations.
The Appraisal of Real Estate, supra, at 18-22; Appraisal Institute, The Dictionary of Real Estate Appraisal 222-23 (3d ed. 1993).
Hull Junction Holding Corp. v. Princeton Borough, 16 N.J.Tax 68, 94 (1996).
GGI bears the burden of proof by a preponderance of the evidence. In re GGI Properties, LLC, 568 B.R. at 251, This standard is defined as "Evidence which is of greater weight or more convincing than the evidence [that] is offered in opposition to it; that is evidence [that] as a whole shows that the fact sought to be proved is more probable than not." Greenwich Collieries v. Dir., Office of Workers' Comp. Programs , 990 F.2d 730, 736 (3d Cir. 1993), aff'd sub nom. Dir., Office of Workers' Comp. Programs, Dep't of Labor v. Greenwich Collieries, 512 U.S. 267, 114 S.Ct. 2251, 129 L.Ed.2d 221 (1994) (quoting Black's Law Dictionary 1182 (6th ed. 1990) ). "[A] party proves a fact by a preponderance of the evidence when [it] proves that the fact's existence is more likely than not." Greenwich Collieries v. Dir., Office of Workers' Comp. Programs, 990 F.2d at 736. See Matter of Crisp, 82-02162-2-3, 1986 WL 22357, at *1 (Bankr. W.D. Mo. Oct. 27, 1986) ("It is 'only necessary that the circumstances established by the evidence be such as would lead a reasonably prudent man to that belief.' ") (quoting Brown Shoe Co. v. Carns, 65 F.2d 294, 297 (8th Cir. 1933) ). The court explains this standard as it found much of the proffered evidence lacking, on both sides.11
Ultimately, the court finds that the most probable fair market value was reflected by the $530,000 Contract. It was an unconsummated contract, not merely an offer; the buyer was to pay cash, no creative financing. It acknowledged the environmental issues and provided for indemnification. It agreed to purchase "as is." Mr. DeSantis was motivated to purchase the property. The property had been exposed to the market since 2009 when it had been listed at $1,649,000 but did not sell. It is not known whether Mr. DeSantis was aware of Mr. Rock's alleged mortgage, but the $530,000 Contract did not require payment of any liens. Similarly, though he did not know about the outstanding taxes, those were allocated to GGI through a customary "to be adjusted as of the closing date" clause. See Ex. P-6, ¶ 7.3. Having been entered into just two weeks prior to the transfer of the property, this contract provided the only settled value then, and to be explained, at the time of the bankruptcy filing.
Generally, unaccepted offers are not admissible evidence in support of fair market value of property, Matter of Burns, 73 B.R. 13 (Bankr. W.D. Mo. 1986), but unconsummated contracts are.
In "the absence of a completed sale, evidence of the price agreed upon in a binding contract of sale for property between the owner and a purchaser, both acting in good faith, would be of substantial significance in arriving at the fair market value of such property.' "
*418Little Egg Harbor [v. Bonsangue ], supra, 316 N.J. Super. [271] at 281, 720 A.2d 369 [ (App. Div. 1998) ] (quoting City of East Orange v. Crawford, 78 N.J. Super. 239, 244, 188 A.2d 219 (Law Div. 1963) ). "The fact that a contract is unconsummated does not ipso facto render the contract inadmissible to establish a property's fair market value." Little Egg Harbor, supra, 316 N.J. Super. at 281, 720 A.2d 369.
Gale & Kitson Fredon Golf, L.L.C. v. Twp. of Fredon, 26 N.J.Tax 268, 287 (2011). Thus, unconsummated contracts have evidentiary weight.
Importantly, had Mr. DeSantis only entered into the $530,000 Contract, the court may have been inclined to discount it as untested by due diligence. But he returned-with more money and another investor-effectively ratifying his earlier offer without suggesting that the property was worth any more than his original offer. Rather, he offered more solely to close more quickly, incentivized by his desire to own both this and the Gerresheimer tract and to keep Ms. Salamon in the deal. While the $690,000 purchase price included an unsecured note for the balance owed after the closing date, as explained above, there would be no balance since $690,000 would not cover $150,000 plus the City's prepetition and postpetition tax claim and Mr. Rock's mortgage. Alternatively, if Mr. Rock's mortgage was not intended to be included in the liens to be paid off at closing, then, as the City argued (see Doc. No. 48, p. 17), the majority of the increase was contained in this unsecured note, further supporting that the "real" price was $530,000. By the time of the $690,000 Agreement, Mr. DeSantis knew the City had foreclosed, thus he understood the ownership contingency.
In coming to this conclusion, the court acknowledges that with a foreclosure judgment looming at the time of the $530,000 Contract, GGI was under a compulsion to sell. Though "distress" sales usually result in a price lower than fair market value, see Tedesco v. Montclair Twp., 21 N.J. Tax 95, 99 (Super. Ct. App. Div. 2003), here the court believes that, for once, GGI accepted only what it could get. At $530,000, GGI would not get covered both the taxes and Mr. Rock's loan, neither of which have anything to do with the value of the property. GGI rushed this contract, falsely warranting that there was no pending litigation involving the property. In contrast, as to CDL, $700,000 was more than the market could bear, with Mr. Brooks unable to get his financers to close. And after GGI's 2016 Bankruptcy filing (which it may not have informed Mr. DeSantis about), GGI felt free to negotiate again, pushing the price up to cover its losses again.
That Mr. DeSantis agreed to increase the price reflected his desire to own both parcels. But so-called assemblage prices generally do not reflect fair market value. See The Appraisal of Real Estate, pp. 363-64 (Appraisal Institute, 14th ed. 2013) ("Certain parcels can achieve a higher value as part of an assemblage.... [A] buyer who purchases a site with the intent to assemble it with other parcels might have to pay a higher-than-market value for that site .... [Appraisers] should avoid assigning the unit value of the whole to the components without other market evidence to support those conclusions."). City of Atlantic City v. Director, Div. of Taxation, 24 N.J. Tax 1, 14 (2008) (rejecting assemblage sale, i.e., contiguous tracts acquired to form one single unit, from calculation of director's chapter 123 tables as adding "significant value to the adjacent property not reflected in the assessment of the combined tract.").
The City complains that the contracts were full of contingencies: due *419diligence, environmental certifications, ownership returned to GGI. Indeed, "... an unconsummated contract is entitled to little or no weight in the absence of key information showing the likelihood that it is capable of being enforced." In re Mocco, 222 B.R. at 463. Thus the more contingencies, the less weight to be given to the agreed-upon price, as the parties have reserved the opportunity to avoid the contract.
"If an agreement is so replete with contingencies ... [s]uch contracts are not really contracts at all but are better characterized as offers or options to purchase which deserve little or no weight in the valuation process." Id. at 331-32 [720 A.2d 369]. However, if "a litigant establishes evidence to support a finding of a 'reasonable probability' or 'likelihood' that the contingencies would be fulfilled, then the contract's relevance and admissibility would be established." Little Egg Harbor, supra, 316 N.J. Super. at 281, 720 A.2d 369.
Gale & Kitson Fredon Golf, L.L.C. v. Twp. of Fredon, 26 N.J. Tax at 287-88. See Lentz v. Mason, 32 F.Supp.2d 733, 743 (D.N.J. 1999) (holding that even failed sale contracts constitute admissible evidence of fair market value); Merck Sharp & Dohme Corp. v. Twp. of Readington, 004383-2016, 2016 WL 7429520, at *4 (N.J. Tax Ct. Dec. 22, 2016) ("The contract, which contains a sales price negotiated by market participants, surely contains information relevant to the true market value of the subject property."); Jersey City Redevelopment Agency v. Weisenfeld, 124 N. J. Super. 291, 294, 306 A.2d 477 (App. Div. 1973) (stating that "in the absence of a completed sale evidence of the price agreed upon in a binding contract of sale for property between the owner and a purchaser, both acting in good faith, would be of significance in arriving at the fair market value of the property") City of E. Orange v. Crawford, 78 N.J. Super. 239, 245, 188 A.2d 219 (Law. Div. 1963) ("Evidence of the price at which one claiming compensation for lands taken has formally bound himself to sell the lands in question to a third person, at least equals in relevancy evidence of the sale price of comparable lands.").
The court in Linwood Properties, Inc. v. Borough of Fort Lee, 7 N.J. Tax 320 (Tax 1985), gave as examples conditioning a contract on "receiving final approvals for subdivision, site and building plans, installation of sewer facilities, adequate utilities and any and all other necessary governmental applications. Additionally, the contract provided for very unusual financing." Id. , at 332-33. The court emphasized that it must thoroughly review an unconsummated contract of sale "and the circumstances surrounding its execution" to determine whether "it is replete with contingencies and is in fact nothing more than an offer or option to purchase, [in which case] the contract must be disregarded and given no probative effect." Id. , at 333. The Mocco court rejected evidence of an unconsummated contract because the court had not been provided a copy of the 11-year old contract to determine whether it had any contingencies.
Thus, while the City makes a fair legal point, it also supports the court's targeting the $530,000 value. The due diligence contingency ended in February prior to the price increase in March. Though the $530,000 Contract required GGI to comply with its ISRA obligations such as to permit sale, the City did not question GGI's ability to comply with this condition, and Mr. DeSantis was seemingly unconcerned enough about it to recruit additional financing to re-contract. At the time of the $530,000 Contract, GGI owned the property, and Mr. DeSantis only conditioned closing on due diligence.
*420In arriving at a $530,000 value, the court includes no value to any salvageable steel on the property. Mr. DeSantis expressed no interest in it, GGI did not disclose its value in its 2015 bankruptcy filing, and Mr. Rock's explanation that he did not consider it an asset because it was an intangible is nonsense: One, steel is not an intangible, and two, intangible assets still must be disclosed. As a former CEO, certainly he understands that. While Mr. Brooks stated that he worked in demolition, he was not qualified as an expert, see Fed. R. Evid. 702, and otherwise his testimony was confused. Mr. Brooks testified that he planned to salvage the steel for a net of $550,000 to $750,000, but if so, then query why he was not able to close the deal. Similarly, if the net value of the steel was so high, it is inconceivable that GGI would not have sold it to pay the taxes to prevent foreclosure. See In re Durso Supermarkets, Inc., 193 B.R. 682, 709 n.23 (Bankr. S.D.N.Y. 1996) (wondering, if it believed there was any value in the equipment and inventory, why the plaintiff did not remove it). GGI improperly proffered a demolition estimate allegedly stated in minutes of the City's Industrial Commission. Nobody presented the court with credible evidence, by expert or otherwise, of an estimate of the amount of steel and a price per pound as of the Relevant Dates.
The court also does not increase the contract price for the $200,000 ascribed to the Glass Group Indemnification Agreement, as GGI agreed in the $530,000 Contract to assign it to the buyer, therefore it was accounted for in the price.
The court cannot take into account the $61,683 per-acre price of the Gerresheimer property, since it has no evidence as to the condition of that property such as the comparability of usable improvements (Mr. DeSantis testified that it was a working glass factory), or its environmental condition, and because the purchase occurred in 2017, remote in time to the Relevant Dates.
The court also attaches little weight to CDL's $700,000 offer. Mr. Brooks did not testify as to how he came up with that price. GGI's appraisal estimated the value just three years earlier at $300,000-$600,000, and nobody testified that the property had increased in value since then. The $700,000 Agreement also was not a cash offer, instead providing for an unsecured note for the balance of the price after payment of only $275,000 at closing. There also was no credible reason given for its failure to close. GGI argued that it was the City's fault for not letting CDL pay the taxes off over time. But CDL entered into two amendments of the sale contract after being notified of that refusal, both with stated closing dates with "time of the essence." The court supposes that the price was too high for Mr. Brooks to find investors.
What of the $600,000 assessed value? First, that the $600,000 came about by way of settlement does not mean that it did not reflect fair market value in 2012. Though the City is correct that, in general, settlements are not subject to judicial estoppel, settlements in Tax Court are different. City of Atl. City v. California Ave. Ventures, LLC, 23 N.J. Tax 62, 66 (Super. Ct. App. Div. 2006). Tax settlements must be approved by the County Board of Taxation, with a judgment entered. N.J.A.C. 18:12A-1.9(i). The settlement request must include the basis for the settlement and indicate whether the municipality's assessor agrees with the settlement. Id. If the board approves the settlement, it enters judgment on the papers; if not, it notifies the parties and schedules a hearing date for the appeal. Id. Indeed, Rule 8:9-5 provides as follows:
*421Judgment pursuant to stipulation: Judgment in a local property tax matter may be entered upon stipulation of the parties supported by such proof as the Court may require.
N.J. Ct. R. 8:9-5. Those facts might include "examination of the value and proper assessment of the properties, ... analysis, information and appraisals...." City of Atl. City v. California Ave. Ventures, LLC, 21 N.J. Tax 511, 519 (2004) (quoting Pressler, Current N.J. Court Rules, comment 4 on Rule 8:9-5 (2004) ).
"For that reason, such judgments are treated as adjudications on the merits." City of Atl. City v. California Ave. Ventures, LLC, 23 N.J. Tax at 66. "... [W]hile a settlement of a pending action is something less than a 'hearing and determination,' it is much more than a withdrawal. It demands an action by the county board a review of the settlement or a taking of testimony in settlement of the appeal, a filing of the stipulation, the entry of a judgment thereon. It requires an action, albeit not a hearing and not a determination, by the county board in its quasi - judicial capacity." Curtiss Wright Corp. v. Wood-Ridge Borough, 4 N.J. Tax 68, 79 (1982).
Accordingly, the City is estopped from arguing that the $600,000 settlement figure was the product of a cost/benefit litigation analysis rather than reflecting the fair market value as of October 1, 2011. See Rosenberg v. S. Orange Twp., 8 N.J. Tax 1, 4 (1983), appeal granted, cause remanded sub nom. Rosenberg v. Twp. of S. Orange, 93 N.J. 279, 460 A.2d 679 (1983) (rejecting settlement at $320,000 based on the taxpayer's appraisal report and the desire to avoid litigation costs, where the assessor did not concur in the settlement and an updated appraisal valued the property at $343,000). However, the estoppel effect of the 2012 settlement only applies to 2012. Thereafter, the assessed value could be rebutted by the City were the condition of the property to change.
GGI then cites N.J.S.A. 54:4-23 for the proposition that an assessor has a duty to maintain assessments at "the full and fair value of each parcel of real property situate in the taxing district at such price as, in his judgment, it would sell for at a fair and bona fide sale by private contract...." This "assessment maintenance ... involves an assessor's annual review of the district's tax roll, at which time the 'assessor changes some assessments in a year when district-wide revaluation or reassessment is not performed.' " City of Elizabeth v. 264 First St., LLC, 28 N.J. Tax 408, 426 (2015) (quoting Regent Care Center, Inc., 362 N.J. Super. 403, 411-412, 828 A.2d 332 (App. Div. 2003) ). An assessor noticing that assessments "in one portion of the taxing district are generally too high or too low" may adjust those assessments "to bring them into line." Handbook for New Jersey Assessors, ¶ 901.09. See Regent Care Ctr., Inc. v. Hackensack City, 362 N.J. Super. at 416, 828 A.2d 332. This includes increasing or decreasing assessments. N.J.S.A. 54:4-23 ("when the assessor has reason to believe that property comprising all or part of a taxing district has been assessed at a value lower or higher than is consistent with the purpose of securing uniform taxable valuation of property according to law for the purpose of taxation,... the assessor shall, after due investigation, make a reassessment of the property in the taxing district that is not in substantial compliance[.]") (emphasis supplied); N.J.S.A. 54:4-35.1 (providing for adjustment of assessment "[w]hen any parcel of real property contains any building or other structure which has been destroyed, consumed by fire, demolished, or altered in such a way that its value has materially depreciated *422...."). "Legitimate reasons to revalue the property include increased property value based on new improvements; addition of formerly-exempt property; and reassessment of apartments converted to condominiums." Schumar v. Borough of Bernardsville, 20 N.J. Tax 46, 52 (Super. Ct. App. Div. 2001) (citing Twp. of W. Milford v. Van Decker, 120 N.J. 354, 362, 576 A.2d 881 (1990) ); Handbook for New Jersey Assessors, § 901.09 (2017) ("when a particular neighborhood changes; when value for a specific property type changes, such as commercial/industrial properties; when apartment properties are converted to condominiums; or when property is upgraded through new buildings or structures, additions or improvements.").12
GGI additionally argues that because tax assessments are presumed to be correct, the City cannot debate the $600,000 assessment in place as of October 1, 2015. The judicially-created "presumption of correctness" provides that original assessments and any county board judgments are presumed to be correct, with the burden on the taxpayer and the appellant, respectively, to prove otherwise. Kazanchy v. Borough of Sea Bright, 6 N.J. Tax 353, 362 (1983), aff'd in part, remanded in part on other grnds, 6 N.J. Tax 622 (Super. Ct. App. Div. 1984).
Even assuming this presumption applies here, rather than solely in New Jersey's tax court-indeed, for a taxpayer to insist that its property value is higher than that asserted by the municipality subverts the presumption's purpose-the presumption merely places the burden of proof on the plaintiff, where it is in most lawsuits. For example, in Borough of Rumson v. Peckham, 7 N.J. Tax 539, 549 (1985), the presumption was applied against the municipality because it sought to establish a value for the property that exceeded the value indicated by the judgment of the County Board of Taxation. Moreover, once the presumption is rebutted, a court may "consider the totality of the evidence presented without reliance on any presumption." In re Curtis Papers, Inc. , 2008 WL 2777277, at *3 (Bankr. D.N.J. July 17, 2008). GGI conceded this in its post-trial brief in stating that the presumption "can only be overcome via definite and certain competent evidence." Doc. No. 47, p. 13.
The court finds here that the $600,000 assessment was rebutted not only by the $530,000 Contract but by the continued deterioration of the property. The property has sat vacant for years. It was last only partially occupied in 2012. By agreement of GGI and the City, the assessed value of the improvements dropped from $2,285,000 in 2005 to $1,311,000 in 2007 to $234,900 in 2011. If, as GGI contended in 2012, the property's value could drop from *423$1,676,000 to $600,000 in two years' time, naturally it would not hold steady at $600,000 over the following four to five years.
While GGI complains that the City did not secure or repair anything during its ownership, it presented no evidence that it had maintained the property in any manner other than fencing. The owners of GGI reside in Kentucky, not in New Jersey available to make certain that the property is secured.13 A roof that caved in would have caved in and the burst pipe would have burst, drug users and skateboard riders could get through fences, regardless of the owner. The City at least covered liability-begging holes in the floors. Mr. Rock admitted that transformers and copper have been removed over many years.
The photographs admitted into evidence show a decaying behemoth. Mr. Rock's testimony that the photos only showed the "bad" buildings carries no weight with the court since there was no reason GGI could not have offered its own photographs of these alleged move-in ready buildings. GGI's argument that the significant deterioration occurred solely after the City took possession due to its failure to adequately secure the property is unsupported.
The court assumes that GGI made a strategic decision not to submit an appraisal, as even in 2012 its own appraiser estimated that the value could be as low as $300,000 (which is less than the $365,100 historically attributed to just the land). This might reflect the biases inherent to property valuation, i.e., that parties' valuation arguments change depending upon the purpose of the valuation with taxpayers seeking low valuations and property sellers seeking high ones. That $300,000 value, GGI's failure to submit that or any appraisal, together with the passage of four years while the property lay vacant, leads the court to conclude that the property is no longer worth $600,000. If GGI is to hold the City to its settlement at $600,000, then certainly it cannot disavow that it argued in 2012 that the property might be worth half as much.
The court acknowledges that an assessor has a statutory duty to perform assessment maintenance, but considering the property was left vacant the City more likely improperly rolled the assessments over from year to year. Though "... the carrying over of assessments each year from one general revaluation to the next is not the proper discharge of the assessor's function[,]" Tri-Terminal Corp. v. Borough of Edgewater, 68 N.J. 405, 414, 346 A.2d 396 (1975),14 it defies common *424sense that the value of this property's improvements did not gradually decline, rather than drop in value by approximately $ 1,000,000 every four of five years coinciding with tax appeals. See Thiedemann v. Mercedes-Benz USA, LLC, 183 N.J. 234, 245, 872 A.2d 783 (2005) (applying "common knowledge, indeed common sense," court concluded that a future buyer would offer less for a vehicle if advised of a potential engine defect); City of New Brunswick v. State Div. of Tax Appeals, Dep't of Treasury, 39 N.J. 537, 551, 189 A.2d 702 (1963) (applying common sense of the situation). GGI put forth no evidence that its appeals were based on destruction of a portion of its buildings. See N.J.S.A. 54:4-35.1 (providing for re-assessment after a property owner provides notice that "any parcel of real property contains any building or other structure ... has been destroyed, consumed by fire, demolished, or altered in such a way that its value has materially depreciated, either intentionally or by the action of storm, fire, cyclone, tornado, or earthquake, or other casualty ....").
Here, GGI entered into a sale contract with CDL in January 2015 for a sale price of $700,000 yet 11 months later, it was content to sell to Mr. DeSantis for $530,000. This too presumes a decline in value.15
The court also rejects the City's estimate of nominal, as based on the assumption that the property only has value as vacant land,16 ignoring the value of the rail *425access, industrial power, sewer and water supply, available work force, bus stop and minimal improvements that attracted Mr. DeSantis to the site, as well as a value effective as of July 2016 instead of either of the Relevant Dates three to six months prior.17 Mr. Bainbridge's contention that the property is unsaleable due to the environmental contamination was rebutted by the sale offers with their provisions for indemnification. In addition, since at least 2005, the land alone has been assessed at $365,100, despite this environmental contamination. See In re Curtis Papers, Inc., 2008 WL 2777277, at *6 (finding that the "impediments to redevelopment," including environmental contamination and asbestos removal, "were in existence during the tax years at issue."). One might even argue that the property will increase in value as remediation continues. Litgo New Jersey Inc. v. Comm'r New Jersey Dep't of Envtl. Prot. , 725 F.3d 369, 387 (3d Cir. 2013) ("Because of the contamination, the Litgo Property is currently unusable and cannot be developed. If the land could be developed after remediation, it would increase its value, and the Litgo Appellants are the only parties that stand to benefit from such an increase."); see N.J.A.C. 18:12A-1.14(j)(3)(viii) (providing for changing an assessed value without the filing of a compliance plan when, inter alia, the assessed value changes due to removal of contaminated soil and property remediation); Borough of Paulsboro v. Essex Chem. Corp., 427 N.J. Super. 123, 131, 47 A.3d 48 (App. Div. 2012) (commenting that removal of landfill could increase the property value).
Though this court, in contrast to Fruehauf was able to determine a specific value for the transferred property, it will address the City's good faith since GGI argued that the City foreclosed in bad faith. GGI's allegation that the City interfered with a possible sale to Chinese investors was not supported by any evidence: Mr. Rock could not remember the investors' names, did not produce any contract, and his allegation that the City told the investors that it could sell the property to them cheaper than GGI, even if true, seems valid since Mr. Rock wanted $100,000 on top of whatever the delinquent taxes had accrued to, while the City would only sell for the amount of the taxes. Moreover, the investors allegedly purchased property in North Jersey instead, suggesting that their interest was low to begin with.
The court already debunked GGPs argument about the City's refusal to let CDL pay the taxes over time. Notably, the City had filed its tax foreclosure complaint six months prior to CDL's request. GGI produced no evidence that the City's request that it end certain leases on the property was inappropriate. The City proceeded in good faith by allowing GGI to appeal its assessment in 2012 without first bringing the taxes current, something it did not have to do, see N.J.S.A. § 54:3-27, and for not commencing foreclosure until more than five years after the 2009 default, despite *426the property not earning any income, and GGI not paying any more taxes or (in 2015, at least) insuring the property. Despite the court's reproach in its previous opinion, GGI did not cite to any duty of the City to cooperate with its sale effort. Thus, the court finds that the City acted in good faith.
Nevertheless, the court holds that $530,000 is not reasonably equivalent value to $429,767. The court previously stated that in determining "rough" equivalence, other courts' decisions in the tax foreclosure context are of little help, as these cases had widely divergent figures to compare, and that the Supreme Court in BFP rejected the "70 percent rule" created by Durrett v. Washington Nat'l Ins. Co. , 621 F.2d 201 (1980). BFP, 511 U.S. at 540, 114 S.Ct. 1757. This court agrees with In re Fitzgerald , 237 B.R. 252, 267 n. 22 (Bankr. D. Conn. 1999), finding the dollar amount of difference more important than any percentage guideline. As the City received $100,233 more than its debt through this transfer, not an insignificant amount considering the $372,537 in claims it could be applied to pay, GGI did not receive reasonably equivalent value in exchange for the transfer.
The court further finds that GGI was insolvent or became insolvent at the time of the transfer. It agrees with the City that some of GGI's scheduled debts look suspicious as possibly belonging to insiders that may have made capital contributions rather than loans. But suspicion is not proof, and the City did not present any evidence of the beneficiaries of the two-member family trusts, or the NARO or RONA trusts, to rebut GGI's assertion of insolvency. Moreover, GGI's schedules reflect that at the time of the transfer, its debts were greater than all of its property. Again, the City did not present any evidence to rebut this. Finally, if not already insolvent, certainly the transfer of arguably its only asset left GGI insolvent. See 11 U.S.C. § 101(32).
Thus, the transfer was constructively fraudulent as there has been a transfer to the City of an interest of GGI in property within 2 years before the date of the filing of the petition, which GGI did not receive reasonably equivalent value, and at the time of the transfer, GGI was or became insolvent. Accordingly, the transfer can be avoided pursuant to Section 548 of the Bankruptcy Code.
Count Two - Section 547
As the court has determined that the transfer of the property to the City is void under section 548, it need not make a determination under section 547.
Count Three - Section 550(a)
In its Complaint, GGI sought restoration of the property to it as an asset of its bankruptcy estate. But in its opposition to summary judgment, it stated that it is also amenable to recovering the value of the property as of the December 31, 2015 transfer.
While the fraudulent transfer laws are intended to protect the debtor's creditors, EBC I v. America Online, Inc. (In re EBC I, Inc.), 382 Fed. Appx. 135, 137 (3d Cir. 2010) ; In re R.M.L., Inc., 92 F.3d 139, 150 (3d Cir. 1996), section 550(a) instead speaks in terms of "benefit to the estate." In re New Life Adult Med. Day Care Ctr., Inc., 11-43510 (NLW), 2014 WL 6851258, at *6 (Bankr. D.N.J. Dec. 3, 2014) ; TWA v. Travellers Int'l AG. (In re Trans World Airlines, Inc.), 163 B.R. 964, 972 (Bankr. D. Del. 1994). If there is no reorganized entity or creditors to receive post-confirmation payment, there may be no benefit to the estate, just benefit to the owners of the debtor. In re New Life Adult Med. Day Care Ctr., Inc., 2014 WL 6851258, at *6. See TWA, 163 B.R. at 972 ("the Code *427clearly contemplates the use of avoidance action recoveries in the operation of the business in a manner which only indirectly benefits creditors.").
It is within a court's discretion to determine whether the court should order payment of the value of the property or the property itself. In re Berley Associates, Ltd. , 492 B.R. 433, 442 (Bankr. D.N.J. 2013). Some courts believe that section 550(a) gives a preference to the return of property unless it would be inequitable to do so. Id. (citing In re Classic Drywall, Inc., 127 B.R. 874, 876 (D. Kan. 1991) ). "This approach finds some support in the language of § 550(a) and the history behind it. Section 60(b) of the Bankruptcy Act allowed the recovery of value only when the property had been converted. While this limitation is gone, § 550(a) lists first the recovery of property and then permits the recovery of value only upon the order of the court." Id. at 442-43. "Other courts have simply read § 550(a) as placing in the court's discretion the choice between return of the property and an award of its value." Id. at 443.
Factors considered by courts in making this discretionary decision of whether to order recovery of the property or its value include whether the property is recoverable, whether the property has diminished in value by virtue of depreciation or conversion, whether there is conflicting evidence as to the value of the property and whether the value of the property is readily determinable and a monetary award would result in a savings to the estate.
Collier on Bankruptcy, ¶ 550.02[3] (Matthew Bender 2017) (footnote omitted).
Though the court finds that the property's improvements continue to decline in value, in light of the disparity between the parties' positions regarding the property's value, it finds that the most equitable remedy is to return the property to GGI and to allow GGI to address the City's prepetition claim through its plan of reorganization.18 If GGI proves the court wrong as to value (i.e. that it is worth $600,000 or more), then that higher value will also inure to the benefit of the City by paying its administrative expense claim consisting of its postpetition taxes.19 This remedy also avoids the municipality having to come up with cash, which could adversely impact its budget and operations. In *428addition, GGI argues the cash settlement as an alternative justified by the City's bad faith-a conclusion the court does not agree with.
V. CONCLUSION
Based on the foregoing, judgment is granted in favor of GGI as to Counts One and Three of the Complaint. As a result, a determination as to Count Two is unnecessary. The City shall transfer the property back to GGI within sixty (60) days of this Memorandum Decision.
An appropriate judgment has been entered consistent with this decision.
The court reserves the right to revise its findings of fact and conclusions of law.
"How South Jersey Shaped Glass, and Vice Versa," New York Times (Tammy La Gorce, May 30, 2014).
Id. , and http://www.southjersey.com/article/6949/Heritage-Glass-Museum (last visited April 26, 2018).
https://theculturetrip.com/north-america/usa/new-jersey/articles/a-brief-history-of-glassmaking-in-south-jersey/ (last visited April 26, 2018).
References to the transcript of November 15, 2017 will be to "T1, p. ----," and to the transcript of November 16, 2017 as "T2, p. ----."
Mr. Rock blamed salaries, T1, p. 121, but others blame plastic for the decline in the 1990s of the glass industry. "How South Jersey Shaped Glass, and Vice Versa," New York Times (Tammy La Gorce, May 30, 2014). Ironically, one prospective purchaser of the property wants to recycle plastic at the site.
The City's assessor testified that the parties agreed that the assessment for October 1, 2011 would be set at $800,000, with $600,000 thereafter, see T1, p. 83, but the City's records do not reflect this. See ex. P-20.
It is not clear why taxes were to be apportioned as of the first of a year rather than on the closing date, or whether the parties meant the credit to be as of 2015 (or 2016) rather than 2014.
At trial, Mr. DeSantis referred to Ms. Salamon as his "previous" or "former" investor, suggesting that she is no longer interested in the property. T1, pp. 34, 36.
The court did not find any buildings built in 1989 on the City's property cards. See Ex. P-21.
Contrary to GGFs assertion, Mr. Bainbridge did address environmental stigma in his appraisal report (see p. 67), thus this testimony was admissible.
GGI in the 2015 Bankruptcy did not disclose either the executory contract with CDL or its interest in any down payment held in escrow. In this case, GGI did not disclose in this bankruptcy any executory contract with Mr. DeSantis or any interest in the $50,000 down payment that was to be made upon the signing of the contract. Nobody testified that Mr. DeSantis made the $50,000 down payment under the $530,000 Contract. GGI apparently told the NJ DEP that it was paying property taxes when it was not. These issues reflected poorly on GGI's credibility.
The City employs too broad a definition of spot assessment in its argument that its assessor could not change the assessment of just one property. Spot assessment refers to singling out one property for re-assessment due to its sale within the year, referred to as the "Welcome stranger" pattern, Twp. of W. Milford v. Van Decker, 120 N.J. at 361-62, 576 A.2d 881 ; Mountain View Crossing Inv'rs LLC v. Twp. of Wayne, 20 N.J. Tax 612, 620 (2003) ("... a prohibited spot assessment occurs only when the assessor has no basis for revising the assessment other than a sale of the property. An assessor may revise assessments for "legitimate reasons" independent of a sale even in the absence of a municipal-wide revaluation."); BASF Corp. Coating & Ink Div. v. Town of Belvidere, 24 N.J. Tax 416, 420 (Super. Ct. App. Div. 2009) ; Schumar v. Borough of Bernardsville, 20 N.J. Tax at 52. See The Handbook for New Jersey Assessors ("It is important that the adjustments be applied on an area-wide basis. It is a mistake to adjust assessments only on properties which have sold. This is called "spot assessing" and is discriminatory."). That would not have been the case here.
The CDL Agreement (ex. P-4), the $530,000 Contract (ex. P-6), and the $690,000 Agreement (ex. P-7) all recite that 1041 Cedar Ridge Lane, Versailles, Kentucky, is GGI's principal place of business, rather than Millville.
N.J.S.A. 54:4-23 requires the assessor to review the fair market value of "each parcel or real property" to determine what it would sell for on the prior October 1, Although "practicalities obviously preclude most assessors reviewing every assessment line item every year, there should nevertheless be alertness to changed valuation factors peculiarly affecting individual properties ... requiring prompt revision of such assessments ..." Tri-Terminal Corp., 68 N.J. at 413-14, 346 A.2d 396 (emphasis supplied); see In re Curtis Papers, Inc. , 2008 WL 2777277, at *4 ("Although such 'roll overs' are an economic reality in most towns, that does not mean that such actions comply with the statutory mandate of N.J.S.A. § 54:4-23."). In performing their duties, assessors must promptly address assessment changes to "individual properties," because a system which promotes "carrying over of assessments each year ... is not the proper discharge of the assessor's function." Id.
Ideally, the annual assessment list of every municipality would reflect that full and fair value every year, but the "practicalities obviously preclude most assessors reviewing every assessment line item every year." Tri-Terminal Corp. v. Edgewater Bor., 68 N.J. 405, 414, 346 A.2d 396 (1975). Accordingly, the Supreme Court of New Jersey has recognized that assessors must be alert to changed valuation factors "peculiarly affecting individual properties in years between revaluations" and make the appropriate adjustments "in fairness to the particular taxpayer or to the taxing district." Ibid.
Chadwick 99 Associates v. Dir., Div. of Taxation, 23 N.J. Tax 390, 413 (2007).
The court also rejects the assertion that the actual deemed value of the property for 2016 would be $652,245 because the ratio of actual to assessed values in the City was 91.99 percent in 2016. That ratio is an average of the true value, as measured by the sales for fair market value in the preceding year, to the assessed value of those properties. See N.J.S.A. 54:1-35.1, et seq. This ratio is used to calculate and apportion inter-municipal county and school tax burdens. N.J.S.A. 54:1-35.1 ; N.J.S.A. 54:1-35.40. It does not mean that every property is worth 8.01 percent more, but that those that were sold in the past year sold for 8.01 percent more than their assessed value. See Tri-Terminal Corp. v. Borough of Edgewater, 68 N.J. at 410 n. 3, 346 A.2d 396 ("[The Director's sales ratios] prime value lies in estimating Aggregate true values of ratables in a municipality and average ratios of Aggregated assessed valuations to true values, not in determining the true value of particular properties or the ratio of assessment to true value of a particular property."); Willingboro Twp. in Burlington County v. Burlington County Bd. of Taxation, 62 N.J. 203, 300 A.2d 129 (1973) ("The state equalization function of the county boards does not in any way affect individual tax assessments against property owners.").
GGI complained that the land extraction method produces less accurate results "due to its reliance on discretionary determinations," and that Mr. Bainbridge wrongly included in his appraisal two sales from New Jersey's "nonusable" category, an estate sale and a sale through the bankruptcy court. See Doc. No. 47, p. 14; N.J.A.C. 18:12-1.1 (a)(10), (31). However, all appraisals require discretionary decisions of an appraiser. As for "non-usables," Mr. Bainbridge explained that those sales are only non-usable by taxpayers appealing their assessment, while appraisers can use them, adjusting for the particular situation they were sold under. T2, pp. 131-33. In addition, Mr. Bainbridge only used those sales as a benchmark to corroborate his overall estimate of value. T2, p. 136.
Moreover, "non-usable" sales falling in certain categories, including the two Mr. Bainbridge's properties fell into, "may be used if after full investigation it clearly appears that the transaction was a sale between a willing buyer, not compelled to buy, and a willing seller, not compelled to sell, with all conditions requisite to a fair sale with the buyer and seller acting knowledgeably and for their own self-interests, and that the transaction meets all other requisites of a usable sale." N.J.A.C. 18:12-1.1(b).
Mr. Bainbridge testified that he did not estimate a value as of December 31, 2015 "because I couldn't inspect it going backwards." T2, p. 76. But he could have attempted a retrospective appraisal. See The Appraisal of Real Estate , p. 52 (Appraisal Institute, 14th ed. 2013) (stating that the valuation date of an appraisal can be a current, retrospective or prospective date); In re Curtis Papers, Inc. , 2008 WL 2777277, at *2 (considering a retrospective appraisal because the relevant valuation dates were from October 1, 2001 to October 1, 2005).
The City retains any and all of its rights and remedies with regard to its postpetition tax claims.
The court declines to entertain GGPs request that it determine its postpetition tax liability, as improperly first raised in a post-trial brief. The court also notes that GGI is time-barred from determining the assessments-or offsets, see In re Custom Distribution Servs. Inc. , 224 F.3d 235, 245 (3d Cir. 2000) -as of October 1, 2016 or October 1, 2017, as those had to be challenged as of April 1 of 2017 and 2018, respectively. See N.J.S.A. 54:3-21. Contrary to GGI's assertion, section 108 does not toll those deadlines. See In re Read, 692 F.3d 1185, 1191 (11th Cir. 2012) (stating that because Congress intended in enacting 505(a)(2)(C), allowing redetermination of taxes only within the period for contesting the amount under applicable nonbankruptcy law, to prevent bankruptcy abuse by debtors and ensure that debtors pay the amount they owe as soon as possible, the specific provisions of section 505 must prevail over the more general provisions of § 108(a) ); In re CM Reed Almeda 1-3062, LLC, 13-19117-GS, 2016 WL 3563148, at *8 (Bankr. D. Nev. May 31, 2016) ("The deadline for the debtor to seek relief as to such taxes is determined by state law, and is not extended by § 108."), aff'd , 2:13-BK-19117, 2017 WL 1505215 (9th Cir. BAP Apr. 26, 2017) ; In re Airport Office Complex, Inc., 5-08-BK-50874-JJT, 2012 WL 5955009, at *2 (Bankr. M.D. Pa. Nov. 28, 2012) (stating that the majority of bankruptcy decisions have concluded that section 108(a) provides no relief to the section 505(a)(2)(C) time limit). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501514/ | Brian F. Kenney, United States Bankruptcy Judge
This adversary proceeding is brought by the Chapter 7 Trustee of Truland Walker Seal Transportation, Inc. ("TWST") against a supplier of electrical equipment, Myers Controlled Power, LLC ("Myers"), for the avoidance and recovery of an alleged preference under Section 547 of the Bankruptcy Code. 11 U.S.C. § 547(b). The Court heard the evidence on February 1 and March 29, 2018. For the reasons stated below, the Court finds in favor of the Trustee.
Findings of Fact
The Court, having heard the evidence, makes the following findings of fact:
1. TWST was one of a group of affiliated companies doing business under the name "Truland." Truland and its affiliates *450comprised one of the largest electrical contractors in the United States, with very substantial contracts, including the contract at issue in this case, the Rehabilitation of the Orange/Blue Line - Stadium Armory to National Airport - for the Washington Metropolitan Area Transit Authority (WMATA).
A. The Parties' Contractual Arrangements.
2. Clark Construction Group, LLC ("Clark") was the General Contractor on the Orange and Blue Line renovation contract for WMATA. The project was a $273 million renovation, involving electrical upgrades, architectural upgrades, the installation of 26 kiosks and mechanical upgrades and repairs.
3. In January 2011, TWST, as Subcontractor, entered into a Subcontract Agreement with Clark Construction Group, LLC ("Clark") as the prime contractor on the Orange/Blue Line job. The total sum to be paid under the Subcontract was $45,000,000.00. Def. Ex. A, at 2.
4. In connection with this contract, Truland caused its bonding companies, Fidelity and Deposit Company of Maryland and Zurich American Insurance Company (together, "Zurich"), to issue Performance Bonds and a Payment Bond on the job. Def. Ex. L, at 00014-00019.
5. Partial payments were permitted under the Subcontract for 95% of the approved work and for on-site stored materials. Def. Ex. A, at 2, ¶ 4(b).
6. The Subcontract contained what is generally known as a "flow down" provision, meaning that TWST as a Subcontractor was contractually obligated to pay its subcontractors and suppliers, and to avoid any bond claims against the surety that guaranteed TWST's performance. Id., ¶ 4(c).
7. At first, Truland intended to use Powell Electrical as a second-tier subcontractor to supply the needed electrical equipment and switches. Powell's circuit breakers did not test properly, however, and were rejected by WMATA. Truland ended up replacing Powell with Myers.
8. Myers did not subcontract directly with TWST. Rather, Myers entered into a Supplier Subcontract with a Disadvantaged Business Entity ("DBE"), Nationwide Electrical Services, Inc. ("NES"), for services and equipment. Def. Ex. B. The total amount to be paid under the Myers-NES Supplier Subcontract was $17,041,113.00. Id. at 1, ¶ 4. The Myers-NES Supplier Subcontract contained a flow down provision similar to the one in the Clark-TWST Subcontract. Id. , ¶ 3.1
9. The initial proposal from Myers was in the amount of $17,211,342.32. Def. Ex. D. This amount included $170,229.32 for payment and performance bonds. Id. In the end, the requirement for Myers to supply payment and performance bonds was dropped, so the price was reduced accordingly. Def. Ex. J.
10. With the exception of one invoice for stored material, Myers sent its invoices to NES. Def. Ex. K.2
11. NES sent invoices to TWST. Def. Ex. G. Most of the invoices state: "Billing for Myers Controlled Power." Id. The parties - TWST and Myers - considered these invoices to be a fee for "managing the Subcontract with Myers." Myers took its *451directions exclusively from TWST, not from NES.
12. When it came time to pay for the equipment, Clark would issue joint checks to TWST and NES. Def. Exs. E, at 1061, 0164; F.
13. Myers and the Trustee dispute whether there was ever a written subcontract between NES and TWST. The Trustee was unable to locate or produce one. The Court concludes that there was not a signed, written subcontract between NES and TWST.
B. The Joint Check Agreement.
14. In April 2014, the Truland companies engaged Charles Goldstein, a Managing Director with Protiviti, to act as their Chief Restructuring Officer. Mr. Goldstein testified that by the spring of 2014, Truland and its affiliates were "out of trust" with their suppliers, meaning that they were receiving payments from general contractors but were not paying the suppliers and subcontractors in violation of the flow-down provisions of their subcontracts, by approximately $23.7 million. Def. Ex. T.
15. On April 29, 2014, Charles Breeden of Clark stated: "It was brought to my attention this afternoon that MCP (Truland's DC Gear Supplier) has notified Truland that they will not proceed with additional work until old invoices have been paid." Def. Ex. O (Charles Breeden e-mail, Apr. 27, 2014).
16. On May 1, 2014, Charles (Chuck) Tomasco of Truland noted that "MCP [Myers Controlled Power] has currently stopped delivering equipment which will delay the entire project and jeopardize the $28M K-Line change order we're awaiting from WMATA/Clark ... [W]e have also requested that Clark issue them payment via joint check but have not confirmed yet." Pl. Ex. 16 (Chuck Tomasco e-mail, May 1, 2014).
17. Myers refused to release the equipment to TWST. Pl. Ex. 17 (Sanchez e-mail, May 7, 2014) ("[W]e have had to stop testing and shipments of the ABB transformers. Presently six (6) transformers are ready for shipment.")
18. In light of Truland's payment default, Myers requested "one party" checks from Clark, that is, checks payable only to Myers, as well as a payment guarantee directly from Clark. Pl. Ex. 18, at CCG 0014-0015 (Sanchez e-mail to Charles Breeden, May 7, 2014).
19. On May 9, 2014, Clark formally notified Truland of its default owing to Truland's failure to pay its suppliers and subcontractors. Def. Ex. O, at CCG 0005.
20. Clark, as the prime contractor, insisted on a joint check arrangement. Pl. Ex. 20, at 0059 (Charles Breeden e-mail, May 13, 2014) ("Clark will issue Joint Checks to MCP/Truland that will be endorsed by Truland and then sent to MCP by Clark.").
21. A draft of a Joint Check Agreement ("JCA") (along with Joint Check Agreements on other Truland projects) was circulated on June 11, 2014. Def. Ex. M.
22. Clark, Myers and TWST entered into a Joint Check Agreement ("JCA"). Def. Ex. P. Although it is dated June 9, 2014, the JCA was still unexecuted as of June 11th. See Pl. Ex. 39; Def. Ex. N, at 0049. Rick Sanchez of Myers testified that Myers signed the JCA about a week after June 9th, thereby putting the effective date of the JCA at about June 16th.
C. Myers Explores Making a Payment Claim on the Bond.
23. As the negotiations for the Joint Check Agreement proceeded in May 2014, *452Myers began exploring the process of making a claim against Zurich, Truland's bonding company on the Orange/Blue Line job. Def. Ex. L.
24. Although Mr. Sanchez testified that Myers "commenced" making claims under Truland's performance and payment bonds with Zurich, no bond claim was entered into evidence.
25. The Court, therefore, concludes that Myers never made a formal claim on the bond. Rather, Zurich signed off on the Joint Check Agreement. Def. Ex. P.3
D. The Payment and the Release of the Equipment.
26. On May 27, 2014, Myers, satisfied with Clark's representations that it would enter into a JCA, released equipment with a cost of $1,819,206.31. Def. Ex. R, at 001123. This invoice included $181,920.63 in "Overhead/Profit," for a total of $2,001,126.94. Id.
27. On June 18, 2014, Myers released additional equipment with a cost of $261,667.00. Id. at 001268. The June 18th Bill of Sale included an additional $26,166.70 for "Overhead/Profit," for a total Invoice of $287,833.70. Id.
28. On July 11, 2014, Clark delivered a check (No. 10101212) to TWST in the amount of $2,107,039.86. Def. Ex. Q. The check was payable jointly to Myers and TWST. Id.
29. TWST endorsed the check and had it delivered back to Clark. Clark then forwarded the check to Myers.
E. Truland and its Affiliates file for Bankruptcy Protection.
30. By mid-July 2014, Truland was planning for a bankruptcy filing. Def. Ex. U. By that point, the Orange and Blue Line contract was approximately 40% complete, with a $2.8 million account receivable in favor of TWST. Id. at 000463.4
31. TWST filed a voluntary petition under Chapter 7 with this Court on July 23, 2014. Case No. 14-12774-BFK.
32. The case is being jointly administered (but not substantively consolidated) with the Chapter 7 cases of The Truland Group, Inc., and its subsidiaries, in Case No. 14-12766-BFK. Case No. 14-12766-BFK, Docket No. 150.
33. The Trustee filed this Adversary Proceeding on July 21, 2016. Docket No. 1.
*45334. The Trustee testified without contradiction that it is "extraordinarily unlikely" that there will be a distribution to the general unsecured creditors in the case. He testified that administrative creditors will be paid in full, and there will be some distribution to priority creditors, but unsecured creditors will not receive a distribution.
Conclusions of Law
The Court has jurisdiction over this matter pursuant to 28 U.S.C. 1334 and the Order of Reference entered by the U.S. District Court for this District on August 15, 1984. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(F) (proceedings to determine, avoid or recover preferences) and (H) (proceedings to determine, avoid or recover fraudulent transfers).
I. Count I - Alleged Preferential Transfer ( 11 U.S.C. § 547(b) ).
Section 547(b) of the Code provides that the trustee may avoid "any transfer of an interest of the debtor in property" that is:
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made-
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if-
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b).
The Debtor is statutorily presumed to be insolvent during the 90 days preceding the bankruptcy, and Myers does not raise a defense based on the Debtor's solvency. 11 U.S.C. § 547(f). The Trustee testified, without contradiction, that the payment to Myers will enable it to receive substantially more than it will receive as an unsecured creditor in the Chapter 7 liquidation of the Debtor. The issues to be resolved are: (a) whether Myers was a creditor of the Debtor at the time of the transfer; (b) whether the joint check was property of the Debtor's estate; and (c) whether Myers has met its burden of proof in establishing that there was a contemporaneous exchange for new value under Section 547(c)(1) of the Code.
A. Was Myers a Creditor?
Section 547(b) allows the Trustee to avoid transfers "to or for the benefit of a creditor," "for or on account of an antecedent debt." 11 U.S.C. § 547(b)(1)-(2). Myers argues that it had no contract directly with the Debtor, and therefore cannot be considered to be a creditor. The term "creditor" is defined as one with a claim against the Debtor. 11 U.S.C. § 101(10)(A). The term claim is defined broadly as any right to payment, whether "liquidated, unliquidated, fixed, contingent, matured or unmatured, disputed, undisputed, legal, equitable, secured or unsecured." 11 U.S.C. § 101(5)(A).5 The Trustee argues that *454Myers was a creditor of TWST at the time of the payment because Myers would have had a claim in quantum meruit against TWST for the value of the equipment it delivered on May 27 and June 18, 2014, and for which Myers was not paid until July 11, 2014.
The first issue to be decided here is what law applies. The cases indicate that a quantum meruit claim is in the nature of a contract and, therefore, the Court will look to the place of contracting to determine whether or not Myers would have had a claim against TWST at the time of the payment. Precision Pipeline, LLC v. Dominion Transmission, Inc., No. 3:16-cv-00180, 2017 WL 1100903, *5 (E.D. Va. Mar. 23, 2017) ; Scott & Stringfellow, LLC v. AIG Commercial Equip. Fin., Inc., No. 3:10cv825-HEH, 2011 WL 1348324, *4 (E.D. Va. Apr. 8, 2011). Another case holds that it is the place of performance that governs issues of breach. EDI Precast, LLC v. Mid-Atlantic Precast, LLC , No. 3:12-cv-00012, 2012 WL 2343033, *2 (W.D. Va. Jun. 20, 2012). These legal principles, though, are easier stated than applied.
Myers is located in Ohio. TWST's offices were in Virginia. The equipment was delivered to sites in both Virginia and D.C. Def. Ex. R. Clark's corporate offices are located in Maryland. The Orange and Blue Lines run through Virginia, D.C. and Maryland. All of the parties' communications were sent or received by e-mail, from their respective offices, so the place of contracting is not clear. Employing the place of performance analysis, the Court concludes that either D.C. or Virginia law governs whether or not Myers had a quantum meruit claim because the equipment was delivered for use in D.C. and in Virginia. In the end, the Court finds that the law on quantum meruit in D.C. and Virginia is not materially different for purposes of this case.
Under Virginia law, Myers would have a claim in quantum meruit where: (1) it conferred a benefit on TWST; (2) there was knowledge on the part of TWST of the benefit conferred; and (3) TWST accepted or retained the benefit in circumstances that would render it inequitable for TWST to retain the benefit without paying for its value. Centex Constr. v. Acstar Ins. Co., 448 F.Supp.2d 697, 707 (E.D. Va. 2006) (citing Nossen v. Hoy, 750 F.Supp. 740, 744-45 (E.D. Va. 1990) ). Although, generally, the existence of an express contract will preclude a claim for quantum meruit ( Artistic Stone Crafters v. Safeco Ins. Co., 726 F.Supp.2d 595, 604 (E.D. Va. 2010) ; Centex Constr., 448 F.Supp.2d at 707 ), in this case there was no contract directly between TWST and Myers - Myers' contract was with NES. The Fourth Circuit has rejected a per se rule that would preclude a quantum meruit claim where the claimant has contracted with a third party on the same subject matter. Raymond, Colesar, Glaspy & Huss, P.C. v. Allied Capital Corp., 961 F.2d 489, 493 (4th Cir. 1992) ("This authority, with which we agree, permits implied contract claims to be brought even though an express contract concerning the same subject matter exists between the claimant and a third party.") (citing Avery v. Sielcken-Schwarz, 5 N.J. Super. 195, 68 A.2d 635, 637 (1949) ("Defendant leans heavily on the rule that the existence of an express contract excludes an implied contract. That rule has full effect only when the parties to the express contract are the same as the parties to the action") ); see also *455Datastaff Tech. Group, Inc. v. Centex Constr. Co., Inc., 528 F.Supp.2d 587, 599 (E.D. Va. 2007) ("[W]hile 'the existence of an express contract between A and B undermines a quantum meruit claim between A and C for those same services,' summary judgment on this claim is improper on the current record ...")
Similarly, under D.C. law, to recover on a claim for quasi contract or unjust enrichment, the claimant must demonstrate: (1) that it rendered valuable services; (2) for the person against whom the recovery is sought; (3) which were accepted and enjoyed by that person; and (4) under circumstances which reasonably notified the person that the claimant expected to be paid. Providence Hosp. v. Dorsey , 634 A.2d 1216, 1218 fn. 8 (D.C. 1993). Further, the existence of an express contract with a third party will not necessarily bar a claim for quantum meruit under D.C. law. Intelect Corp. v. Cellco P'ship GP, 160 F.Supp.3d 157, 191-92 (D. D.C. 2016) ("The principle that a contract between the parties will bar an implied-in-fact contract or unjust enrichment claim applies only where those claims are brought among the contracting parties "); see also Jordan Keys & Jessamy, LLP v. St. Paul Fire & Marine Ins. Co. , 870 A.2d 58, 64-65 (D.C. 2005) ("The equities may be quite different, however, where A, who claims that B has been unjustly enriched at A's expense, has a contract with C rather than with B. It is not at all clear to us that in such a situation, the existence of a contract with C should automatically bar A's claim of unjust enrichment against B.") The Court concludes, therefore, that there is no material difference between Virginia law and D.C. law for purposes hereof.
Under the Restatement (Third) Restitution:
If the claimant renders to a third person a contractual performance for which the claimant does not receive the promised compensation, and the effect of the claimant's uncompensated performance is to confer a benefit on the defendant, the claimant is entitled to restitution from the defendant as necessary to prevent unjust enrichment.
Id. , § 25(1).
The Comments provide the following example:
Owner contracts with A to construct a building. A subcontracts part of the work to B. B in turn subcontracts part of its work to C. C performs under its contract; B defaults and becomes insolvent. C has not been paid by either B or A. A has been paid in full by Owner, but A has paid no one for the work done by C. C has a claim against A under this section for the value of its performance.
Id. , Illus. 15.
In this case, Myers conferred a benefit on TWST: it delivered the equipment for which TWST was contractually obligated to deliver to Clark. TWST clearly knew of the delivery of the equipment at all times. It was intimately involved in the negotiations that resulted in the JCA. The benefits - the delivery of the equipment - were accepted by TWST. And, certainly Myers delivered the equipment with the expectation of being paid and TWST had the same expectation, that Myers would be paid.
The Clark-TWST Subcontract would not bar a claim in quantum meruit for the reasons stated above. Although in the Illustration above, "A" is the general contractor (here, Clark), the Court does not see why the same principal would not apply to a first-tier subcontractor (TWST) occupying the position of A. If Clark had paid TWST directly without the JCA, or had Clark not paid for the equipment at all, Myers would have had a claim against TWST in quantum meruit for the value of the equipment it delivered as of the two *456dates of delivery. The point here is not that Myers had an inarguable claim against TWST. The point is that Myers had a claim in quantum meruit against TWST that may have been "contingent," "disputed," "unmatured" or "equitable" within the broad definition of a claim under Section 101(5)(A) of the Bankruptcy Code.
The Court finds that Myers was a creditor with a claim against TWST for quantum meruit at the time that the transfer was made on July 11, 2014.
B. Do the Proceeds of the Check Constitute Property of the Estate?
Section 547(b) allows the Trustee to avoid transfers of the debtor's interest in property. 11 U.S.C. § 547(b). Section 541(d), on the other hand, provides that property to which the debtor has bare legal title, held in trust for another, is not property of the estate. 11 U.S.C. § 541(d) ; Old Republic Nat'l Title Ins. Co. v. Tyler (In re Dameron), 155 F.3d 718, 721-22 (4th Cir.1998) ("[W]hen a 'debtor' does not own an equitable interest in property he holds in trust for another, that interest is not 'property of the estate' for purposes of the Bankruptcy Code.") (citing Begier v. IRS, 496 U.S. 53, 59, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) ). This principle limits the ability of a trustee to avoid transfers of property that the debtor held in trust for another. See, e.g. , Holmes Envtl., Inc. v. Suntrust Banks, Inc., et al. (In re Holmes Envtl., Inc.), 287 B.R. 363, 382 (Bankr. E.D. Va. 2002) ("Here the funds in the escrow account representing the monies earned by the performance of Hazmed on the Corps Contract are not estate property; therefore, no preference can occur.")
Myers makes two arguments as to why the proceeds of the joint check were not property of the estate.
(i) The Clark-TWST Subcontract.
Myers argues first that the flow down provision contained in the Clark-TWST Subcontract created a trust for its benefit. The Court finds, however, that the flow down provision in the Clark-TWST Subcontract lacks the characteristics of a trust. See Racetrac Petroleum, Inc. v. Khan (In re Khan), 461 B.R. 343, 348 (E.D. Va. 2011) (three primary indicia of an intent to create a trust: (a) the designated trustee lacks legal title to the property; (b) the trustee is restricted in its use of the property; and (c) the property remains separate from the trustee's own property) (citing In re Strack , 524 F.3d 493, 499 (4th Cir. 2008) ). The flow down provision in the Clark-TWST has none of these attributes.
Absent the JCA, the funds indisputably would have been TWST's property upon receipt. There was no requirement in the Subcontract for the segregation of the funds. A violation of the flow down provision by TWST would have given rise to an ordinary breach of contract claim by Clark and nothing more.
The flow down provision in the Clark-TWST Subcontract did not create a trust.
(ii) The Joint Check Agreement.
Myers' second argument in favor of a trust relies on the JCA and the Fourth Circuit's decision in Mid-Atlantic Supply, Inc. of Virginia v. Three Rivers Aluminum Co., 790 F.2d 1121 (4th Cir. 1986). The Mid-Atlantic case involved a dispute between a lower-tier supplier (TRACO) and a lender with a security interest in the Debtor's accounts receivable (United Virginia Bank). TRACO sought relief from the automatic stay with respect to a joint check payable to TRACO and the Debtor. Id. at 1122. The Court granted the motion and the Debtor appealed. The case was then converted to Chapter 7, and the Chapter 7 Trustee abandoned any interest *457in the check. United Virginia Bank then moved to intervene, claiming a security interest in the check and its proceeds. Id. at 1123. The bankruptcy court held in favor of TRACO, and the Bank appealed. Id.
The Fourth Circuit held that under the joint check arrangement the Debtor "had not the slightest interest in the check," and that there was a constructive trust in favor of TRACO. Id. at 1127. The Fourth Circuit described the Debtor's (Mid-Atlantic's) position as that of a "mere conduit," under which its function "was solely to indorse the joint check and pass it on to TRACO as TRACO's property." Id. Although the Mid-Atlantic case involved a dispute between a supplier and a secured party, its holding has been applied in the context of preference cases. See e.g. , In re Railworks Corp., 387 B.R. 156, 164-67 (Bankr. D. Md. 2008) ; In re Diamond K Corp. , No. 04-50356, 2007 WL 2229727, at *4 (Bankr. E.D. Tex. 2007).
The Trustee responds to the Mid-Atlantic joint check argument by asserting that the JCA itself was executed on June 9, 2014, and became effective on or about June 16, 2014, within the 90-day preference period. The Trustee cites In re R.J. Patton Co., Inc. , 348 B.R. 618 (Bankr. D. Conn. 2006), and In re Buono, 119 B.R. 498 (Bankr. W. D. Pa. 1990), for the proposition that where a joint check agreement is entered into within the 90 days, the agreement is a preference. See Patton , 348 B.R. at 625 ("When the Defendant signed the JPA's and simultaneously accepted the Joint Checks, the Debtor's interest in the Receivables was transferred to the Defendant and that was a transfer of property of the Debtor within the preference period"); see also Buono , 119 B.R. at 501 n.1. Here, the Trustee has the better argument. There was no joint check arrangement from the outset of the parties' dealings. The parties entered into the JCA after TWST was in material default, after TWST was deeply out of trust with its suppliers, after Myers refused to release the equipment, and within the 90-day preference period. Myers unquestionably improved its position when it entered into the JCA with Clark and the Debtor.
The JCA fits comfortably within the definition of a "transfer," in that it was a "mode, direct or indirect, absolute or conditional, voluntary or involuntary of disposing of or parting with - (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54)(D). Myers' position is that TWST parted with all interest in the proceeds of the check when it entered into the JCA.
The Court does not see how a preference (the JCA) can save a preference (the payment). The Court finds that the JCA and the joint check issued pursuant to that agreement constitute a preference - subject to Myers' contemporaneous exchange for new value defense, discussed below. The Court, therefore, finds that the joint check was property of the Debtor's estate.6
II. Myers' Defense Under Section 547(c)(1) (Substantially Contemporaneous Exchange for New Value).
Section 547(c)(1) provides a defense to preference liability where the transfer is a substantially contemporaneous exchange for new value. 11 U.S.C. § 547(c)(1). Section 547(c)(1) is intended " 'to encourage creditors to continue to deal with troubled debtors' by 'prevent[ing] trustees from avoiding payments that were clearly intended to support a new transaction, instead of an antecedent *458debt.' " In re ESA Envtl. Specialists, Inc., 709 F.3d 388, 397-98 (4th Cir. 2013) (quoting United Rentals, Inc. v. Angell (In re United Rentals), 592 F.3d 525, 529 (4th Cir. 2010) ). The party asserting the new value defense has the burden of proof. Id. The key question is "whether the alleged preferential transfer diminished the debtor's estate, i.e., whether the debtor in fact acquired a new asset that offset the loss in value to the estate when the debtor transferred existing assets to acquire the new asset at issue." Id. at 398.
Myers posits that it is entitled to the new value defense in two ways: (a) the alleged release of its bond claim against Zurich; and (b) the release of the equipment that it was holding prior to the payment. The Court will examine both claims.
A. Myers' Alleged Release of its Bond Claim.
Myers first claims that it released a bond claim against Zurich, which benefited the Debtor. See In re GEM Constr. Corp. of Virginia , 262 B.R. 638, 652 (Bankr. E.D. Va. 2000). As noted above, though, Myers began investigating making a bond claim against the surety bond, but it never actually made a bond claim. Rather, the parties - including Zurich - entered into the JCA, thereby making any claim under the bond unnecessary.
The situation, then, is indistinguishable from United Rentals where the Fourth Circuit rejected a new value defense based on the release of "inchoate" rights to make a bond claim. 592 F.3d at 532 ("Since United never even attempted to make any claim on the bond here, the Surety never obtained any lien that it could release.") The Court finds that Myers never actually made a bond claim, and, therefore, did not release a bond claim as new value to the Debtor.
B. Myers' Delivery of the Equipment.
Myers argues in the alternative that it provided new value based on the release of the equipment. Myers released equipment with a value of $1,819,206.31, plus Overhead/Profit of $181,920.63, on May 27, 2014, in anticipation of the JCA and the delivery of a joint check from Clark. Def. Ex. R, at 00001123. It released an additional $261,667.00 in equipment on June 18, 2014, plus Overhead/Profit of $26,166.70. Id. at 00001268.
The Trustee argues that the evidence fails to establish that the parties mutually intended the release of the equipment to be a substantially contemporaneous exchange for new value. See 11 U.S.C. § 547(c)(1)(A) ("[T]o the extent that such transfer was intended by the debtor and the creditor ... to be a contemporaneous exchange for new value"). The parties' intent may be "gleaned from, inter alia, 'the agreement or the course of dealings between the parties.' " In re Holmes Environmental, Inc., 287 B.R. 363, 385 (Bankr. E.D. Va. 2002) (quoting Everlock Fastening Sys., Inc. v. Health All. Plan (In re Everlock Fastening Sys., Inc.), 171 B.R. 251, 255 (Bankr. E. D. Mich. 1994) ). It is clear in this case that Myers had no intention of releasing its equipment without the JCA being put into place. It released the equipment with the full expectation that Clark would issue a joint check. The Court finds that the evidence of the parties' intent, through the e-mail exchanges that took place in anticipation of the JCA, establishes a mutual intent to create a substantially contemporaneous exchange for new value. Def. Ex. M (Hinton e-mails, Apr. 28, 2014 and Apr. 29, 2014).
Was the exchange in fact substantially contemporaneous? See 11 U.S.C. § 547(c)(1)(B) ("[I]n fact a substantially contemporaneous exchange"). The Court *459finds that it was not. The "substantially contemporaneous" standard is a flexible one, requiring the Court to take into account the particular facts and circumstances of each case. In re Genmar Holdings, Inc., 776 F.3d 961, 964 (8th Cir. 2015) (citing In re Dorholt , 224 F.3d 871, 874 (8th Cir. 2000) (quotation omitted) ); In re Hedrick , 524 F.3d 1175, 1190 (11th Cir. 2008).
Other courts have found the delivery of goods to be substantially contemporaneous where the goods are delivered within roughly two weeks of the transfer. Pine Top Ins. Co. v. Bank of America Nat. Trust & Sav. Ass'n, 969 F.2d 321, 328 (7th Cir. 1992) (delay of two to three weeks); In re Payless Cashways, Inc. , 306 B.R. 243, 252 (8th Cir. BAP 2004) (payment for goods by EFT within 15 days of delivery); Matter of Anderson-Smith Assocs., 188 B.R. 679, 689 (Bankr. N.D. Ala. 1995) (nine-day delay; "A transaction can be substantially contemporaneous even where there is some separation between the events of the extension of new value and the transfer by the debtor") (citing In re Kiddy Toys, Inc. , 178 B.R. 928, 936 (Bankr. D. P.R. 1994) ).
Somewhat longer periods of time, on the other hand, have been held not to be substantially contemporaneous. In re Furr's Supermarkets, Inc., 485 B.R. 672, 738 (Bankr. D. N.M. 2012) (checks for insurance premiums provided "at least two months" after coverage provided by insurer deemed not substantially contemporaneous); In re Interstate Bakeries Corp. , No. 04-45814, 2012 WL 6614969, at * 5 (Bankr. W.D. Mo. Dec. 19, 2012) (average delay of 31 days not substantially contemporaneous); In re Messamore , 250 B.R. 913 (Bankr. S.D. Ill. 2000) (delay of 50 days not substantially contemporaneous); In re McLaughlin , 183 B.R. 171, 176 (Bankr. W.D. Wis. 1995) (32 days from attachment to perfection of a security interest not substantially contemporaneous); In re Freestate Management Services, Inc. , 153 B.R. 972, 984 (Bankr. D. Md. 1993) (delay of 24 days not substantially contemporaneous); In re Arctic Air Conditioning, Inc., 35 B.R. 107, 109 (Bankr. E. D. Tenn. 1983) (30 days not substantially contemporaneous).
In this case, the vast majority of the equipment ($1,819,206.31) was released on May 27th, 45 days (over six weeks) before the payment on July 11th by joint check. The lesser amount of equipment ($261,667.00) was released on June 18th, 23 days (three weeks and two days) before the joint check was issued on July 11th. The Trustee is correct in his argument that the execution of the JCA was a preference, so Myers cannot rely on the JCA as a defense under Mid-Atlantic . The Court finds that a gap of 45 days, and a gap of 23 days, are simply too long to be considered truly "contemporaneous" under Section 547(c)(1).
For these reasons, the Court finds that Myers has not established a defense to liability under Section 547(c)(1) of the Code.
III. The Remaining Counts in the Complaint.
The remaining Counts in the Complaint are: Count IV (Recovery of Property - 11 U.S.C § 550 ), Count V (Preservation of Avoidance - 11 U.S.C. § 551 ), and Count VI (Disallowance of Claim - 11 U.S.C. § 502(d) ).7
Count IV (Recovery of Property - 11 U.S.C. § 550 ) follows the Trustee's avoidance *460claim on Count I, above. The Court will grant judgment to the Trustee on Count IV for the value of what was transferred, $2,107,039.86, plus pre-judgment interest from the filing of this adversary proceeding on July 21, 2016. See In re Cybermech, Inc., 13 F.3d 818, 822-23 (4th Cir. 1994) (allowing pre-judgment interest); Phoenix American Life Ins. Co. v. Devan , 308 B.R. 237, 242-43 (D. Md. 2004) ; In re ContinuityX, Inc., 569 B.R. 29, 40 (Bankr. S.D. N.Y. 2017) (awarding pre-judgment interest is discretionary and should be awarded unless sound reason not to).
Given the judgment on Counts I and IV, there is no need for the preservation of an avoided transfer under Section 551. Count V (Preservation of Avoidance - 11 U.S.C. § 551 ) will be dismissed. In re Early , No. 05-01354, Adv. No. 05-10079, 2008 WL 2073917, *3 (Bankr. D. D.C. May 12, 2008) ("[T]he remedies are mutually exclusive: a trustee may not both recover the lien via automatic preservation under § 551 and recover a monetary judgment for the value of the lien") (citing Lindquist v. Household Indust. Fin. Co. (In re Vondall), 352 B.R. 193, 200 (Bankr. D. Minn. 2006), aff'd , 364 B.R. 668 (8th Cir. BAP 2007) ).
Finally, Myers did not file a proof of claim in the TWST case. Count VI (Disallowance of Claim - 11 U.S.C. § 502(d) ), therefore, will be dismissed.
Conclusion
For the foregoing reasons the Court will enter a separate Order under which:
A. The Court will grant judgment to the Trustee on Count I (Preference - 11 U.S.C. § 547(b) ) and Count IV (Recovery of Property - 11 U.S.C § 550 ), in the amount of $2,107,039.86, plus pre-judgment interest at the federal judgment rate from the date of the filing of the Trustee's Complaint on July 21, 2016.
B. The Court will dismiss Counts V and VI.
C. The Clerk will mail copies of this Opinion and the accompanying Order, or will provide cm-ecf notice of their entry, to the parties below.
The Myers-NES Supplier Subcontract is not signed by either party. No one disputes, however, that the parties acted as though the Subcontract was in full force and effect.
The one invoice not sent to NES was sent to Truland Transportation. Def. Ex. K, at 0144, Invoice No. 6042.
Myers attempted to introduce evidence of a bond claim at the continued hearing on March 29th. The Court excluded the proffered evidence on the ground that it constituted unfair surprise and prejudice to the Plaintiff. The parties had ten months of discovery in this adversary proceeding, from the time that Myers filed its Answer in October 2016, to August 31, 2017. Docket No. 28. The Court extended the discovery cutoff, at the joint request of the parties. Docket No. 28. The Court's Final Scheduling Order required that Exhibits be filed and exchanged by January 18, 2018. Docket No. 40. The Court continued the trial for a month at Myers' request, to accommodate its witness Mr. Sanchez. The purported bond claim would have been in Myers' possession before the adversary proceeding was filed.
During this period of time - late Spring to early Summer 2014 - Myers was interested in purchasing Truland. At first, Myers was interested in purchasing all of Truland; later, it pared its interest down only to TWST. Def. Ex. V, at 00000766. Myers advanced $250,000.00 so that TWST could make payroll. Id . ("Truland is currently providing additional information to Myers Power Products, Inc. based on their interest in purchasing the Transportation Division.") Ultimately, the parties did not come to terms on an asset purchase agreement and Truland was forced to file for bankruptcy protection when it lost the confidence of its lenders, suppliers and sureties.
Myers' position here is inconsistent with its position that the Clark-TWST Subcontract created a trust for its benefit, discussed below. Where there is a trustee-beneficiary relationship and the trustee (here, TWST) defaults in its fiduciary duties, the beneficiary has a claim for damages against the trustee. See 11 U.S.C. § 523(a)(4) (nondischargeability of claims for defalcation while acting in a fiduciary capacity).
Myers also argues that there was no antecedent debt for purposes of Section 547(b)(2). The Court views this argument to be indistinguishable from the argument that Myers was not a creditor of TWST, addressed above.
Count II (Constructively Fraudulent Transfer - 11 U.S.C. § 548(a)(2)(B) ) and Count III (Post-petition Transfer - 11 U.S.C. § 549 ) previously were dismissed. See Order Granting in Part and Denying in Part Summary Judgment, Docket No. 46. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501515/ | Marci B. McIvor, United States Bankruptcy Judge
This matter is before the Court on a Motion to Dismiss filed by the Internal Revenue Service ("IRS"). Plaintiff/Trustee's adversary complaint alleges that debtor, Laurestine Hatchett, used her assets to pay federal tax liabilities owed by her husband, Elbert Hatchett, and/or his law firm. The Trustee claims that the payments constitute fraudulent transfers under 11 U.S.C. §§ 544(a) and (b), and seeks to recover the payments for Debtor's bankruptcy estate. The IRS asserts that the Trustee's claims are barred by sovereign immunity. For the reasons stated in this Opinion, the Motion to Dismiss is denied.
I. Factual Background
In December, 2014, debtor Laurestine Hatchett's children, Ayanna and Franklin Hatchett, were appointed co-conservators of Debtor based on Debtor's mental disability.
In December, 2014, Debtor's husband, Elbert Hatchett, and their daughter, Ayanna, were appointed Debtor's co-guardians.
In early 2015, a Florida condominium owned 50/50 by Debtor and her son, was sold for $335,000. The sale was approved by the probate court.
After payment of property taxes, closing costs, and recorded liens (including an uncontested *476IRS tax lien against Debtor of $16,589.56), Debtor was entitled to net proceeds of $122,827.09.
Debtor's son/co-conservator, Franklin Hatchett, turned Debtor's proceeds over to Debtor's husband/co-guardian, Elbert Hatchett, who deposited the funds into an account in the name of his law firm, defendant Hatchett, DeWalt & Hatchett. Some portion of those proceeds (between $75,000 and $104,000) were used to pay the IRS for tax liabilities owed by Elbert Hatchett and/or his law firm.
On April 6, 2017, an involuntary Chapter 7 petition was filed against debtor Laurestine Hatchett.
On June 6, 2017, an Order for Relief was entered by the Court.
On October 6, 2017, the Trustee filed the present adversary complaint against Elbert Hatchett, his law firm, and the IRS, seeking to avoid and recover the tax payments made to the IRS. The Trustee asserts that the money used to pay the tax liabilities of Elbert Hatchett and his law firm belong to Debtor's bankruptcy estate, and the payments constitute fraudulent transfers pursuant to 11 U.S.C. §§ 544(a) and (b).
On December 8, 2017, the IRS filed the present Motion to Dismiss the Trustee's complaint. The IRS asserts that as an agency of the federal government, it has sovereign immunity and cannot be sued by the Trustee.
On February 9, 2018, the Trustee filed a response to the IRS's motion. The Trustee asserts that pursuant to 11 U.S.C. § 106(a), Congress waived sovereign immunity as to actions brought by a bankruptcy trustee under § 544 of the Bankruptcy Code, and that the IRS's Motion to Dismiss must be denied.
On March 13, 2018, the IRS filed a reply to the Trustee's response.
On April 17, 2018, the Court heard oral argument on the Motion to Dismiss. The Motion was denied on the record, and the Court indicated that this written Opinion would follow.
II. Standard for Dismissal under Fed. R. Civ. P. 12(b)(1)
A Motion to Dismiss under Rule 12(b)(1) (made applicable to bankruptcy proceedings by Fed. R. Bankr. P. 7012 ) challenges a federal court's subject matter jurisdiction. A defendant may move to dismiss under Rule 12(b)(1) if the complaint does not allege sufficient grounds to establish subject matter jurisdiction on its face, or by factually contesting the plaintiff's allegations that subject matter jurisdiction exists. Establishing jurisdiction in an action against the United States includes establishing that there has been a waiver of sovereign immunity. U.S. v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1980). "Under settled principles of sovereign immunity, 'the United States, as sovereign, 'is immune from suit, save as it consents to be sued ... and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.' ' " Id. (citations and quotations omitted).
III. Analysis
A. Overview of the Relevant Statutes
1. 11 U.S.C. § 544(b)(1) and 11 U.S.C. § 548
Fraudulent transfers can be avoided under two different sections of the Bankruptcy Code: 11 U.S.C. § 548, which creates a body of federal fraudulent transfer law, and 11 U.S.C. § 544 (b), which gives the trustee power to avoid a fraudulent transfer by the debtor if the transfer would be voidable by one of the debtor's creditors under state law. Specifically, *477§ 544(b)(1) permits a trustee to step into the shoes of an actual creditor who has a fraudulent transfer remedy under other "applicable law" (i.e. a state fraudulent transfer statute) and exercise that creditor's remedies on behalf of the bankruptcy estate. 11 U.S.C. § 544(b)(1) provides, in relevant part, that a "trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim..."
The key difference between an action under § 548 and an action under § 544(b)(1) is the reach-back period. Section 548, captures only transfers made in the two years preceding the filing of the bankruptcy. Section § 544(b)(1) looks to the specific state statute's reach-back period, which is generally longer than two years. Thus, a bankruptcy trustee seeking to recover transfers made more than two years prior to the filing of the bankruptcy must file an action under § 544(b)(1).
2. Sovereign Immunity and Section 544(b)(1)
The doctrine of sovereign immunity bars all lawsuits against the United States or its agencies in the absence of its consent as expressly manifested by Congress. Block v. North Dakota , 461 U.S. 273, 103 S.Ct. 1811, 75 L.Ed.2d 840 (1983). This doctrine has its origin in the English concept that the governing royalty should be permitted to exercise his or her authority undisturbed by liability. Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 3654 (2015). As applied in its modern context, sovereign immunity is grounded in the practical realization that essential governmental activities should not be interrupted or slowed by litigation or liability. Id. Sovereign immunity operates to deprive a court of subject matter jurisdiction over the suit unless the sovereign consents to be sued. Id.
If Congress has expressly abrogated sovereign immunity, such consent must be read narrowly, with any ambiguities construed in favor of immunity. F.A.A. v. Cooper, 566 U.S. 284, 290-91, 132 S.Ct. 1441, 182 L.Ed.2d 497 (2012). Congress may provide the conditions under which an action can be maintained against the United States. Stanley v. CIA , 639 F.2d 1146, 1156 (5th Cir. 1981), cert. denied, 483 U.S. 1020, 107 S.Ct. 3262, 97 L.Ed.2d 761 (1987).
Congress has expressly abrogated sovereign immunity for actions brought under 59 sections of the Bankruptcy Code. 11 U.S.C. § 106 (which went into effect with the Bankruptcy Reform Act of 1994), provides, in relevant part:
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, 542, 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.
...
11 U.S.C. § 106(a)(1) (emphasis added).1
B. Is the Trustee's Fraudulent Transfer Action against the IRS Barred by the Doctrine of Sovereign Immunity?
In the present case, the Trustee is suing the IRS to recover alleged fraudulent *478transfers under § 544(b)(1) pursuant to the Michigan Uniform Voidable Transactions Act ( Mich. Comp. Laws Ann. §§ 566.31 - 566.43 ). Notwithstanding the plain language of 11 U.S.C. § 106(a)(1), the IRS argues that its immunity has not been abrogated as to suits under § 544(b)(1) because there is no actual creditor who could maintain a cause of action against the IRS, if a creditor attempted to sue the IRS in state court under state law.
The scope of the Bankruptcy Code's abrogation of immunity as applied to fraudulent transfer actions under § 544(b)(1) has not been addressed by the U.S. Supreme Court or the Sixth Circuit Court of Appeals, thus this Court is not bound by Sixth Circuit law. Fortunately, however, the Ninth Circuit Court of Appeals recently addressed this identical issue in Zazzali v. U.S. (In re DBSI, Inc.) , 869 F.3d 1004 (9th Cir. 2017). That case involved DBSI, Inc. which was set up as an "S" corporation. While the company was operating, it made tax payments to the IRS on behalf of its shareholders. "Tax payments were handled in this manner because S corporations do not themselves pay taxes on corporate income, rather the tax liability is passed through to the corporation's shareholders." Id. at 1007. A total of $17 million was paid to the IRS on behalf of the shareholders. Id. DBSI later filed a Chapter 11 bankruptcy, and the trustee filed an adversary proceeding to recover the tax payments as fraudulent transfers to the IRS under several theories, including § 544(b)(1) and Idaho's Uniform Fraudulent Transfer Act. Id. at 1007-08.
The IRS moved to dismiss the claim on the grounds that the tax payments were not "avoidable under applicable law by a creditor holding an unsecured claim" because the federal government cannot be sued under state law unless it has waived sovereign immunity with respect to the claim. The IRS argued that since the federal government had not abrogated sovereign immunity as to claims under the Idaho fraudulent conveyance statute, it was immune from suit under § 544(b)(1). The bankruptcy court rejected the IRS's argument, holding that § 106(a)(1) abrogated the IRS's sovereign immunity. Both the district court and the Ninth Circuit Court of Appeals affirmed the bankruptcy court's decision.
In ascertaining the meaning of §§ 106(a)(1) and 544(b)(1), the Ninth Circuit first looked at the "particular statutory language at issue" and "the language and design of the statute as a whole." Id. at 1010 (citations omitted). The court summarized how section 544(b) operated, noting that it simply permits a trustee to recover in a case in which an actual creditor could invalidate a transaction. Id. at 1010. While acknowledging that no creditor of DBSI could invalidate the tax payments outside of bankruptcy because of sovereign immunity, it found the language of § 106 to be clear and straightforward. "[R]ead in light of Section 106(a)(1)'s clear abrogation of sovereign immunity, Section 544(b)(1) can only mean one thing: a trustee need only identify an unsecured creditor, who, but for sovereign immunity, could bring an avoidance action against the IRS." Id. (emphasis added).
The Ninth Circuit's broad reading of section 106 was bolstered by the fact that section 106(a)(1) was enacted after section 544(b)(1). As a consequence, when Congress passed 106(a)(1), it was, presumably, well aware of the fact that section 544(b) allowed a trustee to bring claims derived from applicable state law, a power that had been included in the Bankruptcy Code at the time the Code was enacted in 1978, *479and had existed under the Bankruptcy Act of 1898. Id. at 1011. The court concluded that when Congress included section 544 among the Bankruptcy Code sections for which sovereign immunity was abrogated, it meant to include the underlying state law claims as well. Id.
Finally, the Ninth Circuit found that adopting the IRS's interpretation of § 106(a)(1)"would essentially nullify [that section's] effect on Section 544(b)(1)," a result the court sought to avoid. The court explained:
Adopting the government's position would mean that Section 106(a)(1)'s abrogation of sovereign immunity would have no effect on Section 544(b)(1) because a trustee would always need to demonstrate that Congress provided for a separate waiver of sovereign immunity with respect to any "applicable law." As one bankruptcy court deftly put it,
Why would Congress explicitly waive sovereign immunity for all other avoidance actions under the Bankruptcy Code, and include a waiver of sovereign immunity for actions under section 544 knowing that section 544 encompasses state law theories, but then require a separate waiver of sovereign immunity for the necessary state law component in actions under section 544 ?
Furr v. U.S. Dep't of Treasury (In re Pharmacy Distrib. Servs., Inc. ), 455 B.R. 817, 821 (Bankr. S.D. Fla. 2011). The government insists that Section 106(a)(1)'s waiver of sovereign immunity would not be rendered meaningless if we adopted its approach. However, we find the government's arguments unavailing.
Id. at 1011-12. The Ninth Circuit concluded that the text of § 106(a)(1)"is unambiguous and clearly abrogates sovereign immunity as to Section 544(b)(1), including the underlying state law cause of action.... Congress unambiguously and unequivocally waived sovereign immunity for causes of action brought under Section 544(b)(1)." Id. at 1013.
The Ninth Circuit's holding is consistent with the vast majority of lower courts which have addressed the issue, e.g. VMI Liquidating Trust v. U.S. (In re Valley Mortg., Inc.) , 2013 WL 5314369 (Bankr. D. Colo. Sept. 18, 2013) ; David Cutler Indust., Ltd. v. Pennsylvania (In re David Cutler Industries, Ltd.) , 471 B.R. 110 (Bankr. E.D. Pa. 2012) ; Furr v. Internal Revenue Service (In re Pharmacy Distributor Svces., Inc.) , 455 B.R. 817 (Bankr. S.D. Fl. 2011), and the thorough and well-reasoned opinion issued by another court in this district, Kohut v. Wayne County Treasurer (In re Lewiston) , 528 B.R. 387 (Bankr. E.D. Mich. 2015).
In Lewiston , the Chapter 7 trustee sought to recover property taxes from the Wayne County Treasurer under § 544(b)(1). The property taxes were paid directly by the debtor even though the taxes were business obligations not personally owed by the debtor. Since the taxes were not personally owed by the debtor, the Chapter 7 trustee argued that the payments were fraudulent transfers which could be recovered under § 544(b)(1). The defendant Wayne County Treasurer moved to dismiss the trustee's complaint on the grounds that it was protected from suit by sovereign immunity. The court rejected Wayne County's argument, stating,
In sum, the Court is persuaded that § 106(a)(1)'s abrogation of sovereign immunity with respect to § 544(b)(1) means just what the statute says: sovereign immunity is abrogated with respect to § 544. There is no limitation or restriction on the abrogation accomplished by that statute. Regardless of how sovereign immunity may be invoked by Wayne County in a fraudulent transfer *480action brought under MUFTA [now known as MUVTA] against it outside of a bankruptcy case, Wayne County's right to assert sovereign immunity in a fraudulent transfer action brought under MUFTA by the Trustee under § 544(b)(1) is abrogated.
Lewiston , 528 B.R. at 397.
Notwithstanding the well reasoned Ninth Circuit opinion and the case law cited above, the IRS argues strenuously that the IRS's immunity from suit has not been abrogated by § 106(a). As discussed above, the crux of the IRS's argument is that § 544(b)(1) requires that an actual creditor exist who could sue the IRS in state court. Because the IRS has never waived its immunity from suit based on a state law cause of action in state court, the IRS argues that no actual creditor exists who could bring a fraudulent transfer action in state court against the IRS. According to the IRS, since outside of bankruptcy the IRS could not be sued, the IRS is immune from suits brought under § 544(b)(1).
In support of this argument, the IRS relies on an opinion issued by the U.S. Court of Appeals for the Seventh Circuit, In re Equipment Acquision Resources, Inc., 742 F.3d. 743 (7th Cir. 2014) (hereinafter "EARS"). In that case, the Seventh Circuit concluded that absent the existence of an actual creditor who could prevail in a state court action against the IRS (i.e. a creditor whose shoes the bankruptcy trustee could step into for purposes of bringing a derivative state court action under § 544(b)(1) ), waiver of immunity under § 106(a)(1) does not permit a trustee to seek recovery from the IRS. The Seventh Circuit concluded that the IRS's state law immunity is a valid defense to the Trustee's suit for the recovery of a fraudulent transfer under § 544(b)(1). See also Pyfer v. Katzman (In re Nat'l Pool Construction, Inc.) , 2015 WL 394507 (Bankr. D.N.J.), and Field v. Montgomery Cty., Md. (In re Anton Motors, Inc.) , 177 B.R. 58 (Bankr. D. Md. 1995).
This Court finds the reasoning of the Ninth Circuit, and that of my colleague from this District, to be far more persuasive than the reasoning of the Seventh Circuit. This Court acknowledges that the Bankruptcy Code's abrogation of sovereign immunity as to suits brought pursuant to § 544(b)(1) allows a trustee to bring a fraudulent transfer action that could not have been brought absent the abrogation of immunity. But that is precisely the point of § 106(a)(1). One of the primary goals of bankruptcy is to provide a mechanism for the orderly liquidation of assets and the orderly distribution of assets to a debtor's creditors. DBSI , 869 F.3d at 1015; Sherwood Partners, Inc. v. Lycos, Inc. , 394 F.3d 1198, 1204 (9th Cir. 2005). To effectuate this goal, the Bankruptcy Code permits trustees to recover assets fraudulently transferred by a debtor prior to bankruptcy so that those assets may be distributed to debtor's creditors. If a party received a pre-bankruptcy payment from a debtor in payment of an obligation that was not an obligation of the debtor, and for which the debtor received no value, that payment must be recovered for the benefit of debtor's creditors.
It is undisputed that Debtor does not have a tax liability to the IRS. In its fraudulent transfer action under § 544(b)(1), the Trustee is simply seeking to recover money that Debtor should have used to pay her own creditors. In abrogating governmental immunity for suits brought under § 544, Congress's clear intention was that the fraudulently transferred property must be recovered for the benefit of Debtor's creditors, regardless of the status of the recipient of the fraudulent transfer. In light of the clear language of *481§ 106(a), the Court finds the IRS's argument that it should be protected from defending fraudulent transfer suits on the merits unpersuasive.
C. Does a Fraudulent Transfer Action under § 544(b)(1) Create a Substantive Cause of Action that Runs Afoul of 11 U.S.C. § 106(a)(5) ?
The IRS also argues that 11 U.S.C. § 106(a)(5) precludes the Trustee from pursuing a fraudulent transfer action against the IRS. That section states, in relevant part:
Nothing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.
11 U.S.C. § 106(a)(5). The IRS asserts that permitting a Trustee to bring suit against the IRS creates a cause of action not available to a creditor outside of bankruptcy, and therefore creates a substantive claim for relief which does "not otherwise" exist under bankruptcy or non-bankruptcy law. If the Trustee's cause of action is contrary to § 106(a)(5), immunity is not abrogated by § 106(a).
As one would expect, in reviewing the few cases that expressly address § 106(a)(5), the courts which conclude that § 106(a)(1) abrogates sovereign immunity as to fraudulent transfer actions brought under § 544(b)(1), also conclude that a fraudulent transfer action is a substantive cause of action authorized by both federal bankruptcy law and state law. See Lewiston , 528 B.R. at 395 n.5 (an action under § 544(b)(1) is a federal cause of action with state law supplying the substantive law; a trustee must still prove all of the elements of a fraudulent transfer action); Furr v. Internal Revenue Service (In re Pharmacy Distributor Services, Inc.) , 455 B.R. 817, 824 n.3 (Bankr. S.D. Fl. 2011) (trustee's 544 claim is a commonplace fraudulent transfer action; "no part of the [t]rustee's claim was created solely by the application of section 106 itself, and thus there is no violation of section 106(a)(5)").
This Court could find only one case in which the court, after concluding that immunity from suit was not waived as to suits brought under § 544(b)(1), went on to discuss 11 U.S.C. § 106(a)(5). See Field v. Montgomery County (In re Anton Motors, Inc.) , 177 B.R. 58, 64 (Bankr. D.Md. 1995) (because unsecured creditor could not bring suit against the state of Maryland, trustee's suit created a new substantive cause of action which violated § 106(a)(5) ).
After reviewing the relevant case law, this Court rejects the IRS's argument that § 106(a)(5) defeats the Trustee's suit under § 544(b)(1). The substantive cause of action that the Trustee is pursuing against the IRS is a fraudulent transfer action, permitted under otherwise existing law, specifically, § 544(b)(1). The fact that the IRS could assert the defense of sovereign immunity outside of bankruptcy against an unsecured creditor has no bearing on the availability of that defense against a trustee inside bankruptcy. This Court understands the IRS's argument that, by reading § 106 (a)(1) to permit the Trustee's suit, it is allowing the Trustee to bring a cause of action against it that an unsecured creditor in state court would not be able to bring, but that does not, in this Court's view, create a substantive cause of action that does not otherwise exist. This Court's ruling simply recognizes that there are defenses available in state court that are not available in federal court under the Bankruptcy Code. In sum, because a fraudulent transfer action does not create a new substantive cause of action, § 106(a)(5) does not protect the IRS from having to defend a fraudulent transfer action on the merits.
*482For the reasons set forth above, this Court concludes that 11 U.S.C. § 106(a) abrogates the IRS's immunity from suits brought by a trustee under 11 U.S.C. § 544(b)(1) and Michigan's fraudulent transfer statute.
D. Preemption
The IRS also seeks to dismiss the Trustee's suit on the grounds of federal preemption. The IRS argues that the Trustee's ability to recover a fraudulent transfer is preempted by the Internal Revenue Code (Title 26 of the U.S. Code;)("IRC"). The doctrine of preemption arises out of the Supremacy Clause of the United States Constitution. The Supremacy Clause provides, in relevant part, that "the Laws of the United States ... shall be the supreme Law of the Land ... any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. CONST., Art. VI, cl. 2. Where a state law conflicts with or frustrates a federal law, state law must yield. CSX Transp., Inc. v. Easterwood , 507 U.S. 658, 663, 113 S.Ct. 1732, 123 L.Ed.2d 387 (1993) ; Maryland v. Louisiana , 451 U.S. 725, 746, 101 S.Ct. 2114, 68 L.Ed.2d 576 (1981).
The United States Supreme Court has explained that the Supremacy Clause preempts state law in three circumstances. English v. General Elec. Co. , 496 U.S. 72, 78, 110 S.Ct. 2270, 110 L.Ed.2d 65 (1990). First, there is express preemption, whereby Congress explicitly defines the extent to which its pronouncements preempt state law. Id. ; Shaw v. Delta Air Lines, Inc. , 463 U.S. 85, 95-98, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). In the context of express preemption, congressional intent controls. English , 496 U.S. at 79, 110 S.Ct. 2270. Second, absent explicit direction from Congress, state law is preempted where it "regulates conduct in a field that Congress intended the Federal Government to occupy exclusively." English , 496 U.S. at 79, 110 S.Ct. 2270. Such intent may be "inferred from a 'scheme of federal regulation ... so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,' or where an Act of Congress 'touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.' " Id. , (quoting Rice v. Santa Fe Elevator Corp. , 331 U.S. 218, 230, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947) ). Third, under the doctrine of conflict preemption, a state law is preempted "to the extent that it actually conflicts with federal law." English , 496 U.S. at 79, 110 S.Ct. 2270. The Supreme Court has determined that state laws are preempted "where it is impossible for a private party to comply with both state and federal requirements, see, e.g., Florida Lime and Avocado Growers, Inc. v. Paul , 373 U.S. 132, 142-43, 83 S.Ct. 1210, 10 L.Ed.2d 248 (1963), or where state law 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' " English , 496 U.S. at 79, 110 S.Ct. 2270 (quoting Hines v. Davidowitz , 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941) ).
The IRS's argument with regards to preemption is based primarily on the second type of preemption, that is, state law is preempted where state law attempts to regulate conduct in a field that "Congress intended the Federal Government to occupy exclusively." The IRS argues that the IRC is a comprehensive, integrated scheme that occupies the field and controls, to the exclusion of state law, the circumstances under which the IRS receives payments, and forcibly collects, refunds, repays or released amounts collected. The IRS characterizes the Trustee's action as a state law cause seeking a refund *483of federal taxes, and then argues that the use of state law to recover taxes is preempted by the IRC.
The flaw in the IRS's argument is that it mischaracterizes the nature of the Trustee's suit. If this case was about collecting or refunding federal taxes, the Court would agree that the IRC controls the resolution of all issues. This case, however, has nothing to do with the collection or refund of Debtor's taxes. The parties agree that debtor, Laurestine Hatchett, has no outstanding federal tax issues- she has no outstanding federal tax due, nor is she seeking a refund or adjustment of any prior federal taxes paid. What the Trustee seeks to recover is property of the Debtor (and Debtor's estate) which was given to the IRS to pay someone else's tax obligations. The IRS is not a creditor in this action, it is, allegedly, the recipient of a fraudulent transfer. Section 544(b)(1) is a federal cause of action which permits a trustee to recover fraudulently transferred property in a federal court using a state law statute of limitations. As the Ninth Circuit stated in DBSI , § 544(b)(1)"does not authorize a trustee to bring an avoidance action in state court, rather the statute permits a trustee to pursue a federal cause of action in bankruptcy court ... Simply put, we fail to see any Supremacy Clause issue here." DBSI , 869 F.3d at 1015 (citation omitted).
Since § 544(b)(1) is a federal cause of action to recover property fraudulently transferred by a debtor, there is no conflict between state and federal law which might give rise to a preemption argument. The Trustee's cause of action under § 544(b)(1) is not preempted by the IRC.
The IRS also argues that IRC § 7422 ( 26 U.S.C. § 7422 ) prohibits the Trustee's recovery of a fraudulent transfer under § 544(b)(1). Section 7422 of the IRC governs civil actions for refunds. The statute states, in relevant part:
No suit prior to filing claim for refund.--No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.
26 U.S.C. § 7422.
This Court finds that this statute has no applicability to a suit brought by a bankruptcy trustee to recover a fraudulent transfer under § 544(b)(1). The Trustee is not seeking a tax refund, the Trustee is seeking to recover property that Debtor should have used to pay her own creditors. See DBSI , 869 F.3d at 1004, n. 14 ( IRC § 7422"simply has no bearing on [our] interpretation of sections 544 and 106" because the trustee is not standing in the shoes of the debtor seeking a refund, the trustee is standing in the shoes of a creditor seeking to recover property fraudulently transferred); See also VMI Liquidating Trust v. U.S. (In re Valley Mortg., Inc.) , 2013 WL 5314369 (Bankr. D. Colo. Sept. 18, 2013) ("Under its express terms, IRC § 7422 is applicable when taxes have been improperly assessed or are not otherwise properly due. Such is not the case here"). Because the Trustee's suit is a suit to recover money fraudulently transferred by Debtor, § 7422 is not applicable to the Trustee's fraudulent transfer action against the IRS.
IV. Conclusion
For the reasons stated above, this Court concludes that: (1) the IRS's sovereign immunity *484has been abrogated with regards to the Trustee's suit under 11 U.S.C. § 544(b)(1) ; and (2) the Trustee's fraudulent transfer action under 11 U.S.C. § 544(b)(1) is not preempted by the Supremacy Clause of the U.S. Constitution. The IRS's Motion to Dismiss the Trustee's claim under § 544(b)(1) is denied.
The Court recognizes that the parties have raised issues regarding whether preemption bars the Trustee's claim under 11 U.S.C. § 544(a)(1) and, whether the IRS can be considered a subsequent transferee under 11 U.S.C. § 550. The Court finds that those issues have not been fully briefed, and in light of the Court's ruling regarding the Trustee's claim under 11 U.S.C. § 544(b)(1), the Court need not address those issues at this time.
The term "governmental unit" is defined at 11 U.S.C. § 101(27) broadly to include all federal, state and local government entities. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501516/ | Phillip J. Shefferly, United States Bankruptcy Judge
Introduction
Patrice Lynette Harold ("Debtor") is a Chapter 7 bankruptcy debtor. The United States of America (hereafter, "IRS"), filed a complaint seeking a determination that the Debtor's federal income tax debts for the years 2004 through 2012, and 2014, are nondischargeable in her bankruptcy case. The IRS filed a motion for partial summary judgment regarding the taxes for 2008 and 2010. For the reasons set forth in this opinion, the Court will grant the motion and hold that the Debtor's federal *487income taxes for 2008 and 2010 are nondischargeable under § 523(a)(1)(B)(ii) of the Bankruptcy Code.
Jurisdiction
This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a).
Procedural History
The Debtor filed a Chapter 7 bankruptcy petition on January 20, 2016. On November 15, 2016, the IRS filed a three count complaint under § 523(a)(1)(A), (B) and (C) of the Bankruptcy Code. On January 5, 2018, the IRS filed a motion for partial summary judgment ("Motion") (ECF No. 75) with respect to counts I and II of the complaint. The Motion is supported by lengthy transcripts of depositions, declarations and documents. At the joint request of the parties, the Court granted the Debtor an extended period of time to respond to the Motion, in part because of ongoing discovery and in part because of some related litigation pending in the United States District Court for the Eastern District of Michigan.
On April 9, 2018, the Debtor filed a response (ECF No. 97) to the Motion, also supported by lengthy transcripts of depositions, documents and declarations. In the response, the Debtor consents to summary judgment on count I but opposes summary judgment on count II.
On July 17, 2018, the IRS filed a reply (ECF No. 100) to the Debtor's response.1 On July 23, 2018, the Court heard the Motion and took it under advisement. The Court is now ready to rule.
Facts
From its review of the Motion, the response, the reply and the entire file, the Court finds that the following facts are not in dispute.
The Debtor is married to Thomas Barrow ("Barrow"). Historically, they have filed joint federal income tax returns. In March, 2009, Barrow hired Lothamer Tax Resolution, Inc. ("Lothamer") and gave it a power of attorney to help him and the Debtor try to resolve with the IRS their past due taxes going back to 2003. The person assigned to their file at Lothamer was Akono Gross ("Gross"). While Gross was working on helping Barrow and the Debtor address their past due taxes, the Debtor and Barrow obtained a six-month extension of the April 15, 2009 due date for their 2008 return.
On June 2, 2009, Gross sent a fax to Antoinette Cooley ("Cooley"), the IRS revenue officer assigned to the file for the Debtor and Barrows. The fax stated that the 2008 return for the Debtor and Barrows "was sent to the IRS for filing on June 1, 2009." Gross enclosed the first two pages of the return with the fax. The 2008 return had been prepared by Barrow, but Barrow says he gave the return to Gross to file. Gross does not remember if he mailed the return for filing, but says that it was ordinarily his practice to file returns by regular mail, sent to the IRS service center, and not to a revenue officer.
On June 16, 2009, Gross sent a second fax to Cooley to "formally request to set up a step up payment plan with the IRS to settle individual income taxes owed." The fax also stated "[p]lease find enclosed copy *488of the 2008 individual income tax return" for the Debtor and Barrow. Gross testified at his deposition that this was a "courtesy copy," not intended for filing.
On July 6, 2009, Gross sent a third fax to Cooley, enclosing a Form 433-D, Installment Agreement, for the Debtor and Barrow. The tax periods covered by the installment agreement were 2003 through 2008.
On July 10, 2009, Cooley sent a letter to the Debtor and Barrow, with a copy to Gross, that stated that the IRS "approved your request to pay your taxes in installments." The letter stated that "the amount you owe as of 07/09/09 is $132,526.04." On the second page, the letter stated that
This installment agreement includes taxes for the following forms and tax periods:
Form Tax Period Form Tax Period Form Tax Period 1040 200312 1040 200412 1040 200512 1040 200612 1040 200712
Unlike the installment agreement sent by Gross to Cooley just a few days earlier, the taxes and periods covered in the approval did not include or otherwise mention 2008. Neither Gross nor Cooley remember ever speaking about this discrepancy with each other. Gross testified at his deposition that there must have been some mistake by Cooley and the IRS in not including 2008. Cooley testified at her deposition that 2008 would not have been included if the 2008 return had not yet been filed at the time of the installment agreement. Once the IRS sent its July 10, 2009 approval, Gross and Lothamer did not do any further work for the Debtor or Barrow. Eventually, the Debtor and Barrow defaulted under the installment agreement.
The 2010 return for the Debtor and Barrow was due on April 15, 2011. The Debtor and Barrow obtained a six-month extension. Barrow testified at his deposition that he prepared the 2010 return and sent it directly to Cooley, at her express direction. Barrow testified that he sent the return by certified mail, but could not locate the mail receipt card.
Years later, IRS revenue officer Christopher Smith ("Smith") was assigned to the Debtor's and Barrow's file to collect their outstanding tax debt. One of Smith's duties was to "secure any delinquent tax returns." At some point, Smith became aware that the IRS had no record of the Debtor's and Barrow's 2008 and 2010 returns being filed. In January, 2016, he contacted Lothamer, which still had a power of attorney on file with the IRS, and requested copies of the 2008 and 2010 returns. On January 8, 2016, Bridgette Austin, senior case manager at Lothamer, sent an email to Smith that stated as follows:
Attached, please find copies of the signed 2008 and 2010 1040 for [the Debtor and Barrow]. Please note, the 2008 return was filed with [revenue officer] Antoinette Cooley on June 16, 2009. I have included the fax confirmation page of this return, along with the 433-D sent by [ ] Cooley, which included the 2008 tax year. The taxpayers are requesting the 2008 return be processed and that the filing date and any resulting interest and penalties be adjusted to reflect the original filing date.
Mr. Barrow is still looking for his signed certified slip for the original filing date of the 2010 return. We will provide this when we receive it.
Smith then "caused those Forms 1040 to be filed on or about January 15, 2016." The same day, the IRS assessed taxes based on the filed returns, in the amount of *489$38,604.00 for 2008 and $29,559.00 for 2010.
Summary Judgment Standard
The Motion is brought under Fed. R. Civ. P. 56, incorporated in this adversary proceeding by Fed. R. Bankr. P. 7056. Summary judgment under this rule is only appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Id. at 247-48, 106 S.Ct. 2505.
"There is no issue for trial ... unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Street v. J.C. Bradford & Co., 886 F.2d 1472, 1477 (6th Cir. 1989) (citing Anderson, 477 U.S. at 249, 106 S.Ct. 2505 ). The nonmoving party "must 'present affirmative evidence in order to defeat a properly supported motion for summary judgment.' " Id. (quoting Anderson, 477 U.S. at 257, 106 S.Ct. 2505 ). "The court does not weigh the evidence to determine the truth of the matter, but rather to determine if the evidence creates a genuine issue for trial." Brown v. City of Memphis, 921 F.Supp.2d 865, 868 (W.D. Tenn. 2013) (citing Sagan v. United States, 342 F.3d 493, 497 (6th Cir. 2003) ). " 'As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.' " Leichner v. Norfolk & Western Ry. Co., 946 F.2d 895 (Table), 1991 WL 203746, at *2 (6th Cir. Oct. 7, 1991) (quoting Anderson, 477 U.S. at 248, 106 S.Ct. 2505 ).
Discussion
Section 523(a)(1)(B)
A creditor seeking a determination that a debt is nondischargeable under one of the exceptions to discharge in § 523(a) of the Bankruptcy Code, has the burden to prove by a preponderance of evidence that all of the elements of the applicable exception are present. Meyers v. Internal Revenue Service (In re Meyers ), 196 F.3d 622, 624 (6th Cir. 1999) (citing Grogan v. Garner, 498 U.S. 279, 290-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). In count II of its complaint, the IRS seeks a determination that the Debtor's 2008 and 2010 taxes are excepted from her discharge under § 523(a)(1)(B), which excepts from discharge a debt for a tax "with respect to which a return ... (i) was not filed or given; or (ii) was filed or given after the date on which the return ... was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition[.]"
In the Motion, the IRS argues that there are no genuine issues of material fact in dispute with regard to any element of subsection (ii), frequently referred to as the "two-year rule." According to the IRS, the Debtor's 2008 and 2010 tax returns were due to be filed on October 15, 2009 and 2011, respectively, but they are not shown as filed by those dates on the IRS's records. Those records contain a Form 4340, Certification of Assessments, Payments, and Other Specified Matters, for both 2008 and 2010. As explained by Smith in his declaration, these forms show both the 2008 and 2010 returns as having been filed on January 15, 2016, just a few days before the Debtor filed her Chapter 7 petition, and show a tax debt owing for each of those years. "Certificates of assessments *490and payments are generally regarded as being sufficient proof, in the absence of evidence to the contrary, of the adequacy and propriety of notices and assessments that have been made." Gentry v. United States, 962 F.2d 555, 557 (6th Cir. 1992) (citations omitted). See also United States v. Case (In re Case ), 564 B.R. 450, 455-56 (Bankr. N.D.N.Y. 2017) (finding that Form 4340 is self-authenticating and any assessment certified therein is "presumptively correct," and the debtor "bears the burden of proving the invalidity of a tax assessment") (citations omitted).
In her response to the Motion, the Debtor argues that the IRS records are wrong, and that both the 2008 and the 2010 returns were timely filed far more than two years before the Debtor filed bankruptcy. The Debtor argues that the 2008 return was timely filed in two separate ways: first when Gross sent it by regular mail to the IRS, and second when Gross faxed a copy of the return to Cooley on June 16, 2009. The Debtor argues that the 2010 return was timely filed when Barrow sent it to Cooley by certified mail on October 6, 2011. According to the Debtor, because both returns were timely filed, any unpaid tax debt for 2008 or 2010 falls outside of the two-year rule of § 523(a)(1)(B)(ii).
The IRS argues that none of the testimony relied on by the Debtor creates any genuine issue of material fact regarding the filing dates of the Debtor's 2008 and 2010 returns shown on the Form 4340s because of what is known as the "physical delivery rule."
The physical delivery rule
The Internal Revenue Code ("IRC") does not expressly define what it means to "file" a return. But controlling case law does. A document is filed with the IRS when it "is delivered and received." Miller v. United States, 784 F.2d 728, 730 (6th Cir. 1986) (citing United States v. Lombardo, 241 U.S. 73, 76, 36 S.Ct. 508, 60 L.Ed. 897 (1916) ). The physical delivery rule has two statutory exceptions, both of which apply only to a return that is sent to the IRS by mail. The first exception, made by IRC § 7502(a)(1), provides that, if a return is sent by U.S. mail before the filing deadline, but is not actually delivered until after that deadline, the postmark is the deemed date of delivery. The second exception, made by IRC § 7502(c)(1), provides that, if a return is sent by registered or certified U.S. mail, such registration shall be prima facie evidence that the document was delivered, and the postmark date is the date of registration. In Miller, the Sixth Circuit Court of Appeals rejected application of a judicially-created mailbox rule because in enacting IRC § 7502, "Congress explicitly provided two statutory exceptions to the physical delivery rule for the filing of tax claims and returns." 784 F.2d at 730. The Miller court concluded "that the only exceptions to the physical delivery rule available to taxpayers are the two set out in section 7502." Id. at 731.
Not long after deciding Miller, the Sixth Circuit explained how the two statutory exceptions to the physical delivery rule limit a taxpayer's ability to use extrinsic evidence to prove that a return was timely filed. In Surowka v. United States, 909 F.2d 148 (6th Cir. 1990), the taxpayers produced a copy of their return and a page from their bank account records showing a withdrawal of the exact amount needed to pay the tax liability shown on that return. The district court framed the issue as whether the taxpayers "may bring forth circumstantial proof that their [ ] tax return was filed," and held that "filing under the internal revenue code requires both delivery and receipt and that the only two exceptions" to that rule are in § 7502. Id. at 149. The district court then "rejected [the taxpayers]' attempts to prove by *491circumstantial evidence that their [ ] tax return was timely filed." Id." 'While the result may be harsh, since [the taxpayers] did not send their return registered [mail] they are precluded from setting forth circumstantial proof that their [ ] tax return was filed.' " Id. at 150 (quoting the decision of the district court). The Sixth Circuit affirmed, finding that Miller rejected "the judicially-created presumption that material properly mailed is deemed received," and limited the exceptions to the two contained in § 7502. Id. Therefore, the taxpayers could not prove timely filing by extrinsic evidence.
The Debtor correctly observes that Miller has been criticized by other courts. In Carroll v. Commissioner, 71 F.3d 1228 (6th Cir. 1995), the Sixth Circuit recognized some of the criticism, to the point where the "court was invited, not long ago, to reconsider Miller and Surowka in an en banc proceeding." Id. at 1232. There were not enough votes for rehearing. "Unless the Supreme Court or Congress should decide otherwise, therefore, Miller and Surowka will remain good law in the Sixth Circuit." Id. The Sixth Circuit's view of the narrowness of the exceptions to the physical delivery rule was reaffirmed in Stocker v. United States, 705 F.3d 225 (6th Cir. 2013). The taxpayers' "failure to produce evidence that would satisfy either of [ § 7502 ]'s two specified exceptions [was] fatal to their suit for a refund." Id. at 233. As recently as last year, Miller was reaffirmed by the Sixth Circuit, although in an unpublished opinion. See Allred v. United States, 689 Fed. Appx. 392, 394-95 (6th Cir. 2017). Despite the Debtor's criticism, Miller is binding precedent on this Court.2
The filing of the 2008 return by mail
As noted earlier, the Debtor first argues that the 2008 return was filed by Gross by mail. In support, Barrow testified at his deposition that he prepared the return, signed it on June 1, 2009, and "gave it to the Lothamer person," whom Barrow identified as Gross. Barrow then testified that Gross "sent it over to IRS to the revenue officer." Barrow concluded that "I mean as far as we knew, he filed it with the revenue officer." Gross testified at his deposition that he did not recall when he received the return nor did he "recall sending it in." For her part, Cooley testified at her deposition that she only "vaguely" recalled the Debtor's and Barrow's case, and offered no testimony one way or the other as to whether she received the 2008 return from Gross by mail.
The Debtor's evidence that the 2008 return was filed by mail consists solely of the testimony of Barrow and Gross. The Debtor has not come forward with any evidence of a postmark, or certified or registered mail receipts, of the kind required by the statutory exceptions to the physical delivery rule contained in § 7502(a) and (c). Under Miller, the Debtor is barred from using any other extrinsic evidence to support delivery by mail. Therefore, there are no genuine issues of material fact in dispute regarding whether the 2008 return was filed by mail. It was not.
Before leaving the Debtor's argument regarding the mailing of the 2008 return, there is one other related issue raised by the Debtor that requires attention.
*492The Debtor urges the Court to draw an adverse inference against the IRS, and find that the 2008 return was indeed filed by mail in 2009, based on the fact that the IRS no longer has its 2009 paper files regarding the 2008 return. Cooley's deposition testimony shows that those records would have contained documents such as letters of transmittal and notations of any communications with the Debtor, Barrow or Gross. In response, the IRS explains that the IRS' Integrated Collection System files from that time are no longer available because the IRS has only a three year retention policy. The three years runs from when the file is closed. In this case, once the IRS approved the installment agreement in July, 2009, the file was closed and the records would have been purged three years after that.
In the Sixth Circuit, there are three elements that must be shown in order for a court to draw an adverse inference from the destruction of records.
[A] "party seeking an adverse inference instruction based on the destruction of evidence must establish (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to [a] party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense."
Stocker v. United States, 705 F.3d 225, 235 (6th Cir. 2013) (quoting Beaven v. U.S. Dep't of Justice, 622 F.3d 540, 553 (6th Cir. 2010) ).
In this case, the Debtor fails to establish the first two elements. The Debtor attached to her response to the Motion over 1200 pages of IRS internal policies regarding records, but the Debtor does not cite to any provision, either in those materials or otherwise set by statute or case law, that requires the IRS to preserve paper records from 2009, nor does the Debtor present any evidence to suggest that the IRS had a culpable state of mind when it destroyed such records after three years. That was still several years before the Debtor filed her Chapter 7 case, which was the first date that such records could potentially have any relevance to a nondischargeability adversary proceeding. The Court therefore denies the Debtor's request to draw an adverse inference against the IRS because it no longer has the paper files from 2009.
The filing of the 2008 return by fax
The Debtor next argues, in the alternative, that the June 16, 2009 fax from Gross to Cooley constituted delivery of the 2008 return for filing. Because delivery of her 2008 return was accomplished through means other than mailing, the Debtor contends that Miller's narrow reading of § 7502 does not apply.
The IRS counters with four arguments. First, a fax is not a permissible method of delivery of a tax return. Second, the place for filing a return is prescribed by statute, and does not include a revenue officer. Third, a return must have the original signature of the taxpayer. Fourth, the 2008 return that was sent with Gross's June 16, 2009 fax was just a courtesy copy, not intended for filing. The Court will address these arguments in sequence.
First, it is true that the main focus of § 7502 is on returns and other documents that are sent by the U.S. mail, but the statute does not make the U.S. mail the exclusive mode of delivery. Section 7502(f) also refers to other "designated delivery services" and "equivalents of registered and certified mail" that allows for electronic filing and mail by private delivery services. In addition, IRC § 6091(b)(4)
*493provides for delivery of a hand-carried return. Neither the IRS nor the Debtor cite any statute, regulation, or controlling case law that expressly allows or prohibits delivery by fax. Further, Cooley admitted at her deposition that, on the "rare occasion," she had received a return for filing by fax. In light of the additional methods of delivery expressly allowed by statute, and Cooley's acknowledgment of at least some returns having been received by fax, the Court finds that it may look beyond the two exceptions in Miller, if there is evidence that a return has been delivered by means other than by U.S. mail.
Second, the IRS argues that even if delivery of a return may be made by fax, the fax by Gross did not deliver the Debtor's 2008 return to the proper place for filing. For authority, the IRS cites the general rule in IRC § 6091(b)(1) that states that for persons other than corporations, "a return ... shall be made to the Secretary - (i) in the internal revenue district in which is located the legal residence ... of the person making the return, or (ii) at the service center serving the internal revenue district referred to in clause (i), as the Secretary may by regulations designate." Treasury Regulation § 1.6091-2(a)(1) provides that "income tax returns of individuals ... shall be filed with any person assigned the responsibility to receive returns at the local Internal Revenue Service office that serves the legal residence ... of the person required to make the return." The IRS also cites Friedmann v. Commissioner, 82 T.C.M. 381, 2001 WL 883222, at *7 (Aug. 7, 2001) ("Clearly, the revenue agent was not the prescribed place for filing those returns pursuant to section 6901(b)(1).").3
However, there is some contrary authority that supports the Debtor. Even though she had no recollection of the Debtor's 2008 return, Cooley testified at her deposition that taxpayers sometimes did personally give her a return or mail it directly to her. Further, the IRS has conceded in other contexts that it may be permissible to file a return with a revenue officer rather than the IRS service center. On August 20, 1999, the IRS Chief Counsel Advice directly stated in its Memorandum For District Counsel, IRS CCA 199933039, 1999 WL 634177, that "[r]evenue officers may request taxpayers to file delinquent returns directly with the revenue officer" and that they "have the authority to request and receive hand-carried, delinquent returns." Based on Cooley's testimony and on the conflicting authorities cited above, the Court rejects the argument of the IRS that a return can never be filed with a revenue officer.
Third, in support of its argument that the return must bear the original signature of the taxpayer, the IRS cites IRC §§ 6061(a) and 6091(1)(b), and tax court opinions in Friedmann v. Commissioner and Turco v. Commissioner, 74 T.C.M. 1437, 1997 WL 786967 (Dec. 23, 1997). Section 6061(a) provides that a return "shall be signed in accordance with forms or regulations prescribed by the Secretary," but it does not expressly require an original or wet ink signature. Section 6091(b)(1) addresses the place of filing for persons other than corporations, *494but it too is silent as to any original signature requirement.
In Friedmann, the IRS had no record of receiving the taxpayer's returns for 1989 and 1990. 2001 WL 883222, at *2. In 1992, the taxpayer then gave a revenue agent photocopies of the two returns. Following trial, the court held that the subject returns were not filed in 1992 because there was nothing in the record to show that the taxpayer intended his delivery of the documents to the revenue agent to constitute the filing of his returns. Id. at *7. While it is true that there was no wet-ink original signature on the photocopies, the court's opinion did not emphasize that point. Instead, the opinion turned more on the evidence that the taxpayer did not tell the revenue agent that the returns had not previously been filed and the revenue agent received the returns thinking that they were simply copies that he had requested. The court noted that there was no evidence that the revenue agent ever treated these copies as "filed." Id.
In Turco, the taxpayers alleged that they had timely mailed their returns, but had no evidence to support this contention. The IRS had no record of receiving the returns. The taxpayers then hand-delivered photocopies to the revenue agent. The court held that "[a] return is valid only if it is verified under penalty of perjury by an original signature and is filed in the appropriate office." 1997 WL 786967, at *2. As support for this holding, the Turco court cited Beard v. Commissioner, 82 T.C. 766, 1984 WL 15573 (1984). In Beard, a tax protester filed his returns using intentionally and deceptively tampered forms, which he signed. The court held that the taxpayer's wages constituted gross income, and the tampered forms did not constitute a proper filing of the returns. Id. at 773, 777. There was no issue before the court concerning whether a wet-ink original signature is required. The Sixth Circuit affirmed the tax court decision on both grounds but was silent as to any wet ink original signature requirement. See Beard v. Comm'r, 793 F.2d 139 (6th Cir. 1986). The Beard decision does not support the holding in Turco regarding the need for a wet-ink signature.
Another recent tax court case also addressed a photocopied return. In Hulett v. Commissioner, 150 T.C. 4, 2018 WL 618712 (Jan. 29, 2018), the taxpayers were residents of the U.S. Virgin Islands. They filed their federal income tax returns with the Virgin Islands Bureau of Internal Revenue, which electronically sent photocopies of the first two pages of the returns to the IRS. In a later dispute, the IRS insisted that the returns "had to have original signatures (i.e., wet-ink signatures)." Id. at *17. The IRS argued "it has been [the Commissioner's] longstanding custom that an original signature is required," and the court agreed that "Congress granted the IRS great leeway in prescribing the signature method." Id. The tax court was "[n]onetheless ... unable to find anything in the Code or regulations that explicitly calls for an 'original' signature." Id. To the contrary, the court noted that "the IRS does accept returns without original signatures. In [a 1968 revenue ruling], the IRS concluded that it would accept Forms 1040 and Forms 1040NR with facsimile signatures." Id. (citing Rev. Rul. 68-500, 1968-2 C.B. 575 ). In conclusion, the Hulett court explained that it did "not hold today that photocopied or scanned signatures are always sufficient to make a return valid." Id. at *18. Rather, under the specific circumstances and the "strong authenticating safeguards in place in this case" between the Virgin Island Bureau of Internal Revenue and the IRS, the court held that the photocopied signature was a minor and not seriously misleading error. Id. (citation omitted).
*495The Court agrees with Hulett and rejects the argument that, as a matter of law, a copy of a signature rather than a wet-ink original signature necessarily invalidates the filing of a return. In addition, the Court cannot help but notice that the IRS's argument to the contrary is belied by what eventually happened in this case. Smith's declaration states that the Debtor's 2008 return was emailed by Lothamer to Smith on January 15, 2016, and that Smith then caused it to be filed, despite the fact that it was just a copy of the return without a wet-ink original signature.
The IRS's fourth and final argument is that even if a copy of a return may sometimes be filed by a fax to a revenue officer, there is no dispute that this is not what happened here. The IRS is correct. The fax sent by Gross to Cooley on June 16, 2009 expressly states that it "enclosed a copy" of the 2008 return. It does not say, either directly or implicitly, that this copy was intended for filing. This is consistent with the testimony by Gross at deposition. Gross testified without qualification that his general practice was to mail a return by standard U.S. mail, and not fax it. Moreover, Gross testified that when he did mail a return for filing, he would mail it directly to the service center, not to a revenue officer. Gross does not remember who gave him the 2008 return, but when he sent it by fax to Cooley on June 16, 2009, he did so to provide her with a "courtesy copy" as he was negotiating an installment agreement.
There is no evidence in the record to create a genuine issue of fact regarding the June 16, 2009 fax and the 2008 return enclosed with it. Barrow testified at his deposition that he gave the return to Gross to mail in for filing. Gross testified that when he filed returns, he did so by mail, not fax, and that the copy of the 2008 return that he did fax was a courtesy copy that was not intended for filing. Cooley remembered very little about the return but in any event did not testify that it was filed by fax. Assuming, as the Court must, that all of that testimony is true, that is not sufficient to controvert the Form 4340, Certification of Assessments, Payment, and Other Specified Matters, which shows that the Debtor's 2008 return was not filed until January 15, 2016.
The Debtor makes one final argument to try to show the existence of some issue of fact regarding the 2008 return, based on the installment agreement that the IRS approved on July 10, 2009. The Debtor notes that the proposed installment agreement that Gross faxed to Cooley on July 6, 2009 included the Debtor's 2008 taxes. While the Debtor concedes that the July 10, 2009 IRS approval of the installment agreement does not include the Debtor's 2008 taxes, the Debtor argues that the IRS would not have approved the installment agreement unless the Debtor's 2008 return was filed. In support, the Debtor cites IRS policy manuals that require all "current returns" to be filed before the IRS will approve an installment agreement. For further support, the Debtor also points to Cooley's testimony at her deposition. Cooley testified that her general practice before entering into an installment agreement was to require that all delinquent tax returns be filed so that any corresponding debt could be included in the agreement. Cooley also explained that she would include a tax year in an installment agreement based on the taxpayer's representation that the return had been filed, even if the IRS had no record, so long as she was provided a copy.
Here's the problem with the Debtor's argument. The 2008 return was not delinquent, nor were there any current taxes owing under it, at the time the IRS approved *496the installment agreement with the Debtor and Barrow. The Debtor and Barrow had obtained a six month extension to file their 2008 return. It was not due until October 15, 2009. Because it was not delinquent, it posed no obstacle to the IRS approving the installment agreement. And because the 2008 return had not been filed at the time that the IRS gave its approval, the installment agreement did not mention either the 2008 return or any taxes for 2008. The Debtor's contention that the IRS's approval of the installment agreement means that the 2008 return must have been filed is not supported by any probative evidence in the record or applicable legal authority.
The Court concludes that there may be circumstances where Miller does not limit the Court's ability to consider evidence outside of a postmark or registered or certified mail receipt, where the tax return in question was delivered to the IRS through means other than U.S. mail . In this case, the Debtor has provided evidence of a fax transmission of a copy of the Debtor's 2008 return to a revenue officer. However, the Debtor has not come forward with evidence to show that this fax transmission was intended to file the Debtor's 2008 return or that it was treated as filed by the IRS. The uncontroverted evidence before the Court shows that there is no genuine issue of material fact in dispute regarding the filing of the 2008 return. The IRS records show that it was filed on January 15, 2016, less that two years before the Debtor filed her Chapter 7 petition. The Court will therefore grant the Motion as to the taxes shown in the Debtor's 2008 return.
The 2010 Return
Application of the physical delivery rule to the Debtor's 2010 return is uncomplicated. The Debtor's sole contention regarding this return is that it was filed when Barrow mailed it by certified mail. In these circumstances, Miller controls because delivery was allegedly by U.S. Mail. The Debtor has come forward with no evidence of a postmark or registered mail receipt for the 2010 return. Any other extrinsic evidence is barred by Miller. There is no genuine issue of fact that the 2010 return was not filed until January 15, 2016, which was after the date it was due, and after two years before the date of the petition. The Court will therefore grant the Motion as to the taxes shown on the Debtor's 2010 return.
Conclusion
The record leaves the Court with little doubt that the Debtor sincerely believes that her 2008 and 2010 returns were filed timely. But that belief aside, the circumstantial evidence the Debtor relies on is insufficient to create a genuine issue of fact as to whether the 2008 return was timely filed and is irrelevant to the filing of the 2010 return. Accordingly, for the reasons stated, the Court will grant the Motion. Because the grant of the Motion as to count I is based on the consent of the IRS and the Debtor, the parties are directed to submit a proposed order for summary judgment as to that count. The Court will enter its own separate order as to granting the Motion as to count II, consistent with this opinion.
Attached to the reply are two new declarations. L.B.R. 9014-1(f) (E.D. Mich.) permits a party moving for summary judgment to file a reply up to seven pages in length, not less than three business days before a hearing on the motion, but does not permit the filing of additional declarations. Therefore, the Court will disregard the two declarations attached to the reply.
In her response, the Debtor argues that the Court is not required to follow Miller, because Miller conflicts with the standard for summary judgment set forth by the Supreme Court in Anderson, 477 U.S. 242, 106 S.Ct. 2505 (1986). The Court sees no conflict. Miller construes a rule of law set forth in a statute. It does not intrude on the Supreme Court's summary judgment standard in Anderson. The Court must follow both Miller's construction of the IRC, and Anderson's standard of review of the Motion.
The tax court, like the bankruptcy court, is an Article I court. "[W]hile the Tax Court's opinions ... may be illustrative, they have no precedential value in law ...." Klein v. United States, 94 F.Supp.2d 838, 844, 846 (E.D. Mich. 2000) ; see also Rhoades, McKee & Boer v. United States, 822 F.Supp. 445, 449 (W.D. Mich. 1993) (citation omitted), aff'd in part and rev'd in part on other grounds, 43 F.3d 1071 (6th Cir. 1995) ("Decisions of the Tax Court do not bind district courts. They are, however, entitled to considerable weight."). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501517/ | NOW, THEREFORE, IT IS HEREBY ORDERED that the fees and expenses itemized in the Fee Application (ECF No. 44) are APPROVED under § 330(a)(4)(B) in the amount of $6,322.49 and DISAPPROVED to the extent of $2,490.00.
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Memorandum of Decision and Order pursuant to Fed. R. Bankr. P. 9022 and LBR 5005-4 upon Jason L. Hunt, A. Todd Almassian, Esq., James M. Keller, Esq., Brett N. Rodgers, Esq., Elizabeth Clark, Esq., and the United States Trustee (by First Class U.S. Mail).
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501520/ | Beth E. Hanan, United States Bankruptcy Judge
In Celtic lore, a selkie was a seal who could take human form on land, and become a seal again upon returning to the sea. Unfortunately for the debtor's argument, statutory liens do not have that same transformative quality and do not become avoidable judicial liens when the creditor returns with a money judgment.
The debtor, David Doss, filed this adversary proceeding against Norhardt Crossing Condominium Association Inc., which has a statutory lien against the debtor's condominium unit, by virtue of *518Wis. Stat. § 703.165(3). The debtor asserts that Norhardt's lien is wholly unsecured, and therefore can be avoided under 11 U.S.C. sections 506(a) and 506(d). Norhardt responded to the complaint with a motion to dismiss, which the Court converted to a motion for summary judgment. For the reasons explained below, the Court will grant Norhardt's motion.
PROCEDURAL BACKGROUND
The debtor filed a Chapter 13 bankruptcy petition on February 27, 2017, and converted the case to a Chapter 7 in October 2017. Because he failed to file a certificate showing that he had completed a course in personal financial management, see § 727(a)(11), the debtor's case was closed without a discharge on March 7, 2018. The debtor subsequently moved to reopen his case to file the certificate and obtain his discharge. Shortly before the Court granted his motion, on April 4, the debtor's counsel filed correspondence asking that the case be reopened, but not be closed immediately after discharge, explaining:
I will be filing a Motion to Impose the Automatic Stay and Avoid a Lien against one of the creditors, Norhardt Crossing Condo Association with the court within 24 hours.
When the Court issued notice of the closing of the case without discharge on March 9, 2018, creditor Norhardt Crossing Condo Association immediately filed Notice for a Sheriff sale on the debtor's home. The notice of sheriff sale is set for April 25, 2018 and debtor needs to protect his home from this creditor as their lien is totally unsecured.
Case No. 17-21492-beh, CM-ECF, Doc. No. 88.
The Court reopened the case on April 5, and later that same day the debtor filed a motion to reimpose the stay, citing as authority 11 U.S.C. section 362(c)(3)(B). The Court summarily denied the motion, noting that the cited section of the Code did not apply, and that the only way to "reimpose" the stay once it has lapsed as a matter of law is to seek injunctive relief, which requires an adversary proceeding. The Court's order also pointed out that the debtor appeared intent on initiating a proceeding to avoid Norhardt's lien based solely on its purportedly unsecured status, and that Supreme Court precedent precludes a Chapter 7 debtor from avoiding or "stripping off" a valueless lien. See Dewsnup v. Timm , 502 U.S. 410, 417, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) ; Bank of America v. Caulkett , --- U.S. ----, 135 S.Ct. 1995, 1999, 192 L.Ed.2d 52 (2015). The Court therefore ordered the debtor to show cause why his case should remain open once his discharge issues, requiring him to "demonstrate that the relief he appears to be seeking-the avoidance of a lien on his residence based on its purportedly unsecured status-is not prohibited as a matter of law, in light of the Supreme Court's ruling in Caulkett , or otherwise." Case No. 17-21492-beh, CM-ECF, Doc. No. 92.
The debtor responded by initiating this adversary proceeding. His complaint seeks injunctive relief, as well as the avoidance of Norhardt's lien under 11 U.S.C. sections 506(a) and 506(d). It also asserts that Norhardt's claim/lien is dischargeable under section 523(a)(16). The debtor did not move for a preliminary injunction, but instead filed a "Notice of Request for Injunctive Relief," purporting to set a 10-day response deadline to the complaint. The Court issued a summons on April 16 and set a 30-day response deadline (May 16), as prescribed by Bankruptcy Rule 7012(a). On May 8, before the time to respond to the complaint had passed, the debtor filed a proposed order granting his requested injunctive relief "to prevent the confirmation *519of the sheriff sale now pending in Waukesha County Court." Norhardt objected to the proposed order, arguing that the debtor could not unilaterally shorten the time to respond to the complaint. The Court took no action on the proposed order, indicating that it would address Norhardt's objection at the previously-scheduled pretrial conference on May 31, 2018. On May 16, Norhardt moved to dismiss the complaint and for sanctions under Bankruptcy Rule 9011. The Court considered both of these motions at the May 31 pretrial conference.
At the start of the pretrial conference, the debtor's counsel informed the Court of recent developments in Norhardt's state court foreclosure proceeding: on May 24, the parties appeared at a hearing on Norhardt's request for confirmation of the sheriff's sale of the debtor's condominium unit, as well as the debtor's request for a satisfaction of a judgment lien; the state court judge deferred ruling on the requests, explaining that whether Norhardt's lien was "discharged" was a question for the bankruptcy court to decide.
Also at the May 31 pretrial conference, counsel for the debtor conceded that injunctive relief was no longer necessary, and the Court sustained Norhardt's objection to the debtor's May 8 proposed order. Turning to the lien-avoidance request, the debtor's counsel attempted to distinguish Dewsnup and Caulkett by arguing that Norhardt's lien was a judicial lien, and not a mortgage. Counsel's argument on this point was not entirely cohesive: she later conceded that Norhardt had a statutory lien, but that the lien was dischargeable under section 523(a)(16); then asserted that the lien was judicial, and appeared to use the two terms interchangeably.1
Because Norhardt's motion to dismiss attached and relied on exhibits not included in the complaint-a statement of condominium lien and a copy of its recorded lien on the debtor's unit-the Court converted the motion to one for summary judgment and allowed the parties to brief the issues and supplement the record with additional evidence relevant to the motion. See Levenstein v. Salafsky , 164 F.3d 345, 347 (7th Cir. 1998) ("The court must either convert *520the 12(b)(6) motion into a motion for summary judgment under Rule 56 and proceed in accordance with the latter rule, or exclude the documents attached to the motion to dismiss and continue under Rule 12."). The Court then took the matter under advisement.
JURISDICTION
The Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(K). This decision constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052.
SUMMARY JUDGMENT
Summary judgment is appropriate if the pleadings and affidavits on file show there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. See Fed. R. Bankr. P. 7056 ; Fed. R. Civ. P. 56 ; Tapley v. Chambers , 840 F.3d 370, 376 (7th Cir. 2016). A factual dispute is "genuine" only if there is sufficient evidence for a reasonable jury to find in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202, (1986). For a fact to be material, it must be "outcome determinative under governing law." Contreras v. City of Chicago , 119 F.3d 1286, 1291-92 (7th Cir. 1997). To succeed in opposing a motion for summary judgment, the nonmoving party must present "definite, competent evidence to rebut the motion." Smith v. Severn , 129 F.3d 419, 427 (7th Cir.1997) (internal quotation marks omitted). In determining whether there is a genuine issue of material fact, the Court must view the evidence and draw all reasonable inferences in the light most favorable to the non-moving party. E.E.O.C. v. Sears, Roebuck & Co. , 233 F.3d 432, 436-37 (7th Cir. 2000).
Although the debtor's response brief asserts there are "issues of fact that preclude entry of summary judgment" for Norhardt, the purported factual disputes that the debtor appears to raise are not material to the determination of whether Norhardt has a non-avoidable lien on the debtor's condominium unit.2 As a result, there are no disputes as to any material factual issues that would preclude entry of summary judgment for the defendant.
UNDISPUTED FACTS
Based on the parties' briefing and the record in this case, the Court finds that the following facts are undisputed or not reasonably subject to dispute:
• The debtor owns a condominium unit at 1805 Norhardt Drive, in Brookfield, Wisconsin, which is part of Norhardt Crossing Condominium Association, Inc.
• Mr. Doss purchased his unit in November 2003.
• By mid-2015, Mr. Doss had become delinquent in his condominium dues and assessments.
• As a result, on September 18, 2015, Norhardt filed a lien against his unit with the Waukesha County Clerk of Courts, in the amount of $1,185.63, for condominium assessments for the period of May 1, 2015 to September 14, 2015. (See CM-ECF, Doc. No. 11, Ex. A.)
• Norhardt's lien is indexed in the lien docket of the Waukesha County *521Clerk of Courts, as 2015CO000065. (See CM-ECF, Doc. No. 11, Ex. B.)
• The lien docket is electronically available via a database known as CCAP (Consolidated Court Automation Programs), and indicates that the lien is not satisfied.3
• On October 30, 2015, Norhardt commenced a foreclosure suit to foreclose its lien, which is Waukesha County Case No. 2015CV2136.
• The foreclosure action resulted in a Stipulated Order for Foreclosure and Money Judgment and Foreclosure Judgment, entered on February 29, 2016. (See Case No. 17-21492-beh, Claim No. 3-1, at 6-11.) The foreclosure judgment listed a total amount due of $8,307.85, and provided a one-year redemption period. The separate money judgment was entered in the amount of $8,307.85.
• Almost a year later, on February 27, 2017, Mr. Doss filed his bankruptcy case, as a Chapter 13. In his (amended) Chapter 13 plan, he proposed to treat over $63,000 in arrears owed to his principal mortgage-holder, Wells Fargo, through a loan modification, or surrender the property. (Case No. 17-21492-beh. CM-ECF, Doc. No. 28.)
• Before his chapter 13 plan was confirmed, Mr. Doss converted his case to a Chapter 7 on October 20, 2017.
• His case closed without a discharge on March 7, 2018.
• Shortly after the case closed, Norhardt proceeded to enforce its foreclosure judgment and scheduled a sheriff sale of the condominium unit, to take place on April 25, 2018. The debtor received notice of the sale on March 14, 2018.
• The state court docket reflects that the sheriff sale was held as scheduled, and the state court judge signed an order confirming the sale on May 9, 2018.
• Also on May 9, the debtor received his Chapter 7 discharge.
• On May 11, the debtor filed an application with the state court requesting an order of satisfaction of a judgment lien, due to his bankruptcy discharge. The state court vacated the order confirming the sheriff sale on May 14, 2018.
• On May 24, the state court held a hearing on the debtor's application for satisfaction, as well as the confirmation of the sheriff sale, and deferred ruling on the matters until the resolution of this adversary proceeding.
ANALYSIS
The parties' briefing raises two questions of law for the Court to decide. First, did Norhardt's foreclosure of its statutory lien change the nature of the lien to a judicial lien? Second, whatever the nature of the lien, can the debtor avoid it?
A. The foreclosure of Norhardt's statutory lien did not change the nature of the lien to a judicial lien.
In Wisconsin, condominiums are governed by the Condominium Ownership Act, Chapter 703 of the *522Wisconsin Statutes. Section 703.165(3) provides for the creation of a lien on a condominium unit for unpaid assessments:
All assessments, until paid, together with interest on them and actual costs of collection, constitute a lien on the units on which they are assessed, if a statement of lien is filed within 2 years after the date the assessment becomes due. The lien is effective against a unit at the time the assessment became due regardless of when within the 2-year period it is filed. A statement of condominium lien is filed in the land records of the clerk of circuit court of the county where the unit is located, stating the description of the unit, the name of the record owner, the amount due and the period for which the assessment was due. The clerk of circuit court shall index the statement of condominium lien under the name of the record owner in the judgment and lien docket. The statement of condominium lien shall be signed and verified by an officer or agent of the association as specified in the bylaws and then may be filed. On full payment of the assessment for which the lien is claimed, the unit owner shall be entitled to a satisfaction of the lien that may be filed with the clerk of circuit court.
Wis. Stat. § 703.165(3). Additionally, section 703.165(7) allows for the foreclosure of such a lien in the same manner as the foreclosure of a mortgage on real property:
A lien may be enforced and foreclosed by an association or any other person specified in the bylaws, in the same manner, and subject to the same requirements, as a foreclosure of mortgages on real property in this state. An association may recover costs and actual attorney fees. An association may, unless prohibited by the declaration, bid on the unit at foreclosure sale and acquire, hold, lease, mortgage and convey the unit. Suit to recover a money judgment for unpaid common expenses shall be maintainable without foreclosing or waiving the lien securing the same. Suit for any deficiency following foreclosure may be maintained in the same proceeding. No action may be brought to foreclose the lien unless brought within 3 years following the recording of the statement of condominium lien. No action may be brought to foreclose the lien except after 10 days' prior written notice to the unit owner given by registered mail, return receipt requested, to the address of the unit owner shown on the books of the association.
Wis. Stat. § 703.165(7) (italics added). The italicized portion of this provision indicates that a condominium association has at least two remedies to recover delinquent assessments from a unit owner: a suit to recover a money judgment (an in personam action), and a foreclosure suit (an in rem action). Notably, obtaining a money judgment does not result in a waiver of the lien securing it.
Consistent with the above provisions, in September 2015 Norhardt filed a statement of lien with the Waukesha County Clerk of Courts, giving rise to a statutory lien under Wis. Stat 703.165(3). Norhardt then took action to enforce its lien through foreclosure proceedings, under Wis. Stat 703.165(7). In doing so, Norhardt exercised both of its available remedies: it foreclosed its lien to obtain a foreclosure judgment, and it also obtained a money judgment against the debtor personally for the delinquent balance. The debtor asserts, without any supporting authority, that Norhardt's "condo lien filed in September 2015 [would be ] a statutory lien that cannot be avoided in bankruptcy ... if [Norhardt] had not pursued legal action to foreclose on the lien and obtained a money judgment, creating *523a judicial lien." CM-ECF, Doc. No. 15, at 3.
There are several fundamental flaws with the debtor's lien transformation argument. First, the debtor appears to conflate Norhardt's money judgment with its foreclosure judgment. The money judgment Norhardt obtained against the debtor is not the result of the enforcement/foreclosure of Norhardt's statutory lien-it is the result of the enforcement of the debtor's personal obligations under his contractual agreement with the association. To highlight the distinction, the money judgment is the result of Norhardt's in personam action (and would have allowed, for example, the garnishment of the debtor's wages),4 while the foreclosure judgment is the result of its in rem action (and provided for the sale of specific real estate securing a pre-existing statutory lien). Any argument that the separate money judgment is an extension or reincarnation of Norhardt's statutory lien confuses the condominium association's rights against the debtor personally with its rights against his property.
Assuming, however, that the debtor means to argue that the foreclosure judgment-and not the corresponding money judgment-replaced or nullified Norhardt's statutory lien, that contention also must fail. Despite exhaustive efforts, the Court has been unable to find a single case or statute that would sustain this argument. Instead, every authority the Court has located holds to the contrary. See, e.g. In re Cunningham , 478 B.R. 346, 361 (Bankr. N.D. Ind. 2012) (judicial action to foreclose a statutory mechanic's lien in order to enforce it does not alter the characterization of the lien, and the entry of judgment on foreclosure of the mechanic's lien does not convert a statutory mechanic's lien into a judicial lien); In re Green , 494 B.R. 231, 236 n.24 (Bankr. E.D. La. 2013), aff'd , 516 B.R. 347 (E.D. La. 2014), aff'd , 793 F.3d 463 (5th Cir. 2015) ("The Court notes that 'judicial action taken to enforce a lien does not transform a statutory lien into a judicial lien.' ... Also, '[t]he requirement of a judicial action to enforce the lien and establish its particular priority does not transform its essential character to a judicial lien.' ... Therefore, the entry of the Default Judgment does not change the nature of the lien.").
Most notably, a bankruptcy court in this district rejected an almost identical argument regarding a Wisconsin statutory construction lien. In Matter of Sato , 9 B.R. 38, 39 (Bankr. E.D. Wis. 1980), the bankruptcy court dismissed the debtors' claim that a judgment resulting from the foreclosure of a statutory construction lien was a "judicial lien" subject to avoidance under section 522(f)(1). After concluding that the lien at issue arose as a matter of law rather than through any judicial action-much in the same way that the lien here arose, by operation of law after the filing of a statement with the clerk of the circuit court-the court went on to explain:
As a final note, the court rejects the contention that [the lienholder's] foreclosure action transformed its initial statutory lien into a judicial lien. A lien foreclosure judgment is unlike a personal judgment which upon proper docketing becomes a lien against the debtor's real estate in that county. Wis. Stat. s 806.15(1) (1977). Indeed its effect is to authorize the lienor to have the sheriff sell the debtor's interest in the affected *524property to satisfy the lien claim. And in certain cases, such as the one at bar, it also provides for a conditional personal judgment in the event the lienor's claim cannot be completely satisfied from the sale proceeds. Wis. Stat. s. 289.10 (1977).
Matter of Sato , 9 B.R. at 39. The same is true for Norhardt's statutory lien-it has not lost its character or force as a statutory lien because of the foreclosure judgment.
In its reply brief, Norhardt points out that Wisconsin courts have refused to adopt the debtor's theory when it comes to mortgage foreclosure judgments, citing Bank of Sun Prairie v. Marshall Dev. Co. , 2001 WI App 64, ¶ 18, 242 Wis. 2d 355, 626 N.W.2d 319 ("We find nothing in the holding or reasoning of this or other similar cases to suggest a valid mortgage no longer exists solely because the debt the mortgage secures has been reduced to a judgment."). It appears that Congress endorsed this "anti-merger" rule in enacting 11 U.S.C. § 522(f)(2)(C), which essentially clarifies that mortgage foreclosure judgments are not "judicial liens" that can be avoided under section 522(f). As the First Circuit B.A.P. explained:
[In enacting § 522(f)(2)(C),] Congress was not creating an exclusion, it was providing clarification. Congress was making clear that the entry of a foreclosure judgment, which is essentially an order of sale, does not convert the underlying consensual mortgage into a judicial lien which may be avoided.... [S]ubsection § 522(f) describes liens that are subject to avoidance and [ ] subparagraph § 522(f)(2)(C) clarifies that judgments arising out of a mortgage foreclosure are not liens and, hence, are never avoidable under § 522(f).
In re Hart , 282 B.R. 70, 77 (1st Cir. BAP 2002), aff'd , 328 F.3d 45 (1st Cir. 2003) ; see also In re Linane , 291 B.R. 457, 461 (Bankr. N.D. Ill. 2003) ( Hart explained that "[s]ection 522(f)(2)(C) was not included to create any exception to otherwise avoidable judicial liens, but was instead added to clarify that mortgage foreclosure judgments, which involve the sale and eventual transfer of a property's title to a third party, are not, and do not become, judicial liens subject to avoidance under Section 522.").
Norhardt then reminds that condominium liens are foreclosed in the same manner as mortgages in Wisconsin, and asserts that the anti-merger rule likewise applies to the foreclosure of condominium liens. In further support, Norhardt explains: "Without [the anti-merger] rule, creditors would lose their priority status once they decide to enforce their mortgages or liens. Such result would put the entire lien priority structure on its head."
The Court agrees. The foreclosure judgment here is essentially an order of sale; it is not a lien and cannot be avoided. If the Court were to accept the debtor's argument that the enforcement of a statutory lien through judicial action renders the lien "judicial," then, as one district court described, "statutory liens would only be a theoretical possibility. An individual lienholder is not able to recover simply by possessing the lien. Rather, the lienholder must go to court and obtain a judgment against the debtor in order to be able to execute on the lien. This would leave creditors the choice of being able to recover by seeking a judgment or maintaining a statutory lien and not being able to recover." Young v. 1200 Buena Vista Condominiums , 477 B.R. 594, 602 (W.D. Pa. 2012).
Finally, as Norhardt pointed out at both the May 31 pretrial conference and in its reply brief, the authority on which the debtor relies to make his "judicial lien" argument actually supports Norhardt's position.
*525See, e.g. , Wozniak v. Wozniak , 121 Wis. 2d 330, 334, 359 N.W.2d 147, 149 (1984) (distinguishing between statutory and judicial liens, and noting that (1) a judgment lien "ordinarily is not a lien on any specific real estate of the judgment debtor but is a general lien on all of the debtor's real property"; and (2) like mortgages, statutory liens are enforced via foreclosure); and In re Beck , No. 15-29541-svk, 2016 WL 489892, at *3 (Bankr. E.D. Wis. Feb. 5, 2016) (explaining that a Wisconsin construction lien is a statutory lien that arises by operation of law-much in the same way the condominium lien here arose).
In sum, the Court concludes that Norhardt's actions in enforcing its statutory lien and obtaining a foreclosure judgment did not alter the nature of its statutory lien and render it a judicial lien. The debtor's bankruptcy and subsequent discharge likewise had no effect on the rights created by the judgment of foreclosure that Norhardt obtained in enforcing its statutory lien.
B. Regardless of the nature of the lien, section 506(d) does not provide a basis to avoid it.
In his complaint, the debtor relies on 11 U.S.C. sections 506(a) and 506(d) as the authority for avoiding Norhardt's lien. The debtor cited to these provisions of the Code despite the Court's warning in its order to show cause that the Supreme Court's decisions in Dewsnup and Caulkett appear to foreclose the use of that Code section to avoid "unsecured" liens in a Chapter 7 bankruptcy. The debtor attempts to distinguish Dewsnup and Caulkett by arguing-again without any supporting legal authority-that those cases do not apply because Norhardt has a judicial lien rather than a mortgage.
Setting aside that Norhardt has a valid statutory lien, the debtor's argument still fails. Nothing in the language of Dewsnup or Caulkett suggests that the reading of section 506(d), and the meaning of an "allowed secured claim," should be different when a lien is nonconsensual. Numerous courts have reached that same conclusion, holding that Dewsnup applies to both consensual and non-consensual liens, including judicial liens. See, e.g. , In re Swiatek , 231 B.R. 26, 29 (Bankr. D. Del. 1999) (" Dewsnup concerned a consensual lien and not a judgment lien, but the Supreme Court's examination of the history of liens under the Bankruptcy Code and its conclusion based on that examination is not so limited. The Court was very clear in stating that if the claim has been allowed, the lien is not avoidable."); In re Concannon , 338 B.R. 90, 95-96 (9th Cir. BAP 2006) ("Debtors [argue] that Dewsnup and its progeny apply only to consensual liens. Debtors reason that Imperial's wholly unsecured judgment lien may be stripped off simply because it is nonconsensual. This is a distinction without a difference.") (citing cases); and Boring v. Promistar Bank , 312 B.R. 789, 796-97 (W.D. Pa. 2004) ("The Court disagrees with the bankruptcy judge's analysis and conclusion that pursuant to the guidance provided by Dewsnup consensual and non-consensual liens should be treated differently under § 506(d). This Court adopts the opposite position .... This is consistent with the Supreme Court's finding in Dewsnup that Congress intended that liens pass unaffected through the bankruptcy proceedings; no differentiation between consensual and nonconsensual liens was articulated by the Supreme Court in Dewsnup .").
And, although the Seventh Circuit has not weighed in on the issue, there is a strong argument that it would agree. In In re Ryan , 725 F.3d 623 (7th Cir. 2013), the Seventh Circuit was tasked with determining whether Dewsnup applied in the Chapter *52613 context. The debtor argued that it did not, and that he could use section 506(d) to avoid a federal tax lien on the basis that the lien was "unsecured." The Seventh Circuit rejected this contention. In doing so, the court explained that policy considerations did not trump the clear statutory language of the Code:
[The debtor's] argument is that the language in § 506(d) should be interpreted differently in Chapter 13 than in Chapter 7 cases because to hold otherwise would be contrary to the purposes of those statutory vehicles. This argument is not based on any language in § 506(d) that would signal differential treatment. In fact, the language of § 506(d) is straightforward, and does not indicate any intent for the terms to have meanings that differ based upon the circumstances.
...
The language [of section 506(d) ] is uniform and does not lend itself to any differential treatment, and § 103(a) renders the provision applicable to Chapter 7 and Chapter 13 without distinction.... [B]ecause the statute applies to Chapter 7 and Chapter 13 without distinction, to give those words a different meaning for Chapter 13 than Chapter 7 would be to invent a statute rather than interpret it.... It is rare enough to interpret the same language differently in distinct statutory sections, but is an entirely different matter for a court to give a term a different meaning in the same statutory provision.
725 F.3d at 625-27.5
Now, after filing his complaint and pressing his initial arguments at one hearing, the debtor apparently recognizes the lack of legal authority for his position, and urges the Court to avoid the lien under another section of the Code not cited in his complaint, section 522(f)(1), which allows the avoidance of judicial liens that impair a debtor's exemptions. See CM-ECF, Doc. No. 15, at 3. But Norhardt's lien is not a selkie. For the reasons explained above, Norhardt has an unavoidable statutory lien, and therefore section 522(f)(1) cannot invalidate that lien or the related foreclosure judgment.6
The debtor then cites to 11 U.S.C. § 523(a)(16) as further support that Norhardt's lien should be dischargeable. That provision of the Code, which was enacted in 1994 and later amended in 2005, provides that a discharge under section 727 does not discharge a debtor from any debt:
for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor's interest in a unit that has condominium ownership, ... for as long as the debtor or the trustee has a legal, equitable, or possessory *527ownership interest in such unit, ... but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case[.]
11 U.S.C. § 523(a)(16).
The debtor's argument on this point is not entirely clear. He cites to In re Rosteck, 899 F.2d 694, 697 (7th Cir. 1990) and In re Stone , 243 B.R. 40 (Bankr. W.D. Wis. 1999), and appears to suggest that, under the logic of these cases, any post-petition condominium fees he owes to Norhardt were included in his discharge. See CM-ECF, Doc. No. 15, at 4-6 (summarizing Rosteck and Stone , in which the courts concluded that post-petition condominium fees were included in the debtors' discharge, then stating: "In this case before the court, Debtor entered into a contract with Norhardt Crossing Condominium Association just as the other Debtors had in the above referenced cases."). If this is, in fact, the debtor's argument, it is wrong. Section 523(a)(16) was codified in response to cases like the Seventh Circuit's Rosteck decision, and the 2005 amendment to section 523(a)(16) limited the validity of Stone. In other words, if Rosteck or Stone had been decided under the current version of section 523(a)(16), the results in those cases would have been different.
More fundamentally, section 523(a)(16) governs the discharge of personal liability, not liens. There is no question that the debtor's discharge here included his personal liability for any pre-petition fees and assessments owed to Norhardt. But his discharge had no effect on the validity of Norhardt's statutory condominium lien, or Norhardt's ability to enforce the foreclosure judgment it obtained by foreclosing the lien against the debtor's condominium unit.
As a final point, the debtor adds an argument about Wisconsin Statute § 806.19(4). This state statute concerns the satisfaction of judgment liens after a bankruptcy discharge. Like 11 U.S.C. § 522(f), this statutory provision was not referenced in the debtor's complaint (and could not have been, because at the time he filed it, the debtor had not received his discharge). Whether the debtor is entitled to a satisfaction of a judgment under Wis. Stat. § 806.19(4) is a question that can and should be decided by the state court. The only issue before this Court is whether the debtor may "avoid" Norhardt's condominium lien under 11 U.S.C. § 506(d). And based on the undisputed material facts before the Court, he cannot. Norhardt continues to hold a valid statutory lien, as defined by the Bankruptcy Code. This lien arose by virtue of Wis. Stat. §§ 703.165(3) and (7) -not by virtue of the docketing of a judgment under Wis. Stat. §§ 806.10 and 806.15.7 In sum, Wis. Stat. § 806.19(4) cannot save the debtor's complaint under these facts.
CONCLUSION
For the foregoing reasons, the Court concludes that there are no genuine disputes as to any material facts and that Norhardt is entitled to judgment as a matter of law.
An order will be entered consistent with this decision.
*528The Court will consider Norhardt's motion for sanctions under Rule 9011 in a separate decision.
The debtor offers conceded speculation that Norhardt is pursuing the lien due to some racial bias (Doss Affidavit, CM-ECF, Doc. No. 15-1, ¶ 4), and further challenges the underlying foreclosure and Norhardt's motives with arguments that could or should have been raised in the state court, such as his alleged failure to receive 10-day notice, and Norhardt's interference with a mortgage loan modification (Id. , ¶¶ 6-7).
The Court may take judicial notice of the state court docket under Federal Rule of Evidence 201. See , e.g., Guaranty Bank v. Chubb Corp., 538 F.3d 587, 591 (7th Cir. 2008) ("a court is of course entitled to take judicial notice of judicial proceedings"); United States v. Doyle, 121 F.3d 1078, 1088 (7th Cir. 1997) (taking judicial notice of district court's docket sheet).
While the recording of the separate money judgment may have created a judicial lien independent of the pre-existing statutory lien , the existence of the money judgment and any resulting lien has no effect on the validity of Norhardt's statutory lien or its related foreclosure judgment.
The Court has located only one case that has held to the contrary and finds it unpersuasive, particularly in light of the Seventh Circuit's extension of Dewsnup in Ryan . See In re Mayer , 541 B.R. 812, 814 (Bankr. E.D. La. 2015) (concluding that Dewsnup does not apply to nonconsensual judicial liens, and citing several cases for support, all of which either involved avoidance under section 522(f), or relied on pre-Caulkett logic to distinguish Dewsnup as applying only to partially-secured claims).
The Court makes no ruling on the applicability of this Code section to the separate money judgment, because the issue is not fully developed or properly before the Court. See Tyler v. Runyon , 70 F.3d 458, 464 (7th Cir. 1995) ("[A] litigant who fails to press a point by supporting it with pertinent authority, or by showing why it is sound despite a lack of supporting authority, forfeits the point.") (internal quotations omitted). Nor would a favorable ruling on that issue provide the debtor the relief he seeks, which is the invalidation of Norhardt's statutory lien and foreclosure judgment.
Compare Huntington v. Meyer , 92 Wis. 557, 66 N.W. 500, 502 (1896) (former version of Wis. Stat. § 806.15(1) was not applicable to a judgment of foreclosure, because the lien existed before the judgment: "a judgment of foreclosure and sale does not create a lien, but merely enforces a lien previously created by the mortgage itself; and hence the statute cited has no reference to such a judgment, except as to any deficiency.") | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501524/ | Marc Barreca, U.S. Bankruptcy Court Judge
INTRODUCTION
This matter is before me on the Motion for Order Directing Trustee to Disburse Funds ("Motion to Disburse") filed by John and Janice Good ("Debtors"). The Debtors seek disbursement of sale proceeds based on their homestead exemption. Michael Klein, the Chapter 7 Trustee ("Trustee"), objects to disbursement on the grounds that the funds are subject to a one-year reinvestment condition under Washington's homestead statute. The Trustee asserts that he should be permitted to retain possession of the funds up until the Debtors contract for a new residence, and that the Trustee should only be required to disburse the funds upon closing. I continued hearing on the Motion to Disburse to allow the parties to brief whether the one-year reinvestment condition applies to homestead proceeds from a bankruptcy sale. Having considered the pleadings and arguments of counsel, and otherwise being fully advised, I grant the Motion to Disburse.
BACKGROUND
The Debtors filed a Chapter 13 petition on October 18, 2016. On their Schedule C, the Debtors claimed a Washington state law exemption of $125,000 in real property located at 19610 207th Ave SE, Snohomish, Washington ("Homestead Property"). After confirmation of their Chapter 13 plan, the Debtors moved out of the Homestead Property. The case was subsequently converted to Chapter 7 on June 15, 2017, following a change in the Debtors' financial circumstances. The Trustee moved to sell the Homestead Property, indicating that he believed the Debtors were not entitled *575to their previously claimed exemption. The Debtors objected to the sale motion on grounds that the Trustee did not intend to pay the claimed exemption.
While the sale motion was pending, the Trustee filed an objection to the Debtors' homestead exemption, asserting among other arguments that the Debtors' lost their right to the exemption by abandoning the Homestead Property post-petition. The Debtors eventually agreed to sale of the Homestead Property provided that the Trustee hold the proceeds subject to further court order, including a decision regarding the objection to the Debtors' homestead exemption. I approved the sale motion and took the exemption objection under advisement. I subsequently overruled the Trustee's objection, and the Trustee appealed.1 While the appeal was pending, the Debtors filed the Motion to Disburse, seeking distribution of the homestead exemption in the amount of $64,549.95.2 I construed the Trustee's response to the Motion to Disburse in part as a motion for stay pending appeal and in part as a substantive objection to disbursement based on the requirements of RCW 6.13.070(1). I subsequently granted stay pending appeal and took the substantive objection under further advisement.
ANALYSIS
Under 11 U.S.C. § 522(b)(2)3 , each state may "opt out" of the federal exemption scheme and limit its residents to the state-created exemptions. Washington has not "opted out," and therefore a debtor in Washington may choose either the exemptions afforded under state law or the federal exemptions under § 522(d). The Debtors have selected the Washington exemption scheme and have claimed a homestead exemption under RCW 6.13 et seq .
The Trustee contends that, under RCW 6.13.070(1), bankruptcy sales are voluntary and that the proceeds remain exempt only if reinvested within twelve months of receipt. The Trustee alternatively contends that if bankruptcy sales are construed to be forced sales under RCW 6.13.070(1), the Debtors are not entitled to an exemption in the sale proceeds.
I. Washington's "Sunset Provision" Only Applies to Voluntary Sales.
In Washington, homestead and exemption statutes are favored in law and should be liberally construed. Lien v. Hoffman , 49 Wash.2d 642, 649, 306 P.2d 240 (1957). Like some other states within the Ninth Circuit, Washington's homestead statute contains a reinvestment requirement for proceeds of certain sales of homestead property. Such restrictions are commonly referred to as "sunset provisions." See e.g. , In re Combs , 166 B.R. 417, 420 (Bankr. N.D. Cal. 1994). Based on a plain reading of the statute, the "sunset provision" only applies to voluntary sales. RCW 6.13.070(1) provides:
(1) Except as provided in RCW 6.13.080, the homestead is exempt from attachment and from execution or forced sale for the debts of the owner up to the amount specified in RCW 6.13.030. The proceeds of the voluntary sale of the homestead in good faith for the purpose *576of acquiring a new homestead, and proceeds from insurance covering destruction of homestead property held for use in restoring or replacing the homestead property, up to the amount specified in RCW 6.13.030, shall likewise be exempt for one year from receipt, and also such new homestead acquired with such proceeds.
RCW 6.13.070(1) (emphases added).
The "sunset provision" is provided for in the second sentence of the above-paragraph, which concerns the proceeds of a voluntary sale. Forced sales are referenced in the first sentence of RCW 6.13.070(1), which provides that the homestead is exempt "from execution or forced sale" up to $125,000, with certain exceptions. Generally, a valid homestead exemption prevents an execution sale only when the owner's equity in the property is less than or equal to the homestead exemption amount. RCW 6.13.160. The statutory requirements for an execution sale of homestead property are addressed in RCW 6.13.100 -200. These provisions are often referred to as the "excess value" statutes. See e.g. , Washington Credit, Inc. v. Houston , 33 Wash. App. 41, 42, 650 P.2d 1147 (1982).
Washington's statutory scheme also exempts the proceeds of a forced sale. RCW 6.13.170 provides:
Application of proceeds. If the [excess value] sale is made, the proceeds must be applied in the following order: First, to the amount of the homestead exemption, to be paid to the judgment debtor; second, up to the amount of the execution, to be applied to the satisfaction of the execution; third, the balance to be paid to the judgment debtor.
RCW 6.13.170 ; see also Wilson Sporting Goods Co. v. Pedersen , 76 Wash. App. 300, 306, 886 P.2d 203 (1994) ("Following [Washington's] policy of protecting homesteads, the Legislature has required that a determination be made that there is indeed excess value [beyond the homestead exemption] before the lien is actually executed."); Washington Credit, Inc. , 33 Wash. App. at 42, 650 P.2d 1147 ("The 'excess value' statutes allow a creditor to reach only the value of the property in excess of the... homestead exemption.").
There does not appear to be state law authority supporting the proposition that the one-year reinvestment restriction applies to forced sales. To the contrary, the scant caselaw discussing the one-year restriction appears to limit its application to voluntary sales. In the seminal case, Becher v. Shaw , 44 Wash. 166, 87 P. 71 (1906), the Washington Supreme Court held that the proceeds of a voluntary sale by a judgment debtor were exempt for a reasonable time where the judgment debtor sold his residence with the intent to acquire a new homestead. Id. at 169, 87 P. 71. This 1906 decision became the foundation for Washington's "sunset provision." See Lien , 49 Wash.2d at 648, 306 P.2d 240. Notably, when analyzing the substantially similar provisions of Washington's prior homestead statute, the Becher court distinguished the treatment of proceeds in an execution sale from the proceeds of a voluntary sale. See Becher , 44 Wash. at 169, 87 P. 71 ("We are inclined to agree with the appellant that section 5233... has no application to the proceeds of a voluntary sale...").4 Then addressing the proceeds *577of a voluntary sale, the Becher court established the temporal restriction which eventually became codified in RCW 6.13.070(1). See Lien , 49 Wash.2d at 648, 306 P.2d 240 ("[T]he present statute specifically exempts, for a period of one year, the proceeds of the voluntary sale of the homestead in good faith for the purpose of acquiring a new homestead. Thus, the holding of the Becher case is now statutory.") (internal quotations omitted); see also Washington Real Property Deskbook, 4th ed. (2009), § 10.3(3) ("No time limit exists on the protection given to the proceeds that are returned to the judgment debtor after such an involuntary sale. This contrasts with the protection for reinvestment in a replacement homestead given to the proceeds of a voluntary sale.").
Given Washington's established policy of construing its homestead statute liberally in favor of the debtor, I will not interpret Washington's "forced sale" homestead law to include a "sunset provision" where one does not exist. I therefore conclude that the one-year reinvestment condition in RCW 6.13.070(1) does not apply to forced sales.
II. Bankruptcy Sales are "Forced Sales" for Purposes of RCW 6.13.070(1).
When applying state homestead laws, courts within the Ninth Circuit have frequently construed bankruptcy sales to be forced sales. See e.g. , Bencomo v. Avery (In re Bencomo) , 2016 WL 4203918, at *7, 2016 Bankr. LEXIS 2901, at *20-21 (9th Cir. BAP Aug. 8, 2016) ; In re Cole , 93 B.R. 707, 709 (9th Cir. BAP 1988) ; Elliott v. Weil (In re Elliott) , 523 B.R. 188, 195 (9th Cir. BAP 2014) ; Diaz v. Kosmala (In re Diaz) , 547 B.R. 329, 334 (9th Cir. BAP 2016).5
Washington's homestead statute does not define the term "voluntary sale" or "forced sale." The Washington Supreme Court, however, has explained the difference:
[A forced sale is] a transaction in which there is an element of compulsion on the part of either the seller of the buyer. If the element of compulsion is based upon purely economic reasons, the sale is generally considered voluntary... Where, however, a seller or buyer is forced to act under a decree, execution or something more than mere inability to maintain the property, the element of compulsion is based upon legal, not economic factors...
Felton v. Citizens Fed. Sav. & Loan Ass'n of Seattle , 101 Wash.2d 416, 422, 679 P.2d 928 (1984) (quoting State v. Lacey , 8 Wash. App. 542, 549, 507 P.2d 1206 (1973) ). In Felton , the Washington Supreme Court held that a nonjudicial foreclosure was a voluntary sale because the homeowner consented to legal process upon signing the deed of trust. Felton , 101 Wash.2d at 423, 679 P.2d 928.
The Trustee asserts that a bankruptcy sale is akin to the nonjudicial foreclosure in Felton and therefore the bankruptcy sale should be construed as voluntary for the purpose of applying the homestead statute. The Ninth Circuit Bankruptcy Appellate Panel addressed a similar argument in Jefferies v. Carlson (In re Jefferies) , 468 B.R. 373 (9th Cir. BAP 2012). In Jeffries , the court held that the transfer of homestead property pursuant to a dissolution decree was a "forced sale," even though the debtor had previously consented *578to the transfer. Id. at 379-80. The Jefferies court distinguished Felton on the basis that the dissolution decree created legal compulsion, an element not present in a nonjudicial trustee sale according to the Felton decision. Id. In reaching its conclusion, the Jefferies court determined that regardless of the debtor's prior consent, the dissolution decree was the operative document that "triggered the Debtor's obligation to transfer the Residence" and therefore constituted legal compulsion. Id. at 379.
Unlike nonjudicial foreclosures, bankruptcy sales require court involvement. See § 363(b); see also Simantob v. Claims Prosecutor, L.L.C. (In re Lahijani) , 325 B.R. 282, 289 (9th Cir. BAP 2005) (Bankruptcy courts are ultimately responsible for approving § 363 sales). Like the dissolution decree in Jefferies , the Trustee's sale of the Homestead Property was legally compelled. Even though the Debtors eventually acquiesced to the sale, the sale was compulsory as it was made pursuant to court order and was therefore a forced sale under the definition set forth in Felton . Furthermore, the bankruptcy trustee, as a representative of the bankruptcy estate, is vested with the rights and powers akin to a hypothetical judgment lien creditor. See Bencomo , 2016 WL 4203918, at *5-6, 2016 Bankr. LEXIS at *15-16 ; see also § 544(a)(1) and (2). Any sale initiated by the Trustee, therefore, is more analogous to an execution sale under Washington's "excess value" provisions and therefore should be construed as a forced sale.
The Trustee alternatively argues, citing Jefferies , that if a bankruptcy sale is a forced sale, then the Debtors are not entitled to a homestead exemption in sale proceeds under Washington law. The Trustee is correct that the Jefferies court upheld denial of a homestead exemption after concluding that the transfer of property was a forced sale under RCW 6.13.070(1). See Jefferies , 468 B.R. at 380. However, the court offered no legal support or analysis as to why the proceeds of a forced sale would be ineligible for an exemption, given the express terms of RCW 6.13.170. I acknowledge that Jefferies involved a different factual setting and did not address whether bankruptcy sales are forced sales under the Washington homestead statute. However, to the extent the decision in Jefferies stands for the proposition that the proceeds of a forced sale are not exempt under Washington law, I disagree. The "excess value" provisions in RCW 6.13.100 -200 specifically provide for distribution to the "judgment debtor" ahead of lien creditors.6 This statutory framework would be meaningless if homestead proceeds from a forced sale were not entitled to an exemption.
For these reasons, I conclude that a bankruptcy sale of homestead property is a forced sale within the meaning of RCW 6.13.070(1) and that the proceeds are exempt pursuant to RCW 6.13.160 -180.
CONCLUSION
In sum, I conclude that the one year reinvestment condition under RCW 6.13.070(1) does not apply to the proceeds of the Trustee's sale. The Debtors' Motion to Disburse is therefore GRANTED. However, because I have previously granted *579the Trustee's motion for stay pending appeal, the exempt proceeds will remain with the Trustee pending further court order.
The present decision does not affect any of the matters on appeal and is limited to the issue of whether homestead proceeds from a bankruptcy sale in Washington are subject to the one-year reinvestment condition under RCW 6.13.070(1).
The parties agree that $64,549.95 is the amount of proceeds remaining after payment of senior encumbrances and costs of sale.
Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C §§ 101 -1532.
Section 5233 refers to § 548 (5233), Rem. & Bal. Code, Wash., which provides "Application of Proceeds. If the [excess value execution] sale is made, the proceeds thereof, to the amount of the homestead exemption, must be paid to the claimant and the balance applied to the satisfaction of the execution." This provision appears to be the predecessor to RCW 6.13.170.
Unlike Washington's homestead statute, the "sunset provisions" in California, Arizona and Oregon are applicable to forced sales. See Cal. Code Civ. Proc. § 704.720(b) ; Ariz. Rev. Stat. § 33-1101(C) ; Or. Rev. Stat. 18.395(2).
RCW 6.13.180 provides "Money from sale protected. The money paid [from the forced sale] to the owner is entitled to the same protection against legal process and the voluntary disposition of the other spouse or other domestic partner which the law gives to the homestead." Although not directly addressing the reach of judgment creditors to sale proceeds, the provision is also consistent with the statute's overall protection of "forced sale" proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501525/ | Thomas B. McNamara, United States Bankruptcy Judge
This dispute proceeds at the somewhat confounding intersection of bankruptcy and limited liability company law. An individual debtor filed for bankruptcy protection under Chapter 11. He was the sole member of a limited liability company which, itself, filed for protection under Chapter 11. The individual debtor died. Thereafter, the Court converted his individual case to a liquidation under Chapter 7 and the United States Trustee appointed a Chapter 7 trustee. Meanwhile, because the individual debtor wholly owned the limited liability company, his membership interest in the limited liability company passed to the Chapter 7 bankruptcy estate in the individual case. In re Albright, 291 B.R. 538, 541 (Bankr. D. Colo. 2003). The Chapter 7 trustee, acting as owner, removed the limited liability company's manager and appointed himself as the manager. By virtue of his self-appointment, the Chapter 7 trustee continued as trustee in the Chapter 7 individual case while at the same time also acting as the manager of the Chapter 11 limited liability company.
The Chapter 7 trustee did not request or receive authorization from the Court to be employed as a manager of the Chapter 11 limited liability company under Section 327(a) of the Bankruptcy Code.1 Instead, he just started performing services. At first, the Chapter 7 trustee had no expectation of receiving any compensation in the Chapter 11 limited liability company case and instead appeared content that he would receive his statutory commission in the Chapter 7 individual case under Section 326(a). But over time, he worked more than he anticipated, leading him to hope that he would receive more than just a statutory commission in the Chapter 7 individual case. And, later, he formed a belief that he should be paid in both bankruptcy cases.
Thereafter, the Chapter 7 trustee, as manager of the Chapter 11 debtor, directed the filing of a plan of reorganization in the Chapter 11 limited liability company case, which included a compensation package for himself for his pre-confirmation services as well as for his proposed post-confirmation employment. The United *583States Trustee objected to the plan provisions concerning such proposed compensation for the Chapter 7 trustee. At that point, the Chapter 7 trustee put the plan process on the back-burner and instead sought compensation in the Chapter 11 limited liability company case as an administrative expense priority claim under Section 503(b)(1)(A). He did not ask for compensation under Sections 327 and 330 since he had never been approved as a "professional person" in the Chapter 11 limited liability company case and did not believe such approval was necessary. In any event, the Chapter 7 trustee worked hard and seemingly did a good job liquidating the assets of the Chapter 11 limited liability company even though the result was not sufficient to provide any direct monetary benefit to the estate in the Chapter 7 individual case in which he was appointed.
The United States Trustee objected to the Chapter 7 trustee's administrative expense priority claim on a myriad of grounds. At the most fundamental level, the United States Trustee contends that a Chapter 7 trustee may only be compensated through a commission under Section 326(a) in the Chapter 7 case in which he is appointed. Put another way, the United States Trustee contends that a Chapter 7 trustee cannot appoint himself to a new position in another bankruptcy case (especially without seeking to be employed as "professional person" under Section 327(a) in the other bankruptcy case) and enrich himself by receiving additional compensation in the second job. The United States Trustee argues that the Chapter 7 trustee's administrative expense priority claim violates the letter and spirit of the Bankruptcy Code.
All the foregoing leads to a series of tough questions: Is the Chapter 7 trustee a "professional person" under Section 327(a) in the Chapter 11 limited liability company case? If the Chapter 7 trustee is a "professional person," may he be compensated if he did not seek or obtain approval of his employment from the Court? May the Court approve an application for employment for a Chapter 7 trustee who wishes to employ himself as a manager in another bankruptcy case? May the Chapter 7 trustee pursue an administrative expense priority claim under Section 503(b)(1)(A) instead of seeking compensation under Sections 327(a) and 330 ? Is the Chapter 7 trustee's compensation limited by the commission available under Section 326(a) for disbursement in the case in which the Chapter 7 trustee was appointed? May the Chapter 7 trustee use an asset of the estate in which he serves as a fiduciary as a basis for additional personal compensation? These are important and practical questions that were not resolved in Albright, 291 B.R. at 541, the most influential case in this District concerning bankruptcy and limited liability company issues.
I. Jurisdiction and Venue.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Adjudication of the administrative expense priority claim is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning administration of the estate), (b)(2)(B) (allowance or disallowance of claims against the estate), and (b)(2)(O) (other proceedings affecting the liquidation of assets of the estate). Accordingly, the Court may enter final judgment on the matter. Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Procedural Background.
Peter H. Blair, Sr. ("Mr. Blair") filed for protection under Chapter 11 of the Bankruptcy Code on May 7, 2015, in the case captioned: In re Peter H. Blair , 15-15008 TBM (Bankr. D. Colo.) (the "Individual Case"). When he filed for bankruptcy, Mr. *584Blair wholly owned a limited liability company - Blair Oil Investments, LLC - and served as its Manager. Just after Mr. Blair filed the Individual Case, Blair Oil Investments, LLC (the "Debtor") also sought Chapter 11 relief in the case captioned: In re Blair Oil Investments, LLC , Case No. 15-15009 TBM (Bankr. D. Colo.) (the "Blair Oil Case"). (Ex. A; and Docket No. 1.2 ) Shortly after initiating both bankruptcy cases, Mr. Blair died. (Docket No. 106 in Individual Case.) Thereafter, the Court converted the Individual Case from a Chapter 11 reorganization to a Chapter 7 liquidation. (Docket No. 141 in Individual Case.) But, the Blair Oil Case remained in Chapter 11.
Enter Jeffrey A. Weinman ("Mr. Weinman"). On August 20, 2015, the United States Trustee (the "UST") appointed Mr. Weinman as the Chapter 7 Trustee in the Individual Case. (Docket No. 143 in the Individual Case.) Notably, Mr. Weinman is not a trustee in the Blair Oil Case. But, very shortly after being appointed by the UST as Chapter 7 Trustee in the Individual Case, Mr. Weinman took control of Mr. Blair's 100% membership interest in the Debtor. Furthermore, acting as the Chapter 7 Trustee in the Individual Case and as sole member of the Debtor, on August 27, 2015, Mr. Weinman removed Mr. Blair (who, after all, had died) and appointed himself as the Manager of the Debtor.3 (Ex. 5; Ex. C.) From that time on, he has controlled the Debtor in the Blair Oil Case.
Almost two years after he appointed himself to be the Debtor's Manager, Mr. Weinman initiated his first effort to be paid for his managerial services in the Blair Oil Case. He caused the Debtor to file a Plan of Reorganization and Disclosure Statement, which provided that "Mr. Weinman shall be entitled [to] receive compensation for his services to the Debtor, pre and post-confirmation. Such compensation shall be calculated in accordance with 11 U.S.C. § 326...". (Docket No. 198 at 16.) The Plan of Reorganization estimated that Mr. Weinman would receive $55,000 from the Debtor and also provided that "the Debtor will continue to employ Jeffrey Weinman as its Manager" after confirmation. (Id. ) The UST objected "based ... on legal concerns related to the compensation to be paid to Mr. Weinman." (Docket No. 215 at 2.) The UST argued that Mr. Weinman's proposed compensation rights violated the Bankruptcy Code. (Id. ) Then, the Debtor submitted an Amended Plan of Reorganization and Disclosure Statement again providing that Mr. Weinman be compensated for his work as the Manager of the Debtor in the approximate amount of $48,518. (Ex. 4 at 18.) The UST objected again. (Docket No. 227.)
Since then, the Debtor has not proceeded with the plan process. Instead, at Mr. Weinman's direction, the Debtor filed a "Motion for Allowance of Administrative Expense Claim Pursuant to 11 U.S.C. § 503(b)" (Docket No. 229, the "Motion"). In the Motion, the Debtor seeks allowance *585of an administrative expense priority claim for Mr. Weinman in the amount of approximately $48,418 (the "Administrative Expense Claim") based upon estimated distributions to creditors in the Blair Oil Case. The UST objected to the Debtor's Motion. (Docket No. 233, the "Objection").
The Court convened a non-evidentiary hearing on the Debtor's Motion and the UST's Objection. (Docket No. 244.) Consistent with the request of the parties, the Court determined that an evidentiary hearing was required. On February 5, 2018, this Court conducted an evidentiary hearing on the Motion and the Objection. In support of its Motion, the Debtor presented testimony from Mr. Weinman and Jeffrey Bush, an expert witness who owns a professional placement firm focusing on the oil and gas industry. The UST did not call any additional witnesses but also examined Mr. Weinman and Mr. Bush. The Court admitted into evidence Exhibits 1-10 offered by the UST and Exhibits A-D and F-J offered by the Debtor. After the presentation of evidence, the UST and the Debtor made closing arguments. The Court took the matter under advisement. Since the trial, the Court has reviewed all the admitted exhibits and the transcript of the evidentiary hearing. (Docket No. 265, hereinafter "Tr. __".) The Motion and Objection are ripe for decision.
III. Factual Findings.
A. The Debtor and Its Business.
The Debtor is a limited liability company that invested in and owned royalty and working interests in oil and gas wells throughout the United States (primarily in Colorado and Texas). (Ex. 4 at 4.) Compared to other companies in the energy sector, its operations, assets, and liabilities were modest. For example, in 2014, the Debtor earned gross operating income of just $548,925. (Ex. 1 at 1; Ex. 2 at 1.) And, in the first four months of 2015 (just before the Debtor filed for bankruptcy), the Debtor realized gross operating income of only $66,246. (Id. ) In terms of assets, before its bankruptcy, the Debtor had 147 interests in oil and gas wells with a total book value of $1,315,050. (Ex. 1 at 10; Ex. 4 at 4). The Debtor also owned a residential condominium that it valued at $225,000 and miscellaneous equipment and inventory worth about $790,122 on a book-value basis. (Ex. 1 at 8 and 10-11.) As of the bankruptcy filing, the Debtor scheduled its liabilities, all unsecured, in the total amount of $1,102,202. (Id. at 7 and 20.) The largest creditor was the Audrey R. Blair Revocable Trust (the "ARB Trust"). Its $1,045,774 claim4 (based on promissory notes) dwarfed the aggregate of $56,428 owed to the rest of the Debtor's 17 other trade creditors. (Id. at 15-20.)
Mr. Blair, the patriarch of an exceptionally wealthy family, wholly owned the Debtor and served as its sole Manager. Notwithstanding his position as sole Manager, for many years, Mr. Blair shared the day-to-day operating responsibilities of the Debtor with one of his sons: Peter H. Blair, Jr. ("Hy Blair"). But they had a falling-out because of Mr. Blair's marrying a new wife, Suella Crowley Blair, many years after the death of his first wife, Audrey R. Blair. Sometime after Mr. Blair's second marriage, he removed Hy Blair and appointed Todd A. Searles ("Todd Searles") - Suella Crowley Blair's son - in his son's place. Since Mr. Blair was quite elderly by that time, Todd Searles (acting through his corporate vehicle, Searles Enterprises, Inc. ("Searles Enterprises") )
*586assisted in most of the day-to-day operations of the Debtor before it filed for bankruptcy protection. Nevertheless, Mr. Blair remained as sole Manager.
B. Reasons for the Debtor's Bankruptcy Filing.
The Debtor filed for bankruptcy protection because of a family dispute. Following the death of Mr. Blair's first wife, Audrey R. Blair, Mr. Blair managed the ARB Trust for the benefit of the children of that marriage: Hy Blair; Christopher Blair; and Audrey Black (collectively the "Blair Children"). As previously noted, Mr. Blair became estranged from the Blair Children when he married his second wife, Suella Crowley Blair. He was removed as a trustee of the ARB Trust.
Thereafter, the ARB Trust and two other trusts (the GST-Exempt Marital Trust and the Non-Exempt Marital Trust), acting at the behest of the Blair Children, sued Mr. Blair for malfeasance in the case captioned: In the Matter of The Audrey R. Blair Revocable Trust, GST-Exempt Marital Trust and Non-Exempt Marital Trust , Case No. 12-PR-2227 (Probate Court, City and County of Denver, Colorado). On March 27, 2015, the State Probate Court entered a surcharge judgment against Mr. Blair for breach of fiduciary duty in the amount of $2,372,688. (Ex. 3 at 16.) Promptly thereafter, the State Probate Court entered an order freezing Mr. Blair's assets. Because of such order, assets of the Debtor also were frozen. With their assets frozen, both Mr. Blair and the Debtor filed for bankruptcy protection.
C. Mr. Weinman's Control of the Debtor.
During the early stages of the Debtor's bankruptcy proceedings, Todd Searles was the public face of the Debtor. But things changed when Mr. Blair died just a few months after the start of the Blair Oil Case. The Court converted the Individual Case from Chapter 11 to Chapter 7. Then, the UST appointed Mr. Weinman as the Chapter 7 Trustee in the Individual Case. Mr. Weinman promptly took control of Mr. Blair's 100% membership interest in the Debtor. Furthermore, acting as the Chapter 7 Trustee in the Individual Case and as sole member of the Debtor, Mr. Weinman appointed himself as the new Manager of the Debtor on August 27, 2015. (Ex. 5; Ex. C.) Mr. Weinman testified at trial about his role:
... I didn't view myself as a Chapter 11 trustee and I actually did not view myself and still don't view myself as a Chapter 7 trustee for the Blair Oil Case. I am not the trustee of the case. I am the manager by virtue of the fact that I had the authority to become the manager, but I'm not the Chapter 7 trustee [of the Debtor].
(Tr. 43:2-7.) The Court concurs with Mr. Weinman's understanding of his role.
After Mr. Weinman became the Debtor's Manager, he determined that he needed help. Both before and after the Debtor's bankruptcy filing, Todd Searles and Searles Enterprises had assisted in the day-to-day affairs of the Debtor. They charged a fee of about $18,000 per month for such services. Mr. Weinman decided that such a fee was unwarranted. So, he terminated Todd Searles and Searles Enterprises from all work for the Debtor. (Ex. 1 at 2; Tr. 23:8-15.)
Having caused such removal, Mr. Weinman hired McCartney Engineering, LLC ("McCartney Engineering"), an oil and gas engineering firm, to assist him "in the truly oil and gas aspects of the case." (Tr. 26:2-6; Ex. 6; Ex. D.) Mr. Weinman engaged McCartney Engineering to perform "Ongoing Management Consulting Services"
*587and "Oil and Gas Consulting Services" which included evaluation of the Debtor's oil and gas properties and "advice and assistance in liquidation of oil and gas assets owned by Blair Oil." (Ex. 6 at 1; Ex. D at 1.) The Debtor agreed to compensate McCartney Engineering on an hourly basis with the rate being dependent on whether it was performing bookkeeping and accounting services, compliance/legal work, or engineering services. (Id. at 1-2.) The Debtor did not seek to employ McCartney Engineering as a professional under Section 327. Since Mr. Weinman retained McCartney Engineering on behalf of the Debtor (about two and a half years ago), Mr. Weinman has continued to be the controlling Manager of the Debtor and McCartney Engineering has continued to provide supporting services.
D. Mr. Weinman's Background and Experience.
Mr. Weinman is a respected Colorado attorney who has practiced bankruptcy law for 42 years. In addition to a law degree, he has a graduate degree in finance with a focus on securities analysis and business finance. Mr. Weinman has served as a Chapter 7 trustee for over 29 years. During such time, he has administered tens of thousands of Chapter 7 consumer and business cases. Additionally, he has represented hundreds of Chapter 11 debtors in reorganization proceedings. Mr. Weinman has worked on cases involving many different industries, including in the oil and gas sector. Although he has served as a Chapter 11 trustee and a Chapter 11 examiner occasionally, Mr. Weinman has never previously appointed himself as a manager of a Chapter 11 limited liability company debtor by virtue of his role as a Chapter 7 trustee in another case - as happened in the Blair Oil Case.
E. Mr. Weinman's Decision to Liquidate the Debtor.
Shortly after Mr. Weinman assumed control of the Debtor, he determined that the Debtor should be liquidated rather than reorganized as an ongoing business. Mr. Weinman testified at trial:
... keeping the assets [of the Debtor] did not seem like a terribly good idea since ... the monthly outflow exceeded the inflow .... I haven't seen that sort of circumstance generate a confirmed Chapter 11 plan in any kind of case, but in particular ... these were [oil and gas] assets that were very fragile and subject to precipitous market drops and I wasn't prepared to hang around. Of course, as a fiduciary I didn't think I could do that, to wait for an upturn, so I didn't think a Chapter 11 plan made much sense under the circumstances and any reasonable Chapter 11 plan when you don't have a net operating cash flow, positive cash flow, is going to be a liquidation.
(Tr. 30:16-25 and 31:1-2; see also Tr. 89:8-25 (confirming that the Debtor's assets should be liquidated quickly).)
F. Mr. Weinman's Work as the Debtor's Manager .
True to Mr. Weinman's view that the Debtor's assets should be sold, the Blair Oil Case has so far been one long liquidation that is still in process. Unfortunately, Mr. Weinman did not keep contemporaneous time records to show the specific tasks that he performed as the Manager of the Debtor by date, description, and duration. (Tr. 61:20-24.) Instead, the Court is left only with Mr. Weinman's testimony about his work supplemented by the docket in the Blair Oil Case and the headings (but not the actual text) of one to two thousand e-mails sent by or received by Mr. Weinman relating to both the Blair Oil Case and the Individual Case. (Ex. J
*588(listing of e-mail headings).5 )
In a general sense, Mr. Weinman, viewed his "function as trying to steer the ship forward and to avoid as many icebergs as we could ... I was trying to preserve the assets and liquidate them as expeditiously as possible and with the best return possible." (Tr. 30:2-7.) Toward that end, Mr. Weinman: assessed the financial condition of the Debtor; evaluated income and expenses; hired professionals and other personnel (including attorneys, a real estate broker, an appraiser, and McCartney Engineering); continued oil and gas operations to the extent he deemed necessary until sale; considered asset valuations; marketed property; communicated with professionals and potential purchasers; attended meetings; developed a plan and disclosure statement; participated in Court hearings; and negotiated the sales of most of the Debtor's oil and gas, real estate, and personal property assets. Under Mr. Weinman's management, the Debtor filed eight motions to sell property, all of which the Court granted. (Docket Nos. 86, 91, 118, 129, 133, 137, 148, 171, 176, 235, 242, 257, 264, 270, 275.) Although Mr. Weinman is unable to specify the exact amount of time spent on work for the Debtor, his best estimate is about 400 hours. (Tr. 43:1-4.) The Court finds that Mr. Weinman performed a substantial amount of work as the Debtor's Manager.
In terms of results, one measure of performance in a liquidation is to assess the change in a debtor's cash position. When the Debtor filed for bankruptcy protection, the Debtor had $9,955 in cash. Subsequently, the Debtor filed at least 31 Monthly Operating Reports. (Ex. H; Ex. 8-10.) The Monthly Operating Reports show that the Debtor generally suffered operating losses during the bankruptcy proceedings but realized income from sales of assets. (Id. ) In the five most significant sale transactions, the Debtor received $577,000. (Ex. I.) The evidence was unclear whether such amount constituted gross or net proceeds. But, in any event, by November 30, 2017, the Debtor had $487,384 in cash. (Ex. H; Ex. 10.) Thus, the Court finds that Mr. Weinman liquidated most of the Debtor's assets. But, the Debtor has not made any disbursements to creditors yet. Notably, it appears extremely unlikely that there will be sufficient cash to pay the Debtor's creditors in full. Thus, no funds are likely to be disbursed from the Blair Oil Case to the Chapter 7 estate in the Individual Case in which Mr. Weinman was appointed.
G. Mr. Weinman's Expectations Regarding Compensation .
When Mr. Weinman appointed himself as the Manager of the Debtor, he did not have any expectation that he would receive additional compensation for that role. (Tr. 23:22-24; Tr. 88:12-16.) Consistent with such initial expectation, he never sought authorization from the Court to be employed as a "professional person" under Section 327(a). However, Mr. Weinman's views evolved as he spent significant time managing the Debtor. He testified that, after the passage of a few months, he "hoped that I would be [compensated] and I didn't necessarily think that I would be denied compensation." (Tr. 45:10-11.) Later, given the "relatively gargantuan amount of time [Mr. Weinman spent on the Blair Oil Case]," he began thinking that "it was not inappropriate to seek compensation for [his] services." (Tr. 24:7-11.) And, then, Mr. Weinman formed "a true *589expectation that [he] would be compensated for [his] time." (Tr. 63:8-9.) He felt that "it's [not] expected that a Chapter 7 trustee devote his time as a non-trustee without compensation." (Tr. 45:18-19.)
Irrespective of Mr. Weinman's thoughts and expectations about compensation for his work as the Debtor's Manager, the evidence is clear that the Debtor never promised to pay Mr. Weinman for being the Manager of the Debtor. (Tr. 62:2-5.) There was no written or oral agreement. (Tr. 62:2-5; 69:9-17.) And, to make such a contract (which never happened) would have placed Mr. Weinman in the strange position of trying to reach an agreement with himself. The Debtor never requested Court approval of any agreement with Mr. Weinman.
In any event, after Mr. Weinman formed his expectation that he should receive some compensation, he took his concerns to counsel for Hy Blair and to the Blair Children since the ARB Trust held the largest claim in the Blair Oil Case. Mr. Weinman discussed the option of being compensated for his time using his standard hourly rate of $495 which he charges in his work as a bankruptcy attorney. Alternatively, at the suggestion of counsel for Hy Blair, they discussed using the method for calculating a Chapter 7 trustee's commission under in Section 326. Because the hourly lodestar approach would have exhausted most of the Debtor's cash, Mr. Weinman opted to pursue more modest compensation based on the Section 326 commission method for disbursements in the Blair Oil Case.
H. Mr. Weinman's Administrative Expense Claim .
Through the Motion, Mr. Weinman is seeking administrative expense compensation in the amount of $48,418 based on "estimated distributions" to creditors as of May 31, 2017. Notably, no disbursements have been made yet by Mr. Weinman to creditors in Blair Oil Case. But, Mr. Weinman estimates that he will make disbursements to creditors in the amount of $903,3516 and, if such disbursements are made and the Section 326 commission formula is applied, the result would be a $48,418 commission. At trial, no evidence was presented to support the $903,351 projection. Instead, as of the last Monthly Operating Report, the Debtor reported just $487,384 in cash. (Ex. H; Ex. 10.)
At trial, Mr. Weinman relied primarily on his own testimony to establish alleged benefit to the Debtor's estate. As set forth above, Mr. Weinman clearly performed substantial services for the Debtor as its Manager. Because of his efforts, the Debtor sold assets and received at least $577,000. (Ex. I.) By November 30, 2017, the Debtor had $487,384 in cash compared to just $9,955 at the beginning of the Blair Oil Case. (Ex. H; Ex. 10.) So, the Court finds that the services performed by Mr. Weinman (i.e. , primarily liquidating assets) benefited the Debtor's estate.
More generally, Mr. Weinman testified that "at a minimum the benefit that was conferred was the difference between what [he is] asking to be compensated and what a CEO would have been compensated. Basically [his] time and energy at a discount which benefits the creditors of both estates." (Tr. 71:14-21.) Mr. Weinman stated, correctly, that his proposed compensation is substantially less than the $18,000 monthly fee that had been charged to the Debtor by Todd Searles and Searles Enterprises. And, Jeffrey Bush, who testified as an expert on executive compensation at *590oil and gas companies, stated that the amount of compensation sought by Mr. Weinman was reasonable and similar to other oil and gas executives performing comparable services. (Tr. 83:8.) To further bolster his proposed compensation, Mr. Weinman asserted another benefit of his work. He stated that any amount paid to the ARB Trust in the Blair Oil Case would reduce the ARB Trust claim in the Individual Case, thus making more money potentially available for unsecured creditors in the Individual Case. Based on the evidence, the Court finds that the amount of compensation requested by Mr. Weinman generally is reasonable for the services that he provided.
IV. Conclusions of Law.
A. The Parties' Positions.
1. The Debtor's Position.
In the Motion, the Debtor requests that the Court allow Mr. Weinman the Administrative Expense Claim for "wages, salaries, and commissions" based upon Section 503(b)(1)(A) and utilizing the formula in Section 326(a) as applied to expected future disbursements in the Blair Oil Case. The Debtor acknowledges that it did not have any agreement with Mr. Weinman. However, after Mr. Weinman appointed himself as the Debtor's Manager, Mr. Weinman "provided his services to the Debtor in lieu of hiring a professional manager and incurring additional costs." (Mot. ¶ 10.) Furthermore, the Debtor allegedly understood that "at the conclusion of this bankruptcy case, it and Mr. Weinman would determine the amount, if any, of compensation to be paid to Mr. Weinman." (Id. ) After Mr. Weinman decided that he wished to pursue compensation from the Debtor, Mr. Weinman "negotiated a compensation package" with the Debtor's largest creditor.7 The Debtor asserts that Mr. Weinman was not a "professional" within the meaning of Section 327(a), so Court approval of Mr. Weinman's employment was not necessary. Instead, the Debtor proposes that Section 503(b)(1)(A) governs the dispute. The Debtor cites no case law in support of the contention that a Chapter 7 trustee may receive compensation as a manager of a Chapter 11 limited liability company or derive personal gain through control of an asset of a Chapter 7 estate.
2. The UST's Position.
The UST does not seriously contest that Mr. Weinman provided valuable services as the Debtor's Manager. However, at a basic level, the UST contends that since Mr. Weinman was appointed as the Chapter 7 Trustee in the Individual Case, he may only be compensated for disbursements in the Individual Case under Section 326(a). Put another way, Mr. Weinman may not use his position as the Chapter 7 Trustee to obtain additional compensation from an asset of the Individual Case estate (i.e. , the Debtor's membership interest in the Debtor). The UST presents three main sub-arguments to deny any additional personal compensation for Mr. Weinman. First, "the Motion is unclear as to why a formula under Section 326(a) is appropriate" since Mr. Weinman is not a Chapter 7 trustee in the Blair Oil Case. (Obj. at 1.) Second, in the Motion, the Debtor does not request payment of an actual and necessary cost of the Debtor's estate as required under Section 503(b)(1)(A). (Id. ) And, third, Mr. Weinman is a "professional" within the meaning of Section 327(a) such that he was required to seek Court approval to be *591retained; but since Mr. Weinman was not retained under Section 327(a) (and cannot be retained under Section 327(a) ), any compensation request must be denied. (Id. )
B. The Statutory Framework and Sequence of Analysis: Sections 503(b)(1)(A), 327(a), and 326(a).
The Debtor centers its position under the rubric of Section 503(b) which provides:
After notice and a hearing, there shall be allowed administrative expenses ... including - (1)(A) the actual, necessary costs and expenses of preserving the estate including - (i) wages, salaries, and commissions for services rendered after the commencement of the case ....
The burden of proving entitlement to an administrative expense priority claim falls on the movant - the Debtor in the Blair Oil Case - and such priority must be "narrowly construed." Isaac v. Temex Energy, Inc. (In re Amarex, Inc.) , 853 F.2d 1526, 1530 (10th Cir. 1988). Binding precedent from the United States Court of Appeals for the Tenth Circuit establishes that administrative expense priority claims must satisfy two main elements: "(1) the claim resulted from a post-petition transaction; and (2) the claimant supplied consideration that was beneficial to the debtor-in-possession (or trustee) in the operation of the company's business." Peters v. Pikes Peak Musicians Assoc. , 462 F.3d 1265, 1268 (10th Cir. 2006) (citing Amarex , 853 F.2d at 1530 ); see also In re Commercial Fin. Serv., Inc. , 246 F.3d 1291, 1293 (10th Cir. 2001) (same); Gen. Am. Transp. Corp. v. Martin (In re Mid Region Petroleum, Inc.) , 1 F.3d 1130, 1133 (10th Cir. 1993) (same). With respect to the "post-petition transaction" element in the context of employment, this element requires "affirmative action from the debtor-in-possession to either (1) accept the prior agreement between the debtor and claimant, or (2) agree to a new contract." Pikes Peak Musicians , 462 F.3d at 1271 ; see also Commercial Fin., 246 F.3d at 1294 (administrative expense claim not allowed since claimants continued to do work but had not been induced to do so by debtor).
Although the Debtor relies on Section 503(b)(1)(A), the Debtor also claims that Mr. Weinman is "not a 'professional' within the meaning of Section 327(a). Contrariwise, the UST contends that Mr. Weinman is a "professional." Section 327(a) is titled "Employment of professional persons" and states:
... the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
The person seeking to be employed has the burden of satisfying the statutory requirements. Interwest Bus. Equip., Inc. v. U.S. Tr. (In re Interwest Bus. Equip., Inc.) , 23 F.3d 311, 318 (10th Cir. 1994). Compliance with Section 327(a) is mandatory for all "professional persons." Indeed, bankruptcy courts are not authorized to approve compensation for "professional persons" who do not meet the requirements of Section 327(a), including court approval of employment. Mark J. Lazzo, P.A. v. Rose Hill Bank (In re Schupbach Inv., L.L.C.) , 808 F.3d 1215 (10th Cir. 2015). And "any professional not obtaining approval is simply considered a volunteer if it seeks payment from the estate." Schupbach , 808 F.3d at 1219 (quoting Interwest , 23 F.3d at 318 ).
*592Thus, in the context of the two main statutes presented by the Debtor and the UST, the sequence of the analysis is key. First, the Court must determine whether Mr. Weinman is a "professional person" within the meaning of Section 327(a). If Mr. Weinman is a "professional person," the Court must decide whether he has fully complied with Section 327(a). Furthermore, if Mr. Weinman is a "professional person," then he may not avoid the application of Section 327(a) merely by claiming an administrative expense priority under Section 503(b)(1)(A). To allow a "professional person" to skip Section 327(a) and still assert an administrative expense priority claim would "effectively write § 327(a) out of the Bankruptcy Code." Interwest , 23 F.3d at 318 (using the phrase "effectively write § 327(a) out of the Bankruptcy Code" but in the context of denial of an employment application for conflicts). Only if Mr. Weinman is not a "professional person" must the Court assess whether the Debtor has proved that the Administrative Expense Claim is an "actual, necessary cost[ ] and expense[ ] of preserving the estate" satisfying Section 503(b)(1)(A).
Finally, the UST also raised another statutory argument: "Mr. Weinman is entitled to compensation under § 326 in the Individual Case only." (Obj. ¶ 13.) Chapter 7 trustees have expansive duties within the bankruptcy system. 11 U.S.C. § 704. But, their compensation is very circumscribed by two statutes. 11 U.S.C. §§ 326 and 330. Section 330(a)(7) provides:
In determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based upon section 326.
In turn, Section 326(a) establishes a complex formula for calculating a Chapter 7 trustee's compensation. The statute states:
In a case under chapter 7 or 11, the court may allow reasonable compensation under section 330 of this title of the trustee for the trustee's services, payable after the trustee renders such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such monies in excess of $1,000,000, upon all moneys disbursed or turned over in the case by the trustee to parties in interest excluding the debtor, but including holders of secured claims.
11 U.S.C. § 326(a). Thus, the text of Section 326(a) allows compensation on a sliding scale of percentages based upon the distributions in the Chapter 7 case in which the Chapter 7 trustee was appointed.
C. The Section 327(a) Analysis.
1. Mr. Weinman Is a "Professional Person" Under Section 327(a).
The Bankruptcy Code does not expressly define the term "professional person." Instead, Section 327(a) lists several categories of persons8 who are "professional persons": attorneys; accountants; appraisers; and auctioneers. The four specific types of jobs listed have a least one commonality - all are instrumental in the bankruptcy process itself. But, the listing is not exclusive or complete because Section 327(a) also applies to "other professional persons."
*593The Court adopts the majority view that "other professional persons" are those "who play[ ] 'a central role in the administration' of the debtor's estate." In re Neidig Corp. , 117 B.R. 625, 628 (Bankr. D. Colo. 1990) (quoting Matter of Seatrain Lines, Inc. , 13 B.R. 980, 981 (Bankr. S.D.N.Y. 1981) ); see also In re The Dairy Dozen-Milnor, LLP , 441 B.R. 918, 922 (Bankr. D. N.D. 2010) (same); Elstead v. Nolden (In re That's Entertainment Mktg. Grp., Inc. ), 168 B.R. 226, 230 (N.D. Cal. 1994) (same); In re Century Inv. Fund VII L.P. , 96 B.R. 884, 893-94 (Bankr. E.D. Wis. 1989) (relying on "central role in administration standard"); Richard Levin and Henry Sommer, 3 COLLIER ON BANKRUPTCY ¶ 327.02[6][a] (Lexis/Nexis 16th ed. Supp. 2018) ("professional persons" are those "whose occupations play a fundamental or essential role in the administration of the debtor's estate"). Put slightly differently, the term "other professional persons cannot be considered other than in the context of the intimate relationship of the player to services peculiar to the administration of the reorganization process." Committee of Asbestos-Related Litigants and/or Creditors v. Johns-Manville Corp. (In re Johns-Manville Corp.) , 60 B.R. 612, 620 (Bankr. S.D.N.Y. 1986).
As in so many other areas of bankruptcy law, courts have identified various lists of "non-exclusive factors" that might be considered when making Section 327(a) decisions. For example, in In re First Merchants Acceptance Corp. , 1997 WL 873551 (D. Del. Dec. 15, 1997), the district court posited the following factors as bearing on whether a person is a "professional person" under the statute:
(1) whether the employee controls, manages, administers, invests, purchases or sells assets that are significant to the debtor's reorganization, (2) whether the employee is involved in negotiating the terms of a Plan of Reorganization, (3) whether the employment is directly related to the type of work carried out by the debtor or to the routine maintenance of the debtor's business operations; (4) whether the employee is given discretion or autonomy to exercise his or her own professional judgment in some part of the administration of the debtor's estate ...; (5) the extent of the employee's involvement in the administration of the debtor's estate ...; and (6) whether the employee's services involve some degree of special knowledge or skill, such that the employee can be considered a "professional" within the ordinary meaning of the term.
Id. at *3. The Court finds such factors are helpful is assessing whether someone is a "professional person" under Section 327(a).
As applied to Mr. Weinman in the Blair Oil Case, the Court determines that Mr. Weinman is a "professional person" within the meaning of Section 327(a). When the Court converted the Individual Case from Chapter 11 to Chapter 7, and because Mr. Blair wholly owned the Debtor, all of Mr. Blair's membership interest in the Debtor passed to the Chapter 7 bankruptcy estate in the Individual Case. Albright , 291 B.R. at 540. Upon his appointment as the Chapter 7 Trustee in the Individual Case, Mr. Weinman (acting as the sole member of the Debtor) was entitled to control all governance of the Debtor, including the power to elect and change the Manager. Id. at 541. And, on August 27, 2015, he exercised such rights and powers by removing Mr. Blair and appointing himself as the Debtor's Manager. But, simply appointing himself as the Manager of the Debtor did not entitle Mr. Weinman to receive compensation from the Debtor without consideration of Section 327(a).
In naming himself as the Debtor's Manager (an entity with which he had no prior *594relationship), Mr. Weinman put himself in the position of "a central role in the administration of the debtor's estate" - indeed, it was not only "a" central role, it was "the" central role. Mr. Weinman has special knowledge and skill by virtue of his education (a law degree and a graduate degree in finance) and his experience (an accomplished attorney and long-standing Chapter 7 trustee). He is a "professional" within the ordinary meaning of the word. After becoming the Manager of the Debtor, he controlled virtually every facet of the bankruptcy proceedings of the Debtor. He elected to operate the Debtor rather than sell the membership interest held by the Chapter 7 estate in the Individual Case. He chose not to convert the Blair Oil Case to a Chapter 7 liquidation. He decided that the Debtor's assets should be liquidated rather than reorganized in an operating company. Mr. Weinman selected and directed attorneys, appraisers, accountants, and other professionals for the Debtor. He negotiated all the Debtor's sales of assets. And, he decided to prepare and present a disclosure statement and plan of reorganization that he later amended. Mr. Weinman communicated with creditors, including the ARB Trust, and even negotiated his own compensation request with the ARB Trust. He became the only decision-maker for the Debtor and exercised complete autonomy over the Debtor (subject to Court approval of certain actions). He alone ultimately exercised professional judgment for the Debtor's estate. Thus, every one of the non-exclusive factors identified in the First Merchants case points strongly toward Mr. Weinman being considered a "professional person."
Neither the Debtor nor the UST has identified any case law concerning a Chapter 7 trustee who named himself as a manager of a bankrupt limited liability company. But, the most analogous decisions support characterization of Mr. Weinman as a "professional person" under Section 327(a). A Colorado case, Neidig , 117 B.R. 625, is particularly persuasive. In Neidig , a Chapter 11 trustee employed a company to manage and operate the debtor's only asset: a radio station. The Chapter 11 trustee entered into a contract with the company for such management services but the arrangement was not presented to the bankruptcy court and creditors for approval under Section 327(a). The company "acted with relatively unfettered discretion and autonomy" "conducted the day-to-day affairs of the business," and "was effectively responsible for administration of the station." Id. at 629. Having failed to secure bankruptcy court authorization for employment under Section 327(a), the company (like the Debtor in the Blair Oil Case) filed an application for an administrative expense priority claim under Section 503(b)(1)(A) instead. The bankruptcy court denied the administrative expense priority claim because the claimant was a "professional person" who was subject to the requirements of Section 327(a) but had not been approved for employment by the bankruptcy court and likely was ineligible for employment by virtue of conflicts. Id. at 630-31. Furthermore, the Neidig court emphasized the importance of complying with Section 327(a) to protect the parties and the bankruptcy process. The Neidig decision recognized that denying compensation might seem like a harsh result. But, "protection of the integrity of the system is, unfortunately, sometimes at the expense of maximizing assets ...". Id. at 632. The Court concurs with the Neidig decision and reasoning.
Courts in other cases considering the employment of managers who exercised significant control over debtors also have determined that such managers are "professional persons" under Section 327(a). See *595In re Marion Carefree L.P. , 171 B.R. 584, 588 (Bankr. N.D. Ohio 1994) ("The nature of Manager's duties and the degree of autonomy which Manager enjoys in performing these duties compel the conclusion that Manager is an 'other professional person' within the meaning of Section 327(a)."). Accordingly, the Court determines that Mr. Weinman is a "professional person" within the meaning of Section 327(a).
2. Mr. Weinman May Not Receive Compensation Under Sections 327(a) and 330 Because He Did Not Request or Receive Court Approval to Be Employed.
Mr. Weinman never sought approval from the Court for his employment as a "professional person" under Section 327(a) and, since no application was filed, the Court did not approve his employment. The Court is empowered to approve compensation for those "professional persons" whose employment has been approved under Section 327(a). On the other hand, the Court has no authority to approve compensation for "professional persons" whose employment has not been approved. Instead, according to binding precedent, "any professional not obtaining approval is simply considered a volunteer if [he] seeks payment from the estate." Schupbach , 808 F.3d at 1219 (quoting Interwest , 23 F.3d at 318 ). The Debtor's counsel acknowledged as much when he conceded in closing argument:
... the law is clear that if he [Mr. Weinman] is a professional, he's required to seek approval under Section 327 and under the applicable law, you [the Court] can't authorize compensation prior to the date of the application... No question about it ... The law is very, very clear on that in this circuit [the Tenth Circuit Court of Appeals].
(Tr. 127:4-12.) Thus, the Court cannot approve compensation for Mr. Weinman in the circumstances of the Blair Oil Case because he was not approved as a "professional person" eligible to receive compensation.
3. Even If a Chapter 7 Trustee Submits an Application to Be Employed Under Section 327(a) in such Circumstances, Such Application Would Likely Not be Approved.
Given that Chapter 7 trustees frequently encounter limited liability company issues, the Court offers some additional analysis for cases, like this, in which a Chapter 7 estate wholly owns the membership interests in a limited liability company that itself is in Chapter 11 bankruptcy. As set forth in Albright , 291 B.R. at 540, a Chapter 7 debtor's membership interests in a Chapter 11 limited liability company pass to the Chapter 7 bankruptcy estate. At that point, a Chapter 7 trustee, acting as the sole member of a Chapter 11 limited liability company, may control all governance of a Chapter 11 limited liability company. Id. A Chapter 7 trustee may try to obtain value for a Chapter 7 estate by actions such as: (1) pursuing conversion of a Chapter 11 case to a liquidation under Chapter 7 ( 11 U.S.C. § 1112(a) ) following which a Chapter 7 trustee would be appointed for the limited liability company; (2) requesting appointment of a Chapter 11 trustee for a Chapter 11 limited liability company ( 11 U.S.C. § 1104 ); (3) leaving the pre-bankruptcy manager of a Chapter 11 limited liability company in place9 ; (4) changing the manager of a Chapter 11 *596limited liability company by appointing an independent and disinterested new manager; (5) changing the manager of a Chapter 11 limited liability company by a Chapter 7 trustee appointing herself to be the new manager; (6) consistent with Section 363(b), selling a Chapter 7 estate's membership interests in a Chapter 11 limited liability company; or (7) consistent with Section 554(a) abandoning a Chapter 7 estate's membership interest in a Chapter 11 limited liability company if it is burdensome to a Chapter 7 estate or of inconsequential value or benefit to a Chapter 7 estate. Of course, a Chapter 7 trustee's decision how to proceed with a Chapter 11 limited liability company must be guided by the Chapter 7 trustee's fiduciary responsibility to the Chapter 7 estate and informed by one of the Chapter 7 trustee's primarily duties: "[to] collect and reduce to money the property of the estate for which such trustee serves ...". 11 U.S.C. § 704(a)(1) ;10 see also U.S. Tr. v. Joseph (In re Joseph) , 208 B.R. 55, 60 (9th Cir. BAP 1997) (Chapter 7 trustee is an independent person whose "primary job is to marshall and sell assets, so that these can be distributed to the estate's creditors"). If there is nothing in it for the Chapter 7 estate, there may be no role for a Chapter 7 trustee. See, e.g., Jubber v. Bird (In re Bird) , 577 B.R. 365, 377 (10th Cir. BAP 2017) (quoting passages of Chapter 7 Trustee Handbook confirming that Chapter 7 trustee should not administer an asset if it will not generate sufficient funds for distribution to Chapter 7 creditors).
Based upon the Court's observations, Chapter 7 trustees in this District seem to prefer appointing themselves as new managers of Chapter 11 limited liability companies. And, there is no prohibition in the Bankruptcy Code that would block a Chapter 7 trustee from assuming such role if a Chapter 7 trustee determines that such appointment would benefit the Chapter 7 estate. See Interwest , 23 F.3d at 318 ("The Bankruptcy Code and Rules do not provide authority for the court to prohibit a professional from working for any client it chooses.") But, under Sections 326(a) and 330(a)(7), such Chapter 7 trustee's compensation generally may be based only on disbursements made in the Chapter 7 case. That is the normal course. If a Chapter 7 trustee wishes to obtain additional compensation from the Chapter 11 limited liability company, such Chapter 7 trustee, as a "professional person," would need to secure Court approval to be employed under Section 327(a) in the Chapter 11 limited liability company case.
In the Blair Oil Case, Mr. Weinman did not file an application for Court approval to be employed and receive additional compensation as the Debtor's Manager. So, unfortunately, he cannot be paid under Schupbach , 808 F.3d at 1219. However, the Court observes that even if a Section 327(a) application is filed by a Chapter 7 trustee in similar circumstances, such application may be very problematic.
A Chapter 7 trustee who controls the membership interests of a Chapter 11 limited liability company may not be "disinterested" vis-à-vis the Chapter 11 debtor, especially to the extent there are any debts between the two bankruptcy estates. See 11 U.S.C. § 327(a) (to be employed, the professional must not "hold or represent an interest adverse to the estate" and must be a "disinterested person[ ]"); 11 U.S.C. § 101(14) (defining "disinterested person" which means a person that is not "a creditor, an equity security holder, or an insider"). There may also be competing fiduciary duties. Further, attempting to use one's position as a Chapter 7 trustee to *597secure additional employment and compensation as a manager of a Chapter 11 limited liability company may create an appearance of impropriety and may also involve conflicts or potential conflicts of interest. See U.S. Tr. v. Bloom (In re Palm Coast, Matanza Shores L.P.) , 101 F.3d 253, 257-58 (2nd Cir. 1996) (" Section 327 must be interpreted to prohibit the trustee from hiring himself in any non-lawyer or non-accountant capacity.") Such action may harken back to historical concerns of skullduggery, corruption, and cronyism under the Bankruptcy Act.11 See Office of U.S. Tr. v. McQuaide (In re CNH, Inc.) , 304 B.R. 177, 181 (Bankr. M.D. Pa. 2004) (analyzing Section 327(a) and referring to historical bankruptcy skullduggery, corruption, and cronyism as animating reason for requiring court approval of professionals); In re Wolfson , 575 B.R. 522, 523 (Bankr. D. Colo. 2017) (referring to "appearance of impropriety" and "cronyism"). Parties in interest might wonder if a Chapter 7 trustee is "double-dipping" after being appointed by the UST and being entitled to a Section 326(a) commission in a Chapter 7 case and then using that role as a spring board for a new job as a limited liability company manager to receive additional compensation. Moreover, a Chapter 7 trustee's judgment may be clouded by efforts to pursue or protect his own personal gain. The issue is in some ways analogous to a Chapter 7 trustee attempting to hire the Chapter 7 trustee's own law firm - an unsavory and problematic practice permissible only in limited circumstances. Wolfson , 575 B.R. 522 (Chapter 7 trustee may hire own law firm only in special circumstances; such practice is discouraged). Thus, even if a Chapter 7 trustee presents a timely application to employ himself as a manager for a Chapter 11 limited liability company, the Court may be quite reticent to approve such application.
D. The Section 503(b)(1)(A) Analysis.
The Court has determined that Mr. Weinman is a "professional person" under Section 327(a) but he did not request or receive approval to be employed in the Blair Oil Case. As a result, he may not be compensated under Sections 327(a) and 330. Furthermore, since he is a "professional person," Mr. Weinman cannot avoid such adverse result by merely invoking Section 503(b)(1)(A) and requesting allowance of an administrative expense priority claim. As noted earlier, to allow a "professional person" to skip Section 327(a) and still assert an administrative expense priority claim would "effectively write § 327(a) out of the Bankruptcy Code." Interwest , 23 F.3d at 318 ; see also Neidig , 117 B.R. 625 (denying Section 503(b)(1)(A) administrative expense claim for "professional person" who had not been approved under Section 327(a) ). Thus, the Debtor cannot properly invoke Section 503(b)(1)(A) in the circumstances of the Blair Oil Case as a basis for an administrative expense priority claim for Mr. Weinman.
*598However, even if Mr. Weinman was not barred from pursuing an administrative expense priority claim under Section 503(b)(1)(A) by virtue of Section 327(a), the Debtor has failed to meet its burden to establish that the Administrative Expense Claim is an "actual, necessary cost[ ] and expense[ ] of preserving the estate." Administrative expense priority claims must satisfy two main elements: "(1) the claim resulted from a post-petition transaction; and (2) the claimant supplied consideration that was beneficial to the debtor-in-possession (or trustee) in the operation of the company's business." Pikes Peak Musicians , 462 F.3d at 1268 ; see also Commercial Fin. , 246 F.3d at 1293 ; Mid Region Petroleum , 1 F.3d at 1133 ; Amarex , 853 F.2d at 1530.
Although Mr. Weinman did supply consideration that was beneficial to the Debtor (including assistance in liquidating the Debtor's assets), the Debtor has not satisfied the "post-petition transaction" element under Section 503(b)(1)(A). In the Blair Oil Case, Mr. Weinman came to the scene post-petition and never had any agreement with the Debtor regarding wages, a salary, or a commission. After Mr. Weinman became the Chapter 7 Trustee in the Individual Case and appointed himself as the Debtor's Manager the Blair Oil Case, he had no initial expectation that he would receive any compensation from the Debtor. Then, as a few months passed, Mr. Weinman started to "hope[ ]" that he would be compensated. (Tr. 45:10-11.) And later still, he began to believe that he should receive additional compensation because "it's [not] expected that a Chapter 7 trustee devote his time as a non-trustee without compensation." (Tr. 45:18-19.)
The Court appreciates Mr. Weinman's hope that he would receive additional compensation from the Debtor. And, again, the Court finds that he provided benefit to the Debtor. But payment by the Debtor to Mr. Weinman is neither actually incurred nor necessary because the Debtor never induced Mr. Weinman to do anything. He elected to assume the role of the Manager without seeking to be employed as a "professional person" and thus acted as a volunteer. Schupbach, 808 F.3d at 1219. So, Mr. Weinman is not entitled to an administrative expense priority claim under Section 503(b)(1)(A). Pikes Peak Musicians , 462 F.3d at 1271 ; Commercial Fin., 246 F.3d at 1294 ; see also In re FPMC Austin Realty Partners, L.P. , 573 B.R. 679, 695-96 (Bankr. W.D. Tex. 2017) (because there was no "pre-existing agreement" and "there was no [new] agreement in place" prior to the work, administrative expense priority claim was denied).
E. The Section 326(a) Analysis.
Irrespective of Sections 327(a) and 503(b)(1)(A), the UST advances the overarching argument that Chapter 7 trustee compensation is limited by Section 326(a) only to disbursements made in the Chapter 7 case in which the Chapter 7 trustee is appointed. The Court agrees.
Chapter 7 trustees are an indispensable part of the bankruptcy system. Under the Bankruptcy Code, Chapter 7 trustees are required to "collect and reduce to money the property of the estate," "investigate the financial affairs of the debtor," "be accountable for all property received," perform a myriad of other critical functions, and close the bankruptcy estate "expeditiously." 11 U.S.C. § 704(a). It is hard work. For all this, Chapter 7 trustees often are poorly compensated. If the Chapter 7 liquidation process does not garner sufficient funds for distributions to creditors, Chapter 7 trustees receive only $6012 (or *599nothing if the bankruptcy filing fee is waived).13 If money is available for creditors, Sections 326(a) and 330(a)(7) together provide that compensation to Chapter 7 trustees is based upon a percentage of "all moneys disbursed or turned over in the case by the trustee to parties in interest." 11 U.S.C. § 326(a) (emphasis added); see also 11 U.S.C. 330(a)(7) ("In determining the amount of reasonable compensation awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.")
The percentage amounts listed in Section 326"are presumptively reasonable for Chapter 7 trustee awards." Caillouet v. JFK Capital Holdings, L.L.C. (In the Matter of JFK Capital Holdings, L.L.C.) , 880 F.3d 747, 753 (5th Cir. 2018). And, " Section 330(a)(7) therefore treats the commission as a fixed percentage, using Section 326 not only as the maximum but as a baseline presumption for reasonableness in each case." Id. at 755 ; see also In re Rowe , 750 F.3d 392, 396-97 (4th Cir. 2014) (" § 330(a)(3) is generally immaterial in determining the compensation for a Chapter 7 trustee"; "absent extraordinary circumstances, a Chapter 7 trustee's fee award must be calculated on a commission basis, as those percentages are set out in § 326(a)"); Mohns, Inc. v. Lanser , 522 B.R. 594, 601 (E.D. Wis. 2015), aff'd 796 F.3d 818 (7th Cir. 2015) ("Congress viewed a commission calculated under the formula in § 326 as the right amount of compensation in nearly every case").
As a result of the foregoing, Mr. Weinman, as a Chapter 7 trustee, is entitled to a statutory commission based upon a percentage of disbursements in the Individual Case in which he was appointed as the Chapter 7 Trustee.14 The statutory commission also is the maximum compensation that the Court is authorized to award to Mr. Weinman in the Chapter 7 Individual Case.
However, Mr. Weinman now is asking for additional compensation from the Debtor in the Blair Oil Case. As the Chapter 7 Trustee in the Blair Oil Case, Mr. Weinman's principal responsibility vis-à-vis the Chapter 7 estate's ownership of the membership interest in the Debtor was to "collect and reduce to money" such membership interests in the Debtor. For example, Mr. Weinman could have sold the membership interests in the Debtor under Section 363(b), after receiving Court approval in the Individual Case. If he had done so, he clearly would not be entitled to exceed the Section 326(a) statutory commission since part of the Chapter 7 Trustee's job is to liquidate assets. But rather than engage in such course (or other alternatives), Mr. Weinman appointed himself to manage the Debtor in an effort that ultimately will not directly benefit the Chapter 7 estate in the Individual Case. No surplus will be up-streamed to the Chapter 7 estate. While acknowledging that Mr. Weinman spent considerable time as the Debtor's Manager, to allow additional compensation in the Blair Oil Case would contravene the *600Section 326(a) maximum statutory compensation available to Chapter 7 trustees.
V. Conclusion.
For the reasons set forth above, the Court DENIES the Motion.
11 U.S.C. § 101 et seq. Unless otherwise indicated, all references to "Section" are to Sections of the Bankruptcy Code.
Unless otherwise indicated, this Court will use the convention "Docket No. ___" throughout this opinion to refer to the number of a particular document in the electronic CM/ECF docket for the Blair Oil Case.
The Debtor's Limited Liability Company Resolution evidencing the removal of Mr. Blair states that it was executed on September 22, 2015, but that the various actions (including appointment of Mr. Weinman as the Manager of the Debtor) "were duly adopted" on August 27, 2015. (Ex. 5; Ex. C.) The discrepancy between dates is confusing, but is not critical to adjudication of the current dispute. Thus, the Court assumes that Mr. Weinman became the Debtor's Manager as of August 27, 2015 notwithstanding that the corporate resolution was executed about a month later.
The Debtor scheduled the ARB Trust claim in the amount of $1,045,774. (Ex. 1 at 15.) However, the ARB Trust later filed a proof of claim (Claim No. 4-1) in a slightly higher amount: $1,062,720.
The e-mail listing presented in Exhibit J is extremely cursory and contains columns identifying only the name of a sender or recipient, a short message heading (such as "Blair & Blair Oil"), and a date for the many e-mail messages.
If this estimate is correct and the ARB Trust claim in the Blair Oil Case is not disallowed, then no surplus will be available for the estate in the Individual Case.
The ARB Trust has not objected to the Motion and allowance of the Administrative Expense Claim.
Section 101(41) states that "[t]he term person includes individual, partnership, and corporation, but does not include a governmental unit ...".
Leaving the Manager of the Debtor in place in the Blair Oil Case was impossible since Mr. Blair (who was the Manager) died.
The Chapter 7 trustee's other statutory duties are listed in Section 704(a).
The Court does not suggest that Mr. Weinman has engaged in any form of skullduggery, corruption, or cronyism in the Blair Oil Case. Quite to the contrary, Mr. Weinman is a very capable Chapter 7 trustee who has served in this jurisdiction for many years. The evidence at trial indicated that Mr. Weinman's main motivation in appointing himself as the Manager was to save money for the Debtor by removing Todd Searles and Searles Enterprises. And, Mr. Weinman thought he could do a good job in managing what effectively was a liquidation of the Debtor. But appearances matter. Sometimes, "[t]he protection of the integrity of the bankruptcy process is more important than the potential loss of assets for a particular estate." Colorado Nat'l Bank of Denver v. Ginco, Inc. (In re Ginco, Inc.) , 105 B.R. 620, 622 (D. Colo. 1988).
11 U.S.C. § 330(b)(1) ("There shall be paid from the filing fee in a case under chapter 7 of this title $45 to the trustee serving in such case, after such trustee's services are rendered."); 11 U.S.C. § 330(b)(2) (providing for payment of additional $15 to Chapter 7 trustees subject to approval of Judicial Conference of the United States).
28 U.S.C. § 1930(f) (allowing the Bankruptcy Court to waive bankruptcy filing fees under certain circumstances).
In the unlikely event that there is a surplus available in the Blair Oil Case and such surplus is up-streamed to the Chapter 7 estate in the Individual Case, then Mr. Weinman's statutory commission (which is based only on disbursements in the Individual Case) may also increase. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501673/ | *542Rebecca Rice, Esq., Cohen & Rice, Rutland, Vermont, For the Debtor
Jan M. Sensenich, Esq., Office of the Chapter 13 Trustee, Norwich, Vermont, As the Standing Trustee
Heather Z. Cooper, Esq., Facey Goss & McPhee, P.C., Rutland, Vermont, For Jennifer Soutar
MEMORANDUM OF DECISION
OVERRULING THE CREDITOR'S OBJECTION AND GRANTING DEBTOR'S MOTION TO CONTINUE THE AUTOMATIC STAY, WITH CONDITIONS
Colleen A. Brown, United States Bankruptcy Judge
Within one week of this Court entering a memorandum of decision and order determining the scope of the automatic stay applicable in a repeat filer's bankruptcy case, Robert Goodrich filed a motion to continue the automatic stay in this case (doc. # 40, the "Motion"), under § 362(c)(3)(B) of the Bankruptcy Code.1 Mr. Goodrich (the "Debtor") had filed this chapter 13 bankruptcy case on November 20, 2017, within one year of the date this Court dismissed his prior chapter 13 case. Since this is his second chapter 13 case pending within one year, he is subject to the restrictions set out in § 362(c)(3)(A), under which the automatic stay in this case would, absent the instant motion, terminate 30 days after the Debtor filed this case. The primary creditor in this case, *543Jennifer Soutar, filed an objection to the Motion (doc. # 42, the "Objection"). The Court held a hearing on August 17, 2018, and took the matter under advisement.
This is one of three motions a debtor has filed to extend the automatic stay, in this District, since the Court changed its position regarding the scope of stay termination in repeat filer cases, under § 362(c)(3)(A). See In re Goodrich, 587 B.R. 829 (Bankr. D. Vt. 2018). Unlike the other two occasions, where the facts and circumstances weighed decisively for or against the debtor,2 the Motion and proof in this case present a close call.
Based upon the record in this case, the arguments and testimony presented at the hearing on the Motion, and for the reasons set forth below, the Court overrules Ms. Soutar's Objection, grants the Debtor's Motion for an extension of the stay, and imposes conditions on the extension of the stay, as it applies to creditor Soutar.
I. JURISDICTION
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered on June 22, 2012. The Court declares the Debtor's Motion, seeking an extension of the automatic stay, constitutes a core proceeding for purposes of 28 U.S.C. § 157(b)(2)(A) and (G), over which this Court has constitutional authority to enter a final judgment.
II. LEGAL QUESTIONS PRESENTED
This Motion presents five legal issues under the repeat filing statute:
(1) Does § 362(c)(3)(A) apply in this case and trigger a possible termination of the automatic stay, as to all creditors, on the 30th day after the case was filed?
(2) Did the Debtor timely move to extend the stay, and timely present evidence at a hearing, as required by § 362(c)(3)(B) ?
(3) Does a presumption arise that the Debtor filed this case not in good faith, under § 362(c)(3)(C) ?
(4) If so, has the Debtor rebutted the "not filed in good faith presumption," by clear and convincing evidence, in satisfaction of § 362(c)(3)(C) ?
(5) If the Debtor has met that burden of proof and established he filed this case in good faith, what, if any, conditions on the extension of the stay are warranted, under § 362(c)(3)(B) ?
III. FACTUAL BACKGROUND
On August 25, 2000, Jennifer Soutar (the "Creditor") made a loan to the Debtor, secured by a mortgage on the Debtor's real property in Groton, Vermont. On the date he filed the instant bankruptcy case, the Debtor was in default on his payment obligations to the Creditor. See claim # 6-2. The Debtor filed three chapter 13 bankruptcy cases over the past three years and the Creditor has been an active participant in all three cases. The Debtor first filed a petition for relief under chapter 13 of the Bankruptcy Code in June of 2015 (case # 15-10287); the Court dismissed that case, on the Creditor's motion, on September 22, 2015. The Debtor filed his second chapter 13 bankruptcy petition on November 6, 2015 (case # 15-11033); the Court dismissed that case on August 25, 2017, after the Debtor failed to comply with the terms of a conditional order of dismissal, entered *544after the Creditor filed a motion to dismiss (case # 15-11033, doc. # 31). Following dismissal of the second case, the Creditor commenced a foreclosure action (doc. # 17).3 On November 23, 2017, approximately three months after the Court dismissed the Debtor's prior case, the Debtor filed the instant chapter 13 case (case # 17-10500).
On December 21, 2017, thirty-one days after the Debtor filed the instant bankruptcy case, the Creditor filed a motion requesting an order confirming the automatic stay had expired (doc. # 13). On January 5, 2018, the Debtor filed a response, acknowledging he had a chapter 13 case pending within the last year and that the automatic stay terminated by operation of law after 30 days, but only to the extent set forth in In re McFeeley, 362 B.R. 121 (Bankr. D. Vt. 2007), i.e. the stay terminated only as to acts against the Debtor or his property (doc. # 16). On January 11, 2018, the Creditor filed a reply, asking the Court to declare the automatic stay in this case does not apply to her claim, to change its interpretation of § 362(c)(3), and to adopt the rationale of In re Bender, 562 B.R. 578 (Bankr. E.D.N.Y. 2016) in construing that statute (doc # 18).
After the parties filed memoranda of law addressing whether there was cause for this Court to reconsider the position it took in McFeeley, and if so, the scope of the automatic stay in this case, the Court took the matter under advisement. On July 20, 2018, the Court entered a memorandum of decision and order, see doc. ## 35, 36, in which it (i) reconsidered the position it took in In re McFeeley; (ii) adopted what is generally referred to as the "minority approach" to interpreting the repeat filer provisions of § 362(c)(3) ; (iii) determined that under § 362(c)(3)(A), the stay terminates entirely, i.e., against both the debtor's property and property of the estate, and for all creditors, unless the debtor or other party in interest makes the requisite showing, pursuant to § 362(c)(3)(B), and the Court orders otherwise, within 30 days of the date the debtor filed the second case; and (iv) granted the Debtor 30 days, from the date of entry of that order, to file a motion to extend the stay and present his proof, to rebut the presumption this case was not filed in good faith, as described in § 362(c)(3). In re Goodrich, 587 B.R. 829, 849 (Bankr. D. Vt. 2018).
Thereafter, the Debtor timely filed the Motion, the Creditor timely filed her Objection, and the Court held an evidentiary hearing at which only the Debtor testified.4
*545IV. DISCUSSION
Congress added § 362(c)(3) (the "Controlling Statute") to the Bankruptcy Code, to limit the extent of the automatic stay in repeat filer cases, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8 § 302 ("BAPCA"). It reads as follows:
(c) ...
(3) if 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, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b) -
(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;
(B) on the motion of a party in interest for continuation of the automatic stay and upon notice and a hearing, the court may extend the stay in particular cases as to any or all creditors (subject to such conditions or limitations as the court may then impose ) after notice and a hearing completed before the expiration of the 30-day period only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed....
(C) for purposes of subparagraph (B), a 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) more than 1 previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was pending within the preceding 1-year period;
(II) a previous case under any of chapters 7, 11, and 13 in which the individual was a debtor was dismissed within such 1-year period, after the debtor failed to-
(aa) file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be a substantial excuse unless the dismissal was caused by the negligence of the debtor's attorney);
(bb) provide adequate protection as ordered by the court; or
(cc) perform the terms of a plan confirmed by the court; or
(III) there has not been a substantial change in the financial or personal affairs of the debtor since the dismissal of the next most previous case under chapter 7, 11, or 13 or any other reason to conclude that the later case will be concluded -
(aa) if a case under chapter 7, with a discharge; or
(bb) if a case under chapter 11 or 13, with a confirmed plan that will be fully performed; and
(ii) as to any creditor that commenced an action under subsection (d) in a previous case in which the individual was a debtor if, as of the date of dismissal of such case, that action was still pending or had been resolved by terminating, conditioning, *546or limiting the stay as to actions of such creditor; and
11 U.S.C. § 362(c)(3) (2018) (emphasis added).
Though awkwardly drafted, this statute imposes five new, distinct, and tiered inquiries in repeat filer cases. The first is whether the stay terminates on the 30th day after the most recent case was filed, under § 362(c)(3)(A). If so, the second inquiry is whether the debtor has satisfied the procedural requirements for an extension of the stay, under § 362(c)(3)(B). The third inquiry is whether the presumption arises that the debtor filed the instant case not in good faith, as described in subsection (3)(C). If so, the fourth inquiry is whether the debtor has rebutted the presumption, by clear and convincing evidence, as required by § 362(c)(3)(C). If the debtor rebuts the presumption, establishing the right to an extension of the stay, the fifth and final inquiry is whether there are grounds warranting the imposition of conditions or limitations on the extension of the (otherwise terminated) stay, pursuant to § 362(c)(3)(B).
The Court will consider the five legal issues identified above, which flow directly from these statutory inquiries, in the context of the facts and circumstances of this case.
1. Is this Case Subject to the § 362(c)(3) Stay Termination Provision?
The dismissal of an individual's bankruptcy case, other than dismissal under § 707(b), followed by that individual's filing of a new petition under chapter 7, 11, or 13, within a one-year period, opens the door to a termination of the automatic stay, in the later case, on the 30th day after the debtor filed that case. See § 362(c)(3)(A). That early stay termination provision is triggered whenever the earlier of the two cases was dismissed, regardless of why it was dismissed. See, e.g., In re Daniel, 404 B.R. 318, 326 (Bankr. N.D. Ill. 2009) (prior case dismissed for not making mortgage payments required by the plan); In re Charles, 334 B.R. 207, 213 (Bankr. S.D. Tex. 2005) (debtor voluntarily dismissed her prior case); In re Montoya, 333 B.R. 449, 452 (Bankr. D. Utah 2005) (prior case dismissed for failure to make plan payments).
The Debtor filed the instant bankruptcy case on November 23, 2017, approximately three months after the Court dismissed his prior case. Since this is the second bankruptcy case the Debtor has had pending within a one-year period, and the prior case was dismissed, the automatic stay was susceptible to termination on the 30th day after the Debtor filed this case, by operation of law, under § 362(c)(3)(A). The Debtor concedes the § 362(c)(3)(A) stay termination provision applies in this case. See doc. # 16.
The automatic stay in this case would have terminated 30 days after the Debtor filed this case, unless he timely and fully satisfied the requirements set out in the Controlling Statute to avoid that result, starting with the timely filing of a motion, and timely presentation of evidence, to demonstrate his right to an extension of the stay. See § 362(c)(3)(B).
2. Did the Debtor Timely Move to Extend the Stay, and Timely Present Evidence at a Hearing, As Required by § 362(c)(3)(B) ?
In its July 20, 2018 memorandum of decision and order, the Court reconsidered its prior interpretation of § 362(c)(3), as stated in In re McFeeley, 362 B.R. 121 (Bankr. D. Vt. 2007), and adopted what is generally referred to as the "minority approach" to the Controlling Statute. See In re Goodrich, 587 B.R. 829 (Bankr. D. Vt. 2018). Under this interpretation of this *547repeat filer statute, the automatic stay terminates entirely, against both a debtor's property and property of the estate, and as to all creditors, unless the debtor or other party in interest makes the requisite showing, pursuant to § 362(c)(3)(B), and a court orders otherwise, within 30 days of the date the debtor filed the second case. Id. at 849. To extend the stay, debtors must both file the motion and notice of hearing, and present their evidence at a hearing, within 30 days of the date they filed the later, i.e., current, case. See In re McFeeley, 362 B.R. at 123-24 ; Whitaker v. Baxter (In re Whitaker), 341 B.R. 336, 342 (Bankr. S.D. Ga. 2006) ; In re Ziolkowski, 338 B.R. 543, 545-46 (Bankr. D. Conn. 2006).
Because the Court altered its interpretation of the Controlling Statute, upon which the Debtor had reasonably relied in not seeking to extend the stay under § 362(c)(3)(B) during the first 30 days of this case, the Court granted the Debtor 30 days from the date of entry of its decision, to file a motion to extend the stay and present his proof demonstrating he had filed the current case in good faith as to the creditors to be stayed. In re Goodrich, 587 B.R. at 849. The Debtor timely filed the Motion on July 26, 2018 (doc. # 40), and the Court conducted the hearing on the Motion on August 17, 2018, within the designated 30-day period. Thus, the Debtor satisfied the procedural requirement for extending the stay.
3. Does the Presumption the Debtor's Current Case is "Filed Not in Good Faith" Apply?
In evaluating the merits of the Debtor's arguments, and the sufficiency of the Debtor's proof, the Court must first determine whether the statutorily imposed presumption that the Debtor filed the instant case "not in good faith" (the "Presumption") arises. See § 362(c)(3)(C).
Whether this case was presumptively not filed in good faith is crucial because it determines the burden the Debtor must meet to prevail on his motion to extend the stay. COLLIER ON BANKRUPTCY ¶ 362.06(3)(b). If the Presumption arises, the Debtor must rebut the Presumption with "clear and convincing evidence." See § 362(c)(3)(C) ; see also Fed. R. Evid. 301 ("In a civil case, unless a federal statute or these rules provide otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption."). If the Presumption does not arise, the Debtor "need only show that the current case was filed in good faith under the less demanding preponderance of the evidence standard." COLLIER ON BANKRUPTCY ¶ 362.06(3)(b); see also In re Pence, 469 B.R. 643, 646 (Bankr. W.D. Va. 2012) ; In re Thomas, 352 B.R. 751, 754 (Bankr. D.S.C. 2006).
The Presumption arises as to all creditors, under subparagraph (C)(i) of the Controlling Statute, if (I) the debtor had more than one previous case pending within the preceding one-year period; (II) the debtor's previous case was dismissed because the debtor failed to file or amend the petition or other required documents without substantial excuse, failed to provide adequate protection ordered by the court, or failed to perform the terms of a confirmed plan; or (III) there has not been a substantial change in the debtor's financial or personal affairs since dismissal of the last bankruptcy case. See § 362(c)(3)(C)(i).
The record in this case reveals the Debtor's prior case was dismissed because the Debtor failed to comply with the confirmed plan,5 as evidenced by his failure to fulfill the conditions set out in the conditional *548order of dismissal (doc. # 51). Specifically, the Court dismissed the Debtor's prior case because the Debtor failed to become and remain current on his real estate taxes post-petition, a requirement of his confirmed plan (case # 15-11033, doc. # 23, p. 3). Therefore, the Presumption imposed under § 362(c)(3)(C)(i)(II)(cc) arises in this case. See also In re Havner, 336 B.R. 98, 103 (Bankr. M.D.N.C. 2006) (finding the presumption arises as to all creditors as "the Debtor failed to comply with his confirmed plan").
The Creditor asserts the Presumption also arises in this case because there has not been a "substantial change in the financial or personal affairs of the debtor since the dismissal of [his] most previous case," under § 362(c)(3)(C)(i)(III) (doc. # 42, p. 5). However, the Court need not address that aspect of the Objection since the Court has already found the Presumption applies because the Debtor's prior case was dismissed for failure to perform the terms of a confirmed plan. See § 362(c)(3)(C)(II)(cc).
Since the Presumption applies, the Court will adjudicate the Debtor's Motion, starting with the rebuttable Presumption the Debtor filed this case "not in good faith," by clear and convincing evidence.
4. Did the Debtor Rebut the "Not Filed in Good Faith" Presumption By Clear and Convincing Evidence?
This prong of the inquiry has several facets: how one defines "good faith" for purposes of the Controlling Statute, how one measures good faith to determine whether the Debtor filed the case not in good faith, and how one establishes good faith by clear and convincing evidence.
"The Bankruptcy Code does not define 'good faith' for purposes of extending the automatic stay...[and] no perfect analytical carryover from another part of the Code exists regarding the good faith inquiry to be undertaken in section 362(c)(3)(B) cases." In re Carr, 344 B.R. 776, 780-81 (Bankr. N.D.W. Va. 2006) ; see also In re Baldassaro, 338 B.R. 178, 187 (Bankr. D.N.H. 2006). Like many other courts, this Court finds it most appropriate to apply a totality of circumstances analysis to determine whether a repeat filer filed their most recent bankruptcy case not in good faith. See § 362(c)(3)(B) ; see also In re Gibas, 543 B.R. 570, 596-97 (Bankr. E.D. Wis. 2016) ; In re Carr, 344 B.R. 776, 781 (Bankr. N.D.W. Va. 2006) ; In re Baldassaro, 338 B.R. 178, 188 (Bankr. D.N.H. 2006) ; In re Galanis, 334 B.R. 685, 693 (Bankr. D. Utah 2005). A totality of the circumstances analysis seems apt, since that is the same analysis this Court has applied in ruling on objections to confirmation and on motions to dismiss the case, i.e., other prayers for relief based on a debtor's alleged lack of good faith or actual bad faith. See, e.g., In re Hutchins, 400 B.R. 403, 412-13 (Bankr. D. Vt. 2009) (using totality of the circumstances analysis to determine whether the debtor filed his plan in good faith); In re Edwards, 2004 WL 316418, *10, 2004 Bankr. LEXIS 2699, *25 (Bankr. D. Vt. 2004) (finding § 1325(a)(3) "expressly requires a finding of good faith and that such a finding is based on the totality of the circumstances, determined on a case-by-case basis" in the context of plan confirmation); Suggitt v. French (In re French), 2003 WL 21288644, *4, 2003 Bankr. LEXIS 908, **16-17 (Bankr. D. Vt. 2003) (holding "[l]ike good faith, an assessment of bad faith is based on the totality of the circumstances" when assessing objections to confirmation and motions to dismiss a chapter 13 case). This mirrors the rationale of many bankruptcy courts, which borrow and adapt the multi-factor tests they employ in the good faith determination for confirmation of a chapter 13 case under § 1325(a), or in a motion *549to dismiss an individual's case for cause under §§ 1307(c), 1112(b)(1), or 707(a). See Laura B. Bartell, Stay Imposed - The Failed Policy of Section 362(c)(4), 89 AM. BANKR. L.J. 165, 177-81 (2015) (listing cases).
Of the various multi-factor tests for extending the stay, the most frequently employed is the seven-factor test that was established in In re Galanis, 334 B.R. 685, 692 (Bankr. D. Utah 2005). Some courts have varied slightly, or supplemented, this test based upon the facts of the case. See e.g., In re Hart, 2012 WL 6644703, *3 (Bankr. D. Idaho 2012) ; In re Thompson, 2010 WL 4928897, *2 (Bankr. D. Colo. 2010) ; In re Barrows, 2008 WL 2705519, 2008 Bankr. LEXIS 4600 (Bankr. N.D.N.Y. 2008) ; In re Marcello, 2008 WL 821542, **2-3 (Bankr. N.D.N.Y. 2008) ; In re Levens, 2007 WL 609844, *4 (Bankr. W.D. Mo. 2007) ; In re Carr, 344 B.R. 776, 781 (Bankr. N.D.W. Va. 2006).6
While the Galanis factors are useful, they do not constitute "a one size fits all" set of criteria, and the court must tailor use of the factors to the facts and circumstances of each case. As the Montoya court pointed out, the factors "are not necessarily weighted, nor are they exhaustive ... and different weight may be given to different factors in making a final conclusion based upon the totality of the circumstances [in each case]." In re Montoya, 333 B.R. 449, 458, 460 (Bankr. D. Utah 2005). This Court, to the extent it applies particular factors, will consider "how the factors operate together in order to determine the existence of good faith." In re Charles, 334 B.R. 207, 217-18 (Bankr. S.D. Tex. 2005). The great value of the multi-factor tests, notwithstanding the minor variations among them, is they "ultimately reduce to the handy 'totality of circumstances' rubric, by which the court looks at the whole picture and proceeds from there." In re Sarafoglou, 345 B.R. 19, 24 (Bankr. D. Mass. 2006). This Court concurs with the approach expressed in In re Ferguson, 376 B.R. 109 (Bankr. E.D. Pa. 2007), and does not "consider it necessary to evaluate each and every factor that has been considered by a court in a reported decision[,]" and instead "refer[s] to the checklists as a guide," considering "those factors that are most relevant to the circumstances of the particular case at hand." Id. at 125.
An assessment of the Debtor's good faith, or lack thereof, in his filing of the current case is holistic, and "not just an arithmetic exercise." In re Montoya, 333 B.R. at 460. The "bottom line remains whether the debtor is attempting to thwart his creditors or whether he is making an honest effort to repay them to the best of his ability." In re Baldassaro, 338 B.R. 178, 188 (Bankr. D.N.H. 2006). As one court astutely described it, to reach a finding of good faith, the Court needs to determine the current filing "does not violate the spirit of the Bankruptcy Code[,]" is not a "ploy to frustrate creditors[,]" and "represent[s] a sincere effort on the part of the debtor to advance the goals and purposes of Chapter 13." In re Taylor, 2007 WL 1234932, *2, 2007 Bankr. LEXIS 1505, *7 (Bankr. E.D. Va. 2007).
The Court will examine the circumstances underlying the Debtor's current *550bankruptcy case, including if and how they differ from the circumstances of his prior case, as well as the arguments and testimony the Debtor presented at the hearing on the Motion, and the content of the Objection, against the factors it finds most relevant to assess whether, under the totality of circumstances, the Debtor has met his burden of showing, by clear and convincing proof, that he filed this case in good faith. The six non-exclusive factors the Court finds most probative in this case are:
(i) whether the Debtor's present case has a reasonable probability of success;
(ii) why the Debtor's prior case was dismissed;
(iii) what motivated the Debtor to file the instant case;
(iv) how the Debtor's current filing affected creditors, and the nature and extent of prejudice to any creditor(s) the Debtor seeks to stay;
(v) whether the trustee or any creditor has objected to continuation of the stay; and
(vi) whether the Debtor has failed to comply with the obligations imposed by the Bankruptcy Code or is attempting to manipulate the bankruptcy system.7
The Controlling Statute explicitly requires the Debtor to rebut the "not in good faith" Presumption with clear and convincing evidence. In this case, whether the Debtor met that burden is a close call. To prove something by clear and convincing evidence is to meet a standard "somewhere below 'beyond a reasonable doubt' and somewhere above a preponderance." In re Baldassaro, 338 B.R. 178, 188 (Bankr. D.N.H. 2006). "The Supreme Court has defined 'clear and convincing' evidence as that which gives the finder of fact 'an abiding conviction that the truth of [the proponent's] factual contentions [is] highly probable.' " Astra Aktiebolag v. Andrx Pharms., 222 F.Supp.2d 423, 562 (S.D.N.Y. 2002) (citing Colorado v. New Mexico, 467 U.S. 310, 316, 104 S.Ct. 2433, 81 L.Ed.2d 247 (1984) ). "In order to prevail [on a § 362(c)(3)(B) motion] the movant, given the heightened standard of proof [with the existence of the presumption], must do more than merely tip the scales in his favor ... [he] must produce evidence sufficient to tilt the balance decidedly in his favor." In re Thomas, 352 B.R. 751, 754 (Bankr. D.S.C. 2006).
When the Presumption applies, as it does here, "it is as though evidence has already been provided, establishing that the case was not filed in good faith." In re Montoya, 333 B.R. 449, 457 (Bankr. D. Utah 2005). The magnitude of this evidentiary challenge cannot be understated. "If no further evidence is presented by the Debtor, the only evidence the Court has is the presumption." Id. ; see also In re Thomas, 352 B.R. at 754 ("The existence of a presumption means that if the movant comes forward with no evidence, the motion to extend must be denied."). To prevail, the Debtor must "present highly probable evidence of his good faith."
*551In re Taylor, 2007 WL 1234932, *2, 2007 Bankr. LEXIS 1505, *5 (Bankr. E.D. Va. 2007) ; see also In re Ferguson, 376 B.R. 109, 119 (Bankr. E.D. Pa. 2007) ("Clear and convincing evidence is evidence that produces in the mind of the trier of fact an abiding conviction that the truth of the factual contentions is highly probable.").
The Debtor presented the following evidence to rebut the Presumption and extend the stay: the petition and schedules he filed in this case, the current chapter 13 plan, and his testimony at the hearing held on August 17, 2018, which touched upon the circumstances surrounding the filing and dismissal of his last chapter 13 case and the filing of his current bankruptcy case. The Court will assess the import of the Debtor's evidence through the lens of each of the six pertinent factors, to determine if, taken together, the totality of circumstances show the Debtor's filing of this case "does not violate the spirit of the Bankruptcy Code[,]" is not a "ploy to frustrate creditors[,]" and "represent[s] a sincere effort on the part of the debtor to advance the goals and purposes of Chapter 13." In re Taylor, 2007 WL 1234932, *2, 2007 Bankr. LEXIS 1505, *7 (Bankr. E.D. Va. 2007).
(i) Does the Debtor's Current Case Have a Reasonable Probability of Success?
At least one court has identified the probability of success in the current case as the "most important[ ]" factor, and imposing upon the Debtor the obligation to show he has "sufficient income after expenses to fund [his] proposed plan." In re Carr, 344 B.R. 776, 781 (Bankr. N.D.W. Va. 2006). Additionally, the Debtor must demonstrate "an ability to make the [plan] payments," In re Sawyer, 2007 WL 4125411, *3 (Bankr. E.D. Va. 2007), and an ability to "properly fund and maintain a chapter 13 plan." In re Galanis, 334 B.R. 685, 698 (Bankr. D. Utah 2005). Each of these considerations is germane here.
The Debtor's schedules (doc. # 1) state he has a monthly net income of $2,996, sufficient to make the monthly payment of $2,863 required by his proposed chapter 13 plan (doc. # 4). This is a higher monthly income, and a higher monthly plan payment, than the Debtor had when he filed his prior chapter 13 case (case # 15-11033, doc. ## 1, 5, 16, 17). The Debtor testified at the hearing on the Motion that his income has increased since the dismissal of his previous bankruptcy case, he has sufficient income to make his plan payments in the instant case, is current on his plan payments at this time, and will be able meet the plan and tax payment obligations going forward (audio available at doc. # 43).
The Debtor's schedules also reflect a higher amount of tax liability than in his previous case. In his 2015 case, the Debtor scheduled debts of $7,549 to the Town of Barre and $3,000 to the Town of Groton (case # 15-11033, doc. # 1). In the current case, the Debtor lists a debt of $14,676 to the Town of Barre, a debt of $7,287 to the Town of Groton, as well as tax obligations of $3,805 to the State of Vermont and $3,602 to the Internal Revenue Service (doc. # 1). The increased tax liability is cause for concern, but they are included in the Debtor's plan, and the Debtor has both testified to and, through his performance in the current case, demonstrated an ability to make plan payments.8
*552Based on this record the first factor weighs in favor of the Debtor.
(ii) Why Was the Debtor's Prior Case Dismissed?
Second, the Court must measure the gravity of the misconduct underlying dismissal of the Debtor's prior case and weigh it against the impact of terminating the automatic stay, as to all creditors, in the current case. Courts that consider this factor focus on whether the debtor's prior case was "dismissed for the debtor's attempts to manipulate the system or some other bad conduct." In re Galanis, 334 B.R. 685, 696 (Bankr. D. Utah 2005). The burden is on the Debtor "to offer some reasonable assurance that whatever caused the dismissal of the prior case will not repeat in the current case." In re Carr, 344 B.R. 776, 781 (Bankr. N.D.W. Va. 2006). The Court dismissed the Debtor's 2015 chapter 13 case because the Debtor failed to comply with the general terms of his confirmed plan, and the specific terms of a conditional dismissal order, both of which required the Debtor to stay current on his post-petition property taxes to the Town of Groton (case # 15-11033, doc. ## 23, 51). The Court had entered the conditional dismissal order requiring the Debtor to pay certain property taxes by June 30, 2017 (doc. # 51), in response to the Creditor's motion to dismiss the case based on the Debtor's post-petition default on this obligation, and corresponding default under the confirmed plan (case # 15-11033, doc. # 31).
There is no dispute the Debtor failed to comply with the Court's order requiring payment of post-petition taxes by June 30, 2017. At the hearing on the Motion, the Debtor testified that, during the prior case, he entered into an agreement with the Town of Groton to pay the subject post-petition property taxes by July 31, 2017 (doc. # 43 at 3:48) and mistakenly understood his payment would be timely if he paid it before that deadline, rather than by the June 30th deadline the Court set in the conditional dismissal order. The Court found that testimony credible.9 The Debtor also testified he paid the subject property taxes, in full, the first week of July, i.e., within one week of the deadline set in the conditional dismissal order (doc. # 43 at 4:39). There is no evidence before the Court that controverts that statement. Finally, and importantly, the Debtor testified he now understands court orders control and he will be able to make all post-petition property tax payments, when due, during the pendency of the current case (doc. # 43). The Court thus finds the Debtor has offered "reasonable assurance" that the cause of dismissal in the prior case "will not repeat in the current case." See In re Carr, 344 B.R. at 781.
*553While the breach of a court order is always a serious violation, it is not always sufficiently severe to warrant both dismissal of one case and denial of a stay in a subsequent case. The Court found the Debtor's violation of the conditional dismissal order warranted dismissal of the prior case. The Debtor's obligation to pay a certain obligation by a certain date was unequivocal and there is no question he failed to satisfy that obligation. Whether that also warrants denial of the stay in this case is determined under a different set of criteria, i.e., those set out in the Controlling Statute.
The Court must weigh the actual delay or damage caused by the Debtor's failure to comply with this Court's orders against the consequences the Debtor would suffer if the Court denies an extension of the stay in this case. Other courts have addressed whether to terminate the stay under the Controlling Statute based on a debtor's failure to comply with a court order in a prior case. Those courts took into both the nature and extent of the debtor's breaches of duty. For example, in one case, the debtor failed to comply with both state and bankruptcy court orders to produce discovery, respond to deposition questions, produce documents, file a list of creditors, and pay court-ordered sanctions, and the bankruptcy court denied the debtor's motion to extend the stay. In re Young, 2007 WL 128280, *4, 2007 Bankr. LEXIS 229, **10-11 (Bankr. S.D. Tex. 2007). By contrast, in the Sarafoglou case, the bankruptcy court granted a stay extension to a debtor whose previous case the court had dismissed due to the debtor's "failure to comply with a court order regarding the delivery of various documents." In re Sarafoglou, 345 B.R. 19, 21 n. 3 (Bankr. D. Mass. 2006). Here, the Debtor missed the deadline to make the required tax payment by no more than a week. The Debtor's violation is more analogous to the debtor's conduct in Sarafoglou than the debtor's repeated and more aggressive violations of court orders present in the Young case.10
If the Court denies the Debtor's motion to continue the stay as to all creditors, the Debtor will, in effect, be denied relief under chapter 13. While the Court considers any violation of a court order to be serious, the Debtor's breach in this case was one of delay rather than abrogation and appears to have had no actual negative impact on any party. The consequences termination of the stay will have on the Debtor in this case strike this Court as manifestly disproportionate to the Debtor's dereliction in his prior case.
Hence, the second factor weighs in favor of the Debtor.
(iii) What Motivated the Debtor to File the Current Bankruptcy Case?
It is also critical for the Court to consider what evidence the Debtor has presented to illustrate why he filed the current case. As one court observed, "[t]his appears to be a somewhat subjective factor[,]" with a particular focus on "whether, from the Debtor's viewpoint, [he] is attempting to eliminate or to satisfy debt, or ... attempting to target a specific *554creditor." In re Montoya, 333 B.R. 449, 459 (Bankr. D. Utah 2005). Though subjective, the Debtor must come forward with evidence to explicate why he filed this case. Id. (finding the debtor's testimony showed a desire to repay creditors rather than to merely eliminate the debt); see also In re Havner, 336 B.R. 98, 103 (Bankr. M.D.N.C. 2006) (finding debtor's motive was to responsibly address his debts "based on the Debtor's testimony"); In re Baldassaro, 338 B.R. 178, 189 (Bankr. D.N.H. 2006) (observing, "[t]he Debtor testified that he filed the chapter 13 petition ... to prevent the loss of his home to foreclosure"); In re Galanis, 334 B.R. 685, 696 (Bankr. D. Utah 2005) (finding debtors' motive was to responsibly address their debts "[b]ased on the [debtors'] testimony.").
Here, the Debtor offered no evidence about his motivation for filing the current case through either testimony or affidavit. Moreover, while the Debtor's Motion describes his perspective on why his prior case was dismissed, and offers the conclusory statement that the current case "has been filed in good faith[,]" it includes no explanation at all for why he filed the current case (doc. # 40).
Since the Debtor offered no evidence with respect to this factor, the Presumption controls and the factor weighs against the Debtor.
(iv) How Did the Debtor's Current Filing Affect Creditors and What is the Nature and Extent of Prejudice to any Creditor(s) the Debtor Seeks to Stay?
The Court must also take into account how the Debtor's actions affected creditors generally, and the interests of particular and/or moving creditors, In re Galanis, 334 B.R. 685, 696 (Bankr. D. Utah 2005) and, in this case, this factor is as weighty as the Debtor's probability of success. Here, the Court pays particular attention to the Debtor's treatment of the objecting Creditor and the extent to which the Debtor's current filing jeopardizes the Creditor's rights and collateral interest. The Creditor filed a proof of claim asserting a claim for $37,119, secured by a mortgage on the Debtor's Groton property (claim # 6-2). The proof of claim states the collateral securing her $37,119 claim has a value of $200,000 (claim # 6-2; doc. # 1). The Debtor argues, and the Court finds, the Debtor's filing of this case does not put the Creditor's interest at risk, in light of this undisputed equity cushion. See In re Galanis, 334 B.R. at 697 ; In re Franzese, 2007 WL 2083650, *2-*3, 2007 Bankr. LEXIS 2490, *7 (Bankr. S.D. Fla. 2007) (finding creditor's objection "severely discount[ed]" where the creditor was "over secured and is proposed to be paid 100% under the Debtor's latest plan."). "Filing for bankruptcy relief will almost always prejudice one's creditors[,]" In re Galanis, 334 B.R. 685, 696 (Bankr. D. Utah 2005), so the fact of prejudice generally, from the filing of the case, is not, in and of itself, enough to demonstrate the Debtor filed this case not in good faith. This is especially so here, where the Creditor will be able to recover her costs and the full arrearage the Debtor owes, if the Debtor completes the plan in the current chapter 13 case.
The Creditor also argues the filing of this case "the day before [the Debtor's] answer to [the Creditor's] Foreclosure Complaint was due to be filed in the Vermont Superior Court ... indicates that [this case] was 'filed not in good faith.' " (doc. # 42, p. 2; doc. # 43). As the Debtor correctly contends, the fact that the Debtor's filing thwarted the Creditor's foreclosure action is not determinative of good faith for the purposes of his Motion, because debtors frequently (and not improperly) file for bankruptcy relief on the eve *555of foreclosure to prevent the loss of their home. See, e.g., In re Ford, 522 B.R. 829 (Bankr. D.S.C. 2014) (extending the automatic stay despite the "close proximity" of the current bankruptcy case filing to the scheduled foreclosure sale); In re Baldassaro, 338 B.R. 178, 189 (Bankr. D.N.H. 2006) (finding, although the debtor filed his case the day before a scheduled foreclosure sale, the timing of the filing actually weighed in the debtor's favor since it was further indication he filed the case to save his home). The existence of a nexus between a foreclosure proceeding and bankruptcy filing is not sufficient to demonstrate a debtor filed the current case in bad faith. Rather, courts must examine the totality of facts and circumstances to determine whether a given debtor "sincerely intend[s] to attempt to implement a financial rehabilitation plan" or instead filed the case "merely to 'stay and delay' an inevitable foreclosure." In re Ferguson, 376 B.R. 109, 124 n. 27 (Bankr. E.D. Pa. 2007) (citing In re Charles, 334 B.R. 207, 219 (Bankr. S.D. Tex. 2005) ).
Here, the timing of the Debtor's filing on the eve of a crucial deadline in the foreclosure proceeding is not determinative and the Debtor has established the Creditor's interest is more than adequately protected. Therefore, this factor thus weighs in favor of the Debtor.
(v) Has the Trustee or Any Creditor Objected to Continuation of the Automatic Stay?
One creditor filed an objection to the Debtor's Motion to extend the stay and the chapter 13 trustee has taken no position on the Motion. While the absence of an objection supports a finding of good faith, see In re Barrows, 2008 WL 2705519, *4, 2008 Bankr. LEXIS 4600, *11 (Bankr. N.D.N.Y. 2008), In re Carr, 344 B.R. 776, 782 (Bankr. N.D.W. Va. 2006), In re Galanis, 334 B.R. 685, 696 (Bankr. D. Utah 2005), In re Collins, 335 B.R. 646, 653 (Bankr. S.D. Tex. 2005), the fact that a creditor filed an objection does not, ipso facto, shift the balance against the Debtor. Rather, the Court must scrutinize whether and how each objection impacts the viability of the Presumption, in the context of the facts and circumstances of the case. See In re Franzese, 2007 WL 2083650, *2-*3, 2007 Bankr. LEXIS 2490, *7 (Bankr. S.D. Fla. 2007).
In this case, the Creditor filed a well-researched, articulate, thorough, and pointed objection - notwithstanding the short window of time she had to do so. It is clear the Debtor's three bankruptcy filings have impeded the Creditor's efforts to enforce her rights under the subject note and mortgage, and the Creditor has, consequently, spent a great deal of time and incurred substantial attorney's fees in her litigation against the Debtor in the foreclosure and bankruptcy proceedings. The Creditor alleges the Debtor's past performance compels the conclusion the Debtor did not take seriously the obligations imposed on him by either the note and mortgage, or the confirmation and conditional dismissal orders entered in his chapter 13 cases. The Debtor did not introduce any evidence that contradicted these allegations. The Court gives considerable weight to both the Creditor's arguments in assessing whether the Debtor has rebutted the Presumption and the Debtor's failure to refute those arguments.
While not identical, the facts of the instant case are quite similar to the facts presented in the Baldassaro case. There, the court had entered a conditional relief from stay order in favor of the mortgagee in the debtor's first case, the court dismissed that case based on the debtor's failure to comply with the conditional order, the debtor filed a second case on the eve of a foreclosure sale, the debtor filed a *556motion to extend the stay, the mortgagee was the only creditor to object to that motion, and the trustee took no position on the debtor's motion. In re Baldassaro, 338 B.R. 178, 189 (Bankr. D.N.H. 2006). In weighing the import of the creditor's objection on its analysis of whether the debtor had rebutted the Presumption, that court found it "significant" that the trustee did not object, but ultimately concluded the mortgagee's objection caused this factor to weigh against the Debtor. Id. at 191-192. Its rationale is persuasive.
This Court reaches the same conclusions as the Baldassaro court: It finds, in light of the weight of the Presumption, the strength of the Objection, and the Debtor's failure to refute - or even address - the allegations of the Creditor's objection, this factor weighs against the Debtor.
(vi) Has the Debtor Failed to Comply with the Obligations Imposed by the Bankruptcy Code or Attempted to Manipulate the Bankruptcy System?
The Debtor produced no evidence pertinent to this issue. Thus, the Presumption weighs heavily in the Court's assessment of this factor.
However, the Court may, and did, review the record, including the documents the Debtor filed in each of his chapter 13 cases, as well as the documents he filed in support of the Motion, to make an objective determination of whether the Debtor has attempted to manipulate the bankruptcy system. See In re Carr, 344 B.R. 776, 782 (Bankr. N.D.W. Va. 2006) ; In re Baldassaro, 338 B.R. at 188. Additionally, neither the Creditor nor trustee has asserted, and the Court's independent review of the record has not revealed, that the Debtor filed inaccurate or misleading documents in any of his bankruptcy cases. This is in contrast, for example to the Gibas case where the court found the debtors did not regard bankruptcy as "serious business[,]" as indicated by a pattern of late-filed, missing, concealed, and inconsistent information. In re Gibas, 543 B.R. 570, 583-84 (Bankr. E.D. Wis. 2016). While the Court's investigation-based conclusion is not inconsequential, it is not sufficient to rebut the Presumption.
After weighing these circumstances, the Court finds the Debtor's failure to produce affirmative evidence on point leaves the Presumption in place, and the objective evidence reveals there is no basis in the record to support a finding against the Debtor. Therefore, the Court characterizes this factor as neutral.
Considering the Totality of the Debtor's Evidence, Has the Debtor has Met His Burden of Proof?
Considering the totality of the circumstances, through the lenses of the six factors this Court has identified, the Court finds three of the factors weigh in favor of granting the Debtor's motion: probability of success in this case, the reason the prior case was dismissed, and the extent of prejudice to the Creditor. These are the most decisive factors in this case. If the Debtor had not filed a budget showing a reliable source of regular income and sufficient net monthly income to make his plan payment in this case, or if the prior case had been dismissed for more egregious misconduct by the Debtor, or if the evidence did not show the creditors to be stayed had a significant equity cushion, the proof would not be sufficient, under a clear and convincing standard, to demonstrate the Debtor had rebutted the Presumption.
On the record in this case, the Court finds the Debtor has produced sufficient evidence to tilt the balance in his favor. He has persuaded the Court it is more probable the Debtor filed this case in an honest effort to repay his creditors, to the best of his ability, than it is that he filed this case *557to thwart his creditors. See In re Baldassaro, 338 B.R. 178, 188 (Bankr. D.N.H. 2006). Thus, the Debtor has rebutted the Presumption he filed this case not in good faith, albeit by a narrow margin. Based upon a weighing of the totality of circumstances through these six factors, the Court finds the Debtor is entitled to an extension of the automatic stay as to all creditors.
The Court turns to the final inquiry: whether it should impose limitations or conditions on the extension of the stay.
5. Are Conditions on the Extension of the Automatic Stay Warranted?
Once the Debtor rebuts the Presumption imposed by § 362(c)(3)(C), the Court must turn to the question of whether any conditions or limitations should be attached to the extension of the automatic stay. See § 362(c)(3)(B) ; see also In re Baldassaro, 338 B.R. 178, 192 (Bankr. D.N.H. 2006).
The Court's determination of whether the Controlling Statute applies, whether the Presumption arises, and whether the Debtor has established (by the applicable burden of proof) that he filed his current case in good faith, are inquiries limited to the facts and circumstances underlying only the instant and immediately preceding bankruptcy cases. See, e.g., In re Galanis, 334 B.R. 685, 693 (Bankr. D. Utah 2005) (in assessing debtor's good faith under § 362(c)(3)(B), the court considered why "the debtor's prior case" was dismissed); In re Carr, 344 B.R. 776, 781 (Bankr. N.D.W. Va. 2006) (looking at why "the prior case" was dismissed, what has changed in the time between the dismissal "of the prior case" and the commencement of the current case, and the degree of prejudice suffered by creditors due to the lapse of time between the dismissal "of the prior case" and the filing of the current case).
The Controlling Statute does not require courts to employ that same scope of inquiry in the determination of whether to impose conditions or limitations on the extension of stay. Likewise, there is nothing in the relevant jurisprudence or pertinent legal scholarship that precludes courts from expanding the breadth of facts and circumstances they take into account, with respect to this final question, to include scrutiny of the debtor's conduct in all of the bankruptcy cases the debtor has filed or the history of litigation, if any, between the debtor and objecting creditor. It strikes this Court as appropriate, in this discretionary phase, to look at the full constellation of relevant considerations. This includes the facts and circumstances of all three of the chapter 13 cases the Debtor filed over the last three years; the extensive, adversarial history between the Debtor and Creditor; and the Creditor's well-founded concern that the Debtor may fail to complete his plan (for the third time) in the current bankruptcy case.
The Court acknowledges that the question of whether to impose conditions on an extension of the automatic stay is an equitable one that requires the Court to articulate the fundamental premises that establish the framework for its analysis and then reach a decision based on the most salient facts and circumstances the instant case presents. The two premises that undergird the Court's analysis are: First, the purpose of the Controlling Statute is to deter repeat filers who are acting in bad faith. See Reswick v. Reswick (In re Reswick), 446 B.R. 362, 372 (9th Cir. BAP 2011) (citing In re Curry, 362 B.R. 394, 402 (Bankr. N.D. Ill. 2007) ) (observing that Congress added § 362(c)(3) to the Bankruptcy Code under the specific title "Discouraging Bad Faith Repeat Filings."). Second, the purpose of the Bankruptcy *558Code is to give honest debtors a fresh start and treat creditors fairly. See Schwab v. Reilly, 560 U.S. 770, 791, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010) ; Stellwagen v. Clum, 245 U.S. 605, 617, 38 S.Ct. 215, 62 L.Ed. 507 (1918).
The Court identifies the most salient considerations in this inquiry to be the extensive history between these particular parties and the Debtor's performance in prior chapter 13 cases. The history between these parties shows a clear pattern: The Debtor defaults in his obligations under the note and mortgage with the Creditor, the Creditor commences a foreclosure action to enforce her rights, the Debtor responds to that action by filing a chapter 13 bankruptcy case to stop the foreclosure action, and the Creditor files for dismissal of the Debtor's bankruptcy case. In the past two cases, the Creditor was successful in obtaining dismissal of the Debtor's case, and the Debtor then began the pattern anew.
With regard to the Debtor's past performance, the record shows the Debtor failed to fulfill his obligations under chapter 13 in both of his two prior bankruptcy cases.
Therefore, this Court conditions the extension of the automatic stay, as to the Creditor, on the Debtor's continued and consistent payment of the sums due under the confirmed plan and all post-petition obligations which affect the Creditor's collateral interest. Additionally, if the Court dismisses this case, for any reason, the relief from stay the Court grants in this case, in favor of the Creditor, will remain in effect during any subsequent bankruptcy case(s) the Debtor files within one year from the date of dismissal of this case.
Based on the record in this case, and the absence of an objection by any other creditor, the equities do not support the imposition of a filing bar or any other conditions or limitations on the extension of the stay as to other creditors.
V. CONCLUSION
For the reasons set forth above, the Court finds (1) the early stay termination provision in the Controlling Statute applies in this case; (2) the Debtor has met the procedural requirements of the Controlling Statute by timely filing a motion to extend the stay, and timely presenting evidence at a hearing; (3) the Presumption arose that the Debtor filed this case not in good faith, under § 362(c)(3)(C); and (4) under the totality of the circumstances of this case and the Debtor's most recent prior bankruptcy case (case # 15-11033), the Debtor has demonstrated, with clear and convincing evidence, that he filed the current case in good faith, thereby rebutting the Presumption. Accordingly, the Court overrules the Creditor's Objection to the Debtor's Motion, and determines the Debtor is entitled to an extension of the automatic stay under § 362(c)(3).
The Court further finds, under all of the facts and circumstances of the Debtor's three bankruptcy cases, the Debtor's conduct with respect to the obligations he owes the Creditor, the history of persistent litigation between the Debtor and the Creditor, and the potential risks the extension of the stay poses to the Creditor, that the extension of the stay as to the Creditor is subject to two conditions: First, the Debtor must make all plan payments, all payments due the Creditor, and all payments on other obligations that directly affect the Creditor's rights and collateral interest, in full and on time. Second, if the Court dismisses this case, for any reason, this decision, and the conditional or absolute relief from stay the Court has granted to creditor Soutar in this case will remain *559in effect through the duration of any bankruptcy case(s) the Debtor files within one year of the date the Court dismisses this case.
Lastly, the Court extends the automatic stay as to all other creditors without condition, pursuant to § 362(c)(3)(B).
This memorandum of decision constitutes the Court's findings of fact and conclusions of law.
All statutory citations herein refer to Title 11 of the United States Code (the "Bankruptcy Code"), unless otherwise indicated.
See In re Fisher, No. 18-10343 (Bankr. D. Vt. Sept. 14, 2018) (denying motion to extend the automatic stay); In re Gifford, No. 18-10278 (Bankr. D. Vt. Aug. 23, 2018) (granting motion to extend the automatic stay).
All document references pertain to documents filed in case # 17-10500, which is the Debtor's current bankruptcy case, unless otherwise indicated.
The Creditor objected to the Debtor's testifying because the Debtor had not complied with the Local Rules, which require the Debtor to have filed a notice of evidentiary hearing, alerting the Court and parties in interest of the Debtor's intent to present a witness. See Vt. LBR 4001-3(a), 9014-1(b) and LBF Form V. The Court overruled the objection. While the Creditor was correct that the Debtor had failed to comply with the Local Rules, the Court found the following factors weighed in favor of waiving that requirement and permitting the Debtor to present testimony: (1) this interpretation of § 362(c)(3) had been adopted - and thus put in place a new procedure - less than one month earlier; (2) the Debtor had both the burden of meeting the statutorily imposed 30-day deadline and preparing a witness to meet a standard that was not yet tested in this District; and (3) there was little likelihood of surprise to the Creditor as the statute clearly identifies the scope and necessity of proof the Debtor must present to rebut the presumption established by § 362(c)(3)(C). In the absence of these particular factors, the Court would likely have sustained the Creditor's objection on due process grounds.
See footnote 9, infra.
The Galanis factors include (1) the timing of the new petition; (2) how the debt(s) arose; (3) the debtor's motive in filing another petition; (4) how the debtor's actions affected creditors; (5) why the debtor's prior case(s) were dismissed; (6) the likelihood that the debtor will have a steady income throughout the bankruptcy case, and will be able to fund a plan; and (7) whether the trustee or creditors object to the motion. See In re Galanis, 334 B.R. 685, 692 (Bankr. D. Utah 2005).
Courts in other jurisdictions have considered additional or alternative factors. These include what, if anything, has changed between dismissal of the prior case and commencement of the current case, see, e.g. In re Carr, 344 B.R. 776, 781 (Bankr. N.D.W. Va. 2006), how the particular debts in the case arose and whether they are for necessities or luxuries, see, e.g. id., and whether the debtor made 'eve of bankruptcy' purchases, see In re Collins, 335 B.R. 646, 652 (Bankr. S.D. Tex. 2005). The Court finds the first of these factors is encompassed by the factors this Court employs here and the latter two are inapplicable.
As indicated above, the question of whether Debtor met his burden of proof in this case is a close one. The Debtor's proof with respect to this factor illustrates the point. While the Debtor did refer to the schedules and plans filed in the two subject chapter 13 cases, he did not avail himself of the opportunity he had at the hearing to affirmatively show why this case has a strong probability of success. For example, he did not describe how or why this case is different from the last one, describe the steps he has taken to ensure he will be able to stay current on his post-petition property tax obligations, opt to make payments on post-petition taxes using an electronic or ACH payment arrangement, or articulate objective criteria demonstrating he will have the means and commitment to meet his obligations under the plan for the full repayment period. The Debtor's success with respect to this factor is due primarily to the documentary record.
The Debtor argued in his Motion, and at the hearing, that his failure to make a property tax payment to the Town of Groton was the result of a miscommunication with his counsel. The Court rejects that argument as unpersuasive. The conditional order was clear and the Court is convinced the Debtor understood the duty it imposed on him (though he may later have thought it would be acceptable to pay the sum due a few days late if the Town authorized that date).
In her motion to dismiss the prior case (case # 15-11033, doc. # 31), the Creditor alleged the Debtor was in arrears on plan payments, in addition to his failure to timely pay property taxes as they became due, as required by the confirmed plan (doc. # 23). However, the chapter 13 trustee contradicted that allegation at the February 2017 hearing. He stated the Debtor was current on plan payments. The docket supports this, showing the trustee never filed a notice of delinquency in that case. Therefore, the Court construes the impact of the Controlling Statute, starting with the premise that the Debtor's prior case was dismissed solely because he failed to comply with the conditional stay relief order and corresponding confirmation order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501674/ | Robert N. Opel, II, Chief Bankruptcy Judge (BI)
The Plaintiff seeks a finding of non-dischargeability for its claim against the Debtor/Defendant for medical benefits paid to him and his dependents. It is alleged that the benefits were paid based upon the Debtor's fraudulent misrepresentations as to his marital status. On motion, I will dismiss the Complaint, with leave to amend.
I. Jurisdiction
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
II. Facts and Procedural History
Kevin Joseph Brown ("Brown") filed a Voluntary Petition under Chapter 7 of the Bankruptcy Code on February 28, 2018. The required schedules and statements were filed with the bankruptcy petition.
On April 24, 2018, the Pennsylvania Employees Benefit Trust Fund ("PEBTF") commenced this Adversary Proceeding seeking non-dischargeability of its claim against Brown. A First Amended Complaint was filed by PEBTF on April 25, 2018 ("Complaint"). Am. Adversary Compl., ECF No. 2.
The Complaint contains a total of fifteen numbered paragraphs. Unfortunately, the paragraphs are not numbered sequentially. For example, the Complaint contains four (4) written paragraphs, each of which are numbered "1." This does not ease review or construction of the Complaint.
I characterize the Complaint as a single count complaint seeking to determine PEBTF's claim against Brown, for benefits paid to Brown and his dependents, in the amount of $154,837.93, to be non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).2 Complaint, ¶ 2, p 2, ECF No. 2. Brown responded to the Complaint by filing several Motions under the Federal Rules of Bankruptcy Procedure. The Motions include a motion to dismiss for failure to state a claim upon which relief can be granted, a motion for a more definite statement, and a motion to join an indispensable party (collectively the "Motion").
PEBTF filed what is titled Plaintiff's Reply to Defendant's Consolidated Motion to Dismiss Pursuant to Rule 12 and Request for Summary Judgement Pursuant to Rule 7056(a). ECF No. 14.
The Motion has been briefed and a hearing was held on September 13, 2018.
*591III. Discussion
A. Standard to Decide Motions to Dismiss
Generally, a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2), made applicable to adversary proceedings by Fed. R. Bankr. P. 7008. Further, certain matters, including fraud allegations, must be pled with particularity. Fed. R. Civ. P. 9(b) ; In re Adalian , 474 B.R. 150, 158-59 (Bankr. M.D. Pa. 2012).
While detailed factual allegations are generally not required in a complaint filed in Federal court:
[P]laintiff's obligation to provide the grounds of his entitlement to relief require more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.
Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (internal quotations omitted).
To withstand the motion to dismiss for failure to state a claim upon which relief can be granted, the Complaint must contain enough factual content to allow me to draw the reasonable inference that the PEBTF's claim against Brown is non-dischargeable. This plausibility standard requires more than a sheer possibility that a defendant acted unlawfully. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
When considering a motion to dismiss, I must view the Complaint's factual allegations and its legal conclusions in different lights. The Third Circuit has explained:
The District Court must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Second, a District Court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a "plausible claim for relief." In other words, a complaint must do more than allege the plaintiff's entitlement to relief. A complaint has to "show" such an entitlement with its facts.
Fowler v. UPMC Shadyside , 578 F.3d 203, 210-11 (3d Cir. 2009) (internal citations omitted); In re EP Liquidation, LLC , 583 B.R. 304, 314 (Bankr. D. Del. 2018).
When considering a motion to dismiss, a court considers the complaint, as well as attached exhibits and matters of public record. Fed. R. Bankr. P. 7010 (incorporating Fed. R. Civ. P. 10(c) ); Pension Ben. Guar. Corp. v. White Consol. Indus., Inc. , 998 F.2d 1192, 1196 (3d Cir. 1993) ; Taylor v. Henderson , 2015 WL 452405, at *1 (D. Del., Jan. 30, 2015). Federal Rule of Evidence 201 allows the court to take judicial notice of facts that are not subject to reasonable dispute. For example, a bankruptcy court may take judicial notice of the docket entries in a case and the contents of the bankruptcy schedules to determine the timing and status of case events and other facts which are not reasonably in dispute. In re Harmony Holdings, LLC , 393 B.R. 409, 413 (Bankr. D.S.C. 2008) ; In re Paolino , 1991 WL 284107, at *12, n. 19 (Bankr. E.D. Pa., Jan. 11, 1991).
I take judicial notice of the dockets in Brown's underlying Chapter 7 case and in this Adversary Proceeding. I will also take notice of the contents of the bankruptcy schedules which are not in dispute.
B. Dischargeability Generally
One of the underlying purposes of the Bankruptcy Code is to allow a debtor a fresh start. Exceptions to discharge are strictly construed against creditors and liberally construed in favor of debtors.
*592Insurance Co. of N. Am. v. Cohn (In re Cohn) , 54 F.3d 1108, 1113 (3d Cir. 1995) ; In re Gotwald , 488 B.R. 854, 865 (Bankr. E.D. Pa. 2013) ; Customers Bk. v. Roman P. Osadchuk , 2018 WL 4562403, at *2 (D.N.J., Sept. 24, 2018) ; In re Adalian , 474 B.R. 150, 160 (Bankr. M.D. Pa. 2012).
C. What Are the Required Elements to Prove a Non-Dischargeable Claim?
In a non-dischargeability action, the bankruptcy court generally addresses two separate questions. First, has PEBTF pled an enforceable obligation under state law? If so, is the debt non-dischargeable under § 523(a)(2)(A) of the Bankruptcy Code ? Black v. Gigliotti , 514 B.R. 439, 444 (E.D. Pa. 2014) ; In re August , 448 B.R. 331, 346 (Bankr. E.D. Pa. 2011).
Considering the first question, a bankruptcy court looks to state law to determine whether there is an enforceable claim against the debtor. Grogan v. Garner , 498 U.S. 279, 282-84, 111 S.Ct. 654, 657-58, 112 L.Ed.2d 755 (1991) ; In re Hazelton , 304 B.R. 145, 150 (Bankr. M.D. Pa. 2003).
The issue of the alleged non-dischargeability of a creditor's valid claim is a matter of federal law governed by the provisions of the Bankruptcy Code. Grogan , 498 U.S. at 284, 111 S.Ct. 654 ; In re Pulvermacher , 567 B.R. 881, 886 (Bankr. W.D. Wis. 2017) ; In re Guest , 193 B.R. 745, 747 (Bankr. E.D. Pa. 1996).
D. Has an Enforceable Claim Been Pled Under State Law?
The text of the Complaint itself contains relatively few factual allegations. However, the Complaint is supplemented by a number of attached exhibits.
The Complaint alleges that PEBTF paid medical benefits to Brown and his dependents in the total amount of $154,837.93 ("Medical Benefits"). It is further alleged that the Medical Benefits were paid based upon Brown's fraudulent representations as to his marital status. It is alleged that Brown's fraudulent representations violated "Section 1.21 of the PEBTF Medical Plan Agreement" ("Contract"). Compl. ¶ 6, p. 4, ECF No. 2.
I note that Exhibit D to the Complaint provides pages 10 and 11 of the Contract. A portion of the Contract reads:
1.21 Misrepresentation or Fraud
A Member who receives benefits under the Plan as a result of false information or a misleading or fraudulent representation shall be suspended from eligibility for coverage under the Plan (where fraud or material misrepresentation is involved, the suspension may be retroactive), shall repay all amounts paid by the Fund on or after the suspension, and shall be liable for all costs of collection, including attorneys' fees.
Compl., Ex. D, p 46, ECF No. 2.
The Complaint alleges that Brown represented to PEBTF that he was in a common law marriage. Attached as a portion of Exhibit B to the Complaint is an Affidavit Attesting to the Existence of Common Law Marriage ("Affidavit"). The Affidavit appears to bear the signatures of Brown and Diane M. Miller ("Miller"). The notarized Affidavit is dated August 28, 2002 and, in part, provides, "[w]e hold ourselves out to the community as husband and wife, and have cohabited for 8 ½ years." Compl., Ex. B, p. 13, ECF No. 2.
The Complaint further alleges that Miller subsequently brought a state court divorce action against Brown. Reference is made to an opinion of the Superior Court of Pennsylvania which considered an appeal from the dismissal of Miller's divorce action.
*593Miller v. Brown , 2017 WL 5157354, 2017 Pa.Super. Unpub. LEXIS 4102 (Pa. Super., Nov. 7, 2017). The Superior Court affirmed the dismissal of Miller's divorce action finding that she had not presented clear and convincing evidence that "words stating a present intent to marry were exchanged between the parties." Id. at *6, 2017 Pa.Super. Unpub. LEXIS 4102 at *15.
In Pennsylvania, three elements are necessary to plead a cause of action for breach of contract. Namely: (1) the existence of a contract, including its essential terms; (2) a breach of the contract; and, (3) resulting damages. Meyer, Darragh, Buckler, Bebenek & Eck, P.L.L.C. v. Law Firm of Malone Middleman, P.C. , 635 Pa. 427, 137 A.3d 1247, 1258 (2016) ; CoreStates Bank, N.A. v. Cutillo , 723 A.2d 1053, 1058 (Pa. Super. 1999) ; Abdelgawad v. Mangieri , 2017 WL 6557483, at *7 (W.D. Pa., Dec. 22, 2017).
The Complaint is not a model of clarity. However, it does allege the existence of the Contract between PEBTF and Brown. The Complaint also alleges that Brown breached the Contract by fraudulently representing his marital status. It further alleges damages resulting from the breach of the Contract in the amount of $154,837.93.
Viewing the pled facts in the light most favorable to PEBTF, I conclude PEBTF has pled a plausible claim against Brown for breach of contract pursuant to the provisions of Pennsylvania law.
E. Was the Statute of Limitations Defense Properly Pled?
A significant portion of the Motion is grounded upon Brown's argument that the applicable Pennsylvania statute of limitations ran, presumably before the Chapter 7 bankruptcy petition was filed on February 28, 2018. The petition date is significant because § 108 of the Bankruptcy Code extends a statute of limitations, which has not expired pre-petition, to the later of the end of the limitations period or two years after the bankruptcy order for relief. In re O.E.M./Erie, Inc. , 405 B.R. 779, 787 (Bankr. W.D. Pa. 2009) ; In re Southern International Company, Inc. , 159 B.R. 192, 193 fn 2 (Bankr. E.D. Va. 1993).
Brown argues that under the gist of the action doctrine, PEBTF's claim is barred by the statute of limitations for tort actions. The gist of the action doctrine is a common law doctrine which seeks to maintain the conceptual distinction between breach of contract and tort claims. Sarsfield v. Citimortgage, Inc. , 707 F.Supp.2d 546, 552-54 (M.D. Pa. 2010).
I conclude that it is inappropriate to determine the applicable statute of limitations at this time.
The general rule is that a statute of limitations defense should be raised in an answer, not in a motion to dismiss. Fed. R. Civ. P. 8(c)(1) (made applicable by Fed. R. Bankr. P. 7008 ); Robinson v. Johnson , 313 F.3d 128, 134-35 (3d Cir. 2002). There is an exception to the requirement to plead the statute of limitations as an affirmative defense in an answer. If it is clear from the face of the complaint that the claim has not been brought within the statute of limitations, the defense may be raised by motion. Schmidt v. Skolas , 770 F.3d 241, 249 (3d Cir. 2014). Neither the Complaint nor the attached exhibits pleads when any Medical Benefits were last paid to Brown or his dependents. At most, a portion of Exhibit A contains a one-page report showing benefits were paid from August 28, 2002, to December 28, 2017. There is no indication of the alleged dates of payment. Compl., Ex. A, p 8, ECF No. 2. I am unable to determine from the face *594of the Complaint that this matter is untimely.
Based on the above, I conclude the Motion cannot effectively raise the applicable statute of limitations at this stage.
F. Is the Breach of Contract Claim Non-Dischargeable Pursuant to § 523(a)(2)(A) ?
To prevail in a § 523(a)(2)(A) action, a creditor must prove each of the following: (1) the debtor made a false representation; (2) the debtor knew the representation was false when it was made ; (3) the debtor intended to deceive the creditor or to induce him to act upon the representation; (4) the creditor justifiably relied upon the representation; and, (5) the creditor sustained a loss as a proximate result of the representation. In re Griffith , 2014 WL 4385743, at *3 (Bankr. M.D. Pa., Sept. 4, 2014) (emphasis added); In re Ritter , 404 B.R. 811, 822 (Bankr. E.D. Pa. 2009).
A mere breach of contract alone does not establish actual fraud or misrepresentation under § 523(a)(2)(A). In re Giquinto , 388 B.R. 152, 166 (Bankr. E.D. Pa. 2008) ; In re Antonious , 358 B.R. 172, 182 (Bankr. E.D. Pa. 2006) ; In re Witmer , 541 B.R. 769, 777-78 (Bankr. M.D. Pa. 2015).
PEBTF argues that Brown intentionally misrepresented his marital status at the time that he signed the Affidavit. Historically, Pennsylvania recognized common law marriages. The presumption of a common law marriage could arise based upon circumstantial evidence, such as constant cohabitation and a broad and general reputation of marriage. Commonwealth v. Wilson , 543 Pa. 429, 672 A.2d 293, 301 (1996) ; Cooney v. W.C.A.B. (Patterson UTI, Inc.) , 94 A.3d 425, 430 (Pa. Cmwlth. 2014) (providing that a common law marriage only required proof of an agreement to enter into the legal relationship of marriage).
Common law marriage was prospectively abolished in Pennsylvania by statute. 23 Pa.C.S. § 1103 provides:
No common-law marriage contracted after January 1, 2005, shall be valid. Nothing in this part shall be deemed or taken to render any common-law marriage otherwise lawful and contracted on or before January 1, 2005, invalid.
It is undisputed that Brown and Miller began living together in August 1994. Miller bore their biological daughter in June 1995. Miller v. Brown , 2017 WL 5157354, at *1, 2017 Pa. Super. Unpub. LEXIS 4102, at *1 (Pa. Super., Nov. 7, 2017).
Whether a common law marriage existed between Brown and Miller prior to January 1, 2005, the date of the statutory prohibition, is not a simple question of fact. The validity of a common law marriage is a mixed question of fact and law. PPL v. Workers' Compensation Appeal Bd. , 5 A.3d 839, 843 (Pa. Cmwlth. 2010) ; Giant Eagle v. W.C.A.B. (Bahorich) , 144 Pa.Cmwlth. 552, 602 A.2d 387, 388 (1992).
PEBTF relies upon Miller v. Brown . In that case, the Pennsylvania Superior Court found there was no common law marriage between Brown and Miller because of the lack of verba in praesenti , the exchange of words in the present tense for the purpose of establishing the relationship of husband and wife. Miller , 2017 WL 5157354, at *5, 2017 Pa. Super. Unpub. LEXIS 4102, at *14. In this Court's view, the couple's marital status was a nuanced legal decision rendered by two Pennsylvania courts, the Court of Common Pleas and the Superior Court.
PEBTF argues, with the benefit of considerable hindsight, that the 2017 Miller decision somehow evidences fraudulent intent by Brown when he signed the Affidavit, some fifteen years earlier. I conclude that Brown, a layperson, could easily have *595been mistaken as to the ultimate legality of his "common law marriage" when he signed the Affidavit and when he obtained the Medical Benefits.
To be actionable under § 523(a)(2)(A), a representation must be one of existing fact and not merely an expression of opinion or expectation. In re Dupree , 336 B.R. 506, 517 (Bankr. M.D. Fla. 2005) ; In re Schwartz & Meyers , 130 B.R. 416, 423 (Bankr. S.D.N.Y. 1991). Further, the false representation must falsely purport to depict then current or past acts. In re Vernon , 192 B.R. 165, 171 (Bankr. N.D. Ill. 1996).
Where there is room for an inference of honest intent, the question of fraudulent intent must be resolved in favor of the debtor. Id. at 172 ; Buckeye Candy Company v. Ritzer (In re Ritzer) , 105 B.R. 424, 428 (Bankr. S.D. Ohio 1989) ; Wilson v. Mettetal (In re Mettetal) , 41 B.R. 80, 89 (Bankr. E.D. Tenn. 1984) ; Heinold Commodities & Securities v. Hunt (In re Hunt) , 30 B.R. 425, 436 (Bankr. M.D. Tenn. 1983).
To satisfy scienter or the knowingly false element of § 523(a)(2)(A), a misrepresentation must be made with either actual knowledge of its falsity, or with such reckless disregard of the truth that the law will impute the knowledge to the responsible party. New York Life Ins. Co. v. Marotta , 57 F.2d 1038, 1039 (3d Cir. 1932). "In assessing a debtor's knowledge of the falsity of the representation ... the Court must consider the knowledge and experience of the debtor." FTC v. Duggan (In re Duggan) , 169 B.R. 318, 324 (Bankr. E.D.N.Y. 1994). "A false representation made under circumstances where a debtor should have known of the falsity is one made with reckless disregard for the truth, and this satisfies the knowledge requirement." Id.
In re Santos , 304 B.R. 639, 664 (Bankr. D.N.J. 2004).
To the extent any representation of his marital status might have been a material misrepresentation, the Complaint fails to show how Brown would have known it was false at the time it was made. Miller's divorce complaint was not filed until March 21, 2016.3 At most, one might assume that Brown's divorce counsel subsequently advised him of the arcane requirements necessary to prove a common law marriage. The Complaint does not plausibly plead that Brown knowingly misrepresented his marital status to obtain any Medical Benefits.
I cannot discern from the Complaint whether any of the Medical Benefits were paid after March 2016. I do find that, prior to March 2016, there is no basis to conclude that Brown knew, or should have known, that his common law marriage was in doubt. Thus, a required element to plead non-dischargeability is lacking and the Motion (to the extent it is based upon a failure to state a claim upon which relief can be granted) should be granted.
It is a close question as to whether allowing for an amended complaint would be futile. In an amended complaint, PEBTF will need to state a plausible claim of known falsity. Further, it will need to plausibly plead the other required elements of § 523(a)(2)(A). Included in those elements is justifiable reliance. Field v. Mans , 516 U.S. 59, 73-77, 116 S.Ct. 437, 445-47, 133 L.Ed.2d 351 (1995) ; In re Santos , 304 B.R. at 667.
*596This is PEBTF's first pleading. Solely because of that, I will allow leave of twenty-one days to file an amended conforming complaint.
G. Motion for a More Definite Statement
As part of the Motion, Brown filed a motion for more definite statement pursuant to Fed. R. Civ. P. 12(e). Courts in the Third Circuit generally only grant a motion for more definite statement "when the pleading is 'so vague or ambiguous that the opposing party cannot respond, even with a simple denial, in good faith, without prejudice to [itself].' " Clark v. McDonald's Corp. , 213 F.R.D. 198, 232-33 (D.N.J. 2003).
I have already granted a portion of the Motion with leave to amend. The partial grant of the Motion is dispositive. The motion for more definite statement is denied.
H. Motion to Join an Indispensable Party
The Motion seeks to join the Pennsylvania Department of Transportation as an alleged indispensable party. Such a motion essentially asks the Court to determine whether complete relief can be accorded to those parties named in the action, in the absence of any unjoined parties. General Refractories Co. v. First State Ins. Co. , 500 F.3d 306, 313 (3d Cir. 2007).
The partial grant of the Motion is dispositive. The motion for joinder is denied.
I. PEBTF's Motion for Summary Judgment
PEBTF filed a reply to the Motion. The reply included a motion for summary judgment.
Summary judgment is appropriate where there is no outstanding issue of material fact and the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett , 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; United States v. Commander , 734 Fed.Appx. 824, 829 (3d Cir. 2018) ; In re TK Holdings, Inc. , 2018 WL 903980, at *4 (Bankr. D.Del., Feb. 14, 2018).
The partial grant of the Motion is dispositive. The motion for summary judgment is denied.
IV. Conclusion
The Motion is granted for failure to state a claim upon which relief can be granted. PEBTF is granted leave of twenty-one days to file an amended conforming complaint. The motion for a more definite statement is denied. The motion to join an indispensable party is denied. PEBTF's motion for summary judgment is denied.
Unless otherwise noted, all future statutory references are to the Bankruptcy Code, 11 U.S.C. § 101, et seq. , as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 37 ("Bankruptcy Code").
Miller v. Brown , 2017 WL 5157354, at *1, 2017 Pa. Super. Unpub. LEXIS 4102, at *1 (Pa. Super., Nov. 7, 2017). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501675/ | RICHARD E. FEHLING, United States Bankruptcy Judge
I. INTRODUCTION
Defendant's conduct in barring Plaintiff from entering Plaintiff's restaurant constituted a willful violation of the automatic stay that caused Plaintiff to suffer actual damages to his property ($7,250) and emotional distress ($2,000), which combined is $9,250. I will also impose on Defendant, as part of Plaintiff's actual damages, a close approximation of Plaintiff's attorney's fees in the amount of $3,500. Defendant's conduct in violating the stay was patently egregious and outrageous, thereby requiring the imposition of punitive damages in the amount of $5,000. The award of punitive damages is intended to punish Defendant and will deter him (hopefully) from such blatant transgressions of the automatic stay in the future. The total amount owed to Plaintiff from Defendant therefore is $17,750 and I will enter judgment in favor of Plaintiff and against Defendant in that amount.
On February 18, 2015, Plaintiff/Debtor, Tam Q. Vu ("Plaintiff"), initiated this adversary proceeding against Defendant/Landlord, Yung Lin ("Defendant"), seeking damages under 11 U.S.C. § 362(k)(1) for violating the automatic stay. I held the trial on April 27, 2018, and directed the parties to file post-hearing briefs, which they did.1 This matter is now ripe for decision.
II. FACTUAL AND PROCEDURAL BACKGROUND
Sometime in January 2013, Plaintiff purchased the assets of a restaurant business operating at 1930 Columbia Ave., Lancaster, PA (the "Premises"), from Kar Thiem Lee ("Mr. Lee") for $73,000. On January 15, 2013, as part of the acquisition of the restaurant, Plaintiff entered into an Assignment and Assumption of Lease with DFY Realty Management, Inc. ("DFY"), the owner of the Premises. Defendant is the President of DFY.
Beginning almost immediately, in April 2013, Plaintiff had difficulty making timely lease payments to DFY. In February 2014, *601DFY filed a state court eviction action against Plaintiff. The state court entered a judgment of eviction against Plaintiff and in favor of DFY on April 24, 2014. The Sheriff scheduled eviction of Plaintiff from the Premises on May 13, 2014, but Plaintiff stayed the eviction when he filed his bankruptcy petition on that date. Defendant received notice of Plaintiff's bankruptcy filing the next day, May 14, 2014.
After Plaintiff filed his bankruptcy petition, he paid rent to DFY for approximately two months. Thereafter, his payment on the lease became sporadic. Sometime in January 2015, upon the poor health of both Plaintiff and his wife, Plaintiff decided to surrender the Premises to Defendant effective on January 31, 2015. On or about January 28, 2015,2 Defendant entered the Premises (which Plaintiff had not yet surrendered) and changed the locks. As a result, Plaintiff was unable to enter the Premises to retrieve his personal property.3
On January 29, 2015, counsel for Plaintiff sent counsel for Defendant a letter advising her that Defendant had violated the automatic stay by locking Plaintiff out of the Premises. The letter stated that Plaintiff desired to remove his personal property from the Premises and have an auctioneer catalogue the property for sale. Plaintiff's counsel requested that Defendant's counsel contact her for Plaintiff to arrange for speedy liquidation of the personal property. As Defendant had done previously, counsel for Defendant acted with insouciance, ignoring the letter, and she did not reply. Plaintiff was provided no opportunity to enter the Premises to catalogue or retrieve his personal property. As a result, Plaintiff filed the complaint now before me seeking actual damages (including attorneys' fees) and punitive damages against Defendant under 11 U.S.C. § 362(k)(1) for violating the automatic stay.
III. DISCUSSION
A. Plaintiff incorrectly claimed that the Trustee had abandoned the restaurant assets and other property from the estate before Defendant's actions.
Plaintiff alleged in his brief for the first time that the Chapter 7 Trustee had abandoned all assets to Plaintiff on January 7, 2015.4 This abandonment was said to have occurred a couple weeks before Defendant allegedly violated the automatic stay.
Plaintiff appeared to rely on (but did not definitively plead) Section 362(a)(3) of the Bankruptcy Code as the basis for the alleged stay violation. If Plaintiff were correct in alleging that the assets had been abandoned from the estate on January 7, 2015, however, no violation of the stay could have occurred. The stay of Section 362(a)(3) applies to, and protects against, acts to obtain possession of, or exercise control over, property of the estate. 11 U.S.C. § 362(a)(3). It neither applies to, nor protects against, acts to obtain possession *602of, or control over, property abandoned from the estate which would thereafter revert back to a debtor. See Fields v. Bleiman, 267 Fed. Appx. 144, 146 (3d Cir. 2008) ; 11 U.S.C. § 362(c)(1).
On June 20, 2018, I ordered the parties to file supplemental briefs to address the abandonment issue. I also asked Plaintiff to identify the subsection of Section 362(a) on which he relies for his claim of a stay violation. All briefs have been filed and the abandonment issue is ready for disposition.
Plaintiff's supplemental brief now clearly identifies Section 362(a)(3) as the basis for his demands.5 Plaintiff also retracts the statement in his first brief charging that the Chapter 7 Trustee had abandoned all assets to Plaintiff on January 7, 2015. To the contrary, the Trustee filed a "no asset" report on January 7, 2015, but did not abandon the property from the estate on that day.6 Plaintiff now alleges that under Section 544(c) of the Bankruptcy Code, 11 U.S.C. § 544(c), such property was deemed to have been abandoned to Plaintiff upon the closing of the main bankruptcy case. Because Plaintiff now acknowledges that the property in issue had not been abandoned by the Trustee, Plaintiff's Section 362(a)(3) action remains viable.
Plaintiff's supplemental brief, however, states that Defendant was wrong in taking control over the property because Plaintiff had exempted it in his Schedule C.7 Plaintiff's second red herring appears at first glance to present another self-defeating obstacle to Plaintiff's recovery under Section 362(a)(3). Property claimed by a debtor as exempt becomes exempt and is no longer property of the bankruptcy estate unless, 30 days after the creditors' meeting, the trustee or another party in interest files an objection to a debtor's claimed exemptions. Taylor v. Freeland & Kronz, 938 F.2d 420, 423 (3d Cir. 1991), aff'd 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) ; In re Mollo, 196 Fed. Appx. 102, 104 (3d Cir. 2006)citing Taylor.
The deadline for objections to Plaintiff's exemptions was February 6, 2015, 30 days after the January 7 creditors' meeting. Neither the Chapter 7 Trustee nor any other party objected to Plaintiff's claim of exemptions. All of the property that Plaintiff had claimed as exempt therefore finally became exempt and was no longer property of the estate on February 7, 2015. Before that date, however, the property claimed as exempt remained property of the estate. Because Defendant's conduct occurred before February 7, 2015 in all respects, Plaintiff's request for sanctions for Defendant's violation of the automatic stay remains viable. The restaurant and other personal property at issue in this dispute were property of the estate at all relevant times of Defendant's conduct.
B. Defendant violated the automatic stay when he changed the locks to the Premises, and he further violated the stay when he failed to respond to Plaintiff's request for an opportunity to access the Premises to retrieve and catalogue his property.
The filing of a bankruptcy petition operates as an automatic stay of all collection activities, including "any act to obtain possession of property of the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). The automatic stay is one of the fundamental protections *603afforded to a debtor by the Bankruptcy Code. Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr. ), 973 F.2d 1065, 1074 (3d Cir. 1992) ; In re Traversa, 585 B.R. 215, 219 (Bankr. E.D. Pa. 2018). The scope of the automatic stay is broad and provides a debtor with a breathing spell from his creditors. The automatic stay stops all harassment and collection efforts and maintains the status quo between a debtor and his creditors. Univ. Med. Ctr., 973 F.2d at 1074 ; Traversa, 585 B.R. at 219.
Section 362(k)(1) of the Bankruptcy Code provides that "an individual injured by any willful violation of a stay ... shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages." 11 U.S.C. § 362(k)(1). As the Third Circuit instructed:
It is a willful violation of the automatic stay when a creditor violates the stay with knowledge that the bankruptcy petition has been filed. Willfulness does not require that the creditor intend to violate the automatic stay provision, rather it requires that the acts which violate the stay be intentional.... [A] creditor's good faith belief that he is not violating the automatic stay provision is not determinative of willfulness.
Lansdale Family Rests., Inc. v. Weis Food Serv. (In re Lansdale Family Rests., Inc. ), 977 F.2d 826, 829 (3d Cir. 1992) ; see also Lansaw v. Zokaites (In re Lansaw ), 853 F.3d 657, 664 n.4 (3d Cir. 2017).
Defendant received notice of Plaintiff's bankruptcy filing on May 14, 2014. I find and conclude, therefore, that Defendant had actual knowledge of Plaintiff's bankruptcy filing from May 2014 through January 2015. He had actual knowledge when he changed the locks. And he had actual knowledge when he failed to respond to the request of Plaintiff s counsel for access to Plaintiff's property. I find and conclude, therefore, that by changing the locks and failing to respond to counsel's request for access to the restaurant Premises, Defendant acted to obtain possession of and to exercise control over the Premises and Plaintiff's personal property, all of which were property of the estate. When Defendant changed the locks to the Premises and failed to respond to Plaintiff's request for access to the personal property, he knew that Plaintiff was in bankruptcy. His conduct therefore constituted a willful violation of the automatic stay. Lansaw, 853 F.3d at 664, n.4 ; Lansdale Family Rests., 977 F.2d at 829.
Defendant argues that no stay violation occurred because the personal property that remained in the Premises when the lockout occurred belonged to DFY, and not to Plaintiff. Attempting to prove this allegation, Defendant attached to his May 18, 2018 brief a copy of an alleged 2006 lease between DFY and Meifang Lin ("Lin"). I reject this contention out of hand. First, the 2006 lease was neither offered nor admitted into evidence and is not evidence that I may consider. Second, the lease with Lin is not relevant to this case because it is not the lease that Plaintiff assumed when he took possession of the Premises. Plaintiff assumed a lease dated July 3, 2009 between DFY and Mr. Lee.8 The lease between DFY and Mr. Lee does not convey to Mr. Lee any personal property or equipment as part of the leased Premises. I therefore find and conclude that Plaintiff acquired any and all personal property in the leased Premises when he purchased the assets of the restaurant business from Mr. Lee. All such property *604belonged to Plaintiff and not to DFY at the time of the lockout.
C. Plaintiff is entitled to $12,750 for actual damages from loss of his property, attorneys' fees, and emotional distress, which loss he sustained as a direct result of Defendant's willful violation of the automatic stay.
When, as here, a debtor establishes a willful violation of the automatic stay, Section 362(k)(1) of the Bankruptcy Code provides that the debtor may recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, punitive damages. 11 U.S.C. § 362(k)(1).
Actual damages under Section 362(k)(1)"must be prove[n] with reasonable certainty, and mere speculation, guess or conjecture will not suffice." In re Nixon, 419 B.R. 281, 291 (Bankr. E.D. Pa. 2009)quoting Aiello v. Providian Fin. Corp., 257 B.R. 245, 249 (N.D. Ill. 2000), aff'd, 239 F.3d 876 (7th Cir. 2001) ; accord Heghmann v. Indorf (In re Heghmann ), 316 B.R. 395, 405 (1st Cir. BAP 2004) ("actual damages should be awarded only if there is concrete evidence supporting the award of a definite amount"); Sculky v. Internal Revenue Service (In re Sculky ), 182 B.R. 706, 708 (Bankr. E.D. Pa. 1995) ("[d]amages may not be awarded based upon speculation, guess and conjecture"). Plaintiff bears the burden of proving all aspects of his actual damages claim. Nixon, 419 B.R. at 291 ; see also Miller v. Blatstein (In re Main, Inc. ), No. Civ. A. 98-5947, 1999 WL 424296, at *5 (E.D. Pa. June 23, 1999) ; Lord v. Carragher (In re Lord ), 270 B.R. 787, 794 (Bankr. M.D. Ga. 1998) ; see generally In re FRG, Inc., 121 B.R. 451, 458 (Bankr. E.D. Pa. 1990).
Plaintiff seeks the following amounts as actual damages he incurred as a result of Defendant's violation of the automatic stay: (1) $21,200, which is the value Plaintiff ascribes to the restaurant equipment and food items that remained in the Premises when Defendant changed the locks;9 (2) $8,500, the amount of the security deposit Plaintiff provided to Defendant at the inception of the lease, which was never refunded; (3) an unspecified amount as compensation for emotional distress; and (4) an unspecified amount in attorneys' fees.
Plaintiff maintains that various items of restaurant equipment and food items10 remained in the Premises at the time of the lockout. No manufacturer's names or model numbers were provided for the equipment. Plaintiff purchased as new some of the equipment, such as an ice machine, freezer, display, and cash register, but he did not provide the dates of these purchases or the amounts he paid for them. All of the other restaurant equipment was purchased by Plaintiff in January 2013 as part of his purchase of the restaurant business from Mr. Lee.
Defendant testified that the restaurant equipment in the Premises at the time he changed the locks was very old and worth very little, if anything. He also testified that the food remaining in the Premises was old and was not suitable for use.11 But similar to Plaintiff, Defendant, who controlled the Premises after the lockout, failed to provide any detailed information about the nature and value of the restaurant equipment.
*605Plaintiff testified that an auctioneer had agreed to purchase the restaurant equipment remaining in the Premises at the time of the lockout for an amount between $13,000 and $16,000. The anticipated purchase was intended to occur on January 31, 2015, but was thwarted by Defendant's lockout. Defendant offered no agreement, bill of sale, letter, or email to establish the terms of the alleged sale. Plaintiff's testimony about the auctioneer might have been suspect, but Defendant's counsel failed to object to any part of it.12 Plaintiff offered no other evidence regarding the age or condition of the equipment. Based on this meager evidence, I find and conclude that Plaintiff failed to meet his burden of proving that the value of these items is $21,200. Instead, I find from all of the combined evidence that their value was half of what Plaintiff claimed was the auction price - $7,250.13 Plaintiff is therefore entitled to an award for actual damages of $7,250 to compensate him for the value of the equipment.
Defendant concedes that he has not returned the $8,500 security deposit to Plaintiff. But he maintains that DFY is owed much more than this amount in past due rent and as damages for Plaintiff's breach of the lease.14 Plaintiff failed to address this claim at trial or in his briefs. I find and conclude that Plaintiff failed to meet his burden to establish that he is entitled to a return of any part of the security deposit from Defendant as an item of actual damages under Section 362(k)(1).
Plaintiff also requests an award of damages for the emotional distress he suffered as caused by Defendant's violation of the automatic stay. Plaintiff did not quantify the amount of damages to redress the emotional distress he suffered as a component of his actual damages claim. Instead, he relies on his testimony at trial describing his emotional state resulting from the lockout. He requests that I use this evidence to quantify his emotional distress claim. Plaintiff's testimony consisted of the following: At the time of the lockout, Plaintiff and his wife were in poor health and had sole custody of four grandchildren, for whom they were receiving no child support. Plaintiff and his family were living solely on social security income at the time of the lockout and he was a month behind on the mortgage payment for his home. In addition, as a result of the lockout, Plaintiff lost all of his financial records and was forced to recreate them to prepare and file his tax returns. After the lockout, Plaintiff felt lost and very bad because he no longer had a source of income, he was out of money, and he had a family to support.
The Third Circuit has ruled that a debtor may recover emotional distress suffered as a result of a defendant's violation of the automatic stay as an element of actual damages under Section 362(k)(1). Lansaw, 853 F.3d at 668. The Third Circuit refused to adopt a bright line rule requiring the introduction of corroborating medical evidence to prove emotional harm and causation.15 Instead, courts are *606advised to address emotional distress on a case by case basis. The court noted that "at least where a stay violation is patently egregious, a claimant's credible testimony alone can be sufficient to support an award of emotional-distress damages." Id. at 669. The court further stated "[w]e are confident that courts ... can ensure that plaintiffs recover only for actual injury even in the absence of expert medical testimony ...." Id. quoting Bolden v. Se. Pa. Transp. Auth., 21 F.3d 29, 36 (3d Cir. 1994).
I find and conclude that Plaintiff has credibly and sufficiently established that he suffered some emotional distress at the time of the patently egregious lockout. My findings of financial damage renders corroborating medical evidence unnecessary. What I find lacking in Plaintiff's submission, however, is proof that all of the alleged emotional distress he was suffering was caused by Defendant's violation of the automatic stay. Instead, many of the stresses about which Plaintiff testified resulted from his overall life and financial difficulties: The poor health that he and his wife experienced prior to the lockout; raising four grandchildren on a limited income; and financial problems in his restaurant business prior to the lockout. The latter clearly led to the financial difficulties, including a default on his mortgage, which caused Plaintiff eventually to file his bankruptcy petition. Plaintiff established that he experienced emotional distress that was directly caused by Defendant's stay violation (1) when he lost the opportunity to sell the restaurant equipment at a time he desperately needed money to pay his mortgage and other living expenses and (2) when he lost all of his financial records, which forced him to spend substantial time recreating those records. To compensate Plaintiff for this more limited emotional distress, I award him $2,000 as actual damages.
Finally, Plaintiff requests attorneys' fees as part of his actual damages. Plaintiff's counsel did not precisely quantify the amount of attorneys' fees that might qualify as damages incurred by Plaintiff, other than to state that she is requesting a "reasonable attorneys' fee." Plaintiff's counsel states in her first brief, however, that she is not charging Plaintiff any amount for the time she spent on this adversary proceeding. She states in her brief that she should be compensated in the same amount that Defendant testified he had expended for his counsel to defend against this adversary proceeding.16 Defendant had testified that his legal fees in this adversary proceeding were approximately $7,000.
"The language of Section 362(k)(1) provides for the compensation of 'actual damages.' Attorneys' fees are included in 'actual damages' and are not addressed as a separate category of damages." Dean v. Carr (In re Dean ), 490 B.R. 662, 670 (Bankr. M.D. Pa. 2013)quoting In re Thompson, 426 B.R. 759, 768 (Bankr. N.D. Ill. 2010). To recover attorneys' fees as an element of actual damages under Section 362(k)(1), many courts require that Plaintiff actually incur an obligation to pay attorneys' fees to counsel as a result of Defendant's stay violation.
Plaintiff's counsel approached her client's pauperism with nobility and did not charge her impecunious client additional *607thousands of dollars. I will not follow the courts who require that counsel actually bill their clients without regard to their poverty. Our noble profession should look with approval at actions such as counsel's in this case. To the contrary, I follow the sound reasoning of the court in In re Parks, No. 07-18341, 2008 WL 2003163, at **7-8 (Bankr. N.D. Ohio, May 6, 2008). The Parks court explained:
Nor does counsel's agreement to represent the debtor pro bono mean that counsel cannot be awarded attorney's fees under fee-shifting statutes such as 11 U.S.C. § 362(k)(1). See Blanchard v. Bergeron, 489 U.S. 87, 94, 109 S.Ct. 939, 103 L.Ed.2d 67 (1989) (pro bono representation does not bar the award of a reasonable attorneys' fees); Blum v. Stenson, 465 U.S. 886, 895, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984) (attorneys' fees may not be reduced because the attorney conducted the litigation pro bono).
Id.2008 WL 2003163, supra, at *7.
Plaintiff's request for an award of attorneys' fees as a component of his actual damages claim is therefore cautiously17 granted. But determining an amount presents a problem. Plaintiff's counsel failed to establish with clarity the amount of fees she is requesting or the amount of time she spent on this case. Her off-hand remark that her fees are probably on a par with Defendant's counsel fees of $7,000 misses the mark. I will, however, recognize from my experience and counsel's ball park number of $7,000 that a fee award in the amount of $3,500 is certainly reasonable. I shall therefore award Plaintiff $3,500 in attorneys' fees as part of his actual damage claim.
D. Plaintiff is entitled to an award of punitive damages in the amount of $5,000.
Section 362(k)(1) authorizes me to award punitive damages to a debtor to redress a stay violation in "appropriate circumstances." Lightfoot v. Borkon (In re Lightfoot ), 399 B.R. 141, 150 (Bankr. E.D. Pa. 2008). The following factors govern any decision to impose punitive damages for a stay violation: "(1) the nature of the [Defendant's] conduct; (2) the [Defendant's] ability to pay; (3) the [Defendant's] motives; and (4) any provocation by the debtor." Id. Punitive damages are a response to particularly egregious conduct and are, according to the Third Circuit, "reserved for cases in which the defendant's conduct amounts to something more than a bare violation justifying compensatory damages or injunctive relief." Cochetti v. Desmond, 572 F.2d 102, 106 (3d Cir. 1978).
A court considering the imposition of punitive damages must be mindful of their purpose. "Punitive damages are damages, other than compensatory or nominal damages, awarded against a *608person to punish him for his outrageous conduct and to deter him and others like him from similar conduct in the future."
Frankel v. Strayer (In re Frankel ), 391 B.R. 266, 275 (Bankr. M.D. Pa. 2008)quoting Restatement (Second) of Torts § 908 (1979).
The record in this case reflects no evidence regarding factor (2) (Defendant's ability to pay). Similarly, no evidence supports factor (4) (provocation by Plaintiff).
Factor (3) (Defendant's motive), however, is clear on its face - Defendant purposely prevented Plaintiff from getting into the Premises to claim his property (including financial records). Plaintiff's behavior was quite deliberate in withholding Plaintiff's property from him and immediately leasing the Premises to a third party. Defendant's further purposeful refusal to respond to the communication from Plaintiff's counsel adds to Defendant's egregious behavior.
Factor (1) is the nature of Defendant's conduct. I have seen a few purposeful stay violations, but I have seen fewer that are as bold and absolute as Defendant's behavior. The testimony established that Plaintiff had advised Defendant that he intended to surrender the Premises on January 31, 2015. Defendant travelled from New York to Lancaster specifically to seize possession of the Premises immediately, before January 31. When Defendant arrived, the restaurant was not operating. Defendant called a locksmith to gain entry to the restaurant and to change the locks. Four days was all that may have kept Defendant from lawfully moving into the Premises.
Defendant and his counsel also ignored the January 29, 2015 letter, advising that the lockout violated the automatic stay, which letter Plaintiff's counsel had sent immediately to Defendant's counsel. Plaintiff's counsel also requested that the parties reach some agreement regarding the liquidation of Plaintiff's personal property. Again, Defendant ignored and never responded to this letter. No evidence showed any attempt by Defendant to contact either Plaintiff or his counsel. Plaintiff went to the restaurant and knocked, wanting to enter to see Defendant and claim (or at least catalogue) his property. Defendant vaguely testified that either he or his attorney reached out to Plaintiff to return Plaintiff's personal property. I reject this testimony.18 When asked why he never gave Plaintiff's personal property back to Plaintiff, Defendant testified that Plaintiff never set up a time to visit the Premises to remove his personal property. I reject this testimony.19
Defendant blatantly violated the automatic stay both when he enlisted the self-help measure of changing the locks to the Premises and when he failed to respond to Plaintiff's request for access to his personal property. Lansaw, 853 F.3d at 664, n.4. I find and conclude that Defendant's conduct is so patently and excessively egregious that it requires imposition of punitive damages to punish Defendant and thwart future violations of the stay. Punitive damages in the amount of $5,000 fulfill the four factors set forth by the court in Lightfoot, supra, 399 B.R. at 150, which I follow: (1.) The nature of Defendant's conduct was terribly willful, deliberate, and knowing; (2.) Defendant offered nothing to support any argument that he could not afford $5,000; (3.) Defendant's motives were clearly designed to thwart Plaintiff's efforts to rescue his personal property; and (4.) Plaintiff did nothing to provoke Defendant's conduct. I will award punitive damages *609in favor of Plaintiff and against Defendant in the amount of $5,000.
IV. CONCLUSION
For the reasons set forth above, I find and conclude that Defendant violated the automatic stay of Section 362(a)(3) of the Bankruptcy Code, 11 U.S.C. § 362(a)(3), when he locked Plaintiff out of the Premises and when he failed to respond to Plaintiff's requests for access to the Premises to retrieve or, at least, to inventory his personal property and financial records. Plaintiff sustained actual damages as a result of Defendant's stay violation in the amount of $7,250 for the loss of property, $2,000 for emotional distress, and $3,500 for attorneys' fees. Finally, I conclude that imposition of punitive damages in the amount of $5,000 is appropriate. I will therefore enter an Order entering judgment on the Complaint in favor of Plaintiff and against Defendant in the aggregate amount of $17,750.
An appropriate Order, based on this Memorandum Opinion, follows.
ORDER
AND NOW, this 7 day of November, 2018, for the reasons set forth in the accompanying Opinion entered in this adversary proceeding of even date herewith,
IT IS HEREBY ORDERED that JUDGMENT ON THE COMPLAINT IS ENTERED IN FAVOR OF PLAINTIFF AND AGAINST DEFENDANT IN THE AMOUNT OF $17,750.
A new issue arose for the first time in Plaintiff's initial post-trial brief and led me to request supplemental briefs, which were also duly filed.
Plaintiff says that Defendant locked him out of the Premises on January 26, 2015; but Defendant says the lockout occurred on January 28, 2015. This discrepancy is unimportant - whether the lockout occurred on January 26 or January 28, 2015, is of no consequence to my decision.
Plaintiff testified that he went to the Premises on the day of the lockout and saw Defendant and several other people inside the Premises. He knocked on the door, but Defendant and the others in the Premises ignored him. He further testified that after the lockout, No Trespassing signs appeared on the Premises and within several weeks, a new restaurant began operating in the Premises.
Plaintiff's brief filed May 17, 2018, at p. 3.
Plaintiff's supplemental brief filed on July 1, 2018 at pp. 1-2.
Plaintiff's supplemental brief at p. 3.
Plaintiff's supplemental brief, at p. 2.
Exhibit P-1-A, admitted into evidence at trial.
Exhibit P-1-C.
Exhibit P-1-C.
The letter that Plaintiff's counsel sent to Defendant's counsel on January 29 concedes that the food remaining in the Premises was likely unusable. Exhibit P-1-D.
The testimony about the auction and auctioneer is therefore admissible but weak.
Both Plaintiff and Defendant have many years of experience operating restaurants. I therefore afford equal weight to their testimony regarding the value of the items listed on Exhibit P-1-C. Plaintiff says the property is worth $21,200 and Defendant says the property is worthless. I believe it is somewhere in between and that $7,250 constitutes the most likely value.
Defendant testified, without contradiction, that Plaintiff owes DFY approximately $13,000 for delinquent rent and utilities.
The Third Circuit also did not decide whether financial injury is a necessary predicate to recovery of emotional distress damages. Like Plaintiff in this case, the debtor in Lansaw had established financial injury as a result of the stay violation, so damages for emotional distress are therefore appropriate in this case. Lansaw, 853 F.3d at 668.
Plaintiff's first brief at p. 8.
Counsel has put her client's best interests ahead other own. I recognize that the majority standard could lead to counsel preparing an invoice for fees and giving it to the client. Then, with a wink and a nod, counsel might assure the client that it was not to be paid. The invoice could then be proffered to a court as the basis for a request for attorneys' fees. I do not want to contribute to the establishment of incentives for counsel to do just that. I can only hope that the integrity of the profession (if not the risk of severe sanctions) would guide counsel along the appropriate path.
I am also aware that my colleague in the Middle District of Pennsylvania, Honorable Bankruptcy Judge Mary France, considered and then rejected the Parks decision in her Dean v. Carr, supra, decision. This weighed heavily on me because of the high respect I have for Judge France. I must, however, decline to follow her approach in favor of the more appropriate reasoning adopted by the court in Parks.
Defendant's testimony in this respect was shifty and was not credible.
Defendant's testimony in this respect was also shifty and was also not credible. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501677/ | Thomas J. Tucker, United States Bankruptcy Judge
I. Introduction and background
This case came before the Court for a hearing on September 27, 2018, on the Debtors' application entitled "Application for Order Authorizing Debtor, Nicole Blume's Employment of Loren Mannino and Mannino Martin for Non-Bankruptcy Legal Matters and Payment of Legal Fees and Costs," (Docket # 128, the "Special Counsel Application") and the Debtors' Motion to Incur Debt (Docket # 129). The creditor Alisa Peskin-Shepherd, PLLC ("Peskin-Shepherd") objects to the Special Counsel Application and the Motion to Incur Debt.
Confirming action taken during the September 27 hearing, and for the reasons stated by the Court on the record during the hearing, the Court entered an Order on September 28, 2018 (Docket # 140), which permitted further briefing on a specified issue, and which scheduled a further hearing on the Debtors' motions, to be held on October 11, 2018 at 2:00 p.m. In an Order entered on October 3, 2018 (Docket # 142), the Court added an additional issue to the further briefing permitted by the parties. The briefs were due on October 9, 2018, and were filed by each side on the afternoon of that date (Docket ## 143, 145). Then, in an Order entered on October 11, 2018 (Docket # 146), the Court permitted the Debtors to file a further brief, limited to discussing one additional issue that has been raised by Peskin-Shepherd, and adjourned the October 11 hearing to October 25, 2018. The Debtors filed their brief, with exhibits attached, as permitted by the October 11 Order (Docket # 147).
Having reviewed all the briefs and other papers filed by the parties, the Court concludes that a further hearing is not required, and has decided to rule on the pending matters in writing, in this Opinion and the order to follow. For the following reasons, the Court (1) will deny the Motion *677to Incur Debt in part, and grant that motion in part; and (2) will deny the Special Counsel Application.
II. Jurisdiction
This Court has subject matter jurisdiction over this bankruptcy case, and over these contested matters, under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). These contested matters are core proceedings, under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(D), 157(b)(2)(M), and 157(b)(2)(O).
In addition, these contested matters each fall 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). These are proceedings "arising under title 11" because they are "created or determined by a statutory provision of title 11," see id. , including the issues of whether and to what extent Bankruptcy Code § 327(e) applies. And these are proceedings "arising in" a case under title 11, because they are proceedings that "by [their] very nature, could arise only in bankruptcy cases." See Allard v. Coenen , 419 B.R. at 27.
III. The Debtors' Motion to Incur Debt
In their Motion to Incur Debt, the Debtors seek authorization from this Court (1) to incur post-petition debt to attorney Loren Mannino and his firm, Mannino Martin (collectively, "Mannino"), to represent the Debtors in pending state court litigation against Peskin-Shepherd; and, (2) in order to secure payment of such post-petition debt, to grant to Mannino a mortgage lien in the Debtors' real estate located at 330 E. Avon Road, Rochester, Michigan (the "Rochester Property").
In its supplemental brief filed October 9, 2018, Peskin-Shepherd argued, among other things, that it would violate Rule 1.8(j) of the Michigan Rules of Professional Conduct,1 and therefore would violate public policy, for the Debtors to give Loren Mannino and/or his firm a lien in the Rochester Property. (Docket # 143 at 5-7).2 The Debtors dispute this, in their brief filed October 18, 2018 (Docket # 147).
Rule 1.8(j) states:
(j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client , except that the lawyer may:
(1) acquire a lien granted by law to secure the lawyer's fee or expenses; and
(2) contract with a client for a reasonable contingent fee in a civil case, as permitted by Rule 1.5 and MCR 8.121.
Mich. Rules Prof'l Conduct R. 1.8 (2018) (emphasis added).
*678The Court agrees with Peskin-Shepherd's argument. The Court concludes that it would violate Rule 1.8(j) of the Michigan Rules of Professional Conduct, and therefore would violate public policy, for the Debtors to give Loren Mannino and/or his firm a lien in the Rochester Property.
Although the Debtors argue otherwise, the Court finds and concludes that the Rochester Property is part of "the subject matter of" the state court litigation in which Mannino represents the Debtors. This is clear from, among other things, Counts III and IV of Peskin-Shepherd's Third Amended Complaint in the state court action, and the relief sought for those counts.3 Those counts allege that the Debtor Nicole Blume fraudulently transferred the Rochester Property from herself as sole owner, to herself and her then-husband, Debtor Sean Blume.4 As relief for the alleged fraudulent transfer, those counts seek the following relief:
An Order setting aside conveyance of the Rochester Hills property,5 sell the property, and satisfy Nicole's debt to Plaintiff as follows:
i. Set aside the transfer of the Rochester Hills Property, pursuant to MCL § 566.37(1)(a) ;
ii. Impose a constructive trust and grant Peskin-Shepherd an equitable lien on the Rochester Hills property;
iii. Attach the Rochester Hills property, pursuant to MCL § 566.37(l)(b) ;
iv. Enjoin any further disposition by the Defendants Nicole or Sean Blume, or both, of the Rochester Hills Property or other property, pursuant to MCL § 566.37(1)(c)(I) ;
v. Appoint a receiver to take charge of the Rochester Hills Property or other property of Defendants Nicole and/or Sean Blume, pursuant to MCL § 566.3 7( I)( c)(ii);
vi. Levy execution on the Rochester Hills Property or its proceeds, if judgment has been obtained against ... Nicole, pursuant to MCL § 566.37(2) ; and/or
vii. Any other relief the court deems appropriate, MCL §§ 566.37(1)(c)(iii)6
This Court will not authorize the Debtors to grant the proposed lien in the Rochester Property, because doing so would violate Rule 1.8(j) of the Michigan Rules of Professional Conduct, and therefore would violate public policy.
The Court will authorize the Debtors to incur post-petition debt to Mannino, without the granting of the proposed lien. This authorization is based on the assumption that, as the Debtors' counsel has made clear in the Motion to Incur Debt and in the hearing on that motion, the Debtors will not be required to pay, and will not pay, such debt during the pendency of this Chapter 13 bankruptcy case, as part of any Chapter 13 plan or otherwise.7
The Court will enter an order granting the Motion to Incur Debt in part, and denying it in part, consistent with this Opinion *679IV. The Special Counsel Application
The Debtors's Special Counsel Application seeks an order authorizing the Debtors to employ Mannino to represent them in the pending state court litigation against Peskin-Shepherd. Peskin-Shepherd objects to this application, arguing among other things that Mannino's employment would violate Bankruptcy Code § 327(e).
Section 327(e) states:
The trustee, with the court's approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.
11 U.S.C. § 327(e).
In its Order filed September 28, 2018 (Docket # 142), the Court raised the issue of whether § 327(e) applies at all, and allowed the parties to brief that issue. The Order noted the following:
In making their arguments so far, the parties have assumed that the Debtor Nicole Blume's employment of Loren Mannino and his firm, Mannino Martin, as special counsel must meet the requirements of 11 U.S.C. § 327(e). But the Court's own research indicates that there is a split of authority on this question among bankruptcy courts around the country.
Cases holding that § 327(e) and its requirements do apply to a Chapter 13 debtor's request for approval to employ special counsel include: In re Goines , 465 B.R. 704, 706 (Bankr. N.D. Ga. 2012) ; Wright v. Csabi (In re Wright ), 578 B.R. 570, 582 (Bankr. S.D. Tex. 2017).
Cases holding that § 327(e) and its requirements do not apply to a Chapter 13 debtor's request for approval to employ special counsel include: In re Jones , 505 B.R. 229, 231 (Bankr. E.D. Wis. 2014) ; In re Scott , 531 B.R. 640, 645 (Bankr. N.D. Miss. 2015) ; see also In re Gilliam , 582 B.R. 459, 465-66 (Bankr. N.D. Ill. 2018) ( § 327 does not apply in Chapter 13 cases); In re Maldonado , 483 B.R. 326, 330 (Bankr. N.D. Ill. 2012) (same).
Based on the Jones , Scott , Gilliam , and Maldonado cases cited above, the Court concludes that, at least under the circumstances of this case, § 327(e) and its requirements do not apply to the Debtors' proposed employment of Mannino. The circumstances include the fact that, as noted above, the Debtors do not seek authority to pay, and will not pay, Mannino during the pendency of this Chapter 13 bankruptcy case, as part of any Chapter 13 plan or otherwise, and therefore will not be paying or seeking to pay Mannino from any property of the bankruptcy estate.
Under these circumstances, and given that § 327(e) does not apply here, the Court concludes that the Debtors need not obtain this Court's approval or authorization to employ Mannino for the purposes stated. To the extent the Special Counsel Application also seeks authority to grant a lien in favor of Mannino in the Rochester Property, it will be denied, for the reasons stated in Part III of this Opinion. Otherwise, the Special Counsel Application will be denied as unnecessary. The Court will enter an order to this effect.
V. Conclusion
For the reasons stated in this Opinion, the Court will enter an Order denying the Debtors' Motion to Incur Debt in part, and granting that motion in part; and denying the Debtors' Special Counsel Application.
*680The Order also will cancel the October 25, 2018 hearing, as no longer necessary.
ORDER REGARDING DEBTORS' APPLICATION TO EMPLOY SPECIAL COUNSEL AND DEBTORS' MOTION TO INCUR DEBT, AND CANCELLING THE OCTOBER 25, 2018, 2:00 P.M. HEARING
This case came is before the Court on two matters: (1) the Debtors' application entitled "Application for Order Authorizing Debtor, Nicole Blume's Employment of Loren Mannino and Mannino Martin for Non-Bankruptcy Legal Matters and Payment of Legal Fees and Costs," (Docket # 128, the "Special Counsel Application"); and (2) the Debtors' Motion to Incur Debt (Docket # 129). The creditor Alisa Peskin-Shepherd, PLLC objected to the Special Counsel Application and the Motion to Incur Debt. Today, the Court has filed a written opinion regarding these two matters. For the reasons stated by the Court in its written opinion filed today,
IT IS ORDERED that:
1. The Debtors' Motion to Incur Debt (Docket # 129) is denied to the extent that it seeks authorization for the Debtors to grant a lien to attorney Loren Mannino and/or the firm of Mannino Martin in the Debtors' real estate located at 330 E. Avon Road, Rochester, Michigan (the "Rochester Property"), and otherwise the Motion to Incur Debt is granted, subject to the terms of Paragraph 2 of this Order, below.
2. The Debtors will not be required to pay, and will not pay, any such debt incurred to Loren Mannino or Mannino Martin during the pendency of this Chapter 13 bankruptcy case, as part of any Chapter 13 plan or otherwise. Among other things, this means that neither Loren Mannino nor Mannino Martin will have any post-petition claim allowed under 11 U.S.C. § 1305(a)(2).
3. The Debtors' Special Counsel Application (Docket # 128) is denied to the extent that it seeks authorization for the Debtors to grant a lien to attorney Loren Mannino and/or the firm of Mannino Martin in the Rochester Property, and otherwise the Application is denied as unnecessary.
4. The hearing currently scheduled for October 25, 2018 at 2:00 p.m. is cancelled, as no longer necessary. (This Order does not itself cancel or adjourn the confirmation hearing, currently scheduled for 10:00 a.m. on October 25, 2018.)
The Michigan Rules of Professional Conduct apply in this Court, under L.R. 83.22(b) (E.D. Mich.) and L.B.R. 9029-1(a) (E.D. Mich.); see generally Kohut v. Lenaway (In re Lennys Copy Ctr. & More LLC ), 515 B.R. 562, 566-67 (Bankr. E.D. Mich. 2014) ("Good public policy, and the interest of preserving the integrity of the judicial process" requires compliance with the Michigan Rules of Professional Conduct.).
In their brief filed October 18, 2018 (Docket # 147), at page 2, the Debtors complain that Peskin-Shepherd waited too long to raise this argument under Rule 1.8(j). The Debtors make a fair point. But the Court has chosen to consider the merits of this belated argument, after giving the Debtors an opportunity to respond to it in their October 18 brief. This Court will not knowingly enter an order that violates public policy, even if the public policy argument is untimely made.
Peskin-Shepherd's state court Third Amended Complaint is attached as Exhibit 3 to the Debtors' October 18, 2018 brief (Docket # 147, the "Third Amended Complaint").
Third Amended Complaint at ¶¶ 51, 85-91, 93-101.
The Third Amended Complaint defines and refers to the Rochester Property as the "Rochester Hills property." See id. at ¶ 18.
Id. at 14-15.
This means, among other things, that Mannino will have no post-petition claim allowed under 11 U.S.C. § 1305(a)(2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501679/ | Thomas J. Tucker, United States Bankruptcy Judge
I. Opinion
This adversary proceeding is before the Court on the motion by Defendant entitled "Defendant's Third Motion for Discovery Sanctions" (Docket # 104, the "Motion"). Plaintiff filed a response objecting to the Motion (Docket # 106), and Defendant then filed a reply brief in support of the Motion (Docket # 108). The Court has reviewed all of these items carefully, and concludes that a hearing on the Motion is not necessary. The Court further concludes that the Motion should be denied, based on the following considerations and reasons.
The Court finds that Plaintiff's amended response to Defendant's Request to Admit No. 14, filed December 28, 2017 (Docket # 38 at pdf pp. 7-8) was false when made. But the record is not clear as to who is responsible for the false answer - Plaintiff's attorney who signed and filed the *687amended response, or Plaintiff himself (who did not sign the amended response), or both.
The amended response stated as follows:
Request to Admit No. 14: Admit that Susan Wise was not in Michigan on March 9, 2016.
Answer: Plaintiff lacks knowledge or information sufficient to admit or deny this request, has made reasonable inquiry, and the information known or readily obtainable by him is insufficient to enable him to admit or deny.
The testimony given on May 22, 2018 at trial by Plaintiff Norman Wise shows that Plaintiff did know that Susan Wise was not in Michigan on March 9, 2016. Norman Wise testified:
Q: Where was Susan Wise on March 9, 2016?
A: She was in Florida.
...
Q: You knew where -- where Susan Wise was on March 9, 2016, isn't that a fact?
A: Yes.1
The Court cannot determine, on the present record, whether it is Plaintiff Norman Wise alone (for example, because he gave his attorney bad information), or Plaintiff's attorney alone (for example, because he did not base the admission request response on any information provided by Plaintiff), or both of them, who is/are responsible for this false admission request response. In order to determine that, the Court would need to hold a further evidentiary proceeding, such as an evidentiary hearing. In its discretion, however, the Court declines to order any further evidentiary proceeding on this subject, based on the considerations stated below.
Even if the Court could presently determine who is responsible for Plaintiff's false admission request response (the choices being Plaintiff, Plaintiff's attorney, or both), the Court would exercise its discretion to decline to grant any relief to Defendant. And the Court exercises such discretion now to deny any relief to Defendant, despite the falsity of Plaintiff's amended admission request response. This is so for the following reasons:
• As Defendant essentially admits, the subject matter of the false admission request response was utterly unimportant to the prosecution, defense, or outcome on the merits of this adversary proceeding.2
• Defendant suffered no prejudice whatsoever because of the false admission request response.
• Defendant incurred no additional attorney fees or expenses whatsoever, and certainly no reasonable attorney fees or expenses whatsoever, because of the false admission request response.
• Because of the Judgments being entered today in this adversary proceeding, and in Adv. No. 17-4535 (McDermott v. Wise ), the dismissal of this adversary proceeding as a remedy for the false admission request response, as requested by Defendant, would do Defendant no good whatsoever. Defendant is being denied her discharge in each adversary proceeding, on the very same grounds under 11 U.S.C. § 727(a). Dismissal of this adversary proceeding, as requested by Defendant, would still leave Defendant with the same denial of discharge in the McDermott v. Wise adversary proceeding. And as part of the Judgment the Court is entering today, all of Plaintiff Norman *688Wise's claims in this adversary proceeding are being dismissed anyway (as moot), other than the two § 727(a) counts that are identical to those on which the United States Trustee is prevailing in the McDermott v. Wise adversary proceeding.
For the foregoing reasons, the Court will decline to grant any relief for Defendant on Defendant's Motion, and instead will deny the Motion. The Court also will deny Plaintiff's request for attorney fees, for having to respond to the Motion. The Court finds that the Motion raised a serious matter, was not filed for any improper purpose, and was certainly not frivolous.
II. Order
IT IS ORDERED that the Motion (Docket # 104) is denied, in its entirety.
IT IS FURTHER ORDERED that Plaintiff's request for an award of attorney fees for having to respond to the Motion is denied.
May 22, 2018 Trial Tr. (Docket # 73) at 95, 99.
See Def.'s Memorandum in Supp. of Mot. (Docket # 104-3) at pdf pp. 6-7. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501680/ | ALAN M. KOSCHIK, U.S. Bankruptcy Judge
On April 23, 2018, the debtors in these jointly administered chapter 11 cases (the "Debtors") filed a motion (Docket No. 400) (the "Motion") for authority to continue and make payments due and owing under several of the Debtors' employee retention plans. The Motion identified and requested authority to continue making payments under six separate plans. Only the largest and most-recently adopted retention plan, *690Debtor FirstEnergy Nuclear Operating Company's ("FENOC") 2018 Key Employee Retention Plan ("KERP") (the "2018 FENOC KERP"), drew opposition. On May 14, 2018, the Court granted the Motion, in part, authorizing the Debtors to continue making payments due to qualifying employees under the other five employee retention plans identified in the Motion.1 (Docket No. 542.) Consideration of the 2018 FENOC KERP was adjourned for further hearings after an opportunity for further investigation by the Debtors' creditors and other parties-in-interest.
The Court ultimately held an evidentiary hearing on the Motion with respect to the 2018 FENOC KERP and certain objections to that plan on August 10, 13, 14, 17, and 27, 2018. For the reasons set forth in this Memorandum Decision, the Court denies, with leave to amend, the remaining part of the Motion as it relates to the 2018 FENOC KERP. After weighing the evidence and considering the applicable legal standards under 11 U.S.C. §§ 363(b)(1), 503(c)(3), and applicable caselaw interpreting those provisions of the Bankruptcy Code, the Court concludes that the proposed bonus payments under the 2018 FENOC KERP in its present form are not justified by the facts and circumstances of these cases.
This Memorandum Decision constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a)(1), made applicable to this contested matter via Federal Rules of Bankruptcy Procedure 7052 and 9014.
JURISDICTION AND VENUE
This Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334 and General Order No. 2012-7 entered by the United States District Court for the Northern District of Ohio on April 4, 2012. Venue is proper pursuant to 28 U.S.C. § 1409(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (M), and (O).
FACTUAL AND PROCEDURAL HISTORY
On March 31, 2018, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with the Court. The Debtors' cases have been consolidated for procedural purposes only and are being jointly administered. The Debtors are operating their businesses and managing their property as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. On April 11, 2018, the United States Trustee for the Northern District of Ohio appointed the Official Committee of Unsecured Creditors (the "Committee") to represent the interests of unsecured creditors in these cases, pursuant to Section 1102 of the Bankruptcy Code.
Non-debtor FirstEnergy Corp. ("FE Corp"), an Ohio corporation, is the ultimate parent company for each of the Debtors, as well as certain of FE Corp's non-debtor affiliates. Debtor FirstEnergy Solutions Corp. ("FES"), an Ohio corporation, is the parent company for multiple other Debtors. These include FirstEnergy Generation, *691LLC ("FG"), an Ohio limited liability company that owns most or all of the Debtors' fossil-fuel powered electricity generation fleet, and FirstEnergy Nuclear Generation, LLC ("NG"), which owns the Debtors' nuclear powered electricity generation fleet, consisting of four nuclear reactors in three power stations. NG owns (i) the Beaver Valley Power Station ("Beaver Valley") in Shippingport, Pennsylvania, which encompasses two reactors ("Beaver Valley 1" and "Beaver Valley 2"); (ii) the Davis-Besse Nuclear Power Station ("Davis-Besse") in Oak Harbor, Ohio; and (iii) the Perry Nuclear Power Plant ("Perry") in Perry, Ohio.
Debtor FirstEnergy Nuclear Operating Company ("FENOC"), an Ohio corporation, is an affiliate of FES and a direct subsidiary of FE Corp. NG has no employees. The nuclear power plants owned by NG are operated by FENOC, whose employees compose more than two-thirds of the Debtors' combined workforce. As of March 15, 2018, the Debtors had 3,076 employees: 57 employed by FES, 686 employed by FG, and 2,333 employed by FENOC.
The Debtors have only seven employees who they concede meet the statutory definition of "insiders" under 11 U.S.C. § 101(31). None of those insiders participate in any of the Motion's retention plans, including the 2018 FENOC KERP. No party has challenged the Debtors' position that the seven insiders are not participants in any of their retention plans covered by the Motion, including the 2018 FENOC KERP. In addition, all parties appear to be in agreement that no participant in the 2018 FENOC KERP is an insider.
On March 28, 2018, three days prior to the petition date, the board of directors of FENOC and the managing members of NG made the decision to file with the Nuclear Regulatory Commission notice of their intent to deactivate of all of the Debtors' nuclear power plants. The proposed shutdown dates of the various plants are June 1, 2020, for Davis-Besse; June 1, 2021, for Perry and Beaver Valley 1; and October 31, 2021, for Beaver Valley 2. The FENOC board of directors approved the 2018 FENOC KERP contemporaneously with that decision.
The 2018 FENOC KERP was developed over the course of several months prior to the FENOC board's approval. At the time the Debtors began to plan for the potential deactivation of their nuclear plants, they began to consider how to alter or replace the 2016 FENOC KERP because the Debtors had determined that the existing retention plan would be inadequate to ensure the retention of critical employees through the nuclear plants' anticipated shutdown dates. The 2016 FENOC KERP's retention period ends in November 2018, is limited in scope, and, in the Debtors' view, does not cover critical employees who would now be likely to constitute "flight risks" because they are seeking or are likely to seek job security elsewhere in light of the deactivation announcement.
In January 2018, senior management of FENOC formed a working group of experts (the "Working Group") to explore the potential of a new retention plan for FENOC employees. The Working Group consisted of members of FENOC's senior management, certain law firms, a restructuring advisory firm, and human resources management shared with FE Corp via a wholly-owned FE Corp. subsidiary providing shared services, FirstEnergy Service Company ("FESC").
While the Debtors' other, smaller, and already partially-performed retention plans were approved by the Court in May 2018, the 2018 FENOC KERP drew opposition from both the Committee and a *692group of FENOC's collective bargaining units, the Utility Workers Union of America, Locals 270, 351, and 457, AFL-CIO, and the International Brotherhood of Electrical Workers Locals 29, 245, 272, and 1413, AFL-CIO (collectively, the "Unions"). On May 9, 2018, the Committee filed its reservation of rights with respect to the 2018 FENOC KERP at Docket No. 511. The Committee supported the Debtors' other retention plans, but "with respect to the 2018 FENOC KERP ... the Committee is not currently satisfied that [the] relief requested comports with the Bankruptcy Code." The Committee stated its intent to negotiate with the Debtors, obtain additional information, and reserved its right to interpose further objections.
The previous day, on May 8, 2018, the Unions filed their first response to the Motion. (Docket No. 481.) The Unions also asserted no objection to the other retention plans, but reserved their rights with respect to the 2018 FENOC KERP on the grounds that the Unions were still investigating the details of that retention plan.
On June 8, 2018, at Docket No. 707, the Unions filed their substantive objection (the "Unions' Response") to the Debtors' Motion seeking approval of the 2018 FENOC KERP. The Union objected to what it characterized as the unreasonable relationship between the proposed plan and the results that the Debtors sought to achieve with the 2018 FENOC KERP. The Unions objected, in particular, to the proposal to provide substantial retention bonuses to management level employees and other non-union employees only, without providing retention bonuses to any union employees, including a variety of skilled employees they alleged were necessary to operate and maintain the nuclear plants. The Unions cited examples of other utility companies and electricity producers undergoing the shutdown and deactivation of nuclear plants that had maintained their workforce by implementing retention programs applicable to wider cross-sections of their respective employees than would the Debtors' 2018 FENOC KERP. The Unions also objected to the 2018 FENOC KERP on the grounds that it discriminated unfairly against union employees in favor management level employees. The Unions also objected to the cost of the 2018 FENOC KERP, considering that it only provided retention benefits to almost half of FENOC's workforce with average annual retention bonuses per participant allegedly in excess of retention programs implemented by other utilities and electricity generating companies engaged in the deactivation of nuclear plants. The Unions also objected on the grounds that the Debtors' plan was not consistent with applicable industry standards, specifically other nuclear plant deactivation retention plans, and because the Unions were "frozen out of any discussions regarding the design of the [2018 FENOC KERP]." The Unions concluded that the Debtors' proposed retention plan was not the product of sound business judgment.
The Debtors and the Committee ultimately resolved the Committee's concerns with respect to the 2018 FENOC KERP, concerns that were not shared on the bankruptcy court docket with a formal objection. On June 29, 2018, the Debtor filed its Notice of Filing of Second Supplement to Motion for Authority to Continue and Make Payments Due and Owing Under the Debtors' Retentions Plans (Docket No. 869), describing the revised 2018 FENOC KERP (the "Revised KERP Notice"), which was the product of the Debtors' negotiations with the Committee, as well as the Office of the United States Trustee.
Several weeks after the Debtors filed their Revised KERP Notice, the Unions filed their Supplemental Objection to the *693Motion and the revised KERP (Docket No. 944) (the "Supplemental Objection"). The Unions' Supplemental Objection echoed the positions raised in the Unions' original objection. In their Supplemental Objection, the Unions objected more specifically to certain types of union employees being excluded from the 2018 FENOC KERP who the Unions contended were critical to the operation and maintenance of the Debtors' nuclear power plants and their reactors. The Unions also contended that certain management level employees, such as superintendents and supervisors, were not necessary, and that other unspecified and unidentified employees may not be necessary, to the operation and maintenance of the nuclear power plants. Finally, the Unions asserted that the failure to provide retention bonuses to the certain union employees placed the power plants in danger of losing many of their most critical employees.
The parties engaged in discovery during June and July, 2018, while the 2018 FENOC KERP was being renegotiated and revised and the parties refined their objections and responses. On July 27, 2018, the Court entered a scheduling order providing for deadlines to complete all discovery, including specific outstanding depositions, the extent to which the parties would be expected to proffer direct testimony at an evidentiary hearing through declarations, the extent to which direct examination of live witnesses would be permitted, and the availability of all witnesses for cross-examination.
The Court held a multi-day evidentiary hearing on the Motion and in consideration of the Debtors' proposed 2018 FENOC KERP on August 10, 13, 14, and 17, 2018. Closing arguments were presented to the Court on August 27, 2018. This Memorandum Decision follows the Court's consideration of the Motion, the Unions' Objections thereto, the trial testimony, and the exhibits admitted into evidence, after taking the Motion under advisement at the conclusion of the evidentiary hearing.
SUMMARY OF REVISED FENOC KERP'S TERMS
The following is a brief summary of the Debtors' 2018 FENOC KERP, as amended following consultations with the Committee and the United States Trustee, and filed on the Court's docket at Docket No. 869 on June 29, 2018.
The 2018 FENOC KERP establishes three tiers of bonuses for the plan participants. Tier I covers (i) fleet and site management, and (ii) senior reactor operators and reactor operators, who the Debtors contend "are highly marketable in the industry, take several years to replace, and without an adequate number of such employees, the Debtors' nuclear power plants cannot be operated." (Motion at 15.) Tier II primarily applies to superintendents and supervisors. Tier III applies to non-supervisory "individual contributors who are considered essential by senior management." Id.
The eligible participants are set forth in a "Schedule A" referenced but not included in the June 29, 2018 Notice of Revised 2018 FENOC KERP the Debtors' filed with the Court. A redacted form of this schedule was produced in discovery and admitted at trial. The redacted version excludes both the names and base salaries of the eligible participants. It also does not include their job function or category, a criterion that is explained in trial testimony as being the central basis for including or excluding an employee as a participant in the plan. The redacted schedule included the participants' job title, primary location, and bonus tier.
Participants in the 2018 FENOC KERP would receive 15 percent of their respective *694bonus as soon as practicable after May 1, 2019; 15 percent as soon as practicable after May 1, 2020; and the remaining amount as soon as practicable following their full vesting date, which is generally tied to the planned deactivation date of the participant's plant, the last of which (at Beaver Valley 2) is scheduled for October 31, 2021.
Including all interim and final bonus payments, participants in Tier I are each eligible for bonuses equal to 100 percent of their base salary. Reactor operators and senior reactor operators would receive an additional payment of $50,000, all paid at final vesting. Participants in Tier II are eligible to earn a bonus equal to 80 percent their base salary. Participants in Tier III are eligible to earn a bonus equal to 60 percent of their base salary.
Under the 2018 FENOC KERP, an employee forfeits any remaining KERP bonus for which he or she might otherwise be eligible if, prior to the vesting date, he or she (i) transfers to another position without FENOC permission; (ii) voluntarily resigns or retires; or (iii) is involuntarily terminated by FENOC for cause. Employees will be paid prorated amounts if they leave FENOC due to death or disability. In addition, the 2018 FENOC KERP provides for early termination in the event that the deactivation notices for any of the nuclear power plants are rescinded or fuel is procured to operate such plants beyond their currently-announced shutdown dates. If such an early termination event occurs, affected participants would receive only certain prorated amounts up through the date of such early termination event, and would not accrue further entitlement to any retention bonuses thereafter.
The schedule for interim and final bonus payments, as well as the provisions for participant forfeiture and early termination, reflect input from and negotiations with the Committee and the United States Trustee.
The Debtors estimate that the 2018 FENOC KERP will cost approximately $99.7 million, including a discretionary pool of $4.5 million, of which $482,000 had already been utilized prior to the date of the Motion.
LEGAL ANALYSIS
I. Legal Standard Applicable to Employee Retention Plans Proposed by Chapter 11 Debtors-In-Possession.
The Debtors and Unions agree that the approval of a chapter 11 debtor-in-possession's employee retention plan that does not include insiders is governed by 11 U.S.C. §§ 363(b) and 503(c)(3) of the Bankruptcy Code. (Motion at 16; Unions' Response at 4-5.) Section 363(b) of the Bankruptcy Code provides that a trustee, including a debtor-in-possession, "after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. § 363(b)(1). A court may authorize non-ordinary-course transactions using property of the estate pursuant to Section 363(b)(1)"when a sound business purpose dictates such action." Stephens Industries, Inc. v. McClung , 789 F.2d. 386, 390 (6th Cir. 1986) (regarding sale of all of a debtor's assets). The court must "expressly find from the evidence presented before him at the hearing a good business reason to grant such an application." Id. at 389 (quoting In re Lionel Corp. , 722 F.2d 1063, 1071 (2d Cir. 1983) ). "[T]here must be some articulated business justification, other than appeasement of major creditors, for using, selling or leasing property out of the ordinary course of business before the bankruptcy judge may order such disposition under section 363(b)." Id. (quoting Lionel Corp. , 722 F.2d at 1070 ). The *695Lionel rule is commonly referred to as the "business judgment" test and is commonly described as "deferential." See, e.g., In re Alpha Natural Resources, Inc. , 546 B.R. 348, 356 (Bankr. E.D. Va. 2016). However, as described above, even this ostensibly deferential standard requires findings based on a fair preponderance of evidence actually presented. The facially lenient requirement of an "articulated business justification," Lionel Corp. , 722 F.2d at 1070, for a transaction outside the ordinary course of business is not a license to rely on pretextual justifications that fail to withstand scrutiny. This is particularly true when the proposed transaction and the motion filed seeking its approval are the subject of a substantive objection.
The Debtors bear the burden of establishing, by a preponderance of the evidence, that the 2018 FENOC KERP should be approved, and that the payments required by the plan should be made, pursuant to 11 U.S.C. §§ 363(b)(1) and 503(c)(3). See In re Flour City Bagels, LLC , 557 B.R. 53, 57 (Bankr. W.D.N.Y. 2016) (citing Lionel Corp., 722 F.2d at 1071 ); In re Residential Capital, LLC, 2013 WL 3286198, at *20 (Bankr. S.D.N.Y. June 27, 2013).
While all transactions by a bankruptcy debtor outside the ordinary course of business require court approval pursuant to Section 363(b), employee retention plans invoke other statutory provisions as well. Section 503(c) was added to the Bankruptcy Code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. 109-8, 119 Stat. 23 (2005) ("BAPCPA"). Sections 503(c)(1) and (2) establish very strict and specific tests governing retention and severance payments for "insiders." As discussed above, the Unions have not contested the Debtors' assertion that no insider would participate in the proposed 2018 FENOC KERP. Therefore, the only portion of Section 503(c) relevant to FENOC's Motion is Section 503(c)(3), which "governs bonus payments to employees that are outside of the ordinary course." In re Global Aviation Holdings, Inc. , 478 B.R. 142, 150 (Bankr. E.D.N.Y 2012). Such payments are permitted only if they are "justified by the facts and circumstances of the case." Id. ; 11. U.S.C. § 503(c)(3).
Section 363(b)(1) and its long-established business judgment standard predate BAPCPA. Courts are divided about what, if anything, the new language of Section 503(c)(3) added to the standard for evaluating retention programs that did not include the debtor-in-possession's insiders. Most bankruptcy courts that have considered the issue have concluded that it adds nothing to the preexisting business judgment standard, and therefore regardless of Section 503(c)(3), the business judgment standard controls. See, e.g., Alpha Natural Resources, 546 B.R. at 356 ("a majority of courts ... agree that the 'facts and circumstances' test of § 503(c)(3) is identical to the business judgment test under § 363(b)(1)"); In re Patriot Coal Corp. , 492 B.R. 518, 530-31 (Bankr. E.D. Mo. 2013) (non-ordinary course transfers "must be justified by the facts and circumstances of the case, which ordinarily means that the business judgment standard of Section 363(b) applies"); In re Borders Group., Inc. , 453 B.R. 459, 474 (Bankr. S.D.N.Y. 2011) ("the legal standard under section 363(b) is no different than section 503(c)(3)").
However, other bankruptcy courts have concluded that Section 503(c)(3) requires something above and beyond what was already required by Section 363(b)(1). See In re Pilgrim's Pride Corp. , 401 B.R. 229, 237 (Bankr. N.D. Tex. 2009) (" section 503(c)(3) is intended to give the judge a greater role [than section 363(b)(1) ]: even *696if a good business reason can be articulated for a transaction, the court must still determine that the proposed transfer or obligation is justified in the case before it"); In re Global Home Products, LLC , 369 B.R. 778, 783 (Bankr. D. Del. 2007) (if bonus plans are a KERP, "they are subject to the bright light and restrictions of § 503(c)," rather than the "more liberal business judgment review under § 363"). The Pilgrim's Pride court held:
... the test of section 503(c)(3) should not be equated to the business judgment rule as applied under section 363(b)(1). First, to do so would mean that section 503(c)(3) is redundant. A transfer made or an obligation incurred outside the ordinary course of a debtor's business would fall within section 363(b)(1) in the absence of section 503(c)(3), and, thus, the latter provision would add nothing to the Code. Congress is presumed to intend that independent sections of the Code will have independent, differing impacts. See, e.g., BFP v. Resolution Trust Corp. , 511 U.S. 531, 537, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994). To read section 503(c)(3) as requiring nothing not already required by section 363(b)(1) would violate this principle of construction.
Second, the conditioning of approval of covered transfers and obligations upon their being "justified by the facts and circumstances of the case" suggests to the court that Congress intended the court to play a more critical role in assessing transactions, at least those with insiders, that fall within the ambit of section 503(c)(3). In applying the simple business judgment test, courts are adjured to defer to the debtor in possession or trustee; if a valid business reason is shown for a transaction, the transaction is to be presumed appropriate. See 7 Collier on Bankruptcy ¶ 1108.06 (15th ed. rev. 2006).
401 B.R. at 236-37.
The general statutory history of BAPCPA reflects Congress' concern that creditor recoveries were being unfairly diluted by debtors' inequitable conduct. See, e.g., Ransom v. FIA Card Services, N.A. , 562 U.S. 61, 64, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011) ("Congress enacted [BAPCPA] to correct perceived abuses of the bankruptcy system.") (quotation omitted); Baud v. Carroll , 634 F.3d 327, 356 (6th Cir. 2011) ("We believe it is now clear that, where each competing interpretation of a Code provision amended by BAPCPA is consistent with the plain language of the statute, we must, as the Supreme Court did in [ Hamilton v. Lanning , 560 U.S. 505, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010) ] and Ransom , apply the interpretation that has the best chance of fulfilling BAPCPA's purpose of maximizing creditor recoveries.").
While the Unions argue in their original Response that Pilgrim's Pride was correct and a higher standard than the business judgment standard applies, the Unions have chosen to frame the bulk of their argument in this case within the framework of the six factors commonly cited by courts applying the business judgment standard. That standard was articulated in In re Dana Corp. ("Dana II") , 358 B.R. 567 (Bankr. S.D.N.Y. 2006), a post-BAPCPA case governed by Section 503(c)(3) as well as Section 363(b)(1) and the pre-BAPCPA cases that interpreted it. Under the Dana II standard,
Courts consider the following in determining if the structure of a compensation proposal and the process for developing the proposal meet the "sound business judgment" test:
- Is there a reasonable relationship between the plan proposed and the results *697to be obtained, i.e., will the key employee stay for as long as it takes for the debtor to reorganize or market its assets, or, in the case of a performance incentive, is the plan calculated to achieve the desired performance?
- Is the cost of the plan reasonable in the context of the debtor's assets, liabilities and earning potential?
- Is the scope of the plan fair and reasonable; does it apply to all employees; does it discriminate unfairly?
- Is the plan or proposal consistent with industry standards?
- What were the due diligence efforts of the debtor in investigating the need for a plan; analyzing which key employees need to be incentivized; what is available; what is generally applicable in a particular industry?
- Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the incentive compensation?
358 B.R. at 576-77 (emphasis deleted).
These factors are neither exhaustive nor of inherently equal weight. "The Lionel court expressly stated that its list of factors was to 'provide guidance' to the bankruptcy judge and prefaced its list by stating that a bankruptcy judge 'might, for example look to such relevant factors.' " In re Montgomery Ward Holding Corp. , 242 B.R. 147, 154 (D. Del. 1999) (quoting Lionel , 722 F.2d at 1071 ). Neither Lionel 's nor Dana II 's factors are strictly required by the statute. Indeed, Judge Lifland's opinion in Dana II refers to its factors as the ones commonly used by courts to "in determining if the structure of a compensation proposal and the process for developing the proposal meet the 'sound business judgment' test." Dana II, 358 B.R. at 576. Dana II concluded that its factors are the appropriate ones to apply Lionel 's sound business judgment test to compensation plans, including KERPs. It is reasonable, therefore, to apply these factors as Lionel intended with respect to its own factors: as guidance bankruptcy courts may consider, not mandatory elements that must be accorded equal weight in all cases. Since Dana II was decided, its factors have been widely invoked by courts analyzing key employee retention plans pursuant to sections 363(b)(1) and 503(c)(3). E.g., Patriot Coal Corp. , 492 B.R. 518 (approving both an insider incentive plan and a non-insider retention plan under section 503(c)(3) ); In re Residential Capital, LLC (ResCap II) , 491 B.R. 73 (Bankr. S.D.N.Y. 2013) (applying Dana II factors in approving both a non-insider key employee retention plan ("KERP") and an incentive plan for insiders); Global Aviation Holdings , 478 B.R. 142 (approving non-insider KERP) ; In re Velo Holdings, Inc., 472 B.R. 201 (Bankr. S.D.N.Y. 2012) (applying Dana II factors and concluding that debtors exercised sound judgment in their KERP plan); see also 4 Collier on Bankruptcy ¶ 503.17[5] (Richard Levin & Henry J. Sommer, eds., 16th ed.).
No circuit court of appeals has opined as to what, if anything, Section 503(c)(3) adds to Section 363(b)(1) with respect to transfers of retention bonuses to non-insiders. In addition, despite finding that Section 503(c)(3)"is intended to give the judge a greater role" than Section 363(b)(1) in considering proposals for transactions subject to Section 503(c)(3), Pilgrim's Pride was considerably less specific than the Dana II court about what factors it would consider in making that analysis. Indeed, even when the district court in a later case agreed with the analysis in Pilgrim's Pride , it instructed the bankruptcy court on remand to "(1) analyze the KERP in terms of the Dana [II] factors; and (2) do so with the level of scrutiny described in Pilgrim's Pride. "
*698GT Advanced Technologies v. Harrington , 2015 WL 4459502, at *8 (D.N.H. July 21, 2015).
The Unions do not rest their argument on the extent or nature of the difference between the standards different courts have found in Sections 363(b)(1) and 503(c)(3). As a result, this Motion in this case is a poor vehicle to consider in depth the proper interpretation of Section 503(c)(3) and how it may, or may not, modify Section 363(b)'s business judgment standard as it applies to a non-insider employee retention plan.
Because the parties contesting the Motion have agreed as to the factors relevant in deciding the Motion, the Court will apply the Dana II factors to examine whether the 2018 FENOC KERP, in its present form, should be approved.
II. Court's Findings Based on Assessment of Testimony and Document Evidence Introduced at Trial.
Over the course of three and a half days of trial, the Court received the testimony, by declaration and live examination, from witnesses offered by the Debtors, including Donald R. Schneider, the president and chairman of the board of directors of Debtor FirstEnergy Solutions; Donald A. Moul, the president of Debtor FG and chief nuclear officer of Debtor FENOC; Paul A. Harden, senior vice president and chief operating officer of Debtor FENOC; and Brian L. Cumberland, an expert witness and national managing director of the compensation and benefits practice of Alvarez and Marsal, North America, LLC.
The Unions offered testimony of five witnesses, along with their written declarations, in opposition to the Motion. The Court received the testimony of Glenn Camp, president and assistant business manager of International Brotherhood of Electrical Workers Local Union 29, AFL-CIO, which represents 380 bargaining unit members at Beaver Valley. Mr. Camp had worked at the Beaver Valley Power Station from 1987 through December 1, 2016. The Unions also called Patrick Shutic, a master nuclear mechanic at the Perry Nuclear Power Plant in Perry, Ohio and an employee of FENOC. The Unions' third witness was Daniel Kunzman, a FENOC employee serving as a senior nuclear instrument and control ("I & C") technician at the Perry Nuclear Power Plant in Perry, Ohio. Frank Meznarich, another witness called by the Unions, is the president of the Utility Workers Union of America, Local 270, AFL-CIO, which represents 190 bargaining unit members at the Perry Nuclear Power Plant, pursuant to two separate collective bargaining agreements. The Unions' final witness was Larry Tscherne, the business manager and financial secretary of International Brotherhood of Electrical Workers Local Union 245, AFL-CIO, which represents 185 employees in the bargaining unit at the Davis-Besse Nuclear Power Station in Oak Harbor, Ohio. Mr. Tscherne previously worked for Toledo Edison and other predecessor companies of the Debtors from 1978 to 1996.
A. The 2018 FENOC KERP Is Necessitated by, and Intended to Address, the Debtors' Planned Nuclear Power Plant Shutdowns, Not the Reorganization of the Debtors In Chapter 11.
At the outset, the Court observes, based on not only the testimony of the witnesses, but also the stated purpose of the 2018 FENOC KERP and the arguments of Debtors' counsel in support of the Motion, that the proposed retention plan must be judged by whether it is necessary and effective to ensure that FENOC will be able to maintain and operate NG's nuclear power stations during a multi-year shutdown *699process. In designing the KERP, FENOC and its advisors focused on job functions, whether onsite or at headquarters, hands-on or supervisory, with the purpose of maintaining and operating the nuclear power plants safely, but with an eye toward a shutdown within two or three years rather than the long-term operation of the facilities for the remainder of their useful life, or at least until the expiration of their existing licenses issued by the Nuclear Regulatory Commission.
It is also clear from the testimony of the Debtors' witnesses that the precipitating event leading to the 2018 FENOC KERP was FENOC's decision to schedule an early shutdown of the nuclear power plants. These decisions were both made on the eve of the bankruptcy filing, but yet there was no testimony to the effect that the necessity for the retention plan had anything directly to do with the chapter 11 bankruptcy filing and the reorganization process.
Moreover, notwithstanding the frequent argument of counsel to the effect that this case represents a unique circumstance of nuclear power plant deactivation combined with a chapter 11 bankruptcy case, there is no evidence that the circumstances of this chapter 11 case further complicated the already difficult circumstances of retaining critical employees created by the shutdown and deactivation announcement, with the exception of the procedural requirement that the KERP obtain bankruptcy court approval. In this sense, the unique intersection of a nuclear plant shutdown and a chapter 11 case is a coincidence, one that required the consideration of the Motion, notice and an opportunity for hearing, and ultimately the jurisdiction of the bankruptcy court to consider whether the 2018 FENOC KERP should be approved, but not a basis for a unique substantive result.
The scope of the Debtors' own 2018 FENOC KERP demonstrates that this is essentially a nuclear plant shutdown retention plan, not a chapter 11 reorganization retention plan. The testimony of FENOC's expert witness, Brian Cumberland, makes clear that while the scope of this retention plan would be considered exceptional compared to most chapter 11 cases, it is an average one measured by the number of employees involved for a nuclear plant shutdown, perhaps even a conservative one. Mr. Cumberland also testified that the 2018 FENOC KERP by some measures was somewhat average with respect to other chapter 11 cases involving an energy industry debtor, comparing these cases to ones in the energy, chemical, and mining industries with over 100 proposed KERP participants. Nevertheless, the overwhelmingly clear evidence regarding the challenges the Debtors face, whether regulatory, operational, and/or safety, as well as sheer complexity of operating, shutting down, and deactivating three nuclear plants with four reactors, make it clear to the Court that the Motion must be evaluated with respect to the proper exercise of business judgment by a nuclear power plant operator seeking to deactivate its nuclear power plants and the facts and circumstances related thereto, not merely the business judgment of a routine chapter 11 debtor-in-possession seeking to reorganize.
B. The 2018 FENOC KERP Does Not Bear a Reasonable Relationship To the Debtors' Purpose In Proposing a Retention Plan.
The trial on the Motion focused heavily on the third Dana II factor -- whether the plan is fair and reasonable, and in particular, whether it discriminates unfairly among the Debtors' employees. However, in the Court's view, much of the evidence presented had overlapping applicability to *700both the first and third Dana II factors. The Court chooses to begin by examining the first factor: whether "the plan [is] calculated to achieve the desired purpose." Dana II, 358 B.R. at 576.
Debtor FENOC proposes a retention plan for its key employees that may incur a cost as high as $99.7 million dollars. In considering whether this retention program, which is clearly outside the ordinary course of business, may be approved under the applicable standards imposed by Sections 363(c)(1) and 503(c)(3) of the Bankruptcy Code, the Court must determine whether the Debtors have shown by a preponderance of evidence that the 2018 FENOC KERP is necessary to maintain and operate the three nuclear power plants safely until the target shutdown date, and is adequate to reach that goal.
2018 FENOC KERP Excludes Employees the Debtors Concede Are Critical While Being Imprecise About Which Employees Are Included.
Aside from the necessity and sufficiency of the proposed bonuses, the Court has concerns about the Debtors' qualitative decisions regarding which employees to include in the 2018 FENOC KERP. The fundamental approach of the Debtors in formulating its 2018 FENOC KERP was to focus on necessary job functions and to identify which employees it needed to retain to perform those functions and which ones were less critical over the course of a two- to three-year shutdown horizon. This focus included identifying jobs that were particularly critical for the shutdown process, which jobs were less critical if the nuclear plants were not going to be operated on a long-term basis, and also whether the Debtors were overstaffed or perhaps only barely staffed in any of these job functions. This approach is eminently reasonable and the Court has no qualms with this approach. Debtor FENOC identified in particular reactor operators and senior reactor operators, engineers, technical specialists, decommissioning planners, regulatory compliance planners, and supervisors as the most critical job functions, with supervisors included at least in part to assist with the reassignment of various employees, as needed, when faced with the inevitable attrition that the shutdown horizon would generate. The Court accepts FENOC's judgment that these were the critical job functions for which retention was most important.
The Court is concerned with the apparently discretionary definition of the participants in Tier III and the lack of any meaningful disclosure as who may or may not be included therein. The Unions offered their Exhibit 1 into evidence, which is a spreadsheet obtained from the Debtors by the Unions during discovery that included many pages containing line-by-line records for each of the positions to be included in the 2018 FENOC KERP. This document did not include names of any individuals, ostensibly because of the Debtors' concerns for employee privacy. It also did not include reference to any job function, which the Debtors emphasize was the basis for formulating the retention plan. Instead, it included job titles, which are reflective of human resources classifications rather than descriptions of each employees' functional purpose. The latter would have been more informative and tie closer to the strategic theory undergirding the proposed retention plan. The lack of disclosure of the job functions, and perhaps also the identification of the actual employees, leaves the Court wondering who exactly is included or not included in the plan. Moreover, it makes it difficult for third parties, such as the Unions, but perhaps also the Committee and other creditors, to receive clear disclosure as to what is proposed so that they can evaluate *701whether the 2018 FENOC KERP, is in their view, effective and reasonable.
The Court's greatest concern with respect to the efficacy of the 2018 FENOC KERP is its treatment of reactor operators under Tier I. FENOC goes to great length to describe how critical reactor operators and senior reactor operators are to the safe operation and maintenance of the nuclear power plants for day-to-day operations, as well as the shutdown process. These are the individuals who are licensed to operate the nuclear reactors. They are critical for oversight of the reactors and to avoid regulatory violations with respect to their operations. They are highly trained and marketable. They are difficult to replace and their replacement is both costly and time consuming. At this stage of the shutdown horizon for the three nuclear plants, it may be very difficult to train any new reactor operators before such time as the plants are closed and no such operators are necessary. The Debtors also emphasized that these individuals and job functions are essential to the deactivation process that FENOC contemplates.
Therefore, it is without question that reactor operators and senior reactor operators are, by the Debtors' own admission, the most critical employees to retain and may be one of the most marketable employees who are "flight risks" because they may be hired away by other employers. It is for these reasons that the Debtors would be willing to pay the reactor operators the highest bonuses under the plan, 100 percent of annual salary, plus an additional bonus of $50,000.
However, the 2018 FENOC KERP is glaringly inconsistent in satisfying this stated goal of retaining critical reactor operators. The retention plan excludes reactor operators working at two of the three nuclear power plants, Davis-Besse and Beaver Valley. The only reactor operators included as participants in the KERP are those at the Perry Nuclear Power Plant, the only reactor operators who are not members of the Unions. Nothing in the stated purpose of the 2018 FENOC KERP, or the Debtors' witnesses' original declarations in support of the Motion, provide any basis for the failure to include reactor operators at Davis-Besse and Beaver Valley. The Court's concern is that while Debtor FENOC is willing to spend upwards of $100 million to retain employees, it proposes to exclude a set of employees it has already determined are the most critical to retain.
On rebuttal and on cross-examination, the Debtors' witnesses attempted to explain this exclusion of reactor operators at two of the three plants. Mr. Harden in particular explained that the reactor operators at the Perry plant are also supervisors and provide supervisory functions in addition to serving as reactor operators. However, there is nothing in the Plan or its original stated imperative that explains why a reactor operator who is also a supervisor should be paid in Tier I with an additional bonus, while supervisors that are not reactor operators are relegated to Tier II treatment. Moreover, if it is the status as a reactor operator that justifies the exceptional bonuses offered to them, it is difficult to understand why reactor operators at the two other plants are excluded completely.
The Debtors also argue that that status as a union worker, whose employment is the subject of a collective bargaining agreement, provides sufficient additional benefits to justify the disparate treatment between union and non-union reactor operators under the retention plan. This argument is not persuasive. Status as a bargaining unit member and protected under a collective bargaining agreement may have any number of benefits in the ordinary *702course of business. However, in this situation, FENOC is planning the shutdown of the nuclear power plants in two or three years. That decision was the original justification for the 2018 FENOC KERP. The Debtors' witnesses concede, as they must, that upon closing of the plants, the union workers will lose their jobs and be laid off. It is inconceivable to the Court that collective bargaining agreement rights, such as access to grievance procedures, vacation pay, or any of a number of other collective bargaining agreement attributes, would be of material value under these circumstances.
The failure to include the reactor operators at Davis-Besse and Beaver Valley from the 2018 FENOC KERP is the clearest example in which the retention plan's purpose is not addressed by the plan's actual terms. The exclusion of the reactor operators from the 2018 FENOC KERP also stands in stark contrast to an earlier and smaller retention plan offer by FENOC in 2016. The Local 29 Retention Plan covered seven reactor operators at Beaver Valley, who were members of Local 29, because they were approaching retirement and FENOC desired to retain them for a sufficient period so that new reactor operators could be trained. This was eminently reasonable. However, the replacement reactor operators, who are only now graduating from their training program to be available to work for FENOC, are being both recruited by other employers in the face of the shutdown announcement and excluded from the 2018 FENOC KERP. These circumstances further support a finding that the 2018 FENOC KERP would not meet its own goals.
While the Debtors' witnesses strove valiantly to minimize its importance, the Unions provided testimony to the effect that other employers, such as Shell Oil and Entergy, are actively recruiting many of FENOC's employees. In this environment, the Court is reminded of the Debtors' own observations that many of these employees, in particular, reactor operators, are marketable and hard to replace. This is the stated reason why the Debtors seek to enact a retention plan in the first place and spend as much as $100 million dollars to retain employees for the next few years. The Court finds the Debtors' explanations for the exclusions to be unreasonable post-hoc rationalizations used to justify an earlier decision made for other reasons.
The Court is less certain with respect to other job categories or functions such as I & C technicians, chemistry technicians, plant operators, and electricians. FENOC's Paul Harden was clear in his testimony that the Debtor has ample numbers of certain job categories, such as mechanics and project managers. Mr. Harden explained that in light of the shutdown horizon, long-term maintenance will become increasingly unnecessary at the plants and in light of the number of mechanics he has available, it would unnecessary to provide retention bonuses to maintain the current staff. Similarly, with respect to project managers, Mr. Harden testified that the ease of training others to qualify for that job function and perhaps the number of existing project managers in the Debtor's employment makes retention bonuses for those job functions unwise. This decision is reasonable given the testimony before the Court.
However, the Debtors' analysis by job function is somewhat scattershot and not comprehensive, at least as it was presented to the Court. It was anecdotal and given by example rather than as a comprehensive review. The Debtors did not provide evidence of every job function, the targets established by management, the basis for evaluating them, and the current number of employees qualified for each *703function. The Court has no dispute with the theory of the Debtors' approach. However, the evidence supporting its implementation is lacking. The fact that there is such a glaring failure to explain the Debtors' decision with respect to the reactor operators gives the Court pause as to Debtors' analysis of all of the job functions (except with respect to specific functions that were clearly delineated for exclusion, such as mechanics and project managers). With clearer disclosure and more comprehensive testimony, the Debtor may be able to show that the current plan, perhaps with some modifications, would constitute the proper exercise of the business judgment. However, the Court must make a decision based on the record before it.
The Unions' Witnesses Offer Clearer Testimony of the 2018 FENOC KERP's Weaknesses Than Do the Debtors' Witnesses of Its Strengths.
While it is not their burden to either design or to justify a retention program, the Court is struck by the fact that the Unions frequently offered clearer testimony as to the inadequacies of the 2018 FENOC KERP than the Debtor offered to justify it.
For example, Patrick Shutic testified that the concept of "flight risk" emphasized by the Debtor is most properly determined based on the age and the time until retirement of each employee. That observation is supported by the Debtor's own 2016 KERP with respect to the reactor operators at Beaver Valley. It is also an intuitive argument that older workers who are approaching retirement will patiently wait for several years, whereas younger workers will inevitably realize that they have to find long-term positions and will not wait until the bitter end without obtaining a bonus to justify a delay in moving on.
By contrast, the Debtors' witnesses, based on their "thirty years' experience" in managing their employees, contend that union employees are primarily "locals" and therefore not inclined to move. However, this analysis is not supported by any data regarding who was a "local" and who was not. For example, there is no evidence with respect to who attended high school within a particular radius of each plant by job category or union membership status. More to the point, while Mr. Harden and other FENOC witnesses stressed that on average union employees have been historically less likely to be a flight risk, they offered no evidence comparing rates of voluntary attrition for union employees to the same statistic for non-union employees while controlling for level of education and job function. For example, is it really true that a well-trained, marketable reactor operator who is a member of one of the Unions is less of a flight risk than a non-union reactor operator at the Perry Nuclear Power Plant? There is no reason to assume that that is true and the Debtors offered no credible evidence to establish that conclusion. Moreover, even to the extent the Court could accept the impressions of a management witness with thirty years' experience supervising employees in the nuclear industry, the fact remains, as conceded by those witnesses, that they do not have any experience with nuclear power plant shutdowns. The circumstances that FENOC is facing in the next several years are extraordinary and are unlike anything these witnesses have experienced before. While union workers may very well have been content to stay near home and enjoy their union jobs when the work was steady, one cannot reasonably extrapolate from that observation and conclude that those union employees will be content to remain at a job with a scheduled end date if other opportunities are made available to them. It is also inconceivable that they will not seek out new employment.
In addition, Daniel Kunzman provided simple and informative testimony with respect *704to the key participants in any of the plants' emergency response organizations ("ERO"). The parties and their witnesses agreed that EROs were required by applicable regulations to be in place in the event of any emergency at a nuclear power plant. The Debtors' witnesses had indicated that as many as seventy percent of its employees at all of the plants were participants in such teams. The Debtors relied on this point to emphasize that because so many employees were qualified to participate in the EROs that certain union employees who were members of those teams were not absolutely necessary to make those EROs function and thereby garner a retention bonus.
However, Mr. Kunzman explained that each ERO required at all times at least one I & C technician, two radiation protection technicians onsite, three additional radiation protection technicians on-call with pagers, and one chemical technical onsite. By his testimony, none of these job functions were included in the 2018 FENOC KERP. This testimony was much more persuasive in suggesting the currently proposed retention plan fails to provide key employees necessary for the EROs compared to the much more vague testimony of the Debtors' witnesses.
The Unions' position with respect to the staffing of the EROs may ultimately be shown to be lacking in perspective, information, or even ultimate accuracy. However, based on the record before the Court, Kunzman's testimony was strikingly clearer on this point than that offered by the Debtors' witnesses.
Basing KERP Bonuses on Job Functions and Actual Need Is Reasonable, But the Debtors' Implementation of That Strategy Is Not Supported By the Record.
Debtor FENOC assures the Court that it planned the 2018 FENOC KERP focusing on each job category at the nuclear power plants, assessing their criticality for operating the plant for the next two or three years, and staffing adequately for the shutdown process. The Debtors' witnesses, in particular Mr. Harden, stressed that certain job functions would be less important during this time frame than others, that level of criticality may be different than is generally true while the plants are operating on a long-term basis, that some job functions are overstaffed, that attrition is inevitable, and that attrition can be planned for. The Court has no objection to any of these concepts or theories.
However, the Court finds, based on the record presented by the Debtors, that the Debtors did not show that the 2018 FENOC KERP reflected a fair exercise of the Debtors' business judgment "calculated to achieve the desired performance" planned by FENOC and its Working Group, or meet the challenges for preparing nuclear power plants and reactors for shutdown. Dana II, 358 B.R. at 576. This is particularly true with respect to its treatment of reactor operators. These circumstances, while unusual and perhaps unique among other chapter 11 bankruptcy reorganization cases, are the "facts and circumstances of [these Debtors'] cases" that must be considered when evaluating whether the Debtors' proposed KERP satisfies the applicable legal standard. Based on the record before the Court, it does not.
C. The 2018 FENOC KERP, in Its Present Form, Would Discriminate Unfairly Among Its Employees.
The Court also concludes, based on the evidence introduced at trial, that the proposed 2018 FENOC KERP unfairly discriminates *705among its employees and therefore the scope of the plan is not fair and reasonable. Many of the Court's findings in support of this conclusion are among the findings made in Section II.B., wherein the Court concludes that the details of the 2018 FENOC KERP bear an unreasonable relationship to the Debtors' goal of retaining critical employees necessary to maintain and operate its nuclear power plants until their scheduled shutdown date.
The Debtors' witnesses provide clear testimony that their Working Group concluded that the decision of who to include and who to exclude from the retention plan should focus on job functions, which job functions were critical to the safe maintenance and operation of the power plants during their shutdown horizon, which job functions were sufficiently staffed such that the Debtors could sustain expected attrition, and which job functions required the retention of most of its existing employees in those positions because of limited staffing, their marketability and risk of flight, and the difficulty, expense, and lead time necessary to train new employees. The Debtors' witnesses, both in their declarations and live testimony, emphasized that the highest ranked of such positions were those of senior reactor operators and reactor operators.
Donald Moul testified for FENOC about the high value of reactor operators, both from an operational perspective and to satisfy regulatory requirements. Mr. Moul testified that there was no training difference between union reactor operators and non-union reactor operators. He testified further that Entergy began actively recruiting FENOC employees for one of its power plants located in Louisiana, including reactor operators, immediately after the deactivation announcement was made by the Debtors in late March 2018.
Indeed, the 2018 FENOC KERP by its own terms clearly provides the most favored treatment for senior reactor operators and reactor operators, specifically a bonus equal to 100 hundred percent of the employee's annual salary, plus an additional $50,000. No other job function would receive such a generous bonus under the 2018 FENOC KERP. The qualifications for such a bonus, under the terms of the plan, is an employee's status as a reactor operator or senior reactor operator. Nevertheless, the 2018 FENOC KERP would exclude all union-represented reactor operators employed at the Davis-Besse Nuclear Power Station and the Beaver Valley Power Station. Mr. Moul justified this distinction on the grounds that the reactor operators at the Perry facility were also supervisors -- a job function that would entitle an employee to, at most, a Tier II bonus under the plan.
Mr. Moul's testimony, both as to the value of reactor operators and the distinction between those at Perry and those at the other two plants, is also echoed by the testimony of Paul Harden. Mr. Harden testified that not only were reactor operators highly trained, but that they were difficult to replace and replacement took a substantial period of time. He testified that the training horizon for a reactor operator was approximately two years. He confirmed that these employees were essential to the operation of the nuclear power plants and that having an inadequate number of them would violate regulations imposed by the Nuclear Regulatory Commission.
The testimony of the Debtors' witnesses and the evidence supporting the purpose of the 2018 FENOC KERP cannot be reconciled with that plan's disparate treatment of the union and non-union reactor operators. The Court finds reasonable the general observations of Mr. Harden that *706certain job functions would be less necessary in a shutdown mode and that existing staffing may offer a deeper bench for some job categories than others. The Court also agrees that the Debtors and their management team are entitled to reasonable deference with respect to their decisions about these choices. However, where their analysis and intentions are grossly inconsistent with their actions, the Court is forced to intercede. Discrimination itself is permitted. However, where the discrimination is unfair, the retention plan fails to meet the necessary standard.
Other observations already made by the Court support this conclusion. In the Court's view, based on the record evidence, the Debtors' flight risk analysis is faulty. It appears that the Debtors' management relied on stereotypes based on their perception of union employees in determining that they would not be flight risks, notwithstanding the fact that at least some of those employees filled job functions the same management team had concluded were both critical to the operation and maintenance of the nuclear power plants and highly marketable to other employers. The Debtors' justification for denying retention bonuses to union employees based on their rights under their respective collective bargaining agreements is also weak in light of the looming shutdowns and eventual deactivation of the nuclear power plants where they are employed. Moreover, the Court observes that discretionary aspects of the 2018 FENOC KERP, in particular the vague standard for selecting which employees would be participants of the plan under its Tier III category leaves fertile ground for discriminatory decisions based more on stereotypes and gut impressions rather than actual data or objective standards.
Moreover, the 2018 FENOC KERP is inconsistent with FENOC's implementations of other retention plans such as the Local 245 Retention Plan at Davis-Besse, the Local 29 Retention Plan at Beaver Valley, and the 2016 FENOC KERP. All of these retention plans were included in the Motion and the completion of those programs through to their end dates has already been approved by the Court. Mr. Tscherne testified that the Local 245 Retention Plan at Davis-Besse did not include all workers, only focused on job functions that FENOC had determined to be critical, that those job functions included reactor operators, equipment operators, and I & C technicians and that among those job categories receiving bonuses to ensure their retention were sixty-eight union workers.
As previously discussed in Section II.B., the Local 29 Retention Plan included seven union reactor operators at Beaver Valley. Clearly, in very recent history, the same Debtor sought to retain employees to maintain the operations of the same nuclear power plants and in so doing, not only sought to retain critical job functions as it purports to be doing here, but also included union workers who qualified because of their job categories. Of course, it is possible that circumstances have changed in the intervening months and years and that the shutdown plan may have altered FENOC's calculus in a legitimate way. However, there is a lack of evidence to explain or reconcile the distinctions between these plans on this score.
The Court is struck by the explanations for the exclusion of union reactor operators given by Mr. Harden in rebuttal and on cross-examination after the Unions filed their objections. FENOC now argues that the collective bargaining agreement is a basis to exclude union workers from the 2018 FENOC KERP (even though they were not excluded from the earlier retention plans); that supervisory skills justify *707inclusion of certain reactor operators at the highest level of bonuses, despite the fact that supervisory skills only qualify an employee for a Tier II treatment under the KERP; and that a few reactor operators with special emergency skills necessary to avoid catastrophic disaster scenarios such as the one that occurred at the nuclear power plant in Fukushima, Japan, justifies inclusion of those reactor operators notwithstanding the exclusion of other reactor operators, despite the fact that the KERP does not provide an additional bonus based on such emergency skills and does provide for a uniformly generous bonus for all reactor operators -- if they are covered by the plan. The Court is forced to conclude that faced with the Unions' objections to the retention plan, the Debtors had no good responses with respect to how they implemented their original job function strategy and were forced to rely upon post-hoc rationalizations. The Court finds these to be inadequate.
While focusing on the unfair discrimination present in the 2018 FENOC KERP in its current form, the Court must emphasize that it is also clear that the position of the Unions, if given full rein, go too far. The Unions' witnesses, and to some extent their attorneys in argument in open court, urge the inclusion of all union workers in the retention plan. At least one witness stated his opinion that every employee is important and that all employees should be included in order to ensure better morale at the nuclear power plants.
The Court understands and appreciates these sentiments. However, the Debtors' stated purpose of only providing retention bonuses for critical employees and to be efficient and minimize the costs to the extent possible is absolutely the correct approach, certainly for a debtor-in-possession in a chapter 11 bankruptcy case, and quite possibly in all situations such as these. While the Court has considered the observations regarding PG & E's retention plan at Diablo Canyon, which the parties seem to agree included all employees, the Court is not suggesting in any way that such a global retention plan here would be logical, necessary, or proper exercise of the Debtors' reasonable business judgment in this case.
The Unions do not have to be given everything that they want in order for the Debtors to propose a retention plan that does not discriminate unfairly. Unfortunately, the 2018 FENOC KERP in its current form does discriminate unfairly and, based on application of the Dana II factors, is not the product of reasonable business judgment.
D. Consistency with Industry Standards.
The 2018 FENOC KERP includes far more employees and a far larger budget than is typical for key employee retention plans proposed by chapter 11 debtors. This observation was made by the Debtors' expert witness, Brian Cumberland, in his testimony before the Court.
Mr. Cumberland's expert testimony only addressed whether the 2018 FENOC KERP was reasonably in line with industry standards for other retention plans involving nuclear plant shutdowns, energy chapter 11 cases, and chapter 11 reorganization cases generally. He offered no opinion with respect to the identification of critical FENOC employees necessary to maintain and operate the three nuclear plants safely through to shutdown or the percentage bonuses necessary and sufficient to retain critical employees.
Comparing the 2018 FENOC KERP to other retention plans, Mr. Cumberland's testimony suggested that other nuclear plant shutdown retention plans may be more inclusive regarding employees. His *708testimony and his analysis was based on publicly available information from other nuclear power generating companies and utilities and did not rely on comprehensive data concerning the number and type of employees participating in those other plans and the circumstances under which those decisions were made. Some of the limited data Mr. Cumberland relied upon in his analysis was obtained by the company officers themselves, including Paul Harden and one of his colleagues. That attempt to gather information was informal in nature, more anecdotal than scientific, and included phone calls to only a handful of electricity generating companies. That effort revealed facts concerning the ongoing retention plan offered by Pacific Gas and Eletric ("PG & E") with respect to its Diablo Canyon Nuclear Power Plant shutdown in California, which included all employees located at that nuclear power plant. Mr. Harden and Mr. Cumberland believed that their other examples of nuclear plant shutdown retention plans did not include such widespread employee participation, but they conceded that they did not have conclusive information regarding the breadth of those other plans.
Mr. Cumberland noted that while the 2018 FENOC KERP would provide bonuses to 44 percent of FENOC's total employees and 71 percent of its non-bargaining (non-union) employees, he observed that other nuclear plant shutdown retention plans "generally involve all employees, including senior management," and that in this sense the 2018 FENOC KERP was "more selective than other nuclear retention programs." (Cumberland Decl. ¶ 12, Ex. B at 14.) On redirect-examination, Mr. Cumberland stressed that the point of his direct testimony was that other non-bankruptcy programs provide bonuses to senior employees, whereas in FENOC's bankruptcy case the vice president rank and above are excluded from the plan. Nevertheless, as previously noted, the evidence shows that PG & E included all employees and the Debtors' experts and other witnesses were uncertain as to whether their other competitors they had contacted offered plans as broad.
In addition, the Court observes that Mr. Cumberland's analysis regarding the average payment on the 2018 FENOC KERP in comparison to his market observations both refer to per employee payments. Id. However, only 44 percent of the employees at FENOC will be eligible for bonuses and therefore dividing the entire KERP over all employees working for FENOC dilutes the per employee figure, which is, as a mathematical certainty, less than the per participant average. The market observations to which Mr. Cumberland compares those figures offer a range in which the 2018 FENOC KERP figure fits nicely. However, in the case of PG & E, all employees are participants in the retention plan. This suggests that PG & E is able to retain its employees for significantly less per participant than Debtor FENOC proposes here.
While the Court is more persuaded by the comparisons between the 2018 FENOC KERP and retention plans made available by other employers engaged in nuclear power plant shutdown and deactivation, the Court notes that Mr. Cumberland's comparison with other bankruptcy retention plans appears to compare different metrics for FENOC's KERP and Cumberland's other market observations. With respect to retention bonuses only, Cumberland reports that the 2018 FENOC KERP offers an "average retention of $31,000 per employee on an annual basis." Cumberland compares this to a range of $19,800 to $42,900 for the average payout per participant ranges" for other comparable bankruptcy retention plans. As previously observed, the 2018 FENOC KERP only *709includes 44 percent of the FENOC employees. Therefore, the $31,000 per employee figure understates by some amount, perhaps a substantial amount, the average retention payment per participant on an annualized basis. That figure would have been a more appropriate measure to compare to the other market observations.
The Court also observes that Debtors' counsel have frequently argued that the Unions' suggestion to spread out the existing KERP budget of $99.7 million among more employees, or all employees, of the Debtors, would "eviscerate its retentive effect." It is not for the Court to rewrite any retention plan, or impose one on the Debtors. However, the Court is compelled to comment that counsels' statements appear to be hyperbole and at the very least made without supporting evidence. There is no evidence to support the argument that any dilution of the per participant bonus would be so dramatic as to "eviscerate" the retentive effect. The Court accepts that diluting the bonus pool would likely have some effect on the margin with respect to its retentive effect. However, the Court requires better evidence before it could conclude that the marginal effect would be material. Moreover, the evidence regarding industry standards, which is essentially limited to case studies involving a few other nuclear power generators, suggests that a broader employee retention plan with a more diluted bonus pool has been used effectively. Therefore, the Court concludes on the record before it that the 2018 FENOC KERP is not consistent with the relevant industry standards.
E. Application of Other Dana II Factors.
The Court concludes that the first and third Dana II factors discussed in Sections II.B. and II.C., supra , are the most critical factors relevant to whether the Debtors have established by a fair preponderance of the evidence that the 2018 FENOC KERP reflects a proper exercise of the Debtors' reasonable business judgment. The Court's conclusions concerning the fourth Dana II factor, consistency with industry standards, discussed in Section II.D., lead to the same result, albeit based on more limited evidence. The remaining factors are less problematic for the Debtors and are not as heavily disputed by the Unions. To complete the Dana II analysis, the Court considers the remaining factors below.
1. Cost.
The cost of a retention plan would ordinarily be a critical issue for a proposed KERP in a chapter 11 reorganization plan. The Court expects that the issue was front and center among the concerns of the Committee and the United States Trustee when they privately reviewed the original 2018 FENOC KERP with the Debtors and their professionals.
However, the revised 2018 FENOC KERP, having been vetted by the Committee and the United States Trustee, a process that resulted in significant changes to the terms of the proposed plan, suggest that those concerns have been resolved. Clearly, those amendments have addressed payment thresholds, the circumstances upon which employees would waive their right to a bonus, and the early termination of the plan in the event a scheduled nuclear plant deactivation is cancelled. These factors may greatly reduce the cost of the 2018 FENOC KERP, especially to the extent circumstances change and the retention plan is no longer needed because the Debtors' cancel their shutdown plans.
The $99.7 million price tag remains a concern for the Court. However, the careful review of the Committee and the United States Trustee, as well as the lack of any objection from the Unions on this *710point, assures the Court that the cost of the 2018 FENOC KERP has been adequately scrutinized.
Moreover, because this is not an ordinary chapter 11 KERP, but rather one addressing the challenges of nuclear plant shutdowns, which the evidence shows are typically broader and more expensive, the Court is satisfied that the overall cost of the 2018 FENOC KERP is reasonable. Therefore, there is adequate evidence that the proposed 2018 FENOC KERP is not excessively costly and that its cost is not a basis for the denial the Motion.
2. Debtors' Due Diligence and Use of Independent Counsel in Preparing Proposed 2018 FENOC KERP.
The evidence introduced by the Debtors established that the efforts of its Working Group, along with its legal and restructuring advisors, as well as its human resources management team provided by non-debtor affiliate FESC, devoted ample time and effort designing the 2018 FENOC KERP. These efforts led to the identification of principles that lay a sound foundation for implementing a KERP that could be approved by the Court. These include the decision to focus on job functions necessary to maintain and operate the nuclear power plants pending their shutdown dates in two or three years. The Working Group also, in principle, focused on evaluating the necessary level of staffing of each of the critical job functions and the rates of attrition in each job function that FENOC could accept during the course of the shutdown process. The Court's conclusion here in denying the Motion with leave to amend is not a rejection of this fundamental work of the Working Group.
The Court concludes that the Debtors satisfied the Dana II factors with respect to both due diligence and the use of independent counsel.
III. The Motion Will Be Denied, But With Leave to Amend.
The Court cannot, either practically or legally, rewrite the 2018 FENOC KERP or write a new replacement KERP for the Debtors. It will also not compel the process by which the Debtors may, if they so choose, revise their proposed retention plan and seek a further hearing on that revision and on the Motion. However, the Court does grant leave to the Debtors to revise the 2018 FENOC KERP, as well as its evidence in support of it. It encourages the Debtors to seek input from the Committee, the Unions, the United States Trustee, and other parties-in-interest, or at the very least provide full disclosure of any revised retention plan to those parties so they may have an opportunity to provide comment, suggestions, or objections.
If the Debtors choose not to revise the retention plan and stand only on its existing Motion with its existing 2018 FENOC KERP in the face of this ruling, that would be the Debtors' decision and the Court would stand by its ruling herein. The Debtors are debtors-in-possession and entitled to operate their business and manage their estates pursuant to 11 U.S.C. §§ 1107 and 1108. A decision not to amend would be the Debtors' decision and theirs alone.
The Court will not immediately enter an order denying the Motion along with this Memorandum Decision. Therefore this Memorandum Decision shall not be considered a judgment or final order pursuant to Rule 54 of the Federal Rules of Civil Procedure as incorporated into this bankruptcy case pursuant to Rules 7054 and 9014(c) of the Federal Rules of Bankruptcy Procedure. Instead, the Court will direct the Clerk to schedule a status conference on the Motion with counsel for the Debtors, the Unions, the Committee, the United States Trustee, and other parties-in-interest *711who would like to participate as soon as possible consistent with the schedules of relevant counsel as well as the Court. The Court expects this status conference to be held within two weeks of the entry of this Memorandum Decision.
If the Debtors choose to seek an immediate appeal of this Memorandum Decision, whether requested in writing or at the status conference yet to be scheduled, the Court will promptly enter a final order consistent with this Memorandum Decision.
CONCLUSION
The Debtors bear the burden of proving that the 2018 FENOC KERP is a sound exercise of their business judgment and is justified by the facts and circumstances of the case. Among several criteria that courts review in evaluating whether debtors have made such an evidentiary showing are whether the plan bears a reasonable relationship to its purpose, whether it is fair and reasonable or instead discriminates unfairly, and whether it is consistent with industry standards. The evidence does not show that the Debtors satisfy these criteria in this case, and the Court finds that the Debtors' own caginess in presenting their evidence is a significant reason for that.
The 2018 FENOC KERP excludes employees the Debtors expressly found to be critical, marketable, and difficult to replace. The plan also leaves the Debtor with too much discretion to choose KERP participants without meaningful disclosure of those decisions to the creditors or the Court. Finally the evidence supports a finding that the Debtors' 2018 FENOC KERP relies too often on stereotypes instead of reasonable judgment.
It is undisputed that the proposed KERP discriminates between union and non-union personnel, with more than 70 percent of non-union employees qualified to receive bonus payments equal to at least 60 percent of their annual salary, while no union employees would receive any bonus. The burden is on the Debtors to prove a sound business reason for this discrimination, i.e., that this discrimination was not unfair. They did not do so.
The evidence also suggests that the bonuses the Debtors propose to pay to participants in the 2018 FENOC KERP are higher than those offered to participants in other comparable retention plans in the nuclear industry, in particular, where a nuclear plant shutdown looms. At the same time, the Debtors' proposed retention plan excludes more employees that other electricity producers appear to do in similar situations.
For these reasons, the Court will not approve the 2018 FENOC KERP as being a reasonable exercise of the Debtors' business judgment or justified by the facts and circumstances of their bankruptcy cases. However, the Motion is denied with leave to amend. The Court will not enter an order implementing this Memorandum Decision immediately in order to allow the Debtors a reasonable opportunity to amend the 2018 FENOC KERP and seek approval of that revised retention plan after further hearing on the Motion. If the Debtors prefer to appeal this Memorandum Decision, the Court will enter a final order.
The Clerk will schedule a status conference within the next two weeks after consultation with counsel for all parties-in-interest in this contested matter.
Judgment on the Motion will not be deemed entered until a separate form of judgment has been entered by the Clerk.
IT IS SO ORDERED.
The five other plans include the Manager Retention Agreements, which covers five total employees throughout FENOC, with a retention period ending in January 2020; the Local 29 Retention Plan, which covered seven unionized reactor operators at the Debtors' Beaver Valley Power Station, with a retention period ending in June 2018; the Local 245 Retention Plan, which covered 68 unionized employees at the Debtors' Davis-Besse Nuclear Power Station, with a retention period ending December 31, 2018; and the 2016 FES KERP and 2016 FENOC KERP, which together cover 244 FENOC employees, 29 FES employees, and 13 FG employees, with a retention period ending November 30, 2018. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501681/ | HONORABLE RICHARD D. TAYLOR, UNITED STATES BANKRUPTCY JUDGE
The debtors, Freddy and Amber May, filed their Class Action Complaint ("Complaint") on May 4, 2018. The defendants, Midland Funding, LLC and Midland Credit Management, Inc. ("Midland"), filed Defendants' Motion to Compel Arbitration and to Strike Class Allegations and Memorandum in Support ("Motion") on June 25, 2018, which drew Plaintiffs' Memorandum in Opposition to Defendants' Motion to Compel Arbitration and Strike Class Allegations ("Response") on July 25, 2018, each supplemented by sur-replies. Reserving all other matters, the court heard the Motion and Response solely as to the request for arbitration on August 30, 2018, and took the matter under advisement. For the reasons stated herein, Midland's request for arbitration is denied.
I. Jurisdiction
This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a related and core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (C), (O), and (c)(1). The following opinion and order constitute findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.1
II. Background and Analysis
Freddy May2 opened a Lowe's credit card account financed through Synchrony *714Bank ("Synchrony") on May 5, 2013. According to the debtors, Synchrony received notice of their bankruptcy filing and then "transferred data about those debts to Midland under a written agreement." (Complaint, May 4, 2018, ECF No. 1, at ¶ 15.) Thereafter, Midland filed a proof of claim for an amount in excess of the scheduled debt. Despite representations that the proof of claim amount did not include interest or other charges, the debtors assert that Midland "knows that interest and fees are in the claim amount, [but] Midland direct[s] its employees to file Proofs of Claim that assert no interest or fees are in the claim amount." (Compl., at ¶ 25.) The debtors contend that this practice violates three provisions of Federal Rule of Bankruptcy Procedure 3001 : (1) section (a) for "failing to file a Proof of Claim that conform[s] substantially to the Official Form because it failed to accurately disclose that interest, fees, expenses, or charges were included in the claim amount"; (2) section (c)(1) based on the alleged failure of Midland to adequately provide the written document underlying its claim;3 and (3) section (c)(2) for failure "to file with its Proof of Claim an itemized statement of the interest, fees, expenses or charges that were incurred."4 (Compl., at ¶¶ 29-30, 55-56.) Further, debtors assert that the aggregate of these alleged transgressions violate the Fair Debt Collection Practices Act, 15 U.S.C. § 1692.
The debtors seek damages primarily in the context of statutory damages and fees attendant to a class action. (Compl., at 11.) The bankruptcy specific prayer is in the nature of injunctive relief preventing inaccurate proofs of claim being filed in the future, requiring an amended proof of claim with supporting documentation in the instant case, and disallowing the claim if not properly amended. (Compl., at 12.)
Midland asks the court to compel arbitration of all issues raised in the Complaint. During argument, the debtors conceded that a valid arbitration clause exists between the debtors and Synchrony and that the dispute in question would, absent any bankruptcy implications, fall within its ambit as a collection related controversy. The debtors also conceded during argument that they knew of no statutory or legal authority that would restrain alienability of an arbitration clause.5 While conceding those points, the debtors interpose two hurdles to arbitration: (1) that Midland did not succeed to Synchrony's right to compel arbitration, and (2) if Midland does have the right to request arbitration, this court should decline to do so. Each argument is addressed in turn.
1. Transfer of Rights
The debtors question whether Midland purchased and enjoys Synchrony's right to enforce arbitration. Specifically, the debtors assert that the transfer documentation
may only transfer a right to receive payment while Synchrony maintains the other rights of the credit card account agreement, including the right to charge Midland for access to information and *715documents. The Motion [ ] must fail if Midland only bought the right to receive payments rather than all the rights of the credit card agreement.
(Response, July 25, 2018, ECF No. 14, at 7.) The debtors advance this argument in two subparts: first, whether Midland adequately provided a full and complete copy of the actual contract between Synchrony and Midland, and, second, whether the full terms of that agreement encompass the transfer or assignment of the right to compel arbitration.
Midland adequately addressed the first issue by tendering to the court an unredacted purchase agreement (defined and discussed in greater length below). The court reviewed the unredacted version in camera and submits that the redactions do not incidentally or materially affect the issue of what rights were transferred under the agreement and do not inform the basis of the findings and conclusions stated herein.
Remaining is the question of whether Midland succeeded to Synchrony's contractual rights regarding arbitration. Jodi Anderson, through her affidavit and on behalf of Synchrony, indicates that on May 5, 2013, separate debtor, Freddy May, opened a Lowe's credit card account. On or about May 7, 2013, Synchrony sent both a Lowe's plastic card and a credit card agreement that contains the provisions concerning arbitration. Thereafter, Mr. May made charges on his account. The last charge was posted on December 4, 2016, and the last payment was received on November 17, 2016. Synchrony charged off the account due to nonpayment on February 26, 2017. Thereafter, "[a]ccording to Synchrony's records, Synchrony sold all rights, title and interest in the Account to [Midland] on or about March 22, 2017." (Affidavit of Jodi Anderson, June 25, 2018, ECF No. 8-1, at ¶ 10.) The credit card agreement information supplied to Mr. May included a clause under the heading "Assignment" that provided that Synchrony "may sell, assign or transfer any or all of our rights or duties under this Agreement or your account, including our rights to payment. We do not have to give you prior notice of such action." (Aff. of Jodi Anderson, at 5.) Again, the debtors concede that a valid arbitration clause exists and, absent any bankruptcy implications, collection disputes would be within its ambit. Further, the debtors concede that they know of no statutory or other legal authority that would suggest that arbitration rights cannot be transferred to another party. The debtors merely argue that contractually Synchrony did not transfer or assign its arbitration rights to Midland; rather, the debtors argue Synchrony transferred only its right to receive payment on the accounts receivable.
An examination of the contractual terms that contemplated and subsequently effectuated the transfer of the account from Synchrony to Midland compels a different conclusion. Specifically, Synchrony as Seller and, inter alia , Midland as Buyer, executed a Forward Flow Accounts Purchase Agreement ("Purchase Agreement") dated August 30, 2016.
The operative transfer provision for the "Purchase and Sale of Accounts" provides: "[o]n each Transfer Date, Seller shall sell and Buyer shall buy all right (including the right to legally enforce, file suit, collect, settle or take any similar action with respect to such Account), title and interest in and to the Accounts identified in a Notification File[.]" (Purchase Agreement, Aug. 22, 2018, ECF No. 26-1, at § 2.1.) On sale, title to the account passes to Midland as the Purchase Agreement states "upon the purchase by Buyer of the Accounts hereunder from Seller, Buyer shall acquire unencumbered title in and to the Accounts, *716on each Transfer Date, except for such encumbrances, liens and claims caused or created by Buyer." (Purchase Agreement, at § 4.1(d).) See also , the Bill of Sale template attached to the Purchase Agreement as Exhibit A that provides:
[f]or value received and in further consideration of the mutual covenants and conditions set forth in the Forward Flow Accounts Purchase Agreement (the "Agreement"), dated as of this 30th day of August, 2016 by and between ..., Seller hereby transfers, sells, conveys, grants, and delivers to Buyer, its successors and assigns, without recourse except as set forth in the Agreement, the Accounts as set forth in the Notification Files (as defined in the Agreement), delivered by Seller to Buyer on each Transfer Date, and as further described in the Agreement.
(Bill of Sale, Aug. 22, 2018, ECF No. 26-1, at 40.)
Contrary to the debtors' assertion that Midland purchased only the receivable, the "Account" definition is conjunctive, defined as "any charged-off credit card account and associated receivable owned by Seller that is being sold to Buyer pursuant to the terms of this Agreement with respect to which there is an Account Balance." (Purchase Agreement, at § 1.1) (emphasis added). Clearly stated, the Purchase Agreement contemplates the transfer of both the account itself and the associated receivable, not just the receivable. Commensurately and consistent with the more expansive definition of an "Account," an "Account Balance" is separately defined to mean "any credit account that is being sold to Buyer pursuant to the terms of this Agreement, as such balance exists as of the Cut-Off Date, to the extent such balance is set forth on the applicable Notification File." (Purchase Agreement, at § 1.1) (emphasis added).
Continuing, the Purchase Agreement contemplates a Transfer Date on which the seller sends the applicable Notification File to Midland. The Purchase Agreement defines "Notification File" as
(a) a Computer File identifying the Accounts to be delivered to Buyer on each Transfer Date, which listing shall contain the following information with respect to each Account: (a) the Required Information; and (b) the Additional Information, to the extent that the Additional Information is available in Seller's books and records.
(Purchase Agreement, at § 2.1.) The Required Information and the Additional Information are set forth on Exhibits H-1 and H-2 to the Purchase Agreement and include information one would typically need for collection purposes. But, in the event that Midland requires additional information, Midland may "submit to Seller reasonable requests for Account Documents, which requests shall follow the procedures set forth in Exhibit B hereto and, to the extent such information is in the possession of Seller, Seller shall provide it subject to and in accordance with the provisions below in this Section 5.3." (Purchase Agreement, at § 5.3(a)(i).) The Purchase Agreement defines an "Account Document" as
an Affidavit or any application, replacement terms and conditions, last twelve months of reproduced billing statements to include a replacement copy of the last statement prior to charge off and/or the replacement copy of the charge-off statement, any other billing statement, sale notification letter, or other correspondence relating to an Account and relevant to the collection of the related Account, to the extent such item is in Seller's possession and reasonably available to Seller, in the form, if any it exists in Seller's possession, which in all *717cases the terms are the same as that sent to the Account Debtor , but excludes any information provided by parties other than the Seller or the Account Debtor associated with the Account.
(Purchase Agreement, at § 1.1) (emphasis added).
As testified to by Jodi Anderson, the arbitration provision is contained in the credit card agreement originally sent to Mr. May. Additionally, Synchrony must provide, as a matter of course, certain other documents. "Within thirty (30) days of the applicable Transfer Date, Seller will provide the Required Account Documents for each Account to Buyer." (Purchase Agreement, at § 5.3(a)(iv).) The term "Required Account Documents" is expansive, meaning
[a]ccount [d]ocuments that Seller, its officers, directors, agents, employees or representatives provided to an Account Debtor in connection with an Account which include the following: (i) last twelve (12) billing statements of the Account (reduced if an Account was originated less than twelve (12) months from the date of charge off), (ii) the terms and conditions, (iii) the Account statement at the time of charge-off, and (iv) the statement of last account activity.
(Purchase Agreement, at § 1.1) (emphasis added). In his affidavit on behalf of Midland, Sean Mulcahy indicates that the account, when transferred to Midland on March 22, 2017, included from Synchrony a copy of the credit card agreement that governed the account. (Affidavit of Sean Mulcahy, June 25, 2018, ECF No. 8-2, at ¶¶ 7-8.) This credit card agreement included the terms concerning arbitration.
Further, account servicing is clearly delineated between the parties pre- and post-transfer, in the Purchase Agreement.
Until the applicable Transfer Date, Seller may continue to service the Accounts to be transferred and, in connection therewith, shall have the right to handle the Accounts and any matter relating to the Accounts in any manner that Seller deems appropriate, subject to the requirements of Applicable Law and this Agreement; and provided that, following the Cut-Off Date, Seller shall not initiate any outbound collection efforts on the applicable Accounts, but Seller shall be permitted to accept payments in accordance with its ordinary credit policy. Buyer shall be bound by the regular day-to-day actions taken by the Seller in compliance with Applicable Law with respect to the interim servicing of any Account prior to the Transfer Date. Buyer shall not be bound by extraordinary or unusual actions taken by Seller with respect to an Account unless Seller shall have notified Buyer in writing and Buyer agrees to such activities. Buyer shall be bound by the actions taken by the Seller in compliance with Applicable Law with respect to any Account prior to the Transfer Date. Buyer shall take no action to communicate with Account Debtors (or their agents or representatives) or enforce, service or otherwise manage any Account until after the purchase of the Accounts, and only in accordance with any and all applicable federal and state laws, rules, regulations and court orders. In no event shall Seller be deemed a fiduciary for the benefit of Buyer with respect to the Accounts or any Account.
(Purchase Agreement, at § 5.1.) Further, the Purchase Agreement contemplates that Midland will be servicing the account post-transfer, providing "[a]ll actions or omissions by Buyer with respect to the Accounts, including (but not limited to) all servicing, billing, processing, collections, and recovery operations and any communications or notices to Account Debtors, *718shall conform in all respects to any and all Applicable Laws." (Purchase Agreement, at § 5.2.) Commensurately, Synchrony is relieved from its servicing responsibilities post-transfer. See, Purchase Agreement, at § 5.7(a), denoting "(a) [e]xcept as stated herein, Seller shall have no obligation to perform any servicing activities with respect to Accounts from and after the applicable Transfer Date."
The Purchase Agreement is governed by New York law. (Purchase Agreement, at § 12.6.) Under New York law, "[c]onstruction of an unambiguous contract is a matter of law," and should be enforced according to its terms. Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 834 N.Y.S.2d 44, 865 N.E.2d 1210, 1213 (2007). Quite simply, the Purchase Agreement, by its clear and express terms, transfers the account, not just the attendant accounts receivable.
2. Arbitration
This class action purports to address alleged pervasive violations of Federal Rule of Bankruptcy Procedure 3001 through the filing of proofs of claims that contain "false statements concerning whether interest or fees [are] embedded in their claim amounts." (Compl., at ¶ 2.) Specifically, Midland filed a proof of claim for an amount in excess of the scheduled debt. According to the debtors, Midland "knows that interest and fees are in the claim amount, [but] Midland direct[s] its employees to file Proofs of Claim that assert no interest or fees are in the claim amount." (Compl., at ¶ 25.) The debtors contend that this practice violates Federal Rule of Bankruptcy Procedure 3001 : (1) section (a) for "failing to file a Proof of Claim that conform[s] substantially to the Official Form because it failed to accurately disclose that interest, fees, expenses, or charges were included in the claim amount"; (2) section (c)(1) based on the alleged failure of Midland to adequately provide the written document underlying its claim; and (3) section (c)(2) for failure "to file with its Proof of Claim an itemized statement of the interest, fees, expenses or charges that were incurred." (Compl., at ¶¶ 29-30, 55-56.) Further, debtors assert that the aggregate of these alleged transgressions violate the Fair Debt Collection Practices Act.
The debtors seek damages primarily in the context of statutory damages and fees attendant to a class action. (Compl., at 11.) The bankruptcy specific prayer is in the nature of injunctive relief preventing inaccurate proofs of claim being filed in the future, requiring an amended proof of claim with supporting documentation in the instant case, and disallowing the claim if not properly amended. (Compl., at 12.) In considering whether arbitration is appropriate, this opinion does not address the merits of any of the asserted causes of action or relief requested.
The debtors argue that "a bankruptcy court should not compel arbitration in core proceedings where arbitration would create an inherent conflict with the purposes of the Bankruptcy Code." (Resp., at 1.) Thus, the sole remaining issue is whether on that basis this court has the discretion to deny Midland's request for arbitration.
Despite the somewhat adhesive nature of form contracts generally, they nevertheless represent voluntary contractual relationships between parties that, presumably, should be enforced according to their terms, including arbitration clauses. In Gavilon Grain , the district court recognized the following:
the FAA heralds the robust federal policy favoring arbitration agreements. The bankruptcy court noted this law but moved past it quickly. "A written provision in... a contract ... involving commerce to settle by arbitration a controversy *719thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
Gavilon Grain, LLC v. Rice , No. 2:17-cv-40-DPM, 2017 WL 3508721, at *2 (E.D. Ark. Aug. 16, 2017). The Gavilon Grain court went on to recognize "an unmistakably strong line of cases in the last three decades [where] the Supreme Court has implemented this pro-arbitration policy, turning back almost every effort to temper it." E.g., Am. Express Co. v. Italian Colors Rest. , 570 U.S. 228, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013) ; CompuCredit Corp. v. Greenwood , 565 U.S. 95, 132 S.Ct. 665, 181 L.Ed.2d 586 (2012) ; AT&T Mobility LLC v. Concepcion , 563 U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) ; Green Tree Fin. Corp.-Alabama v. Randolph , 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000) ; Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991).
Equally, however, the United States Supreme Court has recognized an exception.
The Federal Arbitration Act [FAA] supports "the fundamental principle that arbitration is a matter of contract," and, as such, courts must enforce arbitration agreements according to the terms agreed upon by the parties. Rent-A-Center, West, Inc. v. Jackson , [561 U.S. 63] 130 S.Ct. 2772, 2776 [177 L.Ed.2d 403] (2010). A party opposing arbitration has the burden of showing "that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." Shearson/American Exp., Inc. v. McMahon , 482 U.S. 220, 227 [107 S.Ct. 2332, 96 L.Ed.2d 185] (1987). Congressional intent to prohibit waiver of a judicial forum may be ascertained from (1) the statute's text, (2) its legislative history, or (3) "an inherent conflict between arbitration and the statute's underlying purposes." Id. Neither the bankruptcy code nor its legislative history addresses arbitration in this context, and other courts have found that without some literal guidance from either source, the relevant prong of the McMahon test becomes whether there is an inherent conflict between the FAA and the bankruptcy code. In re Mintze , 434 F.3d 222, 231 (3rd Cir. 2006) ; In re Rozell , 357 B.R. 638, 642-43 (Bankr. N.D. Ala. 2006).
Blok v. The College Network, Inc. and Southeast Fin. Fed. Credit Union (In re Christine A. Blok ), Ch. 13 Case No. 5:11-bk-70960, Adv. No. 5:11-ap-07104, slip op. at 5 (Bankr. W.D. Ark. Jan. 11, 2012).
The McMahon analysis requires that Congress's intention to override the Federal Arbitration Act in a particular instance be discerned from either the text of Rule 3001, the commensurate legislative history,6 or by identifying an inherent conflict between arbitration and the Bankruptcy Code in this instance.
During argument, the parties conceded that neither the text nor the legislative history contains language that reflects a specific intent to override a valid arbitration agreement in these circumstances. Accordingly, this concession reduces the court's analysis to whether the underlying purposes of the Bankruptcy Code inherently conflict with arbitration in the context of a dispute base on Rule 3001.7
*720Initially pertinent, but not dispositive, is whether this is a core proceeding. As stated in Blok , "[o]ther circuits have noted that even in the case of core proceedings, bankruptcy courts do not have discretion to refuse to compel arbitration without a finding that there is an inherent conflict between the bankruptcy code and the Arbitration Act or that arbitration will jeopardize the objectives of the bankruptcy code."Blok , Adv. No. 5:11-ap-07104, slip op. at 5 (citing MBNA Am. Bank v. Hill , 436 F.3d 104, 108 (2d Cir. 2006) ; Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re Nat'l Gypsum Co. ), 118 F.3d 1056, 1069 (5th Cir. 1997) ). See also Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co .), 671 F.3d 1011, 1020-21 (9th Cir. 2012) (internal citations omitted).
Several of our sister circuits that have addressed the issue have considered, as a threshold matter, a distinction between core and non-core proceedings. In non-core proceedings, the bankruptcy court generally does not have discretion to deny enforcement of a valid prepetition arbitration agreement. In core proceedings, by contrast, the bankruptcy court, at least when it sees a conflict with bankruptcy law, has discretion to deny enforcement of an arbitration agreement. The rationale for the core/non-core distinction, as explained by the Second Circuit, is that non-core proceedings "are unlikely to present a conflict sufficient to override by implication the presumption in favor of arbitration," whereas core proceedings "implicate more pressing bankruptcy concerns."
The claims litigation count is without a doubt core as arising in or under the Bankruptcy Code as contemplated by 11 U.S.C. §§ 1334 and 157 and 28 U.S.C. § 157(b)(2)(A), (B), (C), and (O). Conversely, the Fair Debt Collection Practices Act cause of action is facially non-core and, at best, is only related to this proceeding as having a conceivable effect on the debtors' estate.
The Eighth Circuit has stated that a bankruptcy court still may have "related to" jurisdiction in a non-core proceeding when "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action and which in any way impacts upon the handling and administration of the bankrupt estate."
Blok , Adv. No. 5:11-ap-07104, slip op. at 4 (citing Dogpatch Prop., Inc. v. Dogpatch U.S.A., Inc. et al. (In re Dogpatch U.S.A., Inc. ), 810 F.2d 782, 786 (8th Cir. 1987) (quoting Pacor, Inc. v. Higgins , 743 F.2d 984, 994 (3rd Cir. 1984) ). Given that at least one cause of action is unquestionably core, a McMahon analysis is appropriate. Whether that analysis is independent of or subsumes the second count under the Fair Debt Collection Practices Act is discussed below.
Claims and the proof of claim process have a purpose in bankruptcy without equivalent in nonbankruptcy proceedings. Rule 3001 and the related official proof of claim form detail and require a great deal of specific information concerning claims. They include a copy of the underlying agreement, evidence of perfection, a "itemized statement of the interest, fees, expenses, or charges," necessary to cure defaults on debts secured by property, and, with respect to open-end or revolving consumer *721credit, a list of very specific items. FED. R. BANKR. P. 3001(c)(2)(A) (2018). The failure to provide the information required in Rule 3001 could exclude this information as evidence and possibly afford "other appropriate relief," including "reasonable expenses and attorney's fees." FED. R. BANKR. P. 3001(c)(2)(D)(ii) (2018). Filing of a proof of claim "shall constitute prima facie evidence of the validity and amount of the claim." FED. R. BANKR. P. 3001(f) (2018). The debtor or any other interested party must file an objection and bears the burden of rebutting the prima facie presumption with the ultimate burden thereafter shifting to the claimant. FED. R. BANKR. P. 3001(f), 3007 (2018).
At first glance, these facets of the claims process would appear to be the normal incidences of evidentiary proof that one might expect in either an arbitration or judicial proceeding to collect a debt. But neither event, arbitration nor litigation, typically occur without an accompanying dispute as to either liability or amount. The filing of a petition in bankruptcy creates an entirely different scenario, and the proofs of claim serve a number of purposes, many without an existence outside of bankruptcy. Ideally, the honest but unfortunate debtor would, through his schedules, disclose all of his assets, all of his debts, his complete financial circumstances prior to and at bankruptcy, his exemptions, and, by virtue of the chapter chosen, his desire for a Chapter 7 discharge or reorganization. The aggregate proofs of claim should, again ideally, seamlessly conform to the debtor's schedules and disclosures. Generally, no initiating contest exists as to liability and, frequently, none as to amount.
The disclosures and commensurate proof of claim process are unique to bankruptcy. Proofs of claim serve a number of purposes that only arise in the context of a bankruptcy proceeding-reconciling the accuracy of schedules; confirming and amplifying prepetition transactions disclosed in the statement of financial affairs; determining priority-a significant aspect of all bankruptcy proceedings; confirming secured versus unsecured debt and the commensurate values that must be addressed; and establishing the identities and amounts to be distributed either under a plan or through residual distributions to unsecured creditors in a Chapter 7 liquidation. Short of disclosing and administering all assets, nothing more complementary, integral, or significant in a bankruptcy proceeding exists than the full disclosure, prioritization, and treatment of debt. The entire proof of claim process is designed to serve bankruptcy specific goals; thus, the question is whether the service of these policies sufficiently dictate that bankruptcy courts and not arbitrators resolve issues integral to and arising solely from that process.
A similar circumstance presented itself before the United States Bankruptcy Court for the Northern District of Alabama. Ellswick v. Quantum3 Group, LLC (In re Ellswick ), No. 15-40048-JJR, 2016 WL 3582586 (Bankr. N.D. Ala. June 24, 2016). In Ellswick , the debtor objected to a proof of claim on the basis of state law concerning advances on postdated checks and the Federal Truth in Lending Act. The debtor initiated the request for arbitration but at or about the same time filed an adversary proceeding alleging that the creditor's proof of claim violated Rule 3001 on the basis of a false representation that equally gave rise to a claim under the Fair Debt Collection Practices Act. Later, the debtor asked to compel arbitration in the adversary proceeding. The court declined to do so on the basis of waiver given the passage of time and participation in the litigation process prior to requesting arbitration. Alternatively, the court denied arbitration under a McMahon "inherent conflict" analysis, stating:
*722The claims in the AP complaint begin and end with the proof of claim filed by Quantum in the underlying chapter 13 case and have no relation whatsoever with the validity or enforceability of the debt under non-bankruptcy law or the Consumer Agreement. Contrary to Ellswick's assertion, all the claims in the AP are strictly core; they could not arise anywhere other than in a bankruptcy case under title 11. The claims simply do not exist apart from Ellswick's bankruptcy case, and the action taken by Quantum during and in the case. To say, as Ellswick has, that because some FDCPA claims may exist in the abstract aside from a bankruptcy case does not answer the relevant question, which is: Could the particular FDCPA claims asserted in this specific AP exist apart from this bankruptcy case? The simple answer is no. The AP claims relate solely to the content of Quantum's proof of claim and its alleged failure to comply with Rule 3001, and have nothing to do with the validity or enforcement of the underlying debt, or prepetition matters. Accordingly, the court finds that the alleged FDCPA claims arose in Ellswick's bankruptcy case because of the content of Quantum's proof of claim, not because of some independent, prepetition occurrence or nonbankruptcy matter, and are, therefore, core proceedings within the context of 28 U.S.C. § 157(b)(1).
Ellswick , 2016 WL 3582586, at *3. The court additionally noted:
[b]ecause the issues regarding the content of Quantum's proof of claim are unique to the bankruptcy process, and fall within a bankruptcy court's specialized knowledge, the court finds that allowing arbitration of the AP would conflict with the Bankruptcy Code's purpose of having a centralized forum-the bankruptcy court-determine purely bankruptcy issues that arose within the administration of the case, e.g., allowance of claims, as well as the form and content of claims. See also McCallan v. Hamm , 2012 WL 1392960, *7 (M.D. Ala. 2012) (denying arbitration of non-core breach of contract issues due to the effect on the bankruptcy estate and on "the larger bankruptcy process"); and see Cooley v. Wells Fargo Fin. (In re Cooley) , 362 B.R. 514, 520 (Bankr. N.D. Ala. 2007) ("Stated another way, if the debtor brought the cause of action, contested matter or other dispute underlying the proceeding with him when he filed bankruptcy, no inherent conflict is likely to be found with the enforcement of contractual arbitration. However, if such cause of action, contested matter or other dispute could only exist after the bankruptcy case was commenced, then an inherent conflict exception under the McMahon standard is more likely to be found." (emphasis added) ).
Ellswick concedes that his Rule 3001 allegations indeed lie within this court's purview, but argues the FDCPA claims do not, and, therefore, contends that an arbitrator should decide both issues. This overlooks the fact that there are no FDCPA claims that Ellswick can assert apart from those based on Quantum's postpetition activity in the bankruptcy case. The bankruptcy court is uniquely qualified to decide matters-even FDCPA claims if they indeed may arise during the claims allowance process-which depend entirely upon the Code and Rules for their genesis.
Ellswick , 2016 WL 3582586, at *4-5.
In this instant case, the entirety of the debtors' claim arose postpetition out of a purely bankruptcy centric procedure, proofs of claim, and the cause of actions would have had no existence outside of bankruptcy. This analysis also applies to the FDCPA claim as its genesis is solely *723the alleged fraudulent conduct in the context of asserted fraudulent representations on the proof of claim.
While those factors alone may be dispositive, courts have suggested other considerations as guidance in whether to exercise discretion in these instances.
Four factors are considered when deciding whether to compel arbitration: (1) Whether the issue can be resolved more expeditiously by the bankruptcy judge as opposed to through the arbitration process; (2) Whether or not special expertise is necessary in deciding the issue; (3) The impact on creditors of the debtor who were never parties to the agreement containing the arbitration clause; (4) Whether arbitration threatens assets of the estate.
Slipped Disc Inc., dba Disc Go Round v. CD Warehouse, Inc. (In re Slipped Disc Inc. ), 245 B.R. 342, 345-46 (Bankr. N.D. Iowa, 2000) (citation omitted). Nothing suggests that this matter can be handled by an arbitrator any faster than this bankruptcy court. And, presumably, a bankruptcy court inherently has a better understanding of the necessary integrity and fundamental significance of the proof of claim process. The effect on other creditors and the property of the estate is a function of a quantum of proof; those broader implications are more properly decided by bankruptcy court than an arbitrator.
In Gavilon Grain , the district court reversed the bankruptcy court's decision to deny arbitration because the underlying issue of whether any debt was owed was non-core.
The trustee's substantive claims against Gavilon must be arbitrated by the National Grain and Feed Association. Adjudicating whether Gavilon owes any debts that are property of Turner's chapter 7 estate is non-core. As the bankruptcy court noted, the weight of authority favors enforcing arbitration agreements that cover non-core matters. The bankruptcy court, therefore, is not the only place where the debt question can be answered. The parties' undisputed pre-petition arbitration agreements cover the trustee's contract and unjust enrichment claims. There is no irreconcilable conflict between the trustee's statutory right to turnover (eventually) of a matured debt that is the property of Turner's estate and having an arbitration to resolve the Gavilon/trustee dispute about whether any such debt exists. If one does, and Gavilon doesn't pay it, then the trustee can seek turnover and the bankruptcy court can order it. The bankruptcy court's concerns about limited discovery and cost will be present to some extent in every arbitration. They are not weighty enough here to tilt the balance against the alternative forum. While this Court has no doubt that the bankruptcy court could ably unravel the Turner/Gavilon knot, those parties agreed to another forum, and the substantive claims asserted by the trustee are insufficiently definite in terms of liability to be within the turnover statute's reach at this point.
Gavilon Grain , 2017 WL 3508721, at *6.
Here, however, no dispute existed prebankruptcy arising out of the contractual relationship between the parties. Rather, the issues presented arose specifically as a result of postpetition actions by the creditor in the context of employing purely bankruptcy specific processes to participate in this bankruptcy case and about which the debtors believe the creditor engaged in fraudulent conduct.
III. Conclusion
Certainly, circumstances exist where a McMahon analysis would compel arbitration that both complements and benefits the bankruptcy process. Conversely, unconstrained enforcement of arbitration *724clauses would encourage and permit creditors to opt for a favorably perceived and parallel proceeding that would fragment, moot, and deprive all parties of the benefits of a single integrated forum designed specifically to address the accommodation and reorganization of debt. Arbitration is simply not appropriate in this circumstance. The central issue, claims litigation, is specifically core. The "related to" count under the Fair Debt Collection Practices Act arises solely as a result of the alleged improprieties in the course of completing and filing a proof of claim. No part of either count would or could exist independent of or outside this bankruptcy case. Whether there is a pervasive fraudulent policy and practice as debtors suggest is a matter of scrutiny and offense to a bankruptcy court, not an arbitrator.
The request for arbitration contained in the Motion is denied. The request for dismissal will be set by subsequent notice. Thereafter, if appropriate, the court will consider the class action issues raised in the Complaint.
IT IS SO ORDERED.
This proceeding is conducted in a summary manner as contemplated by 9 U.S.C. § 4. This opinion and order is based on the general averments in the pleadings as supplemented by the exhibits, arguments, and statements by counsel.
The facts currently before the court reflect that separate debtor, Freddy May, may be the only party on the card account. If so, presumably, Amber May is included as a plaintiff as the contested proof of claim is filed in their jointly administered case.
This section is mentioned in the body of the Complaint but not in Count II.
This section is mentioned in Count II but not in the body of the Complaint.
As discussed during a pretrial conference and at argument, the principal question is whether arbitration is in whole or in part appropriate to resolve the issues raised in the Complaint. All other issues, including the motion to dismiss and class action status, are reserved until after the appropriate forum or forums are determined.
Or, for that matter, from the entirety of the Code, rules, or legislative history.
The Shearson/American Express, Inc. v. McMahon framework must "resolve the tension" between the FAA and the Bankruptcy Code. Gavilon Grain , 2017 WL 3508721, at *2. "If Congress intended to limit or prohibit waiver of the bankruptcy forum for the turnover claim, then that intention would appear in ... the 'inherent conflict between arbitration and the statute's underlying purposes.' " Id. (quoting McMahon , 482 U.S. at 227, 107 S.Ct. 2332.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501682/ | KATHLEEN H. SANBERG, CHIEF UNITED STATES BANKRUPTCY JUDGE
At Minneapolis, Minnesota, November 2, 2018.
This adversary proceeding came on for trial beginning on May 29, 2018, and ending on May 30, 2018, to determine whether Defendant Craig Jeffrey Zaligson's discharge should be revoked pursuant to 11 U.S.C. § 727(d)(1). Colin Kreuziger appeared on behalf of Plaintiff and William Skolnik appeared on behalf of Defendant. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b)(1) & 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070-1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(J) & (O).
In this adversary proceeding, the issue is whether the discharge should be revoked for Defendant's making false oaths by failing to disclose two luxury watches in his petition and at his Section 341 meeting *727of creditors. For the reasons stated below, the discharge is not revoked.
The U.S. Trustee, Plaintiff James Snyder, brought this action after learning about two Ulysse Nardin luxury watches, worth approximately $30,000, from a creditor who had seen two YouTube videos in which Defendant referred to one of the watches as "his." Defendant told a suspicious story about the sale of the watches to a mysterious owner and the owner's failure to collect the watches--that Andrew Billison bought the watches in 2007 and 2009 from Defendant's company, dropped off the watches for repair in 2013, and never picked them up. Mr. Billison allegedly lived on an oil rig in Russia and had only returned to the United States twice since 2013.
There was a question about whether Mr. Billison really existed as the addresses on the sales receipts were not valid addresses, he was unable to produce picture identification, and his phone number appeared to be registered to a different person. Now, there is no doubt that he is a real person and that he was the person who appeared at the deposition.
The story that Mr. Billison lived on an oil rig in Russia and did not return to retrieve two luxury watches after four years is not believable. However, after listening to the testimony of the witnesses and reviewing the evidence, the Court is persuaded that it was not the Defendant who made up the story-it was Mr. Billison. He was avoiding arrest. Whether Defendant believed Mr. Billison's Russia story (which the Court doubts) is immaterial as independent witnesses and documentation show that a sale of the watches had taken place.
For purposes of revocation of the discharge, therefore, the Court determines that the U.S. Trustee has failed to meet his burden of proving that Defendant owned the watches and thus, should have disclosed them.
For the reasons stated below, the Court finds in favor of Defendant.
THE PARTIES
The Plaintiff, James L. Snyder, is the United States Trustee for Region 12. Plaintiff has standing to commence this adversary proceeding pursuant to 28 U.S.C. § 586(a) and 11 U.S.C. § 787(c)(1).
The Defendant, Craig Jeffrey Zaligson, is a resident of the State of Minnesota and the debtor in this bankruptcy case.
WITNESSES
The following witnesses provided testimony at the trial:
• Craig Jeffrey Zaligson - Mr. Zaligson is the Defendant and the debtor in the Chapter 7 bankruptcy case. He testified about the sale of the two Ulysse Nardin watches to Mr. Billison and the story Mr. Billison had told him about his work and travel to Russia. There were inconsistencies in Mr. Zaligson's testimony regarding the sale to Mr. Billison. However, Mr. Zaligson's testimony that he did not disclose the two watches in his Chapter 7 petition, schedules, or statement of financial affairs based on the advice of his Chapter 7 bankruptcy attorney was consistent and credible.
• Stephanie Klemz - Ms. Klemz, a child support officer for Hennepin County, testified about the child support obligations owing by Mr. Billison, his criminal history, and outstanding arrest warrants. She was credible.
• Bruce Crawford - Mr. Crawford, a Minnesota licensed attorney, represented Mr. Billison when he was deposed *728by Plaintiff. Mr. Crawford was a credible witness.
• Zanetta Diaz - Ms. Diaz is employed by Defendant's company. She credibly testified that she had called Mr. Billison on several occasions about retrieving the watches, although she did not reach him. She also testified about her handwritten notes on the back of the repair receipts made when attempting to contact Mr. Billison.
• Michael Strom - Mr. Strom is an attorney and customer of Defendant's businesses. He testified that he was familiar with one of the watches at issue in this case. Prior to the bankruptcy, he inquired about the price of one of the watches at issue. Mr. Strom testified that Defendant told him the watch was not for sale as the owner was out of the country and had not picked it up. He was a credible witness.
• Karen Billison - Ms. Billison is Andrew Billison's mother and she was a credible witness. Ms. Billison testified that her son has lived in Minneapolis since he graduated from high school and that she last saw him on May 28, 2018, the night before trial. She also testified that she did not know where he was currently employed.
• Gail Pesis - Ms. Pesis has been Defendant's significant other for thirty-two years. Ms. Pesis testified that she was present when Mr. Billison purchased one of the watches at issue in this case. Ms. Pesis is not disinterested as she has been supporting Defendant since he lost his home in foreclosure and has an incentive to keep Defendant debt-free.
• Matthew D. Swanson - Mr. Swanson is a Minnesota attorney representing Randall Seaver, the Chapter 7 Trustee in Defendant's bankruptcy case. He was a credible witness.
• Andrew Billison - He did not appear at trial. His deposition was received into evidence. He was not credible as his statements were directly contradicted by his mother, who was credible.
FACTS
The following facts were either stipulated to by the parties or found by the Court after trial.
Case and Background Information
1. Defendant is a resident of the State of Minnesota.
2. Defendant filed a voluntary petition for relief pursuant to Chapter 7 of Title 11 of the United States Code on June 16, 2016.1
3. Randall Seaver was appointed Chapter 7 Trustee of the Defendant's bankruptcy estate.
4. Defendant filed his original schedules on June 16, 2016 ("Original Schedules").2
5. Defendant's Original Schedules included a single Seiko men's watch and a pair of cuff links valued at $600.00, but did not list any Ulysse Nardin watches.3
6. Defendant's Statement of Financial Affairs did not state that he was holding or controlling any property that was owned by someone else.4
*7297. Pre-petition, Defendant owned and operated Midwest Diamond & Watch, Inc. ("Midwest Diamond"), which did business under the assumed name TimeScape beginning in 2012.5 Defendant was the sole owner of Midwest Diamond.6 Defendant listed his 100% ownership interest in Midwest Diamond in the Original Schedules and Amended Schedules.7
8. Midwest Diamond ceased doing business on the Petition Date.8
9. On June 17, 2016, one day after filing, Defendant organized a new entity called TimeScape USA, LLC ("TimeScape") and began doing business as that entity.9 There were no documents showing a transfer or sale of Midwest Diamond's assets or inventory to TimeScape.
10. Prior to the meeting of creditors, Defendant sent Mr. Seaver a list of inventory and consigned items held by Midwest Diamond.10 There were no Ulysse Nardin watches on either list.11
11. Mr. Seaver convened the meeting of creditors on August 8, 2016.12
12. Defendant testified at the meeting of creditors that Midwest Diamond had previously carried high-end watches, including Ulysse Nardin watches, but that it ceased selling them before the 2008 recession.13
13. Defendant also testified that the information in the documents filed with the Court were true and correct, contained no errors or omissions, and that all of his assets were listed in the schedules.14
14. Defendant did not tell Mr. Seaver that he was in possession of two Ulysse Nardin watches at the meeting of creditors.15
15. Defendant filed amended schedules on September 8, 2016 ("Amended Schedules") that did not include any Ulysse Nardin watches.16
16. The Court entered its Order granting Defendant's discharge on September 19, 2016.17
Chapter 7 Trustee Learns About Watches and Sale
17. On March 31, 2017, Mr. Swanson first learned about the watches when he received an email from a creditor's attorney stating that Defendant had posted two videos on YouTube in which he is seen wearing one of the two Ulysse Nardin watches at issue.18
18. Defendant posted the first video on May 12, 2016, approximately one month *730before the Petition Date.19 In that video, Defendant refers to the Ulysse Nardin watch as "my watch" on two separate occasions.20 The video also features a second watch, but Defendant does not refer to that watch as "his" at any point.21
19. Defendant posted a second YouTube video on March 6, 2017, approximately 10 months after the Petition Date.22 Defendant is seen wearing the same watch that he referred to as "my watch" in the May 12, 2016 video.23 Defendant, however, had changed the watch band from the first video.24
20. On June 7, 2017, Mr. Swanson conducted a Rule 2004 examination of Defendant.25 During the course of the examination, Mr. Swanson showed Defendant the first YouTube video.26 After Defendant viewed the video, but before Mr. Swanson could question Defendant about the statements he made in it, the court recorder's computer crashed and the parties were required to take a 10 to 15 minute break.27 During that break, Defendant met in private and conferred with his attorney.28
21. After resuming the 2004 examination, Defendant testified that he was holding two Ulysse Nardin watches for Mr. Billison.29 Defendant also testified that Mr. Billison had purchased the watches from Midwest Diamond in 2009 or 2010 and that he had dropped them off for repairs in April, 2013.30 Defendant testified that Mr. Billison told him that he would be back "the next day" to pick them up.31
22. Defendant does not frequently wear watches owned by customers and usually only does so when attempting to sell watches on consignment for clients.32 Defendant testified at the 2004 examination that there were times he wore one of Mr. Billison's watches.33
23. Defendant testified at trial that calling the watch "his" was a poor choice of words and that any use of the watches in the videos was for marketing and demonstration purposes only.34
24. After the Rule 2004 examination, Defendant provided Mr. Swanson with two reprinted receipts purporting to be evidence of Mr. Billison's purchases.35 The receipts indicate that one watch was purchased on November 23, 2007, and the other watch was purchased on June 5, 2009.36 The addresses listed on the receipts *731do not contain valid mailing addresses.37 Defendant testified that the addresses on the receipts were given to him by Mr. Billison.38
25. The receipts provided to Mr. Swanson following the Rule 2004 examination bore the name Timescape USA, LLC, which was an entity that did not exist until 2016.39 Defendant did not begin doing business under the assumed name TimeScape until 2012.40
26. The original receipts were produced to Mr. Kreuziger on December 7, 2017 and bore the name Midwest Diamond.41 At trial, Defendant testified that the computer operating system and software system used by his business had changed since Mr. Billison purchased the watches.42 The receipt copies provided to Mr. Swanson had been reprinted on new forms using the correct sale information.43 The Court finds Defendant's explanation credible.
27. At trial, Defendant introduced the sales and use tax documentation for both sales.44 The documentary evidence shows Defendant's remittance of the sales and use tax for the transactions to the State of Minnesota. This was not challenged or refuted by Plaintiff.
Contact with Andrew Billison
28. In order to contact Mr. Billison, Mr. Swanson sent a letter to the address for Karen Billison, Mr. Billison's mother, around July 11, 2017.45 Ms. Billison testified at trial that she had hand-delivered Mr. Swanson's letter to Mr. Billison in downtown Minneapolis.46
29. Defendant received a call from Mr. Billison on July 18, 2017, stating that he had returned from Russia and wanted his watches back.47 Defendant told Mr. Billison to contact Mr. Seaver.48 Mr. Billison then called and spoke to Mr. Swanson and told him that he would be returning to the United States in August of 2017 after a four-year absence.49 Mr. Billison stated that he had left his watches with Defendant and wanted them back.50 Mr. Huffman sent Mr. Swanson an email indicating the same information.51
30. Mr. Billison contacted Mr. Swanson from a telephone number identified on Mr. Swanson's screen as belonging to Ryan Dietzler.52 The phone number had a 612 area code.53 Mr. Swanson asked Mr. Billison to bring photographic identification and evidence of ownership of the watches *732to his office, which has not happened.54
31. On September 11, 2017, Mr. Swanson sent a text message requesting Mr. Billison's mailing address to the telephone number from which he received the call from Mr. Billison.55 Mr. Billison responded to the text on October 20, 2017, stating that he was not in the country in September but that he was in "NYC," and wanted "his watches back."56
32. On November 27, 2017, Mr. Billison executed an affidavit stating he purchased the two Ulysse Nardin watches from Midwest Diamond (the "Affidavit").57 As provided in the Affidavit, the first watch was purchased for $6,386.14 on November 17, 2007, and the second watch was purchased for $12,657.00 on June 5, 2009.58 The Affidavit also states that Mr. Billison brought the watches to Midwest Diamond for cleaning and repairs on April 24, 2013, and that he never returned to pick them up.59
33. The Affidavit contained very precise statements with respect to the circumstances under which Mr. Billison purchased and relinquished possession of the watches.60 Such details included exact dates of purchase, exact purchase prices, sales tax amounts, and model and serial numbers for the watches.61
34. On December 5, 2017, Mr. Crawford, Billison's attorney, sent a copy of the Affidavit to counsel for Defendant.62 At that time, Mr. Crawford did not have a copy of the sales receipts for the watches.63 On December 7, 2017, Defendant's counsel sent a copy of the Affidavit to counsel for Plaintiff.64
35. On December 8, 2017, Mr. Crawford produced copies of Mr. Billison's social security card and birth certificate.65
36. On December 14, 2017, Plaintiff's counsel issued a subpoena for the deposition of Mr. Billison.66 On January 11, 2018, Mr. Billison appeared for his deposition.67
37. Mr. Billison testified at his deposition that he was currently employed by Link Oil Corporation and had been living on an oil rig in the Caspian Sea.68 Mr. Billison also testified that he had been doing that for a little over 10 years.69 Mr. Billison testified at his deposition that he was not in Minnesota between 2007 and 2010.70 Mr. Billison further testified that he had only traveled to Minnesota twice between 2010 and 2017-once for a friend's wedding in 2014 and once in April of 2017 *733for his mother's birthday.71 He testified that he had been unable to return to Midwest Diamond to retrieve the watches because he was living out of the country.72 There is no evidence that he contacted Midwest Diamond or Defendant at any time after dropping off the watches to arrange to pick them up until July 18, 2017, after the Rule 2004 examination.
38. The deposition subpoena requiring Mr. Billison to appear and provide testimony also required him to produce a government issued photographic identification.73 He did not bring photographic identification to the deposition, but stated that he would bring his passport to Mr. Swanson at his office.74
39. Mr. Billison failed to provide the identification and Plaintiff filed a motion for contempt.75 On April 27, 2018, this Court issued an order finding Mr. Billison in contempt for his failure to appear and produce his identification.76 He did not purge himself of the contempt and this Court issued a bench warrant for his arrest on May 16, 2018.77 Mr. Billison was not found.
Mr. Billison's Background
40. Ms. Klemz testified at trial that she is a child support officer for Hennepin County and has been assigned Mr. Billison's file.78 Ms. Klemz is assisting the mother of Mr. Billison's child in attempting to collect child support.79 She testified that there were several outstanding arrest warrants for Mr. Billison related to paternity and child support.80 One warrant was issued in 2006 and one in 2012.81
41. Ms. Klemz testified that because of the past due child support obligations, a passport hold had been in place on Mr. Billison's passport since April of 2007.82 Mr. Billison would not have been able to obtain a new passport while the hold was in place and he could not have gotten a new one until at least April of 2017.83
42. Kanabec County has been unable to obtain any information regarding Mr. Billison's employment since August of 2006.84
43. Ms. Billison appeared and testified at trial. She told the Court that her son had always lived in the Minneapolis area since graduating from high school, but that she did not have his current address.85 They did not have a close relationship.86
44. Ms. Billison last saw her son on May 28, 2018, the night before trial.87 She and Mr. Billison's father picked him up in downtown Minneapolis and drove him to a local Perkins restaurant.88 They spoke in *734the car and she took a picture of him with her cell phone.89
45. She took a picture of Mr. Billison as requested by Defendant's attorney and she confirmed his identity at trial.90
46. Ms. Billison testified that her son worked for an oil company, but she did not know the name of the company or what type of work her son did for the company.91 She testified that her son had previously been employed at Target and as a bouncer at a bar.92
47. She was unaware of any child support obligations or arrest warrants.93
48. Ms. Billison testified, as had her son at his deposition, that he had keratoconus, a disease that affects his vision and ability to drive.94 Ms. Billison testified that her son does not drive because of his eye condition and because his license was suspended in connection with a previous DUI conviction.95 Mr. Billison testified that he does not have a drivers license on account of his eye disease.96
49. Ms. Diaz began working for Defendant at TimeScape in 2013.97 She made numerous attempts to contact Mr. Billison by phone in 2013 about the watches after they were dropped off for cleaning or repair.98 Ms. Diaz made contemporaneous notes on the back of the watch repair receipts regarding her attempts to reach Mr. Billison.99 One of the notes says "in Russia," which Ms. Diaz testified she wrote because she was told by Defendant that Mr. Billison was in Russia.100 Eventually, the telephone number for Mr. Billison was disconnected.101 Ms. Diaz never met or spoke with Mr. Billison.102
50. Mr. Strom testified that when he brought in a watch for repair in December of 2014, he asked Defendant the price of one of the watches at issue.103 Mr. Strom testified that Defendant told him that it was a client's watch and not for sale.104 Mr. Strom testified that he was told the client had not picked up the watch and was out of the country.105 Mr. Strom testified that cleaning a watch similar to those at issue here would typically take a few weeks and would cost approximately $950.00,106 contrary to what was on the drop-off receipt that the cost would be $0107 and Defendant's testimony that Mr. Billison owed approximately $100 for the repairs.108
51. Defendant has consistently maintained that he did not list the watches on the Original Schedules, Statement of Financial *735Affairs, or Amended Schedules based on the advice of his Chapter 7 bankruptcy attorney, Mr. Huffman, because the watches were owned by Mr. Billison.109
52. On June 19, 2017, Plaintiff first became aware of the watches and of Defendant's failure to list them in the Original Schedules, Statement of Financial Affairs, Amended Schedules, or the inventory and consignment lists.110
53. Plaintiff filed this adversary proceeding on September 18, 2017, alleging that Defendant knowingly and fraudulently made false oaths on his Original Schedules by failing to disclose ownership of the two Ulysses Nardin watches, on his Statement of Financial Affairs by failing to disclose that he was in possession of the two watches, and on his Amended Schedules by failing to disclose his ownership of the two watches.111 Plaintiff also alleges that Defendant knowingly and fraudulently made false oaths at the meeting of creditors by testifying that he listed all his assets on his petition and schedules, by failing to disclose that he organized TimeScape the day after he filed for Chapter 7 relief, and by testifying that Midwest Diamond did not own any "high-end" watches at the time of the filing the Chapter 7 petition.112 Finally, Plaintiff alleges that Defendant knowingly and fraudulently made false oaths at his Rule 2004 examination by testifying that the two watches were being stored for Mr. Billison.113 Plaintiff seeks revocation of Defendant's discharge.
DISCUSSION
Plaintiff asserts that Defendant made multiple false oaths during his bankruptcy case relating to his alleged ownership or holding of the two Ulysse Nardin watches and seeks revocation of discharge under 11 U.S.C. § 727(d)(1). Defendant argues that he did not own the watches and, therefore, the watches did not need to be disclosed.
If the two watches belonged to Defendant and were property of the bankruptcy estate, Defendant was required to disclose the watches as jewelry on Schedule A/B. If Defendant was holding the watches in his individual capacity for Mr. Billison, Defendant would have been required to disclose the watches on the Statement of Financial Affairs as property held or controlled for another. It is undisputed that the watches were not disclosed on Defendant's Original Schedules, Amended Schedules, and were never mentioned at the meeting of creditors. It is also undisputed that Defendant did not list the watches as property being held for someone else on the Statement of Financial Affairs.
First, a debtor is generally not required to disclose property of a corporation, even if the debtor is the sole owner. See McDermott v. Crabtree (In re Crabtree ), 554 B.R. 174, 192 (Bankr. D. Minn. 2016) ("As a general matter, property of the estate does not include assets owned by a corporation in which the debtor holds an interest."), rev'd on other grounds , 562 B.R. 749 (8th Cir. BAP 2017). Rather, a debtor is required to disclose any ownership interests in a business. Here, Defendant properly listed his 100% ownership interest in Midwest Diamond on both the Original Schedules and Amended Schedules.
Defendant argues that the watches were not included on the inventory and consignment *736lists provided to Mr. Swanson or Mr. Seaver because they were not owned by Midwest Diamond or on consignment. Neither party claims that the watches were being held on consignment. If the watches were being held by Defendant's company for the true owner, they did not need to be disclosed as inventory as Defendant was filing in his individual capacity. Plaintiff does not argue nor provide proof that the watches were owned by either Midwest Diamond or TimeScape at the petition date. Rather, Plaintiff argues that the watches were owned by Defendant individually.114 This is the question the Court must determine. We turn to the burden of proof in a revocation of discharge action.
A. Burden of Proof and Section 727(d)
For individual debtors, the principal purpose of the Bankruptcy Code is to give a fresh start to the honest but unfortunate debtor, in part through a discharge of prepetition debt. Marrama v. Citizens Bank of Mass. , 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (citing Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ); see McDermott v. Petersen (In re Petersen ), 564 B.R. 636, 644 (Bankr. D. Minn. 2017). Given the severe and extreme nature of a denial or revocation of discharge, courts must "strictly and narrowly construe the provisions of § 727 in favor of a debtor." Petersen , 564 B.R. at 644 (citing Kaler v. Charles (In re Charles ), 474 B.R. 680, 683 (8th Cir. BAP 2012) ). This is because "the denial of discharge is a harsh result." Id. at 645. In order to bring a successful claim to deny or revoke a discharge, a plaintiff must present reasons that are "real and substantial, not merely technical and conjectural." Id. (citing Boroff v. Tully (In re Tully ), 818 F.2d 106, 110 (1st Cir. 1987) ).
The Bankruptcy Code provides:
On request of ... the United States Trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if - (1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of the discharge.
11 U.S.C. § 727(d)(1). The party seeking a revocation of discharge bears the burden of proving each applicable element of 11 U.S.C. § 727(d) by a preponderance of the evidence.115 In re Petersen , 564 B.R. at 644.
The first element, discharge obtained through fraud of the debtor, is met if "grounds existed which would have prevented the discharge had they been known and presented in time." Fokkena v. Peterson (In re Peterson ), 356 B.R. 468, 475 (Bankr. N.D. Iowa 2006) (quoting First Interstate Bank of Sioux City v. Ratka (In re Ratka ), 133 B.R. 480, 483 (Bankr. N.D. Iowa 1991) ). Thus, if the plaintiff can prove each of the elements that would be necessary to prevail on a denial of discharge under 11 U.S.C. § 727(a)(2)-(5), the proof will be sufficient to demonstrate that the discharge was obtained through the debtor's fraud. See Carns v. McNally (In re McNally ), Adv. No. 15-01445, 2017 WL 4082093, at *4 n.32 (10th Cir. BAP Sept. 15, 2017) (collecting cases);
*737Davis v. Osborne (In re Osborne ), 476 B.R. 284, 292 (Bankr. D. Kan. 2012).
Under 11 U.S.C. § 727(a)(4)(A), bankruptcy courts may deny a discharge if "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). It is a question of fact as to whether a debtor made a false oath under Section 727(a)(4)(A). In re Petersen , 564 B.R. at 649.
"A denial of discharge under § 727(a)(4)(A) requires the objecting party to prove: (1) the debtor made a statement under oath; (2) that statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with a fraudulent intent; and (5) the statement related materially to the debtor's bankruptcy case." Id. at 648 (citing Lincoln Sav. Bank v. Freese (In re Freese ), 460 B.R. 733, 738 (8th Cir. BAP 2011) ). Denial of discharge "is an extreme step and should not be taken lightly." Id. (quoting Rosen v. Bezner , 996 F.2d 1527, 1531 (3d Cir. 1992) ).
B. Statement Made Under Oath
As to the first element, statements made in a bankruptcy petition and schedules require the debtor to sign and verify under penalty of perjury and have the force and effect of an oath. In re Petersen , 564 B.R. at 648 (citing Korte v. United States (In re Korte ), 262 B.R. 464, 474 (8th Cir BAP 2001) ). In addition, "testimony elicited at the first meeting of creditors is given under oath." Id. Plaintiff is correct that Defendant's omission of the watches from his bankruptcy petition and schedules were statements made under oath.
It is undisputed that the watches were not disclosed on Defendant's Original Schedules, Amended Schedules, and were never mentioned at the meeting of creditors. It is also undisputed that Defendant did not list the watches as property being held for someone else on the Statement of Financial Affairs. Defendant signed and verified his bankruptcy petition and schedules under penalty of perjury and, as a result, Defendant's omission of the watches from his bankruptcy petition and schedules, as well as his testimony given at the meeting of creditors, were statements made under oath.
C. False Statement
The Bankruptcy Code imposes a duty on debtors that "requires nothing less than a full and complete disclosure of any and all apparent interests of any kind." In re Charles , 474 at 686-87 (quoting In re Korte , 262 B.R. at 474 ) (internal quotation omitted). An omission in a debtor's bankruptcy petition and schedules is considered a false statement for purposes of Section 727(a)(4)(A). See, e.g. , In re Petersen , 564 B.R. at 649.
Defendant omitted the two Ulysse Nardin watches from his Original Schedules, Amended Schedules, Statement of Financial Affairs, and failed to mention the watches at the meeting of creditors. As discussed above, Defendant was not required to disclose property of Midwest Diamond, even though Defendant was its sole owner. See In re Crabtree , 554 B.R. at 192. Defendant did list his 100% ownership interest in Midwest Diamond on both the Original Schedules and Amended Schedules. If the watches were Defendant's property, his omission of the watches would have constituted a false oath. As discussed in greater detail below, however, Plaintiff failed to show that the watches were Defendant's property and, as a result, failed to show that Defendant's omissions were false.
*738Plaintiff argues that the story surrounding Mr. Billison is not believable and that Defendant is the true owner of the watches. The main evidence in favor of Plaintiff's position is the YouTube videos. Defendant clearly stated that one of the watches was "his" in the first YouTube video, posted pre-petition on May 12, 2016. He refers to the watch as "my watch" on two separate occasions. Defendant had no reason to claim the watch as his own in the video. Defendant also changed the watch bracelet on the watch post-petition, as was evidenced in the second YouTube video posted on March 6, 2017. There is no testimony or evidence as to who owned that bracelet and it was not disclosed on the schedules.
Plaintiff also argues that the receipts submitted by Defendant following the Rule 2004 examination were suspicious, as the receipts bore the name "Timescape USA, LLC." TimeScape is an entity that did not exist until June 17, 2016, long after the time of the purported sales. In addition, the receipt for the 2007 purchase lists an invalid mailing address for Mr. Billison and the 2009 receipt lists an address for Mr. Billison that does not exist.
Defendant explained that the inclusion of "Timescape USA LLC" on the receipts initially given to Mr. Swanson was due to the receipt copies having been re-printed on current invoice forms. Defendant testified, and the Court found credible, that the computer operating system and software system used by his business had changed from the time Mr. Billison purportedly purchased the watches to the time the receipts were re-printed and provided to Mr. Swanson. His testimony is corroborated by original receipts produced at trial that contained the correct name and address for Midwest Diamond.
Defendant also testified that the addresses on the receipts were given to him by Mr. Billison. There was no testimony or other evidence to refute this.116
Finally, Defendant testified that calling the watch his in the YouTube video was a poor choice of words and that any use of the watches in the videos were for marketing and demonstration purposes only. Defendant does not frequently wear watches owned by customers and generally only does so when he is attempting to sell watches on consignment. There were times he wore one of the watches at issue, even though it belonged to Mr. Billison. The Court does not find the YouTube video persuasive evidence that Defendant owned the watches, especially with the evidence that will be discussed below. The comments were not material to the marketing purposes of the video and appeared to be puffery.
The Court agrees with Plaintiff that the story about Mr. Billson's dropping off the valuable watches and the reason for not retrieving them-living on an oil rig in Russia-is not believable. There are conflicting facts as to Mr. Billison's whereabouts during the entirety of the time in question. But who created the story-Defendant or Mr. Billison?
Mr. Billison had a greater incentive than Defendant to create the Russia story and not return for his property. Mr. Billison has been avoiding making payments on a large child support obligation and has been avoiding arrest. Mr. Billison has refused to provide photographic identification, failed to comply with orders of this Court and other courts on a routine basis, and claims to live in the Caspian Sea working on an oil rig. Further, Mr. Billison made no attempts to retrieve the watches until after *739Mr. Seaver and Plaintiff took the position that they belong to Defendant. There is simply no reason why Mr. Billison failed to retrieve the watches before then, unless he wanted them to be kept hidden and he wanted to keep himself hidden.
The Court gives significant weight to the testimony provided by Ms. Billison that her son has resided in the Minneapolis area since graduating high school. She testified that she hand-delivered Mr. Swanson's July 11, 2017 letter to Mr. Billison in downtown Minneapolis. She saw him on May 28, 2018, the night before trial in order to take a picture.
As to the whether the watches were sold to Mr. Billison, there is significant corroborating evidence that the sales occurred. Defendant submitted unrefuted documentary evidence in the form of confirmation statements from the Minnesota Department of Revenue that two watches were sold by Midwest Diamond on the dates and prices stated on the original receipts. Midwest had charged, collected, and remitted the appropriate sales tax to the State of Minnesota.
There is additional support for Defendant's position that he did not own the watches from Mr. Strom and Ms. Diaz's testimony. Mr. Strom, an unbiased witness in this adversary proceeding, testified that when he brought in a watch for repair in December of 2014, he asked Defendant the price of one of the watches at issue. Mr. Strom testified that Defendant told him that it was a client's watch and was not for sale. Defendant told Mr. Strom that the client had not picked the watch up and was out of the country. This conversation took place long before the filing of the bankruptcy.
Ms. Diaz began working for Defendant at TimeScape in 2013. She testified that she made numerous attempts to contact Mr. Billison by phone over several months about the watches in 2013. Ms. Diaz contemporaneously made handwritten notes on the back of the watch repair receipts. One of the notes says "in Russia," which Ms. Diaz testified she wrote because she was told by Defendant that Mr. Billison was in Russia. Eventually, the telephone number for Mr. Billison that Ms. Diaz had been calling was disconnected. This occurred several years before the bankruptcy filing.
Thus, based on the evidence, the Court determines that the watches were sold to Mr. Billison. Plaintiff has failed to carry his burden to show by a preponderance of the evidence that the watches were Defendant's property and, as a result, has failed to show Defendant made a false statement under oath.
D. Knowledge
As to the third element, a debtor "acts knowingly if he or she acts deliberately and consciously." Id. at 650 (citing Roberts v. Erhard (In re Roberts ), 331 B.R. 876, 883-84 (9th Cir. BAP 2005) ). Careless or reckless acts committed by the debtor do not satisfy the knowledge requirement of § 727(a)(4)(A). Id.
The question of whether or not Defendant knew the omission of the two watches from his bankruptcy petition and schedules was false turns on whether or not Defendant actually owned the watches. As stated above, the watches had been sold to Mr. Billison and thus, there were no false statements made knowingly by Defendant.
E. Fraudulent Intent
As to the fourth element, statements made "with reckless indifference to the truth are regarded as intentionally false." In re Charles , 474 B.R. at 684. This element requires more than an "honest mistake or oversight by the debtor."
*740In re Petersen , 564 B.R. at 648 (citing Giansante & Cobb, LLC v. Singh (In re Singh ), 433 B.R. 139, 154 (Bankr. E.D. Pa. 2010) ). A party can establish fraudulent intent by circumstantial evidence. Id. at 650. Courts, however, are "often understanding of a single omission or error resulting from innocent mistake." Id. at 650-51 (citing Jordan v. Bren (In re Bren ), 303 B.R. 610, 613 (8th Cir. BAP 2004), overruled on other grounds , 331 B.R. 797 (8th Cir. BAP 2005) ).
Plaintiff argues that the Court can infer that Defendant's alleged false oaths relating to ownership of the watches were made with fraudulent intent because Defendant made multiple false oaths to conceal the watches from the Chapter 7 Trustee and failed to disclose the existence of the watches until pressed at the Rule 2004 examination. Defendant maintains that because the watches were sold by Midwest Diamond to Mr. Billison and were being held for Mr. Billison by Midwest Diamond, he did not disclose the watches at issue in his Chapter 7 petition, Original Schedules, Statement of Financial Affairs, and Amended Schedules based on the advice of his Chapter 7 bankruptcy attorney, Mr. Huffman. Defendant asserts that he did not recklessly disregard the truth because the watches were not his property to disclose. The Court agrees with Defendant.
Plaintiff failed to prove that the watches were Defendant's property. Thus, Plaintiff has failed to establish that Defendant made false statements under oath with the requisite fraudulent intent.
F. Materiality
As to the final element, "[t]he 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." Id. at 651-52 (citing In re Charles , 474 B.R. at 686 ). The threshold for materiality in the Eighth Circuit is fairly low. In re Charles , 474 B.R. at 686.
Here, the alleged false oaths would materially relate to Defendant's bankruptcy case because they related to property of the estate worth approximately $30,000.00 and concerned the discovery of assets. Defendant admits as much in his post-trial brief, stating that the "Ulysse Nardin watches in dispute would likely be considered material, as the valuable timepieces concern the assets of the bankruptcy estate."117 If the Court had found that the watches were property of Defendant's bankruptcy estate, then any alleged false oaths would be material.
For the reasons stated above, and in strictly and narrowly construing 11 U.S.C. § 727(a)(4)(A) and (d)(1) in favor of Defendant, the Court determines that Plaintiff has failed to carry his burden. Plaintiff has failed to establish that Defendant owned the two watches at issue. As a result, Plaintiff has failed to show by a preponderance of the evidence that the statements were false, that Defendant knew the statements were false, and that the statements were made with fraudulent intent.
CONCLUSION
Revocation of discharge is a harsh and severe result. Bearing in mind the extreme nature of this result, the Court must strictly and narrowly construe the provisions of Section 727 in favor of Defendant. Based on these considerations and the evidence before it, the Court finds that Plaintiff has failed to establish, by a preponderance of *741the evidence, his claim under 11 U.S.C. § 727(d)(1).
CONCLUSIONS OF LAW
1. This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(J) & (O) and this Court has jurisdiction pursuant to 28 U.S.C. §§ 157(b)(1) & 1334.
2. Venue is proper before this Court under 28 U.S.C. §§ 1408 & 1409.
3. Defendant's discharge is not revoked.
ORDER
IT IS ORDERED: The Defendant's discharge is not revoked.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Ex. 3.
Id.
Id. at 12.
Id. at 41.
Trial Tr. vol. 1, 9:21-10:8, 11:4-9.
Id. at 10:9-11.
Ex. 3 at 13, Ex. 5 at 4.
Trial Tr. vol. 1, 12:16-21.
Id. at 13:14-20.
Id. at 41:9-42:24.
Trial Tr. vol. 2, 295:24-296:16. Defendant and Mr. Swanson provided conflicting testimony as to whether the Ulysse Nardin watches were listed on the inventory and consignment list provided to Mr. Seaver. Compare Trial Tr. vol. 1, 42:25-43:25, with Trial Tr. vol. 2, 295:24-296:12. Mr. Swanson's testimony was credible and the Court finds that the watches were not included on any lists provided to Mr. Swanson or Mr. Seaver.
Trial Tr. vol. 1, 40:1-8, 40:21-41:2; Ex. 4.
Trial Tr. vol. 1, 10:20-22; Ex. 4 at 4:25-7:1.
Trial Tr. vol. 1, 43:16-44:10.
See generally Ex. 4.
Ex. 5 at 3.
Trial Tr. vol. 1, 51:5-8.
Trial Tr. vol. 2, 275:20-276:16; Ex. A.
Trial Tr. vol. 1, 23:6-14; Ex. 1.
Trial Tr. vol. 1, 18:21-19:4, 19:17-22; Ex. 1.
Trial Tr. vol. 1, 19:23-20:14; Ex. 1.
Trial Tr. vol. 1, 23:6-14, Ex. 2.
Trial Tr. vol. 1, 23:18-21.
Id. at 23:22-24:13, 26:9-17.
See generally Ex. 6.
Trial Tr. vol. 2, 277:19-21.
Id. at 277:19-278:2.
Id. at 278:10-17.
Trial Tr. vol. 1, 36:20-37:2; Ex. 6 at 44:15-25.
Ex. 6 at 45:16-25.
Trial Tr. vol. 1, 60:13-16; Ex. 6 at 45:16-22.
Trial Tr. vol. 1, 61:2-17.
Trial Tr. vol. 1, 60:23-61:1; Ex. 6 at 47:19-48:1.
Trial Tr. vol. 1, 19:17-22, 102:5-12; Ex. 6 at 37:18-23.
Trial Tr. vol. 1, 67:24-68:21, 69:20-70:1, 102:17-25; Trial Tr. vol. 2, 283:18-284:12; Ex. 7.
Trial Tr. vol. 1, 68:9-15; Ex. 7.
Trial Tr. vol. 1, 70:8-25; Trial Tr. vol. 2, 285:17-286:21; Ex. 7.
Trial Tr. vol. 1, 70:8-25.
Id. at 13:14-20, 69:16-70:7; Ex. 1.
Trial Tr. vol. 1, 9:21-10:8, 11:4-9.
Id. at 75:15-76:12, 85:10-22, 103:17-20; Exs. 9, 11.
Trial Tr. vol. 1, 80:2-81:3, 84:13-85:3, 103:1-20.
Id. at 67:24-68:21, 69:20-70:1, 102:17-25.
Id. at 106:7-107:14, 108:11-25; Exs. H, I, K-L.
Trial Tr. vol. 2, 289:10-290:20; Ex. Q.
Trial Tr. vol. 1, 245:13-246:1.
Id. at 87:4-88:17, 89:25-90:23; Ex. BB.
Trial Tr. vol. 1, 90:15-17; Ex. BB.
Trial Tr. vol. 2, 291:13-20, 311:8-21, 312:4-15; Ex. R.
Trial Tr. vol. 2, 311:17-312:2; Ex. R.
Trial Tr. vol. 2, 291:4-12.
Trial Tr. vol. 2, 281:7-19.
Id. at 281:7-19.
Id. at 292:14-21, 293:5-21; Ex. R.
Trial Tr. vol. 2, 315:19-316:21; Ex. T.
Trial Tr. vol. 2, 317:1-6; Ex. T.
Trial Tr. vol. 1, 177:4-9, 178:15-19, 182:7-23; Ex. 15 at ¶¶ 1-2.
Ex. 15 ¶¶ 1-2.
Id. at ¶¶ 3-4.
Trial Tr. vol. 1, 182:7-23; see generally Ex. 15.
Trial Tr. vol. 1, 182:7-23, 185:21-186:11; see generally Ex. 15.
Trial Tr. vol. 1, 175:18-177:3; Ex. 14.
Trial Tr. vol. 1, 181:12-18.
Id. at 175:18-177:3; Ex. 14.
Trial Tr. vol. 1, 170:1-10; Trial Tr. vol. 2, 320:3-321:10.
Trial Tr vol. 1, 201:13-18; Trial Tr. vol. 2, 294:9-16; Ex. 16.
Trial Tr. vol. 1 170:20-171:4; see generally Ex. 18.
Ex. 18 at 9:6-25.
Id. at 10:3-4.
Ex. 18 at 12:14-13:5.
Id. at 14:5-15:14.
Id. at 24:3-22.
Trial Tr. vol. 1, 201:23-202:1; Ex. 16.
Trial Tr. vol. 1, 202:20-203:21.
Id. at 203:19-204:1.
Dkt. No. 35.
Dkt. No. 40.
Trial Tr. vol. 1, 141:2-17, 148:21-149:6.
Id.
Trial Tr. vol. 1, 150:6-151:10, 156:16-21, 159:2-160:19; Exs. 28, 32-33.
Id.
Trial Tr. vol. 1, 156:22-157:24.
Id. at 157:20-158:7.
Id. at 156:13-18.
Id. at 252:17-253:3, 253:19-254:1.
Id. at 244:17-245:7.
Id. at 243:4-6.
Id. at 243:4-19, 247:21-248:1.
Id. at 246:24-247:7.
Id. at 246:24-247:15, 253:9-12.
Id. at 240:15-22, 242:8-12.
Id. at 242:20-25.
Id. at 248:18-249:5.
Id. at 246:12-16; Ex. 18 at 22:11-18.
Trial Tr. vol. 1, 248:4-17.
Ex. 18 at 22:11-18.
Trial Tr. vol. 1, 212:11-12.
Id. at 213:3-8, 213:16-19.
Id. at 212:18-24, 213:9-19.
Id. at 213:9-19, 216:15-21.
Id. at 218:9-15.
Id. at 214:12-16, 215:2-5.
Id. at 222:2-10, 225:1-226:2.
Id.
Id. at 225:23-226:2.
Id. at 232:21-233:23.
Ex. 13.
Trial Tr. vol. 1, 58:19-22; Ex. 6 at 68:25-69.
Trial Tr. vol. 1, 34:20-25, 35:10-37:9.
Trial Tr. vol. 2, 287:6-289:5; Ex. B.
Compl. at ¶¶ 15-17.
Id. at ¶ 18.
Id. at ¶ 19.
"The only question is whether Mr. Zaligson is the owner of the watches." Pl.'s Post-Trial Br. at 20.
Here, there is no dispute that Plaintiff did not know about the watches prior to the time of the discharge, thus establishing the second element of § 727(d)(1) ; Plaintiff did not have knowledge of Defendant's alleged false oaths until after the discharge was granted. 11 U.S.C. § 727(d)(1).
The Court has the distinct impression that Defendant doubted that the addresses were real at the time of the sale, but it did not matter-Defendant had made two sales.
Def.'s Post-Trial Br. at 23. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501684/ | Probate Proceeding Background
1. Ernest James Burris ("Decedent") died in 2009. (Verified Petition, Exhibit 8, ¶ 1)
2. Dean Burris ("D Burris"), a son, filed a probate action on April 14, 2009, related to Decedent's Will, which appointed him as Executor ("PR"). (Verified Petition, Exhibit 8, ¶ 3, 4)
3. J Burris, also a son, was an heir under the Will. (Verified Petition, Exhibit 8, ¶ 6)
4. Defendant, also a son and an heir, is a licensed attorney admitted to the Oklahoma Bar on September 27, 2007. (Verified Petition, Exhibit 8, ¶ 6; OSCN Docket Sheet, Exhibit 9)
5. Defendant objected to D Burris' appointment as PR contending that he was disqualified by a conflict of interest. (the "PR Objection," Exhibit 10)
6. J Burris filed a Demurrer to the PR Objection. (the "First Demurrer," Exhibit 11)
7. The court rejected the conflict of interest claim at an August 18, 2009 hearing (the "Conflict Hearing"). (Conflict Hearing Transcript, Exhibit 12, p. 98 ll. 15-17)
8. At the hearing, Defendant changed arguments to claim that D Burris lacked "integrity" to be PR under Okla. Stat. tit. 58, § 102. (Conflict Hearing Transcript, Exhibit 12, p. 98 ll. 18-23)
9. Defendant was authorized to file an amended PR Objection to pursue the integrity allegation. (Conflict Hearing Transcript, Exhibit 12, p. 12 - 13)
10. At the Conflict Hearing, Defendant requested, and was authorized, to conduct discovery limited to the singular issue of D Burris' integrity. (Conflict Hearing Transcript, Exhibit 12, p. 16, ll. 8-16; p. 30, ll. 15-19)
*78411. Defendant styled his amended objection as a petition, with seven "Causes of Action" (the "Amended PR Objection"). (Exhibit 13)
12. The Amended PR Objection described, in detail, the family conflict that resulted from Decedent's failed marriage to the parties' mother. (Amended PR Objection, Exhibit 13)
13. Defendant's only change relevant to the "integrity" issue in the Amended PR Objection was the vague and unsubstantiated claim that:
37. Upon information and belief, and per [Decedent] prior to his death, Dean Burris has entered a plea for an offense which could constitute a felony.
(Amended PR Objection, Exhibit 13, p. 7)
14. A three-day hearing on the Amended PR Objection was held August 18, 19 and 23, 2010 (the "Integrity Hearing"). At its conclusion, the court found:
"Be that as it may, the demur is sustained, his [Defendant's] objection will be dismissed on the basis that it completely lacks any foundation as it relates to lack of integrity."
(Integrity Hearing Transcript, Exhibit 14, p. 37, ll. 17-18)
THE COURT: "The Court denies the objection of Brandon Burris. The Court finds Brandon Burris has wholly failed to prove a lack of integrity on behalf of Dean Burris as it relates to the request to prevent Gregory Dean Burris from being the Personal Representative. It's important that we say only the request of Brandon Burris, in case there is another request. The Court orders each party to pay their own fees, with the exception that attorney Mr. Dunham can make a request for fees if he desires within 30 days of this date on behalf of his client, Jason Burris from Brandon Burris. The Court specifically finds that there is bad faith on behalf of both Brandon Burris as well as Gregory Dean Burris. The Court grants both parties an exception to all of the Court's rulings and Order to be submitted by Mr. Poe. All right, does that reflect the Court's ruling, Mr. Poe?
MR. POE: Your Honor, if I could inquire just because I'm not sure I heard. Did you say the Order would find that Dean Burris was determined guilty of bad faith?
THE COURT: You know what, I will change that. The Court finds that both parties were equally uncooperative and as a result of which each party will pay their own fees with the exception of J. Dunham's fees to be paid upon application of Mr. Dunham on behalf of [J Burris] for fees to be paid by [Defendant].
(Integrity Hearing Transcript, Exhibit 14, p. 41, ll. 3-20)
J Burris' Motion for Sanctions
15. Thereafter, J Burris filed his Motion for Award of Costs and Fees; it was verified by counsel, having first-hand knowledge of the alleged facts. (the "Sanctions Motion," Exhibit 15)
16. The Sanctions Motion rested upon the common law ability of a court to award fees "when a litigant has acted in bad faith, vexatiously, wantonly, or for oppressive reasons." (Sanctions Motion, Exhibit 15, p. 3)
17. The Sanctions Motion highlighted Defendant's general use of unsupported allegations in his pro se pleadings to misrepresent his opponents to the court. For example, Defendant made the following unsubstantiated allegations "upon information and belief" that D Burris had:
*785• committed perjury
• committed perjury
• committed drug possession and distribution crimes
• committed murder, or had been complicit in a murder
(Motion for Continuance Pursuant to, Inter Alia, The Court's October 12, 2009 and November 12, 2009 Orders, Exhibit 16, p. 7, ¶ 6 and p. 9, ¶ 6)
18. D Burris was then, and is, an assistant U.S. Attorney in the Eastern District of Oklahoma, and had passed a federal background check. (Sanctions Motion, Exhibit 15, p. 2)
Defendant's Deposition Scheduling Conduct
19. The Sanctions Motion focused on several categories of intentional, bad faith behaviors. It first detailed Defendant's bad faith in scheduling J Burris' deposition prior to the Integrity Hearing. (Sanctions Motion, Exhibit 15, p. 3)
20. J Burris is an AT & T fiber optic network technician responsible for ensuring the seamless operation of AT & T facilities (e.g. server farms) essential to its global network. (Sanctions Motion, Exhibit 15, p. 5)
21. J Burris' daily schedule is made known to him only one month out, on a rolling basis. Blocks as long as ten consecutive days "on" are common. He is generally unable to schedule personal days more than 30 days out. (Sanctions Motion, Exhibit 15, p. 5, 6)
22. Defendant was advised about J Burris' job requirements from the outset. (Sanctions Motion, Exhibit 15, attached Ex. B-1)
23. But Defendant consistently demanded that J Burris pick dates more than a month out, making him decline and offer dates with which he could comply. (Sanctions Motion, Exhibit 15, p. 6)
24. At the Conflict Hearing, the Court ordered all deposition notices be given in 30 days, by September 17, 2009. (Conflict Hearing Transcript, Exhibit 12. p. 83, l. 7 - p. 85, l. 6)
25. Defendant's next request for deposition dates was September 14, 2009, four days short of the deadline; it asked for dates "for the first or second week of December and the first or second week of January." (Sanctions Motion, Exhibit 15, p. 6 and its attached Ex. B-3)
26. Defendant knew these proposed dates were far outside the 30-day window J Burris needed due to his job. (Sanctions Motion, Exhibit 15, and its attached Ex. B-1)
27. Two days later, still within the deadline for notice, J Burris offered two dates within the window, September 25 or 28. (Sanctions Motion, Exhibit 15, and its attached Ex. B-4)
28. Defendant rejected those dates, telling J Burris' counsel "for the reasons previously outlined in my email." (Sanctions Motion, Exhibit 15, p. 6-7)
29. In a response email, Defendant told counsel that he had noticed the deposition for December 8, 2009. (Sanctions Motion, Exhibit 15, p. 7, and attached Ex. B-5)
30. However, no email informing J Burris' counsel that the last week in September was unavailable was ever sent by *786Defendant, a fact pointed out by J Burris' counsel in an email to Defendant. (Sanctions Motion, Exhibit 15, p. 7, fn. 2, and its attached Ex. B-6)
31. The discovery cutoff was extended to December 14, 2009, at Defendant's request. (Sanctions Motion, Exhibit 15, p. 7; OSCN Docket, Exhibit 18, entry dated 10-12-2009)
32. Regardless, J Burris still could not commit to the December 8 deposition date because it was outside the 30-day window, a fact Defendant knew when he picked it. (Sanctions Motion, Exhibit 15, p. 7, and its attached Ex. B-1 and B-7)
33. J Burris then offered on October 14, 2009, to appear for deposition October 26 or 27. (Sanctions Motion, Exhibit 15, p. 7, and its attached Ex. B-7)
34. Defendant rejected the offer without explanation. (Sanctions Motion, Exhibit 15, p.7, and its attached Ex. B-8)
35. J Burris responded October 20, removing October 26 (counsel acquired a conflict) and instead offering November 2. (Sanctions Motion, Exhibit 15, p.7, and its attached Ex. B-9)
36. Defendant again refused the offered date in an email response consisting almost entirely of misrepresentations. (Sanctions Motion, Exhibit 15, p. 7, and its attached Ex. B-10).
The email's misrepresentations include:
"I have properly noticed [J Burris] for deposition pursuant to our agreement..."
There was no such agreement. Defendant merely selected December 8 and sent notice. (Sanctions Motion, Exhibit 15, p. 7, and its attached Ex. B-5)
"We have discussed: (a) your representation that [J Burris] has been forbidden from missing work in November, December, and January"
J Burris' counsel never made this representation. He simply conveyed that [J Burris] could not commit to dates outside a rolling 30 day window. Defendant knew of the issue, but repeatedly demanded deposition dates to which he knew [J Burris] could not commit. (Sanctions Motion, Exhibit 15, p. 7, and its attached Ex. B-1)
"We have discussed: (b) your prior representation on September 17th that the only day [J Burris] was available this year is September 25th"
No such representation was made. (Sanctions Motion, Exhibit 15, p. 7)
"We have discussed [J Burris] (c) your representation now, on October 20, that the only day [J Burris]is available this year is October 27th"
No such representation was made. Counsel's October 20 email to Defendant not only reiterated the availability of October 27th, but offered November 2 as an additional potential date. (Sanctions Motion, Exhibit 15, p. 7, and its attached Ex. B-9)
37. Regardless, J Burris was prepared to be deposed in Tulsa on December 8, 2009, per Defendant's "notice." (Sanctions Motion, Exhibit 15, p. 8)
38. However, Defendant used an unrelated hearing on November 12, 2009, at which J Burris' counsel was not present, to extend the discovery deadline to February 12, 2010, and to obtain an ex parte order stating "JASON BURRIS'S DEPOSITION IS TENTATIVELY SCHEDULED FOR FEB., 2010 AT 10:00 A.M., AS A "TARGET DATE." (Sanctions Motion, Exhibit 15, p. 8; OSCN Docket, Exhibit 18, minute entry dated 11-12-2009)
39. Defendant never informed J Burris about cancelling the December 8 deposition or about the Court-ordered February *787deposition "target" date. (Sanctions Motion, Exhibit 15, p. 8)
40. J Burris' counsel discovered the cancellation just days before the December 8 deposition. (Sanctions Motion, Exhibit 15, p. 8)
41. A December 22, 2009, email sent directly to both J Burris and his counsel (which will be further addressed below) was the first time Defendant even mentioned a February deposition date. (Sanctions Motion, Exhibit 15, p. 8, and its attached Ex. B-11)
42. On March 5, 2010, Defendant filed his Motion for Continuance Pursuant to, Inter Alia, the Court's October 1, 2009, and November 12, 2009, Orders, wherein he asked that the March 25, 2010, Integrity Hearing be reset (the "Continuance Motion"). (Exhibit 16)
43. Defendant used the Continuance Motion to misrepresent J Burris' efforts to schedule his Deposition and to portray J Burris as uncooperative. (Sanctions Motion, Exhibit 15, p. 8; Continuance Motion, Exhibit 16, p. 2-6)
44. In reality, between August 2009 and April 2010, J Burris offered Defendant six specific dates and the entire month of March 2010, for J Burris' Deposition in Tulsa. For example, between late December 2009, and April 9, 2010:
• committed perjury
• committed perjury
• committed drug possession and distribution crimes
• committed murder, or had been complicit in a murder
45. In the Sanctions Motion, J Burris' counsel attached his timekeeping entries related to Defendant's bad faith in selecting a deposition date and requested sanctions against Defendant for those costs in the sum of $3,983.34. (Sanctions Motion, Exhibit 15, p. 9; and it attached Ex. B-22)
Defendant's Deposition Tactics
46. Instead of conducting a serious and relevant inquiry about D Burris' integrity, Defendant deposed J Burris for over four hours on wholly unrelated topics, such as: to determine which of his siblings might (many years ago) have taken a rifle from J
*788Burris, how J Burris defined "integrity," whether J Burris preferred his father to his mother, and similar, irrelevant issues. (Sanctions Motion, Exhibit 15, p. 9)
47. A brief sampling of the irrelevant deposition questions include:
"Okay. Well, let me try again. In the past have you ever thought that Dean was either acting clueless or actually was clueless?" (J Burris' Deposition, Exhibit 19, p. 29, l. 8-11)
"Have you ever described our mother as the one who puts her desires to possess newspapers and junk over the well-being of her kids?" (Sanctions Motion, Exhibit 15, p. 10, and its attached Ex. C-2)
"Have you ever stated, "Mom can let the divorce be over with Dad's death or she can keep the fighting going forever"? (Sanctions Motion, Exhibit 15, p. 10; and its attached Ex. C-3, which is J Burris Transcript, p. 116)
"Have you ever expressed your belief that what was taken from you was not a rifle, but the trust, compassion, and sense of security that you should enjoy within your family, quote/unquote?" (Sanctions Motion, Exhibit 15, p. 10, and its attached Ex. C-4, which is J Burris Transcript, p. 123)
"Have you ever stated, quote/unquote, 'The missing rifle represents another abuse that I have to suffer to be a part of this family?' " (Sanctions Motion, Exhibit 15, p. 10, and its attached Ex. C-5, which is J Burris Transcript, p. 124)
"Have you ever stated, 'Dean now denies knowing that Mom was persecuting Brandon for the stolen gun, but I can recall one occasion when Dean was present when Mom accused Brandon?' " (Sanctions Motion, Exhibit 15, p. 10, and its attached Ex. C-6, which is J Burris Transcript, p. 127)
"Have you ever -- have you -- has it ever been your opinion that there were people that had no obligations to you, yet their food and even love and affection had less conditions than what that woman who claims to be our mother attached to hers?" (Sanctions Motion, Exhibit 15, p. 10, and its attached Ex. C-7, which is J Burris Transcript, p. 130)
Defendant's Direct Contact with Represented Parties
48. After Jay Dunham ("Dunham") appeared in the probate case as J Burris' lawyer, Defendant asked whether he should stop communicating directly with J Burris and communicate only with Dunham. (Sanctions Motion Exhibit 15, p. 11, and attached Ex. D-1)
49. Dunham said yes. (Sanctions Motion, Exhibit 15, p. 11, and attached Ex. D-2)
50. However, Defendant then intentionally communicated directly to J Burris in violation of his agreement to stop and in violation of Oklahoma Rules of Professional Responsibility 4.2 ("Rule 4.2") in two subsequent "batches." (Sanctions Motion, Exhibit 15, p. 11-13)
51. Defendant initiated the first "batch" when he sent a settlement demand to J Burris and other family members. (Sanctions Motion, Exhibit 15, p. 11, and attached Ex. D-6 and D-7)
52. At the bottom of the Exhibit D-7, Defendant told represented parties D Burris, J Burris, and Cherie Burns, to "... not respond without consulting with your attorney." (Sanctions Motion, Exhibit 15, attached Ex. D-7)
53. Defendant managed not to include J Burris in emails the next two weeks; however, on December 22, 2009, he again sent a settlement letter directly to J Burris and his counsel. (Sanctions Motion, Exhibit *78915, p. 12, and its attached Ex. D-8 and D-9)
54. J Burris personally responded, telling Defendant his direct communication violated his ethical duties. (Sanctions Motion, Exhibit 15, p. 12, and attached Ex. D-10)
55. Defendant responded back to J Burris: "Thank you for your unsolicited legal opinion. I extensively reviewed the law regarding my ethical obligations before communicating with you." (Sanctions Motion, Exhibit 15, p. 12, and attached Ex. D-11)
56. Defendant initiated the second batch of direct communications to J Burris by an email on March 11, 2010. It related to scheduling J Burris' deposition and was critical of J Burris and his counsel; Defendant copied the email to other family members and/or their counsel. (Sanctions Motion, Exhibit 15, p. 12, and attached Ex. D-12)
57. J Burris' counsel immediately demanded to know why it was sent directly to J Burris. (Sanctions Motion, Exhibit 15, p. 12, and attached Ex. D-13)
58. This triggered an exchange in which J Burris' counsel presented Defendant 18 cases and bar association ethic opinions from 15 jurisdictions - no pertinent Oklahoma authority was found - that clearly prohibited Defendant's conduct. (Sanctions Motion, Exhibit 15, p. 12, and attached Ex. D-14)
59. Defendant's response offered only his own interpretation of Comment 4 to Rule 4.2, and then offered to cease direct communications with J Burris only if Dunham agreed to follow Defendant's instructions in communicating with his own client. (Sanctions Motion, Exhibit 15, p. 12, and attached Ex. D-15)
60. That response was also sent to J Burris and triggered J Burris' Motion for Injunctive Relief, in which J Burris relied on Rule 4.2 to ask the court to stop Defendant's intentional contact. (Sanctions Motion, Exhibit 15, p. 12, Motion for Injunctive Relief, Exhibit 20)
61. Defendant then filed his Response To Jason Burris' Motion For Injunctive Relief, again citing only his own interpretation of Comment 4 to Rule 4.2 as authority; he cited no cases or other legal authority. (Response to Motion for Injunctive Relief, Exhibit 21)
62. The court granted J Burris' requested injunction in a Minute Order. The Minute Order enjoined Defendant from any further direct communications with J Burris, citing Rule 4.2 as its basis. (Minute Order, Exhibit 22).
Defendant's Threat to File a Sanctions Motion
63. After Defendant filed the Amended PR Objection, J Burris filed a Combined Demurrer and Motion to Dismiss on September 16, 2009 (the "Renewed Demurrer," Exhibit 23)
64. The Renewed Demurrer renewed J Burris' objections related to the repeated portions of Defendant's original PR Objection. Given this similarity to the First Demurrer, which had been overruled, Defendant reasoned that the Renewed Demurrer was in bad faith and threatened to move for sanctions against J Burris, or his counsel, pursuant to Okla. Stat. tit. 12, § 2011, if the demurrer was not withdrawn. (Sanctions Motion, Exhibit 15, p. 13, and its attached Ex. E-1)
65. J Burris' counsel entered into a dialogue with Defendant to explain why renewing his objections in the Renewed Demurrer was not frivolous. (Sanctions Motion, Exhibit 15, p. 13, and its attached Ex. E-1 - E-7).
*79066. Ultimately, Defendant filed no sanctions motion. (Sanctions Motion, Exhibit 15, p. 14)
Defendant's Behavior Violated the OBA's Standards of Professionalism
67. The Oklahoma Bar Association's Standards of Professionalism ("OBA-SOP") require that attorneys "not knowingly misstate, distort or improperly exaggerate any fact, opinion or legal authority." OBA-SOP 1.2. They further require that lawyers' "conduct with clients, opposing counsel, parties, witnesses and the public will be honest, professional and civil." OBA-SOP 1.6.
68. One email from Defendant to D Burris' attorney speaks volumes of Defendant's goals in this case:
... your client now faces the prospect of no less than two trials on his integrity and at least a year or two of litigation, depending on the appeals court, not including the two trials on his conflict of interest as to the bank accounts... Given this, it would be appropriate for your client to submit a reasonable settlement offer....
(Sanctions Motion, Exhibit 15, p. 15, and its attached Ex. F-1)
Procedural History Following the Integrity Hearing
69. The original probate judge was recused by the Supreme Court. (Appeal No. MA109251 Order to Recuse, Exhibit 24)
70. The case was then assigned to Judge Chappelle, who set all pending motions, including the Sanctions Motion, for hearing on August 10, 2011 (the "Sanctions Hearing"). (OSCN Docket, Exhibit 18, entry of 06-16-2011)
71. Defendant then objected to the Sanctions Motion (the "Sanctions Objection"). (Exhibit 25)
72. At the Sanctions Hearing, J Burris and Defendant were given a full opportunity to argue and present evidence related to the Sanctions Motion and Sanctions Objection. (Appeal No. 112,918 Answer Brief, Exhibit 26, p. 4, ¶ 2; Sanctions Hearing Transcript, Exhibit 27)
73. At the Sanctions Hearing, neither J Burris nor Defendant added any argument to their sanctions pleadings. Thereafter, the Court requested suggested findings and conclusions. (Appeal No. 112,918 Answer Brief, Exhibit 26, p. 4, ¶ 2; OSCN Docket, Exhibit 18, entry dated 08-10-2011)
74. J Burris filed his Proposed Findings of Fact and Conclusions of Law on August 22, 2011 (Findings & Conclusions, Exhibit 28), and Defendant filed his on September 6, 2011 (Response to Findings & Conclusions, Exhibit 29).
75. On September 16, 2011, the court granted the Sanctions Motion, sanctioning Defendant in the amount of $29,500.00, out of the of $29,508.34 requested by J Burris in the Sanctions Motion (the "Sanctions Judgment"). (Exhibit 30)
76. The Sanctions Judgment found that:
1. Defendant's litigation conduct toward J Burris in this matter has been, inter alia, wantonly vexatious and oppressive.
2. Defendant's litigation conduct toward J Burris in this matter has been, inter alia, in substantial bad faith;
3. Defendant's litigation conduct toward J Burris in this matter has been, inter alia, grossly and maliciously unprofessional, unethical, rude, insulting, abusive and uncivil;
4. Defendant's substantive legal position(s) in this matter has/have been at all relevant times utterly frivolous *791and without any factual basis whatsoever;
5. As a consequence of the foregoing, J Burris should be compensated, and Defendant Burris should be sanctioned, by monetary sanctions in the amount of $29,500.00.
(Sanctions Judgment, Exhibit 30)
77. Defendant then retained counsel for the first time, who filed a "Motion for New Trial or to Reconsider" (the "1st Motion to Reconsider," Exhibit 31)
78. Thereafter, J Burris filed a response (Response, Exhibit 32), to which Defendant filed a reply. (Reply, Exhibit 33)
79. The 1st Motion to Reconsider was denied. (Order, Exhibit 34)
80. Defendant filed an untimely appeal of that denial, which was dismissed for that reason. (Appeal No. 110,287 Order, Exhibit 35)
81. Defendant filed a second pro se "Motion to Reconsider Interlocutory Sanctions Judgment" pro se March 11, 2014 (the "2nd Motion to Reconsider," Exhibit 36).
82. J Burris responded to the 2nd Motion to Reconsider. (Response, Exhibit 37)
83. The 2nd Motion to Reconsider was denied. (Order, Exhibit 38)
84. Defendant filed a third Motion For New Trial And Alternative Motions To Vacate And Reconsider (the "3rd Motion to Reconsider," Exhibit 39)
85. The 3rd Motion to Reconsider was denied. (Order, Exhibit 40)
86. Defendant appealed both the fact, and amount, of sanctions (the "Sanctions Appeal"):
F. The Court Erred in Awarding Sanctions Against Defendant in Favor of J Burris in the Amount of $29,500, and the Amount of the Sanctions is Unreasonable and Excessive
(Sanctions Appeal Brief in Chief, Exhibit 41, p. 27)
87. J Burris timely filed his Answer Brief. (Sanctions Appeal Answer Brief, Exhibit 42)
88. In affirming the Sanctions Judgment, the Court of Civil Appeals stated:
[W]e agree with the trial court's award in this case. The order making the award made a specific finding as to the bad faith nature of [Defendant's] litigation in this probate, and our review of the record supports this conclusion. While the amount of the estate is small, [Defendant] burdened it with much unneeded animosity and made serious allegations against his siblings, their counsel, and the Special Administrator which had no basis in fact, law, or reality.
(Sanctions Opinion, Exhibit 43, p. 12-13)
89. Ultimately, the trial court entered a Journal Entry of Judgment awarding J Burris appellate fees of $15,960.00 (the "Appellate Fee Judgment"). (Exhibit 44)
90. Defendant later filed the Second/Renewed Motion to Determine Outstanding Judgment, to determine the amounts owed to J Burris (the "Motion to Determine"). ( Exhibit 45)
91. On November 14, 2017, the court found that the outstanding balances would be, as of December 8, 2017, $22,373.13 on the Sanctions Judgment and $15,358.88 on the Appellate Fee Judgment (the "Judgment Amount Order"). (Exhibit 46)
92. Then, on December 7, 2017, J Burris filed a motion seeking an additional $15,259.09 in fees against Defendant incurred in collection efforts (the "Fee Motion"). (Exhibit 47)
*792Mother's Judgment
93. Cherie Burns, the mother of J Burris and Defendant ("Mother"), obtained a judgment against Decedent's estate in the amount of $150,464.61. (Defendant Exhibit 1)
94. Decedent's estate was insufficient to satisfy the claims of Mother. (Order/Final Decree, Exhibit 38)
LEGAL AUTHORITIES AND CONCLUSIONS
I. SECTION 523(a)(6) EXCEPTS FROM DISCHARGE DEBTS RESULTING FROM WILLFUL AND MALICIOUS INJURY BY A DEBTOR.
Section 523(a)(6) excepts from discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." To prevail under Section 523(a)(6), a creditor must prove both a willful act and a malicious injury. Panalis v. Moore (In re Moore ), 357 F.3d 1125, 1129 (10th Cir. 2004). Thus, an intentional tort is required, and debts resulting from recklessness or negligence are not within the scope of Section 523(a)(6). Barenberg v. Burton (In re Burton ), 2010 WL 3422584, at *6 (10th Cir. BAP Aug. 31, 2010) (citing Kawaauhau v. Geiger, 523 U.S. 57, 64, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) ). The Tenth Circuit applies a subjective standard in determining whether a debtor desired to cause injury or believed the injury was substantially certain to occur. Utah Behavior Serv. Inc. v. Bringhurst (In re Bringhurst ), 569 B.R. 814, 823 (Bankr. D. Utah 2017) (citing Via Christi Regional Med. Ctr. v. Englehart (In re Englehart ), 229 F.3d 1163 (10th Cir. 2000) (the willful and malicious injury exception focuses on the debtor's state of mind) ).
The standard for a successful claim under Section 523(a)(6) is a stringent one and requires that the debtor's objectionable conduct must have caused "willful and malicious injury," i.e."that the actor intend the consequences of an act, not simply the act itself." Berrien v. Van Vuuren, 280 F. App'x 762, 766 (10th Cir. 2008) (citing Kawaauhau, 523 U.S. at 61-62, 118 S.Ct. 974 ) ). Because "the debtor must desire to cause the consequences of his act or believe that the consequences are substantially certain to result from it," Berrien, 280 F. App'x at 766 (citing Moore, 357 F.3d at 1129 ), a creditor must allege facts that support a reasonable inference that a debtor deliberately or intentionally caused injury to the creditor. Barenberg, 2010 WL 3422584, at *6 (citing Kawaauhau, 523 U.S. at 61, 118 S.Ct. 974 ).
To fall within Section 523(a)(6), the conduct must be not only willful but also malicious. Reperex, Inc. v. May (In re May ), 579 B.R. 568, 593 (Bankr. D. Utah 2017) (citing Sierra Chems., LLC v. Mosley (In re Mosley ), 501 B.R. 736, 744 (Bankr. D.N.M. 2013) ); Tulsa Spine Hosp., LLC v. Tucker (In re Tucker ), 346 B.R. 844, 854 (Bankr. E.D. Okla. 2006). "For a debtor's actions to be malicious, they have to be intentional, wrongful, and done without justification or excuse." Bertone v. Wormington (In re Wormington ), 555 B.R. 794, 800 (Bankr. W.D. Okla. 2016) (citing Fletcher v. Deerman, 482 B.R. 344, 370 (Bankr. D.N.M. 2012) ; Tso v. Nevarez, 415 B.R. 540, 544 (Bankr. D.N.M. 2009) (" 'Malicious' requires that an intentional act be 'performed without justification or excuse.' ") ); AVB Bank v. Costigan (In re Costigan ), 2017 WL 6759068 (Bankr. E.D. Okla. 2017). "Malice may be implied where the preponderance of the evidence establishes that the debtor committed acts that were 'wrongful and without just cause.' " Costigan, 2017 WL 6759068, *5 (citing In re Jennings, 670 F.3d 1329, 1334 (11th Cir. 2012) ).
*793To establish Defendant's willful and malicious intent in this adversary proceeding, J Burris relies primarily on the doctrine of issue preclusion, formerly known as collateral estoppel.3
II. ISSUE PRECLUSION CAN BE USED IN DETERMINING DISCHARGEABILITY.
The doctrine of issue preclusion bars relitigation of determinations necessary to the ultimate outcome of a prior proceeding. Bobby v. Bies, 556 U.S. 825, 129 S.Ct. 2145, 2149, 173 L.Ed.2d 1173 (2009). Issue preclusion prevents a party that has lost the battle over an issue in one lawsuit from relitigating the same issue in another lawsuit. Melnor, Inc. v. Corey (In re Corey ), 583 F.3d 1249, 1251 (10th Cir. 2009). The doctrine of issue preclusion may be invoked to preclude relitigation of the factual issues underlying a determination of dischargeability. Nelson v. Tsamasfyros (In re Tsamasfyros ), 940 F.2d 605, 606 (10th Cir. 1991) ; Grassmann v. Brown (In re Brown ), 570 B.R. 98, 112 (Bankr. W.D. Okla. 2017).
The Full Faith and Credit Statute, 28 U.S.C. § 1738, directs federal courts to look to the preclusion law of the state in which a judgment is rendered. Cobb v. Lewis (In re Lewis ), 271 B.R. 877, 883 (10th Cir. BAP 2002) (citing Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) ). In Oklahoma, issue preclusion may be invoked where a court has decided an issue of fact or law necessary to its judgment to prevent the same parties or their privies from relitigating that issue in a subsequent suit brought upon a different claim. Tibbetts v. Sight 'n Sound Appliance Ctrs., Inc., 2003 OK 72, 77 P.3d 1042, 1061 (2003) ; Miller v. Miller, 1998 OK 24, 956 P.2d 887, 897 (1998). A party seeking to invoke issue preclusion "must show that the issue sought to be precluded was actually litigated and determined in the prior action ... and that the determination was essential to the decision in the prior action." Miller, 956 P.2d at 897. An issue is actually litigated and necessarily determined only if: (i) it is properly raised in pleadings or otherwise submitted for determination in a prior action; and (ii) judgment would not have been rendered but for the determination of that issue. Oklahoma Dep't of Public Safety v. McCrady, 2007 OK 39, 176 P.3d 1194, 1199 (2007) (citing State ex rel. Oklahoma Bar Ass'n v. Giger, 2004 OK 43, ¶ 13, 93 P.3d 32, 38 (2004).
Oklahoma courts require a party relying on issue preclusion to "produce-as proof of its terms, effect and validity-the entire judgment roll4 for the case which culminated in the decision invoked as a bar to relitigation." Salazar v. The City of Oklahoma City, 1999 OK 20, 976 P.2d 1056, 1061 (1999). Without the judgment roll, no court can determine with the requisite degree of certainty what claims were pressed for adjudication and which of the tendered issues were actually submitted and decided. Salazar, 976 P.2d at 1061-62. Failure to produce the judgment roll is *794fatal to a request that a prior judgment be given preclusive effect. Salazar, 976 P.2d at 1062. Oklahoma bankruptcy courts recognize that the party seeking to rely on a judgment for preclusive force has the obligation to produce the entire judgment roll for the case in which the judgment was entered. Brown, 570 B.R. at 113 ; Hall v. Bolton (In re Bolton ), 2017 WL 535265, *2 (Bankr. E.D. Okla. 2017) ; Factoring of Oklahoma, L.L.C. v. Means (In re Means ), 2006 WL 2847903, *5, n.12 (Bankr. N.D. Okla. 2006) (citing Gouskos v. Griffith, 122 F. App'x 965, 974 (10th Cir. 2005) ); Witaschek v. Sacramento Cty. Bureau of Family Support (In re Witaschek ), 276 B.R. 668, 676 (Bankr. N.D. Okla. 2002) ; Marks v. Hentges (In re Hentges ), 373 B.R. 709, 726, n.13 (Bankr. N.D. Okla. 2007) ; Cook v. Hill, 169 F. App'x 513, 517 (10th Cir. 2006) (Tenth Circuit recognized that failure to submit the entire judgment roll from previous litigation in subsequent civil action is fatal to issue preclusion).
Here, J Burris is to be commended for successfully presenting the complete judgment roll from the state court action5 as required by Oklahoma law for application of issue preclusion, a rare occurrence in this Court. The Court sincerely appreciates the effort and time expended in compiling the complete judgment roll, thus permitting the Motion and Cross-Motion in this adversary proceeding to be considered using the doctrine of issue preclusion. However, under the particular nature and circumstances of this case, even the entire judgment roll is insufficient to entitle either party to complete summary judgment in his favor.
III. DEFENDANT'S INTENT UNDER SECTION 523(a)(6) REMAINS IN DISPUTE.
As set forth in the undisputed facts above, the Sanctions Judgment made the following findings and conclusions as to Defendant's conduct in the state court action:
1. Defendant's litigation conduct toward J Burris was, inter alia, wantonly vexatious and oppressive.
2. Defendant's litigation conduct toward J Burris was, inter alia, in substantial bad faith;
3. Defendant's litigation conduct toward J Burris was, inter alia, grossly and maliciously unprofessional, unethical, rude, insulting, abusive and uncivil;
4. Defendant's substantive legal position(s) was at all relevant times utterly frivolous and without any factual basis whatsoever; and
5. As a consequence of the foregoing, J Burris was awarded, and Defendant was sanctioned, in the amount of $29,500.00.
(Sanctions Judgment, Exhibit 30) Unfortunately, this is the extent of the state court's findings and conclusions. Although the court directed J Burris and Defendant to submit proposed findings of facts and conclusions of law at the close of a hearing, and both parties complied by making detailed submissions, the state court did not adopt either party's proposed findings or conclusions, and additionally, failed to issue any of its own (other than as set forth above).
Even with J Burris' submission of the entire judgment roll from the state court proceeding, application of the doctrine of issue preclusion to his Section 523(a)(6) nondischargeability claim is problematic for several reasons. Initially, it is well-established that questions involving a defendant's state of mind or intent are ordinarily not appropriately resolved on *795summary judgment. Nevarez, 415 B.R. at 544 (citing Gelb v. Bd. of Elections, 224 F.3d 149, 157 (2d Cir. 2000) and Bryant v. Tilley (In re Tilley ), 286 B.R. 782, 792 (Bankr. D. Colo. 2002) (in dischargeability litigation "great circumspection is required where summary judgment is sought on an issue involving state of mind") ). Yet this is precisely what J Burris asks this Court to do, albeit based on the record from the state court action.
But the state court record, while substantial, lacks any findings and conclusions as to the intent underlying Defendant's conduct toward J Burris. The state court's findings and conclusions on this issue are quite abbreviated. In fact, the Sanctions Judgment points to no specific evidence to support the legal conclusions made, and the legal conclusions make no reference to the applicable law or standards applied by the state court in reaching its conclusions. Moreover, the hearing conducted on the Sanctions Motion pertained almost entirely to other matters before the state court, specifically the special administrator's application for attorney fees and the appointment of the personal representative. No arguments as to J Burris' request for sanctions, or Defendant's objections thereto, were heard, because the state court indicated it could rule on the "fee applications" on the pleadings, rather than taking evidence at the hearing. (Sanctions Hearing Transcript, Exhibit 27, pp. 63-65)
Compounding the problem for this Court is that neither the Sanctions Judgment nor the record before the state court on the Sanctions Motion address Defendant's state of mind or intent in connection with his bad faith, vexatious, oppressive, and/or frivolous litigation actions. Stein v. McDowell (In re McDowell ), 415 B.R. 601, 611 (Bankr. S.D. Fla. 2008) (a state court judgment awarding attorney fees based on bad faith does not satisfy the standard of Section 523(a)(6) without specific factual findings that the debtor acted both willfully and maliciously). The record is surprisingly silent as to any relevant case law or other authority discussing or describing the state of mind required for a conclusion of bad faith, vexatious or oppressive behavior. In the absence of such, the Court has no basis for determining whether the intent inferred by the state court in sanctioning Defendant, if any, is equivalent to the required standard for nondischargeability of a debt under Section 523(a)(6).
The Court has independently surveyed relevant Oklahoma case law addressing the specific terminology used by the state court in the Sanctions Judgment. Unfortunately, conflicting definitions of the terms were found, with some authorities finding their meaning to be closer to negligence6 rather than willful and malicious intent to injure, as required by Section 523(a)(6).7
Because material factual issues are disputed at the summary judgment stage, the Court must review the facts and draw reasonable inferences in the light most favorable to Defendant on the Motion, *796and in the light most favorable to J Burris on the Cross-Motion. Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 1776, 167 L.Ed.2d 686 (2007). Although the propriety of Defendant's conduct in the state court action is more than questionable, evidence exists from which the Court can infer that Defendant's motives were, at least in part, to vindicate and protect his Mother and ensure that her judgment against Decedent's estate was paid. In sum, given: (i) the paucity of actual findings and conclusions by the state court, and specifically the absence of any finding regarding the intent behind Defendant's conduct toward J Burris; and (ii) the requirement that this Court view the facts in the light most favorable to the non-moving party, the Court concludes the complete resolution of this adversary proceeding by summary judgment is not appropriate. There is a genuine issue of material fact regarding whether Defendant's conduct was willful, malicious and intended to harm J Burris, and accordingly, with respect to the intent element of the Section 523(a) claim, the Court cannot grant summary judgment to either party.
However, the Court concludes that, on the basis of issue preclusion, it is appropriate to grant summary judgment in favor of J Burris against Defendant as to the debt owed him under the Sanctions Judgment and the Judgment Amount Order of $37,732.01 as of December 8, 2017. As the party invoking the doctrine of issue preclusion, J Burris has demonstrated that both the Sanctions Order and the Judgment Amount Order involve issues actually and finally litigated in the state court action, and that the determination of the amount owed was essential to litigation on the Sanctions Motion. Miller, 956 P.2d at 897. Therefore, no evidence will be required or accepted at trial on these matters. Furthermore, any undisputed fact set forth herein will not require proof at trial.8 Fed. R. Civ. P. 56(g) (applicable pursuant to Fed. R. Bankr. P. 7056 ). The Court cautions counsel for J Burris and Defendant to streamline and tailor their presentation of evidence at trial accordingly.
Trial of the remaining issues will commence on Thursday, November 29, 2018, at 9:30 a.m.
IT IS SO ORDERED.
The Tenth Circuit refers to collateral estoppel as issue preclusion and res judicata as claim preclusion.
The judgment roll includes the petition, the process, return, pleadings subsequent thereto, reports, verdicts, orders, judgments and all material acts and proceedings of the court. Salazar, 976 P.2d at 1061 ; Genoff Farms, Inc. v. Seven Oaks South, LLC, 249 P.3d 526, 530 (Okla. Ct. App. 2011) (judgment roll is the same as the record and is made up of the petition, process, return, the subsequent pleadings, reports, verdicts, orders, judgments and all material acts and proceedings of the court); Mahmoodjanloo v. Mahmoodjanloo, 2007 OK 32, 160 P.3d 951, 958, n.8 (2007).
The complete judgment roll fills a banker's box and contains just short of 5,000 pages.
Recklessly or negligently inflicted injuries are insufficient to meet the requirements under Section 523(a)(6). AVB Bank v. Costigan (In re Costigan ), 2017 WL 6759068, *5 (Bankr. E.D. Okla. 2017).
" 'Wanton' is defined in Webster's New International Dictionary (1910 Ed.): '4. Reckless; heedless; malicious; as, wanton mischief.' " Smith v. State, 71 Okla.Crim. 297, 111 P.2d 198, 199 (1941). "Under Oklahoma law, willful and wanton conduct is viewed as a type of tortious conduct that falls between gross negligence and intentional actions." Molitor v. Mixon, 2016 WL 9050778, *2 (W.D. Okla. 2016) (citing Parret v. UNICCO Serv. Co., 127 P.3d 572, 576 (Okla. 2005) (superseded on other grounds by statute) ). " " 'In bad faith' is not a technical term used only in actions for deceit. It is an ordinary expression, the meaning of which is not doubtful. It means 'with actual intent to mislead or deceive another.' It refers to a real and actual state of mind capable of both direct and circumstantial proof. A man may testify directly to his knowledge and intention if they are in issue, and they may also be inferred from circumstances. If a man makes a statement in the honest belief that it is true, he does not make that statement in bad faith, even if his honest ignorance of the truth is the result of the grossest carelessness." " New York Life Ins. Co. v. Carroll, 154 Okla. 244, 7 P.2d 440 (1932) (citing Continental Casualty Co. v. Owen, 38 Okl. 107, 131 P. 1084, 1088 (1932) ).
The undisputed facts set forth above should be included in the Final Pretrial Conference Order in lieu of stipulated facts with a notation that they were determined on summary judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501687/ | Hon. Catherine J. Furay, U.S. Bankruptcy Judge
Plaintiff Donna Ray filed a chapter 13 petition. She filed this adversary proceeding seeking a finding that Defendant Educational Credit Management Corporation ("ECMC") is prohibited from collecting her student loans and discharging her from liability under 11 U.S.C. §§ 727(a) and (b).1 Plaintiff also objected to ECMC's claim in her chapter 13 petition. The Court *837held a trial in the adversary and a final hearing on the claim objection.
FACTS
On September 16, 2004, Plaintiff signed a Federal Consolidation Loan Application and Promissory Note ("Note") through which Anchor Bank consolidated her preexisting student loans. The Note referred to a preexisting debt in the amount of $24,400. Plaintiff testified she had several student loans, but she did not clarify or recall which loans she intended to consolidate when she filled out the application. In any event, whatever loans she consolidated were student loans-Plaintiff certified on the Note that the proceeds of the relevant loans were "used to finance my education or my child's education."
The Note identifies Anchor Bank as the lender. It lists no guarantor. ECMC presented testimony that Great Lakes Higher Education Guaranty Corporation ("Great Lakes") was the guarantor. Donna Thigpen, ECMC's witness, testified that Great Lakes paid the balance of the Note to Anchor Bank after Plaintiff defaulted. Great Lakes then held title to the Note. Plaintiff provided no contrary evidence.
In 2014, Great Lakes contacted Plaintiff about her default. They explained they were the guarantor of her loan and provided information related to the loan. Two months later, Plaintiff sent a letter to Great Lakes requesting information on the Note. Great Lakes replied with a copy of four pages of the original loan package. It also provided a payment history explanation. The payment history explicitly names Great Lakes as the guarantor and says it acquired title to the loan through a purchase. The Note contains:
• Identification of Plaintiff as the Borrower
• References for Plaintiff
• Identification of the educational loan indebtedness-the loan holder (Anchor Bank), the person asking to consolidate (borrower Plaintiff) and the amount ($24,400)
• Certifications by the Plaintiff
• The Promissory Note section containing the promise to pay to the order of the lender the sums listed plus interest and fees
• Acknowledgement that Plaintiff read the terms and conditions of the Note, the Certification and Authorization, and the Borrower's Rights and Responsibilities Statement
• Plaintiff's acknowledgement that she was entitled to a copy of the Note and the Rights and Responsibilities Statement at the time of signing.
In that same month, Plaintiff also received a letter from Performant Recovery, Inc. ("Performant"). The letter asserts Plaintiff failed to make payments and Great Lakes therefore referred the Note to Performant for collection. Plaintiff alleged in her complaint that Performant claimed an interest in the Note. But it is clear Performant served only as the collection agent on behalf of Great Lakes.
In 2016, Plaintiff filed a different chapter 13 petition. ECMC filed a claim in that case. Plaintiff objected to the claim on the grounds ECMC had not provided the underlying contract. ECMC did not respond to the objection and the Court denied ECMC's claim. That bankruptcy was dismissed at Plaintiff's request in June 2017.
Shortly after Debtor filed her 2016 chapter 13, Great Lakes assigned the Note to ECMC. It appears Great Lakes sent a letter to evidence a batch assignment of loans for debtors who had filed bankruptcy. ECMC presented testimony that Great Lakes automatically assigns all loans to ECMC when the borrower files bankruptcy.
*838Again, Plaintiff provided no contrary evidence.
DISCUSSION
The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. §§ 157(b)(2)(A), (I), and (O).
A. Dischargeability Under 11 U.S.C. § 727
Plaintiff filed her adversary under sections 727(a) and (b). That section says the Court shall grant a discharge except in certain circumstances that are not relevant here. It appears Plaintiff cites that section under the belief the previous petition discharged the Note. ECMC filed a claim in the previous case. Plaintiff objected to that claim. Because ECMC did not respond to the objection, the Court denied the claim in that case. No action was filed seeking dischargeability of the loan. Plaintiff then voluntarily dismissed the chapter 13 without a discharge.
Despite the Court's order denying the claim, the Note was not discharged in the previous chapter 13. First, there was no discharge. Thus, none of Debtor's liabilities were discharged. The mere fact the Court sustained the objection does not determine the debt is dischargeable.
Second, failure to file or have a claim allowed affects distributions under a plan. A chapter 13 debtor is entitled to a discharge only after she has made all plan payments and the Court grants the discharge. 11 U.S.C. § 1328(a). Neither of those events came to pass in the 2016 case.
Finally, under Bankruptcy Rule 7001(6), an adversary is required to determine the dischargeability of a student loan. ECMC's claim in both the prior and current case relate to a student loan. It was not eligible for discharge unless so determined through an adversary. The parties brought no adversary in the previous case and the Note was not discharged. Plaintiff's claims under sections 727(a) and (b) fail and are dismissed.
B. Even if Pleaded, Plaintiff's Claims Under 11 U.S.C. § 523(a)(8) Fail
While the complaint asks that Plaintiff be discharged from liability on the ECMC claim, it appears she may have intended to file this adversary proceeding under some section 523(a)(8) theory since that governs dischargeability of student loans. Much of the argument presented by Plaintiff sounds like an argument under section 523(a)(8). For that reason, and in the interest of completeness, the Court will address such a claim based on the evidence and record here.
Section 523(a)(8) excepts from discharge a debt for an educational benefit, unless the obligation imposes an "undue hardship" on the debtor. Though the debtor bears the ultimate burden at trial to prove the elements of an undue hardship, "[t]he creditor bears the initial burden of establishing that the debt is of the type excepted from discharge under § 523(a)(8)." Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon) , 435 B.R. 791, 796 (1st Cir. BAP 2010). In the context of 523(a)(8), that rule makes practical sense because it is "consistent with the parties' relative access to information." Connecticut Student Loan Found. v. Keenan (In re Keenan) , 53 B.R. 913, 916 (Bankr. D. Conn. 1985).
ECMC has met its burden. ECMC produced the Note in which Plaintiff certified she incurred the original loans to support payments for her education. Plaintiff also executed the consolidation through *839the Federal Family Education Loan Program, a government program designed "to encourage lenders to loan money to students and their parents on favorable terms." Bible v. United Student Aid Funds, Inc. , 799 F.3d 633, 640 (7th Cir. 2015) (citation omitted). The Note therefore meets the definition of "educational benefit" under section 523(a)(8). Its proof of claim is also prima facie evidence of its claim.
The burden of proof therefore shifts to Plaintiff. Plaintiff does not argue the ECMC debt would impose an undue hardship. Instead, she insists the Note is invalid for three reasons-including incompleteness, insufficient evidence proving valid transfers between the various lenders and guarantors, and lack of consideration.
Her testimony was, in most significant parts, incredible. Plaintiff concedes she had many student loans. She admits she didn't pay some loans. She acknowledges looking into consolidation. The handwriting listing the student loans is hers. She admits the signature on the Note is hers. She admits receiving notice from Great Lakes when she didn't make payments. She says that she simply does not recollect signing the Note, agreeing to consolidate, or what loans were outstanding. Yet the amount of the loans to be consolidated is in her handwriting. The name of the lender-Anchor Bank-is in her handwriting.
1. Incompleteness of the Note
ECMC produced a copy of the Note that contains the first four pages of a nine-page document. Plaintiff's signature is on the Note. She agrees she received the first four pages in 2014. She did not affirmatively deny receiving all nine pages when she signed the Note. She merely argues there is no way for the Court to know whether she received the five additional pages when she signed it. The Plaintiff asks the Court to conclude her faulty memory is enough to render the Note invalid.
In response, ECMC filed the blank loan application form used to execute these types of loan consolidations. The blank form is identical to the form used in the Note in every way, except it contains five additional pages. ECMC presented testimony that the five additional pages contain only boilerplate language about definitions, the Borrower's Rights and Responsibilities Statement, and instructions for completing the form. The Court's review of the blank form confirms ECMC's testimony.
And the Note itself says Plaintiff read the entire Note before signing. It says she understood she was entitled to an exact copy of the Note. It also confirms she understood she was entitled to a copy of the "Borrower's Rights and Responsibilities Statement"-pages 8 and 9 of what she says was missing.
ECMC also offered testimony that Great Lakes typically only transmits the first four pages of these loans when it assigns them to ECMC and ECMC considers those pages to be the loan in its entirety. Great Lakes regularly assigns these loans to ECMC. To avoid needless paper shuffling, Great Lakes transmits only the first four pages to ECMC. The remaining pages are identical in all such loans and not essential to the loan agreement itself. That understanding, paired with the complete form loan application, leads the Court to the conclusion that the omission of the final pages from the exhibit containing the Note is harmless. For this Court to require Great Lakes and ECMC to transmit boilerplate language every time they engage in a loan assignment would amount to the needless exchange of thousands of pages and a waste of untold hard drive space.
*840As noted, the final five pages of the Note provide instructions on completing the form, some terms, and notices-none of which have any direct relevance to Plaintiff's claim in this adversary. In fact, two pages are disclosures called "Borrower's Rights and Responsibilities Statement." This is more information for the borrower and does not change or affect the terms of the Note. The remaining page is disclosures related to information about the Federal Family Education Loan Program. It refers to the loan and disclosures as separate documents.
Plaintiff insists she did not understand the Note affected the consolidation. That testimony is incredible. Immediately above Plaintiff's signature on the Note are the words-bolded and in all capital letters-"I understand that this is a loan that I must repay." The language is clear and unambiguous. A paragraph above that warning contains statements that Plaintiff read the entire note and would not sign if she had not done so. She acknowledged she was entitled to a complete copy of the Note and of the "Borrower's Rights and Responsibilities Statement." While the latter contained page numbers 8 and 9, if it was part of the Note there would have been no need for inclusion of the reference above her signature. Whatever came after pages one through four does not change the fact Plaintiff agreed to a loan consolidation and obliged herself to repay the debt.
Plaintiff argues various other deficiencies render the Note unenforceable. To support her argument, Plaintiff cites the Code of Federal Regulations, which governs the administration of Federal Family Education Loans. See 34 C.F.R. §§ 682.200, 682.414(a)(4)(ii), and 682.414(c)(2) (2018). Plaintiff insists ECMC failed to meet its obligations under the Regulations by failing to maintain, among other things, copies of the promissory note, repayment schedule, and documentation of the assignment. Plaintiff then accuses ECMC of forging a loan balance sheet to "give the appearance that [Great Lakes] owned the loan on 7/25/16."
First, ECMC did maintain and produce each of those documents. As noted, ECMC produced the four-page signed Note. It provided the final five pages of boilerplate language in a separate exhibit. ECMC offered testimony that it only received the first four pages of the Note from Great Lakes because the remaining pages are standard in all documents. ECMC also produced a letter evidencing the assignment from Great Lakes to ECMC. It produced a loan history and projected balance. ECMC has maintained and produced all the information it received from Great Lakes, and the Court has no reason to doubt the veracity of any of those documents or testimony. The Great Lakes testimony about the assignment of the Note, the role of ECMC, and the Note itself was clear, direct, and credible.
Second, even if ECMC had not produced all the documents, Plaintiff has not shown ECMC violated the Regulations. The Regulations require guaranty agencies to maintain "[a]ll documentation supporting the claim filed by the lender" in addition to other records like payment and collection histories. 34 C.F.R. § 682.414(a)(1)(ii). The Regulations also require guaranty agencies to induce lenders to maintain even more detailed records, including copies of the loan and repayment schedule. Id.
Plaintiff asserts that ECMC has not produced a signed repayment schedule. But under the Regulations the lender , not the guarantor, must maintain the repayment schedule. Even so, she admits the document titled "The Solution" is in fact a repayment schedule. She does not dispute receiving a copy. Nowhere has Plaintiff *841pointed to a requirement of her signature on the repayment schedule. Once again, her testimony was incredible.
In any case, the lack of a signature on the repayment schedule does not render ECMC's claim invalid. A claim, at its heart, is simply a right to payment. ECMC's "right to repayment" is memorialized in the Note and assignments. The lack of a signature on the repayment schedule does not extinguish that right.
2. Validity of Transfers of Interest
Plaintiff argues there is insufficient evidence showing Great Lakes was the original guarantor and acquired title to the Note. While the Note may not explicitly name Great Lakes, the only conclusion that can be drawn from the evidence is that Great Lakes was the guarantor. First, by statute all federal student loans must be guaranteed by an organization "that has an agreement with the Secretary under which it will administer a loan guarantee program under the Act." Id. § 682.200, 20 U.S.C. § 1072(a)(1). The evidence establishes Great Lakes is such an organization. At no point has any other entity claimed to be the original guarantor of the Note.
Second, the evidence shows Great Lakes was the guarantor. It took title to the Note when Plaintiff defaulted, and then transferred its interest to ECMC. In response to one of Plaintiff's inquiries, Great Lakes produced a Payment History which names it as the guarantor and affirms Great Lakes acquired the Note through a purchase. Great Lakes is also named on the Loan Consolidation Disclosure Statement and Repayment Schedule dated September 29, 2004. The payment schedule and disclosures were all drafted by Great Lakes.
Third, the testimony offered by ECMC buttresses this conclusion. Lisa Matheny, an employee of ECMC Shared Services, stated the loan-like countless others-was automatically assigned by Great Lakes to ECMC when Debtor filed her first chapter 13 petition in 2016. Great Lakes was the guarantor of the Note.
Even if Great Lakes were not the original guarantor, it is clear Great Lakes "purchased" title to the Note from Anchor Bank. It then eventually assigned its interest through a letter assignment to ECMC when Plaintiff filed her 2016 petition. Indeed, Great Lakes filed a letter requesting the Court dismiss it as a defendant because it acknowledged it assigned the Note to ECMC. It was dismissed from the adversary. Plaintiff fruitlessly argues the evidence is insufficient, but she identifies no alternate guarantor. She gives no explanation as to how Great Lakes acquired such detailed information if it was not in fact the guarantor. The only reasonable conclusion the Court can reach is that Great Lakes was the guarantor. It properly acquired title to the Note when Plaintiff defaulted. Thus, this argument fails.
3. Lack of Consideration
A novel argument raised by Plaintiff is that ECMC "did not pay to acquire" the loan. Unchallenged is the testimony that Great Lakes paid the original lender for the consolidated loans. Put differently, she doesn't dispute:
• Plaintiff sought out consolidation of her loans and signed the Note.
• ECMC is a guarantor in the Federal Family Education Loan Program ("FFELP").
• Great Lakes was the guarantor.
• When Plaintiff defaulted, Great Lakes paid Anchor and obtained title to the Note.
• When a borrower from Great Lakes files bankruptcy, the right, title, and interest in the loan is transferred to ECMC.
*842The original lender received payment pursuant to federal law. 34 C.F.R. § 682.102(g). By doing so, Great Lakes became the owner of the Note. The Note was assigned to ECMC when Plaintiff filed bankruptcy. Again, this transfer was in writing. It was one of many loans assigned to ECMC at the same time. The assignment lists Plaintiff, her loan number, and the amounts of her loans-both guaranteed and non-guaranteed amounts.2 She did not challenge this fact when raised in a Motion to Dismiss. She stipulated to the dismissal of Great Lakes.
Great Lakes confirmed in its Motion to Dismiss that it assigned the loan to ECMC. ECMC has an agreement with the Department of Education permitting it to accept transfer of title to loans when a bankruptcy is filed. 20 U.S.C. §§ 1078(c), 1085(j). ECMC must pursue and collect student loans under regulations issued by the U.S. Department of Education. Id. § 1071, et seq. ; 34 C.F.R. § 682.410, et seq. See also Bukovics v. Navient (In re Bukovics) , 587 B.R. 695, 703 (Bankr. N.D. Ill. 2018). As the only entity holding the Note, ECMC is the holder of the Note without the need to pay Great Lakes.
For the above reasons, if the claim asserted in this adversary is intended to seek a determination that the debt is dischargeable under 11 U.S.C. § 523(a)(8), it fails. Any such claim is denied and the complaint dismissed based on the record and file.
C. The Objection to the Proof of Claim
Finally, Plaintiff argues the lender, not ECMC, is the only party who may file a claim under the Regulations. Plaintiff cites 34 C.F.R. § 682.402(f)(5)(i), which provides the "lender shall file a bankruptcy claim on the loan with the guaranty agency in accordance with paragraph (g) of this section." Plaintiff argues therefore that the only party entitled to file a claim for the student loan is the lender, Old National Bank.
Plaintiff's argument is wrong. Plaintiff neglects to address the paragraph immediately preceding paragraph (5), which stipulates "the holder of the loan shall file a proof of claim." 34 C.F.R. § 682.402(f)(4) (emphasis added). The section she cites applies to loans held by the original lender, not those assigned to the guarantor. Id. § 682.402(g). As the current holder of the loan, ECMC properly filed a proof of claim.
As a result, the objection to claim is overruled.
D. A Determination That Payments Are Not Owed to ECMC Would Not Discharge Plaintiff's Student Loans
Plaintiff mistakenly equates denial of a claim with dischargeability. Even if Plaintiff is correct that ECMC isn't entitled to enforce the Note, she hasn't established it is dischargeable.
This case is a chapter 13. It has a Plan-of sorts. The Plan says there are no attorneys' fees,3 secured claims, priority claims, or executory contracts or leases under the plan. It proposes to pay nothing per month to unsecured claims. It does, however, propose *843payments of $30.00 per month for 36 months. Whatever sum the payments generate will be distributed pro rata, as calculated by the Trustee after reviewing filed claims.
Once a debtor has satisfied his or her payments under the confirmed plan, the bankruptcy court grants a discharge of all debts provided for by the plan, see 11 U.S.C. § 1328(a). But not those debts which are nondischargeable under 11 U.S.C. § 523(a).4 The debtor remains personally responsible for all such nondischargeable debts. See Kielisch v. Educ. Credit Mgmt. Corp. (In re Kielisch) , 258 F.3d 315, 318 n.1 (4th Cir. 2001) ; Internal Revenue Serv. v. Cousins (In re Cousins) , 209 F.3d 38, 40 (1st Cir. 2000).
Under the Code, student loan debts are dischargeable only if repayment would impose an undue hardship. Unless the debtor establishes undue hardship, "[s]tudent loans ... fall within the category of nondischargeable debts and pass through the [chapter 13] bankruptcy process unaffected." In re Jordan , 555 B.R. 636, 641 (S.D. Ohio 2016) (citing Ekenasi v. Educ. Res. Inst. (In re Ekenasi) , 325 F.3d 541, 545 (4th Cir. 2003) ). A debtor remains personally liable for all nondischargeable debts. Yet Plaintiff seeks a decision in this adversary and provisions in a Plan that theoretically would eliminate her personal liability for the Note. Asking that ECMC or Great Lakes be enjoined from pursuing collection would not have the same effect.
Thus, whatever the Plan may provide, Plaintiff will still owe all amounts on any unpaid student loans at the closure of this case, upon completion of payments under any Plan, or upon entry of a discharge. This will be the case even if no payments are made to ECMC through a Plan.
CONCLUSION
The objection to ECMC's claim is overruled.
Plaintiff's obligation under the Note is not dischargeable, and the complaint is dismissed.
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.
Orders consistent with this decision will be entered.
A default judgment was granted as to non-answering defendants Performant Recovery, Old National Bank, and Anchor Bancorp Wisconsin Inc. Great Lakes Higher Education Guaranty Corporation, once a defendant, was dismissed from this action.
While she may not understand the difference, the testimony proved it was the total amounts listed on the second line that were the balances on her loans.
While the Plan affirmatively says "None" and "pro bono" for attorneys' fees, that is not accurate. Plaintiff's attorney filed a proof of claim for $20,625.01. Perhaps the plan so provides because all but $812 predate the filing of the current bankruptcy. Any issues this raises, however, are not before the Court.
The chapter 13 statutory scheme provides that
(a) As soon as practicable after completion by the debtor of all payments under the plan, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt-
...
(2) of the kind specified in paragraph (5), (8), or (9) of section 523(a) of this title....
11 U.S.C. § 1328(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501688/ | WALLACE, Bankruptcy Judge *845This matter is before the Court on a corporate debtor's motion to dismiss an involuntary chapter 11 petition filed against it by three, and later four, alleged creditors. The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order 13-05, filed July 1, 2013, of the United States District Court for the Central District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Petitioning creditors Carl Wiese, as trustee of the Wiese Family Trust dated as of October 31, 2013 ("Mr. Wiese"), Felice Terrigno ("Mr. Terrigno") and Matthew Hayden ("Mr. Hayden") (collectively, Mr. Wiese, Mr. Terrigno and Mr. Hayden shall be referred to as the "Original Petitioning Creditors") filed an involuntary chapter 11 petition against QDOS, Inc. (aka Desksite) ("QDOS") on May 31, 2018. QDOS filed a Notice of Motion and Motion to Dismiss Involuntary Petition and Request for Costs, Fees and Damages (Docket No. 7) on June 22, 2018 (the "Motion") pursuant to Federal Rule of Bankruptcy Procedure 1011 (incorporating by reference Federal Rule of Civil Procedure 12 and more particularly Rule 12(b) ). In the Motion, QDOS contests the involuntary petition on the grounds that (1) the Original Petitioning Creditors fail to qualify under 11 U.S.C. § 303(b)(1) as the kind of creditors who are entitled to file an involuntary petition and (2) the involuntary petition was filed in bad faith.
The Motion was set for hearing on August 8, 2018 at 9:00 a.m. In advance of the hearing, the Court published a tentative ruling to grant the Motion and dismiss the case on the ground that Mr. Terrigno was not a qualified petitioning creditor and, therefore, that too few qualified petitioning creditors existed to support the petition. At approximately 1:00 p.m. on August 6, 2018, less than 48 hours prior to the scheduled hearing, alleged creditor Jim Maddox filed a Joinder in Involuntary Petition, Docket No. 27, thereby joining in the involuntary petition against QDOS. (Mr. Maddox together with the Original Petitioning Creditors shall be referred to as the "Petitioning Creditors.")
In view of this development, the Court continued the hearing on the Motion to August 10, 2018 at 10:00 a.m. and ordered that it be an evidentiary hearing in the nature of a trial and that the Petitioning Creditors personally appear at such hearing. Counsel for the Petitioning Creditors complained in a letter to the Court dated August 9, 2018 (Docket No. 38) that Mr. Terrigno, Mr. Maddox and Mr. Wiese were all out of state and unavailable to attend on August 10. Based upon the unavailability of all Petitioning Creditors except Mr. Hayden, the Court continued the evidentiary hearing for a period of one month to September 10, 2018 and again ordered all Petitioning Creditors to attend the September 10 hearing in person and be subject to cross-examination. (Based upon supplemental pleadings filed by the parties and evidence actually introduced, the Court deems the pleadings to conform to the evidence and proof and therefore treats the Motion as addressing itself to *846the Petitioning Creditors and not merely the Original Petitioning Creditors.)
Following the rescheduling of the evidentiary hearing to September 10, 2018, Mr. Terrigno filed a Supplemental Declaration of Felice Terrigno Re Motion to Dismiss, Docket No. 48, filed August 22, 2018, alleging various reasons why he should qualify as a petitioning creditor and also informing the Court that, notwithstanding the Court's order, he would not be appearing at or attending the September 10, 2018 evidentiary hearing. Mr. Maddox filed a similar declaration (Docket No. 49, filed August 23, 2018), advising that he too would not be attending the September 10 evidentiary hearing.
Mr. Terrigno and Mr. Maddox each failed to appear at the evidentiary hearing with respect to the Motion on September 10, 2018. However, due to certain unfortunate ambiguities in the Court order setting the evidentiary hearing, counsel for QDOS appeared at one time and counsel for the Petitioning Creditors appeared at a different time, leading the Court to continue the evidentiary hearing once again, this time to October 17, 2018. Once again, each Petitioning Creditor was ordered to appear at the hearing so that he might be cross-examined by QDOS's counsel regarding the contents of declarations made by him allegedly supporting the contention that he was a qualified petitioning creditor under applicable bankruptcy law.
The Court had previously ordered that if a Petitioning Creditor failed to appear at the October 17, 2018 evidentiary hearing, any and all declarations filed by such Petitioning Creditor would be stricken. For a third time, Mr. Maddox failed to appear after being ordered to do so by this Court. In a transparent effort to avoid the effect of the striking of Mr. Maddox's declarations, Mr. Maddox filed Proof of Claim 7-1 on September 26, 2018. In this cagily-drafted document, Mr. Maddox does not actually assert how much he is owed by QDOS; he merely states that he is owed "not less than $220,000.00." He also asserts in the Proof of Claim that he has eliminated any claim for interest. (QDOS had previously argued that the loan Mr. Maddox made to QDOS was usurious and that therefore the claim was in bona fide dispute.) By reason of Mr. Maddox's failure to appear for a third time at an evidentiary hearing after being ordered to do so by this Court, the Court determines that QDOS's due process rights were violated and that QDOS was prejudiced by its inability to cross-examine Mr. Maddox under oath regarding his claim and his alleged status as a qualified petitioning creditor.
REQUIREMENTS FOR A VALID INVOLUNTARY BANKRUPTCY PETITION
11 U.S.C. § 303(b)(1) provides in relevant part that "[a]n involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title - (1) by three or more entities, each of which is ... a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount ... if such noncontingent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims." (Boldfaced type added by the Court.)
11 U.S.C. § 303(b)(2) sets forth a separate rule that governs when there are fewer than 12 such holders. At the evidentiary hearing, Richard Gillam ("Mr. Gillam"), QDOS's chief executive officer, testified that QDOS has between 40 and 50 *847creditors holding undisputed claims.1 Thus, 11 U.S.C. § 303(b)(2) is inapplicable here.
Petitioning Creditors bear the burden of proving all the statutory requirement elements of 11 U.S.C. § 303(b)(1). If they meet this burden, the burden of proof then shifts to the alleged debtor to show that there is a dispute as to a material fact. If there is a genuine issue of material fact that bears upon the debtor's liability or amount of the claim, then the petition must be dismissed. Laxmi Jewel Inc. v. C & C Jewelry Mfg., Inc. (In re C & C Jewelry Mfg., Inc.) , BAP Nos. CC-08-1190-HMoMk, CC-08-1267-HMoMk, 2001 WL 36340326, at *8, 2009 Bankr. LEXIS 4517 at *21-22 (9th Cir., BAP April 14, 2009) (unpublished but cited for persuasive value).
A. The Status of Mr. Terrigno as a Qualified Petitioning Creditor.
Two sets of subscription documents were transmitted to Mr. Terrigno with respect to his investment in QDOS: subscription documents for the purchase of QDOS common stock2 and subscription documents (a Participation Agreement) for the making of a loan to QDOS.3 Mr. Terrigno executed the QDOS common stock subscription agreement, thereby making a $60,000 investment in QDOS common stock, and returned it to QDOS.4
Mr. Terrigno testified that he thought he was making a loan to QDOS when he executed subscription documents, not buying common stock.5 The Court determines that such testimony is not credible. Mr. Terrigno is a graduate of West Point and has a graduate degree in Business from Rice University. The Court concludes that Mr. Terrigno knew exactly what he was buying when he sent in his $60,000 - and even if he did not, the fact of the matter is that he bought common stock, not a QDOS promissory note.
Petitioning Creditors make much of the fact that Mr. Gillam later sent Mr. Terrigno an email on February 27, 2018 stating that "there is zero debate nor question on our side that you're owed $60k."6 However, Mr. Gillam testified that he prepared the February 27 email in haste, without actually checking the QDOS records to see if Mr. Terrigno was a creditor or a shareholder and taking him at his word that he was a creditor.7 The Court finds Mr. Gillam's testimony credible in this regard, noting that the emails show that there is only a 54 minute timespan between the transmission of Mr. Terrigno's email inquiry and Mr. Gillam's email reply.
The Court concludes that Mr. Terrigno is not a qualified petitioning creditor under 11 U.S.C. § 303(b)(1) because he holds an interest, namely, QDOS common stock, not a claim.
B. The Status of Mr. Maddox as a Qualified Petitioning Creditor.
Unlike the case of Mr. Terrigno, there is no question that Mr. Maddox is a creditor, not an interest holder. Rather, the dispute between QDOS and the Petitioning Creditors revolves around whether Mr. Maddox holds an undisputed claim or, alternatively, a claim that is "the subject of a bona fide dispute as to liability or amount ..." within the meaning of *84811 U.S.C. § 303(b)(1). QDOS contends that the loan made by Mr. Maddox is usurious, and therefore that the interest charges on the loan cannot be lawfully collected under California law. Petitioning Creditors argue that even if the loan is usurious, only interest is cancelled, not principal, and the principal portion of the loan is not subject to any bona fide dispute as to liability or amount.
Although the plain language of the statute (i.e., 11 U.S.C. § 303(b)(1) ) as well as the legislative history is about as clear as it can possibly be, a surprising number of courts, both before and after the enactment of the BAPCPA amendments to section 303(b)(1) - and the Collier on Bankruptcy treatise - have reached the conclusion that a claim that is partially disputed as to amount - as the Maddox claim is here - is somehow not a claim that is "the subject of a bona fide dispute as to liability or amount ..." within the meaning of 11 U.S.C. § 303(b)(1).8
If a claim is disputed as to liability, then the entire amount of the claim is disputed.9 If a claim is disputed as to "amount," this implies that less than the entire amount is disputed. If the rule were otherwise - that is, if the entire amount had to be disputed to make the claim disputed as to amount - then the word "amount" in the statute would be redundant because it would mean the same thing as "liability." In construing a statute, a federal court is obliged to give effect, if possible, to every word Congress used. Reiter v. Sonotone Corp. , 442 U.S. 330, 339, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979) ; Lyon v. Chase Bank United States, N.A. , 656 F.3d 877, 890 (9th Cir. 2011) (emphasis added). This is best done by interpreting a dispute as to liability as a dispute over the entirety of the claim and a dispute as to amount as a dispute only over a portion of the claim.
Additionally, the legislative history shows that from the inception, Congress intended that a bona fide dispute as to either liability or the amount of a claim be sufficient to disqualify the creditor holding such claim from qualifying as a petitioning creditor in an involuntary case. Senator Max Baucus made the following statement found in the Congressional Record with respect to 1984 amendments to the Bankruptcy Code of 1978:
Mr. President, my amendment is designed to correct what I perceive to be an unintended inequity in the law of involuntary bankruptcies ... The problem can be explained simply. Some courts have interpreted section 303's language on a debtor's general failure to pay debts as allowing the filing of involuntary petitions and the granting of involuntary relief even when the debtor's reason for not paying is a legitimate and good faith dispute over his or her liability. This interpretation allows creditors to use the Bankruptcy Code as a club against the debtors who have bona fide questions about their liability, but who would rather pay up than suffer the usual stigma of involuntary bankruptcy proceedings. My amendment would correct this problem. Under my amendment, *849the original filing of an involuntary petition could not be based on debts that are the subject of a good-faith dispute between the debtor and his or her creditors. In the same vein, the granting of an order of relief could not be premised solely on the failure of a debtor to pay debts that were legitimately contested as to liability or amount. I believe that this amendment, although a simply [sic] one, is necessary to protect the rights of debtors and to prevent the misuse of the bankruptcy system as a tool of coercion.10 (Underscoring added by the Court.)
Thus, from at least the time of the 1984 amendments to the Bankruptcy Code, it was or should have been clear from the legislative history quoted above that a legitimate dispute as to either liability or amount ("amount" meaning something less than the full amount of the claim, because a dispute as to the full amount of a claim is a dispute as to liability) was sufficient to disqualify a claim holder from being a petitioning creditor. Certain courts did not reach this result and determined that a holder of a partially disputed claim could still qualify as a petitioning creditor. If any further proof were needed to show that this conclusion was incorrect, such proof came in the form of the BAPCPA amendments to section 303, which added the words "as to liability or amount" to the statute. Nevertheless, some courts persist in reading the words "or amount" out of the statute despite the illogic of this interpretation.11
The magnitude of a particular dispute is not necessarily related to whether such dispute is over liability or amount. If the magnitude of a dispute is proportional to the amount of dollars at stake, a dispute over whether the amount of the claim should be $50 million or $150 million is of greater magnitude than a dispute over liability with respect to a $10,000 claim. Everything else being equal, and assuming each creditor would like to use the bankruptcy system as a tool of coercion, the creditor holding the $50 million/$150 million claim would seem to have a greater incentive to join an involuntary petition than the creditor holding the $10,000 claim. It is folly to believe that a debtor automatically has more to fear being pushed into bankruptcy by a creditor holding a claim disputed as to liability than from a creditor whose claim is disputed as to amount.
On an even more basic level, the proposition "a partially disputed claim is a disputed claim" is not only true, it is necessarily true. Its truth is not contingent on anything, and it would be contradictory to deny that a partially disputed claim is nonetheless a disputed claim. The word "dispute" includes within it various degrees, just like the term "bald." If a creditor sent a debtor an invoice for $1,000, and *850the debtor wrote back that he owed only $600, it is properly said that the invoice is in dispute. Equally true, it would be palpably false to state under these circumstances that the invoice is not in dispute. Only under the rarest of circumstances does the resolution of legal questions involve an inquiry into the philosophical concept of necessary truth, yet this is one of those rare instances because of various pre-BAPCPA and post-BAPCPA cases holding contrary to the plain meaning rule, legislative history, statutory interpretation principles and logic that a partially disputed claim is not "a claim ... that is ... the subject of a bona fide dispute as to ... amount."
For these reasons, the Court concludes that a dispute as to a portion of a claim can be a bona fide dispute as to liability or amount. The Court therefore follows the decisions of other courts reaching a similar conclusion. Laxmi Jewel Inc. v. C & C Jewelry Mfg., Inc. (In re C & C Jewelry Mfg., Inc.),supra;12 In re Rosenberg , 414 B.R. 826, 845-46 (Bankr. S.D. Fla. 2009) ; Reg'l Anesthesia Assocs. PC v. PHN Physician Servs. (In re Reg'l Anesthesia Assocs. PC) , 360 B.R. 466, 470 (Bankr. W.D. Pa. 2007) ;13 In re Euro-American Lodging Corp. , 357 B.R. 700, 712 (Bankr. S.D.N.Y. 2007). See also 2 Collier on Bankruptcy ¶ 303.11[2] at footnote 32 and cases cited therein.
The next issue facing the Court is whether a bona fide dispute exists as to the Maddox claim. In order for a bona fide dispute to exist, the alleged debtor must do more than just disagree with the amount of the claim. Rather, the court must determine whether there is "an objective basis for either a factual or legal dispute as to the validity of the debt." In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1064 (9th Cir. 2002). The court need not "evaluate the potential outcome of a dispute" but must "determine whether there are facts that give rise to a legitimate dispute over whether money is owed, or, in certain cases, how much." Laxmi Jewel Inc. v. C & C Jewelry Mfg., Inc. (In re C & C Jewelry Mfg., Inc.), supra, 2001 WL 36340326, at *7, 2009 Bankr. LEXIS 4517 at *21 (quoting Vortex ).
The Maddox claim is based upon a promissory note with a principal amount of $250,000 and carrying a "loan fee" of $25,000.14 The loan's term is six months, so the effective per annum interest rate is 20 percent. California's Constitution prohibits commercial loans with rates in excess of 10 percent. California Constitution, Article XV, Section 1.
Petitioning Creditors argue that the "loan fee" is not interest - even though, if it is not interest, there is no other interest required to be paid under the promissory note - and that there are various exceptions to the usury law that apply to this particular loan. Petitioning creditors have not made a sufficient showing that either of these arguments carries the day. QDOS has cited California state case authority indicating that loan fees are permitted *851when they are "reasonable amount[s] for incidental services, expenses or risk additional to lawful interest," Klett v. Security Acceptance Co., 38 Cal. 2d 770, 787, 242 P.2d 873 (1952) (underscoring added), and Petitioning Creditors have in no way shown what "incidental services, expenses or risk" would render a $25,000 loan fee reasonable on a six-month $250,000 loan. Nor have they shown what exceptions to the usury law would apply in this case. Clearly, the underlying facts here give rise to a legitimate dispute over how much money is owed.
The Court holds that a bona fide dispute exists as to the amount of the Maddox claim, and therefore that Mr. Maddox is not qualified to be a petitioning creditor in this case.
As an alternative holding, the Court determines that Mr. Maddox's Proof of Claim will not be taken into account in determining whether he has a claim for purposes of being a qualifying petitioning creditor. The basis for not taking Mr. Maddox's Proof of Claim into account is twofold: (1) his repeated violations this Court's orders requiring him to appear, despite two re-schedulings of the evidentiary hearing, and (2) violation of QDOS's due process rights to examine him concerning the declarations and Proof of Claim that he filed, especially in a situation where the Proof of Claim does not affirmatively state a sum certain owed but instead cagily states "not less than $220,000." In a nutshell, Mr. Maddox cannot be permitted to disobey multiple Court orders requiring his appearance at an evidentiary hearing, consistently dodge cross-examination on pleadings he filed in support of the contention that he is a qualified creditor and still qualify as a petitioning creditor. There being no probative evidence of Mr. Maddox's claim - all his declarations having been stricken and his proof of claim not being taken into account - Petitioning Creditors have failed to meet their burden of proof and therefore the Court determines on these alternative grounds that Mr. Maddox is not qualified to be a petitioning creditor in this case.
C. Other Issues in the Case.
With the elimination of Mr. Terrigno and Mr. Maddox as qualifying petitioning creditors, only two alleged petitioning creditors remain, namely, Mr. Wiese and Mr. Hayden. This is not a sufficient number to satisfy the three-creditor rule of 11 U.S.C. § 303(b)(1). Accordingly, the Court does not need to reach, and does not reach, the issues of whether Messrs. Wiese and Hayden are qualifying petitioning creditors and whether the involuntary petition was filed in bad faith.
CONCLUSION
The Court grants the parties' requests for judicial notice relating to the Motion.
The Court grants Debtor's Motion. The involuntary petition against QDOS is dismissed with prejudice for the reasons stated above.
Pursuant to 11 U.S.C. § 303(i)(1), the Court sets a hearing on January 28, 2019 at 2:00 p.m. on the issue of whether the Court should grant judgment against Mr. Wiese, Mr. Hayden, Mr. Terrigno and Mr. Maddox and in favor of QDOS for reasonable attorneys' fees and costs incurred by QDOS in connection with this involuntary petition proceeding. In that connection, QDOS's brief is due on or before November 30, 2018; Petitioning Creditors' brief is due December 31, 2018; and QDOS's reply is due January 14, 2019.
IT IS SO ORDERED.
Reporter's Transcript ("R.T.") at 97-98.
Exhibit 30.
Exhibit U.
Exhibit 29.
R.T. at 47.
Exhibit P at its Exhibit B.
R.T. at 107-110.
See 2 Collier on Bankruptcy ¶ 303.11[2] and cases cited therein.
If 11 U.S.C. § 303(b)(1) had not used the words "or amount," it might be plausible to contend that a claim where liability was disputed as to only a portion of the claim is a claim disputed as to liability. The addition of the words "or amount" would seem to justify - for purposes of avoiding the assignment of the same meaning to different terms - treating a dispute as to liability as a dispute over the entirety of the claim (i.e., the entire amount) and a dispute as to amount as a dispute over a portion of the claim.
Bankruptcy Reform Amendments: A Legislative History of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Public Law 98-353 (1992), D. Bernard, E.M. Wypinski Reams, A.N. Resnick, downloaded from https://heinonline.org/HOL/Print?collection=leghis&handle=hein.bank/banrefam0010&id=646.
See 2 Collier on Bankruptcy ¶ 303.11[2] and cases cited in footnote 34. It might be argued that a $100,000 claim that is only disputed as to $1,000 should not be treated as a claim subject to a bona fide dispute because that would elevate form over substance. However, it would equally elevate form over substance to treat a $100,000 claim that is disputed as to $99,000 as a claim that is not subject to a bona fide dispute. Finally, there is nothing in either the language of the statute or the legislative history providing support for the notion that a dispute as to amount must rise to either an absolute or a relative level before a bona fide dispute can be found to exist.
"The Ninth Circuit has not yet interpreted the new language of § 303(b) and (h) ; however, other courts have held that an objective legitimate dispute as to an amount owed on a petitioning creditor's claim is sufficient to demonstrate a bona fide dispute and forestall a petitioning creditor from maintaining an involuntary petition under § 303(b)." 2001 WL 36340326, at *7, 2009 Bankr. LEXIS 4517 at *18-19.
"As a result of the [BAPCPA] amendment, any dispute regarding the amount that arises from the same transaction and is directly related to the underlying claim should render the claim subject to a bona fide dispute."
Exhibit Q at its Exhibit A. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501689/ | Christopher M. Alston, U.S. Bankruptcy Judge
The Court conducted a bench trial in this adversary proceeding on January 30 and 31, 2018. David Neu and K & L Gates LLP represented Plaintiff Mark Calvert, the Chapter 11 Trustee (the "Trustee") of the estate of Northwest Territorial Mint, LLC (the "Mint"). Thomas Quinlan and Smith Alling PS represented Defendant Diane Erdmann. The Court requested additional briefing and heard closing arguments on February 6, 2018, and then took the matter under advisement.
At trial, the Trustee asserted the Mint's payment of Ms. Erdmann's personal American Express bills gave rise to claims of constructive and intentional fraudulent transfers under the Washington Uniform Fraudulent Transfer Act and United States Bankruptcy Code, and a claim of unjust enrichment under Washington State law. Ms. Erdmann asserted that the obligations satisfied by the payments to American Express largely benefitted the Mint and contested liability.
*856For the reasons stated below, the Court finds and concludes that the Mint's payments to American Express were for the benefit of Ms. Erdmann, the Mint did not receive reasonably equivalent value for the payments, and the Mint knew or should have known it was unable to pay its debts when they became due when it made the payments. However, Ms. Erdmann is entitled to credit for the value conveyed to the Mint with each payment. The Court will enter judgement against Ms. Erdmann and in favor of the Trustee for an amount equal to the transfers, less the charges on the American Express account that were for business purposes.
I. FINDINGS OF FACT
A. Background on the Mint and the Amex Account.
The Mint filed a voluntary petition under chapter 11 of the Bankruptcy Code on April 1, 2016 (the "Petition Date"). At the time of the filing, the Mint billed itself as the largest private mint in the United States, employing approximately 240 employees at facilities in six states. The Mint's business operations included custom minting of medals and commemorative coins as well as on-line and walk-in sale of precious metals and coins. Ross Hansen was the 100% owner, sole manager, sole member, and Chief Executive Officer of the Mint. Seven days after commencing its voluntary case, the Mint stipulated to the appointment of a chapter 11 trustee, and the Court approved the appointment of Mark Calvert just four days later.
Ms. Erdmann and Mr. Hansen met in 1997, when Ms. Erdmann purchased gold and silver coins from the Mint. The two of them have lived together since 2000. While they claim to maintain separate bank accounts, Ms. Erdmann and Mr. Hansen jointly own pets and share household expenses. Mr. Hansen is considered the "breadwinner" and Ms. Erdmann ensures payment of household bills. Ms. Erdmann worked at the Mint as vault manager, a role that required her to control the flow and fulfillment of customer orders and to keep control over precious metal inventory. Though she worked long hours-up to 100 hours per week, according to Mr. Hansen-she never received any salary, benefits, or compensation from the company.
In 2000, Diane Erdmann opened an American Express Platinum account (the "Amex Account"). While the Mint was not an account holder, Ms. Erdmann authorized Mr. Hansen to charge purchases on the account. Ms. Erdmann received one reward point for every dollar charged, and she linked the Amex Account to her Amazon.com and PayPal.com accounts. Both Ms. Erdmann and Mr. Hansen charged the Mint business-related expenses on the Amex Account. Neither Mr. Hansen nor the Mint were ever liable to American Express for the amounts charged on Ms. Erdmann's account.
B. Over Many Years, Ms. Erdmann and Mr. Hansen Made Substantial Charges on the Amex Account.
Each month, Mr. Hansen and Ms. Erdmann charged numerous purchases on the Amex Account. Ms. Erdmann acknowledged that they used the account for both business and personal reasons to obtain reward points, which they could in turn use to purchase goods and services. During the four-year period before the commencement of the chapter 11 case, Ms. Erdmann accrued approximately 3.5 million Amex reward points. While contending that the Mint used most of these points, Ms. Erdmann conceded that she used some of them to acquire items for herself and Mr. Hansen.
*857The Trustee alleges Ms. Erdmann and Mr. Hansen made numerous monthly charges on the account during the four-year period prior to the petition date for their personal benefit. The Trustee has categorized those charges and determined the amounts spent in each category. The expenditures identified by the Trustee as personal include the following in the stated approximate amounts:
PayPal: $108,158.00
Grocery, Drug, and Convenience Stores: $85,883.00
Travel/Lodging: $77,235.00
Amazon.com: $41,809.00
Costco/Sam's Club: $28,192.00
Clothing/Apparel: $22,034.00
Gas/Auto: $18,370.00
Medical Expenses: $18,115.00
Entertainment: $17,097.00
Veterinarian and Pet-related Expenses: $16,201.00
Restaurants: $15,191.00
Home Improvement/Crafts: $6,309.00
Fitness/Beauty Products: $4,949.00
Sporting Goods: $1,536.00
The Trustee offered a summary of the charges he contends were personal in nature for each month. Exh. P-35. Ms. Erdmann testified extensively on these alleged personal charges. While disputing the personal categorization of some of the charges, Ms. Erdmann essentially confirmed that most of the expenses in most of these categories were personal in nature.
Medical: Ms. Erdmann admitted that she and Mr. Hansen incurred the charges listed in this category for personal reasons, even though she did not agree that all of the listed charges were for medical treatment.
Fitness/Beauty Products, Clothing/Apparel, and Home Improvement/Crafts: Ms. Erdmann guessed that some of the expenses might have been gifts for company employees or somehow related to the business, but conceded many of the charges must have been personal. Her inability to identify a credible basis for when or why she or Mr. Hansen would allegedly buy employee gifts, coupled with a lack of any corporate documents or records to support this practice, leads the Court to reject her testimony that many, if any, of the these charges were corporate gifts.
Vet/Pet-Related: Ms. Erdmann asserted that some of the charges could have been for military identification tags for service dogs, but acknowledged that most of the charges were for the dogs she and Mr. Hansen owned.
Gas/Auto: Ms. Erdmann acknowledged these charges included gas that went into vehicles that she and Mr. Hansen owned, but she testified the Mint used her vehicle and therefore the gas charges were business expenses. She provided no company records or tax returns to support her claim that the company used her vehicle to such an extent that she was entitled to have the company pay for gas for her personal or non-business travel. The Trustee did include charges for plane tickets on the list of Gas/Auto expenses that should have been included in the Travel/Lodging category. Given the timing and frequency of the charges, it does appear that these plane tickets were more likely than not for business trips.
Grocery, Drug, and Convenience Stores and Costco/Sam's Club (collectively the "Grocery Charges"): Ms. Erdmann asserted that most of these expenses were for the business because she and Mr. Hansen often bought food and supplies for the Mint. On cross-examination, she conceded that after September 2012, the Mint tasked an employee with purchasing food *858and supplies for the company. She therefore agreed that any Costco/Sam's Clubs charges after that time were almost entirely personal. Further, Ms. Erdmann admitted that whenever she made Grocery Charges for the company, she always included items for personal use and consumption and that she always used the Amex Account to buy all household groceries to obtain the rewards points. Finally, after the Mint commenced this case and Ms. Erdmann and Mr. Hansen ceased using the Amex Account for Mint business, they continued to make sizable Grocery Charges that were comparable in amount to the pre-petition purchases. See Exh. P-35 and Exh. P-2.
Entertainment and Travel/Lodging: Ms. Erdmann testified she had stopped traveling for work after 2012 and admitted that many of expenses were personal, but nonetheless declared that she considered many of these expenses to be business-related. These expenses included tickets and travel to Disneyland, science-fiction conventions, concerts, and other entertainment venues. Ms. Erdmann acknowledged she attended these events, but she noted that on many occasions one or more Mint employees accompanied her at the Mint's expense, purportedly as a bonus or benefit to the employee. She concluded that if an employee went to the event, the entire expense was business-related. Ms. Erdmann conceded, however, that these employees were all friends. Further, she had no decision-making authority at the Mint, and neither she nor Mr. Hansen testified that Mr. Hansen had either authorized any of the alleged employee benefits or granted Ms. Erdmann the authority to do so. Finally, Ms. Erdmann offered no company financial records, tax returns, or documents to support her claim that the Mint distributed bonuses in the form of tickets for entertainment or travel. The Court finds Ms. Erdmann's testimony is not credible and is merely an after-the-fact justification for these Entertainment and Travel expenses that were for her personal benefit.
PayPal: Ms. Erdmann acknowledged that many of the charges were for personal items, such as T-shirts, costume jewelry, and felted animals, purchased from e-commerce websites such as Etsy and eBay. She argued charges that involved foreign currencies or had the term "professional services" were made by Mr. Hansen and related to the business. Mr. Hansen testified that he purchased books, collectibles, art, and antiques for the Mint to create new images for coins and medals and to replace items in the company archives. The Court notes that prior to the bankruptcy, all PayPal activity occurred on Ms. Erdmann's credit card. Even though she testified that Mr. Hansen did much of the purchasing on their joint PayPal account for business purposes, it is impossible for the Court to verify either what was purchased or who made the purchases. Further, Ms. Erdmann and Mr. Hansen continued to make a large number of PayPal charges after the bankruptcy filing-including transactions in foreign currencies and transactions identified as "professional services." After the chapter 11 case had been pending for a month and Mr. Hansen had been removed from control, there were over 200 charges to PayPal made in May 2016 as reflected in the June 2016 Amex Account statement. Notably, the majority of these charges were made under Mr. Hansen's card [see Exh. P-22], which negates his testimony that he acquired art and antiques with PayPal solely for the Mint. The Court rejects Ms. Erdmann's contention that PayPal charges were presumptively for business.
Amazon: Ms. Erdmann admitted that she bought items from this site for personal use. She believed Mr. Hansen purchased books and art from Amazon for use in the *859business, but when asked to review Amex Account statements, the best she could recount was the Amazon charges "possibly" were for the Mint. Mr. Hansen said very little at trial about Amazon purchases, briefly stating that the Amex Account allowed him to buy images from Amazon and eBay for "art meetings" at the Mint. Notably, Mr. Hansen did not testify about any particular Amazon charges. The Court infers that the absence of Mr. Hansen's testimony means he could not truthfully testify the Amazon charges that Ms. Erdmann thought might "possibly" be for business were in fact for the benefit of the Mint. In addition, like so many other charges, Amazon purchases on the Amex Account continued after the Mint commenced the case and Mr. Hansen had ceded control of the company. See Exh. P-22.
In sum, Ms. Erdmann admitted she used the Amex Account to purchase everyday living expenses, and the Mint paid those charges with the approval of Mr. Hansen. The Court reviewed the Amex Account statements and the witness testimony, and reached its own conclusion on charges that were clearly for business and those that were likely all or at least in part personal.
The Court determined that business expense charges included the following: advertising costs, travel (and associated food and lodging costs) to cities where the Mint had operations (Reno, Maui, Green Bay, Tomball, Virginia/D.C., and San Diego) and travel and related costs for trade shows. Ms. Erdmann offered testimony that she sometimes charged expenses related to the Mint's participation in various trade shows to the Amex Account, which was not rebutted at trial. Ms. Erdmann did not offer testimony about travel to other cities, so the Court declines to include them in the business expense category. Where the charges are not clear, such as purchases of books at Amazon, Ms. Erdmann's failure to keep records precludes her from receiving the benefit of the doubt. The Court has thus estimated the following amounts charged on the Amex Account were for the benefit of the Mint:
Statement Month New Charges Business Expense Remaining & Year Charges Charges March 2012 $91,098.78 $85,808.99 $5,289.79 April 2012 $109,307.91 $102,658.90 $6,649.01 May 2012 $100,617.34 $92,009.04 $8,608.30 *860June 2012 $105,275.29 $98,544.89 $6,730.40 July 2012 $103,789.04 $100,061.80 $3,727.24 August 2012 $106,338.33 $101,438.20 $4,900.13 September 2012 $107,669.65 $98,795.34 $8,874.31 October 2012 $112,035.01 $104,000.00 $8,035.01 November 2012 $105,222.83 $99,289.71 $5,933.12 December 2012 $121,212.53 $109,402.10 $11,810.43 January 2013 $125,185.17 $104,091.70 $21,093.47 February 2013 $110,257.56 $105,597.80 $4,659.76 March 2013 $104,037.54 $96,800.00 $7,237.54 April 2013 $108,538.73 $100,259.20 $8,279.53 May 2013 $92,627.91 $ 77,202.00 $15,425.91 June 2013 $64,498.92 $53,203.00 $11,295.92 July 2013 $63,800.41 $53,803.40 $9,997.01 August 2013 $53,308.63 $47,691.92 $5,616.71 September 2013 $65,982.78 $60,143.22 $5,839.56 October 2013 $65,355.06 $60,336.20 $5,018.86 November 2013 $61,028.94 $ 55,958.00 $5,070.94 December 2013 $57,237.86 $48,971.62 $8,266.24 January 2014 $52,781.77 $46,153.57 $6,628.20 February 2014 $64,463.96 $58,263.47 $6,200.49 March 2014 $61,810.90 $56,914.17 $4,896.73 April 2014 $80,130.72 $74,822.90 $5,307.82 May 2014 $72,213.74 $67,203.00 $5,010.74 June 2014 $66,024.37 $ 48,750.12 $17,274.25 July 2014 $46,081.58 $42,895.41 $3,186.17 August 2014 $42,988.10 $35,603.00 $7,385.10 *861September 2014 $50,529.17 $40,967.06 $9,562.11 October 2014 $50,813.42 $43,825.15 $6,988.27 November 2014 $61,741.16 $52,994.53 $8,746.63 December 2014 $46,882.53 $41,375.86 $5,506.67 January 2015 $51,749.94 $45,991.93 $5,758.01 February 2015 $66,866.65 $53,292.53 $13,574.12 March 2015 $67,613.64 $61,600.00 $6,013.64 April 2015 $82,449.93 $72,425.17 $10,024.76 May 2015 $67,484.03 $58,468.10 $9,015.93 June 2015 $56,675.00 $47,256.01 $9,418.99 July 2015 $45,759.99 $35,373.65 $10,386.34 August 2015 $44,966.78 $31,338.76 $13,628.02 September 2015 $54,791.34 $33,226.05 $21,565.29 October 2015 $57,918.75 $43,283.08 $14,635.67 November 2015 $53,199.22 $34,526.18 $18,673.04 December 2015 $53,124.61 $37,528.10 $15,596.51 January 2016 $50,014.19 $34,511.56 $15,502.63 February 2016 $45,536.94 $35,334.73 $10,202.21 March 2016 $53,889.16 $32,539.99 $21,349.17
The Business Expense Charges during this period total $3,122,531.11. Some of the Remaining Charges, in whole or in part, could have been for the business. Nonetheless, the Court finds that the Trustee has demonstrated more than a negligible portion of the charges incurred each month were not for the benefit of the Mint.
C. The Mint Paid for the Personal Charges on the Amex Account.
Ms. Erdmann and Mr. Hansen testified that the Mint regularly paid the monthly Amex Account statements for sixteen years. The Mint's bank statements and Amex Account statements confirm the regularity of the payments since January 2008. From April 1, 2012, to March 31, 2016, the Mint made 69 payments to American Express totaling $3,552,993.72 to pay the Monthly Charges incurred on the Amex Account. The Court will refer to each payment as a "Transfer" and to the payments collectively as the "Transfers." No other person or entity made any payments to American Express on the Amex Account during this period.
Ms. Erdmann was personally liable for all of the Monthly Charges, and she ensured the Mint made the Transfers each month. She testified that she directed American Express to send the bills for the Monthly Charges to her post office box in Federal Way. Because of past issues with the accounting department, she did not *862forward the statements to the Mint personnel for payment. Instead, she would inform the accounting department of the amount due. After obtaining authorization from Mr. Hansen to pay, the accounting department then either issued a check to Ms. Erdmann for her to send to American Express or authorized Ms. Erdmann to make the payment herself from a Mint bank account via internet or phone.
Notably, Ms. Erdmann never submitted to the Mint any receipts identifying which of the Monthly Charges were for business purposes. Mr. Hansen testified the Mint's reimbursement policy required employees to provide receipts to prove personal monies spent were for business purposes. Ms. Erdmann testified she was not aware of the policy and that she did not believe she needed to differentiate between personal and business charges because she understood from Mr. Hansen that he, the 100% owner and CEO, authorized the payment of the Monthly Charges.
Mr. Hansen offered a different explanation for how the Mint paid Ms. Erdmann's monthly Amex bill. He readily acknowledged that he authorized the Mint to pay the personal expenses he and Ms. Erdmann incurred on the Amex Account because he characterized those payments as distributions to him. He testified that Ms. Erdmann submitted the Amex Account statements to the Mint's accounting department-either Ms. Erdmann delivered hard copies or made them available to company personnel electronically. Then, according to Mr. Hansen, the people in the accounting department would take the statements and "peel them apart" to identify which charges were for business. Mr. Hansen testified that the Mint erred on categorizing charges as personal, but that such charges still were negligible compared to the business expenses in each monthly statement.
Mr. Hansen further testified that after identifying the total amount of personal charges included in each Transfer, the Mint would then record that amount as an "owner's draw" to Mr. Hansen from the Mint in lieu of a salary. He declared that his accountants approved this treatment of the payments as draws, since he was the sole owner of the company and could take distributions. Mr. Hansen further stated he disclosed the owner's draws on his federal income tax returns. He admitted, however, that he had not filed federal income tax returns since 2011, thereby refuting his own claim that he always disclosed the alleged draws to the IRS. Notably, he and Ms. Erdmann offered no tax returns from any years, offered no papers presented to or prepared by accountants, and offered no other documents showing Mr. Hansen and the Mint identified the personal charges and then treated the payments for those items as owner draws. Moreover, Ms. Erdmann's description of how the Mint paid the Monthly Charges does not match Mr. Hansen's explanation, and no other witness came forward to support his version of events. The Court finds that Mr. Hansen is not credible and declines to accept his story in the glaring absence of any documentary support or corroborating testimony.
Contrary to Ms. Erdmann's assertions, there was no agreement or understanding between her and the Mint on the treatment of the company payments of the Monthly Charges that were not reimbursable expenses. There is no credible evidence that anyone attempted to separate the business charges from the purely personal ones and record the personal charges as draws to Mr. Hansen. She had no explicit or implicit agreement that the Mint could use her Amex Account for corporate expenses in exchange for the Mint paying an unlimited amount of personal charges every *863month. Ms. Erdmann did not need any agreement, because her boyfriend, who was also the owner of the Mint, made sure the company paid all Monthly Charges. Ms. Erdmann and Mr. Hansen treated the Mint as if it was their personal piggy bank-they could make any personal charges on the Amex Account knowing the company would pay Ms. Erdmann's bills each month without question.
D. The Mint Experienced Financial Difficulties.
The Trustee and Ms. Erdmann agreed that at some point the Mint became insolvent and unable to pay its debts as they became due. The Trustee attempted to prove the Mint was insolvent as far back as the end of 2008. Ms. Erdmann, however, conceded only that entry of the multi-million dollar judgment in early 2016 rendered the Mint insolvent.
The Trustee served as his own expert on the financial condition of the Mint. He analyzed numerous documents and synthesized his findings in an Insolvency Schedule showing the Mint was significantly insolvent on a balance sheet basis at the end of every year from December 2008 through the Petition Date. Exh. P-30. According to the Trustee, the Mint's liabilities exceeded its assets at year-end by at least $19 million each year and by $45.5 million when it filed bankruptcy.
The Trustee acknowledged, however, that the Mint's records were incomplete and required him to make educated guesses as to some of the line items on his exhibit. For example, he used the same inventory figure of $4,651,158.00 every year; he explained that he had no inventory records, the bank statements indicated that inventory came in and went out of the company continuously, and it was cost-prohibitive to try to make an accurate determination of the amount of inventory on hand at the end of each year.
The Trustee also explained that he allocated portions of certain substantial liabilities the Mint owed over a period of years. For example, the entry of a $12.5 million jury verdict in early 2016 liquidated the liability entitled "Cohen Litigation Payable." The Insolvency Schedule shows a liability for this line item of $2.5 million at the end of 2012, $5 million at the end of 2013, $7.5 million at the end of 2014, $10 million at the end of 2015, and $12.5 million as of April 1, 2016. The Trustee testified that there were points in the litigation that one could estimate the Mint would be held liable for some portion of the total ultimate liability. However, the Trustee did not sufficiently explain how or why he determined the Mint was likely to be liable for exactly 1/5 of the ultimate amount at the end of each year. His Insolvency Schedule references an Exhibit 19 that might shed some light on his analysis, but the Trustee did not provide that document to the Court. The liabilities entitled Cohen Toxin clean up, Nevada EPA, and EEOC suffer from the same deficiencies: the exhibits referenced on the Insolvency Schedule (20, 21, and 22) are missing and the Trustee's testimony was not sufficient to substitute for documents (e.g., copies of claims, complaints, demands) to explain how he estimated the liability for each item at each point in time.
The Trustee also testified the Mint was operating under a consent decree when it filed for bankruptcy protection. Entered in 2008 in the State of Washington, the consent decree provided that if the Mint did not deliver product to a customer within the time frame promised, the Mint would return the money or deliver additional gold or silver to unsatisfied customers. The Trustee testified the Mint had a terrible reputation for delivering goods late to customers *864when compared to industry standards, but he did not identify the source of his information for either the Mint's alleged reputation or the supposed industry standards. Upon cross-examination, the Trustee acknowledged he was not aware of any action by the State of Washington to enforce violations of the consent decree or any complaints filed by customers alleging the Mint had violated the decree.
The Trustee conducted a detailed analysis of individual customer orders and the days between promised delivery date and the actual delivery date. From the end of 2008 to the end of 2010, the Mint delivered product fairly close to within the timeframe promised to customers. His analysis showed that in 2010 the Mint began delivering product several days beyond the promised date. With respect to silver sales, using the most generous average promised days for delivery (which was 70), by the end of 2011, the average days for actual delivery was nearly 100. That number increased to over 120 days by the end of 2012, remained at above 120 days through 2013, decreased to about 80 days by the end of 2014, and went back up to about 90 days by the end of 2015. See Exh. P-33. With respect to gold sales, using the most generous average promised days for delivery (which again was 70), by the end of 2011, the average days for actual delivery was 80. That number increased to nearly 120 days by the end of 2012, remained at 116 days through 2013, and returned to the average promised number of days by the middle of 2015. See Exh. P-34. In short, the Trustee demonstrated that by the end of 2011, the Mint was no longer able to deliver silver and gold by the dates it had promised to customers.
Ms. Erdmann did not offer any expert testimony, and relied on Mr. Hansen to testify as a lay witness on the Mint's financial condition. He acknowledged that the Mint became involved in legal battles in 2010 with its former landlord, Cohen Asset Management ("Cohen"), over environmental clean-up issues and defamation claims Cohen asserted against the Mint. With respect to the environmental issues, Mr. Hansen estimated the Mint's clean-up costs, lost revenue, and litigation expenses were in the range of $10-15 million over a four-year period. In early 2016, Cohen obtained a $12 million judgment for defamation against the Mint. In the view of Mr. Hansen, the Mint was solvent up until entry of the Cohen judgment.
Mr. Hansen vigorously attacked the Trustee's Insolvency Schedule. He pointed to the Mint's bank statements, which showed the company had between $2.3 million and $3.6 million coming into and going out every month. Mr. Hansen asserted that this consistent cash flow demonstrated the Mint was solvent. However, he failed to explain how the company could be still solvent when cash flow remained the same while the costs relating to the disputes with Cohen began to soar. Importantly, Mr. Hansen admitted the Mint was unable to make regular payments to creditors beginning in 2015 due to the costs of the Cohen litigation.
Mr. Hansen challenged the Trustee's decision to include portions of certain obligations as liabilities in years prior to the ultimate liquidation of the obligations. In particular, Mr. Hansen contended that the Mint disputed the Nevada EPA, the EEOC, and Cohen Litigation Payable obligations and argued there was no basis to estimate any portion of those amounts to the liability column prior to the time of their actual liquidation. He also claimed the Trustee greatly overstated the Allowance of Doubtful Accounts. The Trustee testified that he considered any receivable over 90 days old as uncollectible. Mr. Hansen countered that the Mint entered into many contracts with the U.S. government, *865an entity that always paid in full but often more than 90 days after issuance of an invoice. Mr. Hansen also testified-without reference to any record or document-that accounts receivable ranged between $2 million and $20 million at any given time between 2008 and the Petition Date. This huge range is enough for the Court to discount Mr. Hansen's testimony, but his lack of any supporting evidence-a situation created by his failure or refusal to maintain financial records-makes his allegations completely unreliable. Nonetheless, the lack of financial and accounting records greatly hampered the Trustee's ability to determine the assets and liabilities of the Mint during the relevant period.
Mr. Hansen also disputed that the Mint failed to comply with the Consent Decree entered into with the State of Washington. While admitting there were some delays in getting products to customers, Mr. Hansen testified that when customers complained, the Mint always either refunded their money or provided extra commodities to the customer.
The Court conducted its own review of the evidence. The Accounts Payable Aging Schedule identifies obligations the Mint owed to vendors, and for each vendor states the amount that is current, the amount due for more than 30 days, the amount due for more than 60 days, and the amount due for more than 90 days. Exh. P-28. Beginning in 2012, the Schedule indicates the Mint started falling behind in payments to several venders:
*866Amounts* Marten Mendoza Yong Tuo Young deNormandie Law Law Emblem 12/31/2011 Total due 62 -- 659 41 Current 62 -- 132 41 Over 90 days 0 -- 254 0 12/31/2012 Total due 156 23 587 374 Current 4 0 103 42 Over 90 days 143 15 266 163 12/31/2013 Total due 104 36 370 440 Current 0 0 14 0 Over 90 days 104 22 163 440 12/31/2014 Total due 140 83 451 577 Current 0 0 0 0 Over 90 days 140 83 227 577 12/31/2015 Total due 140 88 548 744 Current 0 0 102 8 Over 90 days 140 88 150 729 3/31/16 Total due 141 89 292 800 Current 0 0 0 56 Over 90 days 141 89 161 744
*Amounts in thousands of dollars, rounded to nearest $1,000.00.
Notably, this handful of vendors comprised a significant percentage of the total amount the Mint owed at the end of each year.1 See Exh. P-28. Three of these vendors provided legal services,2 which comports *867with Mr. Hansen's testimony that litigation costs caused the Mint to begin to default on its obligations. While Mr. Hansen asserted the accounts payable issues did not arise until 2015, the records indicate the problem began well before then.
II. CONCLUSIONS OF LAW
A. The Court Has Jurisdiction and the Authority to Enter Final Judgments.
This Court has jurisdiction by virtue of 28 U.S.C. § 1334(b). This matter is a core proceeding described by 28 U.S.C. § 157(b)(2)(H) and (O). Both the Trustee and Ms. Erdmann consent to this Court entering final orders and judgments. Dkt. Nos. 10 and 31, at 2.
B. Ms. Erdmann's Proposed Amendment to the Pleadings Would Be Futile.
Prior to resting her case, Ms. Erdmann made an oral motion at trial to amend the pleadings to include the affirmative defense of set-off. Ms. Erdmann desires to amend so she may offset the approximately $1,700 in expenses on the Amex Account incurred for a tradeshow trip in March that she paid post-petition after the Mint ceased paying the monthly Amex Account statements. The Trustee opposed the request, and the Court requested and received additional briefing from the parties on the matter.
Fed. R. Civ. P. 15(b), made applicable by Fed. R. Bankr. P. 7015, governs amendments to pleadings during and after trial. Subsection 15(b)(1) provides that where a party objects that evidence is not within the issues raised in the pleadings, the court may permit the pleadings to be amended if the evidence would not prejudice the objecting party's action or defense on the merits. Subsection (b)(2) provides that an amendment may be made where issues not raised by the pleadings are tried by the parties' express or complied consent. "The purpose of Rule 15(b) is to authorize amendments to conform the pleadings to issues or evidence that appear for the first time at trial." EEOC v. Hay Assocs. , 545 F.Supp. 1064, 1070 (E.D. Penn. 1982). A court may deny leave to amend if the amendment would be "an exercise in futility." Steckman v. Hart Brewing, Inc. , 143 F.3d 1293, 1298 (9th Cir. 1998) (citation omitted).
The Court concludes that the proposed amendment would be futile. First, a defendant cannot use a general pre-petition claim to offset a fraudulent transfer claim. In re Acequia, Inc. , 34 F.3d 800, 817 (9th Cir. 1994). Allowing such a setoff would defeat the purpose of recovering fraudulent transfers to redistribute the recoveries among creditors on a pro rata basis: "[t]he right to offset is denied, because the estate has been depleted to the detriment of creditors of like class, and to allow the right of set off would perpetuate the depletion." Id. (citations omitted). Second, the Court must disallow Ms. Erdmann's unsecured claim to the extent that the Trustee obtains a judgment against her on his fraudulent transfer claims unless she has "paid the amount, or turned over any such property, for which such entity or transferee is liable." 11 U.S.C. § 502(d). Ms. Erdmann cannot set off a disallowed claim against a judgment entered in favor of the Trustee. The Court therefore denies Ms. Erdmann's oral motion to amend her answer.
C. Trustee May Utilize his Strong-Arm Powers to Reach All of the Transfers.
Trustees in bankruptcy court may avoid fraudulent transfers made by the *868debtor within two years of the filing of the bankruptcy petition. 11 U.S.C. § 548. Bankruptcy trustees also have "strong arm powers" under 11 U.S.C. § 544(b) to avoid fraudulent transfers under state law. The existence of a section 544(b) cause of action depends upon whether a creditor existing at the time of the transfers still had a viable claim against the debtor on the petition date. Acequia, Inc. , 34 F.3d at 807.
Under the Washington Uniform Fraudulent Transfer Act ("WUFTA"),3 there are two species of fraudulent transfers: constructive fraud and actual fraud. The Trustee asserts the Transfers may be recovered under RCW § 19.40.041(a)(1) (defining actual fraudulent transfers) and § 19.40.041(a)(2) (defining constructive fraudulent transfers). A creditor may bring a claim for relief with respect to a constructive or actual fraudulent transfer under these statutes within four years of the transfer. RCW § 19.40.091(a) and (b).
As of April 2012 and through the Petition Date, numerous creditors of the Mint had viable claims under the WUFTA, as evidenced by the list of Accounts Payable. See Exh. P-28. Mr. Hansen also acknowledged the $12.5 million judgment that the Cohen Group obtained against the company that caused the Mint to seek protection under the Bankruptcy Code. For good reason, Ms. Erdmann does not challenge the Trustee's ability to attempt to recover allegedly avoidable transfers made by the Mint within four years of the Petition Date.
Ms. Erdmann does object, however, to any attempt by the Trustee to recover payments made to American Express before April 1, 2012. The Court concludes that the Trustee did not preserve for trial the ability to pursue these older transfers. A pretrial order has the effect of amending the pleadings. In re Hunt , 238 F.3d 1098, 1101 (9th Cir. 2001). While the amended complaint prays for recovery of payments on the Amex Account made eight years before the petition date, the Pretrial Order [Dkt. No. 88] indicates that the Trustee seeks judgment for only those payments made from April 2012 forward. Notably, in his initial proposed findings of fact and conclusions of law filed with his trial brief [Dkt. No. 85-1], the Trustee did not include any proposed findings on payments prior to April 2012, defined the payments made in and after April 2012 as the "Transfers," and requested judgment only for the Transfers plus interest on each of the Transfers. Therefore, the Trustee is not entitled to a pursue recovery of any payments made by the Mint prior to April 2012.
D. The Transfers Were Constructively Fraudulent.
Under the WUFTA, a transfer made by a debtor is fraudulent to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) without receiving reasonably equivalent value in exchange for the transfer or obligation; and (2) the debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction or intended to incur, or believed or reasonably should have believed that he or she *869would incur, debts beyond his or her ability to pay as they became due. RCW § 19.40.041(a)(2).
Constructive fraud must be shown by "substantial evidence." Clearwater v. Skyline Constr. Co. Inc. , 67 Wash. App. 305, 321, 835 P.2d 257 (Wash. App. 1992), review denied , 121 Wash.2d 1005, 848 P.2d 1263 (Wash. 1993). The burden of proof rests on the party alleging the fraudulent transfer. Sedwick v. Gwinn , 73 Wash. App. 879, 885, 873 P.2d 528 (Wash. App. 1994).
1. The Mint Did Not Receive Reasonably Equivalent Value in Exchange for Each Transfer.
When the immediate benefit flows to an identifiable non-debtor third party (in this case, the immediate benefit was to Diane Erdmann, whose bills were being paid and who was receiving bonus points), the burden of production lies on the defendant to show that the debtor received some sort of cognizable benefit. See, e.g. , In re Yellowstone Club , 436 B.R. 598, 666 (Bankr. D. Mont. 2010) (it is the defendant's burden to produce evidence of indirect benefit that is tangible and concrete, and to quantify its value); In re Minn. Util. Contracting, Inc. , 110 B.R. 414, 417-18 (Bankr. D. Minn. 1990) ; In re Brooke Corp. , 541 B.R. 492, 511 (Bankr. D. Kan. 2015) ("If the Trustee proves the absence of a direct benefit to the Debtor, the burden then shifts to [the defendant] to show the Debtor received an indirect benefit").
The standard for judging whether reasonably equivalent value has been exchanged is more strict for transactions involving cash. See In re Bennett Funding Grp., Inc. , 232 B.R. 565, 572 (Bankr. N.D.N.Y. 1999) ("the range of non-fraudulent discounts is much narrower for transactions involving cash, cash substitutes, or commodities with readily ascertainable market values"); see also In re Hedged-Investments Assocs., Inc. , 84 F.3d 1286, 1290 (10th Cir. 1996) (in analyzing transfers received by investor in debtor's Ponzi scheme, no value was given for payments received by investor in excess of principal investment).
Ms. Erdmann claims that the value exchanged was reasonably equivalent because the extra payment made by the Mint for personal charges was negligible. First, the Court found that the personal charges were not negligible-the charges were in the thousands of dollars every month. See supra Part I.B. Second, the Court rejects this notion that a company may reimburse individuals for corporate expenses and then give that person an extra amount, even if negligible, for no reason. Whether large or small, the extra payment is not equivalent to the value when the value is a precise and known dollar amount. As the Trustee noted at trial, additional payments, even tiny ones, made over a long period of time will add up for the recipient.4 Moreover, whether she purchased the items for the Mint herself or allowed Mr. Hansen to use the card for business items, it is unreasonable to expect the Mint would reimburse her for more than the amount *870spent on purchases that benefitted the business, in violation of its own reimbursement policy.
Ms. Erdmann asserts she also conferred value by allowing the Mint to use her personal account to purchase corporate expenses. First, Ms. Erdmann and Mr. Hansen testified that she was able to obtain a $150,000 line of credit on her Amex Account, while Mr. Hansen and the Mint could not secure a limit that large. As the Trustee pointed out, Ms. Erdmann had no income or other obvious ability to repay monthly bills of that size. The Court concludes she obtained the large credit limit because the Mint paid her bills each month like clockwork-thereby enabling Ms. Erdmann to achieve a high level of credit-worthiness the Mint could have secured for itself.
Next, Ms. Erdmann claims she transferred value by providing the Mint unsecured, unlimited access to her Amex card knowing that if the Mint failed to pay, she would be responsible to Amex. The Court notes, however, that she did not give the Mint access to her card: rather, she gave her boyfriend access to the card, who used it for both personal and business expenses. The Court also rejects any notion that she was extending short-term credit to the Mint. She insisted that the Mint pay the monthly statements as soon as she received them.
Further, the Court concludes the arrangement provided far greater benefits to Ms. Erdmann. For many years, the Mint paid for her bills directly to American Express. Thus, the company paid for virtually all of her personal expenses; until the Mint filed for bankruptcy, she never had to actually pay for anything. In contrast, Mint employees who incurred expenses related to business would have to pay the bill and then document the expense before receiving reimbursement. And by having the Mint pay her personal expenses, Ms. Erdmann did not need to receive a salary from the Mint-thereby allowing her to avoid paying federal income taxes. The Court declines to conclude that Ms. Erdmann conveyed value by allowing the Mint to use her card because she received more value by having the Mint pay her personal bills and obtaining millions of dollars in rewards points for her personal use.
2. At the Time of Each of the Transfers, the Mint Should Have Known it Was Unable to Pay Its Debts as They Became Due.
A transfer made without adequate consideration is constructively fraudulent where any one of the following exists: (1) the debtor was left by the transfer with unreasonably small assets for a transaction or the business in which the debtor was engaged, RCW § 19.40.041(a)(2)(i) ; (2) the debtor intended to incur, or believed he or she would incur, more debts than the debtor would be able to pay, RCW § 19.40.041(a)(2)(ii), or; (3) the debtor was insolvent at the time or as a result of the transfer, RCW § 19.40.051(a). Clearwater , 67 Wash. App. at 320-21, 835 P.2d 257. Under the WUFTA, a debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets, at a fair valuation. RCW § 19.40.021. The Trustee attempted to show that since the beginning of 2012, the Mint was insolvent on a balance-sheet basis or, in the alternative, that the Mint was unable to pay its debts when they became due.
When a debtor fails to keep accurate or complete records, a subsequently-appointed bankruptcy trustee may be hampered in his or her ability to prove insolvency. Nonetheless, even if the trustee is without fault, a court cannot overlook the lack of underlying support and grant much weight to an expert report based upon scant or unreliable evidence.
*871In re KZK Livestock, Inc. , 290 B.R. 622, 631 (Bankr. C.D. Ill. 2002) (giving little weight to trustee's expert report and then ruling against the trustee on the issue of insolvency, noting the trustee had done the best he could with what he had but was unable to overcome the unreliability inherent in the debtor's poor recordkeeping).
In this case, the Trustee acknowledged the poor recordkeeping by Mr. Hansen at the Mint. Mr. Hansen used his failure to keep records as a weapon to attack Trustee's conclusions, and then offered his own numbers, free of any supporting evidence or even logical reasoning in some instances. Nonetheless, the lack of reliable data on assets such as inventory and accounts receivable precludes affording substantial weight to the Trustee's Insolvency Analysis. It also bears repeating that the Trustee did not provide some of the critical underlying data used for his calculations, such as information on the Cohen Litigation Payable and the EEOC claims. The Trustee also did not engage an uninterested person to serve as an expert but instead relied solely on his own analysis. Since the Trustee has an interest in the outcome of the litigation, his bias requires the Court to discount the expert report even further. In sum, the Court affords little weight to the Trustee's Insolvency Schedule captured in Exh. P-30.
The evidence does, however, support the conclusion that Mr. Hansen knew, or at least should have known, that the Mint was unable to pay its debts as they became due. Since the end of 2011, the Mint clearly fell behind on obligations to four substantial vendors. Not coincidentally, the Mint became embroiled in litigation with Cohen and others in 2012. These legal expenses caused the Mint to either pay slowly or make no payment at all to certain creditors. In addition to the delayed payments, the records show that the Mint fell behind on fulfilling gold and silver orders in 2012 and the problems persisted until the Petition Date. Finally, Mr. Hansen testified that he did not file tax returns for tax year 2012 and thereafter because the Mint experienced losses, and therefore, he had no income to report. The company's losses for those years corroborate the Trustee's conclusions that the Mint was either insolvent or unable to pay its obligations as they became due since April 2012.5
E. The Trustee Did Not Prove the Transfers Were Actually Fraudulent.
The Trustee also seeks to use his strong arm powers of 11 U.S.C. § 544 to recover the Transfers as actual fraudulent transfers under RCW § 19.40.041(a)(1). Under this statute, a transfer made or an obligation incurred by a debtor is fraudulent as to a creditor whether the creditor's claim arose before or after the transfer was made, if the debtor made the transfer with actual intent to hinder, delay, or defraud a creditor of the debtor. The party asserting an actual intent to defraud must provide "clear *872and satisfactory proof." Clearwater , at 321, 835 P.2d 257. Clear and satisfactory proof is between "preponderance of the evidence" but less than "beyond a reasonable doubt." Nw. Elec. Co. v. Fed. Power Comm'n , 134 F.2d 740, 743 (9th Cir. 1943).
In determining actual fraudulent transfers, the Court may consider circumstantial evidence of intent. United States v. Black , 725 F.Supp.2d 1279, 1291 (E.D. Wash. 2010). The Court may consider eleven specific factors enumerated in the WUFTA, as well as other factors not specifically identified that may impact the Court's determination of intent.6 Sedwick , 73 Wash. App at 886-87, 873 P.2d 528.
The Court concludes the Trustee did not meet his burden to show an actual intent to defraud. Ms. Erdmann and Mr. Hansen testified that they used the Amex Account for business and personal charges for approximately 16 years. While the Court agrees with the Trustee that Ms. Erdmann was an insider at all times, the Trustee failed to prove the Mint paid the Amex Account bills each month to avoid paying other creditors. Rather than attempting to secret away money, Mr. Hansen caused the Mint to cover his and Ms. Erdmann's daily living expenses. Mr. Hansen and Ms. Erdmann may have intentionally defrauded the IRS by failing to disclose income, but the Trustee did not demonstrate that the Mint intended to hinder, delay, or defraud any of its creditors.
F. The Trustee is Entitled to a Judgment Against Ms. Erdmann for the Total Amount of the Transfers Less the Charges on the Amex Account Incurred for the Benefit of the Mint.
Under the WUFTA, a creditor may avoid a fraudulent transfer. RCW § 19.40.071(a)(1). The avoidance, however, is subject to RCW § 19.40.081. Id. Under that latter statute, a creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c) of this section, or the amount necessary to satisfy the creditor's claim, whichever is less. The judgment may be entered against the first transferee of the asset or the person for whose benefit the transfer was made. RCW § 19.40.081(b). A judgment based upon the value of the asset transferred must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require. RCW § 19.40.081(c). This equitable adjustment is available to good faith transferees who have provided value to the debtor. RCW § 19.40.081(d) ; Thompson v. Hanson , 168 Wash.2d 738, 749-50, 239 P.3d 537 (Wash. 2009).
The Washington Supreme Court explained that RCW § 19.40.081(b) limits liability to the value of the property received by the transferee and, for good *873faith transferees, subsection (d) further limits liability to the net value received (the value of the asset transferred less the value given the debtor). The value given to the debtor, including any debt assumed, is deducted from the value of the asset transferred prior to determining the measure of judgment. Subsection (c) is the means by which this occurs, as it allows for the adjustment to the value of the asset transferred. Under this interpretation, a good faith transferee is liable to a debtor's creditors only for the net value (the total value of the asset less consideration given) while a non-good-faith transferee is liable for the full value of the asset, regardless of consideration given. Thompson , 168 Wash.2d at 752, 239 P.3d 537. The party seeking a reduction of the liability based on value given by a good-faith transferee bears the burden of proof of this defense. In re LLS America, LLC , 520 B.R. 841, 846 (E.D. Wash. 2014) (interpreting both 11 U.S.C. § 548 and WUFTA).
All of the Transfers to American Express were constructively fraudulent transfers and therefore may be avoided. However, pursuant to RCW § 19.40.071(a), any recovery for the avoidable Transfers is subject to reduction for any value given to the Mint by a good faith transferee or obligee.7
Technically speaking, Ms. Erdmann is neither a transferee nor an obligee, since she did not receive any of the Transfers and none of the Transfers created an obligation to her. American Express is the only entity that can be the transferee of the Transfers. The Court easily concludes that American Express received the Transfers in good faith, as it had no way of knowing the Mint was paying the personal expenses of the owner of the company and his girlfriend. Accordingly, any avoidance judgment should be reduced by the value given to the Mint for the Transfers. American Express provided some value to the Mint with each Transfer, namely the items purchased on the Amex Account that were for the Mint's business.
As noted above, the Court determines that, based on its own analysis of the Amex Account Statements, $3,122,531 of the Transfers constituted Mint business expenses. The Court declines to give Ms. Erdmann credit for any of the Remaining Charges that may or may not have benefitted the company. For example, Ms. Erdmann testified that most of the purchases at the Grocery Stores were for the Mint. She acknowledged, however, that some portion of virtually every transaction included personal items. The evidence also shows that even after the Mint was in bankruptcy and Ms. Erdmann and Mr. Hansen no longer bought items for the business, they continued to use the Amex Account to make purchases at the Grocery Stores at almost the same rate. Her failure to keep records that would show which portion of the Grocery Store purchases benefitted the Mint precludes her from receiving a credit for any value allegedly conveyed to the Mint. In the end, Ms. Erdmann may reduce the amount that may be avoided by the purchases the *874Court has determined constituted business expenses.
In sum, the Trustee may avoid the net value of the Transfers ($3,552,993 less $3,122,531) in the amount of $430,462.00. Since the Mint had no obligation to American Express, and each of the Transfers satisfied Ms. Erdmann's obligations to American Express, the Mint made these Transfers for the benefit of Ms. Erdmann. Consequently, the Trustee may recover this net amount from Ms. Erdmann. See 11 U.S.C. § 550(a)(1). Because the Trustee may recover the net value of all of the Transfers made four years before the Petition Date, the Court need not reach the Trustee's alternative claims to recover those Transfers made within two years of the Petition Date under section 548 of the Bankruptcy Code.
G. Since the Trustee Has an Adequate Remedy at Law, He May Not Pursue Claims for Unjust Enrichment.
The Trustee also sought the remedy of unjust enrichment as another basis to recover the Transfers. Since the Trustee has prevailed on his constructive fraudulent transfer claim, he need not rely on this alternative theory. Even if he did not succeed under the WUFTA, the Trustee may not pursue this equitable remedy since he has an adequate remedy at law under both Federal and Washington state fraudulent transfer law. Seattle Prof'l Eng'g Emps. Ass'n v. The Boeing Co. , 139 Wash.2d 824, 839, 991 P.2d 1126 (Wash. 2000) (employees not entitled to pursue equitable remedy for restitution when they had adequate legal remedy under state law).
H. The Trustee is Entitled to Only Post-Judgment Interest at the Federal Judgment Rate.
The Trustee requests prejudgment interest at the rate of 12% per annum on the amount of each Transfer until the date of judgment to an award of post-judgment interest at the rate of 12% per annum. The Court declines to award any prejudgment interest and will order that interest accrue post-judgment at the federal judgement rate.
The Trustee asserted causes of action under section 548 of the Bankruptcy Code and under the WUFTA by virtue of section 544 of the Bankruptcy Code. In seeking prejudgment interest "at the statutory rate of 12 percent per annum," the Trustee is presumably asserting the Bankruptcy Court has pendant jurisdiction over this matter. However, the Trustee's complaint pleads that the Court has subject matter jurisdiction over this proceeding under 28 U.S.C. §§ 157 and 1334(b). The Trustee has not asserted supplemental jurisdiction of the Court over the Washington state law claims under 28 U.S.C. § 1367 ("district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form the same case or controversy"). Thus, on the face of the complaint, the Trustee has alleged only federal question jurisdiction, and the Court concludes this is a federal question case.
When a court maintains federal question jurisdiction, the decision whether to award prejudgment interest is a matter within the court's discretion, to be decided according to federal law. Wessel v. Buhler , 437 F.2d 279, 284 (9th Cir. 1971) ; see also United States v. Pend Oreille Pub. Util. Dist. No. 1 , 28 F.3d 1544, 1553 (9th Cir. 1994). Prejudgment interest is not a penalty, but a means of making a wronged plaintiff whole. See In re Exxon Valdez , 484 F.3d 1098, 1101 (9th Cir. 2007). The determination of prejudgment interest is a "question of fairness, lying within the *875Court's sound discretion, to be answered by balancing the equities." Wessel , 437 F.2d at 284 ; see also Pend Oreille , 28 F.3d at 1553 ("The cases teach that interest is not recovered according to a rigid theory of compensation for money withheld, but is given in response to considerations of fairness. It is denied when its exaction would be inequitable.") (quoting Bd. of Cnty. Comm'rs v. United States , 308 U.S. 343, 352, 60 S.Ct. 285, 84 L.Ed. 313 (1939) ).
Under federal law, "the rate of prejudgment interest is the Treasury Bill rate as defined in 28 U.S.C. § 1961 unless the district court finds on substantial evidence that a different prejudgment interest rate is appropriate." United States v. Gordon , 393 F.3d 1044, 1058 n.12 (9th Cir. 2004) ; see also W. Pac. Fisheries, Inc. v. SS President Grant , 730 F.2d 1280, 1289 (9th Cir. 1984). "Substantial evidence" is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Blankenship v. Liberty Life Assurance Co. , 486 F.3d 620, 628 (9th Cir. 2007).
Balancing the equities of this case, the Court will not award the Trustee prejudgment interest. While Ms. Erdmann was not a completely innocent party, as she knew that the Mint was paying her personal expenses, Mr. Hansen led her to believe the payments were appropriate and authorized. In addition, the evidence was not sufficient to prove that Ms. Erdmann knew the Mint was experiencing difficulties paying it debts and meeting gold and silver deliveries. The Court is imposing a sizable judgment against Ms. Erdmann. These facts do not warrant adding prejudgment interest to the award.
As for post-judgment interest, 28 U.S.C. § 1961 sets forth the federal judgment rate, which applies to civil and bankruptcy adversary judgments. While parties may contractually agree to waive the application of this statute, there is no evidence here that the parties intended to "contract around" section 1961. See Cataphora v. Parker , 848 F.Supp.2d 1064, 1074-75 (N.D. Cal. 2012) ("[A]n exception to section 1961 exists when the parties contractually agree to waive section 1961's application.") citing Fid. Fed. Bank, FSB v. Durga Ma Corp. , 387 F.3d 1021, 1023 (9th Cir. 2004) (promissory notes at issue included an express, mutually-agreed upon interest rate in the case of default). Accordingly, the Court orders that the judgment against Ms. Erdmann shall bear interest at the federal judgment rate in effect as of the date of entry of the judgment.
III. CONCLUSION
For years, the Mint paid Ms. Erdmann's Amex Account bills that included personal charges for the daily living expenses of Ms. Erdmann and Mr. Hansen. More than four years before filing for bankruptcy protection, the Mint knew or should have known that it was unable to meet its obligations as they became due. As a consequence, the Mint's payments to American Express that were, at least in part, for personal expenses constituted constructively fraudulent transfers under the Washington Uniform Fraudulent Transfer Act. The Trustee shall be awarded judgment against Ms. Erdmann in the amount of those payments less the Amex Account charges for business expenses, for a total judgment amount of $430,462.00, plus post-judgment interest at the federal judgement rate. The Trustee's remaining claims shall be dismissed. The Court will enter a separate judgment, pursuant to Federal Rule of Bankruptcy Procedure 7058 and Federal Rule of Civil Procedure 58, consistent with this Memorandum Decision.
The total amount owed to these four vendors represented at least 27% of the total amount owed to all vendors between the end of December 2011 and the end of March 2016. At the end of 2015, the total owed to these four accounted for approximately 61% of the Mint's debt.
In addition to Marten Law and Mendoza Law, per Proof of Claim No. 2675-1 filed in the main case, Young deNormandie, P.C. provided services to the Mint in connection with a number of legal disputes.
Statutory references to the Washington Uniform Fraudulent Transfer Act refer to the statutes that were in effect in 2016. In July, 2017, the relevant statutory provisions were amended by the adoption of the Uniform Voidable Transactions Act (the "UVTA"). Per RCW § 19.40.905 (2017), the UVTA does not apply to transfers made or obligation incurred prior to July 23, 2017.
One may find an example of this phenomenon in the film Office Space (Twentieth Century Fox, 1999), where three employees at the fictional Initech infect the company's accounting system with a computer virus designed to divert fractions of pennies into a bank account. The trio believes such transactions are small enough to avoid detection but will result in a substantial amount of money over time. Unfortunately, a bug in the code caused their virus to steal over $300,000 in just a few days. Fortunately for the employees, an act of arson (by someone else) results in the Initech building going up in flames, destroying all evidence of the missing money. To be clear, Office Space is a comedy.
While the Court has determined that the Trustee did not preserve claims to recover avoidable transfers prior to April 1, 2012, the Court also notes the evidence does not support a conclusion that the Mint was insolvent prior to that date either. Due to the lack of records, the Court cannot rely on the Trustee's Insolvency Analysis. The Accounts Payable Aging chart (P-28), Average Delivery Days - Silver chart (P-33) and Average Delivery Days - Gold chart (P-34) all indicate the Mint was meeting its obligations when they came due until the end of 2011. And while he produced no tax returns, Mr. Hansen testified that he filed personal tax returns for tax years 2008 through 2011 because the Mint generated income for him. Consequently, the Trustee could not meet his burden to demonstrate insolvency for those earlier years.
These factors, known as the "badges of fraud," consist of the following: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was disclosed or concealed; (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor." RCW § 19.40.041(b).
The limitation of a judgment under RCW § 19.40.081(b)(1) to the lesser of the net value of the asset transferred and the amount necessary to satisfy the creditor's claim does not apply here. When a trustee utilizes his strong arm powers to recover fraudulent transfers under state law, the judgment is not limited to the amount necessary to satisfy the claim of the so-called "golden creditor" and the trustee may recover the entire fraudulent transfer: "If the transfer is avoidable at all by any creditor, it is avoidable in full for all creditors regardless of the dollar amount of the prevailing claim." Acequia, Inc. , 34 F.3d at 809-10 (9th Cir. 1994), citing Abramson v. Boedeker , 379 F.2d 741, 748 n.16 (5th Cir. 1967) ; see also In re Imageset, Inc. , 299 B.R. 709, 715 n.10 (Bankr. D. Me. 2003). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501690/ | Janice D. Loyd, U.S. Bankruptcy Judge
Before the Court is the Plaintiffs' Motion to Reconsider1 (the "Motion") [Doc. 52], the Response of Danny Kretchmar and Debbie Kretchmar to Plaintiffs' Motion to Reconsider (the "Response") [Doc. 57] and the Plaintiffs' Reply to Kretchmar Parents' Response to Motion to Reconsider [Doc. 58]. The Motion seeks the Court to reconsider its Opinion and Order on Motion to Dismiss entered on February 5, 2018, in which it dismissed without prejudice five (5) of sixteen (16) Claims for Relief and dismissed with prejudice the one Claim for Relief seeking the substantive consolidation of the estates of the Debtor with those of his non-debtor parents. [Doc 43].
Plaintiffs assert that the Court erred in having: (1) dismissed without prejudice Plaintiff Farm Credit of Enid, PCA's ("Farm Credit") Claim for Relief 1 which sought liquidation of Farm Credit's deficiency claim against the Debtor; (2) apparently inadvertently dismiss with prejudice the claim of substantive consolidation against all defendants, including non-debtor entity Kretchmar Farms which had not entered an appearance in the case and was in default; (3) failed to afford Plaintiffs the opportunity to amend their Complaint before dismissing with prejudice the substantive consolidation claim as against Kretchmar Farms; and (4) failed to apply the *879proper motion to dismiss standard of accepting as true all of Plaintiffs well-pleaded allegations and construing such allegations in the light most favorable to the claimants.
1. Background
Debtor is an individual farmer residing in Medford, Grant County, Oklahoma. He lives and conducts a cattle, ranching and/or farming operation on a half-section of land in Grant County, the title to which is held by his mother, Defendant Debbie Kretchmar. The Debtor owns no real property in his individual name. Neither Debtor nor Kretchmar Farms paid rent for the home in which Debtor lived or for the agricultural land on which Debtor or Kretchmar Farms conducted operations.
Debtor also conducts cattle, ranching and/or farming operations on additional tracts of land in Grant County, Oklahoma, which are titled in the name of both his mother and his father, Defendant Danny Kretchmar (Defendants Danny and Debbie Kretchmar being collectively identified as the "Parents"). The Parents reside in Cleveland, Pawnee County, Oklahoma. Debtor's farming operations as well as those of the Parents were sometimes conducted under the name of Kretchmar Farms or Kretchmar Partners. Plaintiffs allege that Kretchmar Farms is an unincorporated association (either as a general partnership or joint venture) through which the Debtor and the Parents as partners conducted the business known as Kretchmar Farms. Plaintiffs allege that all cattle, ranching and farming operations, as well as for custom farming conducted elsewhere, were invoiced on Kretchmar Farms letterhead or invoices.
On June 9, 2017, Plaintiffs, the Chapter 7 Trustee and Farm Credit (the Debtor's largest creditor), filed a forty-five (45) page adversary Complaint comprised of sixteen (16) Claims for Relief against the Debtor, his Parents and/or Kretchmar Farms, including:
Count 1 - Money judgment for liquidated Farm Credit claim against Debtor;
Counts 2-5 - Objection to the Debtor's discharge under 11 U.S.C. § 727(a)(2)-(5) ;2
Counts 6-7 - Objections to Debtor's dischargeability of a debt under § 523(a)(2)(A)-(B);
Count 8 - for turnover of property under § 542;
Count 9 - for substantive consolidation of the estates of Debtor, the Parents and Kretchmar Farms;
Count 10 - action for an accounting under § 105;
Count 11 - action to avoid fraudulent transfers under § 548
The Complaint also included claims arising under Oklahoma state law:
Count 12 - Farm Credit claim for veil-piercing, fraud and injustice;
Count 13 - Farm Credit claim for piercing the veil and for alter ego;
Count 14 - claim by Farm Credit for civil conspiracy;
Count 15 - action by Trustee against Kretchmar Properties for general partnerships and/or joint venture liability; and
Count 16 - action by Farm Credit against Kretchmar Partners for general partnership and /or joint venture liability.
*880Defendant Parents filed a Motion to Dismiss seeking dismissal of several, but not all, of the Counts. [Doc. 21].
First, the Parents argued that Count 9 should be dismissed because substantive consolidation of non-debtors circumvented the stringent procedures and protections relating to involuntary bankruptcy cases imposed by § 303 of the Bankruptcy Code. Second, Parents argued that numerous other Counts of the Complaint were state law claims against non-debtor entities over which the bankruptcy court lacked jurisdiction. On February 5, 2018, the Court entered its Opinion and Order on Motion to Dismiss [Doc. 43] in which it dismissed with prejudice the Plaintiffs' Claim for Relief 9 for substantive consolidation.3 The Court rejected the Parents contention that substantive consolidation was only available under the remedy of an involuntary bankruptcy proceeding pursuant to § 303. The Court further found that while substantive consolidation of an individual debtor and affiliated business entities or a business entity debtor with non-debtor affiliates was available as an equitable remedy in certain rare instances, substantive consolidation was not available to consolidate individual debtors and individual non-debtors as was sought in the present case. Accordingly, the Court dismissed the substantive consolidation claim (Claim 9) with prejudice, finding that the legal deficiency of the consolidating individual debtors and individual non-debtors could not be rectified by amendment.
The Parents' Motion to Dismiss also sought dismissal of the following Claims for Relief of Plaintiff, Farm Credit (as opposed to the Plaintiff Trustee): (1) Claim 10, Accounting; (2) Claim 12, Veil Piercing: Fraud and Injustice (3) Claim 13, Piercing the Veil: Alter Ego; (4) Claim 14, Civil Conspiracy; (5) and Claim 16, Partnership/Joint Venture. The Parents asserted these were simply state law claims by which Farm Credit sought to collect money from third party non-debtors (the Parents) and over which the Bankruptcy Court did not have jurisdiction. In response, Farm Credit argued these state law claims were "related to" the bankruptcy over which this Court has jurisdiction. 28 U.S.C. § 157(a)(4). The Court found Claims 12, 13, 14 and 16 were not related to the bankruptcy because they did not seek the recovery of money against the Debtor, were not necessary to the administration of the bankruptcy estate and, by virtue of the Court's rejection of the claim of substantive consolidation, did not seek the recovery of property of the bankruptcy estate. In re Gardner , 913 F.2d 1515 (10th Cir. 1990) ; Personette v. Kennedy (In re Midgard Corp.) , 204 B.R. 764, 771 (10th Cir. BAP 1997) ; In re Mordini , 491 B.R. 567, 571 (Bankr. D. Colo. 2013). The Court also dismissed the claim for Relief 1 which the court viewed as a state law claim as well.
The Plaintiffs' Motion to Reconsider does not challenge the Court's dismissal of Claims for Relief 12, 13, 14 and 16. What Farm Credit does challenge is the Court's dismissal as a state law claim its Claim for Relief 1 which sought to liquidate its monetary, and potentially non-dischargeable, claim against the Debtor and Claim for Relief 9 which sought substantive consolidation against all defendants, including non-debtor Kretchmar Farms.
2. Reconsideration of the Court's Dismissal of Plaintiff's Claim 1 for the Liquidation of Its Claim Against the Debtor .
The Parents in their Motion to Dismiss did not seek dismissal of Claim for *881Relief 1. In its Opinion and Order, the Court acknowledged that the Parents had not sought dismissal of Count 1 [Doc. 43, pg. 25 n. 10], but the Court found that Claim 1 was a state Court claim that did not affect the bankruptcy estate. That finding was in error. A claim to liquidate a debt against a debtor is a core proceeding over which this Court should exercise jurisdiction, 28 U.S.C. § 157(b)(2)(B) ; In re Hirsch , 339 B.R. 18, 25 (E.D.N.Y. 2006) ("The estimation of allowance or disallowance of claims against a debtor's estate are core proceedings over which a bankruptcy court has jurisdiction.").
Furthermore, despite a long history of conflicting authorities, there now appears to be virtual unanimity among courts that bankruptcy courts have both subject matter jurisdiction and constitutional authority to liquidate debts in the context of dischargeability actions. See Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 793-94 (10th Cir. 2009) ; In re Lang , 293 B.R. 501, 516-17 (10th Cir. BAP 2003) ("In accordance with these other circuits, we conclude that under the broad congressional grant of jurisdiction given to bankruptcy courts under 28 U.S.C. § 157, bankruptcy courts have the jurisdiction to award money damages in a § 523(a) proceeding."); Heckert v. Dotson (In re Heckert) , 272 F.3d 253, 257 (4th Cir. 2001). "Because liquidation of a claim is, most times, integral to the determination of non-dischargeability of that claim, as well as determination of the debtor-creditor relationship in the bankruptcy case, the liquidation of the claim is tied to the core jurisdiction of the bankruptcy court as well because the dispute and its complete resolution invoke the court's equitable jurisdiction." In re Neves , 500 B.R. 651, 660 (Bankr. S.D. Fla. 2013) ; In re Cowin , 492 B.R. 858 (Bankr. S.D. Tex. 2013) (holding that liquidating state law claims against the debtor is closely integrated into the code and is a necessary element to determine dischargeability and, therefore, is not precluded by Stern v. Marshall ). Unlike the properly dismissed state court claims, there can be no doubt that this Court has jurisdiction, should it so decide to exercise it, to determine the liquidation of the Farm Credit claim against the Debtor.
The Parents (on behalf of the Debtor) argue that Count 1 seeking liquidation of Farm Credit's claim could easily be litigated in state court in the event that the bankruptcy court found such debt to be non-dischargeable. Though not stated as such, the Court construes this argument as a request that the Court permissively abstain from liquidating the claim in this case. That the state court would also have jurisdiction to liquidate the claim, however, does not mean that this Court should cede its jurisdiction to the state court. Permissive abstention under 28 U.S.C. § 1334(c)(1) grants discretion to the Court to abstain if abstention is in the best interest of justice or in the interest of comity or respect for state law. Permissive abstention is a doctrine affording court's discretion whether to abstain from hearing certain matters, but abstention is "an extraordinary and narrow exception to the duty of [federal courts] to adjudicate a controversy properly before it." Colorado River Water Conservation District. v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976).
Amongst the factors that courts look to determine whether permissive abstention is appropriate are: (1) the effect that abstention would have on the efficient administration of the bankruptcy estate; (2) the extent to which state law issues predominate; (3) the difficulty or unsettled nature of applicable state law; (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court;
*882(5) the federal jurisdictional basis of the proceeding; (6) the degree of relatedness of the proceeding to the main bankruptcy case; (7) the substance of asserted core proceeding; (8) the feasibility of severing the state law claims; (9) the burden the proceeding places on the bankruptcy court's docket; (10) the likelihood that commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; (11) the existence of a right to jury trial; and (12) the presence of non-debtor parties in the proceeding. Commercial Financial Services, Inc. v. Bartmann (In re Commercial Financial Services, Inc.) , 251 B.R. 414, 429 (Bankr. N.D. Ok. 2000). The evaluation of these factors is not merely a "mathematical exercise." Trans World Airlines, Inc. v. Karabu Corp. , 196 B.R. 711, 715 (Bankr. D. Del.1996). Some factors are more substantial than others, such as the effect on the administration of the estate, whether the claim involves only state law issues, and whether the proceeding is core or non-core under 28 U.S.C. § 157. In re LaRoche Industries, Inc., 312 B.R. 249 (Bankr. D. Del. 2004).
The Court finds no compelling reason to have the state court liquidate the Farm Credit claim. This Court can do so as easily, and at least as quickly, with no loss in judicial economy or additional expense. Farm Credit must necessarily present much, if not all, evidence sufficient to liquidate the underlying claim in the context of this Court's dischargeability determination, an issue over which this Court has exclusive jurisdiction. This makes the Parents'/Debtor's implicit request to have a second trial in state court over the amount of damages less economical, rather than more so. The Plaintiffs' Complaint seeks to determine Farm Credit's claim of non-dischargeability, and this Court sees no reason why it should not proceed to determine the amount of the underlying debt in the same pending action.
3. Reconsideration of the Dismissal with Prejudice of Claims for Substantive Consolidation as Against Kretchmar Farms.
As stated above, the Parents' Motion to Dismiss the Plaintiffs' claim for substantive consolidation was predicated on the argument that the only means to achieve such consolidation of a non-debtor was through the filing of an involuntary bankruptcy petition in accordance with § 303. The Court denied the Parents' Motion to Dismiss on that ground that relief in the form of substantive consolidation was only permissible through the process of an involuntary bankruptcy; however, it granted dismissal insofar as the Plaintiffs had attempted to state a claim based on the elements of common law or equitable grounds for substantive consolidation even though the Motion to Dismiss was not predicated on that basis. As pointed out in its Order, the Court was not sua sponte raising a motion to dismiss (the motion had been brought by the Parents); rather, it was appropriate for the Court to identify a complaint's inadequacies on its own initiative and dismiss the complaint based on applicable legal standards. See Best v. Kelly , 39 F.3d 328, 331 (D.C. Cir.1994) ; Oatess v. Sobolevitch, 914 F.2d 428, 430 n. 5 (3rd Cir. 1990). Plaintiffs are correct in stating that the reason for the Court's dismissal of the substantive consolidation with prejudice against the Parents was because the Court found as a matter of law that individual debtors cannot be substantively consolidated with individual non-debtors. [See, Doc. 52, pg. 15]. For the reasons stated in its Opinion and Order, the Court reaffirms that holding. However, Plaintiffs also separately challenge the Court's dismissal of the claims of substantive consolidation as against Kretchmar Farms.
*883Though inferred by the Plaintiffs in their Motion to Reconsider, the Court's dismissal with prejudice of any claim against Kretchmar Farms was not by oversight. It did so in large measure because the Court accepted at face value the Parents' assertion in their Motion to Dismiss that "Kretchmar Farms is not a legal entity, but is a name under which the Parents occasionally have done business [and] [b]ecause Kretchmar Farms is not a legal entity, no response to the Complaint by Kretchmar Farms is required."4 [Doc. 21, pg. 2 n. 1]. If Kretchmar Farms was not a separate entity but was (is) merely a trade style or "d/b/a" of the Parents or the Debtor there would be no need for the Court to have considered the substantive consolidation claims against it separate and apart from the Parents. In Oklahoma, as in most if not all states, a trade name is not a separate legal entity. See Thomas v. Colvin , 1979 OK CIV APP 2, 592 P.2d 982, 983 ; Lewis v. Am. General Assurance Co., 2001 WL 36160929 (W.D. Ok. 2001) ; Naming a defendant under his trade name is the same as naming him individually. Id. ; National Surety Co. v. Oklahoma Presbyterian College for Girls , 1913 Okla. 429, 132 P. 652.
On the other hand, the Plaintiffs have alleged in their Complaint that "Kretchmar Farms is an unincorporated business association or entity through which Debtor and Danny Kretchmar, and upon information and belief Debbie Kretchmar (collectively or individually as context requires, 'Kretchmar Partners') transact business as general partners and/or joint venturers, sometimes using 'Kretchmar Farms' and/or 'Kretchmar Seeds' as a trade name...." [Doc. 1, ¶ 6]. They further allege that "Danny Kretchmar is an individual and the Debtor's father... and is a general partner and/or joint venture with Debtor, and upon information and belief with Debbie Kretchmar, doing business as an unincorporated business association or entity, sometimes under the name of Kretchmar Farms." [Doc. 1, ¶ 4].
From the pleadings there appears to be, at least to the Court, an issue as to the exact legal status of "Kretchmar Farms". Is it a trade name or sole proprietorship of the Debtor, of the Parents (or either of them) or a partnership of the Debtor and the Parents, or at various times variation of all three? If it was a partnership, was it dealing with Farm Credit in that capacity? Unlike the legal issue decided by the Court as to whether an individual debtor could be substantively consolidated with another non-debtor individual, the issue of whether a claim for substantive consolidation of an individual debtor and a separate but related business entity cannot be decided on a motion to dismiss, at least based solely on the face of the Complaint before the Court.
In making the determination that the claims against Kretchmar Farms should not have been dismissed with prejudice, *884the Court is also mindful that the Plaintiffs believe they were not given proper notice that the Court was considering the dismissal of the substantive consolidation claim against Kretchmar Farms when the Parents' Motion to Dismiss did not clearly state it was seeking that relief.5 If the Parents do not believe that Kretchmar Farms is an entity separate and apart from them or that the Complaint otherwise fails to state a claim for substantive consolidation against Kretchmar Farms, in retrospect it should have plead so in a fashion sufficient to give adequate notice to the Plaintiffs that they were seeking dismissal on that ground. The Court should not have, at this motion to dismiss stage, dismissed the substantive consolidation claim (Claim 9) as against Kretchmar Farms with prejudice.
For the above reasons, the Court finds, and accordingly,
IT IS ORDERED that the Plaintiffs' Motion to Reconsider [Doc. 52] is hereby Granted insofar as it seeks to reinstate Plaintiff Farm Credit's Claim for Relief 1 (the liquidation of the claim of Farm Credit against the Debtor), and the Court's Opinion and Order on Motion to Dismiss entered on February 5, 2018 [Doc. 43] dismissing Claim 1 is hereby vacated and modified accordingly;
IT IS FURTHER ORDERED that the Plaintiffs' Motion to Reconsider [Doc. 52] is hereby Granted insofar as it seeks to reinstate Plaintiffs' Claim for Relief 9 for the substantive consolidation of the Debtor and Kretchmar Farms, and the Court's dismissal with prejudice of the claim of substantive consolidation pursuant to the Court's Opinion and Order on Motion to Dismiss entered on February 5, 2018 (Doc. 43] as against named defendant Kretchmar Farms, only, is hereby vacated.
Except as specifically provided above, in all other respects the Opinion and Order on Motion to Dismiss [Doc. 43] remains in full force and effect.
Motions to reconsider are not recognized as such in the Federal Rules of Bankruptcy Procedure. Rather, if such a motion is filed within fourteen days following the entry of the order in a contested matter, it is treated as a motion to alter or amend the judgment/order under Civil Rule 59, applicable in bankruptcy under Fed.R.Bankr.P. 9023. A motion for reconsideration is analogous to a motion for new trial or to alter or amend the judgment pursuant to [Civil Rule] 59 as incorporated by Rule 9023. United Student Funds, Inc. v. Wylie (In re Wylie) , 349 B.R. 204, 209 (9th Cir. BAP 2006). Although Rule 59(e) refers to amendment of a "judgment", the court has inherent power to reconsider and amend its interlocutory orders and may utilize Rule 59(e) as a vehicle for doing so. Cincinnati Insurance Co. v. Crossman Communities, Inc , 2008 WL 2598550, at *2 (E.D. KY. 2008). The Court's Opinion and Order challenged here is interlocutory in that it did not dispose of all the claims in the case. A motion to reconsider can also be analogous to Civil Rule 60 as made applicable to bankruptcy proceedings under Fed.R.Bankr.P. 9024. The Plaintiffs have alleged relief being sought under both Rules 59 and 60. In the Court's opinion, it matters not which Rule is applicable where the complaining party asserts, as do Plaintiffs here, that the Court has committed some manifest error of law or fact justifying relief. The Court will entertain the Motion.
Unless otherwise noted, all statutory references are to sections of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq.
The Court's decision was published as Manchester v. Kretchmar (In re Kretchmar) , 579 B.R. 924 (Bankr. W.D. Okla. 2018).
The Parents expand upon the argument that Kretchmar Farms is not a separate legal entity but "simply a sole proprietorship of Danny Kretchmar" in a lengthy footnote in their Response to the Plaintiffs' Motion to Reconsider by alleging detailed facts concerning how the Debtor and the Parents did business. [Doc 57, pg. 5 n. 4]. Plaintiffs responded by stating: "... Parents detail the history of a defunct sole proprietorship and a limited liability company that is no longer in good standing, both of which were known as Kretchmar Farms to try to neutralize the Complaint's allegation that Debtor formed a partnership with his Parents that did business as Kretchmar Farms and whose activities include diversion of Farm Credit's collateral." [Doc. 58 pg.1 n.1]. The "facts" asserted by the Parents as to the form of Kretchmar Farms are outside the record in this case, not admissible evidence and, most importantly for motion to dismiss purposes, contradicted by allegations on the face of the Complaint which the court is required to accept as true.
The Parents' Motion to Dismiss, however, in a footnote did state "to the extent that a response by Kretchmar Farms is required, Kretchmar Farms adopts the assertion of the Parents." [Doc. 21, pg.2 n.1]. The "conclusion" of the Motion to Dismiss only sought relief on behalf of the Parents. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501691/ | KEVIN R. ANDERSON, U.S. Bankruptcy Judge
I. Introduction
Over twenty years ago, Theodore William White, Jr. (the "Debtor") was accused, *887arrested, and incarcerated for a crime he did not commit. Approximately seven years after his initial arrest, and after multiple proceedings, trials, and appeals, the Debtor was exonerated on all charges and released from prison. Shortly thereafter, the Debtor commenced legal proceedings against those who had wrongfully accused him. On August 28, 2008, the Debtor obtained a $15 million judgment against his accusers. On September 29, 2008, the Debtor and his wife executed a promissory note directing that upon collection of the judgment, $1 million of its proceeds would be paid to six family members, including his parents who are the Defendants in this proceeding. The stated consideration for the $1 million note was the emotional and financial support provided to the Debtor by his family during his incarceration and legal proceedings. In July of 2011, after three more years of legal proceedings, the Debtor received a payment of $15.5 million in satisfaction of the judgment. At the same time, and pursuant to the note, the Debtor directed that $1 million of the judgment proceeds be transferred to the Defendants.
Almost three years later on May 30, 2014, the Debtor and his spouse, Porscha Shiroma, filed a voluntary Chapter 7 bankruptcy petition. J. Kevin Bird was appointed as the Chapter 7 Trustee ("Trustee"). Two years later, on May 30, 2016, the Trustee filed this adversary proceeding against Ryan B. White, in his representative capacity as personal representative of the estate of Theodore W. White, Sr., deceased, and Myrna Y. White (the "Defendants").1 The Complaint seeks to avoid and recover the Debtor's transfers of $1 million and $1,500 to the Defendants under 11 U.S.C. §§ 544, 547, 550, and Utah's Uniform Fraudulent Transfer Act (the "UFTA").2
The matter before the Court is the Defendants' Motion for Summary Judgment ("MFSJ"), which argues that the $1 million transfer is not avoidable because the Debtors received reasonably equivalent value.3 The Court held a hearing on Defendants' MFSJ on August 1, 2018. The Court has reviewed the parties' papers and has conducted independent research of applicable law. For the reasons set forth in this memorandum decision, the Court grants the Defendants' MFSJ.
II. Jurisdiction and Venue
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334(a) & (b) and 157(b). Defendants' MFSJ is a core proceeding under 28 U.S.C. § 157(b)(2)(H). Venue is appropriate in this District under 28 U.S.C. §§ 1408 and 1409, and notice of the hearing was proper.
III. Undisputed Facts
Defendants' MFSJ centers on whether the Debtors received "reasonably equivalent value in exchange" for the transfer of $1 million to Defendants. The following undisputed facts4 are material to the Court's decision and are derived from Defendants'
*888MFSJ,5 the Trustee's Memorandum and Supporting Document in Opposition,6 and Defendants' Response:7
1. On August 28, 2008, Debtor Theodore White obtained a judgment for $15 million arising from his wrongful arrest, prosecution, and incarceration (the "Judgment").
2. On September 29, 2008, Debtors executed a promissory note in Lawrence County, Missouri ("Note").
3. The Note names six payees consisting of the Defendants Theodore W. White, Sr., and Myrna White (the Debtor's parents); Ryan and Tiffany White (the Debtor's brother and sister-in-law); and Tiffany and Michael Means (the Debtor's sister and brother-in-law) (collectively the "Payees").8
4. The Debtors promised under the Note to pay the six Payees a total of $1 million "share and share alike," but "contingent upon full payment of ... [the Judgment] from any source."9
5. The stated consideration for the Note was "the love, support and advancement of the necessary defense funds to Theodore W. White, Jr. [the Debtor] during the time that he was charged, prosecuted and unfairly imprisoned from 1998 to 2005."10
6. None of the Payees assigned their interests in the Note to the Defendants.
7. On July 21, 2011, the Debtor received $15.5 million in settlement of the Judgment.
8. On July 22, 2011, the Debtor caused $1 million of the Judgment proceeds to be transferred to the Defendants (the "$1 Million Transfer").
9. All Payees agree that the Debtor's $1 Million Transfer to the Defendants was in full satisfaction of the Note.
10. On May 30, 2014, the Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.
11. On May 30, 2016, the Trustee filed a complaint against the Defendants to recover the $1 Million Transfer as a constructively fraudulent transfer under the UFTA.
IV. Summary Judgment Standard
Under Fed. R. Civ. P. 56(a), as incorporated into bankruptcy proceedings by Fed. R. Bankr. P. 7056, the Court is required 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." Substantive law determines which facts are material and which are not. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment."11 Whether a dispute is "genuine" turns on whether "the evidence is such that a reasonable [fact finder] could return a verdict for the nonmoving party."12 In sum, the Court's function at the summary judgment stage is to "determine *889whether there is a genuine issue for trial."13
The moving party bears the burden to show that it is entitled to summary judgment,14 including the burden to properly support its summary judgment motion as required by Rule 56(c).15 If the moving party has failed to meet its burden, "summary judgment must be denied," and the nonmoving party need not respond because "no defense to an insufficient showing is required."16 Once the moving party meets its initial burden, "the burden shifts to the nonmoving party to demonstrate a genuine issue for trial on a material matter."17 The nonmoving party may not rely solely on allegations in the pleadings, but must instead designate "specific facts showing that there is a genuine issue for trial."18
When considering a motion for summary judgment, the Court views the record in the light most favorable to the non-moving party,19 but the Court does not weigh the evidence or make credibility determinations.20
V. Summary of the Issues
The Trustee's complaint seeks to recover the $1 Million Transfer from Defendants based on the allegation that the Debtors did not receive reasonably equivalent value in exchange for such transfer. Defendants counter that the $1 Million Transfer is not avoidable because it fully satisfied the legally-enforceable Note for $1 million.
The Trustee now alleges that the Note was not enforceable for want of consideration. The Trustee also alleges that the Defendants were overpaid because the Note's "share-and-share alike" provision gave each Payee a one-sixth interest in the $1 Million Transfer.
Therefore, the core issues are whether the Note constituted a legally-enforceable, antecedent debt of the Debtors, and whether the $1 Million Transfer was in full satisfaction of the Note.
VI. Analysis
The Trustee's Complaint alleges that the Debtors "did not receive equivalent value in exchange for the" $1 Million Transfer.21 The UFTA provides that "[v]alue is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied."22 A transfer that results in a dollar-for-dollar reduction of a valid, antecedent debt is not constructively fraudulent because it has no impact on a debtor's net worth and thus results in no prejudice to other creditors.23
*890A. Was the Note a Valid and Legally-Enforceable Obligation of the Debtors?
A dispositive issue in this case is whether the Note was valid and enforceable at the time of the $1 Million Transfer. While not alleged in his Complaint, the Trustee has now asserted that the "Note was not enforceable for lack of consideration."24 In essence, the Trustee is arguing that the Note can be avoided because the Debtors did not receive reasonably equivalent value at the time they signed the Note. However, this separate cause of action is not in the Complaint, and the statute of limitations for challenging the Note under § 544 and the UFTA has long passed - even for the Trustee.
Specifically, the Trustee is proceeding under § 544, which means he steps "into the shoes of an actual creditor who has standing to avoid the transfer under the applicable state law."25 This includes any defenses that could be asserted against such creditor.26 In this case, the Note was signed on September 9, 2008. The statute of limitations for the recovery of a constructively fraudulent transfer under UTAH CODE ANN. § 25-6-5(1)(b) or 25-6-6(1) is four years.27 So the time to avoid the Note ran on Monday, September 10, 2012. The Debtors filed their bankruptcy petition on May 30, 2014, and the Trustee filed this Complaint on May 30, 2016. Consequently, the Trustee is time-barred from seeking to avoid the Note under the UFTA.28
In the similar case of Cox v. Nostaw, Inc. , the trustee sought to recover $900,000 in note payments as constructively fraudulent transfers.29 The trustee argued that because the note was invalid for lack of consideration, the payments on the note were without value to the debtor.30 The bankruptcy court rejected the trustee's argument because his complaint did not include a cause of action to avoid the note, and the time for filing such an action had expired.31
On a motion for reconsideration, the bankruptcy court augmented its ruling by noting that because the statute of limitations *891to avoid the note had expired, the trustee's only authority to attack the note for lack of consideration was to step into the debtor's shoes under § 541 (as opposed to stepping into a creditor's shoes under § 544 ).32 However, the court noted under § 541 that the trustee takes no greater rights than the debtor held, and thus the trustee was subject to the same defenses and limitations as would apply to the debtor.33 The court then ruled that because lack of consideration is an affirmative defense, it is waived when the obligor pays the note. Further, a "trustee in bankruptcy is bound by any waiver of a defense made by a debtor before the filing of the petition."34 Therefore, because the debtor could not attack the note for lack of consideration, neither could the trustee.
On appeal, the district court agreed that under such facts, the avoidance of the note was essential to the trustee's cause of action to recover the $900,000 in payments as constructively fraudulent transfers:
It is widely recognized by courts that where a debtor makes prepetition payments on a contractual debt, in order for those payments to be avoidable as constructively fraudulent, it is necessary for the trustee to first avoid the underlying contract as a fraudulently incurred obligation. Absent avoidance of the underlying contract, the payments discharge the obligation and are, by definition, for reasonably equivalent value.35
In other words, if payments result in a commensurate, dollar-for-dollar satisfaction of a note, the note itself must either be avoided or found to be legally unenforceable before a trustee in bankruptcy can avoid such payments as constructively fraudulent transfers.36 And as the trustee in Cent. Ill. Energy Coop. , the Trustee in this case cannot seek to avoid the Note because the statute of limitations for an action under UFTA expired some years before the bankruptcy filing. Even though not specifically pleaded or alleged, the Trustee's only basis to avoid the Note for lack of consideration would be to "stand in the debtor's shoes" under § 541. However, because the Debtors have already accepted the consideration under the Note and paid it in full, the Debtors have waived any challenge to the Note, and the Trustee is bound by that waiver.37
For these reasons, the Court finds that the Note cannot be avoided by the Trustee, and that it was otherwise a valid and legally-enforceable obligation of the Debtors at the time of the $1 Million Transfer.
B. The Note is Supported by Adequate Consideration Under Missouri Law.
Even if the Trustee was not barred from challenging the Note's adequacy of consideration, *892the Debtors received legally-sufficient consideration for the Note to be valid under Missouri law. The Note asserts three forms of consideration: "love, support, and advancement of the necessary defense funds to Theodore W. White Jr. [the Debtor] during the time that he was charged, prosecuted, and unfairly imprisoned from 1998 to 2005."38 The last phrase alone is dispositive as to the issue of adequate consideration.
Under Missouri law, consideration on a note "may consist of some benefit to one party or some detriment to the other."39 The "discharge, release or forbearance of a right or claim against a third person, at the instance or request of the obligor, is sufficient consideration to support the latter's undertaking on a note."40 A promissory note specifically imports consideration.41 In Hammons v. Ehney , the Missouri Supreme Court stated:
A recitation of the consideration on which an agreement is based is prima facie evidence that sufficient consideration existed. Furthermore, all written promises to pay another a specific sum of money, signed by the promisor, import a consideration. Under both theories, a presumption is created that consideration exists, which must be overcome by evidence to the contrary.42
This import of consideration occurs regardless of whether the Note was negotiable or non-negotiable.43 Finally, if multiple considerations are stated for a promise, only one form of consideration need be legally sufficient to render the promise enforceable.44
The Trustee argues that "[l]ove, affection, and moral support will not suffice as consideration for a contractual promise,"45 citing to the Missouri case of Rose v. Howard .46 This is indeed the law, but the Trustee cannot overcome the other stated consideration in the Note regarding "the advancement of the necessary defense funds" to the Debtor. A note to repay funds previously advanced for the benefit of the note's obligor is unquestionably sufficient consideration under Missouri law.
Further, the Note contains an implicit forbearance agreement by stating that "payment pursuant to the terms of this note is contingent upon full payment of ...
*893the judgment of $14,000,000."47 And this is exactly what happened. Almost three years later, on July 21, 2011, the Debtor received $15.5 million under the Judgment, and the next day he transferred $1 million to the Defendants.48 Thus, the Payees' agreement to await collection on the Judgment before receiving payment on the Note constituted additional consideration.
The Trustee makes other arguments under pre-UCC Missouri law because the Note is non-negotiable.49 However, the Trustee has not demonstrated why pre-UCC Missouri law should apply. In contrast, the Missouri Legislature has specifically indicated that applying the UCC by way of analogy to non-negotiable instruments may be appropriate.50 MO. ANN. STAT. § 400.3-303(a)(3), provides that, "[a]n instrument is issued or transferred for value if: ... (3) the instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due." Under this clear and straightforward test, there was consideration on the part of the Defendants and other payees for the Note based on the antecedent debt, without any need for a showing of extinguishment.51
The Trustee makes other arguments on this point, but he has stretched his lack-of-consideration fight far beyond its reasonable application.52 None of these arguments were alleged in the Complaint, and the Court has already found that the Trustee is barred from seeking to avoid the Note for lack of consideration. The Court has nonetheless addressed this issue and has found that the Note was based on good and valuable consideration under Missouri law. The Court therefore finds that at the time of the $1 Million Transfer, the Note was a valid and legally-enforceable obligation of the Debtors in favor of the Payees.
C. Did the Debtors Receive Equivalent Value in Exchange for the $1 Million Transfer?
The next issue is whether the Debtors received equivalent value in exchange for the $1 Million Transfer. The Trustee argues under Missouri law that with the Note's "share-and-share-alike" provision, each of the six Payees was entitled to one-sixth of the $1 Million Transfer.53 Therefore, because the Defendants received the entirety of the $1 Million Transfer, the other four Payees collectively still hold a claim for $666,666.67 based on their remaining one-sixth interests. Thus, the Debtors only received a value of $333,333.67 in exchange for the $1 Million Transfer.
*894This argument might be relevant if the other Payees were still making a claim under the Note - but they are not. They have all definitively stated by declaration that they deemed the $1 Million Transfer to the Defendants to be in full satisfaction of Note.54 The Trustee cannot overcome the effect of these declarations. For these reasons, the Court finds that there is no issue of fact that the $1 Million Transfer was in full satisfaction of the Note. Thus, the Debtors received dollar-for-dollar consideration in exchange for the $1 Million Transfer - and that is all that is required for Defendants to prevail on their MFSJ.
VII. Conclusion
The Court finds that the Trustee's authority to challenge the Note for lack of consideration under § 544 and the UFTA is time-barred. Moreover, the Court finds that the Trustee would likewise be barred from any challenge to the Note under § 541 due to the Debtors' pre-petition waiver of any defenses when he paid it. Even if the Trustee could contest the Note's adequacy of consideration, the Court has found under Missouri law that it is supported by adequate consideration arising from the Defendants' advance of monies to fund the Debtor's legal defense and prosecution for his wrongful incarceration. The Court finds further consideration from the Payees' three-year forbearance in collecting on the Note until the Debtor recovered on the Judgment. Thus, the Court finds no genuine issue of material fact that at the time of the $1 Million Transfer, the Note was a valid and legally-enforceable obligation of the Debtors.
The Court further finds that all Payees deemed the $1 Million Transfer to be in full satisfaction of the Note, and thus the Debtor's payment of $1 million to the Defendants represented a dollar-for-dollar reduction of the Note. Consequently, the Court finds that the Debtors received reasonably equivalent value in exchange for the $1 Million Transfer. Because reasonably equivalent value is an absolute defense to the Trustee's constructively fraudulent transfer action, the Court grants the Defendants' MFSJ. The Trustee's cause of action to avoid and recover the $1,500 the Debtor transferred to Mrs. White within one year of the bankruptcy filing remains at issue.
The Court will enter an Order consistent with the rulings set forth in this Memorandum Decision.
Dkt. No. 1. Hereinafter, all references to the docket will be in Case No. 16-02090 unless otherwise specified.
Utah Code Ann. §§ 25-6-5(1)(b) and 25-6-6(1)(a) (2016) (In 2017, the Utah Legislature renamed and amended the Uniform Fraudulent Transfer Act to the Uniform Voidable Transfer Act ).
Dkt. No. 57.
This statement includes facts that the parties may have objected to, but that the Court determines are not in material dispute.
Dkt. No. 57.
Dkt. No. 65; Dkt. No. 66.
Dkt. No. 67; Dkt. No. 68
See Note, Dkt. No. 57, Ex. 1.
Id.
Id.
Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Id.
Id. at 249, 106 S.Ct. 2505.
Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
Murray v. City of Tahlequah, Okla. , 312 F.3d 1196, 1200 (10th Cir. 2002).
Reed v. Bennett , 312 F.3d 1190, 1195 (10th Cir. 2002) (citation omitted)
Concrete Works of Colorado, Inc. v. City & County of Denver , 36 F.3d 1513, 1518 (10th Cir. 1994).
Celotex , 477 U.S. at 324, 106 S.Ct. 2548.
Schrock v. Wyeth, Inc. , 727 F.3d 1273, 1279 (10th Cir. 2013) (citation omitted).
Nat'l Am. Ins. Co. v. Am. Re-Insurance Co. , 358 F.3d 736, 742-43 (10th Cir. 2004) (citing Cone v. Longmont United Hosp. Ass'n , 14 F.3d 526, 533 (10th Cir. 1994) ).
Dkt. No. 1 at ¶ 18.
Utah Code Ann. § 25-6-4(1) (2016).
Klein v. Michelle Tuprin & Assocs., P.C. , No. 2:14-cv-00302-RJS-PMW, 2016 WL 3661226, at *7, 2016 U.S. Dist. LEXIS 86954 (D. Utah July 5, 2016) (if a transfer satisfies a legally-enforceable debt of the payor, then the payor has received reasonably equivalent value for purposes of the UFTA); Klein v. Cornelius , 786 F.3d 1310, 1321 (10th Cir. 2015) ("The primary consideration in analyzing the exchange of value for any transfer is the degree to which the transferor's net worth is preserved.") (citation omitted); Rupp v. Moffo , 358 P.3d 1060, 1064 (Utah 2015) ("In cases where the debtor does receive reasonably equivalent value, the transfer puts one asset beyond the reach of the creditors, but replaces the asset with one of equivalent value, thus avoiding any harm to creditors.").
Dkt. No. 65, p. 13.
Montoya v. Tobey (In re Ewbank) , 359 B.R. 807, 809-10 (Bankr. D. N.M. 2007) (citation omitted).
Id.
Utah Code Ann. § 25-6-10. Claim for relief - Time limits. A claim for relief or cause of action regarding a fraudulent transfer or obligation under this chapter is extinguished unless action is brought:
...
(2) under Subsection 25-6-5(1)(b) or 25-6-6(1), within four years after the transfer was made or the obligation was incurred.
See Montoya v. Tobey (In re Ewbank) , 359 B.R. 807, 809-10 (Bankr. N.M. 2007) (trustee barred from avoiding deeds as fraudulent transfers under § 544 because the four-year statute of limitations of New Mexico's fraudulent transfer act had expired well before the bankruptcy filing).
Cox v. Nostaw, Inc. (In re Cent. Ill. Energy Coop.) , 521 B.R. 868 (Bankr. C.D. Ill. 2014).
Id. at 874.
Id.
Id. at 792.
Id.
Id. at 795 (citation omitted).
Id. at 791 (citing In re Tanglewood Farms, Inc. of Elizabeth City , 487 B.R. 705 (Bank. E.D. N.C. 2013) ; In re Incentium, LLC , 473 B.R. 264 (Bankr. E.D. Tenn. 2012) ; In re TSIC, Inc. , 428 B.R. 103 (Bankr. D. Del. 2010) ; In re All-Type Printing, Inc. , 274 B.R. 316 (Bankr. D. Conn. 2002) ).
Klein v. Michelle Tuprin & Assocs., P.C. , No. 2:14-cv-00302-RJS-PMW, 2016 WL 3661226, at *7, 2016 U.S. Dist. LEXIS 86954 (D. Utah July 5, 2016) (transfer was avoidable as constructively fraudulent based on court's finding that the payor was not legally obligated to pay defendant's invoice for legal services).
See 5 Collier on Bankruptcy ¶ 541.07 (16th 2018) ("In all cases where the trustee seeks to assert or enforce the debtor's right of action against another, the trustee generally stands in the debtor's shoes regarding defenses to the action.").
Note, Dkt. No. 57, Ex. 1 at ¶ 4.
Brown v. Mustion , 884 S.W.2d 365, 369 (Mo. Ct. App. 1994) (citation omitted).
Id.
Sverdrup Corp. v. Politis , 888 S.W.2d 753, 754 (Mo. Ct. App. 1994) ("In a suit on a note the holder makes a prima facie case by producing the note admittedly signed by the maker and showing the balance due. A promissory note imports consideration.") (citations omitted).
Hammons v. Ehney , 924 S.W.2d 843, 850 (Mo. 1996) (citations omitted). See also Mo. Ann. Stat. § 431.020 ("All instruments of writing made and signed by any person or his agent, whereby he shall promise to pay to any other, or his order, or unto bearer, any sum of money or property therein mentioned, shall import a consideration.").
See Lowrey v. Danforth , 69 S.W. 39, 39 (Mo. Ct. App. 1902) ("A promissory note, whether negotiable or not, imports a consideration.")
See Baker v. Bristol Care, Inc. , 450 S.W.3d 770, 774 (Mo. 2014) ("If two considerations are given for a promise, one of them being legally sufficient to support a promise and the other not sufficient, the promise is enforceable.") (quoting Earl v. St. Louis Univ. , 875 S.W.2d 234, 236-237 (Mo. Ct. App. 1994) ).
See Dkt. No. 65, p. 5.
Rose v. Howard , 670 S.W.2d 142, 146 (Mo. Ct. App. 1984).
The Judgment was for $14 million in general damages and $1 million in punitive damages. The Note's repayment was thus contingent upon payment of only the general damage award.
Dkt. No. 68.
Dkt. No. 65, at p. 14.
Mo. Ann. Stat. § 400.3-104 cmt. 2.
See also Mo. Ann. Stat. § 400.3-310(b) (antecedent debt is considered "suspended" so no need to show that it was extinguished).
The Trustee asserts that Defendants must prove that they actually advanced defense funds to the Debtor, and that the Note extinguished the antecedent debt of the advanced defense funds. For the reasons stated, the Court declines to consider these additional arguments.
See Rotert v. Faulkner , 660 S.W.2d 463 (Mo. Ct. App. 1983) (even though the obligor paid one payee the full amount of the note, the second payee still held a claim against the obligor for one-half of the note amount).
Dkt. No. 68, Ex. 3 at ¶¶ 18 - 25. See also Declarations of Ryan White, Tiffany White, Tiffany Means, and Michael Means (stating that they considered the $1 Million Transfer to be in full and complete satisfaction of any obligation owed to them by the Debtors under the Note). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501692/ | Erik P. Kimball, Judge, United States Bankruptcy Court
Robert C. Furr, as trustee (the "Trustee" or "Plaintiff") in the substantively consolidated chapter 7 cases of Rollaguard Security, LLC ("Rollaguard"), Shamrock Jewelers, Inc. ("Shamrock Jewelers"), and Shamrock Jewelers Loan & Guarantee, LLC, commenced these three adversary proceedings by complaints filed on December 29, 2016. The Trustee brought substantially identical claims against TD Bank, N.A. ("TD Bank") (Adv. Proc. No. 16-01755-EPK), PNC Bank, N.A. ("PNC Bank") (Adv. Proc. No. 16-01756-EPK), and JPMorgan Chase Bank, N.A. d/b/a Chase Bank ("JPMC Bank") (Adv. Proc. No. 16-01757-EPK) (collectively, the "Defendants"). The Defendants moved to dismiss and, after full briefing, the Court granted those motions and entered judgments in favor of the Defendants. Thereafter, *900the Trustee sought reconsideration of the dismissal order and, in the alternative, permission to file amended complaints. The Court denied the Trustee's request for reconsideration of the Court's legal rulings made in granting the motions to dismiss. The Court also ruled, consistent with prevailing law in this circuit, that because judgments had been entered in favor of the Defendants the Trustee must first obtain relief from the judgments under the applicable rules of civil procedure and only then would the Court consider the Trustee's request to amend the complaints. After a hearing to consider the Trustee's request to amend the complaints, the Court denied that request. The Trustee appealed the Court's orders dismissing the adversary proceedings, the judgments, and the orders denying the Trustee's motion to reconsider and for permission to file amended complaints. On appeal, the District Court ruled that the more lenient standard of Fed. R. Bankr. P. 7015 applied even though this Court had entered judgments in favor of the Defendants, and remanded the cases to this Court to consider the Trustee's request to file amended complaints under that standard. As discussed more fully below, after a careful review of the Trustee's proposed amended complaints, the Court rules that the proposed amendments would be futile and thus denies the Trustee's request to file amended complaints.
ORIGINAL COMPLAINTS
Each of the original complaints in these adversary proceedings alleged substantially the same facts and presented the same five requests for relief. In counts I and II of the original complaints, the Trustee sued the Defendants to avoid alleged fraudulent transfers made by Rollaguard and Shamrock Jewelers (together, the "Debtors")1 to the Defendants under the actual and constructive fraud provisions of sections2 548(a)(1)(A)-(B) and under the actual and constructive fraud provisions of section 544 incorporating Florida Statutes §§ 726.105(1)(a)-(b), and to recover the alleged fraudulent transfers from the Defendants pursuant to section 550. In counts III, IV, and V of the original complaints, the Trustee sought money damages for the Defendants' alleged aiding and abetting of conversions and for their alleged negligence.
MOTIONS TO DISMISS
In response to the original complaints, each of the Defendants filed a motion to dismiss [ECF No. 26, Adv. Proc. No. 16-01755-EPK; ECF No. 26, Adv. Proc. No. 16-01756-EPK; and ECF No. 21, Adv. Proc. No. 16-01757-EPK]. In the motions to dismiss, the Defendants raised substantially similar arguments in opposition to the original complaints and adopted each other's arguments. The Court permitted the parties to brief the motions to dismiss in full [ECF Nos. 38 and 39, Adv. Proc. No. 16-01755-EPK; ECF Nos. 42 and 43, Adv. Proc. No. 16-01756-EPK; and ECF Nos. 30 and 31, Adv. Proc. No. 16-01757-EPK].
ORDER GRANTING MOTIONS TO DISMISS
On July 27, 2017, the Court entered a consolidated order dismissing with prejudice *901all three adversary proceedings [ECF No. 43, Adv. Proc. No. 16-01755-EPK; ECF No. 50, Adv. Proc. No. 16-01756-EPK; and ECF No. 33, Adv. Proc. No. 16-01757-EPK] (the "Dismissal Order"). The Court dismissed counts I and II on several grounds. First, the Court ruled that the original complaints did not describe any "transfers" that could be avoided as fraudulent transfers under either section 548 or section 544 incorporating Florida law. Second, the Court ruled that the Defendants are not "transferees" from whom the Trustee may recover under section 550(a)(1). Third, the Court ruled that the original complaints did not contain sufficient allegations to plausibly support the conclusion that the Debtors deposited their own funds into their own unrestricted bank accounts with the intent to hinder, delay, or defraud creditors, as required by the relevant statutes, and so the Trustee's actual fraud claims in counts I and II must be dismissed. Fourth, the Court ruled that the Debtors obtained reasonably equivalent value in exchange for the bank deposits, and so the Trustee's constructive fraud claims in counts I and II must be dismissed. Fifth, the Court ruled that the Trustee's claims in counts I and II based on section 544, incorporating Florida law, must be dismissed as the Trustee failed to identify by name at least one triggering creditor for each such claim. The Court ruled that the claims relating to Shamrock Jewelers Loan & Guarantee, LLC in counts IV and V must be dismissed as a result of the application of the in pari delicto defense, as that defense was apparent on the face of the original complaints. The Court ruled that counts III and IV of the original complaints must be dismissed as the Trustee failed to allege sufficient facts to show that any of the Defendants had actual knowledge of the alleged conversion by the Debtors' principal or that any of the Defendants rendered substantial assistance to the Debtors' principal, two independent reasons for dismissal of those claims. The Court ruled that the claims in count V based in negligence must be dismissed as the Trustee failed to plead a duty of care on the part of the Defendants. Because the Trustee did not seek permission to amend the original complaints, consistent with prevailing law in this circuit the Court dismissed the original complaints with prejudice. The Court then entered judgments in favor of the Defendants [ECF No. 45, Adv. Proc. No. 16-01755-EPK; ECF No. 52, Adv. Proc. No. 16-01756-EPK; and ECF No. 35, Adv. Proc. No. 16-01757-EPK].
MOTION FOR RECONSIDERATION AND/OR TO AMEND COMPLAINTS
The Trustee then filed an omnibus motion seeking reconsideration of the Dismissal Order and the judgments under Fed. R. Civ. P. 59(e), 60(b)(6), and 15(a)(2), made applicable here by Fed. R. Bankr. P. 9023, 9024, and 7015, respectively, and/or permission to file an amended complaint in each adversary proceeding [ECF No. 50, Adv. Proc. No. 16-01755-EPK; ECF No. 57, Adv. Proc. No. 16-01756-EPK; and ECF No. 40, Adv. Proc. No. 16-01757-EPK]. The Trustee asked the Court to reconsider several legal issues addressed in the Dismissal Order. The Trustee argued that the bank deposits alleged in the original complaints were "transfers" avoidable as fraudulent transfers, that it was not proper for the Court to address the "conduit defense" at the motion to dismiss stage and so the Court should not have ruled that none of the Defendants are "transferees" subject to judgment under relevant law, and that the original complaints contained sufficient allegations to overcome the other shortcomings relied on by the Court in dismissing the original *902complaints.3 In the alternative, the Trustee sought leave to file amended complaints against each of the Defendants. The Trustee stated that he received discovery from the Defendants after the motions to dismiss were fully briefed.4 The Trustee alleged that the recently received documents contained new evidence, not available prior to the filing of the original complaints, which supported certain of the Trustee's original claims and new claims for aiding and abetting breach of fiduciary duty. The Trustee sought permission to file amended complaints, in the forms attached to the Trustee's omnibus motion, that the Trustee stated incorporated the new evidence.
RULINGS ON MOTION FOR RECONSIDERATION/AMENDMENT
The Court entered two orders in connection with the Trustee's omnibus motion for reconsideration and/or for permission to filed amended complaints. In the first order, the Court denied the Trustee's request for the Court to reconsider its legal rulings in dismissing these adversary proceedings [ECF No. 51, Adv. Proc. No. 16-01755; ECF No. 58, Adv. Proc. No. 16-01756; ECF No. 41, Adv. Proc. No. 16-01757]. In that first order the Court also ruled that, because the Court had entered judgments in favor of the Defendants, in order to obtain permission to file the proposed amended complaints the Trustee must first obtain relief from judgment under Fed. R. Bankr. P. 9023 (incorporating Fed. R. Civ. P. 59 ) or Fed. R. Bankr. P. 9024 (incorporating Fed. R. Civ. P. 60 ), and only then would the Trustee have the benefit of the more lenient standard under Fed. R. Bankr. P. 7015 (incorporating Fed. R. Civ. P. 15 ). The Court set a hearing to permit the Trustee to show the Court how it could satisfy these requirements.
On November 7, 2017, the Court held a hearing on the Trustee's request for permission to amend the complaints. At the end of that hearing, after an extensive and detailed review of the alleged new evidence and the proposed amended complaints, the Court made a ruling on the record. That oral ruling was incorporated into a written order, which is the second order addressing the Trustee's motion for reconsideration and/or permission to file amended complaints [ECF No. 69, Adv. Proc. No. 16-01755-EPK; ECF No. 76, Adv. Proc. No. 16-01756-EPK; and ECF No. 58, Adv. Proc. No. 16-01757-EPK]. Among other things, the Court ruled that the Trustee had not satisfied the standards of Fed. R. Bankr. P. 9023 or 9024 because, first, the Trustee had obtained the so-called new evidence before the Court granted the motions to dismiss and had *903failed to act on it in a timely manner, second, even if that timing was ignored the Trustee had not been diligent in obtaining the so-called new evidence and, third, nothing in the so-called new evidence would cause the Court to change its rulings in the original Dismissal Order.
It is useful to draw attention to this last point - that nothing in the discovery materials that the Trustee pointed to as the catalyst for its proposed amended complaints would cause the Court to change any of its rulings in the Dismissal Order. The proposed amended complaints include changes to nearly every page of the original complaints. While the Trustee has moved some text around, and added color to the allegations in the form of more negative sounding phrasing and semantic flourishes, there are few actually new factual allegations in the proposed amended complaints. Indeed, from the way the proposed amended complaints were revised as compared to the original complaints, it appears that the text was modified in part to make it seem that there was significant actually new material. Only through a painstaking review of the redlined proposed amended complaints, highlighter in hand, was the Court able to identify the truly new factual allegations. In the end, the few new factual allegations are simply more of the same kinds of allegations that the Court found insufficient in the Dismissal Order, coupled with conclusory statements that do not necessarily follow from the concrete factual allegations.
Not surprisingly then, in the November 7, 2017 oral ruling the Court specifically stated with regard to the claims presented in counts I through V-"Even if Rule 15 applied at this stage of the litigation, and it does not because the newly discovered evidence argument fails, the proposed amendments would be futile." [Page 202, Line 25 - Page 203, Line 3 in ECF No. 83, Adv. Proc. No. 16-01755-EPK; ECF No. 91, Adv. Proc. No. 16-01756-EPK; and ECF No. 73, Adv. Proc. No. 16-01757-EPK]. In its ruling on appeal, the District Court interpreted this sentence as applying only to the negligence claims presented in count V. It appears that the District Court's conclusion resulted from an unfortunate inclusion of the quoted sentence in a paragraph of the transcript addressing only count V. But this Court intended the quoted statement to apply to all of proposed amended counts I though V. Indeed, a review of the Court's oral ruling will reveal that the Court addressed each of counts I through V prior to that statement, indicating that the proposed amendments did not resolve the Court's concerns in the Dismissal Order. The Court went on to consider the new counts VI and VII of the proposed amended complaints, ruling that those claims suffered from the same shortcomings as the similar counts III and IV and so the amendments to include counts VI and VII would be futile. Thus, the Court has already ruled that the proposed amended complaints would be futile as to nearly all of the claims presented. The only claims not explicitly included in the Court's futility analysis at the hearing on November 7, 2017 were the Trustee's fraudulent transfer claims arising from satisfaction of overdrafts. At that time, the Court denied the Trustee's proposed amendments incorporating those claims based solely on the Trustee's failure to satisfy the requirements of Fed. R. Bankr. P. 9023 or 9024.
APPEAL AND DISTRICT COURT RULING
The Trustee appealed the Court's consolidated Dismissal Order, the judgments entered in favor of the Defendants, and the two orders denying the Trustee's motion to reconsider and denying the Trustee's request for permission to file amended *904complaints [ECF No. 71, Adv. Proc. No. 16-01755-EPK; ECF No. 78, Adv. Proc. No. 16-01756-EPK; and ECF No. 60, Adv. Proc. No. 16-01757-EPK].
On appeal, the District Court ruled that this Court had applied an incorrect standard in denying the Trustee's request for permission to file amended complaints [ECF No. 90, Adv. Proc. No. 16-01755-EPK; ECF No. 98, Adv. Proc. No. 16-01756-EPK; and ECF No. 80, Adv. Proc. No. 16-01757-EPK]. Specifically, the District Court ruled that the standard under Fed. R. Bankr. P. 7015 (incorporating Fed. R. Civ. P. 15 ) applies to a request to amend a complaint even after judgment is entered. The District Court remanded the matter to this Court and directed this Court to consider the Trustee's request for permission to file amended complaints under the standard set out by the Supreme Court in Foman v. Davis , 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).5 The District Court did not rule on the other issues raised in the appeal.
ANALYSIS ON REMAND
The Trustee's request for permission to file amended complaints is well presented in the motions originally filed by the Trustee, in which the Trustee argues the same standard required by the District Court on remand, among other arguments [ECF No. 50, Adv. Proc. No. 16-01755-EPK; ECF No. 57, Adv. Proc. No. 16-01756-EPK; and ECF No. 40, Adv. Proc. No. 16-01757-EPK]. The Defendants recently filed notices stating that they do not intend to attempt to appeal the District Court's order remanding this matter and, while they would be willing to file additional briefs if requested by this Court, stating that they believe the record is sufficient for the Court to rule on the Trustee's request for permission to file amended complaints [ECF No. 92, Adv. Proc. No. 16-01755-EPK; ECF No. 100, Adv. Proc. No. 16-01756-EPK; and ECF No. 82, Adv. Proc. No. 16-01757-EPK]. The Court agrees and does not find it necessary to require additional briefing. The Court has carefully reviewed the Trustee's motion and the proposed amended complaints.
Background
Anthony T. Simpson was the Managing Member of Rollaguard and David Tabony was the Chief Financial Officer and Vice President of Rollaguard. Prior to the filing of this chapter 7 case, Mr. Simpson was removed as managing member and resigned all management responsibilities with respect to Rollaguard. Rollaguard was then controlled by a group of independent investors. Mr. Tabony caused Rollaguard to file the chapter 7 petition commencing this case on December 30, 2014.
Mr. Simpson was also the President of Shamrock Jewelers and his spouse, Debra Simpson, was the Vice President of Shamrock Jewelers. Mr. Simpson was the sole member of Shamrock Jewelers Loan & Guarantee, LLC. Shamrock Jewelers and Shamrock Jewelers Loan & Guarantee, LLC are sometimes referred to together as the "Shamrock Entities."
Rollaguard represented itself as a manufacturer of traceable security cases used to transport valuable items, such as jewelry and sensitive documents. Rollaguard, under the control of Mr. Simpson, sought *905investors and raised substantial capital in order to finance the manufacture, marketing, and sale of security cases.6 However, at the time Rollaguard filed its chapter 7 petition, Rollaguard was not engaged in a viable business venture. Indeed, it appears Rollaguard never manufactured a single security case.
Shamrock Jewelers operated a jewelry store in Florida from approximately 1965 to 2015. Shamrock Jewelers also claimed to operate a pawn brokerage business. Mr. Simpson created Shamrock Jewelers Loan & Guarantee, LLC to help facilitate the pawn brokerage business. The pawn brokerage business contemplated a series of pawn-loan transactions where the Shamrock Entities would provide short-term loans to customers in exchange for jewelry. The Shamrock Entities, under the control of Mr. Simpson, raised capital from investors in order to finance the purported pawn brokerage business. However, the Shamrock Entities did not in fact engage in any pawn brokerage. In addition, capital investments raised by Mr. Simpson on behalf of Rollaguard were routinely used by the Shamrock Entities.
Mr. Simpson manipulated Rollaguard and the Shamrock Entities to defraud investors and obtain funds for himself. Prior to filing these adversary proceedings against the Defendants, the Trustee obtained, among other relief, a final default judgment of $2,208,407.60 against Mr. Simpson and his spouse for pre-petition transfers from Rollaguard. ECF No. 70, Adv. Proc. No. 15-01311-EPK. It appears that Mr. Tabony and Ms. Simpson were each without knowledge of any wrongdoing by Mr. Simpson.
The Debtors maintained four bank accounts at TD Bank from December 2010 through November 2013, three bank accounts at PNC Bank from December 2010 through December 2014, and three bank accounts at JPMC Bank from July 2014 through March 2015. During the four-year period before the commencement of this chapter 7 case, the Debtors deposited monies into and withdrew monies from the various bank accounts maintained at TD Bank, PNC Bank, and JPMC Bank.7 Sometimes the Debtors' withdrawals resulted in those accounts becoming overdrawn.8 The Debtors also freely transferred monies between the various accounts maintained at TD Bank, PNC Bank, and JPMC Bank, but always within the respective banking institution.9
*906Each of the subject bank accounts was a typical demand deposit account. There is nothing in the original complaints or the proposed amended complaints that would lead the Court to conclude that the Debtors ever gave up complete autonomy over the various accounts. Indeed, the Trustee makes it clear that the Debtors in fact exercised unfettered discretion with the various accounts, depositing and withdrawing funds, transferring funds, and making payments from the accounts, whenever, in whatever amounts, and however they liked. When this bankruptcy case was filed the Debtors' accounts at the Defendants either had a very small balance or were slightly overdrawn. On the date each Debtor became subject to this case, the Debtors had, in effect, no funds on deposit at TD Bank, PNC Bank, or JPMC Bank. The Debtors had abandoned their banking relationships with TD Bank more than a year prior to the filing of this case and with PNC Bank at the time of the filing of the petition. Shamrock Jewelers' use of accounts at JPMC Bank continued through March 2015, about six months prior to its substantive consolidation with Rollaguard in September 2015. ECF No. 126, Case No. 14-38071-EPK. In other words, the Debtors had used the various accounts for several years and then left them empty, in each case before the relevant Debtor became part of this case.
Counts I and II
As in the original complaints, in counts I and II of the proposed amended complaints the Trustee argues that the Debtors' regular deposits to the various bank accounts maintained at TD Bank, PNC Bank, and JPMC Bank constitute actual fraudulent transfers avoidable under section 548 or under section 544 incorporating Florida law. In other words, the Trustee argues that each time one of the Debtors deposited funds into its own unrestricted accounts at TD Bank, PNC Bank, or JPMC Bank, that deposit constituted a fraudulent transfer to the relevant Defendant that the Trustee may avoid under applicable law. The Trustee seeks a judgment avoiding each such transfer and a money judgment against each of the Defendants.10
In counts I and II of the proposed amended complaints, the Trustee describes a new category of claims arising from the Debtors' repayment or satisfaction of overdrafts in their accounts with the Defendants.11 The Trustee alleges that the Debtors from time to time overdrew their accounts at the Defendants. The Trustee refers to these overdrafts as "Overdraft Loans." The Trustee alleges that the overdrafts were repaid by future deposits or by dishonored transactions and that each of these constitutes an avoidable fraudulent transfer. To some extent, as discussed below, the fraudulent transfer claims relating to satisfaction of overdrafts are legally distinct from the fraudulent transfer claims arising solely from a Debtor's deposit into its own unrestricted bank account.
To prove his fraudulent transfer claims, the Trustee must show that there *907was a fraudulent transfer under section 548 or under section 544 incorporating Florida Statutes § 726.105(1)(a). Among other things, this requires the Trustee to show there was in fact a transfer within the meaning of section 101(54) and Florida law. And then the Trustee must show that each Defendant is a party from whom the Trustee may recover under section 550. "Section 550 allows a trustee to recover the fraudulently transferred property from the initial transferee, the entity for whose benefit the transfer was made, or a subsequent transferee of the initial transferee." In re Chase & Sanborn Corp. , 848 F.2d 1196, 1198 (11th Cir. 1988) (citing 11 U.S.C. § 544(a) ).
Under the actual fraud provision of section 548, the Trustee "may avoid any transfer ... of an interest of the debtor in property," made within two years before the filing of a bankruptcy petition, if the debtor made such transfer "with actual intent to hinder, delay, or defraud" any existing or future creditor. 11 U.S.C. § 548(a)(1)(A). Under section 544(b)(1), the Trustee "may avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by a creditor holding an [allowable] unsecured claim." The Trustee argues that he can avoid the relevant transfers under section 544(b)(1) because they are voidable under Florida law, specifically Florida Statutes § 726.105(1)(a). Under this provision, a transfer made within four years before the filing of a bankruptcy petition is avoidable if the debtor made such transfer "[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor[.]" Fla. Stat. § 726.105(1)(a).
The Trustee's fraudulent transfer claims under section 544(b), incorporating Florida law, are analogous "in form and substance" to their bankruptcy counterparts in section 548(a)(1)"and may be analyzed contemporaneously." Woodard v. Stewart (In re Stewart) , 280 B.R. 268, 273 (Bankr. M.D. Fla. 2001) (citations omitted). "The only material difference between the state and bankruptcy provisions is the favorable four-year look-back period under the Florida law." Kapila v. Suntrust Mortg. (In re Pearlman) , 515 B.R. 887, 894 (Bankr. M.D. Fla. 2014) (citations omitted).
The Debtors' deposits into their own unrestricted bank accounts maintained at the Defendants do not constitute "transfers" within the meaning of that term under section 101(54) or Florida law, and so cannot form the basis for the Trustee's fraudulent transfer claims (other than the claims relating to satisfaction of overdrafts, addressed below). While the Eleventh Circuit has not ruled on this specific issue, Eleventh Circuit case law provides persuasive support for the conclusion that there is no avoidable transfer when a debtor deposits its own funds to its own unrestricted bank account. Numerous other courts, including circuit courts of appeal, have so ruled.
Section 101(54) defines "transfer," in pertinent part, as any "mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with ... property; or ... an interest in property." 11 U.S.C. § 101(54)(D)(i)-(ii). For this purpose, Florida statutes define the term "transfer" in an essentially identical manner: " 'Transfer' means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset[.]" Fla. Stat. § 726.102(14).
Technically, when one makes a deposit with a bank, the bank becomes the owner of the funds. It is presumed that the bank will use the funds to make loans to others. The depositor becomes a creditor *908of the bank. When the depositor seeks to withdraw funds or use them to make a payment via check or other method, the depositor is a creditor of the bank seeking payment from the bank. See Menotte v. United States (In re Custom Contractors, LLC) , 745 F.3d 1342, 1350 (11th Cir. 2014). Recognizing the debtor-creditor relationship between a depositor and a bank, some courts have ruled that the deposit of funds into the debtor's own unrestricted bank account is a "transfer" for purposes of federal and state fraudulent transfer analysis. See, e.g. , Bernard v. Sheaffer (In re Bernard) , 96 F.3d 1279, 1282-83 (9th Cir. 1996) (applying California debtor-creditor law in ruling that a typical bank deposit is a transfer).
On the other hand, the overwhelming majority of courts considering the issue have ruled that the special rights of a depositor vis-a-vis the bank take precedence over the technical legal relationship, at least for purposes of fraudulent transfer analysis. See, e.g. , Ivey v. First Citizens Bank & Trust Co. (In re Whitley) , 848 F.3d 205, 208-10 (4th Cir. 2017), cert. denied , --- U.S. ----, 138 S.Ct. 314, 199 L.Ed.2d 207 (2017) (holding that "when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business, he has not transferred those funds to the bank that operates the account [because] the debtor is still free to access those funds at will"); In re Prescott , 805 F.2d 719, 729 (7th Cir. 1986) (holding that "to the extent a deposit is made into an unrestricted checking account, in the regular course of business and withdrawable at the depositor's will, it is not avoidable by the trustee") (citing Katz v. First Nat'l Bank of Glen Head , 568 F.2d 964, 969 (2d Cir. 1977), cert. denied , 434 U.S. 1069, 98 S.Ct. 1250, 55 L.Ed.2d 771 (1978) ); Katz , 568 F.2d at 969 ("It is well settled that deposits in an unrestricted checking account, made in the regular course of business, do not constitute transfers within the meaning of the Bankruptcy Act.") (citations omitted); Wiand v. Wells Fargo Bank, N.A. , 86 F.Supp.3d 1316, 1327 (M.D. Fla. 2015), aff'd , 677 F. App'x 573 (11th Cir. 2017) (holding that since the principal "was essentially transferring funds to and from himself, he (and the entities he controlled) never disposed of or parted with the 'assets' and therefore no transfers took place."); In re Tonyan Constr. Co. , 28 B.R. 714, 728-29 (Bankr. N.D. Ill. 1983) ("Ordinarily, a deposit in an unrestricted checking account does not constitute a parting with property, because it 'results in substituting for currency, bank notes, checks, drafts, and other bankable items a corresponding credit with the bank, which may be checked against[.]' ") (quoting Citizens' Nat'l Bank of Gastonia, N.C. v. Lineberger , 45 F.2d 522, 527 (4th Cir. 1930) ); In re Perry , 336 F.Supp. 420, 425 (D.S.C. 1972) (ruling that "deposits and subsequent set-offs are not transfers" because they "result in a substitution of credit for various forms of commercial paper or currency" and "are withdrawable at the will of the depositor") (citing Joseph F. Hughes & Co. v. Machen , 164 F.2d 983, 986-87 (4th Cir. 1947) ).
This line of cases recognizes that when a depositor places its own funds in an unrestricted bank account, the depositor is not truly disposing of or parting with the funds as contemplated by the definition of the term "transfer." For all practical purposes, the depositor to a traditional demand deposit account retains complete autonomy over the funds, with the unfettered ability to withdraw them, transfer them to other accounts, use them to write checks, or use them to make wire or other electronic payments. Whitley , 848 F.3d at 209-10 (summarizing cases that hold bank deposits do not constitute transfers *909under section 101(54) ). As is apparent from the proposed amended complaints, the Debtors in fact withdrew, transferred, and paid out from their accounts with the Defendants, in the end leaving the accounts in question empty or overdrawn. If there was any transfer at all in making the deposits, the Debtors were transferring funds to themselves; by making the deposits the Debtors were not disposing of or parting with the funds, and so no avoidable transfers took place. Wiand , 86 F.Supp.3d at 1327-29.
That a deposit into one's own unrestricted bank account is not a transfer under fraudulent transfer law is consistent with decades of case law in this and other circuits analyzing whether a particular defendant is an initial or subsequent transferee of a fraudulent transfer. Section 550(b) provides an important distinction between initial and subsequent transferees. Only a subsequent transferee may take advantage of the value and good faith defense provided in that section. Nearly all of the reported decisions involving fraudulent transfers of money involve payments made by check, wire transfer, or other electronic transfer from a debtor's bank account.12 Obviously, in each such case the debtor's bank account balance resulted from deposits of various kinds. In some cases, the deposit into a debtor's account is followed almost immediately by the debtor transferring funds to another. If the Trustee's view here was correct, then in nearly every case where a debtor made a fraudulent transfer by check drawn on or wire transfer from a bank, the bank would have had to previously receive the funds in question, making the bank the initial transferee, and the recipient of the check or wire transfer would be a subsequent transferee, with the potential benefit of the good faith and for value defense. Yet all of the case law points to the payee of the check or wire transfer as the initial transferee under section 550(a)(1). Indeed, the Court was unable to find a decision in this circuit where the payee on a check or wire transfer was not treated as the initial transferee of the funds. This is because in this context the case law is uniform in the assumption that funds held by a debtor in a demand deposit account are the debtor's funds, a direct asset of the debtor for purposes of fraudulent transfer analysis.
The legislative history of section 101(54), which defines "transfer," states that the term includes "[a] deposit in a bank account or similar account." S. Rep. No. 95-989, at 27 (1987) (the "Senate Report"). Taken out of context, this statement seems to support the conclusion that every deposit into every bank account is a "transfer." But the Senate Report "did not ... distinguish between different types of deposits; it merely articulated the general principle that 'transfer' is meant to encompass an array of transactions." In re Whitley , 848 F.3d at 208. The Senate Report merely provides support for the breadth of the concept of transfer, to include deposits into bank accounts when that act is otherwise within the scope of the term, meaning when it involves disposing of or parting with an interest in property. When a debtor deposits funds into the account of another, or into an account where the debtor's interests are legally transcribed, for example, such a deposit may be a transfer. A debtor's regular deposits into the debtor's own unrestricted bank accounts are not transfers within the meaning of section 101(54) or Fla. Stat. § 726.102(14).
*910In decisions where a debtor's deposit of funds into its own unrestricted bank account is not considered a transfer, courts sometimes refer to the deposits in question as "regular deposits" or deposits made "in the regular course of business." See, e.g. , In re Whitley , 848 F.3d at 210. One might argue that the deposits in this case were made by Mr. Simpson to allow him to perpetuate his fraudulent scheme and so were not "regular." Yet it is apparent from these decisions that the term "regular" refers to typical banking transactions between a bank and its customer and not to the business of the customer itself. For example, in In re Whitley , the funds deposited with the defendant bank resulted from the debtor's Ponzi scheme, but this did not disqualify the deposits from being considered "regular." Id. at 206-07, 210.
The Debtors' deposits into their own unrestricted bank accounts, other than those relating to satisfaction of overdrafts, are not "transfers" that may be subject to avoidance as fraudulent transfers. For this reason alone, such claims have no basis in law and the proposed amendments to those portions of counts I and II would be futile. This is the same legal ruling made by the Court in the Dismissal Order and nothing in the proposed amended complaints has any impact on that ruling. The Court notes that this ruling eliminates the vast majority of the Trustee's fraudulent transfer claims in the proposed amended complaints.
The claims presented in counts I and II of the proposed amended complaints, other than claims relating to satisfaction of overdrafts, also fail because the Defendants are not transferees of the deposited funds within the meaning of the relevant statutes. The Defendants lacked control over the deposited funds, making the Defendants "mere conduits" under Eleventh Circuit precedent. See Martinez v. Hutton (In re Harwell) , 628 F.3d 1312 (11th Cir. 2010). Thus, even if the Debtors' deposits to their own unrestricted bank accounts could be considered transfers for purposes of fraudulent transfer analysis, the Defendants are not transferees from whom the Trustee may recover.
Section 550(a)(1) provides that, to the extent a transfer is avoided under sections 548 or 544, "the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from[,]" among others, "the initial transferee of such transfer." Neither the Bankruptcy Code nor its legislative history define the term "transferee." In re Harwell , 628 F.3d at 1317 (citing Bonded Fin. Servs., Inc. v. European Am. Bank , 838 F.2d 890, 893 (7th Cir. 1988) ). As the Eleventh Circuit has explained, "[t]he term 'initial transferee' is a term of art whose meaning in any given transaction is not always straightforward." Andreini & Co. v. Pony Express Delivery Servs., Inc. (In re Pony Express Delivery Servs., Inc.) , 440 F.3d 1296, 1300 (11th Cir. 2006).
"A 'literal or rigid interpretation' of the term [initial transferee] leads to the conclusion that 'the first recipient of the debtor's fraudulently-transferred funds is an initial transferee.' " In re Custom Contractors, LLC , 745 F.3d at 1349 (quoting In re Harwell , 628 F.3d at 1322 ). "Recognizing the inequity that would result if every initial recipient of fraudulently-transferred funds could be forced, as an initial transferee, to return the funds to the bankrupt's estate, [the Eleventh Circuit] crafted an exception-grounded in the equitable powers of the bankruptcy court-known as the 'mere conduit or control test.' " Id. The hallmark of the mere conduit or control test is the recognition that certain recipients of a debtor's assets cannot legally exercise control over those *911assets-can never legally use the assets for their own benefit-and so should not be held responsible for merely holding and/or disposing of the assets for the benefit of the debtor or another. See In re Harwell , 628 F.3d at 1317-24 (reviewing the development of the mere conduit or control test). This defense, which is "based on, and defined by, equity," requires the Court to take "a flexible, pragmatic, equitable approach," considering a transaction in its entirety, rather than focusing in on the particular transfer in question. Id. at 1322.
A debtor's own bank, where the debtor maintains its demand deposit accounts, is nearly always a conduit that cannot be held liable under section 550. As discussed above, when one deposits funds into a typical demand deposit account, the bank technically becomes the owner of the funds. The bank may use the funds to make loans to others. The depositor is a creditor of the bank, with the right to demand immediate repayment at any time. See In re Custom Contractors, LLC , 745 F.3d at 1350. But the bank-depositor relationship is not a typical debtor-creditor relationship. The Eleventh Circuit has repeatedly pointed to the depository bank as the ultimate example of a conduit for purposes of transferee analysis. For example, the Eleventh Circuit recently stated, "[o]ur case law ... stands for the proposition that, when a bank receives funds in the form of a deposit, the attendant obligations owed to the transferor-namely to return the funds upon request-are sufficiently important that we will not hold the bank liable as an initial transferee in spite of the significant control it exercises over the funds." Id. (citing In re Chase & Sanborn Corp. , 848 F.2d at 1200-02 ); cf. In re Harwell , 628 F.3d at 1324 ("In the vast majority of cases, a client's settlement funds transferred in and out of a lawyer's trust account will be just like bank transfers, and lawyers as intermediaries will be entitled to mere conduit status because they lack control over the funds. Mere conduits, such as lawyers and banks, do not have an affirmative duty to investigate the underlying actions or intentions of the transferor."). Following this Eleventh Circuit precedent, the Sixth Circuit ruled that a bank will not be held liable as an initial transferee because the bank does not gain dominion and control over a debtor's deposits by virtue of the bank being the debtor's depository bank. Meoli v. Huntington Nat'l Bank , 848 F.3d 716, 725-28 (6th Cir. 2017). Courts in this circuit have regularly applied this concept. See, e.g. , Super Vision Int'l, Inc., v. Mega Int'l Commercial Bank Co. , 534 F.Supp.2d 1326, 1344 (S.D. Fla. 2008), aff'd , No. 08-15031, 2009 WL 1028034, 2009 U.S. App. LEXIS 8089 (11th Cir. 2009) (granting motion to dismiss a fraudulent transfer claim against a bank which was alleged to have accepted the debtor's transfers of funds into accounts owned by the debtor at the bank) (citing In re Chase & Sanborn Corp. , 848 F.2d at 1200 ); In re Colombian Coffee Co. , 75 B.R. 177, 179 (S.D. Fla. 1987) ("[I]t would be both problematical and preposterous were courts to" find a depository bank a transferee under federal bankruptcy law when the bank "possessed no discretion with respect to the disposition of the funds - it was constrained to follow the debtor's instructions.").
To establish the mere conduit defense, a defendant must show both that it did not have legal control over the assets that it received and that the defendant "acted in good faith and as an innocent participant in the fraudulent transfer." In re Harwell , 628 F.3d at 1323. The context of Harwell is instructive. The defendant was the debtor's former counsel. Id. at 1314. In anticipation of collection attempts on a judgment entered in another state, *912the debtor transferred, or caused to be transferred, a substantial sum to his counsel, who placed it in his attorney trust account. Id. The defendant (former counsel) then assisted the debtor in avoiding paying the substantial judgment by making distributions from the trust account to the debtor and others at the debtor's direction. Id. at 1314-15. In ruling on a motion for summary judgment, the bankruptcy court assumed that the defendant was the mastermind of the debtor's scheme to defraud the judgment creditor, but determined that under prevailing Eleventh Circuit precedent the defendant lacked legal control over the funds and could not be held liable as a transferee. Id. at 1316, 1323. The Eleventh Circuit focused on the obvious lack of good faith of the defendant, which was assumed by the bankruptcy court for purposes of the ruling. Id. at 1324. The Eleventh Circuit stated that the mere conduit or control defense required the defendant to prove that it lacked control over the asset and also that it acted in good faith in receiving the asset. Id. at 1323-24. The Eleventh Circuit remanded the matter for the bankruptcy court to consider both whether the defendant had legal control over the funds in his attorney trust account and whether he acted in good faith in receiving them. Id. at 1324. The Court notes that in Harwell there was in fact a transfer as the debtor gave his funds to his counsel who placed them in counsel's attorney trust account, held in counsel's name. Id. at 1314-15. In addition, unlike in this case, it was fairly obvious that the defendant (debtor's former counsel) had received the funds in question as part of a coordinated scheme to assist the debtor in defrauding a particular creditor. Id.
The mere conduit defense is an affirmative defense to fraudulent transfer liability. Mukamal v. BMO Harris Bank N.A. (In re Palm Beach Fin. Partners, L.P.) , 488 B.R. 758, 769 (Bankr. S.D. Fla. 2013) (citing Perlman v. Bank of Am., N.A. , 2012 WL 1886617, at *2, 2012 U.S. Dist. LEXIS 71663 at *5 (S.D. Fla. 2012) ); Perlman v. Bank of Am., N.A. , 561 F. App'x 810, 813 (11th Cir. 2014) ("[T]he 'mere conduit' theory must be affirmatively proved by the one seeking to obtain its protection."). It is not necessary for a complaint to anticipate defenses. In re Palm Beach Fin. Partners, L.P. , 488 B.R. at 771. For this reason, it is generally not proper to dismiss a complaint because it fails to negate an affirmative defense. Id.
On the other hand, a court may consider an affirmative defense at the pleading stage "when the complaint affirmatively and clearly shows the conclusive applicability of the defense to bar the action." Jackson v. BellSouth Telecomms. , 372 F.3d 1250, 1277 (11th Cir. 2004) (quotations omitted); Bingham v. Thomas , 654 F.3d 1171, 1175 (11th Cir. 2011) (citations omitted). In this case, the Trustee had ample reason to challenge the Defendants' good faith. As discussed below, the Trustee claims that the Defendants aided and abetted Mr. Simpson's wrongful acts. The Trustee had the incentive to paint as bleak a picture as possible of the Defendants' knowledge and actions. Before the Trustee filed his motion seeking permission to file amended complaints, the Trustee had the benefit of this Court's Dismissal Order which stated these same things. And so, with new text in the proposed amended complaints, the Trustee explicitly attempts to negate the Defendant's good faith.
While the Trustee included some additional relevant language in the proposed amended complaints compared to the Trustee's original complaints, the Trustee's overall presentation on this issue remains the same. The Trustee alleges that there were circumstances that should *913have lead the Defendants to investigate the Debtors and, had they done so, the Defendants would have discovered Mr. Simpson's illegal scheme. In effect, the Trustee argues that the Defendants were on inquiry notice of Mr. Simpson's fraud and thus did not receive the deposits in good faith. However, as the Eleventh Circuit has repeatedly confirmed, under Florida law the Defendants had no duty to investigate transactions involving the Debtors' own demand deposit accounts. Perlman v. Wells Fargo Bank, N.A. , 559 F. App'x 988, 993 (11th Cir. 2014) (citations omitted); Lawrence v. Bank of Am., N.A. , 455 F. App'x 904, 907 (11th Cir. 2012) (citations omitted). "Mere conduits, such as lawyers and banks, do not have an affirmative duty to investigate the underlying actions or intentions of the transferor." In re Harwell , 628 F.3d at 1324. If this Court were to rule that anything less than actual notice of Mr. Simpson's fraudulent scheme is sufficient to negate the good faith of the Defendants, this would be tantamount to requiring them to have investigated their depository clients, a burden inconsistent with applicable law.
When the fraudulent transfer defendant is a banking institution that conducts routine banking services and the transfer in question is a deposit into the debtor's own demand deposit account, lack of good faith may only be proven by showing that the defendant had actual knowledge that the debtor was acting in an illegal manner. In the proposed amended complaints, among other similar allegations, the Trustee alleges that the Defendants knew that Rollaguard was a startup company, the Defendants knew that Rollaguard was obtaining all of its revenue from investors, the Defendants knew that Mr. Simpson controlled both Rollaguard and Shamrock Jewelers and that these were separate entities, and the Defendants allowed Mr. Simpson to transfer funds among the accounts at each Defendant at will. Elsewhere in the proposed amended complaints,13 the Trustee alleges that Mr. Simpson caused the Debtors to violate various banking laws and regulations and that the Defendants knew or should have known this. But even if all of the allegations in the proposed amended complaints are proven, the Court would not be convinced that any of the Defendants actually knew that Mr. Simpson was operating a fraudulent scheme through the Debtors. Mr. Simpson initiated a large number of transactions in the Debtors' accounts involving large sums of money. Mr. Simpson caused the Debtors to routinely overdraw their accounts and to have insufficient funds to cover payments. Mr. Simpson transferred funds, after they were deposited in the accounts, to a variety of entities *914including between the Debtors and to himself, in the end leaving the accounts empty or overdrawn. Mr. Simpson caused the Debtors to structure transactions likely in an effort to avoid reporting requirements. Some of the Defendants knew that Mr. Simpson had written checks on the Debtors' accounts and asked the payees not to deposit them as the Debtors did not have sufficient funds. Some of these things may have violated applicable banking laws and regulations. Certain of the Defendants found it appropriate to monitor the Debtors' transactions. It is not surprising that the Defendants maintained documents recording the Debtors' insufficient funds transactions, overdrafts and the like, sent the Debtors numerous notices regarding these events, and even met with Mr. Simpson on occasion to question these practices without learning more. Mr. Simpson was a difficult client and caused headaches for the Defendants. Some of the Defendants may have considered terminating their banking relationship with the Debtors but did not do so. But these allegations, if proven, do not mean that any of the Defendants actually knew that Mr. Simpson was defrauding others.
In each proposed amended complaint, the Trustee added a few allegations tailored to the specific Defendant that the Trustee suggests indicate actual knowledge on the part of the relevant Defendant. In paragraphs 36 and 47(g) of the proposed amended complaint against PNC Bank, the Trustee alleges that PNC Bank had actual knowledge that Mr. Simpson was defrauding investors because a bank manager learned that Mr. Simpson had "produced fraudulent letters purporting to confirm available bank balances" and an investor sought confirmation of the bank balances from PNC Bank. Yet there is no specific information in these paragraphs from which one could ascertain the materiality of the bank balance discrepancy. It is quite a jump in logic to go from the fact that Mr. Simpson provided bank balances to an investor that proved to be inaccurate to the conclusion that Mr. Simpson is involved in a fraud. Similarly, in paragraph 47(e) of that same proposed amended complaint, the Trustee alleges that PNC Bank had learned that Mr. Simpson had provided "one false wire confirmation number ... in order to hinder, delay, or defraud" a creditor. All we know from this allegation is that Mr. Simpson gave a wire confirmation number to someone that was not correct. There is nothing in that paragraph or elsewhere in the proposed amended complaint that would lead anyone to conclude that providing an incorrect wire transfer confirmation number was indicative of fraud. In paragraph 47(f) of that same proposed amended complaint, the Trustee alleges that PNC Bank knew Mr. Simpson "was pledging funds to third parties ... that were not available on deposit" and that a bank officer stated that he or she was " 'very comfortable' with this arrangement." In support of the Trustee's request to file the proposed amended complaints, the Trustee filed all of the discovery that the Trustee argued supported the amendments to the complaints and the Court reviewed those documents in preparation for the hearing on November 7, 2017. Among the documents the Trustee obtained from PNC Bank is an internal memo dated February 6, 2014. That memo reads as follows: "Comment: client indicated a wire was on its way for $15,000. As of 12:20, I am still waiting on a trace number to confirm the incoming wire. As the business banker, I am very comfortable with the owner and the business. I recommend paying this item." The text of paragraph 47(f) of the proposed amended complaint would lead one to conclude that a banker at PNC Bank had expressed he was "very comfortable" with an ongoing practice of *915Mr. Simpson causing the Debtors to initiate payments for which they did not have sufficient funds. But a review of the memo behind this allegation indicates that the banker was stating his personal comfort with regard to Mr. Simpson and his business and, based on that view, recommending payment of a particular item. Contrary to the Trustee's suggestion, the actual underlying document supports the conclusion that PNC Bank did not in fact have actual knowledge that Mr. Simpson was involved in a fraud.14 In paragraphs 33 and 46(h) of the proposed amended complaint against Chase Bank, the Trustee alleges that Chase Bank had actual knowledge that investor funds were flowing into and out of Debtor accounts and that the funds were being used for "non-business purposes, including to fund Simpson's personal expenses." In paragraph 37 of the proposed amended complaint against TD Bank, the Trustee alleges that the bank permitted "the withdrawal for improper purposes of hundreds of thousands of dollars of funds that TD Bank knew at the time belonged to Rollaguard investors. TD Bank sanctioned and enabled this conduct despite the fact that it had already determined that Simpson was using his relationship with TD Bank for fraudulent purposes." These are conclusory statements. There are no specific allegations to support them. It is necessary in cases such as this to support such statements with allegations to support the conclusion that the defendant had relevant knowledge of the debtor's business enterprise and then provide actual examples of how funds were used, to support the contention that they were used for purposes inconsistent with the debtor's business enterprise. The proposed amended complaints provide none of this. These new allegations do not change the Court's view that the proposed amended complaints fail to provide adequate, plausible allegations to support lack of good faith on behalf of any of the Defendants.
Although the conduit defense is an equitable doctrine developed over decades, it is only relatively recently that the Eleventh Circuit explicitly ruled that the conduit defense involves an affirmative good faith requirement, in a case involving a stark instance of bad faith as the defendant was in fact conspiring with the debtor to defraud a particular creditor. In re Harwell , 628 F.3d at 1323-24. Since that decision, there has been scant case law addressing the nature of the good faith required to support the conduit defense. In light of the Eleventh Circuit's consistent rulings on the scope of duties of depository banks in this context, cited above, a depository bank should not be held to a standard less than actual knowledge.
Yet even if the Defendants here were held to an inquiry notice standard, the proposed amended complaints would not be sufficient. The Court must look behind the Trustee's bald statements that the Defendants knew Mr. Simpson was committing fraud, converting investor funds to his own ends, and breaching his fiduciary duties to the Debtors, to the underlying factual allegations from which the Trustee asks the Court to make those conclusions. There must be a nexus between those underlying factual allegations and the Debtors' fraudulent purpose such that the Defendants would reasonably be expected to connect what they know with the conclusion that the Debtors were acting in a *916wrongful manner. But the Trustee's allegations in this case amount to a game of six degrees of separation. Mr. Simpson caused the Debtors to enter into many transactions, involving funds flowing into and out of their accounts with the Defendants. Mr. Simpson regularly caused the Debtors to overdraw their accounts and to issue payments for which there were insufficient funds. Mr. Simpson corralled funds from several accounts to make certain payments. Mr. Simpson sometimes made multiple payments in smaller amounts possibly in an effort to avoid reporting requirements. In short, Mr. Simpson was a troublesome client for the Defendants. The activity in the Debtors' accounts required the Defendants to monitor those accounts more closely and to send the Debtors numerous official notices. The Defendants met with Mr. Simpson in an attempt to stem the number of transactions that required extra involvement from the bank. The Trustee paints these facts with dramatic language, but the foregoing summary is an objective overview of the facts presented in the proposed amended complaints. From these allegations, the Trustee asks the Court to conclude that the Defendants should have known that Mr. Simpson was a fraudster who was taking money for his own benefit. Yet there is nothing in the proposed amended complaints that would even suggest that the Defendants knew anything about the actual activities of the Debtors, their agreements with parties from whom they received payment, or their relative corporate relationships. The Trustee baldly alleges only that the Defendants knew that Rollaguard received its income from investments, that the Defendants knew that the Debtors were separate corporate entities, and that the Defendants knew that the Debtors shuffled funds amongst themselves apparently to avoid reporting requirements. From this, the Trustee argues that the Defendants should have investigated further and, if they had done so, would have discovered Mr. Simpson's fraud, shut down the Debtors' accounts, and saved the Debtors' creditors from harm. Based on the actual allegations in the proposed amended complaints, this would be a huge leap. Would the Defendants have been better off if they terminated their relationships with the Debtors and sent the Debtors elsewhere? It certainly looks like that was the case as Mr. Simpson's banking practices were obviously a distraction and, in spite of the Trustee's blanket allegations otherwise, it seems unlikely the benefit the Defendants received in overdraft fees and the like was worth the time and effort. But, based on the actual allegations in the proposed amended complaints, were the Defendants under any duty to question Mr. Simpson's motives or good faith with regard to anyone other than the Defendants themselves? Even if the concept of inquiry notice applies to these Defendants, and to do so would violate established law with regard to the duties of depository banks, the answer is no.
Taking as proven all of the allegations in the proposed amended complaints, the Defendants acted in good faith in receiving the Debtors' deposits into their own bank accounts. The accounts in question were routine demand deposit accounts. The Debtors maintained complete autonomy over those accounts. The Defendants initiated all transactions at the request of the person with authority to direct them. In light of these facts, other than in connection with claims relating to satisfaction of overdrafts, none of the Defendants are "transferees" from whom the Trustee may seek judgment under section 550. Those claims presented in counts I and II of the amended complaints based on the Debtors' deposits into their own unrestricted bank *917accounts (excluding claims relating to satisfaction of overdrafts) have no basis in law and the proposed amendments to those portions of counts I and II would be futile for this additional and separate reason. This is the same legal ruling made by the Court in the Dismissal Order and nothing in the proposed amended complaints would cause the Court to change that ruling. The Court notes that this ruling, by itself, also eliminates the vast majority of the Trustee's fraudulent transfer claims.
To be clear, those portions of counts I and II of the amended complaints expressing claims related to satisfaction of overdrafts, as discussed in more detail below, do not present the same concerns with regard to the "transfer" and "transferee" requirements of applicable law. When a bank permits a customer to overdraw its account, the bank is making a loan to the customer. When the bank customer satisfies that overdraft by making a deposit to the account, the customer is repaying credit made available by the bank. The satisfaction of an actual bank overdraft is a potentially avoidable transfer. In that instance, the bank is a transferee under applicable law as it is receiving the repayment for the bank's own account.15
But all of the Trustee's fraudulent transfer claims in counts I and II of the proposed amended complaints, including both those arising solely from the Debtors' deposits into their own unrestricted bank accounts as well as those arising from satisfaction of overdrafts, suffer from a fatal shortcoming. In order to prove these claims, the Trustee must show that the alleged transfers were made with actual intent to hinder, delay, or defraud creditors. The proposed amended complaints do not contain sufficient allegations to plausibly support the conclusion that the Debtors deposited their own funds into their own unrestricted bank accounts or satisfied their own overdrafts with the intent to hinder, delay, or defraud creditors, as required by the relevant statutes.
Because actual intent to hinder, delay, or defraud is difficult to prove, courts look to the totality of the circumstances surrounding the allegedly fraudulent transfer, and this often involves analyzing the traditional badges of fraud. Dev. Specialists, Inc. v. Hamilton Bank, N.A. (In re Model Imperial, Inc.) , 250 B.R. 776, 791 (Bankr. S.D. Fla. 2000) (citing Dionne v. Keating (In re XYZ Options, Inc.) , 154 F.3d 1262, 1271-72 (11th Cir. 1998) ). The commonly listed badges of fraud include: (1) the transfer was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer was not disclosed or was concealed; (4) before the transfer was made the debtor had been sued or threatened with suit; (5) the transfer was of substantially all of the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred; (9) the debtor was *918insolvent 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. (citing In re XYZ Options, Inc. , 154 F.3d at 1271-72 ).16 But the traditional badges of fraud are not the sole indicators of actual fraudulent intent. The traditional badges of fraud represent examples of indicators of actual fraudulent intent, culled from decades of case law. They are intended to be guideposts-as opposed to ineluctable factors-in a court's analysis of the totality of the circumstances to determine whether a transfer was made with actual fraudulent intent. That the proposed amended complaints here do not rely exclusively on the traditional badges of fraud is not fatal. Instead, the Court must look to the factual allegations in the proposed amended complaints to determine whether, if proven, they would support a finding of actual intent to hinder, delay, or defraud.
Before the Court engages in a review of the allegations in the proposed amended complaints intended to support a finding of actual intent to defraud, it is useful to consider what needs to be proven in this regard. In prosecuting a fraudulent transfer claim based on actual intent, it is typically not sufficient to show that the debtor intended to defraud someone and the debtor also made a transfer. Just because a debtor is involved in a fraudulent scheme does not mean that every transfer made by that debtor is made with fraudulent intent.17 In order to prosecute a claim based on actual intent to hinder, delay, or defraud a creditor, the plaintiff must show that the alleged fraudulent intent is related to the transfers sought to be avoided. Bakst v. Bank Leumi, USA (In re D.I.T., Inc.) , 561 B.R. 793, 803 (Bankr. S.D. Fla. 2016) (citing Sharp Int'l Corp. v. State St. Bank & Trust Co. (In re Sharp Int'l Corp.) , 403 F.3d 43, 56-57 (2d Cir. 2005) ).
The most common example is when a debtor transfers assets to an insider, for no consideration, when the debtor is involved *919in significant litigation or is being pursued by creditors, for the obvious purpose of placing assets beyond the reach of creditors. In such a case, the transfer achieves the debtor's fraudulent end.
Id. In the present case, the transfers at issue are the Debtors' deposits into their own bank accounts maintained at the Defendants and the Debtors' satisfaction of overdrafts in those same accounts. The proposed amended complaints must include allegations of fact which, if proven, show that the Debtors had fraudulent intent in taking those specific actions.
The Trustee alleges that Mr. Simpson regularly caused Rollaguard to transfer money to the Shamrock Entities, thereby placing such funds out of the reach of Rollaguard's creditors and using such funds for Mr. Simpson's personal benefit. But these and similar allegations focus on what happened to the funds after they were in Rollaguard's accounts, not on Rollaguard's deposits into those accounts or Rollaguard's satisfaction of overdrafts in those accounts, the alleged transfers at issue here. That Rollaguard, acting through Mr. Simpson, had fraudulent intent in transferring funds out of its bank accounts maintained at the Defendants is not probative on the issue of whether Rollaguard had fraudulent intent when it deposited funds into its own bank accounts or satisfied overdrafts in those accounts.
The Trustee alleges that the Debtors removed property from the reach of their creditors by depositing monies in their own bank accounts and by satisfying their own overdrafts. Let us focus on the actual transfers alleged in this case. The transfers at issue in the proposed amended complaints do not involve any Debtor depositing its funds into an account owned by another Debtor or satisfying the overdrafts of another Debtor. The "transfers" in question are each Debtor's deposits into its own bank accounts and each Debtor's satisfaction of its own overdrafts. These activities, by themselves, did not remove funds from the reach of any Debtor's creditors.18 The Debtors transferred and otherwise used the funds after they had been deposited, but those later transfers are not at issue in the fraudulent transfer claims here.
The Trustee alleges that Mr. Simpson was causing the Debtors to engage in various fraudulent or deceptive schemes at the time of the deposits and satisfaction of overdrafts that the Trustee is attempting to avoid in these cases. The Trustee states that it was necessary for Mr. Simpson and the Debtors to have bank accounts in order to effectuate Mr. Simpson's fraudulent scheme, and so the Trustee alleges that each time the Debtors deposited funds into their own bank accounts or satisfied their own overdrafts those acts were imbued with the bad intent of Mr. Simpson and the Debtors. But this argument goes too far. Nearly every fraudulent scheme, from complex Ponzi schemes to the most straightforward bait and switch, involves the use of a bank account, a brokerage account, or some other financial accommodation. To suggest that a fraudster's mere use of a bank or financial institution as an intermediary to accomplish the fraud means that each transaction with the intermediary is also tainted with fraudulent intent is to make the bank or other financial intermediary a target for the debtor's creditors, even where the bank or other *920financial intermediary has no knowledge of the fraud. The more well-reasoned case law does not support this leap. See Perkins v. Lehman Bros. (In re Int'l Mgmt. Assoc.'s, LLC) , 563 B.R. 393, 414-19 (Bankr. N.D. Ga. 2017). That the Debtors, through Mr. Simpson, were obtaining investments they never intended to repay, and moving funds among themselves and for the benefit of Mr. Simpson, does not mean that when they put their own funds in their own bank accounts, or satisfied their own overdrafts, that those actions were taken with actual intent to hinder, delay, or defraud creditors. In other words, there is no connection between the alleged transfers at issue here and the Debtors' collective intent, acting through Mr. Simpson, to fraudulently obtain investments they did not intend to return.
The Trustee alleges that the Debtors were not paying their debts as they became due. This allegation is sometimes helpful to support the conclusion that a failing debtor made a transfer with the intent to place the asset out of view of the debtor's creditor body generally. In this case, the allegation lends nothing to the question of whether the Debtors' deposits into their own unrestricted bank accounts or satisfaction of their own overdrafts were done with fraudulent intent. As discussed above, those acts had no material impact on the Debtors' ability to pay creditors and are not in themselves stained with bad intent.
The proposed amended complaints do not contain sufficient allegations that, if proven, would plausibly support the conclusion that the Debtors deposited their own funds into their own unrestricted bank accounts or satisfied their own overdrafts with the intent to hinder, delay, or defraud creditors, as required by the relevant statutes. None of the Trustee's claims set out in counts I and II of the proposed amended complaints state claims under applicable law and thus the proposed amendments would be futile. With regard to most of the Trustee's actual fraud claims, excluding only those relating to satisfaction of overdrafts, this is the same ruling the Court made in its original Dismissal Order. Here, the Court extends that ruling to those portions of counts I and II relating to satisfaction of overdrafts. Nothing in the proposed amended complaints would cause the Court to change that ruling. The Court notes that this ruling eliminates all the Trustee's fraudulent transfer claims.
In summary, the proposed amendments to counts I and II would be futile for the following reasons. With regard to those claims based on the Debtors' deposits into their own unrestricted bank accounts and which deposits are not alleged to constitute satisfaction of overdrafts in the relevant account (a) the deposits are not transfers subject to avoidance under applicable law, and (b) the Defendants are not transferees of such deposits from whom the Trustee may recover under applicable law. Each of these reasons is by itself sufficient to deny amendment with regard to such claims. With regard to all claims presented in counts I and II, including those arising from the satisfaction of overdrafts as well as those arising solely from the Debtors' deposits into their own unrestricted bank accounts, the proposed amended complaints lack specific allegations to support the Trustee's claims that the alleged transfers were made with actual intent to hinder, delay, or defraud creditors. This is a separate reason to deny amendment to counts I and II with regard to claims arising from deposits, and is also a reason to deny amendment to counts I and II with regard to claims arising from satisfaction of overdrafts. None of the claims stated in counts I and II of the proposed amended complaints meet the standard for amendment *921under Fed. R. Bankr. P. 7015 as set out in Foman v. Davis .
Counts III, IV, VI and VII
As in the original complaints, in counts III and IV of the proposed amended complaints the Trustee argues that the Defendants had actual and/or constructive knowledge of Mr. Simpson's suspicious activity, that they rendered substantial assistance to Mr. Simpson by violating federal banking regulations and banking norms, and that the Defendants are therefore liable for aiding and abetting Mr. Simpson's conversions of investor funds. The Trustee seeks a money judgment against each of the Defendants.
Counts VI and VII in the proposed amended complaints are new. In counts VI and VII, the Trustee argues that the Defendants had actual and/or constructive knowledge of Mr. Simpson's breach of his fiduciary duties to the Debtors, that they rendered substantial assistance to Mr. Simpson by allowing the Debtors' bank accounts to remain open and by permitting Mr. Simpson to cause the Debtors to make allegedly atypical transactions in those accounts and otherwise by providing Mr. Simpson an "unregulated platform" to effectuate his schemes, and that the Defendants are therefore liable for aiding and abetting Mr. Simpson's breach of fiduciary duties to the Debtors. The Trustee seeks a money judgment against each of the Defendants.
In support of the claims in counts III, IV, VI and VII, the Trustee maintains that the Defendants disregarded federal banking regulations thereby allowing Mr. Simpson to use the Debtors' bank accounts to take funds for himself at the expense of the Debtors' creditors. For example, the Trustee alleges that, during the respective banking relationships, the Defendants failed to respond properly when Mr. Simpson purchased cashier checks where the "remitter" was a different person or entity from the owner of the bank account. The Trustee alleges that some of the Defendants failed to respond properly to Mr. Simpson's purchasing of cashier checks using monies from multiple bank accounts, or withdrawing monies from one bank account and consecutively depositing those monies in another account, in order to purchase cashier checks. The Trustee maintains that, under these circumstances, the Defendants improvidently sold cashier checks to Mr. Simpson at the expense of the Debtors' creditors, because the Defendants should have known that the recipients would be misled as to the source of the payments.19 In this vein, the Trustee also points to the fact that the Defendants permitted Mr. Simpson to overdraw the Debtors' bank accounts repeatedly during the four-year period prior to the commencement of this chapter 7 case. In addition to these common allegations, the Trustee makes a handful of allegations specific to the separate Defendants, which the Court has addressed above in connection with the analysis of the conduit defense.20
*922The Trustee argues that these facts, accompanied by the magnitude and number of the deposits and withdrawals, put the Defendants on actual and/or constructive notice (a) that Mr. Simpson was converting monies from the Debtors' bank accounts for an improper purpose or for his own personal use and (b) that Mr. Simpson was breaching his fiduciary duties to the Debtors.
Under Florida law, to state a claim for aiding and abetting, a plaintiff must allege: "(1) an underlying violation on the part of the primary wrongdoer; (2) knowledge of the underlying violation by the alleged aider and abetter; and (3) the rendering of substantial assistance in committing the wrongdoing by the alleged aider and abettor." Lawrence , 455 F. App'x at 906-07 (citing AmeriFirst Bank v. Bomar , 757 F.Supp. 1365, 1380 (S.D. Fla. 1991) ; ZP No. 54 Ltd. P'ship v. Fid. & Deposit Co. of Md. , 917 So.2d 368, 372 (Fla. 5th DCA 2005) ). There appears to be no dispute that underlying violations exist. Mr. Simpson misappropriated funds from the Debtors for his own personal use and other improper uses. The Court focuses on the latter two elements.
"[W]hen a claim of aiding and abetting is asserted against a bank, the second element-knowledge-will only be satisfied if the plaintiff pleads facts demonstrating that the bank had 'actual knowledge' of the wrongdoings." Perlman , 559 F. App'x at 993 (citing Lawrence , 455 F. App'x at 907 ). "And while actual knowledge may be shown by circumstantial evidence, the circumstantial evidence must demonstrate that the aider and abettor actually knew of the underlying wrongs committed." Id. (citing Wiand v. Wells Fargo Bank, N.A. , 938 F.Supp.2d 1238, 1244 (M.D. Fla. 2013) ). Importantly, in the context of aiding and abetting claims against banks, Florida law does not require banks to investigate their customers' transactions. Lawrence , 455 F. App'x at 907 (citing Home Fed. Sav. & Loan Ass'n of Hollywood v. Emile , 216 So.2d 443, 446 (Fla. 1968) ); O'Halloran v. First Union Nat'l Bank of Fla. , 350 F.3d 1197, 1205 (11th Cir. 2003) (finding that banks have the "right to assume that individuals who have the legal authority to handle the entity's accounts do not misuse the entity's funds").
The allegations in the proposed amended complaints, if proven, would not raise a plausible inference that any of the Defendants actually knew Mr. Simpson was engaged in conversion or breach of fiduciary duty. Some of Mr. Simpson's actions were suspicious. But mere suspicion is not sufficient to trigger any obligation by the Defendants to investigate. Lawrence , 455 F. App'x at 907 ; Perlman , 559 F. App'x at 993-94. Since the proposed amended complaints fail to plead sufficient facts to support a plausible inference that the Defendants had actual knowledge of Mr. Simpson's wrongful acts, the proposed amendments in counts III, IV, VI and VII would be futile. This is the same ruling the Court made in the Dismissal Order with regard to the claims presented in counts III and IV of the original complaints and nothing in the proposed amended complaints would cause the Court to change its ruling. While the Trustee has added some additional language in the proposed amended complaints, most of these allegations *923are simply more of the types that the Court found wanting in the Dismissal Order. To the extent there are new, specific allegations aimed at individual Defendants, these are conclusory in nature and are not supported by concrete allegations, as discussed more fully in the Court's analysis of the conduit defense. The Trustee relies on all of these same allegations to support the knowledge element of its claims in new counts VI and VII and so the same analysis applies to those new claims. This ruling alone is sufficient to deny amendment to counts III, IV, VI and VII. None of the claims stated in counts III, IV, VI and VII of the proposed amended complaints meet the standard for amendment under Fed. R. Bankr. P. 7015 as set out in Foman v. Davis .
Likewise, counts III, IV, VI and VII do not contain sufficient allegations to plausibly support the inference that the Defendants rendered substantial assistance to Mr. Simpson's conversions or breach of fiduciary duties. "Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur." Hsi Chang v. JPMorgan Chase Bank, N.A. , 845 F.3d 1087, 1098 (11th Cir. 2017) (quoting Lerner v. Fleet Bank, N.A. , 459 F.3d 273, 295 (2nd Cir. 2006) ). "Mere inaction 'constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff.' " Id. (quoting Lerner , 459 F.3d at 295 ). There is nothing in the proposed amended complaint that would lead the Court to believe that any of the Defendants affirmatively assisted or concealed Mr. Simpson's wrongful acts. The Trustee's claims are based on alleged failures to act by the Defendants. In this case, the Trustee is the stand-in for the Debtors, so the Trustee must show that the Defendants had a duty to the Debtors that they failed to satisfy. The Trustee has not plead sufficient facts to show that any of the Defendants owed any duty to the Debtors, fiduciary or otherwise, other than the duty to complete banking transactions as directed by the Debtors' authorized agent, which duty they faithfully complied with. As discussed below in connection with count V, the Defendants' duties arising under the banking regulations and customary banking practices pointed to by the Trustee are not duties for the benefit of the Debtors. Nor do the Trustee's allegations support the conclusion that any of the Defendants breached any duty whatsoever relevant to this case. "Red flags" and mere suspicions are insufficient to trigger any obligation by the Defendants to investigate. Lawrence , 455 F. App'x at 907 ; Perlman , 559 F. App'x at 993-94. Such "red flags" or suspicions are not sufficient to elevate the Defendants' alleged inactions into the realm of "substantial assistance." Since the proposed amended complaints do not plead sufficient facts to plausibly support the inference that any of the Defendants rendered substantial assistance to Mr. Simpson's conversions or breach of fiduciary duties, the proposed amendments to counts III, IV, VI and VII would be futile. This is substantially the same ruling the Court made in the Dismissal Order with regard to the claims presented in counts III and IV of the original complaints and nothing in the proposed amended complaints would cause the Court to change its ruling. While the Trustee has added some additional language in the proposed amended complaints, the allegations are simply more of the types that the Court found wanting in the Dismissal Order. To the extent there are new, specific allegations aimed at individual Defendants, these are conclusory in nature and are not supported by concrete allegations, as discussed more fully in the Court's analysis of the conduit defense. The Trustee relies on *924all of these same allegations to support the substantial assistance element of its claims in new counts VI and VII and so the same analysis applies to those new claims. This ruling alone is sufficient to deny amendment to counts III, IV, VI and VII. None of the claims stated in counts III, IV, VI and VII of the proposed amended complaints meet the standard for amendment under Fed. R. Bankr. P. 7015 as set out in Foman v. Davis .
In summary, the proposed amendments to counts III, IV, VI and VII would be futile for two independent reasons. First, the Trustee does not plead sufficient facts which, if proven, would support the conclusion that the Defendants had actual knowledge of Mr. Simpson's wrongful acts. Second, the Trustee does not plead sufficient facts which, if proven, would support the conclusion that any of the Defendants rendered substantial assistance to Mr. Simpson's conversions or breach of fiduciary duties. None of the claims stated in counts III, IV, VI and VII of the proposed amended complaints meet the standard for amendment under Fed. R. Bankr. P. 7015 as set out in Foman v. Davis .
Count V
As in the original complaints, in count V of the proposed amended complaints, the Trustee argues that the Defendants were negligent in processing wire transfers from the Debtors' bank accounts. According to the Trustee, state and federal law, "including but not limited to Chapter 670 of the Florida Statutes," imposed a duty of care on the Defendants "to correctly, cautiously, and prudently process the [withdrawals] subject to commercially reasonable security procedures." The Trustee alleges that the Defendants breached that duty by violating federal banking regulations or by lacking good faith in processing the wire transfers due to their actual or constructive knowledge of Mr. Simpson's suspicious activities. As a result, the Trustee alleges that the Defendants caused damage to the Debtors in the amounts transferred by wire from the various bank accounts maintained at the Defendants and seeks money judgments.
To plead a claim for negligence under Florida law, the Trustee must allege a duty, a breach of that duty, causation, and damages. Virgilio v. Ryland Group, Inc. , 680 F.3d 1329, 1339 (11th Cir. 2012). Under Florida law, "establishing the existence of a duty ... is a minimum threshold legal requirement that opens the courthouse doors to the moving party, and is ultimately a question of law for the court rather than a jury." Williams v. Davis , 974 So.2d 1052, 1056 n.2 (Fla. 2007) (citing McCain v. Florida Power Corp. , 593 So.2d 500, 502 (Fla. 1992) ); Virgilio , 680 F.3d at 1339. A duty of care may arise from four sources: " '(1) legislative enactments or administration regulations; (2) judicial interpretations of such enactments or regulations; (3) other judicial precedent; and (4) a duty arising from the general facts of the case.' " Clay Elec. Co-op., Inc. v. Johnson , 873 So.2d 1182, 1185 (Fla. 2003) (quoting McCain , 593 So.2d at 503 n.2 ).
The Trustee seeks to establish a duty of care under state and federal law, "including but not limited to Chapter 670 of the Florida Statutes," "to correctly, cautiously, and prudently process the [withdrawals] subject to commercially reasonable security procedures." The essence of the Trustee's negligence claim is that the Defendants failed to monitor the Debtors' bank accounts and discover Mr. Simpson's fraudulent activity.
Florida law does not impose an independent duty on banks, in the course of routine banking services, to monitor transactions made by authorized agents of the account holder in order to protect the *925account holder against fraud or misappropriation. Lawrence , 455 F. App'x at 907 (citing Emile , 216 So.2d at 446 ); O'Halloran , 350 F.3d at 1205. A bank's responsibility extends only to confirming that the agent, at the time of the transaction, has the authority to make the transaction. O'Halloran , 350 F.3d at 1205. There is nothing in the proposed amended complaints that would lead the Court to question Mr. Simpson's authority to initiate the relevant transactions on behalf of the Debtors.
Likewise, Chapter 670 of the Florida Statutes, titled "Uniform Commercial Code - Fund Transfers," does not impose a general duty on banks to monitor customer accounts for fraud or misappropriation for the benefit of the customers themselves. To the extent federal banking statutes and regulations, such as the Bank Secrecy Act, impose duties on banks, "those duties extend to the United States, not a bank's customers." Wiand , 86 F.Supp.3d at 1322.
Nor does any duty on the part of the Defendants arise from the general facts of the case. As discussed above, "red flags" or mere suspicions are insufficient to trigger any obligation by the Defendant banks to investigate. Lawrence , 455 F. App'x at 907 ; Perlman , 559 F. App'x at 993-94.
Because the existence of a duty of care is essential to a claim for negligence and no duty exists here, the proposed amendments to count V would be futile. This is the same ruling made by the Court in its original Dismissal Order. Nothing in the proposed amended complaints would cause the Court to change that ruling. None of the claims stated in count V of the proposed amended complaints meet the standard for amendment under Fed. R. Bankr. P. 7015 as set out in Foman v. Davis .
In Pari Delicto Concerns
In the original Dismissal Order, the Court ruled that certain of the Trustee's claims relating to Shamrock Jewelers Loan & Guarantee, LLC were barred by the in pari delicto defense. In the proposed amended complaints, the Trustee no longer pursues claims relating to Shamrock Jewelers Loan & Guarantee, LLC. See note 1, supra . The Court ruled that none of the other claims stated in the original complaints were at that point in the proceedings barred by the in pari delicto defense, and the Court's analysis in the Dismissal Order applies equally to the claims stated in the proposed amended complaints. In addition, the fact that the Trustee now alleges that Mr. Simpson had been removed from control of Rollaguard prior to the commencement of this case likely provides another basis for ruling that the in pari delicto defense does not bar the Trustee's claims relating to that entity at this stage of the proceedings. See Mukamal v. Nat'l Christian Charitable Found., Inc. (In re Palm Beach Fin. Partners, L.P.) , 588 B.R. 633, 647 (Bankr. S.D. Fla. 2018) (citing Scholes v. Lehmann , 56 F.3d 750 (7th Cir. 1995) ).
ORDER
For the foregoing reasons, the Court hereby DENIES the Plaintiff's request, contained in the Trustee's omnibus motion [ECF No. 50, Adv. Proc. No. 16-01755-EPK; ECF No. 57, Adv. Proc. No. 16-01756-EPK; and ECF No. 40, Adv. Proc. No. 16-01757-EPK], to file amended complaints in these adversary proceedings.
In the original complaints, the Trustee included alleged transfers by Shamrock Jewelers Loan & Guarantee, LLC, but in the proposed amended complaints the Trustee states that Shamrock Jewelers Loan & Guarantee, LLC did not maintain any bank accounts with any of the Defendants and is not the subject of any claims in the proposed amended complaints.
Unless otherwise noted, the word section or sections refers to the stated section or sections of the United States Bankruptcy Code, 11 U.S.C. §§ 101 et seq.
In the motion to reconsider, the Trustee several times mischaracterized the Court's actual rulings in dismissing these adversary proceedings, and cited without explanation case law that the Court previously distinguished or which is contradicted by decisions of the same court, including the Eleventh Circuit Court of Appeals.
From the Trustee's omnibus motion, it was not clear when the Trustee received the discovery materials in question, what form they took, the volume of those discovery materials, or whether they were material to the Trustee's claims. The Trustee stated only that the discovery materials were delivered after entry of an agreed order regarding discovery on June 22, 2017. The Court entered its dismissal order on July 27, 2017, more than a month later. The Court later learned that the discovery materials were not voluminous or difficult to parse, the Trustee was unable to explain to the Court's satisfaction why the Trustee had not acted on the discovery materials prior to the Court's ruling on the motion to dismiss, and in any case the discovery materials did not materially augment the allegations in the original complaints. In the Court's view, the Trustee relied on the discovery materials as an excuse to present a tardy request for permission to amend the original complaints.
In Foman , the Supreme Court ruled that leave to amend a complaint should be freely given "[i]n the absence of any apparent or declared reason - such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc." Foman , 371 U.S. at 182, 83 S.Ct. 227.
Rollaguard's schedules reflect that it received capital investments exceeding $12 million. Schedule F, ECF No. 24, Case No. 14-38071-EPK.
According to the amended complaints: (1) during the banking relationship between the Debtors and TD Bank, the Debtors deposited no less than $21,055,042.00 and withdrew no less than $21,146,529.00; (2) during the banking relationship between the Debtors and PNC Bank, the Debtors deposited no less than $9,853,183.82 and withdrew no less than $9,852,488.75; and (3) during the banking relationship between the Debtors and JPMC Bank, the Debtors deposited no less than $4,368,395.29 and withdrew no less than $4,368,729.18.
According to the amended complaints the accounts at TD Bank were overdrawn from time to time in the aggregate amount of $939,633.00, the accounts at PNC Bank were overdrawn from time to time in the aggregate amount of $170,476.00, and the accounts at JPMC Bank were overdrawn from time to time in the aggregate amount of $1,916.00. The Trustee alleges that most of the overdrafts were later repaid or otherwise satisfied by the relevant Debtor and that such repayments and satisfactions constitute avoidable transfers.
According to the amended complaints: (1) the Debtors transferred no less than $3,675,841.00 among the accounts at TD Bank; (2) the Debtors transferred no less than $956,756.00 among the accounts at PNC Bank; and (3) the Debtors transferred no less than $100,092.00 among the accounts at JPMC Bank.
In the original complaints, counts I and II also included claims based in constructive fraud. In the proposed amended complaints the Trustee does not pursue any claims based in constructive fraud and so the Court need not address certain of the issues ruled on in the Dismissal Order.
While the Trustee noted the existence of overdrafts in the original complaints, the Trustee did not specifically allege fraudulent transfer claims arising from satisfaction of overdrafts.
In the case law, it is extremely unusual for the courts to address fraudulent transfers of money in the form of cash. Perhaps such transfers occur more often than we see in reported decisions and they are just more difficult to investigate or prove.
Depending on the proposed amended complaint, the Trustee includes between 47 and 49 introductory paragraphs, all of which are incorporated into each count of the subject amended complaint. The counts themselves contain restatements of the relevant legal standards and only short summaries of allegedly relevant facts without cross-reference to any of the many paragraphs incorporated by reference. To a great extent it is impossible to determine which of the specific allegations in the introductory paragraphs of the proposed amended complaints are intended to support each of the Trustee's claims. For example, each of the proposed amended complaints includes a paragraph with a number of lettered subparagraphs explicitly addressing the alleged lack of good faith of the relevant Defendant for purposes of the conduit defense. But it is unclear whether the Trustee is relying on these allegations also in connection with the counts based in aiding and abetting. Rather than attempt to parse the matter further, for purposes of this order the Court has assumed that every factual allegation in the incorporated paragraphs of the proposed amended complaints is intended to be relevant to every count of the proposed amended complaint.
In the present procedural context, it is typically not appropriate to consider any documents other than the proposed amended complaint, documents attached to it and, sometimes, documents that are referenced in the complaint and central to the claim. However, in this case, the document in question was filed by the Trustee in support of the very motion now under consideration by the Court.
The Trustee alleges that overdrafts were "either repaid by future deposits ... or by dishonored transactions ...." It is unclear what the Trustee means by "dishonored transactions." If the Trustee intends the phrase dishonored transactions to include the presentation of checks for which a Debtor had insufficient funds, where a Defendant did not in fact permit an actual overdraft in the Debtor's bank account, such provisional settlements do not constitute transfers subject to avoidance. Sarachek v. Luana Sav. Bank (In re Agriprocessors, Inc.) , 547 B.R. 292, 308 (N.D. Iowa 2016) ; In re AppOnline.com, Inc. , 296 B.R. 602, 615-20 (Bankr. E.D.N.Y. 2003). In light of the Court's other rulings in this order, which dispose of all fraudulent transfer claims for other reasons, it is not necessary to address this issue further.
Similarly, under Florida law, in determining actual intent to defraud courts may consider whether:
(a) The transfer or obligation was to an insider. (b) The debtor retained possession or control of the property transferred after the transfer. (c) The transfer or obligation was disclosed or concealed. (d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. (e) The transfer was of substantially all the debtor's assets. (f) The debtor absconded. (g) The debtor removed or concealed assets. (h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. (i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. (j) The transfer occurred shortly before or shortly after a substantial debt was incurred. (k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Fla. Stat. § 726.105(2).
There are limited circumstances where a debtor's fraudulent intent in making certain transfers is presumed. For example, if a debtor is perpetrating a Ponzi scheme, a transfer made in furtherance of that Ponzi scheme is deemed to have been made with actual fraudulent intent. Welt v. Publix Super Markets, Inc. (In re Phoenix Diversified Inv. Corp.), 2011 WL 2182881, at *3, 2011 Bankr. LEXIS 4100 at *7-9 (Bankr. S.D. Fla. 2011). However, the transfer must be specifically in furtherance of the fraudulent scheme and not some unrelated transaction. Id. The facts of the present case do not present a Ponzi scheme or even a Ponzi-like scheme involving rotating investment and investor repayment. Mr. Simpson is alleged to have committed a straightforward fraud in bilking investors, taking their funds and not paying anyone back.
One might argue that the satisfaction of an overdraft could result in reduction of funds available to pay other creditors. Yet in this case, in the end, the accounts in question were left empty or slightly overdrawn. The net effect of all of the overdrafts was for the benefit of the Debtors, as they enjoyed repeated short term credit from the Defendants.
In light of the substantive consolidation of the Debtors and Shamrock Jewelers, done at the Trustee's request, it is hard to see how creditors were harmed by not knowing the ultimate source of payments they received. In order to obtain substantive consolidation, among other things, the Trustee argued convincingly that the financial affairs of the Debtors and Shamrock Jewelers were hopelessly intertwined. The Court notes that in substantively consolidating the Debtors and Shamrock Jewelers in this case, the Court did not preserve inter-company claims. See ECF No. 126, Case No. 14-38071-EPK. Thus, for all purposes in this bankruptcy case, the assets and liabilities of the Debtors and Shamrock Jewelers are combined as if they were a single entity.
As addressed in footnote 14, supra , it is unclear whether these individualized allegations were intended by the Trustee to support the aiding and abetting claims as most of them were presented in the factual allegations explicitly relating to the conduit defense. Again, for purposes of this order, the Court assumes that all of the allegations in the introductory paragraphs of the proposed amended complaints are intended to support each count of the proposed amended complaints. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501693/ | Honorable Diane Davis, United States Bankruptcy Judge
I. Introduction
The pro se plaintiffs, Dr. Deepika Reddy and Dr. Pratap Reddy (collectively, "Plaintiffs"), commenced this adversary proceeding *13against the debtor-defendant, Dr. Igor Melnik ("Debtor"), in order to prevent Debtor from discharging the debt he owes to them in his chapter 7 bankruptcy case.1 Specifically, on May 1, 2017, Plaintiffs filed an adversary complaint setting forth causes of action including § 523(a)(2)(A) and (a)(6) (the "Complaint"). (ECF Adv. No. 1.)2 Following a one-day trial on March 13, 2018, the Court provided the parties with an opportunity to submit post-trial memoranda of law. Plaintiffs submitted their memorandum of law on April 12, 2018 ("Plaintiffs' Memorandum," ECF Adv. No. 33), and Debtor, through counsel, submitted his memorandum of law on April 13, 2018 ("Debtor's Memorandum," ECF Adv. No. 34). The Court then reserved its final decision. After consideration of the parties' arguments, the documentary and testamentary evidence presented, and post-trial memoranda of law, the Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable here by Rule 7052. For the reasons set forth below, the Court concludes that Plaintiffs have not met their burden of proof under § 523(a), and thus the debt owed to them by Debtor is dischargeable.
II. Jurisdiction
The Court has jurisdiction over the parties and subject matter of this adversary proceeding pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and (b). This is a core proceeding which this Court may hear and determine pursuant to 28 U.S.C. § 157(b)(2)(I).
III. Factual Background
On February 3, 2017, Debtor filed a voluntary petition for chapter 7 relief. (ECF No. 1.) Under Paragraph 4.2 of Official Form 106E/F, titled "Schedule E/F: Creditors Who Have Unsecured Claims" ("Schedule E/F"), Debtor listed the debt he owes to Plaintiffs in the amount of $557,250.00. Debtor marked the debt as "contingent, unliquidated, [and] disputed." On Attachment 1 to Schedule E/F, he described the debt as a business-related claim for breach of contract in connection with his purchase of a dental practice and a related commercial lease. Under Part 4, Paragraph 9, of Official Form 106Sum, titled "Summary of Your Assets and Liabilities and Certain Statistical Information" ("Summary of Assets"), Debtor listed a pending state court action brought by Plaintiffs against Debtor in the Onondaga County Supreme Court in Syracuse, New York, under Index Number 2016-1265 (the "State Court Action"). Under Paragraph 16 of the Summary of Assets, Debtor disclosed that he had spent approximately $35,000.00 in legal fees from May 5, 2016, to the date of filing for defense representation in legal actions, including the State Court Action, Plaintiffs' related eviction action, and an administrative licensure proceeding. Under Paragraph 27 of the Summary of Assets, Debtor indicated that, within 4 years prior to the date of filing, he had owned the dental practice that was no longer operating.
Debtor's bankruptcy filing was precipitated by the State Court Action, together with Plaintiffs' other legal proceedings against him. While the parties disagree as to the significance of certain facts in relation *14to Plaintiffs' nondischargeability causes of action, they do not disagree as to the facts themselves. The details related to the parties' history and dealings with one another and with third-parties involved in their business transaction have been documented extensively in pre-trial depositions and reiterated during trial. (Pls.' Ex. T; Def.'s Exs. 11 & 12; Trial Tr., ECF Adv. No. 37.) Without belaboring the parties' history, given that their recollections and accounts of the past are so similar, the Court will set forth only those findings of fact necessary to provide context and support for its decision.
Both Dr. Reddy and Debtor are foreign-educated dentists who later trained and became licensed professionals in the United States. In 2004, Dr. Reddy purchased and began to operate her own dental practice in East Syracuse, New York. (Def.'s Ex. 11, 13; Trial Tr. 16.) In 2009 or 2010, Dr. Reddy became the subject of a professional disciplinary action, wherein she entered into a consent order that restricted her right to practice and prohibited her from performing certain dental procedures.3
Dr. Reddy testified that the disciplinary action and media coverage surrounding the same caused her to suffer from post-traumatic stress disorder ("PTSD"), which her psychiatrist diagnosed in 2012. (Def.'s Ex. 11, 20.) In 2015, Dr. Reddy's medical circumstances and physician's advice compelled her to sell her dental practice. (Trial Tr. 20.) By that time, Dr. Reddy had lost a significant number of patients and she was operating the practice only one to two days per week. (Def.'s Ex. 11, 16.)
After seeing an advertisement on the New York State Dental Association's website, Dr. Reddy hired Henry Schein Professional Practice Transitions, a division of Henry Schein Financial Services LLC ("Henry Schein"), to provide practice transition experts who would work on her behalf to value, market, and sell the practice as a going concern. (Trial Tr. 24-25.) Dr. Reddy and her husband, the co-plaintiff Dr. Pratap Reddy, contacted Henry Schein and they were placed in touch with its local representative, Donna Bambrick ("Bambrick"). (Trial Tr. 25.) In connection with Henry Schein's services, Plaintiffs agreed to pay 10% of the sale price to Henry Schein upon closing. (Compl. ¶ 14.)
Due to her PTSD, Dr. Reddy decided that it was in her best interest to let her husband handle the paperwork and serve as the principal contact for Bambrick. (Trial Tr. 25.) Dr. Reddy testified that she did not fill out the Practice Valuation Questionnaire dated May 20, 2015 (Pls.' Ex. E), which was provided by Henry Schein to Debtor on or about May 11, 2016, and she did not believe that Dr. Pratap Reddy did either (Def.'s Ex. 11, 28-30). Rather, she thought that the writing belonged to Bambrick. (Def.'s Ex. 11, 28.) In exchange for a fee of approximately $2,500.00, Henry Schein evaluated Dr. Reddy's practice and assigned it a going-concern value of $202,000.00. (Trial Tr. 27-28.)
In late 2015, while working as a dentist at Aspen Dental, Debtor contacted Henry Schein through Bambrick. A colleague advised *15him that Dr. Reddy's practice was for sale and he provided Debtor with Bambrick's contact information. (Pls.' Ex. T, 5-6; Trial Tr. 121-22.) At that time, Debtor had approximately five years of experience in general dentistry but he had no independent business experience. (Trial Tr. 124.) He testified during his deposition, however, that it was his dream to own his own practice and he was confident in his ability to do so. (Pls.' Ex. T, 6.)
Debtor was divorced for the second time from his former spouse, Lidiya Melnik ("Lidiya"), who had also been a dentist in the Ukraine. Unlike Debtor, she did not become a licensed dentist in the United States and she was working as a dental hygienist in New York City, where she resided with the parties' minor son. Although they were divorced, Lidiya planned to and did in fact move from New York City to Syracuse, New York, along with their son, to work with Debtor at the practice. (Pls.' Ex. T, 16-17; Trial Tr. 125.) Debtor testified that he and Lidiya were planning to work together to build a successful dental business and that they were looking forward to a new start. (Trial Tr. 143.)
After Henry Schein introduced Plaintiffs to a prospective purchaser who had lost his dental license in Ohio and was not licensed to practice dentistry in New York, Plaintiffs advised Henry Schein and Bambrick directly that they would only meet with serious buyers. (Trial Tr. 27.) On January 13, 2016, Bambrick contacted Dr. Pratap Reddy by e-mail and stated, "Congratulations! I think we found a wonderful doctor and family to care for the patients of your wife. I will move forward on completing this sale and keep you informed." (Pls.' Ex. B.)
When Henry Schein introduced Debtor to Plaintiffs, they assumed that he was a "perfect match" for Dr. Reddy's practice. (Trial Tr. 29.) While Dr. Reddy knew that Debtor did not have experience running his own practice since he worked for Aspen Dental in a clinical setting, she was comfortable with his dental skills and his general knowledge of dentistry. (Trial Tr. 29-30.) According to Dr. Reddy, Debtor indicated that he planned to work two to three days per week at the practice and he had approximately $100,000.00 in cash available to use for operating expenses while he generated new business. In contrast, according to Debtor, he indicated to Bambrick and/or Plaintiffs that he planned to work one to two days a week at the practice and he had approximately $80,000.00 in cash available for the few months of operation of the practice. Moreover, Plaintiffs understood that Lidiya, whom he referred to as his wife, would also work at the practice in a dual role as the office manager and part-time hygienist. (Trial Tr. 31.) Dr. Reddy and Debtor met in person twice before he made a formal offer to purchase the practice, and each time the subject matter of their discussions was limited to general dentistry and did not include business or financial matters. (Def.'s Ex. 11, 21-27.)
On multiple occasions, Dr. Reddy admitted that she had little to do with either the initial practice evaluation or the vetting of Debtor's offer. In fact, Dr. Reddy testified that she relied entirely on the judgment and recommendations of Bambrick and other Henry Schein representatives. (Def.'s Ex. 11, 48; Trial Tr. 38.) Dr. Reddy indicated that Henry Schein informed Plaintiffs that Debtor would be very comfortable running the practice and that it would be a family endeavor. (Def.'s Ex. 11, 35-36.) Dr. Reddy did not actually meet Lidiya until after she sold the practice to Debtor. (Def.'s Ex. 11, 40; Trial Tr. 40.) Henry Schein also informed Plaintiffs that Debtor was "financially fine," which, in *16part, made him a "pre-approved client." (Def.'s Ex. 11, 39.) Debtor similarly trusted Henry Schein and Bambrick to steer him to a "good practice." (Pls.' Ex. T, 8-9.)
On March 28, 2016, Dr. Reddy and Debtor entered into a Practice Purchase Agreement (the "PPA"), whereby Debtor agreed to purchase Dr. Reddy's dental practice assets for the sum of $202,000.00. (Pls.' Ex. C.) The PPA required the purchase price to be paid in cash or a cash equivalent on the closing date, which was March 24, 2016, at the latest.4 The assets included, but were not limited to, the office furnishings, fixtures, and equipment, dental equipment and supplies, office equipment and furniture, computer hardware and software, patient records and files, and personal goodwill. The assets were sold "as is," and each party made certain representations, acknowledgements and/or warranties to the other. Dr. Reddy's practice was located in a commercial building owned by Dr. Pratap Reddy. On March 28, 2016, Dr. Pratap Reddy and Debtor entered into a Commercial Lease Agreement (the "Lease"), whereby Dr. Pratap Reddy agreed to rent the office space to Debtor for a defined term from April 1, 2016, through March 31, 2023, in exchange for monthly rent in the amount of $4,750.00 starting on March 2, 2017, subject to a 3% annual increase. (Pls.' Ex. J.)
With the assistance of Bambrick, Debtor initially applied for commercial loans from Bank of America and TD Bank. (Trial Tr. 127.) He testified that those loans were denied not because of his credit rating and history, but rather because of the negative publicity attached to the practice following Dr. Reddy's disciplinary proceeding. (Trial Tr. 127-28.) He further testified that Bambrick approached him with an offer from Dr. Pratap Reddy to provide private financing, which he immediately accepted. According to Plaintiffs, however, Henry Schein approached them about financing Debtor's purchase of the practice until he could obtain commercial financing in order to ensure a successful transition and continued service to the existing patients. (Def.'s Ex. 11, 43-45.) Ultimately, Plaintiffs agreed to loan Debtor funds in the principal amount of the purchase price set forth in the PPA, plus interest at a rate of 6% per annum.
Between March 23, 2016, and April 1, 2016, Debtor executed a Promissory Note ("Note") and Personal Guaranty ("Guaranty") in connection with Plaintiffs' loan. (Pls.' Ex. L.) The Note provided for repayment in eighty-four equal, consecutive, monthly payments of $2,950.93. On April 1, 2016, Dr. Reddy and Debtor entered into a Credit and Security Agreement (the "CSA"), whereby Debtor granted Dr. Reddy a security interest in certain collateral to secure payment of the obligations described in the Note. (Pls. Ex. K.)
With respect to the loan, Dr. Reddy testified that she did not know whether Debtor provided a financial statement to Henry Schein or what type of due diligence was done, but she and her husband relied on Bambrick's assurances that Debtor was financially sound. (Def.'s Ex. 11, 46, 50-52, & 62.) Dr. Pratap Reddy confirmed that Debtor did not provide Plaintiffs with any written financial information. Dr. Pratap Reddy testified that he did not know that Debtor had a child support obligation when Plaintiffs agreed to extend Debtor financing. (Trial Tr. 81.) Debtor, however, had a child support obligation *17at that time in the approximate amount of $900.00.
Notwithstanding the length of the repayment term provided for in the Note, based on Bambrick's representations, Dr. Pratap Reddy understood the transaction would be for short-term financing until Debtor could secure a bank loan with the assistance of Henry Schein. (Def.'s Ex. 12, 26.) Bambrick also represented to Dr. Pratap Reddy that Debtor had an excellent credit score and that he had sufficient funds in the bank to operate the practice for the first few months. (Def.'s Ex. 12, 28-29.)
At this point in time, the parties' accounts differ somewhat as to Lidiya's involvement in the loan transaction. According to Debtor, he and/or Lidiya informed Bambrick that they were "not officially married," but that Lidiya was ready to be part of the practice. (Trial Tr. 158, 164.) Plaintiffs, however, maintain that they did not know that Debtor and Lidiya were divorced until after they agreed to provide the loan. Plaintiffs also were not informed by Debtor or Bambrick that Debtor had an ongoing child support obligation when they agreed to finance Debtor's purchase of the practice. Debtor testified that Plaintiffs never asked for the child support information prior to making the loan. (Trial Tr. 190.)
Debtor made the initial payment to Plaintiffs for the security deposit and the first and last month's rent, which he recollected as totaling $9,500.00. (Trial Tr. 134.) Debtor made additional payments to Plaintiffs, which he believed totaled approximately $24,900.00. (Trial Tr. 134.) Prior to working at the practice, Debtor applied for but had not yet obtained participating provider status with nearly a dozen insurance companies. (Trial Tr. 136.) He initially worked two days a week at the practice, three days a week at Aspen Dental, and weekends at a Wilson Dental. (Trial Tr. 144.) He also placed advertisements in the local newspapers and on the internet in order to generate new business at the practice. (Trial Tr. 200.)
Based on the representations made to him by Plaintiffs and Bambrick, Debtor believed that he would not have to make a capital investment in the office for approximately five years. (Trial Tr. 147-48.) Within weeks of acquiring the practice, however, Debtor realized that he was not going to be able to succeed. According to Debtor, the practice had been misrepresented to him by Henry Schein, Bambrick, and Plaintiffs. The number of active patients was much lower than he expected, the equipment was outdated or, in some cases, not functional at all, and he had staffing issues, including with Donna Walker, Dr. Reddy's former dental hygienist. In addition, he faced exhaustion and Lidiya decided to return to New York City after seeing the state of the practice and experiencing certain uncomfortable exchanges with Plaintiffs. (Pls.' Ex. T, 44; Trial Tr. 134-36.) The parties communicated in person and via e-mail, and it became clear to Debtor that Plaintiffs were still communicating with Dr. Reddy's former hygienist, Donna Walker, whom Debtor had unsuccessfully tried to retain. (Trial Tr. 199.)
Debtor testified that, by June 2016, he realized that he had jeopardized his income and benefits from Aspen Dental because he had moved to part-time status. He was too exhausted to continue working seven days a week as a dentist and he therefore had to give up his part-time weekend position at Wilson Dental as well. He further testified that he was not able to cover his expenses at the practice and he was not making a profit as he anticipated he would when he purchased the practice and he became overwhelmed. (Trial Tr. 134-35.) In addition, his student loan and *18child support payments had increased because of his increase in income due to working seven days a week in order to financially carry the obligations of the practice. By August 2016, Debtor could not afford the payments under the Lease or Notice and he defaulted on his obligations. (Pls.' Ex. T, 86.) Shortly thereafter, Dr. Pratap Reddy sought to evict Debtor from the business premises.
Debtor then returned to Bambrick and he hired Henry Schein to resell the practice. He did not ask for an updated practice evaluation and he accepted Henry Schein's new valuation and agreed to market the practice for $160,000.00. (Pls.' Ex. T, 163; Trial Tr. 214-15.) Debtor reduced the asking price because he wanted to sell it as quickly as possible. (Trial Tr. 215.) He eventually received two offers, including one from Thomas B. Nolan, D.D.S. ("Dr. Nolan"), which Debtor felt was reasonable under the circumstances. (Trial Tr. 215.) Dr. Nolan submitted a Business Offer to Purchase the practice on September 14, 2016, for $125,000.00. (Pls.' Ex. H.) Dr. Nolan's offer contemplated a closing date of September 30, 2016. Debtor agreed to permit Dr. Nolan to finance $100,000.00 of the purchase price and to take back a promissory note, as Plaintiffs had done for him. That note, however, would have required monthly interest only payments for six months, followed by principal and interest payments thereafter with a balloon payment due on or before the five year mark. Dr. Nolan's offer was also subject to his ability to obtain a lease from Dr. Pratap Reddy for the business premises at one-half of the rent paid by Debtor for two years with a five year option to renew at an agreed upon rent. Dr. Nolan required that the lease contain a right of first refusal on the commercial building and a guarantee from Dr. Pratap Reddy that he would sell the building to Dr. Nolan. It was understood by Dr. Nolan that both Debtor and Dr. Reddy would have to be parties to the contract and both would have to accept and execute his offer.
In late September 2016, following Debtor's receipt of Dr. Nolan's offer, Debtor and/or Bambrick approached Plaintiffs and a series of communications occurred between Debtor, individually or through his retained counsel, Dr. Reddy, and Bambrick regarding Dr. Nolan's offer and the monetary difference between that offer and the balance due to Plaintiffs from Debtor under the Lease and Note. (Pls.' Exs. 6 & 7.) Debtor had retained counsel, Attorney Compagni, to represent him in the settlement discussions with Plaintiffs. The parties could not reach an agreement as to the amount due Plaintiffs to offset the damages owed for Debtor's breach of the lease, or for the balance due under the Note. According to Debtor, he could only afford to make monthly payments to Plaintiffs in the amount of $2,000.00, but this amount was unacceptable to Plaintiffs. (Trial Tr. 220-23.) In early October 2016, Plaintiffs then made a counteroffer, which Debtor rejected.5 Shortly thereafter, on October 22, 2016, Debtor sent letters to the practice's remaining patients informing them that he would be closing the practice and that their records would be available off-site at another location. (Trial Tr. 245-46.)
Plaintiffs then proceeded with the State Court Action and eviction proceeding against Debtor, and Dr. Reddy filed a licensing complaint against Debtor in relation to his transfer of patient records. In addition, in January 2017, Dr. Reddy filed *19a civil action in state court against Henry Schein, wherein she set forth, inter alia , causes of action against Henry Schein for breach of contract, breach of express and implied warranties and of the covenant of good faith and fair dealing, deceptive trade practices and/or false advertising, negligent misrepresentation, negligent infliction of emotional distress, and unjust enrichment. (Def.'s Ex. 3.) In her deposition testimony, Dr. Reddy stated that she was very upset with Henry Schein and its representatives because they told her that Debtor was "a pre-approved client[,] that he was financially fine and everything was okay." (Def.'s Ex. 11, 39.)
IV. Arguments
Plaintiffs argue that two subsections of § 523(a) prevent the Court from discharging the debt due to them by Debtor.6 First, Plaintiffs assert that they have met the requirements for nondischargeability of the debt under § 523(a)(2)(A) because they have shown that Debtor obtained the practice, use of the premises, and loan from them by virtue of false representations or actual fraud. As the gravamen of their § 532(a)(2)(A) claim, Plaintiffs focus on Debtor's repeated references to Lidiya as his wife during the course of the parties' dealings before entering into the PPA, Lease, Note, and CSA, and his omission of the fact that he was paying child support to Lidiya at that time. Notwithstanding that Debtor and Lidiya are legally divorced, they contend that he repeatedly falsely represented that he and Lidiya would operate the practice together on a full-time basis once he transitioned out of Aspen Dental and into his own dental practice. Plaintiffs also contend that Debtor made false representations regarding his financial affairs and obligations and the loan application process with Bank of America and TD Bank. Plaintiffs argue that Debtor did so with the requisite intent to deceive and induce them into loaning him money, and that they justifiably relied on those representations when they agreed to finance his purchase of Dr. Reddy's practice and extend the Lease to him. (Pls.' Mem. 7-13.) Second, Plaintiffs assert that they have met the requirements for nondischargeability under § 523(a)(6) because they have shown that Debtor intentionally failed to mitigate the damages from his breach of the PPA, Lease, Note, and CSA. Instead, Plaintiffs argue that Debtor willfully and maliciously transferred patient records and destroyed the practice's remaining goodwill, thereby preventing Dr. Reddy from now being able to sell the practice to another dentist and preventing Dr. Pratap Reddy from renting the building, as it is designed and equipped as a dental office. (Pls. Mem. 14-16, 21-22.)
Debtor asserts that Plaintiffs have not satisfied a single element of either § 523(a) claim. Debtor argues that Plaintiffs cannot do so because relief from this type of business failure is precisely contemplated by the Bankruptcy Code and subject to discharge. Simply stated, the resulting debt does not fall within the ambit of § 523(a). Here, as to Plaintiffs' § 523(a)(2)(A) claim, Debtor contends that Plaintiffs have not proven that he made material misstatements or omissions with the intent to deceive them, upon which they in fact relied. Rather, Debtor suggests that his conduct evidences an intent to succeed and to repay Plaintiffs. As to Plaintiffs' § 523(a)(6) claim, Debtor argues *20that a simple breach of contract, as is the case here, cannot invoke the "willful and malicious injury" exception to discharge under § 523(a)(6). Debtor argues that his conduct cannot be characterized as either willful or malicious because he did not intend to inflict any injury upon Plaintiffs and, at all times, his actions were motivated not by malice but rather by his personal desire to succeed or to fulfill his professional responsibilities to patients once it became clear that he could not operate the practice.
V. Discussion
A. Plaintiffs' Pro Se Status
Because Plaintiffs have raised their pro se status numerous times while prosecuting this adversary proceeding, including during both depositions and trial, the Court is compelled to address the same. Throughout this adversary proceeding, the Court has been mindful that Plaintiffs are self-represented. On May 27, 2017, Debtor filed a Motion to Dismiss the Complaint. (ECF Adv. No. 4.) In ruling on Debtor's Motion to Dismiss, the Court construed Plaintiffs' Complaint and objection liberally in accordance with the Second Circuit's directive to hold pro se pleadings to less stringent standards than formal pleadings drafted by lawyers. Bertin v. United States , 478 F.3d 489, 491 (2d Cir. 2007). As the Court stated during trial, however, a lower standard does not exist when it comes to the rules of evidence and procedure.
While pro se litigants are afforded some latitude when it comes to technical procedural requirements, they are not " 'exempt ... from compliance with relevant rules of procedural and substantive law.' " Traguth v. Zuck , 710 F.2d 90, 95 (2d Cir. 1983) ; Caidor v. Onondaga Cty. , 517 F.3d 601, 605 (2d Cir. 2008). In fact, as the trial record reflects, the Court quashed Plaintiffs' subpoena issued to Lidiya upon Lidiya's letter request, which the Court treated as a motion, pursuant to Federal Rule of Civil Procedure 45. Thus, "[t]hough a litigant who proceeds pro se is entitled to some leniency, due to the fact that [the litigant] did not have the benefit of counsel, ... [the litigant] is not ultimately relieved of the burden to prove [his or] her case." Grubin v. Sallie Mae Servicing Corp., L.P. (In re Grubin) , 476 B.R. 699, 715 (Bankr. E.D.N.Y. 2012). Moreover, whether or not proceeding pro se , the trial strategy and presentation of evidence are squarely within the litigant's control and beyond the purview of the Court. See Greene v. U.S. Dep't of Educ. (In re Greene) , Chapter 7 Case No. 10-51071-SCS, 2013 WL 1724924, at *13 n. 17, 2013 Bankr. LEXIS 1636, at *51 n.17 (Bankr. E.D. Va. Apr. 22, 2013).
B. General Law of Nondischargeability
The "central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.' " Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt , 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) ). The discharge provided to a debtor by the Bankruptcy Code is intended to effectuate this "fresh start" opportunity, but it is reserved for only the " 'honest but unfortunate debtor.' " Id. (quoting Local Loan Co. , 292 U.S. at 244, 54 S.Ct. 695 ).
This fresh start policy drives the allocation of the burden of proof in nondischargeability proceedings.
*21FDIC v. Bacino (In re Bacino) , Bankruptcy No. 09-20080-LT7; Adversary No. 10-90315-LT, 2014 WL 806159, at *9, 2014 Bankr. LEXIS 894, at *25 (Bankr. S.D. Ca. Feb. 28, 2014). In order to except its claim from discharge, a creditor bears the burden of proving, by a preponderance of the evidence, that the particular debt falls within one of the exceptions to discharge enumerated in § 523(a). Grogan , 498 U.S. at 286-91, 111 S.Ct. 654. This means that the creditor must present evidence " 'sufficient to persuade the finder of fact that the proposition is more likely true than not.' " Bacino, 2014 WL 806159, at *9, 2014 Bankr. LEXIS 894, at *25 (quoting United States v. Arnold & Baker Farms (In re Arnold & Baker Farms) , 177 B.R. 648, 654 (9th Cir. BAP 1994) ). When determining whether a debt is excepted from discharge, a bankruptcy court must construe the evidence strictly against the creditor and liberally in favor of the debtor. Signature Bank v. Banayan (In re Banayan) , 468 B.R. 542, 573 n.285 (Bankr. N.D.N.Y. 2012) (citing Geiger v. Kawaauhau (In re Geiger) , 113 F.3d 848, 853 (8th Cir. 1997) (citations omitted); accord State Bank of India v. Chalasani (In re Chalasani) , 92 F.3d 1300, 1310 (2d Cir. 1996) ).
C. Plaintiffs' Section 523(a)(2)(A) Claim
1. "False Pretenses, False Representation, or Actual Fraud"
Section 523(a)(2)(A) excepts from discharge any debt "for money, ... or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A). " 'To be actionable, the debtor's conduct must involve moral turpitude or intentional wrong; mere negligence, poor business judgment or fraud implied in law (which may exist without imputation of bad faith or immorality) is insufficient.' " Straight Line, LLC v. Madigan (In re Madigan) , Ch. 7 Case No. 15-31545, Adv. No. 16-50002, 2018 WL 2143315, at *9, 2018 Bankr. LEXIS 1394 at *25 (Bankr. N.D.N.Y. May 8, 2018) (quoting In re Schwartz & Meyers , 130 B.R. 416, 422 (Bankr. S.D.N.Y. 1991) (citing 3 Lawrence P. King, Collier on Bankruptcy (MB) ¶ 523.08 at 523-24 (15th Ed. 1990) ) ).
While § 523(a)(2)(A) includes three separate types of fraud with somewhat different meanings, the United States Supreme Court "has historically construed the terms in § 523(a)(2)(A) to contain the 'elements that the common law has defined them to include.' " Husky Int'l Elecs., Inc. v. Ritz , --- U.S. ----, 136 S.Ct. 1581, 1586, 194 L.Ed.2d 655 (2016) (quoting Field v. Mans , 516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ). To establish a fraud claim under federal common law, a plaintiff must prove the following five elements: (1) debtor made a material false representation; (2) scienter: debtor made the representation knowing of its falsity; (3) debtor acted with intent to defraud plaintiff; (4) plaintiff justifiably relied on the false representation; and (5) plaintiff suffered damages that were the proximate cause of plaintiff's reliance. Madigan, 2018 WL 2143315, at *9, 2018 Bankr. LEXIS 1394, at *25 (citing Restatement (Second) of Torts 1976 §§ 525, 546, and 548A (Am. Law Inst. 1976) ). Because each type of fraud enumerated in § 523(a)(2)(A) has a specific meaning, however, they must be analyzed individually in light of the facts of the particular case. Argento v. Cahill (In re Cahill) , Ch. 7 Case No. 15-72418; Adv. No. 15-08298, 2017 WL 713565, at *5, 2017 Bankr. LEXIS 501, at *14 (Bankr. E.D.N.Y. Feb. 22, 2017) (citing Husky , 136 S.Ct. at 1586 ).
*22For purposes of § 523(a)(2)(A), the term "false pretenses" means " 'conscious, deceptive, or misleading conduct calculated to obtain or deprive another of property.' " Banayan , 468 B.R. at 574 n.293 (quoting Indo-Med Commodities, Inc. v. Wisell (In re Wisell) , 494 B.R. 23, 35 (Bkrtcy.E.D.N.Y. 2011) (citing Gentry v. Kovler (In re Kovler) , 249 B.R. 238, 261 (Bankr. S.D.N.Y. 2000) ) ). It includes "the practice of any scam, scheme, subterfuge, artifice, deceit or chicane in the accomplishment of an unlawful objective" by the defendant. Id. False pretenses, therefore, may be based on an implied misrepresentation or silence in the face of a duty to disclose material facts on which a transaction depends. Id. n.195 (citing Farraj v. Soliz (In re Soliz) , 201 B.R. 363, 369 (Bankr. S.D.N.Y. 1996) (collecting cases) ).
The elements required to establish a debt as nondischargeable under false pretenses are: (1) an implied misrepresentation or conduct by the debtor; (2) promoted knowingly and willingly; (3) to create a contrived or misleading understanding of the transaction on the part of the creditor; (4) which wrongfully induced the creditor to advance money, property, or credit to the debtor. Id. n. 292 (citing Henderson , 423 B.R. at 621 (citing Vidomlanski v. Gabor (In re Gabor) , Ch. 7 Case No. 05-18719 (ALG), Adv. No. 06-01916 (ALG), 2009 WL 3233907, at *4, 2009 Bankr. LEXIS 3110 at *12 (Bankr. S.D.N.Y. Oct. 8, 2009) (citing Lubit v. Chase (In re Chase) , 372 B.R. 125, 128 (Bankr. S.D.N.Y. 2007) ) ) ).
Similarly, to prove that a debt arose from false representation, the creditor must show: (1) the debtor made a false or misleading statement; (2) with the intent to deceive; (3) on which the creditor justifiably relied; (4) in order to induce the creditor to turn over money or property to the debtor. Id. at 574-75 n. 296 (citing Henderson , 423 B.R. at 621 (citing Gabor, 2009 WL 3233907, at *4, 2009 Bankr. LEXIS 3110, at *12 (citing Weiss v. Alicea (In re Alicea) , 230 B.R. 492, 500 (Bankr. S.D.N.Y. 1999) ) ) ). "The element distinguishing a false representation from a false pretense is an explicit, definable statement by the debtor that results in a misrepresentation. A false pretense, on the other hand is conduct by the debtor that implies or promotes a scheme that is misleading." Cahill, 2017 WL 713565, at *6, 2017 Bankr. LEXIS 501, at *16-17.
Finally, a debt may be excepted from discharge under § 523(a)(2)(A) on the basis of actual fraud, which now may include types of fraud beyond frauds based on a misrepresentation. Husky , 136 S.Ct. at 1586. The term "actual fraud" encompasses " 'any deceit, artifice, trick, or design involving direct or indirect operation of the mind, used to circumvent or cheat another.' " Banayan , 468 B.R. at 577 n.306 (citing Henderson , 423 B.R. at 621 (citing Gabor, 2009 WL 3233907, at *4, 2009 Bankr. LEXIS 3110, at *12 (citing Sandak v. Dobrayel (In re Dobrayel) , 287 B.R. 3, 12 n.3 (Bankr. S.D.N.Y. 2002) ) ) ).
"Despite the distinctions between the three types of fraud, some of the underlying elements overlap under § 523(a)(2)(A)." Cahill, 2017 WL 713565, at *7, 2017 Bankr. LEXIS 501, at *18 (citing Husky , 136 S.Ct. at 1588 ). These include scienter, reliance, and materiality. Each of these elements bears a brief discussion in its own right before being applied to the facts at hand.
a. Scienter
For purposes of § 523(a)(2)(A), the creditor must prove scienter by showing that, at the time the debt was incurred, the debtor lacked the intent to repay the obligation. Banayan , 468 B.R. at 576 n.309 *23(citing EDM Machine Sales, Inc. v. Harrison (In re Harrison) , 301 B.R. 849, 854 (Bankr. N.D. Ohio 2003) (citing AT & T Universal Card Servs. v. Mercer (In re Mercer) , 246 F.3d 391, 403 (5th Cir. 2001) ; Binger v. Bloomfield , 293 B.R. 148, 153 (Bankr. N.D. Ohio 2003) ) ).
The standard is a subjective one, and it may be satisfied by proof of either actual intent or a reckless disregard for the truth. Since direct proof of state of mind is rarely available, scienter can be inferred. In re Balzano , 127 B.R. 524, 531 (Bankr. E.D.N.Y. 1991). Such inference is negated, however, where a debtor makes payments to a lender and files bankruptcy only after he can no longer do so and is unsuccessful in negotiations with the lender to reduce the payments. Id.
b. Reliance
The Supreme Court has held that a minimal, justifiable reliance standard applies in a § 523(a)(2)(A) case. Field , 516 U.S. at 74-75, 116 S.Ct. 437. Under this standard, the creditor is not required to conduct an examination or investigation unless, under the circumstances and from a cursory glance, the facts should be apparent to one of his knowledge and intelligence, or he has discovered something that should serve as a warning that he is being deceived. Id. at 70-72, 116 S.Ct. 437. The creditor must prove both actual and justifiable reliance, keeping in mind that "the greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact." Id. at 76, 116 S.Ct. 437.
c. Materiality
The Second Circuit has not reviewed the proper standard for materiality under § 523(a)(2)(A). As a recurring guidepost for materiality, however, case law often relies on the Restatement (Second) of Torts § 551 (1977). Bacino, 2014 WL 806159, at *17, 2014 Bankr. LEXIS 894, at *48.
For facts to be material, the Restatement requires that there be a duty to disclose:
(a) Facts which the other is entitled to know based on the parties' relationship;
(b) Facts which, if not disclosed, may be misleading;
(c) Facts which are subsequently acquired which a party knows will make untrue or misleading a previously understood representation;
(d) Facts about which a party made representations without the expectation of them being acted on, subsequently learns the other is going to act in reliance on those facts;
(e) And when the other party is about to enter the transaction under a mistake as to facts which are basic to the transaction, and the other party, because of the relationship between them, would reasonably expect disclosure of those facts.
Id.
In order for a fact to be material, it must have played a substantial part and, thus, have been a substantial factor, in influencing the creditor's decision. See , e.g. , North Shore Cmty. Bank & Trust Co. v. Carlson (In re Carlson) , Case No. 08-B-22322, Adv. No. 09-A-00231, 2011 WL 666307, at *5-6, 2011 Bankr. LEXIS 654 at *18 (Bankr. N.D. Ill. Feb. 10, 2011) (citing Mercer , 246 F.3d at 413 ); see also , Green v. Salvatore (In re Salvatore) , Case No. 10-16449/JHW, Adv. No. 10-01679, 2011 WL 2115816, at *11-12, 2011 Bankr. LEXIS 2091, at *33-34 (Bankr. D. N.J. May 26, 2011) (citing Evans v. Dunston , 146 B.R. 269, 275 (D. Colo. 1992) ("The false representation *24must be sufficiently material to have caused the plaintiff to act where she would not have done so had she known the truth") ). "While it is certainly not practicable to require the debtor to 'bare his soul' before the creditor, the creditor has the right to know those facts touching upon the essence of the transaction." In re Van Horne , 823 F.2d 1285, 1288 (8th Cir. 1987).
2. Analysis
This case involves a commercial contract dispute between parties that were introduced and brought together by Henry Schein in its capacity as a broker, whose services failed to meet the expectations of any of the parties. All of the parties involved made decisions based upon Henry Schein or Bambrick's advice, which in hindsight, now appear to have been ill-advised. As a result, Plaintiffs and Debtor suffered financial losses. Yet a breach of contract does not, by itself, render Plaintiffs' resulting damages claim nondischargeable under § 523(a)(2)(A).
Under the facts and circumstances of the case, the Court cannot conclude that the requisite elements of materiality, reliance, or intent have been met. Plaintiffs allege that Debtor misrepresented his marital status during the parties' negotiations, and that his alleged marriage to Lidiya was a principal consideration in their decision to accept his offer and to finance the purchase. In fact, they suggest that but for this misrepresentation, they would not have accepted his offer to purchase the practice or agreed to finance the purchase. Other than their testimony at trial, the record bears no evidence that the purchaser's marital status was material to either the sale or financing.
As argued in Debtor's Memorandum, few courts have addressed the issue of whether a debtor's marital status is material in the context of a § 523(a)(2)(A) proceeding, and only one has answered this inquiry affirmatively. Compare Van Horne , 823 F.2d 1285 (finding materiality where the debtor's relationship with the creditor's daughter, a woman who he intended to divorce, was the "raison d-etre " for the renewal of credit), with Parker v. Grant (In re Grant) , 237 B.R. 97 (Bankr. E.D. Va. 1999) (rejecting plaintiffs' argument that the debtor's marital misrepresentation was the "sine qua non " and, thus, failing to find materiality with respect to debtor's marital status in a residential lease transaction). Given the nature of the transaction and the involvement of Henry Schein as experts and an intermediary to the transition of the practice from one dentist to another dentist, the Court does not find the prospective purchaser's marital status to have been material to Plaintiffs' business determinations or, more specifically, the parties' sale transaction.
Even if this Court found otherwise, the evidence strongly suggests that there was no reliance by Plaintiffs on Debtor's misrepresentation of Lidiya as his wife rather than as his ex-wife. Reddy's deposition testimony, which is more plausible than her trial testimony on this point because of its proximity to the failed business transaction, shows a lack of reliance on any representations made by Bambrick or Debtor about his relationship with Lidiya. When asked during her deposition what she would have done differently if Debtor had told her directly that he and Lidiya were divorced during their initial meeting, Dr. Reddy answered, "I don't think it would have made any difference to me at that time because it's his personal life. I have nothing to do with that. You're coming to buy my practice. It's up to you. Whatever your personal life is, is your personal life." (Def.'s Ex. 11, 75.) It was not until after *25Plaintiffs and Debtor had entered into the PPA, Lease, Note, and CSA that Plaintiffs became fixated on Debtor's marital circumstances. Their decision to sell the practice and rent the premises to Debtor, as well as to finance the sale, appears to have been founded upon Debtor's ability to practice dentistry and care for the practice's existing patients, as well as his creditworthiness, notwithstanding the differences in Dr. Reddy and Debtor's business philosophies and the fact that Henry Schein's recommended banks had already denied his business loan applications.
Finally, the Court finds that Debtor lacked the requisite fraudulent intent in his dealings with Plaintiffs. "The issue of intent requires actual or positive intent." Salvatore, 2011 WL 2115816, at *14, 2011 Bankr. LEXIS 2091, at *39 (citing N.J. DOL & Workforce Dev. V. Carey (In re Carey) , Chapter 7 Case No. 08-24396, Adv. No. 08-2934, 2010 WL 936117, at *1, 2010 Bankr. LEXIS 970 at *1 (Bankr. D.N.J. Mar. 11, 2010) ). For purposes of § 523(a)(2)(A), scienter requires a showing that, at the time the debt was incurred, there existed no intent on the part of the debtor to repay the obligation. Banayan , 468 B.R. at 576 n.309 (citing Harrison , 301 B.R. at 854 (citing Mercer , 246 F.3d at 403 ; Binger v. Bloomfield , 293 B.R. 148, 153 (Bankr. N.D. Ohio 2003) ) ). Because intent to defraud or deceive is rarely admitted, it may be established by circumstantial evidence or inferred from the surrounding facts and circumstances of the case. Id. n.311 (citing Desiderio v. Parikh (In re Parikh) , 456 B.R. 1, 34 (Bankr. E.D.N.Y. 2011) (citing Dubrowsky v. Estate of Perlbinder (In re Dubrowsky) , 244 B.R. 560, 572-73 (E.D.N.Y. 2000) ). Accordingly, the debtor's credibility is an important factor in finding or rejecting the same. Id. n.312 (citing In re Magnusson , 14 B.R. 662, 669 (Bankr. N.D.N.Y. 1981) (citing cases) ).
Preliminarily, the Court notes that Debtor was a credible witness. Debtor's testimony during his deposition and at trial, together with the record as a whole, convince the Court that he did not harbor an improper motive in his dealings with Plaintiffs. Debtor testified that it was his dream to own and operate his own dental practice in the United States. Given his admitted lack of business acumen, Debtor trusted Henry Schein's representations that Dr. Reddy's practice would be a turn-key operation. According to Debtor, this was inaccurate as the practice was outdated and would have required a significant investment to modernize the equipment necessary for the type of practice Debtor envisioned. Perhaps even more detrimental to Debtor's success, and as shown by Dr. Reddy's decline in income prior to the sale, the practice was far from thriving due to the publicity of Dr. Reddy's disciplinary proceeding. (Ex. 11, 14-16.) While Debtor did not make any improvements to the practice, he did make payments to Plaintiffs under both the Note and Lease prior to his default, which he testified occurred after he depleted his savings and he could no longer work multiple jobs to support the monthly payments to Plaintiffs. Even after his default, Debtor attempted to resell the practice and to negotiate repayment terms to Plaintiffs for the shortfall between his offer and Dr. Nolan's offer, which Plaintiffs ultimately rejected. Thus, an examination of the traditional indicia of fraud, including whether Debtor undertook any significant measures toward the performance of his obligations, compels the Court to find in his favor.
D. Plaintiffs' Section 523(a)(6) Claim
Section 523(a)(6) excepts from discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity."
*2611 U.S.C. § 523(a)(6). "The terms willful and malicious are separate elements, and both elements must be satisfied." Vyshedsky v. Soliman (In re Soliman) , 539 B.R. 692, 698 (Bankr. S.D.N.Y. 2015) (internal quotation marks and citations omitted). "To establish that a debtor acted willfully under § 523(a)(6), the plaintiff must demonstrate that the injury in question was a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Kawaauhau v. Geiger , 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). To establish that a debtor acted maliciously, the plaintiff must prove that the debtor's act was "wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will." Navistar Fin. Corp. v. Stelluti (In re Stelluti) , 94 F.3d 84, 87 (2d Cir. 1996) (collecting cases).
"The heart of any action under § 523(a)(6) is the debtor's intent to injure the plaintiff." Bombardier Capital, Inc. v. Tinkler (In re Tinkler) , 311 B.R. 869, 880 (Bankr. D. Colo. 2004). For that reason, commercial contract disputes do not fit comfortably into the rubric of a § 523(a)(6) nondischargeability action based on willful and malicious injury. Id.
Here, Plaintiffs' sole allegation in support of their § 523(a)(6) claim is that Debtor acted willfully and maliciously when he violated the CSA by transferring the medical records off-site to a different dental practice and informed the patients that they could obtain their records at that alternate location, which Plaintiffs repeatedly asserted also violated his professional duties and federal law. Plaintiffs' believed that this destroyed any remaining goodwill associated with the dental practice and, in turn, their ability to sell or rent the premises to another professional.
This occurred, however, after Dr. Pratap Reddy commenced an eviction proceeding against Debtor, and after Debtor rejected Plaintiffs' final offer to mitigate damages in relation to the proposed sale of the practice to Dr. Nolan. While this Court does not take a position as to whether the transfer occurred in compliance with the Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191 (1996), even if it did not, the illegality of an action does not render it willful and malicious for purposes of § 523(a)(6). Westfall v. Glass (In re Glass) , 207 B.R. 850, 857 (Bankr. E.D. Mich. 1997). Under the facts and circumstances presented, the Court does not find evidence of tortious conduct by Debtor. Because § 523(a)(6) requires significantly more than a breach of contract or failure to comply with a known duty, the Court is again compelled to find in Debtor's favor.
VI. Conclusion
For the reasons set forth herein, although the Court's decision in this proceeding may seem harsh, particularly in light of what Plaintiffs' have endured thus far with respect to Dr. Reddy's exit from her profession, the Court is constrained to hold that Plaintiffs failed to carry their burden sufficient to establish that the debt owed to them by Debtor is nondischargeable under § 523(a). Accordingly, the Court will enter a separate judgment consistent with this Memorandum-Decision and Order dismissing Plaintiffs' Complaint.
Accordingly, it is now
ORDERED, that Plaintiffs' Complaint is dismissed.
Unless otherwise indicated, all chapter and section references are to the United States Bankruptcy Code, 11 U.S.C. §§ 101 -1532 (the "Bankruptcy Code"), and all rule references are to the Federal Rules of Bankruptcy Procedure.
Docket entries in the adversary proceeding will be cited as "ECF Adv. No. __," while docket entries in Debtor's chapter 7 bankruptcy case will be cited as "ECF No. __."
Dr. Reddy conceded that she entered into the consent order in settlement of the misconduct charges, but she testified that she did so reluctantly because she believed she had been unfairly targeted by a competitor and the accusations against her were unfounded. (Trial Tr. 20-23.) Thereafter, Dr. Reddy commenced a civil action in federal court against certain area dentists and members of the New York State Department of Education's Office of Professional Discipline wherein she alleged, inter alia , that she was not given a full and fair opportunity to defend herself. (Def.'s Exs. 1 & 2.) According to Dr. Reddy, this action was dismissed on procedural grounds. (Trial Tr. 63.)
Although this would appear to be a typographical error, it is in fact what the PPA provides.
The exact terms of Plaintiffs' counteroffer are unclear to the Court from the record before it, but they do not have any bearing on the Court's determination of either cause of action or the final outcome in this proceeding.
During the course of this litigation, neither Plaintiffs nor Debtor acknowledged the separate debts due to Dr. Reddy under the PPA and Note and to Dr. Pratap Reddy under the Lease. Because the Court's analysis is the same for both debts, the Court will follow suit and refer to Plaintiffs' aggregate debt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501694/ | BRENDAN LINEHAN SHANNON, UNITED STATES BANKRUPTCY JUDGE
*28Before the Court is the Motion for Interim and Final Orders Authorizing the Debtors To Assume the Closing Store Agreement and for related relief (the "Store Closing Motion") [Docket No. 25]. By this Motion, Brookstone seeks to assume a store closing agreement (the "Agreement") with Gordon Brothers Retail Partners, LLC and Hilco Merchant Resources, LLC (collectively referred to hereinafter as "Hilco") to perform certain services relating to going-out-of-business sales (the "GOB Sales"). The United States Trustee ("UST") does not object generally to the relief sought by way of the Store Closing Motion, but argues that assumption of the Agreement is procedurally improper to the extent that the Agreement with Hilco constitutes the retention of a "professional" under Bankruptcy Code § 327(a). For the reasons that follow, the Court determines that Hilco is not a professional for the purposes of the Bankruptcy Code § 327(a), and the Debtor has otherwise carried its burden to warrant assumption of the Agreement.
INTRODUCTION
Hilco is a familiar player in Chapter 11 retail restructurings in this Court. In countless cases, it has provided valuable services to debtors relating to disposition and monetization of inventory, real estate, intellectual property and other estate assets. The procedural mechanism by which Hilco (and the handful of entities that are its industry peers) are engaged to perform these services has - with very few exceptions - been by way of assumption of a services contract by motion under §§ 365(a) and 363(b) of the Bankruptcy Code. Notwithstanding a well-developed practice in this and other courts, the UST has in recent months objected in several cases and insisted that, in the circumstances described above, Hilco is serving as a "professional" in the bankruptcy proceeding and must be retained under the strictures of § 327(a). See Heritage Home Corp., LLC, et al. , Case No. 18-11736 (KG), UST Objection [Docket No. 265]; Samuels Jewelers, Inc. , Case No. 18-11818 (KJC), UST Limited Objection [Docket No. 162].
In a very recent case, my colleague Judge Gross was called upon to decide whether SB360 Capital Partners was a professional where it was acting in a role broadly similar to Hilco in the instant case. Heritage Home Corp., LLC, et al. , Case No. 18-11736 (KG), 2018 WL 4684802, Mem. Op. dated September 27, 2018 ("Heritage Home") [Docket No. 330]. After review of the applicable legal test derived from the First Merchants decision discussed in detail below, Judge Gross distilled the relevant analysis down to a standard the undersigned cannot improve *29upon: "What is clear in First Merchants is that a 'professional' is limited to those occupations which control, purchase or sell assets that are important to reorganization, is negotiating the terms of a plan of reorganization, [and] has discretion to exercise his or her own personal judgment...." Id. at ¶ 12, citing In re First Merchants Acceptance Corp. , 1997 WL 873551 at *3 (D. Del. Dec. 15, 1997).
Applying this test to the case at bar, this Court is satisfied that Hilco's services, while clearly valuable and important, are not sufficiently central to the development and implementation of the Debtor's reorganization to support a finding that it is a "professional" within the meaning of § 327(a). The established practice requires fulsome disclosure of the services to be provided and the compensation to be paid, followed by a hearing on the merits where a debtor must carry its burden under Bankruptcy Code §§ 365 and 363 to demonstrate that it is proceeding in good faith and that its proposed course of action reflects the exercise of its reasonable business judgment. This structure is compliant with the Bankruptcy Code and is sufficient to address the UST's legitimate desire for transparency and due process without imposing the additional requirements and restrictions required by § 327(a).
BACKGROUND
Brookstone Holdings Corporation and its affiliates (hereinafter "Brookstone" or the "Debtor") operate a well-known manufacturing and retailing business which produces and sells Brookstone-branded products in traditional retail outlets, including both mall and airport stores. Declaration of Greg Tribou In Support of the Debtors' Chapter 11 Petitions and Requests for First Day Relief (the "First Day Aff.") [Docket No. 2] at ¶ 16. Brookstone also sells its branded products on the internet and as wholesaler. In addition to selling its own products, Brookstone provides distribution and sale opportunities for third-party products that fit within Brookstone's brand concept. Id. at ¶ 15.
The record reflects that, as of the commencement of these cases on August 2, 2018 (the "Petition Date"), the Debtor operated 137 retail stores, 102 of which were located in malls and 35 of which were located in airports. Id. at ¶ 11. For fiscal year 2017, sales from Brookstone's mall stores made up approximately 52% of Brookstone's net sales, and sales from Brookstone's airport stores made up approximately 14% of Brookstone's net sales. The balance of Brookstone's sales came from e-commerce and its wholesale operation. Id. at ¶ 16.
A number of factors led Brookstone to seek Chapter 11 relief. Notably, the Debtor represents that a shift in consumer preferences has led to a decline in profitability for Brookstone's mall stores, which have been operating at a loss each year since the Debtor's emergence from its first Chapter 11 proceeding in 2014. Id. at ¶ 17, 55, 57. While its mall stores have been struggling, however, Brookstone sees potential for improvement in its other business segments. Id. at ¶ 18-19, 22-27. In contrast to its mall stores, Brookstone's airport stores have, for the most part, operated profitably. Id. at ¶ 18. The Debtor believes that its intellectual property carries substantial value, and its e-commerce presence has potential for expansion and further development. Id. at ¶ 27-29. However, Brookstone asserts that in order to realize its potential, it must restructure its operations. Id. at ¶ 6-7, 18, 22, 26.
Prior to the Petition Date, Brookstone determined that its restructuring plan would include the closure of its mall stores and the liquidation of a substantial portion of the inventory of those stores.
*30Id. at ¶ 66-67. In order to assist Brookstone with the management of those store closures and the associated GOB Sales, it engaged the services of Hilco. Id. at ¶ 66-67. On August 1, 2018, the Debtor and Hilco executed the Store Closing Agreement, which laid out the terms and conditions by which Hilco would assist Debtor with its store closures. The Debtor filed its petition for Chapter 11 relief the next day, and contemporaneously filed the Store Closing Motion [Docket No. 25] which requested, inter alia , that the Court authorize the Debtor to assume the Agreement.
The UST has filed a limited objection to the issuance of an order granting Debtor approval of the assumption of the Closing Store Agreement (hereinafter the "Limited Objection") [Docket No. 185]. Specifically, the UST asks the Court to find that Hilco is a professional for the purpose of 11 U.S.C. § 327(a), and that the Debtor therefore must abide by the statutory requirements governing the retention of professionals in bankruptcy proceedings. After a hearing, the Court issued an Interim Order [Docket No. 75] granting most of the relief requested by the Debtor in the Store Closing Motion (and thereby allowing the GOB Sales to proceed), but taking under advisement the issue of whether Hilco is a "professional" for purposes of § 327(a).
Hilco and the UST have prepared and submitted a helpful Joint Stipulation of Facts (the "Joint Stipulation") [Docket No. 261] setting forth agreed-upon facts relevant to the Store Closing Motion and the Limited Objection. The Joint Stipulation reflects that, prior to the Petition Date, the Debtor determined to close 102 stores and liquidate inventory over an 8-week post-petition period, and in order to facilitate this process, it entered into the Store Closing Agreement with Hilco. Joint Stipulation at ¶ 2-4. Hilco's duties and obligations are as follows:
(i) Recommend appropriate discounting to effectively sell all of Merchant's goods located at the Stores as of the Sale Commencement Date or thereafter delivered thereto as may be mutually agreed by the parties in accordance with a "store closing" and other mutually agreed upon themed sale, and recommend appropriate point-of-purchase, point-of-sale, and other internal and external advertising in connection therewith;
(ii) Provide qualified supervision to oversee the conduct of the Sale;
(iii) Maintain focused and constant communication with Merchant's Store Operations team to coordinate and keep them abreast of strategy and timing and to properly effect Store-level communication by Merchant's employees to customers and others about the Sale;
(iv) Establish and monitor accounting functions for the Sale, including evaluation of sales of Merchant's goods located at the Stores by category, sales reporting and expense monitoring;
(v) Recommend loss prevention strategies;
(vi) Coordinate with Merchant so that the operation of the Stores is being properly maintained including ongoing customer service and housekeeping activities; and
(vii) Recommend appropriate staffing levels for the Stores and appropriate bonus and/or incentive programs (to be funded by Merchant) for Store employees.
Id. at ¶ 8.
The parties have also stipulated that Hilco's fee arrangement in the Store Closing Agreement is as follows:
...the Debtors agreed to pay the Consultant a sliding "Incentive Fee" from no *31Incentive Fee to 1.50 percent, which is tied to merchandise sales and the Aggregate Recovery Percentage. The Consultant will be reimbursed for controlled expenses ("Consultant Controlled Expenses") upon presentation of reasonable documentation for expenses actually incurred up to $520,871 (or such amount as mutually agreed by Consultant and Debtors). The Consultant will also receive a separate 15% commission for selling furnishings, trade fixtures, and equipment, which the Debtors has not informed the Consultant that the Debtors wish to retain ("Retained FF & E"). Any furniture, fixtures, and equipment not identified as Retained FF & E, the Consultant may sell on a commission basis.
Id. at ¶ 9.
The record reflects that Hilco and Brookstone anticipated, at the time of entry into the Agreement on the eve of the bankruptcy proceeding, that they might enter into additional transactions or business arrangements beyond the GOB Sales contemplated in the Agreement. The potential for such transactions is expressly mentioned in the Agreement between Hilco and the Debtor. As described in the Joint Stipulation, the Agreement contained a provision which provided that:
The Consultant is a service provider to the Debtors whose services have a limited purview, but may be expanded should the Debtors and [Hilco] agree mutually upon the terms of a global transaction (an 'Alternative Transaction') for assets not subject to the Closing Stores Agreement. In the event that the Debtors and the Consultant do enter into an Alternative Transaction, the Store Closing Agreement may be terminated.
Id. at ¶ 22; Agreement § 2(C).
Additionally, Hilco and the Debtor also envisioned the prospect that Hilco might make an offer to purchase assets of the Debtor unrelated to the GOB Sales:
[Hilco] and a third party, as a joint venture submitted an offer to the Debtors to purchase certain other assets of the Debtors that expired by its own terms prior to August 28, 2018. It is still possible that [they] may submit additional offers at this time.
Joint Stipulation at ¶ 22.
In connection with the request for assumption of the Agreement, Hilco has filed comprehensive disclosures under penalty of perjury identifying connections and relationships relevant to this case. See Declaration of Disinterestedness of Ian Fredericks [Docket No. 232]; Declaration of Disinterestedness of Mackenzie Shea [Docket No. 234]. Hilco has represented that, while it is not required to file such disclosures in the context of an assumption motion under § 365, it has developed this practice in many prior cases either in response to concerns raised by the UST or in an effort to provide greater transparency regarding the transaction at hand. Brief of Hilco in Support of the Motion to Assume at ¶ 74 [Docket No. 186].
The foregoing recounts a complicated but hardly unusual business relationship in the context of a retail bankruptcy. In a nutshell, Hilco contracted immediately before the Petition Date to assist the Debtor with the GOB Sales in exchange for compensation that appears in line with industry standards. However, informed by decades of experience with the potential pitfalls of even the most promising retail restructurings, Hilco and the Debtor left open and expressly contemplated that Hilco might be called upon or invited to play other roles in the case as circumstances may require, such as buying estate assets *32or even serving as a lender to Brookstone.
JURISDICTION AND VENUE
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a "core proceeding" under 28 U.S.C. § 157(b)(2)(A) and (O).
THE PARTIES' POSITIONS
The UST posits that Hilco is serving as an auctioneer and so must be retained under Bankruptcy Code § 327(a). Alternatively, the UST contends that, given the nature of the services to be performed by Hilco for the Debtor here, Hilco is an "other professional" within the meaning of that term as it is used in § 327(a) and therefore must be formally retained.
Hilco and the Debtor offer several responses to the UST's objection. First, the Debtor observes that Hilco and its peers have performed these services, without being retained under § 327(a), in scores if not hundreds of retail bankruptcies stretching back decades. Next, Brookstone submits that Hilco is not an auctioneer since it is not in any fashion conducting an auction. Brookstone then walks through the familiar six-factor test laid down in First Merchants to assert that Hilco is not an "other professional" under § 327(a). And finally, Brookstone contends that any ruling that would require Hilco to be retained as a professional would have a significant and detrimental impact, not only in this case, but in most retail Chapter 11 cases by severely limiting the types of work and services Hilco could perform.
DISCUSSION
The issue before the Court is whether Hilco must be retained as a professional pursuant to § 327(a) of the Bankruptcy Code. That section provides as follows:
Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons , that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
11 U.S.C. § 327(a) (emphasis added).2 If Hilco, serving in the role described by the Store Closing Agreement, is a professional for the purposes of § 327(a), the retention of Hilco must be requested and approved under section § 327(a) and Federal Rule of Bankruptcy Procedure 2014. These provisions operate to require the Debtor and Hilco to provide the Court with disclosures that relate to all connections and potential conflicts-of-interest. The Court must also determine that the professional is "disinterested"3 and does not "hold or represent *33an interest adverse to the estate." Id. Importantly, if Hilco is a retained professional, it would likely be precluded from engaging in further transactions with the Debtor (such as purchasing assets not encompassed within the GOB Sales) that were referenced in the Agreement. See, e.g. , 18 U.S.C. § 154(a).
As noted above, the UST argues as a threshold matter that Hilco must be retained as a professional, pursuant to § 327(a), because Hilco is an "auctioneer." Limited Objection at 12-13. In the alternative, the UST argues that Hilco must be retained as a professional because Hilco is an "other professional" for purposes of § 327(a). Id. at 13. The Court addresses both arguments, in turn, below.
A. Hilco is Not an Auctioneer for the Purpose of § 327(a)
An auctioneer is a professional identified under § 327(a). If a party is serving as an auctioneer, no matter how modest the compensation or how limited the services, it must be formally retained. In re Borders Grp., Inc. , 453 B.R. 477, 485 (Bankr. S.D.N.Y. 2011). The Bankruptcy Code does not define the term "auctioneer." The Court looks therefore to common usage of the term. An auctioneer is defined as "[o]ne who conducts sales by auction." Oxford English Dictionary 778 (2nd ed. 2004). An auction is "[a] public sale in which each bidder offers an increase upon the price offered by the preceding, the article put up being sold to the highest bidder." Oxford English Dictionary 778 (2nd ed. 2004). These general definitions are consistent with the Court's understanding and expectation regarding usage of these terms in the bankruptcy context.
The undisputed record reflects that inventory being sold by Hilco is not being sold to the highest bidder at a public sale. Instead, it is being priced and sold at stores in a manner typical of a retail sale, not an auction. Transcript regarding hearing held August 29, 2018 at 149 [Docket No. 336] (hereinafter "August 29 Tr."). During the course of Brookstone's GOB Sales, the customer does not compete with other purchasers for items, negotiate with Hilco regarding price, or make bids for any of the items for sale. Instead, the customer browses, selects, and purchases pre-priced merchandise from the store:
The consumer walks in, picks the item off the shelf, brings it to the cash register in the store, the merchant's employees are the ones who operate their [point-of-sale] systems; consumer hands the goods, it's scanned at the [point-of-sale] system, the receipt is generated, the merchant collects the proceeds of the sale from whatever tender the customer gave, customer walks out with the receipt and the merchandise...There is no bidding. There is no negotiation .
August 29 Tr. at 149-150 (emphasis added).
In addition to the retail sale of inventory, Hilco is also under contract with the Debtor to sell the "furniture, fixtures, and equipment" ("FF & E") in the stores. [Docket No. 25, Exhibit 2, ¶ 6 (A)-(D) ]. While the disposal of this FF & E is distinct from a typical retail sale, it is, nevertheless, not sold in an auction; nor does Hilco act as an auctioneer. Ian Fredericks, an officer of Hilco, testified that the FF & E is marked with prices and is available for purchase. August 29 Tr. at 150-51. At no point is the FF & E the subject of competitive bidding or of an auction process managed by Hilco. Id. at 150-51.
*34The Court is of course aware that there is a variety of ways to conduct an auction. However, the sale process contemplated by the Agreement between the Debtor and Hilco is not an auction in any respect. Because the undisputed record clearly establishes that Hilco was not hired to conduct an auction on behalf of Debtor, the Court concludes that Hilco has not been engaged as an "auctioneer" for the purposes of § 327(a). Accord Heritage Home at ¶ 8.
B. Hilco Is Not an "Other Professional" For the Purposes of 327(a)
The Court turns now to whether Hilco is an "other professional" as that term is used in § 327(a). In addition to "attorneys, accountants, appraisers [and] auctioneers," § 327(a) allows debtors-in-possession to retain "other professional persons." 11 U.S.C. § 327(a). "Professional" is a term not defined in the Bankruptcy Code, and courts have struggled to identify clear principles to use to determine whether a given employee is an "other professional" which must be retained under § 327(a). See First Merchants at *2 (D. Del. Dec. 15, 1997) (describing approaches to the issue as "vague and difficult to apply").
Chief Judge Farnan's approach in First Merchants is helpful and instructive. In that case, First Merchants operated a business that primarily serviced payments on account of sub-prime vehicle loans. Id. at *1. The debtor proposed to sell certain of its receivables to Ugly Duckling Corporation ("Ugly Duckling"), and under the arrangement presented to the court, the debtor would enlist the assistance of Ugly Duckling in servicing not just the receivables it was purchasing, but all of the receivables in the debtor's portfolio. Id. At bottom, the debtor's business consisted of moving and accounting for payments received from a portfolio of loans, and Ugly Duckling was to largely take over that process. Id. at *1, *3-*4. The UST objected to the proposed hiring of Ugly Duckling, contending that the breadth and significance of the service to be provided by Ugly Duckling rendered it an "other professional" and so it was required to be formally retained. Id. at *1.
To resolve that question, the court developed and applied a "list of factors to be considered and applied in making the determination of whether an employee is a 'professional' within the meaning of Section 327." Id. at *2. Chief Judge Farnan wrote that "[a]lthough the list is not exclusive...it reflects many of the considerations that have impacted judicial decisions in this area." Id. at *3. The court in First Merchants noted - and this Court emphasizes - that "in applying these factors...no one factor is dispositive...the factors should be weighed against each other and considered in toto ." Id. While affording substantial flexibility in applying the test, the court stressed that the most important considerations were the amount of independence and discretion afforded to Ugly Duckling in its relationship with the debtor and the nexus between the services to be provided and the debtor's reorganization. Id. at *3-*4 ("[T]he Court finds the amount of discretion afforded [Ugly Duckling] in the Consultation Agreement to be troublesome.").
The six factors developed in First Merchants are as follows:
(1) whether the employee controls, manages, administers, invests, purchases or sells assets that are significant to the debtor's reorganization;
(2) whether the employee is involved in negotiating the terms of a Plan of Reorganization;
*35(3) whether the employment is directly related to the type of work carried out by the debtor or to the routine maintenance of the debtor's business operations;
(4) whether the employee is given discretion or autonomy to exercise his or her own professional judgment in some part of the administration of the debtor's estate, i.e. the qualitative approach;
(5) the extent of the employee's involvement in the administration of the debtor's estate, i.e. the quantitative approach; and
(6) whether the employee's services involve some degree of special knowledge or skill, such that the employee can be considered a "professional" within the ordinary meaning of the term.
Id. at *3 (footnotes removed). Applying these factors to the stipulated facts of the instant proceeding helps shape the Court's analysis, and informs its ultimate determination that Hilco is not acting as an "other professional" when performing its duties pursuant to the Store Closing Agreement.
The first First Merchants factor is "whether the employee controls, manages, administers, invests, purchases or sells assets that are significant to the debtor's reorganization." Id. Here, Brookstone is hiring Hilco to assist with the closure of 102 of Brookstone's stores, which together were responsible for more than 50% of the debtor's sales in FY 2017. First Day Aff. at ¶ 6. At first blush, then, it would appear that Hilco is in fact engaged in "[selling] assets that are significant to the debtor's reorganization plan." First Merchants at *3.
However, the record developed here shows that the Debtor and its management and staff remain at all times in complete control of all aspects of the GOB sales. The sales are conducted in their stores, run by the Debtor's existing employees, and the Debtor retains control over both the pricing strategies and the duration of the GOB Sales at the stores. So while it is true that Hilco is certainly providing services in connection with an important sale process, the record does not support a finding that Hilco "controls" or "manages" that process. The first factor weighs in favor of Hilco and the Debtor.
The second First Merchants factor is "whether the employee is involved in negotiating the terms of a Plan of Reorganization." Id. at *3. The record reflects that Hilco is not involved in negotiating the terms of a plan, and the parties are in agreement as to this prong. See Limited Objection at 14 (stating that "factors 1 and 3 through 6 weigh in favor" of determining that Hilco is a professional). This factor weighs in favor of Hilco and the Debtor.
The third First Merchants factor concerns "whether the employment is directly related to the type of work carried out by the debtor or to the routine maintenance of the debtor's business operations..." First Merchants at *3. If it is, then there is an assumption that the provider of these services is not a "professional."
The closure of 102 of Brookstone's retail stores - in essence, the shuttering of its entire mall retail business segment - is not "routine." Id. ; First Day Aff. at ¶ 11. The stores to be closed were collectively responsible for more than half of Brookstone's net sales in FY 2017. First Day Aff. at ¶ 16. Liquidations and store closures at this scale are not the "type of work carried out by the debtor." Instead, the Debtor entered into these proceedings with the expectation that the GOB Sales and the related store closings would constitute a substantial part of the Debtor's restructuring. First Day Aff. at ¶ 66.
*36The Debtor entered into Chapter 11 with the expectation of being able to "execute an orderly store closing process." Id. at ¶ 66. That process, which includes the liquidation and store closure services provided by Hilco, is undoubtedly enabled by the Debtor's entry into Chapter 11 proceedings. The protections afforded to the Debtor by the Bankruptcy Code (and this Court) allow the Debtor to operate the GOB Sales free from contractual and regulatory restrictions that might otherwise restrict the Debtor's ability to quickly and efficiently liquidate its inventory and close its stores. As the parties stipulated, "[i]nside of bankruptcy, retailers face fewer restrictions...can receive relief from lease restrictions...[and] have other rights that a retailer in a non-bankruptcy context does not." Joint Stipulation at ¶ 17. Given these facts, the Court finds that Hilco's services for the Debtor relate to the Debtor's restructuring activity, not the Debtor's routine "business operations," First Merchants at *3, and that this factor weighs in favor of the UST.
The fourth First Merchants factor is "whether the employee is given discretion or autonomy to exercise his or her own professional judgment in some part of the administration of the debtor's estate ..." Id. The UST argues that Hilco has "a meaningful amount of autonomy and control" in overseeing the GOB Sales. Limited Objection 15. However, the record developed in this case and the Joint Stipulation actually reflect that the discretion afforded to Hilco under the Agreement is limited, and the discretion that is being exercised by Hilco is not being exercised "in the administration of the debtor's estate." Id. The two most important considerations in conducting the GOB Sales are (1) pricing strategy and (ii) the timeline for the sales. Hilco may offer advice or guidelines to the Debtor as to these areas, but it does not enjoy the freedom to dictate how the process is implemented. Indeed, the record reflects that Hilco offered advice to the Debtor as to how long to run the GOB Sales, and the Debtor rejected that advice. Joint Stipulation at ¶ 4; August 29 Tr. at 148.
It is useful to compare Hilco's role in this case to the amount of discretion and control granted Ugly Duckling, the consultant in the First Merchants case. As noted above, Ugly Duckling was given extensive and exclusive discretion to manage virtually all of the assets of the debtor.4 First Merchants at *3. Ugly Duckling was even given the discretion to determine the scope of its own contractual obligations to the debtor: the agreement between First Merchants and Ugly Duckling provided that Ugly Duckling would "support the Debtor with specific accounting, record keeping and cash management functions with respect to billing, payment and collection of the Serviced Receivables" and this support was to be provided "[t]o the extent deemed necessary and appropriate by [Ugly Duckling] " - not by First Merchants, the debtor-in-possession. Id. (emphasis added). The court emphasized the extent to which Ugly Duckling was proposing to essentially run the debtor's entire business:
*37[Ugly Duckling] will be intimately involved in the management of these receivables, the primary asset remaining in the Debtor's estate, and in accomplishing tasks that are within the fiduciary duties undertaken by a debtor-in-possession.
Id.
In contrast to the wide discretion given to Ugly Duckling in First Merchants , Hilco is given a relatively narrow mandate under the Agreement. Hilco did not determine that store closures were warranted, which stores would be closed, or what the duration of the Store Closing Sale would be. Joint Stipulation at ¶ 2-4, August 29 Tr. at 148. The Debtor retained final authority over the Store Closing Sale, acting as the final word on matters as minor as the design of the signage advertising for the GOB Sales and as major as pricing strategy and the sale timeline. Joint Stipulation at ¶ 2-4; August 29 Tr. at 138-39, 148, 150.
Further, what discretion is being exercised by Hilco is not being "exercise[d]...in some part of the administration of the debtor's estate." First Merchants at *3. Unlike the consultant in First Merchants , Hilco has not been given discretion to "accomplish[ ] tasks that are within the fiduciary duties undertaken by a debtor-in-possession." Id. Here, Hilco provides advice and guidance on an inventory reduction and liquidation strategy. In First Merchants , by contrast, the court stressed the extraordinary mandate granted to the putative consultant:
[Ugly Duckling's] role under the Consultation Agreement extends beyond mere debt collection to the evaluation and assessment of the [d]ebtor's equipment, personnel, organization, current and future facilities, and certain procedures and policies, relating to servicing the [r]eceivables.
Id. at *4. This factor weighs in favor of Hilco and the Debtor.
The fifth First Merchants factor is "the extent of the employee's involvement in the administration of the debtor's estate ..." Id. The analysis of this factor is similar to the analysis of the fourth First Merchants factor, because both factors address Hilco's involvement in "the administration of the debtor's estate." Id. The closure of 102 of the Debtor's stores does, as asserted by the UST, "represent[s] a significant amount of restructuring activity." Limited Objection at 14. However, there is considerable distance between Hilco's assistance in inventory disposition, and the negotiation and implementation of a reorganization strategy that will be embodied in a plan that hopefully will enjoy stakeholder input and support. Indeed, the record reflects that Hilco's work for Brookstone has already concluded as of the date hereof, long before the filing of a plan or the closing of other transactions that form the core of the restructuring strategy. Accordingly, the Court finds that Hilco's role in the store closures does not constitute meaningful participation in the "administration of the debtor's estate" as contemplated by § 327(a). The fifth factor therefore favors Hilco and the Debtor.
The sixth First Merchants factor is "whether the employee's services involve some degree of special knowledge or skill, such that the employee can be considered a 'professional' within the ordinary meaning of the term." First Merchants at *3. In all candor, the Court finds this prong of the test to be entirely unhelpful. Long experience teaches that literally all business and service activities require "specialized knowledge or skill" on the part of the service provider. Hilco personnel undoubtedly possess specialized knowledge or skill, but so do all of the other entities providing services to the Debtor, from IT support to *38waste management services and beyond. This factor therefore does not meaningfully weigh into the Court's decision today.
Considering the relevant factors "in toto ," as First Merchants contemplates, the Court is satisfied that Hilco is not acting as an "other professional" when it provides services to the Debtor pursuant to the Agreement.
CONCLUSION
For the reasons stated above, the Limited Objection of the UST is overruled, and the Store Closing Motion is granted. The parties are requested to confer and provide the Court with a form of order consistent with this Opinion within 7 days of the date hereof.
This Opinion constitutes the Court's findings of fact and conclusions of law, as required by the Federal Rules of Bankruptcy Procedure. See Fed. R. Bankr. P. 7052, 9014(c).
"Although section 327 speaks only in terms of a trustee, a debtor in possession in a [C]hapter 11 case has all of the rights, duties and powers of a trustee." 3 Collier on Bankruptcy P 327.01 (16th 2018). See also In re Borders Grp., Inc. , 453 B.R. 477, 485 (Bankr. S.D.N.Y. 2011) ("Section 327(a)...permits a debtor-in-possession, with the court's approval, to retain professional persons, including auctioneers.").
The Code defines "disinterested person" as a person or entity that:
(A) is not a creditor, an equity security holder, or an insider;
(B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and
(C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.
11 U.S.C. § 101(14).
In the initial version of the agreement between First Merchants and Ugly Duckling, Ugly Duckling - again, in its role as an alleged "consultant" to debtor First Merchants - was granted the "sole discretion, [to] employ outside personnel or consultants without the scrutiny of the Court, creditors, or the [UST]." First Merchants at *3. The extent of the discretion sought by Ugly Duckling is striking, although First Merchants later submitted a revised version of the agreement which narrowed Ugly Duckling's hiring power to "such persons as the Debtor currently utilizes or as approved by the Court or the United States Trustee's office."Id. at *3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501695/ | JEFFERY A. DELLER, United States Bankruptcy Judge
The matter before the Court concerns the interpretation of a post-petition financing order previously entered by the Court. This order was entered with the consent of the Debtor (Somerset Regional Water Resources, LLC), the Debtor's sole member (Mr. Larry Mostoller), and the Debtor's post-petition lender (Somerset Trust Company).
This Court has jurisdiction to interpret and enforce its prior orders. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 149, 129 S.Ct. 2195, 2205, 174 L.Ed.2d 99 (2009). This matter is a core proceeding over which the Court has both subject-matter jurisdiction and the requisite statutory authority to enter a final order. See 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(D), 157(b)(2)(K), 157(b)(2)(M), 157(b)(2)(O), and 1334(b).
Somerset Trust Company ("STC") is the Debtor's largest creditor and was the Debtor's pre-existing secured lender. Following the commencement of this bankruptcy case, the Debtor needed liquidity to support its current operations and approached STC regarding the Debtor's continued use of STC's cash-collateral. The Debtor also requested further working capital from STC in the form of post-petition financing to fund the Debtor's business affairs during the early parts of this bankruptcy case. By all accounts, the Debtor's continued use of cash-collateral and the acquisition of post-petition financing were viewed by the Debtor as being immediately necessary to avoid irreparable harm to its business and assets.
Working on a short timeframe, the Debtor, Mr. Mostoller, and STC (collectively referred to herein as the "Parties") negotiated a post-petition financing package. An important component of the financing package was Mr. Mostoller's pledge to STC of Mr. Mostoller's right to a federal income tax refund attributable to losses incurred by the Debtor in year 2015, and imputed to Mr. Mostoller by virtue of the Debtor's taxation as an S-Corporation. This element of collateral was important to STC because (a) the long-term viability of the Debtor's business was uncertain in light of the recent downturn of the energy markets, (b) the Debtor was already highly leveraged, and (c) the Debtor did not own any other significant unencumbered assets which could be pledged to support new lending by STC.
The Parties memorialized their agreement in a consent order submitted and approved by this Court, which was titled: Final Order Pursuant to Sections 11 U.S.C. § 546 of the Bankruptcy Code and Bankruptcy Rule 4001(c) Authorizing Postpetition Financing, Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363, Granting Adequate Protection Pursuant to 11 U.S.C. §§ 363 and 364 ("Final DIP Order", ECF No. 138).
*42Ultimately, the losses sustained by the Debtor in 2015 generated a refund of federal income taxes paid in 2015. Through the carry-back of the unused portion of those 2015 losses, it also generated a tax refund of federal income taxes paid in 2013 and 2014. The refunds referenced herein were processed by the IRS in 2016, as set forth more fully below.
Specifically, the refund of taxes paid on account of tax years 2015 and 2013 were completely offset by the Internal Revenue Service against outstanding federal tax obligations owed thereby leaving only a tax refund of taxes paid with respect to the 2014 amended tax return of Mr. and Mrs. Mostoller (the "Respondents").
For purposes of clarity it is noted that the amended 2014 tax return was filed by the Respondents in 2016 based upon the operating losses attributable to the Debtor in 2015. This amended tax return was also filed at the same time the Respondents filed other tax returns, including their 2015 tax return. As such, by the instant contested matter, STC seeks payment of this refund set forth in the amended 2014 tax return contending it constitutes STC's collateral.
The operative issue presented by these proceedings is therefore whether the Final DIP Order mandates the payment of the remaining tax refund to STC. In this regard, a question has arisen as to whether ¶ 6 of the Final DIP Order contains an ambiguity which would bring the refund of taxes (paid by the Respondents in 2014) within the ambit of the tax refund pledged to STC (when such refund was obtained by the Respondents on account of the Debtor's 2015 operating losses).
STC contends that the refund of taxes paid in 2014 falls within the scope of the collateral pledged to STC. Towards this end, STC argues that (a) Mr. Mostoller's course of conduct and participation in negotiations of the Final DIP Order supports STC's position and mandates a finding that the refund at issue should be paid to STC, and (b) interpreting the Final DIP Order to exclude the refund of taxes paid in 2014 from the pledge of collateral to STC would lead to an "absurd and unreasonable" result because all the parties intended STC to receive the tax refund attributable to the Debtor's year 2015 operating losses.
The Respondents disagree and argue that the Final DIP Order does not contain any ambiguity, and they further contend that the refund of the 2014 taxes is free and clear of any collateral pledged to STC. The Respondents also argue that reading the Final DIP Order to exclude the refund of taxes paid in 2014 does not lead to an "absurd and unreasonable" result under the circumstances of this case. In this regard, the Respondents argue that STC got exactly what it bargained for. That is, no right to a refund for the 2014 taxes paid even though the refund is on account of the carryback of the Debtor's 2015 losses.
I.
BACKGROUND
The Debtor is a limited liability company taxed as an S-Corporation. Stipulation ¶ 2, ECF No. 1082. Prior to the Debtor's bankruptcy filing, Mr. Mostoller was the sole owner or member of the Debtor. See Tr. of Jan. 26, 2017 Hr'g 45:8-18, ECF No. 1055; Stipulation ¶¶ 2, 5. Being taxed as an S-Corporation, the Debtor's profits and losses were imputed to the Respondents, which were then reported on the Respondents' joint tax returns. Stipulation ¶ 6.
Prior to 2015, the Debtor was a profitable enterprise. However a downturn in the oil and gas industry caused the Debtor to experience significant losses, resulting in a deductible tax loss of $6,356,642 for 2015. Stipulation ¶ 32.
*43Given the downturn in business and the significant operating losses it had incurred, the Debtor commenced this bankruptcy case by filing a voluntary petition under Chapter 11 of the Bankruptcy Code on November 9, 2015. See Voluntary Petition , ECF No. 1.
As part of its turnaround efforts, the Debtor retained Compass Advisory Partners LLC and its managing director, John W. "Jack" Teitz ("Teitz"), to serve as the Debtor's Chief Restructuring Officer. Stipulation ¶ 14.
Upon commencement of the case, the Debtor recognized an immediate need for continued access to the cash collateral (i.e., collected accounts receivable) pledged to STC and a need for further working capital in the form of post-petition financing. As a result, the Debtor (through Teitz) approached STC1 regarding the Debtor's working capital needs. Discussions ensued and those discussions resulted in an agreement between the Parties.
Thereafter, on December 2, 2015, the Debtor filed its Motion for an Interim Order Allowing Use of Cash Collateral and Debtor in Possession Financing and Request for an Expedited Hearing in Regard to Same ("Expedited Motion for DIP Financing," ECF No. 48). Stipulation ¶ 15.
In the Expedited Motion for DIP Financing, the Debtor explained the importance of the financing it obtained from STC. In this regard, the Debtor stated as follows:
Without the use of cash collateral and the approval of the financing, the Debtor will be seriously and irreparably harmed, resulting in significant losses to the Debtor's estate and its creditors.... It goes without saying that the Debtor's inability to use Cash Collateral and obtain the financing proposed would cause immediate and irreparable harm to the estate. If the Debtor cannot pay its ongoing operating expenses, the Debtor simply will have no business to reorganize.
See Expedited Motion for DIP Financing 4, ¶¶ 16-17, ECF No. 48.
Following a hearing held December 4, 2015, the Expedited Motion for DIP Financing was granted on an interim basis. See Interim Order Granting Expedited Motion for DIP Financing ("Interim DIP Order"), ECF No. 68. The Interim DIP Order was executed by Counsel for the Debtor, Counsel for STC, and Mr. Mostoller, individually. See Interim DIP Order 20, ECF No. 68.
A final hearing on the Expedited Motion for DIP Financing was held on January 5, 2016. At the hearing, Mr. Mostoller was represented by Steven Shreve, Esq. See Tr. of Jan. 5, 2016 Hr'g 4:20-21, ECF No. 1073. He was also represented from time to time by attorney Salene Mazur Kraemer, Esq.
During the course of the January 5th hearing, Counsel for the Debtor iterated the importance of the post-petition financing provided by STC, and described the entry of the final order as "imperative" for the continuation of the case. Tr. of Jan. 5, 2016 Hr'g 8:22-9:8, ECF No. 1073.
Counsel for the Debtor also explained that in the effort to obtain financing from STC, a tax refund due to Mr. Mostoller in the approximate range of $2 million to $2.5 million, subject to offsets for certain tax obligations, had been pledged to STC as a security for the financing. Tr. of Jan. 5, 2016 Hr'g 8:9-17, ECF No. 1073. Such *44offsets were estimated to be approximately $1.2 million, thereby leaving an estimated expected net tax refund of $800,000 to $1.3 million. See Affidavit of Robert L. Enos of Somerset Trust Company ("Enos Affidavit") at ¶¶ 11, 12 and 22-25.
Counsel for STC emphasized at the January 5th hearing the importance of the tax refund in inducing STC to provide the financing. Counsel to STC's statements to the Court included describing the tax refund pledge as an "important component of the collateral package" and a "major motivation" inducing STC to advance new monies to the Debtor. Tr. of Jan. 5, 2016 Hr'g 11:20-23, 44:3-8, ECF No. 1073.
In particular, the tax return collateral was an important inducement to STC's lending decision because (a) the long-term viability of the Debtor's business was uncertain in light of the recent downturn of the energy markets, (b) the Debtor was already highly leveraged, and (c) the Debtor did not own any other significant unencumbered assets which could be pledged to support new lending by STC. See Enos Affidavit ¶¶ 7-26; Affidavit of David L. Fuchs ("Fuchs Affidavit") at ¶¶ 6 and 33; Affidavit of John W. (Jack) Teitz of Compass Advisory Partners, LLC ("Teitz Affidavit") at ¶¶ 22-29.
Following the January 5, 2016 hearing, the Court entered the Final DIP Order. Paragraph 6 of the Final DIP Order addresses the tax refund at issue and provides, in part, that:
Mostoller further agrees to assign to Lender any rights or interest in the 2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor (the "Tax Refund") subject to the setoff rights of the Internal Revenue Service and past due Pre-Petition and application of PA State fiduciary tax obligations of the Debtor ....
See Final DIP Order 7.
After the Court's approval of the Final DIP Order, STC advanced $740,000 of new funds to the Debtor. See Motion Seeking Release of Certain Tax Refund Check to Somerset Trust Company , at ¶ 17, ECF No. 1057. It also appears that $703,863 of STC's cash collateral was expended by the Debtor. See Monthly Financial Report for the Period of 1/1/2016 to 1/31/2016 (Schedule of Cash Receipts and Disbursements) , ECF No. 328.
Notwithstanding the working capital provided to the Debtor, STC's concerns regarding the long-term viability of the Debtor proved prophetic.
Within a month of entry of the Final DIP Order and the advance of new funds, STC determined that the Debtor was in default of the Final DIP Order and sought appointment of a Chapter 11 Trustee. See Expedited Motion to Appoint a Chapter 11 Trustee (the "Trustee Motion"), ECF No. 228. According to the Trustee Motion, the Debtor's defaults included the fact that (a) the Debtor failed to operate within its budget, (b) the Debtor failed to generate any additional significant revenues (and barely had any additional inflows of cash) beyond either the borrowings from STC and the use of STC's cash collateral, and (c) the Debtor's personal property became subject to increasing claims and requests for relief from stay by equipment lessors or financiers thereby jeopardizing the continuation of the Debtor's business operations. See Trustee Motion at ¶¶ 1-12.
The motion was granted and a Chapter 11 Trustee was appointed by the Court. Shortly thereafter, upon motion of the Chapter 11 Trustee and by order dated February 25, 2016, the case was converted to a case under Chapter 7 of the Bankruptcy Code. See Order Converting the *45Debtor's Chapter 11 Case to a Case Under Chapter 7 , ECF No. 365.
On December 16, 2016, STC filed its Motion to Compel Compliance with Final DIP Order ("Motion to Compel"), citing Mr. Mostoller's alleged failure to file his 2015 tax return despite STC's numerous requests for him to do so. See Motion to Compel, ECF No. 901. A hearing was held on the Motion to Compel on January 26, 2017, at which time Mr. Mostoller, appearing pro se, informed the Court that his 2015 federal tax return, as well as amended versions of his 2013 and 2014 federal tax returns, (collectively, the "Federal Tax Returns") had been filed on his behalf by accountant Randy Tarpey of Sickley Tarpey & Associates. To support his claim that the Federal Tax Returns were filed, Mr. Mostoller filed copies of the Federal Tax Returns with the Court. See Tr. of Jan. 26, 2017 Hr'g, 39:18-42:11.
The Federal Tax Returns reflect that the 2015 operating losses incurred by the Debtor, and imputed to the Respondents, resulted in a refund of federal taxes paid in 2015 in the amount of $125,978. See Stipulation ¶¶ 34-36. The unused portion of the 2015 operating losses was then carried-back to the 2013 and 2014 tax years, for which amended returns were filed. The 2015 operating losses therefore resulted in refunds of taxes paid in 2013 and 2014 in the amount of $142,868 and $1,810,755, respectively. See Stipulation ¶¶ 39-44.
In total, the Respondents were entitled to a refund on account of the Federal Tax Returns in the amount of $2,079,601.00. See Stipulation ¶ 46. However, prior to distribution, the Internal Revenue Service offset outstanding obligations and penalties owed by the Respondents, resulting in a total offset of the refund of federal taxes paid in the 2013 and 2015 tax years, and a reduction in the refund of federal taxes paid in 2014 to $1,124,538.31. See Stipulation ¶¶ 47-54.
Following the hearing on the Motion to Compel, the Court entered an order directing that, inter alia , Mr. Mostoller and/or his affiliates and agents, immediately turn-over to the Court "any refund he is due on account of the 2015 Tax Returns[.]" Order Granting Motion to Compel Compliance with Final DIP Order , ECF No. 934.
The Court then received a check dated July 17, 2017 and issued by the United States Treasury listing as payees, "Larry L. & Connie J Mostoller" in the amount of $1,124,538.31 (the "Refund Check").
Upon receipt of the Refund Check, the Court issued an order dated July 21, 2017, requiring that any party asserting an interest in all or part of the Refund Check file a motion for release by August 4, 2017. In response to the order, on August 3, 2017, STC filed its Motion Seeking Release of Certain Tax Refund Check to Somerset Trust Company ("STC Motion for Release," ECF No. 1057).
Pursuant to the STC Motion for Release, STC sought payment of half of the amount of the Refund Check, after deduction for payment of the accountant fees. During the proceedings with respect to the STC Motion to Release, STC had no objection to the remaining half being paid to Mrs. Mostoller. It appeared that such resolution was in line with the prior negotiations of the Parties as well as the discussion on record during the January 26, 2017 hearing on the Motion to Compel. STC Motion for Release ¶ 20, ECF No. 1057. Those discussions were that STC recognized that the Respondents believed that some portion of the tax refund was not attributable to the operating losses of the Debtor. Rather, without providing any proof, the Respondents argued that such sums could possibly be on account of other *46tax deductions that the Respondents may have had or were attributable to taxes paid by Mrs. Mostoller only. In any event, the proposed split of the Refund Check was effectively a settlement of these issues raised by the Respondents.
On August 4, 2017, the Respondents filed their own motion seeking release of the full Refund Check net of accountant fees ("Respondents' Motion for Release," ECF No. 1058). As the basis for their motion, the Respondents argued that under the terms of the Final DIP Order, Mr. Mostoller only pledged his portion of the refund due to him on account of his 2015 federal tax return, whereas the Refund Check represented the refund requested by the Respondents' amended 2014 federal tax return. In support, the Respondents emphasized that the Refund Check read, in part, "MOST KANSAS 12/2014 TAX REFUND." See Respondents' Motion for Release ¶ 6, ECF No. 1058. As expected, STC objected to the Respondents' Motion for Release. See Objection to Motion Seeking Release of Check , ECF No. 1060.
A hearing on the competing claims to the tax refund was held on August 25, 2017. Unable to resolve the matter, the issue was set for evidentiary hearing. In the interim, and as set forth above, the parties agreed at the August 25, 2017 hearing that after payment of the accountant's fees ($50,750.00), fifty-percent the remaining balance of the Refund Check was to be distributed to the Respondents. See Consent Order Regarding Competing Motions Seeking Release of Certain Tax Refund Check ("Consent Order dated Aug. 31, 2017," ECF No. 1069). To effect this result, and pursuant to the Consent Order dated Aug. 31, 2017, the Clerk of the U.S. Bankruptcy Court then released the Refund Check to the Respondents, who in turn endorsed the Refund Check to STC. STC negotiated the Refund Check and, after distribution of the accountant fees, distributed one-half of the remaining proceeds of the Refund Check to the Respondents. Taking these distributions into account, the remaining amount in controversy is $536,894 which is being held by STC pending the outcome of these proceedings and until further order of this Court.2
An evidentiary hearing on STC's motion for release was held on January 26, 2018. At this hearing, STC presented the testimony of Teitz, David L. Fuchs, Esq. ("Fuchs"), Counsel for the Debtor; Robert L. Enos ("Enos"), Senior Vice President and Senior Loan Officer at STC, and Randy Tarpey ("Tarpey"), Certified Public Accountant.
The direct testimonies of Teitz, Fuchs, Enos, and Tarpey were presented by affidavit, and all of these witnesses were either subject to live cross-examination or cross examination was waived by the Respondents.3 The Respondents elected to not testify at trial. They also did not present any other witness testimony of their own.
Two days prior to the evidentiary hearing, the Respondents did file a motion in limine seeking to exclude all extrinsic evidence offered by STC (including the affidavits *47referenced above). The gist of the motion in limine is that the Respondents contend the evidence submitted by STC is barred by the parol evidence rule. Alternatively, the Respondents contend that the affidavits should be excluded because counsel for STC served as the scrivener in preparing the affidavits. STC opposed the motion in limine and argument on the motion was held immediately prior to the evidentiary hearing.
Following the hearing, the parties were provided the opportunity to file post-trial briefs. STC filed its post-trial brief on February 16, 2018. The Respondents filed their post-trial brief on March 1, 2018, to which STC filed a reply brief on March 7, 2018. By order dated July 25, 2018, this Court requested further briefing on certain legal issues, which was completed by the parties on or about August 17, 2018. STC's motion for release and the Respondents' motion in limine are now ripe for adjudication.
II.
LEGAL ANALYSIS
Resolution of the pending matter requires the Court to interpret the relevant provisions of the Final DIP Order, which was entered with the consent of STC, the Debtor, and Mr. Mostoller.
Paragraph 6 of the Final DIP Order reads, in part, as follows:
Mostoller further agrees to assign to Lender any rights or interest in the 2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor (the "Tax Refund") subject to the setoff rights of the Internal Revenue Service and past due Pre-Petition and application of PA State fiduciary tax obligations of the Debtor and further subject to any validity[sic] existing, properly perfected lien and security interest of Community Bank, as of the Petition Date, in and to the Tax Refund.
See Final DIP Order at ¶ 6. The primary dispute between STC and the Respondents is whether this paragraph of the Final DIP Order contains an ambiguity as to the scope of the tax refund pledged to STC.
STC alleges that the tax refund pledged in paragraph 6 is not limited to a refund of taxes paid in 2015, but instead refers to all refund proceeds "attributable to the operating losses of the Debtor" that were incurred in tax year 2015. Somerset Trust Company's Post-Trial Brief with Respect to the Remaining Balance of the Tax Refund Proceeds ("STC Post-Trial Brief") 3, ECF No. 1141.
In STC's view, the phrase "attributable to the operating losses of the Debtor" in paragraph 6 of the Final DIP Order modifies the preceding term "2015 Federal tax refund." As a result, STC argues that these phrases refer to all federal tax refunds attributable to or paid on account of the 2015 operating losses of the Debtor. STC Post-Trial Brief 7. This would include the refund of federal taxes paid by the Debtor in 2014, as that refund was generated on account of the 2015 operating losses. In fact, the Debtor was only able to amend its tax returns in year 2016 and receive this refund once it had the year 2015 operating losses to "carry back."
The Respondents contest that any ambiguity exists. Instead, the Respondents proffer that the tax refund at issue is not a "2015 Federal tax refund" and is instead a prior year tax refund. The Respondents further argue in their motion in limine that due to the lack of ambiguity, the Final DIP Order should be interpreted without reference to parol evidence of any sort. Indeed, as the Third Circuit Court of Appeals has held: "[o]nly where the writing is ambiguous may the factfinder examine all *48the relevant extrinsic evidence to determine the parties' mutual intent." Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 613 (3d Cir. 1995).
Therefore, a fundamental question before the Court is whether paragraph 6 of the Final DIP Order is ambiguous. If it is ambiguous, then another question before the Court is whether the extrinsic evidence clears up the ambiguity and entitles STC to the remaining portion of the tax refund.
For the reasons explained below, the Court finds that paragraph 6 is ambiguous. The Court also finds that the evidence of record supports the construction of paragraph 6 as postulated by STC. As a result, STC is entitled to the remaining tax refund proceeds.
Legal Standards Regarding Ambiguity
The Third Circuit Court of Appeals has held: "[s]ince a consent decree issued upon the stipulation of the parties has the characteristics of a contract, contract principles govern its construction." McDowell v. Philadelphia Hous. Auth. (PHA), 423 F.3d 233, 238 (3d Cir. 2005) ; see also United States v. New Jersey, 194 F.3d 426, 430 (3d Cir. 1999) ("Further, as consent decrees have many of the attributes of contracts, we interpret them with reference to traditional principles of contract interpretation."); Fox v. U.S. Dep't of Hous. & Urban Dev., 680 F.2d 315, 319 (3d Cir. 1982).
Consistent with this holding, principles of contract interpretation have been held to govern interpretation of a consent order entered by a bankruptcy court. See e.g. In re Trico Marine Servs., Inc., 450 B.R. 474 (Bankr. D.Del. 2011) ("When construing an agreed or negotiated form of order, such as the Sale Order in this case, the Court approaches the task as an exercise of contract interpretation rather than the routine enforcement of a prior court order").
A tenant of traditional contract interpretation is that in the absence of ambiguity a contract should be enforced according to its terms. McDowell, 423 F.3d at 238.
Whether a consent decree is ambiguous is a question of law for this Court to decide. In this regard, the Court is called upon to determine whether, "from an objective standpoint, [the decree] is reasonably susceptible to at least two different interpretations." McDowell, at 238 (bracketed language in the original) (quoting United States v. New Jersey, 194 F.3d at 430 ; see also SOF-VIII-Hotel II Anguilla Holdings LLC v. Akin Gump Strauss Hauer & Field LLP (In re Barnes Bay Dev. Ltd.), 478 B.R. 185, 191 (D.Del. 2012) (interpreting a DIP order) (quoting United States v. New Jersey, 194 F.3d at 430 ).
Stated in other words, ordinarily, interpretation of a consent decree should be confined to the "four corners" of the document. McDowell, at 239. Courts should "not try to divine [the consent decree's] meaning from speculation about the purposes of the parties or the background legal regime." McDowell, at 239.
This "four corners" rule comports with the ordinary principle of contract construction which provides that the use of extrinsic evidence is only permissible when the instrument in question is itself ambiguous. See Fox v. U.S. Dep't of Hous. & Urban Dev., 680 F.2d at 319.
However, when a consent decree is found to be ambiguous, applicable law provides that extrinsic evidence may be used to adjudicate the consent decree's meaning. See McDowell at 238 ; See also Fox, at 319. As the Third Circuit Court of Appeals has instructed:
*49The first task, therefore, is to determine whether the instrument by its terms unambiguously covers the dispute. The relevant search, as in contract interpretation, is not for the subjective intention of the parties "but what (their) words would mean in the mouth of a normal speaker of English, using them in the circumstances in which they were used."[ ] The rule employed to reach this result is that language must be interpreted in accordance with its generally prevailing meaning unless the parties manifest a different intention or the words are technical. ITT Continental Baking, 420 U.S. at 238, 95 S.Ct. at 935 ; see Restatement (Second) of Contracts s 202(3). As in statutory construction, we reject a view that would "make a fortress out of a dictionary," Cabell v. Markham, 148 F.2d 737, 739 (2d Cir.) (L. Hand, J.), aff'd 326 U.S. 404, 66 S.Ct. 193, 90 L.Ed. 165 (1945), because a word or a phrase "is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used." Towne v. Eisner, 245 U.S. 418, 425, 38 S.Ct. 158, 159, 62 L.Ed. 372 (1918) (Holmes, J.).
Fox v. U.S. Dep't of Hous. & Urban Dev., 680 F.2d at 320.
In setting forth their arguments, the parties cite to principles of Pennsylvania law governing contract interpretation. Pennsylvania law recognizes two types of contractual ambiguity-patent and latent. See Bohler-Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d 79, 93 (3d Cir. 2001). "While a patent ambiguity appears on the face of the instrument, 'a latent ambiguity arises from extraneous or collateral facts which make the meaning of a written agreement uncertain although the language thereof, on its face, appears clear and unambiguous.' " Bohler-Uddeholm, 247 F.3d at 93 (quoting Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d at 614 ).
A claim of latent ambiguity must be based on a "contractual hook." Bohler-Uddeholm, 247 F.3d at 93. Significantly, where a claim of latent ambiguity is asserted, the court may look beyond the four corners of the document to determine whether a latent ambiguity exists. Id. However, "a court must consider whether the extrinsic evidence that the proponent of the alternative interpretation seeks to offer is the type of evidence that could support a reasonable alternative interpretation" of the contract. Id.
In addition to the principles set forth above, the United States Supreme Court has found that reliance on certain aids to interpretation does not conflict with the "four corners" rule and a court may consider other certain interpretive aids in determining whether an ambiguity exists within a consent decree. See United States v. ITT Continental Baking Co., 420 U.S. 223, 228, 95 S.Ct. 926, 935, 43 L.Ed.2d 148 (1975) ; see also United States v. New Jersey, 194 F.3d at 430 (observing that the first step in contract interpretation was to "determine whether this phrase is ambiguous in light of the context in which the decree was signed and the specialized meaning of any words used").
Such permissible extrinsic aids recognized by the United States Supreme Court include "the circumstances surrounding the formation of the consent order, any technical meaning words used may have had to the parties, and any other documents expressly incorporated in the decree." ITT Continental Baking Co., 420 U.S. at 228, 95 S.Ct. 926 ; accord United States v. New Jersey, 194 F.3d at 430.
*50Patent Ambiguity and the Final DIP Order
The first issue for resolution is whether the Final DIP Order, specifically paragraph 6, is ambiguous on its face.
As stated above, a consent decree is ambiguous if from an objective standpoint it could be reasonably interpreted in two or more different ways. McDowell, 423 F.3d at 238.
The Respondents argue that the Final DIP Order is not patently ambiguous. To support this argument, the Respondents contend that STC has stipulated that the operative language is unambiguous.
Initially, this contention of the Respondents had inertia. By way of example, the record reflects that STC's motion and related papers initially described the language in paragraph 6 of the Final DIP Order as being "inartful" and ambiguous.4 Notwithstanding these assertions, STC later focused its arguments before the Court on the existence of a latent ambiguity in the Final DIP Order. See e.g. STC's Post-Trial Brief. STC also stated in its post-trial brief that: "While the Assignment of the Final DIP Order appears unambiguous on its face, it contains a latent ambiguity." STC Post-Trial Brief 7.
These assertions created the appearance to the Court that the parties agreed that the pertinent provision of the consent order was not patently ambiguous. However, a full examination of the record, a review of the language used in paragraph 6 of the Final DIP Order, and due consideration of applicable law leads this Court to conclude that such statements of STC do not discretely decide the matter.
The Court reaches this conclusion because whether an ambiguity exists in a consent order or contract is a question of law for the Court to decide. See McDowell, 423 F.3d at 238. In fact, it is well-settled law that courts are not bound by stipulations regarding questions of law. Ulitchney v. Ruzicki, 412 F. App'x 447, 451 (3d Cir. 2011) (quoting Mintze v. American Gen. Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 228 (3d Cir. 2006) ).
The Third Circuit Court of Appeals held as much in Mintz v. American Gen. Fin. Servs., Inc., supra, wherein a debtor sought to enforce a prepetition claim for rescission of a mortgage containing a mandatory arbitration clause. In Mintz, the lender filed a motion to compel arbitration. At the hearing on the motion to compel, the parties stipulated (1) that the matter was a "core" matter, and (2) that the bankruptcy court had discretion to deny enforcement of the arbitration clause. Id. at 227. The bankruptcy court accepted the stipulations and denied the motion. The lender then appealed to the district court, which affirmed the holding of the bankruptcy court. On appeal to the Third Circuit, the lender argued, in direct contrast to its stipulations, that the matter was not core, but even if it was, that the bankruptcy court lacked discretion to deny the enforceability of the arbitration clause.
In resolving the matter in Mintz, the Third Circuit first observed that it is not bound by parties' stipulations concerning questions of law. Id. at 228. Noting that whether a proceeding is core or non-core and whether a bankruptcy court has discretion to deny the enforceability or applicability of an arbitration clause are both *51questions of law, the Third Circuit determined that the stipulations at issue were not binding on the court. Id. Ultimately, the Third Circuit chose to accept the parties' stipulations that the matter was "core," finding that they were actually consistent with the law, and found that the bankruptcy court did not have discretion to deny the arbitration clause. Id. at 232.
The Third Circuit reinforced the proposition that stipulations regarding questions of law are not binding in Ulitchney v. Ruzicki, supra, at 451 (3d Cir. 2011). In that case, a homeowner brought suit against a parole officer for a warrantless entry into her home. Prior to trial, the parties stipulated that, in the absence of a warrant, a law enforcement official may only enter a residence with a resident's voluntary consent. Despite the stipulation, the parole officer reversed course and argued that he did not need a warrant for entry. The district court initially instructed the jury that the stipulation regarding the necessity of a warrant was one of fact and was binding for the purpose of the trial. However, on post-trial motion, the district court ruled that it had erred in its prior holding and set aside the joint stipulation to rule in favor of the parole officer. On appeal, the homeowner argued that the district court erred in setting aside the joint stipulation "which formed the basis for the parties' presentation of evidence and argument at trial." In reviewing the effect of the stipulation, the Third Circuit, held that:
It is well-settled that courts "are not bound by the parties' stipulations concerning questions of law." In re Mintze, 434 F.3d 222, 228 (3d Cir.2006). It is a similarly "well-recognized rule of law that valid stipulations entered into freely and fairly, and approved by the court, should not be lightly set aside." Waldorf v. Shuta, 142 F.3d 601, 616 (3d Cir.1998) (internal quotation omitted) (emphasis added). A stipulation of law, however, is invalid, and must be distinguished from a stipulation of fact. United States v. Reading Co., 289 F.2d 7, 9 (3d Cir.1961) (upholding a factual stipulation, because, in part, it "is not a stipulation of the controlling law, which the parties could not validly make").
See Ulitchney, 412 F. App'x 447 at 451.
Courts outside of the Third Circuit, including the Supreme Court, have similarly found that stipulations concerning questions of law are not binding on the court. See e.g. Thompson v. Roland (In re Roland), 294 B.R. 244, 250 (Bankr. S.D.N.Y. 2003) (recognizing that the interpretation of a contract is a question of law and as such "... a stipulation regarding the interpretation of a contract does not bind the court").
For example, in Swift & Co. v. Hocking Valley Railway Co., 243 U.S. 281, 290, 37 S.Ct. 287, 61 L.Ed. 722 (1917), Justice Brandeis had to address whether a stipulation by the parties that railroad tracks were "private tracks" as opposed to "carrier's tracks" for purposes of calculating a demurrage fee was a nullity. Writing for the majority, Justice Brandeis held: "If [a] stipulation is to be treated as an agreement concerning the legal effect of admitted facts, it is obviously inoperative; since the court cannot be controlled by agreement of counsel on a subsidiary question of law." Id. ; accord Noel Shows, Inc. v. United States, 721 F.2d 327, 330 (11th Cir. 1983) (upholding the lower court's exclusion of evidence even though the parties had stipulated to its admission. Observing that whether evidence should be admitted is a question of law and "[a] stipulation by the parties to a lawsuit as to questions of law is not binding on the trial court." (citation omitted) ); and Sinicropi v. Milone, 915 F.2d 66 (2d Cir. 1990) (recognizing *52that a court is not bound by a stipulation on questions of law).
In light of this precedent, the Court must make its own independent judgment of law as to whether the Final DIP Order is patently ambiguous.5 In doing so, the Court appreciates the parties respective interpretations-that is STC's claim that paragraph 6 should be read to include any tax refund generated on account of the 2015 operating losses versus the Respondents' interpretation that the plain text limits the pledge only to a refund of taxes paid on account of a 2015 federal tax return (and not any amended prior year returns filed in connection therewith).
In looking at the plain language of the text of paragraph 6, the Court finds that it is subject to multiple reasonable interpretations. In so finding, the Court observes that the term "2015 Federal tax refund" is an undefined term that could have three distinct connotations.
First, as used in paragraph 6, the term "2015 Federal tax refund" could refer to a federal tax refund actually paid to Mr. Mostoller in year 2015 on account of any prior tax return processed by the IRS.6 Second, the phrase "2015 Federal tax refund" could also refer to a refund of taxes previously paid by Mr. Mostoller in all prior years but for which a refund is now due or has become due on account of year 2015 tax events of the Debtor (including any refunds payable on account of a 2015 tax return or any amended returns filed by Mr. Mostoller).7 Third, the phrase "2015 Federal tax refund" could also refer to a refund of federal taxes paid by Mr. Mostoller solely in connection with the 2015 tax year and no other (i.e., a refund due based on a 2015 tax return).8
*53Of these three possible meanings of the phrase "2015 Federal tax refund," only the first possible translation is unreasonable. The Court reaches this conclusion because when the Final DIP Order was approved, year 2015 had essentially come and gone and there was no refund actually paid to Respondents in year 2015.
As such, only the other two interpretations of the phrase "2015 Federal tax refund" are reasonable. Given these two possible interpretations, it is appropriate for the Court to consider extrinsic evidence to ascertain what the phrase "2015 Federal tax refund" means, and whether the remaining proceeds of the Refund Check fall within the scope of this term. The answer to these questions are addressed more fully below.
Latent Ambiguity
The Court notes that even if it were determined that the language of paragraph 6 of the Final DIP Order is not patently ambiguous, this Court would still nonetheless find it to be latently ambiguous.
A "latent ambiguity arises from extraneous or collateral facts, which make the meaning of a written agreement uncertain although the language thereof, on its face, appears clear and unambiguous." Duquesne Light Co., supra, 66 F.3d at 614.
The Third Circuit Court of Appeals instructs that a party may rely on extrinsic evidence "but this evidence must show that some specific term or terms in the contract are ambiguous; it cannot simply show that the parties intended something different that was not incorporated into the contract." Bohler-Uddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d at 93. In this regard, the Third Circuit reminds us that the "parties expectations, standing alone, are irrelevant without any contractual hook on which to pin them." Id. (quoting Duquesne Light, 66 F.3d at 614 & n. 9 ).
With this standard in mind, the Court holds that STC has developed a framework and requisite showing for this Court to consider extrinsic evidence based upon a claimed latent ambiguity. Namely, even if the phrase "2015 Federal tax return" is unambiguous on its face, the contractual hook cited by STC, which is the phrase "but attributable to the operating losses of the Debtor," convinces the Court that paragraph 6 of the Final DIP Order is latently ambiguous.
As articulated by STC, by adding the phrase "but attributable to the operating losses of the Debtor," the parties certainly modified the meaning of the phrase "2015 Federal tax refund." Their linguistic preference appears to encompass tax refund proceeds specifically "attributable to the operating losses of the Debtor" in year 2015. The predominant question, however, is to what extent? This question highlights the nature of the latent ambiguity embodied in paragraph 6 of the Final DIP Order. As such, considering extrinsic evidence is appropriate under the circumstances of this case to determine the appropriate resolution of the latent ambiguity and to determine the full contours of the parties' bargain which formed the basis of their linguistic preference and/or contractual hook.
Circumstances and Other Acceptable Tools of Construction
For purposes of completeness, the Court further notes that a total lack of ambiguity may not preclude a party from offering some extrinsic evidence as a part of their case. Of course, the Respondents assert that no extrinsic evidence whatsoever may be consulted because the general rule is that interpretation of a contract or consent order must be confined to the four corners of the document. This "four corners" rule, enunciated in *54United States v. Armour & Co., 402 U.S. 673, 682, 91 S.Ct. 1752, 1757, 29 L.Ed.2d 256 (1971), is reflective of the precept that an unambiguous contract is to be interpreted according to its plain terms.
This Court's examination of precedent in this area, however, leads it to conclude that the "four corners" rule is not the Supreme Court's only pronouncement on matters of interpretation in the context of enforcement of consent orders and contracts. Nor is it the only pronouncement of the Third Circuit Court of Appeals or the trial courts within the Third Circuit.
In ITT Continental Baking Co., supra, the Supreme Court was tasked with interpreting a consent decree which prohibited the "acquiring" of a certain type of asset. At issue in that case was whether the term "acquiring" should be interpreted as a singular occurrence or ongoing event for purposes of assessing sanctions. In construing the term, the Supreme Court permitted the introduction of certain extrinsic evidence, stating:
Since a consent decree or order is to be construed for enforcement purposes basically as a contract, reliance upon certain aids to construction is proper, as with any other contract. Such aids include the circumstances surrounding the formation of the consent order, any technical meaning words used may have had to the parties, and any other documents expressly incorporated in the decree. Such reliance does not in any way depart from the "four corners" rule of Armour.
ITT Continental Baking Co., 420 U.S. at 238, 95 S.Ct. 926.
The Third Circuit further clarified whether these aids to construction may be considered prior to or only after a finding of ambiguity stating that "resort to extrinsic evidence is permissible, but only when the decree itself is ambiguous, although circumstances surrounding its formation are always relevant to its meaning." United States v. New Jersey, 194 F.3d at 430 (emphasis and underline added); see also Fox v. U.S. Dep't of Hous. & Urban Dev., 680 F.2d at 320.
Courts have also held that in order to determine whether an ambiguity exists a court may look at the "context in which the decree was signed and the specialized meaning of any words used." New Jersey, 194 F.3d at 430. Thus, this Court is not relegated to considering the "aids to construction" identified in ITT Continental Baking Co. only after an initial finding of ambiguity. Rather, the Court may consider them in its determination of whether an ambiguity exists.
In reaching this conclusion, it is not lost on this Court that permitting a broad review of the circumstances surrounding the formation of a contract could potentially nullify the prohibition against introducing extrinsic evidence absent ambiguity. Surely creative counsel could argue that almost any extrinsic evidence is evidence of a circumstance surrounding formation. As such, it may be necessary to narrow the field in this respect. To do so, it is appropriate to look at prior instances where the review of circumstances surrounding the formation of contracts was addressed.
In United States v. New Jersey, supra, the Third Circuit was asked to interpret a consent order that was entered in an employment discrimination case. The operative consent order contained language entitling to those hired under the consent decree to "all the emoluments of the job title to which they are appointed, including full retroactive seniority ...." New Jersey, at 428.
The dispute at the center of the litigation in United States v. New Jersey concerned whether the consent decree, and specifically the language quoted, entitled those hired to the wage step increases *55which matched their grant of retroactive seniority. While recognizing that a determination of ambiguity should be confined to the four corners of a document and should focus on the objective definitions of the language utilized, the Third Circuit nonetheless considered the dictionary definition of "emolument," as well as the general structure of awarding step increases under the state scheme-noting that the State of New Jersey did not dispute that seniority was a factor in determining pay and that counsel had conceded that "very few" individuals were denied step increases. New Jersey, at 431.
In addition to this "factual context," the Third Circuit also considered the context in which the district court had initially approved the decree. Of note, the Third Circuit observed that in approving the consent order, the district court made statements elucidating its understanding of the consent decree's terms to which the parties failed to object. Thus, in addition to the factual backdrop, uncontested statements made in connection with the entry of the consent order appear to fall within the realm of what may be permissibly considered. See also United States v. City of Erie, Civ. Action No. 04-4, 2006 WL 3343896 (W.D.Pa. Nov. 17, 2006) (recognizing that unobjected to comments made by the court in connection with the entry of a consent order are part of the "context" in which it was entered); Bartock v. Bae Systems Survivability (In re Bartock), 398 B.R. 135, 155 (Bankr. W.D.Pa. 2008) (statements made to the court by counsel when announcing that a settlement had been reached, but before such settlement was memorialized and presented to the court, are a "relevant part of the circumstances surrounding the settlement").
In Arnold M. Diamond, Inc. v. Gulf Coast Trailing Co., 180 F.3d 518 (3d Cir. 1999) the Third Circuit reviewed a grant of summary judgment in connection with the interpretation of an assignment clause whereby the assignor assigned to an assignee any legal claims it had against the appellee. The lower court found that the assignment clause was ineffective based upon the record in that case. In setting forth the framework for review, the Third Circuit noted that "[w]hen the meaning of contract language is at issue, we affirm a grant of summary judgment only if the contract language is unambiguous and the moving party is entitled to judgment as a matter of law." Id. at 521. Thus, the operative issue was whether the appellant had provided a reasonable alternative reading of the contract-i.e. whether the contract contained an ambiguity. Id. at 521-522.
To determine whether a reasonable alternative reading had been advanced by the appellant, the Third Circuit employed general principles of contract law including the tenet that "[w]hen interpreting a contract, a court may consider extrinsic evidence of surrounding circumstances" to ascertain the intended meaning of the parties. Id. at 522 (citing 3 Arthur L. Corbin, Corbin on Contracts, §§ 542, at 100-04, 579, at 414-25; Restatement (Second) of Contracts § 524 cmt. b.) The Third Circuit ultimately found that the appellant had advanced a reasonable alternative interpretation based on the language of the assignment and extrinsic evidence (which included correspondence between the assignor and assignee and between the assignor and appellee). Id. at 522-523. In that matter, the correspondence conveyed the assignor's beliefs that the assignee was the appropriate party to bring action against appellee. Id. at 523 n. 5.
In Bartock v. Bae Systems Survivability (In re Bartock), supra, the debtor was embroiled in litigation with its former employer related to a non-compete agreement. After leaving his position with his *56former employer, BAE, the debtor began working for a competitor, Ibis Tek. BAE commenced an action in state court, the result of which was an agreed order prohibiting Ibis Tek from employing the debtor. The debtor sought relief and expressed to the bankruptcy court a desire to return to work at Ibis Tek. Ultimately, the parties entered into a settlement agreement which released the debtor from the non-compete agreement. However, a dispute remained as to whether the settlement agreement likewise released the debtor from the agreed state court order. BAE argued that while the debtor could seek employment elsewhere he was still prohibited from being employed by Ibis Tek. Finding the language of the settlement agreement unambiguous, the Judge Agresti of this Court noted that the circumstances surrounding the formation of the settlement agreement indicated that Ibis Tek was a special case to the debtor and central to the dispute. Thus, if Ibis Tek were an exception to the settlement agreement, it would have been explicit in the settlement agreement. In noting that Ibis Tek was a special case and central to the dispute, Judge Agresti considered Ibis Tek's involvement in the state court proceedings, that the debtor specifically sought relief to work for Ibis Tek, and that Ibis Tek was the company the debtor was working for when BAE brought action against him.
Conversely, although not explicitly categorized as "circumstances surrounding the formation of the contract" type of case, the Third Circuit in Harley-Davidson, Inc. v. Morris, 19 F.3d 142 (3d Cir. 1994) excepted from consideration any parol evidence of "prior inconsistent terms or negotiations" to demonstrate the intent of the parties. In that case, a seller of merchandise entered into a consent judgment which prohibited the seller from utilizing Harley-Davidson trademarks. After entry of the consent judgment, contempt proceedings were brought against the seller in part for selling t-shirts containing the Harley-Davidson trademark. The seller argued that he was not in contempt because he had reached an oral agreement with Harley-Davidson prior to entry of the consent judgment under which he could continue to sell the t-shirts until his existing supply was exhausted. These facts in Harley-Davidson, Inc. v. Morris are distinguishable from the case at hand because STC does not seek to introduce evidence of a collateral agreement which directly contradicts the plain terms of the Final DIP Order. Rather, STC seeks to introduce evidence of what the contract's terms mean. As such, STC's efforts to utilize evidence of the circumstances surrounding the entry of the Final DIP Order is appropriate.
The Fact That Counsel Aided in Drafting the Affidavits Does Not Render Them Inadmissible
Having found that the language of Paragraph 6 of the Final DIP Order is ambiguous, the Court may properly consider extrinsic evidence to adjudicate its meaning. See McDowell at 238 ; see also Fox, at 319. As set forth above, it is also appropriate for the Court to consider evidence of the circumstances surrounding the entry of the Final DIP Order. Accordingly, the Respondents' motion in limine is denied.
In denying the motion in limine , the Court also recognizes that the Respondents have asked that this Court exclude the affidavits of Teitz, Enos, Tarpey, and Fuchs on the basis that the affidavits were drafted by counsel to STC and not the affiants themselves. In making this request, the Respondents cite to no legal authority to suggest that an attorney drafted affidavit is per se inadmissible thereby warranting their exclusion.
*57The absence of such authority is not surprising because the weight of the case law is that it is a common and acceptable practice for counsel to draft witness affidavits. See Ford Motor Co. v. Edgewood Properties, Inc., 257 F.R.D. 418, 423 (D.N.J. 2009) ("[a]ttorneys frequently work with witnesses to prepare their statements"); Reynolds v. Jamison, 488 F.3d 756, 769 (7th Cir. 2007) (affidavits "are typically drafted by lawyers"); and Russell v. Acme-Evans, Inc., 51 F.3d 64, 67 (7th Cir. 1995) ("Almost all affidavits submitted in litigation are drafted by the lawyers rather than by the affiants").
The United States District Court for the Western District of Pennsylvania has also found that a declaration drafted by counsel, rather than the witness, is proper. Pritchard v. Dow Agro Sciences, 263 F.R.D. 277, 282-83 (W.D. Pa. 2009). Specifically, in Pritchard, the District Court rejected the defendant's contention that an expert's declaration was not a proper rebuttal because it was drafted by plaintiff's counsel as opposed to the expert witness himself. Id.
Nor have the Respondents alleged that the drafting of the affidavits by counsel suborned perjury. The Respondents have also not offered a shred of credible or convincing evidence showing that the affidavits themselves are inaccurate in any fashion. Moreover, this Court's own independent review of the record, and due consideration of the testimony of the witnesses upon cross examination, leads it to conclude that the testimony proffered by STC is credible and trustworthy.
Finally, the Court notes that the Respondents have not argued that the offering of the affidavits was procedurally improper in the first instance. The record reflects that this Court's pre-trial order permitted the parties to present direct testimony by way of affidavit, subject to the requirement that the witness be present in the courtroom for cross examination if a party so requested. Also, except for hearsay objections, other objections by a party were preserved as to the affidavits (e.g., relevance, etc.). No party objected to this process, and at trial the affidavits were offered by STC and the opportunity for cross examination was provided to the Respondents. These circumstances and applicable law, therefore warrant the denial of the motion in limine .
The Weight of the Evidence Supports the Construction Advocated by STC
In support of its interpretation of the relevant language, STC offered into evidence the affidavit testimony of Teitz, Enos, Tarpey, and Fuchs, as well as email correspondence between the representatives of STC, Debtor's counsel, the Debtor's management team, and Mr. Mostoller concerning the circumstances surrounding the formation of the Final DIP Order. In addition, Teitz, Enos, and Fuchs were subject to cross-examination and re-direct examination.
Of significant interest, the affidavits and testimony set forth the sequence of events surrounding the drafting of the Final DIP Order. They also reference both emails between the Parties and terminology utilized by the Parties during the negotiation that are specific to the pledged tax refund.
The gist of this evidence is that the Parties understood that the entirety of any refund to be generated on account of the 2015 operating losses was referred to by the Parties as the "2015 refund." See Fuchs Affidavit ¶ 25; Teitz Affidavit ¶ 19, and; Enos Affidavit ¶¶ 11-13.
The record further reflects that throughout the formation of the Final DIP Order the Parties' utilized the term "2015 refund" to refer to any and all tax refunds *58due Mr. Mostoller on account of the 2015 operating losses of the Debtor (less the IRS offset). Significantly, Teitz, Enos, and Fuchs all testified to as much. See Fuchs Affidavit ¶ 25; Teitz Affidavit ¶ 19, and; Enos Affidavit ¶ 13. Although Mr. Mostoller has not conceded that he manifested the term "2015 refund" with the same meaning as understood by STC, Mr. Mostoller did not testify at trial. Moreover, the weight of the evidence is that as a member of the Debtor's management team, as well as the recipient of e-mail correspondence regarding the negotiation of the financing package,9 Mr. Mostoller no doubt was aware of this understanding by STC and never voiced an objection and never advised STC of his disagreement to it.
However, to the extent that Mr. Mostoller could claim ignorance of STC's (as well as Teitz's and Fuch's) understanding of the deal, Mr. Mostoller's knowledge of the size of the refund to be pledged obviously contradicts his position. As discussed above, following the Debtor's bankruptcy filing, it became readily apparent that the Debtor was in desperate need for post-petition financing, which it sought from STC. However, in order to induce STC to provide financing, Fuchs credibly testified that the Debtor's management team, including Mr. Mostoller, understood that the collateral to be pledged to STC would need to be significant. Tr. of Jan. 26, 2018 Hr'g 44:15-45:22, ECF No. 1139. After identifying the potential of offering a tax refund as collateral, Teitz consulted with the accounting firm of Baker Tilly Virchow Krause, LLP ("Baker Tilly"), who had filed the Debtor's and the Respondents' 2014 tax returns. Teitz Affidavit ¶¶ 11, 16. The estimated amount of the tax refund to be generated by the Debtor's 2015 operating losses was estimated to be in the range of $2 million to $2.5 million, subject to approximately $1.2 million in outstanding tax offsets. This is precisely the range of refund that was ultimately received in this case.
Fuchs testified that during the negotiations of debtor-in-possession financing, he had several conversations with Mr. Mostoller regarding the necessity that Mr. Mostoller pledge the tax refund. See Tr. of Jan. 26, 2018 Hr'g 35:19-40:17, ECF No. 1139. Fuchs averred that although Mr. Mostoller waivered from time to time on whether to pledge the tax refund, Mr. Mostoller ultimately conceded to it because the pledge was necessary to obtain financing from STC.
Further, Fuchs testified that Mr. Mostoller was aware that the tax refund subject of the pledge was anticipated to be between $2 - $2.5 million, subject to certain tax setoffs. See Tr. of Jan. 26, 2018 Hr'g 35:19-40:17, ECF No. 1139. As that amount was the total amount anticipated to be refunded on account of the operating losses, Mr. Mostoller was fully aware that the term "2015 Federal tax refund" in paragraph 6 of the Final DIP Order referred to the entirety of the refund to be generated on account of the 2015 operating losses. Moreover, Fuchs told Mr. Mostoller as much, as Fuchs testified that in discussing the pledge of the tax refund, he explained to Mr. Mostoller that the outstanding taxes would be paid and "then [STC] would be secured by the remaining funds."
*59Tr. of Jan. 26, 2018 Hr'g 42:18-24, ECF No. 1139.
Finally, if there was any lingering doubt as to the scope of the pledged collateral as communicated to Mr. Mostoller, Mr. Mostoller was clearly made aware of STC's interpretation of the pledge through e-mail communications. For example, during the negotiation of the Interim DIP Order, the Parties exchanged e-mails containing the proposed Interim DIP Order. In discussing the particular language, including the term "Tax Refund," STC's Counsel communicated to Fuchs and Teitz, in part:
David. I have alerted the client to the debtor's intention to use the federal tax refund to pay federal and state withholding taxes of the debtor. I will let you know client response once I hear back from them. I am not sure that they or I understood this intention previously. The figures that we relied upon were a tax year loss of $8 to $10 million with a federal refund expected of no less than $1.8 million and perhaps up to $2.2 million . We understood the withholding tax obligation about which you previously referred to total approximately $1.3 million. Does the withholding tax figure that was previously provided take the state piece into account? Have your views about these figures changed with the passage of time....
Somerset Trust Company Exhibits , Ex. 12 (emphasis added). This e-mail was forwarded to Mr. Mostoller by Fuchs, and it is obvious by its content that the parties' bargain is that the refund at issue is not limited to the refund amounts set forth in a 2015 tax return. Rather, it is any tax refund of Mr. Mostoller attributable to the 2015 tax year losses of the Debtor.
Moreover, just days before the entry of the Final DIP Order, on December 28, 2015, Mr. Mostoller received an e-mail from Teitz reading, in part, that "based on est. GAAP loss of ($15.0mm), estimated tax refund from IRS = $2.5mm to Larry M.... this refund will be used to settle unpaid 941 taxes w-IRS ($1.5mm) & balance to pay-down STC loans as per DIP loan agreement." See Somerset Trust Company's Exhibits Ex. 16; Tr. of Jan. 26, 2018 Hr'g 82:10-83:24, ECF No. 1139. Again, evidencing that Mr. Mostoller was on notice that the other parties, including STC, manifested an intent that a reference to the "2015 refund" would be a reference to the entire refund to be generated by the 2015 operating losses of the Debtor.
This understanding was further iterated at the hearing on the entry of the Final DIP Order. At that hearing, and in Mr. Mostoller's counsel's presence, counsel for the Debtor (Attorney Fuchs) explained that in the effort to obtain financing from STC, the tax refund due to Mr. Mostoller in the approximate amount of $2 million - $2.5 million (again the full amount of the refund due on account of the 2015 operating losses), subject to certain offsets for tax obligations, had been pledged to STC as a security for the financing. Tr. of Jan. 5. 2016 Hr'g 8:9-17, ECF No. 1073. Counsel for STC then explained STC's understanding of the tax refund pledge on the record by stating:
I would also note to the Court that, to the extent that the tax refund is actually property of Mr. Mostoller, he has pledged all rights in that tax refund, after tax obligations are otherwise paid, for the benefit of Somerset Trust, specifically in the order, as consideration for the debtor-in-possession financing.
Tr. of Jan. 5, 2016 Hr'g 12:7-12, ECF No. 1073. No objection or comment was made by Mr. Mostoller's counsel to signify a conflicting understanding by Mr. Mostoller.
These circumstances surrounding the formation of the Final DIP Order demonstrate *60that the Parties-including Mr. Mostoller-manifested an intention for the phrase "2015 refund" to refer to the entire refund due on account of the 2015 operating losses of the Debtor regardless of the tax year.
Given the Parties' manifested understanding of the term "2015 refund," the Court finds STC's proffered reading of the phrase "2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor" to be reasonable. It is therefore clear that the Parties intended for the tax refund pledge to be for the entire tax refund due on account of the 2015 operating losses. See Fuchs Affidavit ¶ 35 ("At all relevant times-from the time the idea was generated to include the anticipated tax refund as additional collateral to secure STC's commitment to extend DIP financing, to the date the Bankruptcy Court entered an order approving the DIP financing on a final basis-I understood that the intention of all parties involved was that the anticipated tax refund to be generated on account of the Debtor's 2015 operating losses was to be assigned to STC to secure STC's commitment to extend DIP financing and to allow the Debtor's continued use of its cash collateral."); Teitz Affidavit ¶ 29; Enos Affidavit (discussing that the refund generated on account of the losses was referred to as the "2015 refund" and that the "2015 refund" was pledged).
Furthermore, there is credible testimony that Mr. Mostoller himself either intended or at least understood STC's understanding of the bargain. Mr. Mosteller cannot now at this late hour change his mind or the deal. This conclusion is particularly acute since "it is a central principle of contract interpretation that if a party knew or had reason to know of the other parties' interpretation of terms of a contract, the first party should be bound by that interpretation." Bohler-Uddeholm, 247 F.3d at 99 ; see also Emor, Inc. v. Cyprus Mines Corp., 467 F.2d 770, 775-776 (3d Cir. 1972) (citing 3 Corbin, On Contracts, § 537, at 51-42 (1960), and United States v. Stuart, 489 U.S. 353, 368 n.7, 109 S.Ct. 1183, 1192, 103 L.Ed.2d 388 (1989) (discussing the proper interpretation of a treaty, "It is hornbook contract law that the proper construction of an agreement is that given by one of the parties when 'that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.' Restatement (Second) of Contracts § 201(2)(b) (1981).").
Not to be forgotten in this analysis is that Mr. Mostoller's actions post-entry of the Final DIP Order are also indicia that the Respondents understood and conceded that under the Final DIP Order STC is entitled to at least half of the proceeds of the Refund Check.
For example, during the hearing on the Motion to Compel, Mr. Mostoller relayed to the Court that he had been informed that the tax refund due on the 2015 federal tax return, which Mr. Mosteller indicated to be $125,000, had already been applied against the outstanding "nine hundred and eighty some thousand dollars" in tax obligations. See Tr. of Jan. 26, 2017 Hr'g 64:19-65:04, ECF No. 1055. Thus, Mr. Mostoller was aware that the entirety of the refund of taxes paid in the 2015 tax year was offset by pre-existing tax obligations. Nonetheless, Mr. Mostoller's protests at the hearing concerned not whether any portion of the remaining refund due to him on the account of the collective Federal Tax Returns was owed to STC, but instead his arguments were limited solely to claims that (i) he had not assigned his wife's portion of the refunds, and (ii) he should not be required to execute a power of attorney to give STC power over the *61entire refund. At no time did Mr. Mostoller contend that STC was owed no portion of the forthcoming refund. In fact, Mr. Mostoller averred that upon receipt of the refund, STC would be paid its half:
Mr. Mostoller: ... I believe, and I might as well say it, that Somerset Trust is due half of the tax refund that was due to me individually minus what's owed to the Internal Revenue Service....
Tr. of Jan. 26, 2017 Hr'g 59:23-60:01, ECF No. 1055. Mr. Mostoller also represented that he was "going to try and help [STC] get their money." Tr. of Jan. 26, 2017 Hr'g 59:11, ECF No. 1055.
Based on the forgoing, the Court finds that STC's interpretation is the appropriate interpretation under the circumstances of this case.
The Court further notes that the Respondents advanced additional arguments in support of their efforts to obtain the full proceeds of the Refund Check. Specifically, the Respondents contend that this dispute is largely caused by STC's failure to complete adequate due diligence upon the closing of the loan subject to the Final DIP Order. The Court is unsure of the relevance of this argument, but finds that the Respondents' efforts to lay blame upon STC are misplaced.
The circumstances of the negotiation and entry of the Final DIP Order are as follows. At the time of the Debtor's bankruptcy case filing on November 9, 2015, the Debtor was cash-strapped and in desperate need of continued access to cash-collateral and post-petition financing. Teitz, recognizing that the refund on account of the Debtor's net operating losses could be pledged as collateral, approached STC to induce it to lend funds. In connection therewith it was represented to STC that the anticipated "2015 refund" would be in excess of $2 million with approximately a $1.2 million offset. It was further represented that these figures were provided by Baker Tilly, the accounting firm which filed the Debtor's and the Respondents' 2014 tax returns. See Enos Affidavit ¶ 11. At STC's urging, the Debtor, through Teitz, sought further information from Baker Tilly regarding the anticipated tax refund, but Baker Tilly declined to provide the information without first being retained with payment in advance and without further documentation from the Debtor. See Enos Affidavit ¶ 17-18; Teitz Affidavit ¶ 23. Nonetheless, the Debtor represented to STC that Baker Tilly had verbally confirmed that a refund in excess of $2 million was "a very realistic estimate." See Enos Affidavit, ¶ 17, Ex. 3; Teitz Affidavit ¶ 24.
At this point, "given the Debtor's liquidity crisis, discussions between STC and Debtor related to DIP financing and the Debtor's continued use of cash collateral were proceeding at an extremely rapid pace." Teitz Affidavit ¶ 22. Without an accountant having been retained, STC relied on the Debtor's representations as to the amount of the "2015 refund." See Tr. of Jan. 26, 2018 Hr'g 25:12-16, ECF No. 1139. Throughout the negotiation period, the estimated "2015 refund" remained consistently between $2 million-$2.5 million, subject to tax offset. See Enos Affidavit ¶ 22.
The "rapid pace" negotiations resulted in the entry of the Interim DIP Order on December 4, 2015, pursuant to which the Debtor received the first $500,000 distribution of its $1,000,000 DIP facility with STC. See Tr. of Jan. 26, 2017 Hr'g 6:11-18. The Interim DIP Order contained the same pledge of Mr. Mostoller's "2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor[.] ..." See Interim DIP Order ¶ 5. Thus, while the Final DIP Order was entered on January 6, 2016, the phrase subject *62of this dispute was drafted on an even tighter timeline-less than a month after the Debtor's bankruptcy case filing.
The Respondents argue that the expediency of the negotiation period is of no consequence as it was STC's choice to rely on the statements of the Debtor's management team-a management team which included Mr. Mostoller-regarding the amount of the tax refund and forgo intensive due diligence as to the mechanics of how the refund would be generated. See Post-Trial Brief of Respondents, Larry L. Mostoller and Connie Mostoller 8, ECF No. 1144. However, the speed at which the Final DIP Order was put together was entirely for the benefit of the Debtor, which was in desperate need of continued access to cash collateral and post-petition financing. Indeed, in the view of both Fuchs and Teitz, the Debtor's financial condition made STC its only viable option for financing:
Robleto: In Paragraph 12 you say that no other options for DIP financing were considered because of the short timeframe and the debtor's fragmented borrowing. Can you tell me first why wouldn't the timing allow you to at least consider other options?
Fuchs: Well, I don't think there was any time or other viable options present. We were essentially early on in the case. There was very little funds left available to pay the ongoing expenses and it was a battle by Mr. Mostoller every day to find money to pay payroll, fuel, other things that he needed to keep the business going.
Robleto: I understand but the time required to consider additional, the sources of DIP financing, not to actually go out and make proposals or to pitch the possibility of DIP financing but to consider other potential lenders. I'm asking why would the understandably short period of time limit the scope of who you might consider for that purpose?
Fuchs: Well, there was only one logical choice and it was [STC] because they had a first position blanket lien and Mr. Teitz was out there for Compass as-in a financial advisory role and he believed, I think, that that made the most sense and was the direction where we should put our efforts.
Despite the benefit to the Debtor, the Respondents now aver that STC should not be rewarded for its "rapid paced" negotiations and limited due diligence. Respondents' Post-Trial Brief 8, ECF No. 1144. However, it is the Respondents, specifically Mr. Mostoller, who are seeking to take advantage of both sides of the coin. First benefitting as the sole owner of the Debtor from STC's willingness to fast-track the negotiation of a debtor-in-possession loan facility that was crucial to the Debtor's ability to carry-on under chapter 11 of the Bankruptcy Code, and now faulting STC for assisting the Debtor so quickly. The Court finds this position untenable. Further, the Court finds that to award the remainder of the proceeds of the Refund Check to the Respondents would be an absurd and unreasonable result given that (a) the due diligence period was constrained for the benefit of the Debtor, (b) STC relied on the Debtor's representations, and (c) there is overwhelming evidence that the Parties understood that the deal was to pledge the entirety of the refund generated by the 2015 operating losses to STC. Thus, STC's interpretation is the only reasonable one.
*63The Stern Challenge is Without Merit
Finally, the Court notes that the Respondents have contended that this Court lacks the authority to enter a final order with respect to this controversy. The Respondents essentially contend that the Refund Check was owned by the Respondents as tenants-by-the-entireties. As a result, they contend that this controversy is a both non-core proceeding under applicable state law and a proceeding which this Court may not adjudicate on a final basis pursuant to the United States Supreme Court's decision in Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).10
The Stern challenge by the Respondents is unconvincing for a number of reasons. First, as set forth in the initial parts of this Memorandum Opinion , this Court has jurisdiction to interpret and enforce its prior orders. See Travelers Indem. Co. v. Bailey, 557 U.S. at 149, 129 S.Ct. 2195.
Second, this matter is a core proceeding over which the Court has both subject-matter jurisdiction and the requisite statutory authority to enter a final judgment. Indeed, enforcement of the Final DIP Order concerns the administration of this estate inasmuch as the funds to be paid to STC effectively reduces its post-petition claim. It also deals with the enforcement of the Final DIP Order and therefore is a controversy that concerns both an order "in respect to obtaining credit" and the Debtor's use of cash collateral. Furthermore, this controversy is a request for a determination of the validity, extent or priority of liens of STC against the applicable tax refund, and obviously the controversy affects the adjustment of the debtor-creditor relationship. All of these types of matters fall within the core jurisdiction of this Court. See 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(D), 157(b)(2)(K), 157(b)(2)(M), 157(b)(2)(O), and 1334(b).
Third, the record reflects that Mr. Mostoller expressly consented to entry of the Final DIP Order and both Respondents filed their own Motion for Release with this Court. In addition, the claim that a portion of the refund belongs to Mrs. Mostoller was addressed by the partial release of the refund, which the Respondents gladly accepted. These circumstances clearly evince that the Respondents consented to this Court's final determination of the parties' relative rights and interests in the proceeds of the Refund Check. This consent obviates any Stern based challenge the Respondents may have. See Ardi Ltd. P'ship v. The Buncher Co. (In re River Entm't), 467 B.R. 808 (Bankr. W.D. Pa. 2012) and Wellness Int'l Network, Ltd. v. Sharif, --- U.S. ----, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).
Fourth, it appears that after the Court authorized the partial release (and after the evidentiary hearing on this matter), the Respondents have not advanced the "entireties theory" of their case. Even if they did not abandon this theory for relief, this Court concludes that the weight of the evidence and applicable law warrants the rejection of the entireties claim.
Specifically, the United States Tax Code provides that a refund may only be obtained by the "person who made the overpayment." See 26 U.S.C. § 6402(a) ; see also Ruscitto v. United States, 629 Fed. App'x 429, 432 (3d Cir. 2015) (quoting *64Delaune v. United States, 143 F.3d 995, 1006 (5th Cir. 1998) ). Courts have also held that "[s]pouses who file a joint return have separate interests in any overpayment, the interest of each depending on his or her relative contribution to the overpaid tax." Id. (quoting United States v. Elam, 112 F.3d 1036, 1038 (9th Cir. 1997), which cites additional cases).
With this applicable law in mind, the Court notes that there is no evidence of record that Mrs. Mostoller had any taxable income of her own that contributed to the overpayment of taxes for any of the years at issue. These circumstances warrant a finding that Mrs. Mostoller has no further interest in the remaining proceeds of the Refund Check. As such, the remaining proceeds are the collateral of STC under the Final DIP Order.
III.
CONCLUSION
For the reasons set forth above, the Court grants STC's Motion Seeking Release of Certain Tax Refund Check to Somerset Trust Company and denies the Respondents' Motion in Limine to Exclude Extrinsic Evidence . An appropriate order shall be issued in accordance herewith.
ORDER
For the reasons set forth in the Memorandum Opinion issued contemporaneously herewith, the Court hereby ORDERS, ADJUDGES, and DECREES that the Movant's Motion Seeking Release of Certain Tax Refund Check to Somerset Trust Company , ECF No. 1057, is GRANTED. In accordance with the Consent Order Regarding Competing Motions Seeking Release of Certain Tax Refund Check entered August 31, 2017, this Court directs that the Movant, Somerset Trust Company, may distribute to itself the remainder of the proceeds of the Refund Check1 .
The Court further ORDERS, ADJUDGES, and DECREES that the Respondents' Motion in Limine to Exclude Extrinsic Evidence , ECF No. 1122, is DENIED.
Moreover, to the extent that the Respondents may seek any remaining relief pursuant to their Motion Seeking Release of Check , ECF No. 1058, said motion is DENIED.
As of the petition date, the Debtor was indebted to STC for pre-petition loans in the amount of $3,320,996.26, for which Mr. Mostoller was a personal guarantor. Stipulation ¶¶ 12-13.
Plus any additional sums earned by virtue of the funds' placement into an interest-bearing escrow account. See Consent Order dated Aug. 31, 2017 ¶ 5, ECF No. 1069.
By agreement of the parties, hearsay objections to the affidavits were waived and the affiants were either present and available for cross-examination at trial or (in the case of Mr. Tarpey) attendance at trial was excused. In fact, Mssrs. Teitz, Fuchs, and Enos were cross-examined at trial. In the course of observing their demeanor and the substance of their testimony, the Court finds such witnesses to be credible.
Counsel for STC stated: "I think to the extent that the language is somewhat inartful in the final DIP order, I think it's ambiguous, you know, as to whether it refers to taxes actually paid in 2015 or whether it refers to refunds generated on account of losses claimed in 2015 pursuant to a 2015 tax return." Tr. of Aug. 25, 2018 Hr'g 12:9-12:12, ECF No. 1116.
In arriving at this conclusion, the Court notes that even though STC later focused its arguments on the existence of a latent ambiguity, STC preserved its patent ambiguity argument at pages 24-26 of its pre-trial memoranda, even though it is under a heading labeled "latent ambiguity." See ECF No. 1084 at pp. 24-26. The Court also notes that the Respondents are not prejudiced by this Court's finding of a patent ambiguity. Given STC's earlier position regarding ambiguity, the Respondents had the opportunity to address patent ambiguity and did so in their Memorandum of Law in Opposition to the Motion Seeking Release of Certain Refund Check to Somerset Trust Company , ECF No. 1091. The Respondents were also provided further opportunity to address whether paragraph 6 of the Final DIP Order is patently ambiguous in response to this Court's supplemental briefing order dated July 25, 2018, which plainly asked the parties to brief issues regarding patent ambiguity. See Order Directing that the Parties File Supplemental Briefs , ECF No. 1215.
The transcript of the evidentiary hearing reflects the following exchange that supports this possible construction:
THE COURT: What is a 2015 federal tax return?
MS. SCHORR: The federal tax refund was the -
THE COURT: Well, let's break it down a little bit.
MS. SCHORR: OKAY.
THE COURT: Phrase 2015 federal tax refund. 2015 means the Year 2015, correct?
MS. SCHORR: The tax year, correct.
THE COURT: And when you combine 2015 with the phrase, federal tax refund, does that mean a tax refund that's due and payable in Year 2015?
MS. SCHORR: Yes, it does. But we believe that's modified by the following language ...
See Tr. of the Jan. 26, 2018 Hr'g 8:13-23, ECF No. 1139.
This is essentially the interpretation advocated by STC.
In a colloquy with the Court at the January 26, 2018 evidentiary hearing, counsel for the Respondents stated: "the 2015 federal tax refund means the refund that was due from the return filed in 2015." See Tr. of the Jan. 26, 2018 Hr'g 10:12-13, ECF No. 1139.
In addition to being an addressee of e-mail communications during the negotiation (ex. Exhibits 12, 16), both Teitz and Fuchs testified that they regularly forwarded e-mail communications regarding the negotiations to Mostoller. See Teitz Affidavit ¶ 27; Tr. of Jan. 26, 2018 Hr'g 38:03-38:06, ECF No. 1139. Moreover, Fuchs testified that during the negotiations of debtor-in-possession financing, he had several conversations with Mr. Mostoller regarding the necessity to pledge the tax refund. See Tr. of Jan. 26, 2018 Hr'g 35:19-40:17, ECF No. 1139.
Even if this this controversy constitutes either a non-core matter or a matter that required adjudication by an Article III Judge, this Memorandum Opinion can be construed to be a report and recommendation (or proposed findings of fact and conclusions of law) to the United States District Court. See Fed.R.Bankr.P. 9033 ; see also Executive Benefits Agency, Inc. v. Arkison, 573 U.S. 25, 134 S.Ct. 2165, 2172, 189 L.Ed.2d 83 (2014).
"Refund Check" shall have the same meaning as in the contemporaneous Memorandum Opinion . | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501696/ | MEMORANDUM OPINION 1
The Honorable Jeffery A. Deller, United States Bankruptcy Judge *67This adversary proceeding is the latest installment of an ongoing feud between Park Restoration, LLC ("Park Restoration") and the Trustees of Conneaut Lake Park, Inc. ("TCLP").
Because the claims or causes of action asserted by Park Restoration herein fail as a matter of law, an order shall be entered that dismisses Park Restoration's Second Amended Complaint , ECF No. 5 (the "Amended Complaint"), with prejudice.
I.
In this adversary proceeding Park Restoration is seeking to assert (by way of subrogation) a $478,260.75 secured tax claim (the "Secured Tax Claims") against TCLP. Park Restoration is asserting its claim pursuant to 11 U.S.C. § 509 because such claims of the taxing authorities (the "Taxing Authorities")2 were previously paid during the pendency of this case from proceeds of a fire insurance policy obtained by Park Restoration.
The undisputed facts are that the Secured Tax Claims date back to 1996, which is well before Park Restoration's relationship with TCLP.
In 2008, Park Restoration and TCLP entered into a management agreement. Pursuant to this management agreement, TCLP turned over to Park Restoration a certain building and real estate located at or near the shore of Conneaut Lake, which was known as the "Beach Club."
In connection with its control and use of the Beach Club, Park Restoration obtained a policy of insurance from Erie Insurance Exchange ("Erie Insurance"), which included "Property Protection" covering "Buildings" in case of fire damage in the amount of $611,000.
On August 1, 2013, the Beach Club was destroyed by fire, the cause of which is undetermined.
As a result of the fire, Park Restoration, TCLP, and the Taxing Authorities asserted competing claims to payment from the insurance proceeds.
As it relates to the Secured Tax Claims, the Taxing Authorities sought payment from Erie Insurance pursuant to 40 P.S. § 638 (the "State Statute").
The State Statute provides that an insurance company presented with "a claim of a named insured for fire damage to a structure located within a municipality" may not pay such a claim in excess of $7,500 without first receiving a "certificate" explaining whether "delinquent taxes, assessments, penalties, or user charges against the [insured] property" are owed to the municipality. See 40 § 638(a), (b)(1)(i)-(ii).
The State Statute further provides that after receiving a "certificate and bill" indicating that the covered property remains subject to a municipal tax liability, the insurance company must "return the bill to the [municipal] treasurer and transfer to the treasurer an amount from the insurance proceeds necessary to pay the taxes, *68assessments, penalties, charges and costs shown on the bill." Id. at § 638(b)(2)(ii).
In September of 2013, and not wanting any of the insurance proceeds to be paid to anyone but itself, Park Restoration commenced a declaratory judgment action (the Declaratory Judgment Action") in state court asserting a claim to all of the insurance proceeds. In connection with the Declaratory Judgment Action, Erie Insurance interpleaded the $611,000 of insurance proceeds with the state court.
Shortly after TCLP filed its bankruptcy case with this Court, the Declaratory Judgment Action was removed to this Court on February 3, 2015. Thereafter, the funds subject to the interpleader were also removed to the registry maintained by the Clerk of the United States Bankruptcy Court.
On December 22, 2015, this Court rendered its decision in the Declaratory Judgment Action thereby awarding the Taxing Authorities $478,260.75 of the insurance proceeds, and awarding the remaining sums above and beyond this amount to Park Restoration. Park Restoration, LLC v. Summit Twp. (In re Trustees of Conneaut Lake Park, Inc.), 543 B.R. 193, 202-03 (Bankr. W.D.Pa. 2015) (the " Declaratory Judgment Opinion").
In connection with rendering this decision, the Court overruled the various claims of Park Restoration, including Park Restoration's contention that the application of the State Statute to the insurance proceeds at issue constituted an unlawful taking under both the Pennsylvania Constitution and the United States Constitution. In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 203-07. This Court's decision and order was ultimately affirmed by the United States Court of Appeals for the Third Circuit. See Park Restoration, LLC v. Erie Ins. Exch. (In re Trustees of Conneaut Lake Park, Inc.), 855 F.3d 519 (3d Cir. 2017).
Thereafter, the Secured Tax Claims were paid from the insurance proceeds.3 Also, within the underlying bankruptcy case, TCLP had its plan of reorganization confirmed by order of this Court.
While TCLP was confirming its plan of reorganization, Park Restoration chose to not participate in the underlying bankruptcy case, and it chose to not file a proof of claim against TCLP on account of any claims it may have against the debtor. Instead, well after plan confirmation and well after the bar date for filing claims, Park Restoration filed a lawsuit against TCLP sounding in unjust enrichment (for, after all, Park Restoration paid the insurance premiums giving rise to the insurance proceeds paid to the Taxing Authorities). The unjust enrichment action, however, violated the discharge injunction contained within TCLP's confirmed plan and confirmation order. As a result, Park Restoration was enjoined from further prosecution of the unjust enrichment action. See Trustees of Conneaut Lake Park, Inc. v. Park Restoration, LLC (In re Trustees of Conneaut Lake Park, Inc.), No. 14-11277-JAD, 2018 WL 2246582 (Bankr. W.D.Pa. May 15, 2018).
Undaunted, Park Restoration commenced the instant adversary proceeding contending that because $478,260.75 of the insurance proceeds was paid to the Taxing *69Authorities on account of the Secured Tax Claims, Park Restoration may now step in the proverbial shoes of the Taxing Authorities and seek payment from TCLP by operation of 11 U.S.C. § 509.
In response to the subrogation claim, TCLP has filed a Motion to Dismiss Amended Complaint , ECF No. 12 ("Motion to Dismiss" ). In its Motion to Dismiss, TCLP contends that the cause of action averred by Park Restoration does not meet the technical requirements of 11 U.S.C. § 509 and as such, Park Restoration's Amended Complaint should be dismissed for failure to state a claim upon which relief can be granted.4
Upon review of both Park Restoration's Amended Complaint and applicable law, as well as the briefs filed by the parties relative hereto, this Court agrees that Park Restoration fails to state a claim under 11 U.S.C. § 509.
II.
Fed. R. Civ. P. 12(b)(6), made applicable to adversary proceedings by Fed. R. Bankr. P. 7012(b), provides that complaints may be dismissed for "failure to state a claim on which relief can be granted."
In deciding such a motion, the Court "may consider material which is properly submitted as part of the complaint ... without converting the motion to dismiss into a motion for summary judgment." Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001).
The Court may also consider: documents the complaint incorporates by reference or are otherwise integral to the claim (see Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1178 (10th Cir. 2012), Brownmark Films, LLC v. Comedy Partners, 682 F.3d 687, 690 (7th Cir. 2012), Building Indus. Elec. Contractors Ass'n v. City of New York, 678 F.3d 184, 187 (2d Cir. 2012) ), information subject to judicial notice (see Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55-56 (1st Cir. 2012), Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1016 n. 9 (9th Cir. 2012), Gee v. Pacheco, 627 F.3d 1178, 1186 (10th Cir. 2010) ), and matters of public record such as orders and other materials in the record of the case (see Miller v. Redwood Toxicology Lab., Inc., 688 F.3d 928, 931 n. 3 (8th Cir. 2012) ).
In order "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).
"A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ).
Determining whether a claim for relief is plausible is a "context-specific task" requiring the court to "draw on its judicial experience and common sense." Ashcroft v. Iqbal, 556 U.S. at 679, 129 S.Ct. 1937 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) ). "A pleading that offers 'labels and conclusions' or 'a formulaic recitation to the elements of a cause of action will not do.' " Id. at 678, 129 S.Ct. 1937.
*70Additionally, the court need not accept as true bald assertions (or bald conclusions or inferences), legal conclusions couched or masquerading as facts, or conclusions contradicted by the complaint's own exhibits or other documents of which the court may take proper notice. See Lazy Y Ranch Ltd. v. Behrens, 546 F.3d 580, 588 (9th Cir. 2008) ; Bishop v. Lucent Tech., Inc., 520 F.3d 516, 519 (6th Cir. 2008) ; Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996) (the court is not obligated to "swallow the plaintiff's invective hook, line, and sinker; bald assertions, unsupportable conclusions, periphrastic circumlocutions, and the like need not be credited").
With these standards in mind, the Court will examine whether Park Restoration has stated a plausible claim for subrogation under 11 U.S.C. § 509.
Subrogation Under 11 U.S.C. § 509
As a general matter:
[S]ubrogation is the substitution of one party in place of another with reference to a lawful claim, demand or right. It is a derivative right, acquired by satisfaction of the loss or claim that a third party has against another. Subrogation places the party paying the loss or claim (the "subrogee") in the shoes of the person who suffered the loss ("the subrogor"). Thus, when the doctrine of subrogation applies, the subrogee succeeds to the legal rights and claims of the subrogor with respect to the loss or claim. See, e.g., Amer. Surety Co. of New York v. Bethlehem Nat. Bank, 314 U.S. 314, 317, 62 S.Ct. 226, 86 L.Ed. 241 (1941) (discussing equitable doctrine of subrogation in surety context); Han v. United States, 944 F.2d 526, 529 (9th Cir.1991) (discussing equitable subrogation generally).
Hamada v. Far E. Nat'l Bank (In re Hamada), 291 F.3d 645, 649 (9th Cir. 2002).
Subrogation is commonly categorized as being one of three types: (i) "conventional" or "contractual," (ii) "legal" or "equitable," or (iii) statutory. In re Hamada, 291 F.3d at 649. The first type, "conventional" or "contractual" is what its name suggests-subrogation rights arising from an express or implied agreement between the subrogee and subrogor. Id. Equitable subrogation, on the other hand, "is a legal fiction, which permits a party who satisfies another's obligation to recover from the party 'primarily liable' for the extinguished obligation." Id. (quoting In re Air Crash Disaster, 86 F.3d 498, 549 (6th Cir. 1996) ). Finally, a party's right to statutory subrogation emanates from an applicable statute. See In re Hamada, 291 F.3d at 649.
Park Restoration acknowledges that by the Amended Complaint it is not seeking relief based on theories of contractual subrogation or equitable subrogation. Rather, the basis of the relief it seeks is grounded in statute- 11 U.S.C. § 509.
Section 509 of the Bankruptcy Code provides, in pertinent part, that: "an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment." See 11 U.S.C. § 509(a). What is plain and clear from this statute is that in order to succeed on a subrogation claim, Park Restoration must show that (i) it is liable with the debtor on, or has secured, a claim5 of a creditor *71against TCLP, and (ii) it paid the claim.6
The Court will first examine whether Park Restoration is a "payor" of the Secured Tax Claims at issue and then whether it is a "co-obligor" with respect to the same under the unique facts and circumstances of this case.
Whether Park Restoration is a Payor under § 509
The requirement for subrogation under Section 509 that an averred subrogee has actually paid the debtor's debt is not to be understated.
In addition to being set forth in the plain text of § 509(a), it has been observed that "[t]he legislative history to § 509 indicates that it was designed to describe rights available to a limited class of creditors, namely, true co-debtors who have actually paid a debtor's obligation to the third party in question." In re Hamada, 291 F.3d at 650 (emphasis added). As the court in Hamada observed:
This section is based on the notion that the only rights available to a surety, guarantor, or comaker are contribution, reimbursement, and subrogation. The right that applies in a particular situation will depend on the agreement between the debtor and the codebtor, and on whether and how the payment was made by the codebtor to the creditor.
In re Hamada, 291 F.3d at 650 (quoting H.R.Rep. No. 95-595, 95th Congr., 1st Sess. (1977) p. 358, U.S. Code Cong. & Admin. News at 5963, 6314).
Courts have held that "payment" need not necessarily be in the form of cash or cash-equivalent, but need only discharge the obligation against the debtor. See Feldhahn v. Feldhahn, 929 F.2d 1351, 1354 (8th Cir. 1991) (finding that an ex-spouse's assignment of a collateralized interest in real property to a lienholder in satisfaction of a debt was sufficient to merit subrogation to that lienholder's claim).
Nonetheless, "payment" must be made with the property of the averred subrogee. See Greenfield, Stein & Senior, LLP v. Daley (In re Daley), 222 B.R. 44, 47 (Bankr. S.D.N.Y. 1998). That is payment from someone else's property is insufficient to state a claim.
In this case, Park Restoration has not contended that Park Restoration has paid TCLP's debt to the Taxing Authorities (i.e. the Secured Tax Claims) directly. Rather, Park Restoration has contended that Park Restoration did so indirectly by virtue of Erie Insurance's tender of the insurance proceeds to the Taxing Authorities. Specifically, Park Restoration asserts that Park Restoration had a vested interest in the insurance proceeds and thus, the Secured Tax Claims were satisfied with Park Restoration's property. See e.g., Plaintiff's Second Brief in Response to Debtor's Motion to Dismiss , ECF No. 18 ("Park Restoration's Second Brief").
The crux of Park Restoration's argument is that under Pennsylvania law, an insured's right to insurance proceeds vests immediately upon the occurrence of the loss which, in-turn, triggers the insurer's liability under the relevant policy. See *72Park Restoration's Second Brief at p. 2. Moreover, Park Restoration asserts that Pennsylvania courts have been reluctant to enforce restrictions on an insured's right to payment after a right to payment has occurred. Thus, it is Park Restoration's position that Park Restoration had a "vested interest in the entirety of the insurance proceeds at the moment the Beach Club was destroyed...." See Park Restoration's Second Brief at p. 4. Further, Park Restoration contends that the Court had previously recognized this interest in the Court's prior Memorandum Opinion entered at adversary proceeding no. 15-1010, ECF No. 82 (i.e. the Declaratory Judgment Opinion). See Park Restoration's Second Brief at p. 4 & n. 2.
TCLP disagrees that Park Restoration is entitled to subrogation and filed its Motion to Dismiss averring that not only did Park Restoration not have a legally cognizable property interest in the insurance proceeds, but that such determination had been made in prior proceedings as well.
Specifically, TCLP refers to the holdings of the Third Circuit Court of Appeals in Park Restoration, LLC v. Erie Ins. Exch. (In re Trustees of Conneaut Lake Park, Inc.), 855 F.3d 519 (3d Cir. 2017). That opinion overruled the District Court's reversal of certain of this Court's findings in the Declaratory Judgment Opinion and affirmed this Court's findings and conclusions.
By way of background, the matter previously before the Court relative to the Declaratory Judgment Opinion concerned whether Park Restoration had a legally cognizable property interest in the insurance proceeds in the context of an averred unconstitutional taking. See In re Trustees of Conneaut Lake Park, Inc., 543 B.R. 193 (Bankr. W.D.Pa. 2015).
In that proceeding, Park Restoration challenged the constitutionality of Erie Insurance's disbursement of $478,260.75 of the insurance proceeds to the Taxing Authorities as required by the State Statute. Park Restoration contended that this provision violated the Takings Clause of the United States Constitution and the Pennsylvania Constitution.
Essential to a determination of whether an improper "taking" occurred, this Court observed that it was first necessary to determine that the averred taking affected a "constitutionally protected property interest"-i.e. a legally cognizable property interest. See In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 204.
In addressing this question, this Court recognized that the relevant insurance policy included language indicating that the policy conformed to the laws of the state in which Park Restoration's home office was located-in this case, Pennsylvania. Further, that applicable law provided that "pre-existing statutory provisions pertaining to the subject matter of a contract are deemed to be incorporated within the terms agreed to by the contracting parties." In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 205.
Accordingly, since the State Statute predated Park Restoration's policy with Erie Insurance, this Court concluded it was interwoven into the policy. Moreover, this Court's conclusions were further supported by the fact that the face of the policy itself read "We [i.e., Erie Insurance Exchange] will adjust all losses' with you [i.e., the Plaintiff]. We will pay you unless some other person ... is legally entitled to receive payments." See In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 205.
Given these considerations, as well as the fact that the property taxes were delinquent *73as early as 19967 -with the Beach Club Management Agreement being executed in 2008-this Court found that Park Restoration's rights to the insurance proceeds were "always subject to the Taxing Authorities." Id. at 206. Stated another way, that Park Restoration "... never acquired a vested right to the $478,260.75 owed to the taxing authorities at the time of the fire." Id.
Although the District Court reversed the holding of this Court, on appeal the Third Circuit Court of Appeals agreed with this Court's analysis regarding Park Restoration's possession of a "legally cognizable property interest" in the portion of the insurance proceeds remitted to the Taxing Authorities and reversed the District Court. See In re Trustees of Conneaut Lake Park, Inc., 855 F.3d at 526. The Third Circuit therein also found that the State Statute made Park Restoration's receipt of the insurance proceeds conditional on satisfaction of the real property taxes. Id. Thus, the Third Circuit found that Park Restoration had no legally cognizable property interest in the insurance proceeds subject to the Taxing Authorities' claims. Id.
In defense of what can be described as TCLP's law of the case arguments, Park Restoration asserts that reliance on the Third Circuit's statement finding that Park Restoration had no "legally cognizable property interest" in the insurance proceeds is erroneous. Specifically, Park Restoration argues that the Third Circuit's statement "was made in the context of responding to [Park Restoration's] argument that applying § 638 would violate the Takings Clause of the United States Constitution, and the Third Circuit did not include citation to any authority suggesting that insureds do not have any 'legally cognizable interest' in the contracted-for insurance policies." Park Restoration's Second Brief at pp. 4-5. Park Restoration therefore asserts that reading the Third Circuit's opinion to find no legally cognizable interest undercuts Pennsylvania state law which provides that an insured's right to insurance proceeds vests at the time of the loss. See Park Restoration's Second Brief at p. 5.
Park Restoration therefore urges this Court to read the Third Circuit's statement of no cognizable legal interest in conjunction with its statement that "[i]n sum, when Park Restoration insured the Beach Club, its rights to any insurance proceeds were subject to the claim of the Tax Authorities." Park Restoration further asserts that this statement is a "clear recognition" that Park Restoration had a legal right to the remitted insurance proceeds, which was subordinated to the claim of the Taxing Authorities. See Park Restoration's Second Brief at p. 5.
To the extent that Park Restoration asserts that this Court's and the Third Circuit's findings that Park Restoration had no "legally cognizable property interest" in the insurance proceeds remitted to the Taxing Authorities do not equate to a finding that Park Restoration had no rights whatsoever to those funds, this Court agrees with Park Restoration. In fact, this Court found in its Declaratory Judgment Opinion that, but for the application of the State Statute, Park Restoration would have had an interest in the entirety of the insurance proceeds. See In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 202. Thus, Park Restoration clearly had some right to the remitted insurance proceeds.
*74The operative question is then whether Park Restoration's rights matured into a vested property interest. This Court finds that it did not. Instead, it appears that any rights that Park Restoration had in the insurance proceeds were subject to the rights of the Taxing Authorities and, as a result Park Restoration's rights were not vested and were inchoate, contingent and unmatured as long as the Secured Tax Claims remained unpaid.
This finding was articulated in this Court's Declaratory Judgment Opinion wherein this Court observed that Park Restoration's rights to the entirety of the insurance proceeds "were always subject to the claim of the Taxing Authorities." In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 206 ; see also Trustees of Conneaut Lake Park, Inc., 855 F.3d at 526.
Further, that since the State Statute was incorporated into the terms of the insurance contract with Erie Insurance, Park Restoration "never acquired a vested right to the $478,260.75 owed to the taxing authorities at the time of the fire." In re Trustees of Conneaut Lake Park, Inc., 543 B.R. at 206 (emphasis added).
Accordingly, it logically follows that since Park Restoration had no vested property interest in those funds remitted by Erie Insurance, it cannot be said that Park Restoration satisfied the Secured Tax Claims with its (that is Park Restoration's) own property. Park Restoration's subrogation claim must fail under these circumstances.
Nonetheless, Park Restoration argues that to find that it lacked a property interest in the insurance proceeds would contradict established Pennsylvania caselaw which provides that an insured's rights to insurance proceeds vest upon the occurrence of the loss triggering the insurer's liability. As Park Restoration states it, TCLP's interpretation of the Third Circuit's holding would mean that " § 638 precludes an insured's interest from vesting until after any third party claims or defenses to the distribution of those proceeds are resolved...." Park Restoration's Second Brief at p. 5 (emphasis and underline added). Park Restoration's argument is unpersuasive for a couple of reasons.
First, any perceived effect is vastly overstated by Park Restoration as the State Statute only provides for the withholding of payment to the insured upon condition of satisfying certain tax obligations, not any party's claims or defenses. Moreover, as discussed above, the relevant caselaw and the language of the insurance policy incorporate the conditions of the State Statute into the insurance policy itself-which this Court has already found that Park Restoration voluntarily entered into-making it no different from any other bargained-for condition of payment. See Trustees of Conneaut Lake Park, Inc., 543 B.R. at 205.
Second, even assuming that Park Restoration's statement that a right to payment under an insurance policy vests upon the occurrence of a triggering loss is the correct statement of the law, at least one court addressing the issue has denied subrogation claims by parties claiming a vested right in property due to a lack of a sufficient ownership interest (on account of the superior interest of another).
In Greenfield, Stein & Senior, LLP v. Daley (In re Daley), 222 B.R. 44 (Bankr. S.D.N.Y. 1998), the United States Bankruptcy Court for the Southern District of New York determined a similar issue to the one sub judice .
In Daley, an attorney represented the debtor in two separate actions-an employment litigation case and a divorce proceeding. Pursuant to the divorce litigation, the debtor entered into an agreement with *75his now former spouse under which he would pay her a certain sum from the proceeds from any recovery in the employment litigation and that sum would be "paid prior to any other third party."
However, when the debtor obtained a judgment, the debtor's counsel asserted that its charging lien primed the spouse's lien. It was ultimately decided that the former spouse's claim was superior.
Thereafter, the debtor filed for bankruptcy relief and counsel filed an adversary proceeding seeking to assert the former spouse's claim and have it declared non-dischargeable. In those proceedings, counsel argued that it could assert a non-dischargeability action on a subrogation basis because the former spouse's interest primed counsel's charging lien and the former spouse would be paid out of counsel's alleged property. The bankruptcy court noted that under 11 U.S.C. § 509, a crucial element of subrogation is that the subrogee must have utilized its own property to pay the debtor's debt. See In re Daley, 222 B.R. at 47. Thus, the counsel's subrogation claim in Daley-like Park Restoration's in the instant case-depended on whether counsel "owned" the proceeds of the employment litigation action paid to the former spouse. This determination hinged on the rights conferred to counsel in the proceeds by virtue of its charging lien. Id. at 47. The bankruptcy court noted that under New York law, a charging lien is a vested property right created by law. Id. at 47-48. Accordingly, counsel had a vested property right or an equitable ownership interest in the employment litigation claims asserted by the debtor. However, this vested property interest did not equate to an ownership interest in the proceeds of that litigation. Notably, it had been previously determined that despite the charging lien, the former spouse had a superior interest in the litigation proceedings. This determination turned, in part, on the fact that the counsel asserting the charging lien was also counsel to the debtor in the marriage dissolution action and thus, "either signed, negotiated or were fully aware of the settlement" which granted the former spouse priority to certain amounts from the employment litigation proceeds. Consequently, although counsel's vested property interest in debtor's cause of action in the employment litigation was an "inchoate right" to litigation proceeds-which under normal circumstances would create a property interest upon recovery-by acquiescing to the settlement agreement, counsel effectively waived its right to make its interest in the proceeds "choate." Id. at 48-49. Accordingly, the litigation proceeds to be paid to the former spouse in Daley were not the property of the counsel, and the counsel's subrogation theory failed.
Like counsel in In re Daley, Park Restoration entered into the insurance contract with Erie Insurance with knowledge, either actual or constructive, that its rights were conditioned on the satisfaction of certain tax obligations. As such, any interest in the insurance proceeds that Park Restoration had was an inchoate right, which Park Restoration waived the right to make choate until the tax obligations were satisfied in accordance with the applicable law. See In re Daley, at 49.
As stated above, both this Court and the Third Circuit previously found as much, noting that Park Restoration's rights to the insurance proceeds were always subject to the claims of the Taxing Authorities. Thus, even if Park Restoration possessed a "vested" right to the remitted portion of the insurance proceeds such right would nonetheless be inferior to that of the Taxing Authorities and Park Restoration's claim for subrogation fails.
Finally, Park Restoration argues that the Third Circuit's statement that "we emphasize *76that nothing in this opinion should be construed to preclude Park Restoration from seeking an accounting or other equitable relief in the future[,]" evidences that Park Restoration had a vested interest in the insurance proceeds. Park Restoration rationalizes that if it had no cognizable legal interest in the insurance proceeds, that Park Restoration would not have a right to seek such relief. See Park Restoration's Second Brief at p. 5.
Park Restoration has relied on this language in support of a claim for equitable relief before and in its Memorandum Opinion granting TCLP's Motion for Order (A) Enforcing the Discharge Injunction; and (B) Imposing Sanctions for Civil Contempt of the Court's Plan Confirmation Order , this Court observed that the plain language of the Third Circuit's statement "does not mandate the outcome of any claim for equitable relief sought by Park Restoration." See In re Trustees of Conneaut Lake Park, Inc., 2018 WL 2246582, at *4. Thus, the Third Circuit's statement is not a guarantee or an advisement that Park Restoration is entitled to equitable relief-it was only a statement that its opinion is not a foreclosure of Park Restoration's ability to pursue such relief.
Accordingly, the Court finds that Park Restoration did not have a vested interest in the insurance proceeds remitted by Erie Insurance and as such, did not satisfy the Secured Tax Claims with Park Restoration's own property. Therefore, Park Restoration is not a "payor" as required by 11 U.S.C. § 509, and its claim for subrogation must fail.
Park Restoration Is Not "Liable With" TCLP on the Secured Tax Claims
Turning back to the first prong, § 509(a) requires that a subrogee be "liable with the debtor on" or has "secured" a claim of a creditor against the debtor. See 11 U.S.C. § 509(a).
Park Restoration asserts that it is a "co-debtor" of TCLP as it was "secondarily liable" on the Secured Tax Claims. See Plaintiff's Response to Debtor's Motion to Dismiss 2, ECF No. 16 ("Response").
Park Restoration disputes that it was "primarily liable" for the taxes. See Response at p. 3. Park Restoration, however, does assert that it was secondarily liable pursuant to the State Statute. As Park Restoration puts it "[t]hat [Park Restoration] was secondarily liable for [TCLP's] delinquent taxes is the only logical explanation for how insurance proceeds that it paid for, could be used to pay the delinquent property taxes owed by another." See Response at p. 3.
Essential to an evaluation of Park Restoration's claim that it is a "co-debtor" with TCLP is an understanding of Park Restoration's liability on the tax obligation.
The phrase "liable with" means:
[To be] "[b]ound or obliged in law or equity." The word "with" means "in addition to." Consequently, looking to the plain language of the statute and giving effect to its meaning, "an entity ... is liable with the debtor," when the entity is bound or obliged in law or equity in addition to the debtor on "a claim of a creditor against the debtor."
In re Daley, 222 B.R. at 47 (quoting CCF, Inc. v. First Nat'l Bank & Trust Co. of Okmulgee (In re Slamans), 69 F.3d 468, 473 (10th Cir.1995) (all citations omitted) ).
Stated in other words, to be "liable with" the debtor is to be liable "to the same creditor at the same time on the same debt." In re Daley, 222 B.R. at 47 (quoting In re Topgallant Lines, Inc., 154 B.R. 368, 381, fn. 12 (S.D.Ga. 1993) ).
Courts examining whether subrogation is warranted have noted that a signal of whether a potential subrogee is *77"liable with" a debtor on a particular debt is the independence of the subrogee's obligation-i.e. whether the potential subrogee's obligation is its own, separate and distinct from the debtor's. After all, the "legislative history to § 509 indicates that it was designed to describe rights available to a limited class of creditors, namely, true co-debtors who have actually paid a debtor's obligation to the third party in question." In re Hamada, at 650 (emphasis added).
For example, the Third Circuit in Tudor Dev. Grp., Inc. v. United States Fidelity & Guar. Co., 968 F.2d 357 (3d Cir. 1992), found that, in contrast to a guarantor of a debt, a bank which issued standby letters of credit in connection with a construction project cannot "accede to the rights of its customer" when it pays out on the standby letters of credit. The court reasoned that the liability the bank satisfied in making the payment was its own-for which it was primarily liable-as the bank was contractually obligated to make the payment. As noted by the Third Circuit:
[T]he key distinction between letters of credit and guarantees is that the issuer's obligation under a letter of credit is primary whereas a guarantor's obligation is secondary-the guarantor is only obligated to pay if the principal defaults on the debt the principal owes. In contrast, while the issuing bank in the letter of credit situation may be secondarily liable in a temporal sense, since its obligation to pay does not arise until after its customer fails to satisfy some obligation, it is satisfying its own absolute and primary obligation to make payment rather than satisfying an obligation of its customer. Having paid its own debt, as it has contractually undertaken to do, the issuer "cannot then step into the shoes of the creditor to seek subrogation, reimbursement or contribution from the [customer]. The only exception would be where the parties reach an agreement to the contrary." In re Kaiser Steel Corp., 89 B.R. 150, 153 (Bankr. D.Colo. 1988).
Tudor Dev. Grp., Inc., at 362 ; see also In re Hamada, 291 F.3d at 650 (citing to Tudor, finding that an issuer of letters of credit, in contrast to a surety or guarantor, is not "liable with" a debtor as contemplated by 509(a) ).
Thus, to determine whether Park Restoration was "liable with" the debtor on the Secured Tax Claims, we must understand the origin of Park Restoration's personal liability, if any. In this regard, Park Restoration avers that it was liable by virtue of the State Statute-specifically, the mandate that its property (the insurance proceeds) be used to satisfy delinquent taxes of TCLP prior to disbursement.
An issue with Park Restoration's claim that it was "secondarily liable" or a "co-debtor" of TCLP on the Secured Tax Claims by virtue of the State Statute is actually articulated by Park Restoration in its arguments against subrogation by Erie Insurance.8 In Park Restoration's Second Brief, it argues that under the State Statute, Erie Insurance was only required to make payment out of the insurance proceeds (which had allegedly vested in Park Restoration) and that Erie Insurance had no obligation to utilize its own separate funds to pay the outstanding taxes even in the event of a shortfall. See Park Restoration's Second Brief at p. 7. Thus, Park Restoration maintains that Erie Insurance is neither a co-debtor or payor under § 509(a). See Park Restoration's Second *78Brief at p. 7. However, this is exactly the scenario which Park Restoration itself has faced.
As averred by Park Restoration, Park Restoration is not the party liable for payment of the property taxes-as it is not the property owner.9 In fact, the record reflects that Erie Insurance (and not Park Restoration) became the party responsible for payment pursuant to the State Statute because the State Statute only requires payment from the insurance proceeds. Moreover, Park Restoration does not aver that (if the insurance proceeds were insufficient to satisfy the tax delinquency) Park Restoration would be personally liable for the deficiency. And, the Court does not find as much. As noted by both this Court and the Third Circuit, the State Statute creates an in rem interest versus an in personam liability which attaches to all fire insurance proceeds for the property.10
As it has been determined that Park Restoration did not have a vested property interest in the insurance proceeds remitted by Erie Insurance, Park Restoration's own personal property has not been used to satisfy the tax obligation nor does it appear that it would be so required in the event that the insurance proceeds failed to satisfy the Secured Tax Claims. Thus, Park Restoration appears to have no true co-liability for the taxes in its own sense. These circumstances are also fatal to Park Restoration's subrogation demands.
As Park Restoration was neither a payor of, nor co-liable on, the Secured Tax Claims as contemplated by 11 U.S.C. § 509, Park Restoration has failed to state a claim upon which relief may be granted and dismissal of the Amended Complaint is warranted.
As the Court finds that dismissal of the Amended Complaint is appropriate on the basis of Fed. R. Civ. P. 12(b)(6), no further analysis of TCLP's remaining bases for dismissal is necessary at this time.
III.
Based on the foregoing, the Court finds that Park Restoration has failed to state a claim upon which relief may be granted and dismissal is warranted under Fed. R. Civ. P. 12(b)(6), made applicable herein by Fed. R. Bankr. P. 7012(b). Accordingly, the Court grants TCLP's Motion to Dismiss. An appropriate order will be entered contemporaneous with this Memorandum Opinion.
This adversary proceeding is a core proceeding over which this Court has the requisite subject-matter jurisdiction to enter a final order. See 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(B), 157(b)(2)(K), 157(b)(2)(O), and 1334(b).
The Taxing Authorities consist of: Summit Township, Crawford County, the Tax Claim Bureau of Crawford County, and the Conneaut School District.
The allowed secured tax claims of the Taxing Authorities actually exceeded $478,260.75 by several hundred thousand dollars. The manner in which these sums were paid was that $478,260.75 was paid from insurance proceeds, and the confirmed plan provided that the remainder of the claims were to be paid from the sale of parcels of property owned by TCLP. See Joint Amended Plan of Reorganization Dated July 28, 2018 at Article V, Section 5.01.
TCLP also avers that dismissal of the Amended Complaint is appropriate because: (i) Park Restoration's subrogation claim was discharged by TCLP's confirmed chapter 11 plan, and (ii) litigation of the subrogation claim is barred by the doctrines of res judicata and collateral estoppel. See Motion to Dismiss at ¶ 9.
Section 101(5) of the Bankruptcy Code defines a "claim" as: "(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." See 11 U.S.C. § 101(5).
11 U.S.C. §§ 509(b) and 509(c) contain some exceptions to the application of the statutory subrogation set forth in 11 U.S.C. § 509(a). The exceptions contained in these parts of the statute have not been invoked by TCLP as a defense to the Amended Complaint and, as such, they are irrelevant to this matter.
The Declaratory Judgment Opinion indicates that the tax obligations dated back to at least 1999, but the Third Circuit's opinion and subsequent filings by the parties indicate that the delinquent taxes dated as far back as 1996. See e.g., Amended Complaint at ¶ 14.
At the July 17, 2018 hearing, the parties were asked to address whether the insurer, Erie Insurance, could have a plausible claim for subrogation.
Park Restoration avers that Pennsylvania caselaw provides that the "real owner" of real property is the party responsible for payment of the corresponding real estate taxes. See Amended Complaint at ¶ 32. Moreover, that it was TCLP's "legal duty" to pay the real estate taxes since it owned the property. See Amended Complaint at ¶ 39.
As this Court and the Third Circuit observed:
[T]he statute does not "qualify its terms by requiring that the named insured be the 'owner' of the structure destroyed by the fire. Nor does the statute limit the imposition of the tax claim against insurance proceeds payable to the entity primarily liable for the tax debt in question."Conneaut Lake Park, Inc., 543 B.R. at 203. The tax claim is "levied against the insured property"-that is, it is "in rem in nature and runs with the real property." Id. (internal formatting and quotation marks omitted). So the Taxing Authorities' claim "attache[d] to any fire insurance proceeds payable to any named insured as opposed to being limited solely to the beneficial interests (if any) of the primarily liable taxpayer." Id.
See Trustees of Conneaut Lake Park, Inc., 855 F.3d at 523. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501697/ | Rebecca B. Connelly, UNITED STATES BANKRUPTCY JUDGE
The Court now faces round two of the dispositive motions to dismiss or dispose of this adversary proceeding. In round one, the defendants, Midland Funding, LLC and Midland Credit Management, Inc. ("Midland"), moved to dismiss the complaint under Rule 12(b)(6) for failure to state an actionable claim. The Court denied the motion to dismiss Count I but granted the motion to dismiss Count II with leave to amend the complaint. Now in round two, the plaintiffs, Karen Thomas, Gary Brooks, and Mary Gillespie-Brooks, amended the complaint, and the defendants move to dismiss the amended complaint under Rule 12(b)(6) or in the alternative compel arbitration.
This case is about practices of filing proofs of claim in chapter 13 bankruptcy cases that may violate the Fair Debt Collections Practices Act ("FDCPA")1 and may not comply with Federal Rule of Bankruptcy Procedure 3001. The plaintiffs allege the defendants' business practice involves filing proofs of claim that the defendants reasonably know contain false statements and do not comply with Rule 3001 such that the defendants are violating the FDCPA and should be subject to Court ordered relief for noncompliance with Rule 3001.
*102JURISDICTION
Karen Thomas, Gary Brooks, and Mary Gillespie-Brooks are debtors in this Court. Midland is a creditor in each of the bankruptcy cases. This Bankruptcy Court has jurisdiction over these bankruptcy cases by virtue of 28 U.S.C. § 1334(a). The amended complaint, which is subject to this motion to dismiss, concerns federal non-bankruptcy law (specifically, the FDCPA) and Federal Rule of Bankruptcy Procedure 3001. The plaintiffs have consented to have this Court issue a final ruling in this adversary proceeding. Am. Compl. ¶ 3. The defendants move to dismiss the amended complaint for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6), or in the alternative to compel arbitration and strike class allegations; the defendants have neither challenged this Court's jurisdiction nor moved to dismiss the complaint for lack of jurisdiction under Federal Rule of Civil Procedure 12(b)(1) or (b)(2). See Fed. R. Bankr. P. 7012(b) (incorporating Federal Rule of Civil Procedure 12(b)-(i) and providing 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."). The Court will issue its ruling on the motions by consent.
PROCEDURAL HISTORY
The plaintiffs' initial complaint described the proofs of claim that defendants filed in these chapter 13 cases and defendants' actions before and after they filed their claims. The Court determined that the complaint sufficiently pleaded, in Count I, a cause of action under the FDCPA (specifically, 15 U.S.C. § 1692e and § 1692f ). As to Count II, the Court found that the complaint sufficiently pleaded how the proofs of claim did not comply with Rule 3001 but concluded that the complaint was so unspecific as to the relief requested that it failed to state a cause of action. The Court granted leave to amend the complaint.
The plaintiffs amended the complaint. In the amended complaint, the plaintiffs recount how after they filed the initial complaint, the defendants amended the proofs of claim. Plaintiffs contend that the amended proofs of claim still fail to adequately comply with Rule 3001. Plaintiffs assert that defendants' practice of first filing claims that violate Rule 3001 and contain false statements, coupled with a practice of not providing complete documentation in response to written requests made by a debtor, and only after service of an adversarial complaint related to the practice, filing amended, yet still deficient, proofs of claim demonstrates conduct which violates the FDCPA.
Defendants naturally disagree. Defendants reiterate that the plaintiffs have failed to state an actionable claim under the FDCPA and insist that the misstatements in the original proofs of claim are simply not material misstatements or material misrepresentations and do not create any plausible risk of injury. Defendants point out that all the same they amended the proofs of claim. They purport that the amended proofs of claim attach appropriate documentation and argue that the amended proofs of claim comply with Rule 3001 and do not violate the FDCPA.
ANALYSIS
A. Motion to dismiss
A motion under Rule 12(b)(6) looks into the legal sufficiency of a complaint. RTC Mortg. Tr. v. McMahon , 225 B.R. 604, 607 (E.D. Va. 1997). The merits of the claims or the defenses are not relevant. The relevant question is whether the plaintiffs pleaded a claim that is more than *103conceivable and indeed plausible. See Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
The parties agree that the amended complaint, like the original complaint, sufficiently meets two of the three necessary elements2 of a FDCPA action: that the plaintiffs are "consumers" as defined by 15 U.S.C. § 1692a(3) and that Midland is a "debt collector" as defined by 15 U.S.C. § 1692a(6). The third element requires a plaintiff to plead the act or omission by which a defendant has violated the FDCPA. As in the previous motion to dismiss, the third element remains in dispute. The defendants move to dismiss the amended complaint alleging that the facts described in the amended complaint fail to show an actual violation of the FDCPA, fail to show that any alleged violation was material, and fail to show a plausible risk of injury from any alleged violation. More to the point, defendants refer to the amended facts and allegations in Count I that describe their amended proofs of claim. Midland argues these new allegations in the complaint provide a basis for the Court to dismiss Count I of the amended complaint notwithstanding the Court's earlier ruling denying the motion to dismiss Count I.
1. The amended complaint
Just as in the original complaint, the plaintiffs are debtors in pending chapter 13 bankruptcy cases, and Midland is one of their creditors. Midland filed proofs of claim in each of the bankruptcy cases. Midland did not itemize interest, fees, or costs when it originally filed its proofs of claim. Midland has since filed amended proofs of claim with some itemization. The entire dispute centers around Midland's business practice associated with filing proofs of claim in bankruptcy cases.
The amended complaint alleges, in addition to what has already been described in this Court's previous ruling: (1) the plaintiffs made formal written requests to defendants for the writings on which the proofs of claim were based; (2) plaintiffs served defendants with the original complaint on July 10, 2017; (3) four days later, on July 14, 2017, defendants filed amended proofs of claim in the two cases of the named plaintiffs; (4) defendants have not amended other proofs of claim that fail to disclose or itemize interest, in other bankruptcy cases in this district; (5) the amended proofs of claim combine fees and interest together as "finance charges"; (6) defendants informed plaintiffs that future proofs of claim will combine fees and interest as finance charges and will separate the amount characterized as finance charges from principal; and (7) the amended proofs of claim attach documentation but not the contract between the debtor and Synchrony Bank. Further, the amended complaint alleges (8) the documentation attached to the amended proofs of claim is insufficient because it fails to provide the contract between the debtor and Synchrony Bank and so deprives the debtor from information such as the contract rate of interest and applicable choice of state law; (9) the documentation fails to include the Purchase Agreement between Synchrony Bank and Midland and so deprives the *104debtor of information confirming the extent of Synchrony Bank's ownership in the receivable sold to Midland; (10) the documentation attached to the amended proofs of claim includes a document purporting to be an account statement but it is not an account statement; and (11) "the debtor cannot determine from the documentation provided the amount of finance charges attributable to interest and the amount attributable to fees and other charges." The amended complaint notes that the documentation attached to the proofs of claim includes information created by Midland that "shows some of the account information that Synchrony Bank regularly makes available to Defendants, including the exact breakdown of the fees and interest charged on the account in that calendar year," but all the same does not set apart the interest separate from the fees on the claim breakdown statement attached to the proofs of claim. The amended complaint stresses that the proofs of claim fail to attach the agreement between the debtor and Synchrony Bank and alleges that the defendants' practice is to withhold this contract in response to a written request.
The Court has already ruled that Count I of the original complaint meets the pleading standard for a cause of action under FDCPA to defeat a Rule 12(b)(6) motion. Critical to the Court's ruling was that the facts alleged demonstrated a practice of consciously making false statements on the proofs of claim and ignoring the requirements of Rule 3001. For example, the original complaint alleged Midland filed proofs of claim in amounts greater than the plaintiffs admitted they owed, Midland deprived the plaintiffs of accurate information about whether the proofs of claim included interest and fees, Midland falsely answered on the proofs of claim that no interest or fees were included in the claim amount, Midland had a reasonable belief that the information about the amount of principal on the proofs of claim was incorrect, and Midland knew its practice of incorrectly reporting interest as principal violated the Federal Rules of Bankruptcy Procedure. This Court noted in its previous ruling that Rule 3001 requires a proof of claim to disclose the amount of interest and fees and that this information could inform the plaintiffs along with other parties in interest whether a legal challenge is appropriate. The Court concluded that the allegations in the complaint described material misrepresentations in connection with the collection of a debt which may create a plausible risk of injury and may constitute an unfair or unconscionable means to collect a debt. Putting it all together, the Court determined the plaintiffs sufficiently pleaded a cause of action under the FDPCA regarding the original proofs of claim filed in these chapter 13 cases.
2. The amended proofs of claim
Now the amended complaint notes Midland amended its proofs of claim. The complaint states the amended proofs of claim attach a statement with a breakdown of the claim into principal amount and "finance charges." The complaint describes how the amended proofs of claim include language on the face of the attached claim breakdown statement declaring in all capital letters: "THE FINANCE CHARGES REFLECTED ABOVE MAY INCLUDE INTEREST, FEES, OR OTHER CHARGES TO THE ACCOUNT PRIOR TO ACQUISITION BY MIDLAND." The complaint acknowledges the amended proofs of claim also attach other documents, including a document that discloses interest separate from fees as of a date sometime in the months leading up to the bankruptcy. Because the document discloses Synchrony Bank's prior breakdown *105of interest and fees, the plaintiffs allege that had Synchrony Bank filed the claim (instead of Midland who apparently bought the receivable from Synchrony), it could have itemized the interest and fees instead of combining them as "finance charges." The plaintiffs allege that it is not clear on the amended proofs of claim how to distinguish the interest from the fees, and, without the contract between Synchrony Bank and the debtor, how to know the appropriate state law to apply or interest rate to verify if the interest and fees are appropriate.
At this stage, the Court must consider whether the amended proofs of claim make a difference. The plaintiffs correctly note that the original proofs of claim did not comply with Rule 3001 and the allegations that Midland's practice of routinely filing claims knowing the claims were defective, coupled with the refusal to provide appropriate information in response to a written request, stated a claim under FDCPA. The plaintiffs are correct that amending the claims after the complaint does not erase or moot the fact that the original complaint sufficiently pleaded a violation. But the plaintiffs are also alleging that the practice of filing these amended proofs of claim is part of the FDCPA violations, that the amended proofs of claim do not comply with Rule 3001, and that the amended proofs of claim coupled with the failure to provide the contract also violate the FDCPA. If the plaintiffs have not alleged facts that show plausible actions given the new facts, the complaint may not meet the standard to defeat a Rule 12(b)(6) motion.
Like the exercise in round one, this Court now must determine if: (1) the amended proofs of claim contain misrepresentations which are material and lead to a plausible risk of harm; (2) the practices alleged in the amended complaint show unfair or unconscionable means to collect a debt; (3) the amended proofs of claim fail to comply with Rule 3001 ; and (4) if the answers to these questions are "no," whether the plaintiffs have nonetheless pleaded a plausible cause of action.
a. Do the amended proofs of claim contain misrepresentations?
Unlike the original proofs of claim, the amended proofs of claim correctly answer "yes" to the question "does this amount include interest or other charges?" Unlike the original proofs of claim, the amended proofs of claim attach an exhibit labeled "account summary" and describe a "claim breakdown" followed by an itemization that separates the claimed amount among "principal," "finance charges," and "adjustment." Directly beneath the itemization appears the following disclaimer in all capitalized letters: "THE FINANCE CHARGES REFLECTED ABOVE MAY INCLUDE INTEREST, FEES, OR OTHER CHARGES TO THE ACCOUNT PRIOR TO ACQUISITION BY MIDLAND." The amended complaint includes all of these facts.
The amended complaint alleges the defendants use the label "finance charges" for amounts that combine interest with charges and that these combined amounts "are not considered 'Finance Charges' by the federal Truth in Lending Act ("TILA")." The amended complaint alleges the amount on the exhibit attached to the proof of claim statement under the term "finance charges" combines interest and fees. Yet this same exhibit (the claim breakdown statement attached to the proof of claim) discloses, as the complaint admits, that the amount shown for finance charges is likely a lumping of interest, fees, and costs. Midland is telling the reader, in clear language, that the figure underneath the label "finance charges" combines interest and fees. It is hard to see how Midland's statement confessing that it has combined interest, fees, and costs under *106a single label "finance charges" is a false statement or misrepresentation.3
b. Are the amended proofs of claim misleading?
The complaint implies that the label of finance charges is inappropriate per TILA and is misleading. The amended proofs of claim include a disclaimer informing the reader that the claim breakdown lumps interest and fees directly under the term "Finance Charges." Clear and simple language informs the reader that the amounts listed under the term finance charges may include amounts of interest, fees, and costs combined. That the amounts under the term finance charges does include a combination of interest, fees, and costs is a true statement. For this reason, and in particular because of the disclaimer, the term finance charges on the attachment to amended proofs of claim does not mislead. The facts as alleged do not illustrate that the statement (acknowledging lumping) is false, or a misrepresentation, or misleading. Furthermore the facts as alleged show that the proofs of claim as amended do not contain a false statement. Consequently, the amended complaint does not state an actionable claim under section 1692e as to the amended proofs of claim. The motion to dismiss is granted in part as to the section 1692e counts related to the amended proofs of claim but again denied as to the portions of the complaint addressing the practice of filing the original proofs of claim knowing they contain false statements and knowing that they violate Rule 3001.
c. Does the amended complaint show unfair or unconscionable means to collect a debt?
The amended complaint alleges "Defendants violated 15 U.S.C. § 1692f by using unfair and unconscionable means to collect a debt, including but not limited to a standard practice of filing Proofs of Claim without complying with Federal Rule of Bankruptcy Procedure 3001(c)(2)(A) and without having the ability to comply with Federal Rule of Bankruptcy Procedure 3001(c)(3)(B)." The plaintiffs largely tie the violation under section 1692f to a practice of routine and intentional violations of Bankruptcy Rule 3001. This means that if the plaintiffs have not pleaded facts showing a violation under Rule 3001, it is not clear that the complaint has stated a claim under section 1692f.
So, a critical question at the center of this motion to dismiss is what "an itemized statement of the interest, fees, expenses, or charges" means as that phrase is used in Rule 3001. One reason why this is critical is that the proof of claim form directs the claimant to first answer (yes or no) whether the amount claimed includes interest or other charges, and if the answer is yes, to "attach a statement itemizing interest, fees, expenses, or other charges required by Bankruptcy Rule 3001(c)(2)(A)."
The defendants contend the amended proofs of claim adequately comply with the requirement contained in Rule 3001 to itemize the interest and fees but the plaintiffs contend they do not. Further the plaintiffs contend that even if the amended proofs of claim remedy the false statements contained in the original proofs of claim, regardless, the business practice described in the amended complaint sufficiently supports an actionable claim under the FDCPA. The defendants in turn counter *107that if the Court finds that the amended complaint sufficiently states an action under the FDCPA, the Court must submit the action to arbitration.
This Court found that in the original complaint, the plaintiffs pleaded facts describing a business practice of reporting on proofs of claim filed in chapter 13 bankruptcy cases principal amounts of credit card debt exceeding the debt amounts the plaintiffs admit, then withholding from the plaintiffs information to explain how the amounts in the claim were derived, despite rules requiring its disclosure. The plaintiffs pleaded a potential injury: how they were deprived information to evaluate whether to object to the claim which seeks to collect amounts greater than the plaintiffs admit they owe as of the date they filed bankruptcy.
The Court noted in its previous ruling that " Rule 3001 requires substantive information: the amount of interest and fees must be disclosed. The information may inform the debtor, trustee, or other creditors if a legal challenge is appropriate .... Because Rule 3001 requires a proof of claim to disclose details regarding interest and fees, and this information could inform the plaintiff along with other parties in interest whether a legal challenge is appropriate, the complaint has alleged actions which demonstrate a plausible risk of harm and as such may prove material and not just a technical violation of the rule." Thomas v. Midland Funding, LLC (In re Thomas) , 578 B.R. 355, 362 (Bankr. W.D. Va. 2017).
In the amended complaint, however, the pleaded facts describe that the amended proofs of claim answer correctly that the amount claimed includes interest and other charges. In addition, the amended proofs of claim attach a statement containing an itemization with interest and fees combined as "finance charges" plus a statement created by defendants which mirrors a customer credit card statement along with a copy of an actual, somewhat outdated, credit card statement for the account. Both of the credit card statement documents disclose fees separate from interest charges. The risk of injury is that the plaintiffs cannot determine whether they have a valid legal objection to the claim because Midland has withheld information showing the contractual interest rate and applicable state law governing the contract. The complaint alleges Midland is required to provide this information in response to a written request pursuant to Rule 3001, and the complaint further alleges that Midland neither has provided nor intends to provide the documentation. The complaint states "failure to comply with Rule 3001" is an unfair or unconscionable means of collecting a debt.
Plaintiffs allege that the amended claims do not adequately break down interest and fees on the attached statement in noncompliance with Rule 3001. Plaintiffs allege that not providing the contract in response to a written request pursuant to Rule 3001(c)(3)(B) prevents the plaintiffs from determining whether the amounts claimed for interest or other charges are authorized by the contract or applicable law. In this way, the practice of filing claims in noncompliance with Rule 3001, even if the claims do not contain a false statement, violate the FDCPA section 1692f as an unfair or unconscionable means of collecting a debt. Plaintiffs' cause of action, it seems, gets down to whether the defendants comply or do not comply with Rule 3001. Count I alleges a business practice of deliberate noncompliance with Rule 3001 as a basis for an unfair means to collect a debt. After that, Count II alleges the violation of Rule 3001 and prays for relief under that rule.
*108On a motion to dismiss for failure to state a claim, the Court does not rule on the underlying merits but only on whether the amended complaint states a claim at all. The amended complaint alleges a business practice of filing proofs of claim that knowingly contain false statements regarding whether the amount claimed includes interest, fees, or other charges, then withholding from debtors the credit card agreement when a written request is made pursuant to Bankruptcy Rule 3001, then amending the proofs of claim only when an adversary proceeding is filed against the defendants, but amending the clams in a manner that is inappropriate and defies Rule 3001. Accepting these facts as true, the amended complaint shows that the debtors had to file a lawsuit in a bankruptcy court before the defendants would amend the proofs of claim and also shows that the debtors, trustee, and other parties in interest are deprived from reviewing the contract in order to evaluate whether the proofs of claim (filed in amounts greater than the debtor admits owing) are incorrect (and accordingly merit objection). In this way, the amended complaint illustrates a plausible risk of injury from the conduct. Without ruling on the merits, the Court determines the amended complaint pleads a cause of action under section 1692f.
d. Does Count II of the amended complaint state a cause of action for relief under Bankruptcy Rule 3001 ?
The amended complaint alleges Midland's business practice causes Midland to file proofs of claim which fail to comply with Bankruptcy Rule 3001. In particular, the amended complaint describes that despite the language of Bankruptcy Rule 3001, Midland (1) files proofs of claim that falsely answer "no" to the question whether the amount claimed includes interest, fees, or other charges; (2) fails to provide the credit card contract in response to a written request for the writing upon which the claim is based; and (3) files amended proofs of claim that answer "yes" to the question whether the claimed amount includes interest, fees, or other charges yet fail to attach a statement itemizing the interest, fees, and other charges. The amended complaint requests that the Court, among other relief, (1) order Midland to pay the attorney's fees based on an hourly rate for the time spent in each of the cases for services related to the review and prosecution of the Rule 3001 action, (2) direct Midland to amend the proofs of claim in a manner that complies with Bankruptcy Rule 3001, and (3) require Midland to provide the written credit card agreement in response to a written request.
As a matter of fact, Bankruptcy Rule 3001(c)(2)(A) provides that "[i]f ... a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim." Fed. R. Bankr. P. 3001(c)(2)(A). Additionally, Rule 3001(c)(1) requires the claimant to file a copy of the writing with the proof of claim "[e]xcept for a claim governed by paragraph (3)," which governs the claims at issue in the complaint. Rule 3001(c)(3)(B) requires that "[o]n written request by a party in interest, the holder of a claim based on an open-end or revolving consumer credit agreement shall, within 30 days after the request is sent, provide the requesting party a copy of the writing specified in paragraph (1) of this subdivision." Fed. R. Bankr. P. 3001(c)(3)(B). When reviewing the amended complaint, and taking the facts as true, the Court finds that the assertions in the amended complaint line up neatly with the language of the Rule. The amended complaint pretty clearly alleges a violation of Rule 3001.
*109If a creditor fails to comply with Rule 3001(c)(2), the Rule allows for sanctions for failure to comply. After notice and a hearing, the Rule permits the Court to take one or both of two explicit actions. First, the Court may "preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless." Id. at 3001(c)(2)(D)(i). Second, the Court may "award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure." Id. at 3001(c)(2)(D)(ii). The committee notes to this Rule express that "[t]he court retains discretion to allow an amendment to a proof of claim under appropriate circumstances or to impose a sanction different from or in addition to the preclusion of the introduction of evidence." Fed. R. Bankr. P. 3001(c) advisory committee's note to 2011 amendment. Rule 3001(c)(2)(D) does not expressly limit who may request relief.
Unlike the original complaint that pleaded nonspecific "appropriate relief" for the consequences of violating Rule 3001, the amended complaint provides for specific relief. The specific relief requested in the amended complaint does not include damages for failure to comply but rather sanctions in the form of attorney's fees related to the Rule 3001 action. Indeed the Rule explicitly authorizes the Court to "award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure." For the Court to hold that a debtor has no right to the relief specifically provided in Rule 3001 would require the Court to ignore the language in the Rule or insert terms not present. Regardless, at this stage, the issue before the Court is not the merits of the action and whether to award the relief requested but merely whether the amended complaint sufficiently pleads a claim under Rule 3001. For all of the foregoing reasons, the amended complaint sufficiently pleads a claim under Bankruptcy Rule 3001.
The Court denies the motion to dismiss Count I as to the violation of FDCPA section 1692f and denies the motion to dismiss Count II.
B. Motion to compel arbitration
Midland asks, if this Court does not dismiss the complaint pursuant to Rule 12(b)(6), to compel arbitration of the FDCPA and Rule 3001 claims. According to Midland, the credit card contract agreements between Synchrony Bank and these debtors contain mandatory arbitration provisions.
Midland contends that it bought accounts, including those of the debtor plaintiffs in this action, from Synchrony Bank as part of a portfolio of charged off debts. Midland filed with the Court a redacted copy of its purchase agreement with Synchrony Bank. What Midland filed is a "Receivables Purchase Agreement" to sell "delinquent credit card account receivables." ECF Doc. No. 40. Within this purchase agreement, the parties define "Account" as a "credit account owned by Seller with respect to which there is a Receivable." The purchase agreement defines "Receivable" as "any credit agreement receivable that is being sold to Buyer pursuant to the terms of this Agreement, as such receivable exists as of the Cut-Off Date, to the extent such receivable is set forth on the Notification File." The particular credit agreement receivables are identified in the notification file and described in the exhibits to the Receivables Purchase Agreement. The exhibits to the Receivables Purchase Agreement clarify the specifications for the credit agreement receivables sold to Midland. As shown in Exhibit G to the Receivables Purchase Agreement, the *110credit agreement receivables sold are the ones that are for borrowers who have filed chapter 13 bankruptcy within a certain time period of the Receivables Purchase Agreement, for which no proof of claim has been filed and for which the bar date has not passed, plus other specifications about the credit account receivables set out in Exhibit G. The Receivables Purchase Agreement and exhibits contain certain restrictions on the buyer (see e.g. , ECF Doc. No. 40 at 10-11, 39), but otherwise sells the credit agreement receivables to Midland. The bill of sale attached to the Receivables Purchase Agreement provides "in further consideration of the mutual covenants and conditions set forth in the [REDACTED] Receivables Purchase Agreement ... Seller hereby transfers, sells, conveys, grants and delivers to Buyers ... to the extent of its ownership, the Receivables." It is through this agreement and the bill of sale that Midland apparently came to own the credit agreement receivable for each of the plaintiffs.
Midland points to language in the credit card agreement between the debtors and Synchrony Bank that provides for arbitration of disputes, other than Synchrony Bank's collection action. The language in the credit card agreement also provides for a waiver of class action participation. For these reasons, Midland moves this Court to strike the class allegations in the amended complaint, dismiss or stay further proceedings, and compel plaintiffs to assert their claims through arbitration. Midland also notes, as an alternative, that to the extent ultimate adjudication of Count II would have an impact on the plaintiffs' bankruptcy estates or if arbitration of Count II might pose a potential conflict with the Bankruptcy Code, the Court could retain jurisdiction of the claims of Count II but still compel arbitration in order to allow the arbitrator to determine the other claims but return to the Bankruptcy Court to apply the bankruptcy law to the arbitrator's factual findings.
This adversary proceeding would not exist had the plaintiffs not filed bankruptcy. Apparently because the plaintiffs filed chapter 13 bankruptcy cases when they did, their credit account receivables were sold to Midland. And then Midland filed the proofs of claim, which are now the subject of this controversy. Ultimately, the plaintiffs assert that Midland buys credit account receivables of chapter 13 debtors but then does not or cannot comply with Bankruptcy Rule 3001 when it files its proofs of claim in the bankruptcy cases. Even if these facts constitute an unfair or unconscionable means of collecting a debt, or a violation of bankruptcy rules for which the bankruptcy rules provide a remedy, the central question is whether Midland has or has not complied with Bankruptcy Rule 3001. This is a bankruptcy matter.
It appears Midland is asking this Court to stay the proceedings and require the plaintiffs to individually pursue arbitration in order for the arbitrator to find whether Midland has or has not complied with Rule 3001. All other essential facts are uncontested. To the extent Midland requests an arbitrator hear and determine whether Midland complied with Rule 3001, the Court finds that it would be inappropriate to compel arbitration of this bankruptcy question. "If Congress did intend to limit or prohibit waiver of a judicial forum for a particular claim, such an intent 'will be deducible from [the statute's] text or legislative history,' or from an inherent conflict between arbitration and the statute's underlying purposes." Shearson/Am.Express, Inc. v. McMahon , 482 U.S. 220, 227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (quoting *111Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. , 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) ). In 2005, applying the inherent conflict analysis, the Fourth Circuit agreed with the Second Circuit concluding that "[i]n the bankruptcy setting, congressional intent to permit a bankruptcy court to enjoin arbitration is sufficiently clear to override even international arbitration agreements." Phillips v. Congelton , LLC (In re White Mtn. Mining Co. ), 403 F.3d 164, 168 (4th Cir. 2005) (quoting In re U.S. Lines, Inc. , 197 F.3d 631, 639 (2d Cir. 1999) ).
Patently, Federal Rule of Bankruptcy Procedure 3001 is a rule of procedure employed by this Court. More specifically, Rule 3001 establishes the basic standards of filing a proof of claim. The Rule sets out the form and content of the proof of claim to be filed with the Bankruptcy Court, who may file the proof of claim with the Bankruptcy Court, what supporting information must be provided to the Bankruptcy Court and parties in interest with the proof of claim, and what evidentiary effect the Bankruptcy Court must give the proof of claim if in compliance with the Rule.
In 2011, Rule 3001 was amended to add Rule 3001(c)(2)"to require additional information to accompany proofs of claim filed in cases in which the debtor is an individual. When the holder of a claim seeks to recover-in addition to the principal amount of a debt-interest, fees, expenses, or other charges, the proof of claim must be accompanied by a statement itemizing these additional amounts with sufficient specificity to make clear the basis for the claimed amount." Fed. R. Bankr. P. 3001(c) advisory committee's note to 2011 amendment. Rule 3001(c)(2) is the subsection which the plaintiffs allege the defendants have violated.
Included in the 2011 amendment was Rule 3001(c)(2)(D), which "sets forth sanctions that the court may impose on a creditor in an individual debtor case that fails to provide information required by subdivision (c)." Id. (emphasis added). As noted above, after notice and a hearing, Rule 3001(c)(2)(D) permits the Court to take one or both of two explicit actions. First, the Court may "preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless." Id. at 3001(c)(2)(D)(i). Second, the Court may "award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure." Id. at 3001(c)(2)(D)(ii).
These sanctions, however, are permissive and not mandatory. In re Goeller , Case No. 12-17123-RGM, 2013 WL 3064594, at *2 (Bankr. E.D. Va. June 19, 2013). The Court therefore may exercise its discretion in determining whether to impose the sanctions provided for by the Rule. The discretionary nature of the imposition of such sanctions comports with the reality that the relief exists solely by force of a rule of procedure. The Federal Rules of Bankruptcy Procedure are designed and maintained to aid in the just and efficient resolution of matters pending before the Court. Cf. Fed. R. Civ. P. 1 (mandating that the Federal Rules of Civil Procedure "should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding"). Although the Rules of Procedure may permit sanctions or other penalties as a part of enforcement, the Rules of Procedure do not allow for a private cause of action for damages from violating a rule of procedure (in other words, as noted by Midland, there is no private cause of action to seek damages for *112a violation of Rule 3001 ). Instead Rule 3001 gives the Court authority to patrol the parties before it to achieve the efficient, speedy, and just resolution of adversarial and contested matters.
Consequently, it is nonsensical for the Court to order parties to submit to an arbitrator the task of applying and enforcing a procedural apparatus applicable only before this Court. The question of whether an alleged violation of Rule 3001 occurred, and if so whether any relief is appropriate, is not a question of fact or law for arbitration.
The Court will not compel the parties to submit procedural mechanisms to arbitration in this case. For these reasons, the Court denies the motion to compel arbitration as to the Rule 3001 relief under Count II. This leaves the question as to whether the Court should direct the parties to submit to arbitration the FDCPA claims under Count I. The FDCPA claims boil down to a determination of whether Midland has complied with the procedural rules governing bankruptcy proceedings. Again, but for the filing of this bankruptcy case, the Federal Rules of Bankruptcy Procedure would not be triggered and an action claimed thereunder would not exist. For the same reasons as to Count II, the Court finds it appropriate to retain jurisdiction and determine whether the defendants violated procedural rules before deciding whether it is appropriate to submit the FDCPA implications of such alleged violation to arbitration.
Accordingly, having found that there is an inherent conflict between arbitration and the Bankruptcy Code as to the matters pending in this adversary proceeding, the Court denies Midland's motion to compel arbitration in its entirety.
The Court will contemporaneously issue an Order consistent with the findings and ruling of this Memorandum Decision.
The Fair Debt Collection Practices Act is codified at 15 U.S.C. §§ 1692 -1692p.
A plaintiff must plead three elements to state a claim that a defendant has violated the FDCPA. The first two elements address identity: (1) the plaintiff must be a "consumer," and (2) the defendant collecting the debt must be a "debt collector" as defined by the FDCPA. Creighton v. Emporia Credit Serv., Inc. , 981 F.Supp. 411, 414 (E.D. Va. 1997). The third element requires the plaintiff to plead the act or omission by which the defendant has violated the FDCPA. Id. When the plaintiff has sufficiently pleaded facts to support these three elements, he or she has made a prima facie case for a violation of the FDCPA.
Although the amended complaint alleged the label "finance charges" for a figure which combines interest with fees or costs is "not considered finance charges" under the TILA, the amended complaint did not show how this fact or observation renders an actionable violation of the FDCPA or Rule 3001 in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501698/ | Hon. Elizabeth W. Magner, U.S. Bankruptcy Judge
This matter came before the Court on the Motion for Preliminary Injunction filed by Ronald Hof in his capacity as Chapter 7 Trustee for FoodServiceWarehouse.com, L.L.C. ("FSW").
I. Facts
Pride Centric Resources, Inc., f.k.a. Pride Marketing and Procurement, Inc., ("Pride") is a food service equipment collective. Members of Pride formed FSW in 2006 to sell equipment online. Many of FSW's members and managers are also members and/or managers of Pride.
During the relevant period, Pride's Board members were Kevin Bouma, Mike Bell, Jay Pattinger, Demetre Selevredes, Gary Thiakos, Ian McIntyre, Steve Dickler, David Castino, Ellison Berlin, David Curran, and Tom Carr. Exh. 42. Pride's Chief Financial Officer ("CFO") was Louis Puissegur, and Pride's Chief Executive Officer ("CEO") was Robert Autenreith.
On October 15, 2012, FSW opened a line of credit with IberiaBank ("Iberia") in the amount of $3,000,000.
On October 15, 2013, Pride agreed to guarantee $2,000,000 on an increase of $5,000,000 in FSW's line of credit.
On May 27, 2014, Iberia increased FSW's line of credit to $10,000,000, and Pride increased its guaranty to $5,000,000.
On June 19, 2014, FSW hired LaPorte APLC to conduct an audit of its books and records as of December 31, 2013. Exh. 5.
On June 19, 2014, Pride hired LaPorte APLC to conduct an audit of its books and records as of December 31, 2013. Exh. 35.
On September 12, 2014, LaPorte APLC completed its audit report of FSW for 2012 and 2013 ("FSW Audit 1"). Exh. 7.
On September 12, 2014, LaPorte APLC completed its audit report of Pride for 2012 and 2013 ("Pride Audit 1"). Exh. 8.
On October 14, 2014, Iberia increased FSW's line of credit to $20,000,000, and Pride increased its guaranty to $10,000,000.
On April 24, 2015, Iberia increased FSW's line of credit to $21,000,000.
On June 19, 2015, FSW contracted with LaPorte APLC to audit its books and records as of December 31, 2014. Exh. 14.
On June 19, 2015, Pride contracted with LaPorte APLC to audit its books and records as of December 31, 2014. Exh. 15.
On June 29, 2015, FSW approached JP Morgan Chase Bank ("Chase") for a loan in the amount of $75,000,000.00.
On July 9, 2015, Chase began an audit of FSW.
On August 31, 2015, FSW hired Brad Stone as CFO.
*116On September 14, 2015, LaPorte APLC completed its audit of Pride for 2013 and 2014 ("Pride Audit 2"). Exh. 18.
On October 13, 2015, LaPorte APLC's completed its audit of FSW for 2014 ("FSW Audit 2"). Exh. 19.
On December 3, 2015, Robert Autenreith sent an email to Kevin Bouma, Tom Carr, David Curran, Steve Dickler, Gary Licht, Ian McIntyre, Mike Bell, and Madhu Natarajan, Brad Stone, and Louis Puissegur stating that FSW had "cash flow and net income problems which are being solved." Exh. 21. One of the solutions being explored was a loan from JP Morgan Chase.
On December 21, 2015, Robert Autenreith emailed David Castino, David Curran, Demetre Selevredes, Ellison Berlin, Gary Thiakos, Ian McIntyre, Jay Pattinger, Kevin Bouma, Mike Bell, Mini,1 Rudy Ourso, Ryan Carr, Sherri Lilly, and Steve Dickler advising of Iberia's request for an increase in the Pride guaranty from $10,000,000 to $15,000,000. Exh. 22.
On December 22, 2015, Robert Autenreith notified Iberia Bank that Pride's Board had voted in favor of increasing its guaranty of FSW's debt Iberia to $15,000,000. Exh. 23.
In January 2016, Chase informed FSW that it could not proceed with FSW's requested loan.
On or about March 10, 2016, Iberia swept approximately $8,590,000 from Pride's bank account.
After March 10, 2016, Pride entered into an agreement with Iberia to satisfy its guaranty obligation by paying $7,500,000 in addition to the amount that Iberia swept from Pride's bank account. Exh. 48.
On March 18, 2016, FSW hired Thomas Kim as its Chief Executive and Restructuring Officer.
On May 20, 2016, Debtor filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. The case was converted to Chapter 7 on October 12, 2016, and Ronald Hof was appointed Chapter 7 trustee ("Trustee").
On September 19, 2016, Pride filed Proofs of Claim 209-1 and 209-2 in the unsecured amount of $32,624.563.93. On January 19, 2017, Pride amended its claim by filing Claim 209-3 in the same amount.
On October 12, 2016, Pride filed an Application for Accountant Review Panel against LaPorte APLC and Cheryl Haspel, Tracy Tufts, Anthony M. Rutledge, Michael Simon, and Terri Troyer, employees of Laporte (collectively "LaPorte"). On August 16, 2017, Pride filed a First Supplemental and Restated Application for Accountant Review Panel. On November 27, 2017, Pride filed a Second Supplemental, Amending and Restated Application for Accountant Review Panel ("Pride Complaint"). Exh. 48.
Pride alleges it incurred the following direct damages between September 15, 2015, and June 30, 2016, in reliance on FSW Audits 1 and 2 (collectively "FSW Audits") as well as the Pride Audits 1 and 2 (collectively the "Pride Audits"). The damages requested can be described as:
1. Advances of $1,204,054.79 to FSW for rebates to FSW customers earned but not yet paid by FSW vendors to FSW ("Rebate Costs");
2. Advances of $5,715,061.20 in additional guarantees to Iberia;
3. Loans of $3,762,677.53 to FSW ("Loans");
*1174. Payroll advances of $50,811.50 to FSW ("Payroll Costs");
5. $100,130.81 in advances to Primoris, LLC d/b/a Saturn ("Saturn");
6. Advances, expenses incurred or resources expended for FSW's licensing program of $84,995.79 ("Licensing Costs");
7. Advances, expenses incurred or resources expended for FSW's Market Source Operating Division of $1,258.42 ("Marketing Costs");
8. Advances, expenses incurred or resources expended for FSW's operations ("Operating Costs") totaling $398,276.53; and
9. Payments of $7,003,733.78 to vendors of FSW on invoices guaranteed by Pride ("Vendor Guarantees").
P-35.
On October 31, 2016, Trustee filed an Application to Employ Special Counsel for FSW's claims against LaPorte. Case 16-11179, P-320. The Application was approved by the Court on November 14, 2016. Case 6-11179, P-337.
II. Procedural History
On January 15, 2018, Trustee initiated the above-captioned adversary by filing a Complaint against Pride for declaratory and injunctive relief ("Trustee Complaint"). P-1. The Trustee Complaint seeks declaratory judgment on the applicability of 11 U.S.C. § 362(a)(3) to the Pride Complaint. In the alternative, the Trustee Complaint seeks injunctive relief against further action on the Pride Complaint through 11 U.S.C. § 105(a).
Trustee filed an Emergency Motion to Enforce the Automatic Stay and/or for a Temporary Restraining Order, which was heard by the Court on January 22, 2018. The Court denied the Motion for Temporary Restraining Order and scheduled hearings on the Motion to Enforce the Automatic Stay and for Preliminary Injunction on February 7, 2018. P-13. The Court afforded the parties time to file additional briefs: Trustee's brief was due on January 31, 2018, and Pride's brief was due on February 2, 2018.
On January 30, 2018, Trustee filed a Motions for Stipulated Protective Order and to File Its Brief Under Seal. P-16, 17. The Court approved those Motions on February 1, 2018. P-18 and 19.
On February 7, 2018, hearing on the request for preliminary injunctive relief occurred. P-29. The Court afforded the parties time to file additional briefs and continued the hearing to April 11, 2018. Pride's brief was filed under seal on March 1, 2018, and Trustee's was filed on March 26, 2018. P-35 and 46.
At the hearing on April 11, 2018, the parties asked for a continuance to negotiate settlement. The Court continued the matter to June 13, 2018. P-57. The parties did not reach an agreement.
On May 17, 2018, Trustee submitted a letter of complaint against LaPorte to the Society of Louisiana Certified Public Accountants. Exh. 47.
Trustee seeks preliminary injunctive relief under Bankruptcy Rule 7065 against Pride's prosecution of any claims against LaPorte arising from or related to the failure of FSW or any of the obligations owed by FSW to Pride. Trustee contends all damages incurred by Pride are derivative from causes of action FSW holds against LaPorte; as such, they are property of the bankruptcy estate. Alternatively, if any of the claims contained in the Pride Complaint are not derivative of FSW, Trustee seeks an injunction against Pride through the exercise of 11 U.S.C. § 105.
Pride argues its injuries result from its personal reliance on the FSW and Pride *118Audits. As such, it avers that the causes of action are direct and independent of the claims held by FSW and are not property of the estate. It also argues against the imposition of an injunction from the pursuit of those claims on the same basis.
III. Law and Analysis
Pride alleges that it relied upon the FSW Audits in making corporate investments, guarantees, or loans. It asserts that the FSW Audits did not fairly reflect the financial condition of FSW when these decisions were made because of material misstatements in the financial statements; FSW's noncompliance with laws and regulations; and significant deficiencies or material weaknesses in FSW's internal controls. As a result, Pride allegedly suffered particular losses separate and apart from its investment in FSW or the obligations owed to it prior to the issuance of the FSW Audits. Specifically, Pride avers that LaPorte failed to:
1. Discover FSW losses of $10-15 million in 2015, rather than the profit previously recorded and accepted by FSW Audit 2;
2. FSW Audit 2 failed to disclose an existing default on the loans between FSW and Iberia. That default is alleged to have occurred in June of 2015;
3. LaPorte failed to discover an overstated inventory valuation allowance causing an inflated calculation in income for 2013-2014; and
4. Numerous deficiencies in FSW's accounting systems, internal controls, and other matters that were significant to the oversight of the financial reporting process.
Pride has alleged damages as a result of these deficiencies. Its damages fall into five (5) broad categories:
1. Rebate Costs;
2. $5,715,061.20 in payments to Iberia on guarantees executed after the FSW Audits;
3. Loans, Licensing, Marketing, Operation and Payroll Costs;
4. $100,130.81 in advances to Saturn; and
5. Vendor Guarantees
P-35.
The Pride Complaint also alleges inaccuracies in the Pride Audits:
1. LaPorte incorrectly concluded that FSW's members and not Pride were the primary beneficiaries of financial support provided by Pride to FSW. Therefore, it did not recommend consolidation of FSW and Pride's financial returns under a variable interest entity theory;
2. LaPorte failed to discover and identify unauthorized advances made by Pride to customers of FSW for manufacturer rebates earned but not yet paid;
3. LaPorte failed to discover and identify unauthorized guarantees issued by Pride to FSW manufacturers/vendors for products ordered; and
4. LaPorte failed to disclose FSW's default on the Iberia Bank loan guaranteed by Pride.
As a consequence of these alleged actions, Pride argues that the following damages were incurred:
1. The issuance of additional guarantees to Iberia Bank for $5,000,000.00 resulting in payments of $5,715,061 on FSW's default;
2. $7,003,733.78 in payments on FSW vendor manufacturer guarantees issued by Pride's CFO or CEO and which exceeded their authority;
3. The loss of $1,204,054.79 in advances to FSW customers for earned but unpaid vendor manufacturer rebates owed FSW. Pride alleges that these advances *119exceeded the authority of Pride's CEO and CFO; and
4. $100,130.81 in advances to Saturn.
As a threshold matter, Trustee challenges Pride's assertion that it holds any causes of action against LaPorte. Trustee argues Pride has failed to state a claim upon which relief may be granted.
A. Pride States a Cause of Action Against LaPorte
The Pride Complaint alleges two overarching causes of action: one against Laporte for damages resulting from its reliance on the FSW Audits and the other for breach of contract and negligence in connection with the Pride Audits. To state a cause of action, Pride must allege "enough facts to state a claim that relief is plausible on its face." Bell Atlantic v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 1973, 167 L.Ed.2d 929 (2007).
1. The Pride Audits
Pride contracted with LaPorte for its audit services. All of LaPorte's engagement letters with FSW and Pride contained the same language. Under those agreements, LaPorte obligated itself to audit the financial statements of Pride including balance sheets, statements of operations, changes in members' equity, cash flows, related notes to financial statements, and any supplemental information. Exh. 8, 18, 34, 35. LaPorte's objective was to "express[ ] an opinion on the financial statements." Exh. 35, p. 1.2 The engagement letters require that LaPorte "plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement." Id.
The engagement letters between Pride and LaPorte provide:
In making our risk assessments, we consider internal control relevant to the Company's preparation, and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. However, we will communicate to you in writing concerning any significant deficiencies or material weaknesses in internal control relevant to the audit of the financial statements that we have identified during the audit.
We will also communicate to the board of directors (a) any fraud involving senior management and fraud (whether caused by senior management or other employees) that causes material misstatement of the financial statements that becomes known to us during the audit, and (b) any instances of noncompliance with laws and regulations that we become aware of during the audit (unless they are clearly inconsequential).
La. R.S. 37:91(B)(1) states:
B. No action based on negligence may be brought against any defendant licensee, or any employee or principal of a defendant licensee, unless the plaintiff claims to have been injured as a result of their justifiable reliance upon financial statements or other information examined, compiled, reviewed, certified, audited, prepared pursuant to a preparation of financial statement engagement, or otherwise prepared, reported or opined on by the defendant licensee or in the course of the defendant licensee's engagement to provide other services *120and at least one of the following conditions apply:
(1) The plaintiff is the issuer or successor of the issuer of the financial statements or other information examined, compiled, reviewed, certified, audited, prepared pursuant to a preparation of financial statement engagement, or otherwise prepared reported, or opined on by the defendant licensee, and such plaintiff has engaged the defendant licensee to examine, compile, review, certify, audit, prepare pursuant to a preparation of financial statements or to provide other services....
Pride identifies several facts which if true might constitute professional negligence in the preparation of the Pride Audits. Specifically, Pride alleges that it retained LaPorte to investigate and document not only its financial status, but also review its internal controls over operations and financial affairs. In connection with this retention, Pride asserts that LaPorte failed to discover actions by its officers which exceeded their authority and increased Pride's losses. Specifically, Pride points to guarantees granted to FSW vendors in order to secure purchases on credit. Pride asserts it lost over $7,000,000.00 after FSW failed to pay these accounts.
Pride also alleges that its officers exceeded their authority by advancing FSW funds to pay customers for earned but unpaid rebates owed by FSW vendors. Pride's losses in connection with these activities are alleged to exceed $1,200,000.00.
Pride claims that LaPorte's advice concerning its ability to consolidate financial returns with FSW cost it an additional, undisclosed amount.
Finally, Pride asserts approximately $100,000 in amounts due to it by Saturn, a subsidiary of FSW but an independent and unrelated claim to those asserted against FSW.
The allegations asserted by Pride with regard to LaPorte's alleged failure to discover the transgressions of its officers fall directly within the confines of its contract with LaPorte. In total, Pride asserts that the ultra vires actions of its officers resulted in unrecorded direct or contingent debt exceeding $8,000,000. In addition, LaPorte's failure to report FSW's default on the Iberia loan resulted in a material misstatement on the status of Pride's contingent debt to Iberia. LaPorte's alleged malpractice in connection with its advice regarding the ability of Pride to file consolidated financial returns also potentially falls within LaPorte's duties under its contract with Pride. Any failure to professionally discharge that commitment could result in liability for LaPorte. As a result, Pride has stated a cause of action against LaPorte for breach of contract or professional negligence.
2. The FSW Audits
Pride has alleged that a large share of its advances to FSW were made because it relied on LaPorte's opinion in the FSW Audits. Trustee argues that Pride has no cause of action against LaPorte in connection with the FSW Audits. La.R.S. 37:91(B)(2) provides:
B. No action based on negligence may be brought against any defendant licensee, or any employee or principal of a defendant licensee, unless the plaintiff claims to have been injured as a result of their justifiable reliance upon financial statements or other information examined, compiled, reviewed, certified, audited, prepared pursuant to a preparation of financial statement engagement, or otherwise prepared, reported or opined on by the defendant licensee or in the course of the defendant licensee's engagement to provide other services *121and at least one of the following conditions apply:
* * *
(2) The defendant licensee was aware at the time the engagement was undertaken that the financial statements or other information were to be made available for use in connection with a specified transaction by the plaintiff who was specifically identified to the defendant licensee, was aware that the plaintiff intended to rely upon such financial statements or other information in connection with the specified transaction, and had direct contact and communication with the plaintiff and reliance on such financial statements or other information.
Clearly, Louisiana law provides a cause of action for parties in Pride's position. Specifically, Pride avers that LaPorte knew that the FSW Audits would be used to request an increase in FSW's Iberia line of credit. Pride alleges that LaPorte was aware that any increase in the line would require a commitment from Pride to increase its guaranty. As a result, Pride asserts that LaPorte knew it was relying on the FSW Audits concerning the decision to increase its contingent debt.
Pride more generally alleges that advances to FSW for Rebate, Operating, Payroll, Licensing, or Marketing Costs; Loans; and Vendor Guarantees were dependent on LaPorte's findings. As such, Pride has stated a cause of action under La. R.S. 37:91(B)(2).
Having established that Pride has stated causes of action against LaPorte for damages sustained in connection with the Pride and FSW Audits, the next issue to consider is whether or not any of the claims are derivative of FSW or directly held by Pride.
B. Does the Pride Complaint Assert Claims Belonging To the Estate?
Property of the estate includes "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The Fifth Circuit defines "all legal and equitable interests" "broadly to includes causes of action." Matter of Educators Group Health Trust , 25 F.3d 1281, 1283 (5th Cir. 1994). A trustee has exclusive standing to assert causes of action that are property of the estate. Id. at 1284 (citing Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153-54 (5th Cir. 1987) ); see also Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities, L.L.C. , 429 B.R. 423, 430 (Bankr.S.D.N.Y. 2010) (" Madoff 2010"). However, if "a cause of action belongs solely to the estate's creditors, then the trustee has no standing" to assert it. Matter of Educators Group Health Trust , 25 F.3d at 1284.
Whether a particular [ ] cause of action belongs to the estate depends on whether under applicable state law the debtor could have raised the claim as of the commencement of the case.
Id. In determining whether a cause of action is property of the estate, the Court must examine the "nature of the injury for which relief is sought." Id.
If a cause of action alleges only indirect harm to the creditor (i.e., an injury which derives from harm to the debtor), and the debtor could have raised a claim for its direct injury under the applicable law, then the cause of action belongs to the estate.
Id. A trustee has exclusive standing to raise a causes of action that "generally affect[s] all creditors" and could be brought by any creditor. Madoff 2010, 429 B.R. at 431.
*1221 Derivative Versus Independent Causes of Action
If a cause of action is based on the defendant's conduct with regard to the debtor, it typically will belong to the estate. The simplest example is a suit by the debtor against a defendant for fraud or breach of contract. In either case, the defendant's conduct is alleged to have caused damage to the debtor.
Estate claims may also extend to causes of action held by creditors under state law. For example, fraudulent conveyance or revocatory actions are held by creditors and prosecuted by them in state courts to recover property a debtor transferred to a third party. See La. C.C. Art. 2036. Generally, under state law, any recovery is kept by the creditor. See Dorries v. Linder , 51, 070 (La.App. 2 Cir. 1/11/17), 211 So.3d 1242.
Bankruptcy seeks to ensure the orderly liquidation of assets and a fair distribution to creditors based on the Code's priorities. In state law fraudulent conveyance actions, the recovery of assets wrongly transferred by a debtor to a third party for the sole benefit of a creditor offends these principles. State law avoidance claims pursue damages for injuries to the debtor, not directly to the creditor. Because the creditor's damage is only as a result of the damage inflicted on the debtor, the creditor is actually asserting a claim for derivative damage. As a result, the Fifth Circuit has held that avoidance actions are property of the estate as are their recoveries. See American National Bank of Austin v. Mortgage America Corp. (In re Mortgage America Corp.) , 714 F.2d 1266 (5th Cir. 1983).
An example of this policy can be found in the case of American National Bank of Austin v. Mortgage America Corp. In Mortgage America, an officer of Mortgage America Corp. ("M.A.") transferred, for his own benefit, M.A.'s assets. One of M.A's creditors filed suit against the officer in state court alleging that the transfers were fraudulent conveyances. M.A. filed for bankruptcy relief and requested a stay of the state court proceeding, alleging that the cause of action was property of the estate. The Fifth Circuit found that the cause of action belonged to the estate, section 362 applied, and reasoned:
Actions for recovery of the debtor's property by individual creditors under state fraudulent conveyance laws would interfere with this estate and with the equitable distribution scheme dependent upon it, and are therefore appropriately stayed under section 362(a)(3).
Id. at 1276.
Because the creditor's claim against the officer to recover the debtor's assets was based on conduct between the debtor and officer (rather than the creditor and officer) and the creditor had not suffered any particularized injury as a result of the conduct, the Fifth Circuit found that the recovery should be shared by all creditors, not just those who win the race to the courthouse.
On the other hand, if a creditor alleges particular injury " 'significantly different' from the injuries to creditors in general," the creditor has standing to pursue the claim; the claim is not property of the estate; and the automatic stay is not applicable. Madoff 2010, 429 B.R. at 431.
Therefore, as an initial matter the Court must determine which, if any, claims asserted by Pride are derivative of FSW and therefore, property of the estate. This determination will then advise as to the proper legal basis for considering the relief requested.
2. Jurisprudence
In *123Phar-Mor, Inc. v. General Electric Capital (In re Phar-Mor, Inc., et al) , 166 B.R. 57 (W.D.Penn. 1994), Phar-Mor sued its accountant, Coopers & Lybrand, C.A. ("Coopers") for negligence and breach of contract for failing to uncover fraud in its audits. Some of Phar-Mor's creditors filed independent actions against Coopers alleging that they relied on Coopers' audits of Phar-Mor in extending credit. Phar-Mor sought to enjoin the creditors under 11 U.S.C. § 105(a) from pursuing claims against Coopers.
The Court found that the claims of reliance on Coopers' audits were personal to the creditors, and "the fact that [Phar-Mor was] also injured by the audits [did] not transform the [c]reditor [a]ctions into derivative claims." Id. at 62.
The Creditor Actions are based on the premise that Coopers breached a duty of care to each of the Creditor[s]. They do not rely on Coopers' alleged breach of contractual obligations or duties to Phar-Mor.
Id. The Court also found that the creditors' actions would not compromise Phar-Mor's "ability to assert its own claims against Coopers." Id.
Moreover, the fact that the Creditor Actions may result in disproportionate recoveries by certain creditors is also irrelevant. The Code is concerned with a disproportionate distribution of the debtor's estate.
Id. (emphasis in original).
Phar-Mor argued that the creditors' suits diminished the possibility of it settling its own claim with Coopers. The Court found that this was "mere speculation" that did "not constitute the type of proof required to entitle [Phar-Mor] to an injunction" and did "not rise to the level of irreparable harm." Id. at 63. The Court found that Coopers was solvent, and there was no basis to conclude that it would not be able to satisfy all judgments. The Court also found that the harm to the creditors should an injunction be issued outweighed any harm to Phar-Mor.
[A] stay of the Creditor Actions would act to subrogate the rights of the Creditor-Defendants to those of the Debtor against a non-bankruptcy defendant, which is not contemplated by the Code.
Id. The Court denied Phar-Mor's Motion for Preliminary Injunction.
In Capital Salvage v. Gordon Noble (In re R.E. Loans, L.L.C.) , 519 B.R. 499 (Bankr.N.D.Tex. 2014), both the debtor, R.E. Loans, L.L.C. ("R.E."), and its creditors filed suit against Wells Fargo Capital Finance, L.L.C. ("Wells Fargo"). The creditors alleged Wells Fargo participated in a fraudulent scheme to offer them membership for notes. R.E. sought to enjoin the creditors from pursuing their action against Wells Fargo. The Court found that the creditors' claims were direct, rather than derivative, because they outlined allegations of inducements made directly to the creditors by the defendants and which gave rise to the claimed damage. Id. at 508 (citing In re Seven Seas Petroleum, Inc. , 522 F.3d 575, 586 (5th Cir. 2008) ). The Court again cited the Fifth Circuit's ruling in Seven Seas for the proposition:
[T]he fact that the bankruptcy estate may have claims for its own direct injuries that it could have brought as of the commencement of the case does not mean that the creditor's claims are merely derivative of the debtor's.
Id. at 513. The Court also found that the damages requested would not compensate the creditors for the injury to R.E, but in abundance of caution, the Court stated:
[T]o the extent a component of the [creditors'] damages at trial includes compensation to [R.E.] for ... mismanagement of [R.E.], that component of damages must be excluded...
Id. at 514. The Court concluded:
[I]t is impossible to enjoin the [creditors] from pursuing their direct claim *124against Wells Fargo for aiding and abetting the [R.E.] managers' breach of fiduciary duty owed to them as members.
Id. at 515.
In Begier v. Price Waterhouse , 81 B.R. 303 (E.D.Penn. 1987), the trustee filed suit against Price Waterhouse, the debtor's auditor ("Auditor"), asserting creditors' claims through 11 U.S.C. § 544.3 The Auditor filed a Motion for Summary Judgment on the basis that the trustee lacked standing to pursue the creditors' causes of action.
The Court found that the claims were specific, "personal to each creditor and require[d] proof that each creditor received the financial information prepared by [the Auditor] and relied on this information to its detriment." Id. at 306. Therefore, the trustee lacked standing to assert the claims under § 544.
Trustee cites Fisher v. Apostolou , 155 F.3d 876 (7th Cir. 1998), as support for its contrary position. In Fisher , Collins fraudulently solicited investments through his company Lake States Commodities, Inc. ("Lake States"). Involuntary bankruptcy petitions were filed against Lake States and Collins, and a trustee was appointed. A group of creditors filed suit against accomplices of Collins and Lake States. The trustee filed a Motion to Enforce the Automatic Stay, or in the Alternative, to Obtain Injunctive Relief. The Court found:
To the extent [the creditors] are suing the [accomplices] for debts that arose out of these] transactions, they stand in exactly the same position as the rest of the aggrieved investors, pursuing identical resources for redress of identical, if individual, harms. As creditors, with claims so closely related to the Lake States estate, the [creditors] must wait their turn behind the trustee, who has the responsibility to recover assets for the estate on behalf of the creditors as a whole.
Id. at 881.
The Fisher Court cited a jurisdictional statute, 28 U.S.C. § 1334(b),4 for its conclusion:
In limited circumstance, the trustee may temporarily block adjudication of claims that are not property of the estate by petitioning the bankruptcy court to enjoin the other litigation, if its sufficiently "related to" her own work on behalf of the estate.
Id. at 882. The Seventh Circuit used section 105 to enjoin the creditors suit pending the outcome of the bankruptcy proceeding as impairing jurisdiction. Id.
On the surface, Fisher is authority for the relief Trustee seeks. The Fisher Court enjoined claims held by creditors against non-debtor third parties because they might reduce the Fisher estate's recovery. On closer inspection of the facts, however, it becomes apparent that Fisher does not go that far. Although the Fisher Court states that the creditors held direct claims against the other defendants, the claims were for generalized damages suffered as a result of the defendants' conduct with Fisher. The record is absent of any conduct directed specifically and uniquely by the defendants to the creditors. While the creditors articulated claims against the defendants, *125the basis for those claims existed due to the actions perpetrated on Fisher. For this reason, the creditors claims were claims any Fisher creditor could assert and, therefore, derivative of Fisher.
Trustee also cited Peterson v. Ellerbrock Family Trust, L.L.C. (In re Lancelot Investors Fund, L.P.) , 408 B.R. 167 (Bankr.N.D.Ill. 2009), which relied on Fisher . In Lancelot , the creditor admits that he only has general, rather than specific, claims. Again, this case does not support Trustee's request to enjoin direct claims held against a defendant simply because they may compete with the estate for recompense.
Two Fifth Circuit decisions are controlling in this case, S.I. Acquisition, Inc. v. Eastway Delivery Service, Inc. and Matter of Educators Group Health Trust , cited supra at 121. In S.I. Acquistion, Inc. ("SI"), SI defaulted on payments to Eastway. Eastway filed suit in state court against S.I., its affiliate ("Abel"), and S.I.'s registered agent. When S.I. filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code, Eastway stayed its action against S.I. Nevertheless, it continued to pursue Abel and the registered agent. S.I. filed a Motion for Sanctions for violation of the automatic stay seeking protection for both Abel and its registered agent. The Fifth Circuit summarized "three guiding principles" from its decision in In re Mortgage America :
(1) a section 362(a)(3) stay applies to a cause of action that under state (or federal) law belongs to the debtor;
(2) a section 362(a)(3) stay applies to a cause of action that seeks to recover property of the estate where the property is held or controlled by a person or entity other than the debtor; and
(3) in applying the above rules we do so by keeping in mind the Bankruptcy Code's general policies of securing and preserving the debtor's property and of ensuring equal distribution of the debtor's assets to similarly-situated creditors.
S.I. , 817 F.2d at 1150. The Fifth Circuit ruled that because the state court suit was "premised solely upon the theory that the defendants therein are controlling entities or persons of a chapter 11 debtor," the automatic stay applied. Id. at 1151. Eastway's alter ego cause of action belonged to the debtor because the claim could have been brought by any creditor of S.I.
In Matter of Educators Group Health Trust , the Educators Group Health Trust ("EGHT") provided benefits to teachers in small school districts. EGHT filed a Voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code, and the school districts became creditors of the estate. Seven (7) of the school districts filed suit in state court against the administrator of EGHT charging that direct solicitations by the administrator to them were fraudulent. The chapter 7 trustee sought to enjoin the districts from pursuing their state court suit.
There is no question that the losses sustained by the districts were a part of the losses sustained by the county. Nevertheless, the Court found that some causes of action were property of the estate while others were not.
The Court concluded that any actions based on negligent management of EGHT, breach of contract, or breach of fiduciary duty in connection with the administration of the county's fund were generalized claims derivative of the injury to EGHT. Because these wrongs were perpetrated on EGHT, they were not specific to the district participants in the EGHT fund and the harm experienced by any individual district was derivative of the harm inflicted on EGHT.
*126On the other hand, claims for fraudulent and negligent misrepresentations directly to the districts by the defendants were based on specific conduct against them. As such, those claims were not property of the estate. Although the damages alleged by the individual districts were included in the damages sustained by EGHT, the claims were not derivative, and the Fifth Circuit held this fact did not justify enjoining their pursuit.5
3. The Pride Complaint
Based on the case law cited above, the Court concludes that some of the claims asserted by Pride are derivative of FSW and, thus, property of the estate. Beginning with Pride's claims under La.R.S. 37:91(B)(2), Pride must detail facts to establish its reliance on the FSW Audits and LaPorte's knowledge that the FSW Audits would be used as support for Pride's actions.
Pride has failed to articulate facts supporting LaPorte's knowledge that the FSW Audits would be relied upon by Pride in advancing funds or resources for FSW's operating costs. This applies to losses sustained as a result of Payroll, Operation, Licensing or Market Costs, and Loans.
Pride has also failed to articulate a direct claim against LaPorte in connection with its Rebate Costs or Vendor Guarantees. Pride alleges that the guarantees and rebate advances exceeded the authority of its officers or were ultra vires . That allegation by its very nature refutes that the advances were knowingly made by Pride and dependent on the FSW Audits. Nevertheless, should Pride assert this claim in the alternative, (i.e. that the officers were induced to participate in both of these programs based on the FSW Audits) Pride has not asserted a sufficient nexus between the FSW Audits, LaPorte's knowledge that Pride would rely on the Audits for these advances, and Pride's actions.
In short with regard to these damages, the Pride Complaint fails to state how the FSW Audits created a unique loss to Pride, differing from the losses sustained by any other creditor. All creditors advanced funds, credit, or resources to FSW prior to collapse. In order to distinguish Pride's actions from those of other creditors, Pride must detail facts that outline both Pride's reliance on the FSW Audits to make these advances and LaPorte's knowledge that its audits were being used for this purpose. It has failed to do so.
The only claim alleged by Pride under La.R.S. 37:91(B)(2) that contains allegations of specialized injury concerns Pride's decision to increase its guarantee of FSW's loan to Iberia. Pride has stated a unique claim based on its reliance of the FSW Audits. Those Audits were conducted by FSW in an effort to secure additional financing for expanded operations. Pride's guarantee was critical to additional funding by Iberia. As a result, the Court finds that this claim is both specific and direct as to Pride ("FSW Audit Direct Claim").
Additionally, Pride's claims under La.R.S. 37:91(1) brought in connection with the Pride Audits are Pride's property. Because the estate is not in privity with LaPorte on the Pride Audits, nor has it asserted or could assert any claims based on those audits, the causes of action are separate and distinct. The Court finds that allegations pertaining to Saturn, Rebate Costs or Vendor Guarantees all constitute direct claims held by Pride. These claims rely not on the FSW Audits, but the failure of LaPorte to discover and report unauthorized *127conduct within the management of Pride while it was conducting the Pride Audits ("Pride Audit Direct Claims").
By the same token, the Court cannot find any articulated reason LaPorte's conduct in connection with the Pride Audits would create any liability for the expenses or resources advanced by Pride to FSW for Loans, FSW's Payroll, Licensing, Marketing or Operating Costs. Therefore, it finds that these claims have not been sufficiently tied to LaPorte's conduct in connection with the Pride Audits. Instead, they appear to be an attempt to shoehorn additional losses into a claim against LaPorte under 37:91(B)(1).
C. The Relief Requested
Trustee has requested injunctive relief under two separate sections of the Bankruptcy Code, 11 U.S.C. §§ 105(a) and 362(a)(3).
1. Standard for Injunctive Relief Under 11 U.S.C. § 362(a)
Trustee contends that the causes of action raised by the Pride Complaint are property of the estate and the Pride Complaint violates the automatic stay granted by 11 U.S.C. § 362(a)(3).
If a cause of action is property of the estate, the trustee controls its disposition.
A trustee's exclusive ability to bring causes of action that generally affect all creditors fosters the goals of the automatic stay by promoting orderly resolution of claims and preventing single creditors from achieving preferential recoveries.
Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities, L.L.C. , 443 B.R. 295, 312 (Bankr.S.D.N.Y. 2011) (" Madoff 2011").
For this reason, the automatic stay prohibits a third party creditor from pursuing causes of action which belong to the estate.6 Specifically, section 362(a)(3) provides a bankruptcy petition acts to stay of "any act to obtain possession of property of the estate or property from the estate or to exercise control over property of the estate." No other proof of its applicability need be shown.7 The parties do not contest this is the law under section 362(a)(3).
2. Standard for Issuance of Injunctive Relief under Section 105(a)
Even if a cause of action is not property of the estate, an injunction under 11 U.S.C. § 105(a) is requested. Trustee seeks an injunction preventing Pride from prosecuting any causes of action. Trustee argues that Pride's pursuit against LaPorte might impair his ability to obtain or collect on potential settlement of or judgment on the estate's claims. Trustee asserts the Court need not perform the analysis for traditional injunctive relief under F.R.B.P. 7065 when enjoining a party under section 105.8
*128In Feld v. Zale Corp. (Matter of Zale Corp.) , 62 F.3d 746, 761 (5th Cir. 1995), injunction was sought based on a settlement agreement. The Fifth Circuit held that an adversary proceeding was the proper vehicle in which to seek injunctive relief. Zale , 62 F.3d at 764. The Zale Court also found that the lower court failed to perform the traditional analysis for injunctive relief under F.R.B.P. 7065. Id. at 765.
Moreover, we find no indication on the record that the bankruptcy court conducted the proper analysis and made the requisite findings for entry of a preliminary injunction. See Commonwealth Oil Ref. Co. v. U.S.E.P.A. (In re Commonwealth Oil Ref. Co.) , 805 F.2d 1175, 1188-89 (5th Cir. 1986) ("[T]he legislative history of § 105 makes clear that stays under that section are granted only under the usual rules for the issuance of an injunction."), cert. denied , 483 U.S. 1005, 107 S.Ct. 3228, 97 L.Ed.2d 734 (1987) ; In re Eagle-Picher Indus., Inc. , 963 F.2d [855,] 858 [ (6th Cir. 1992) ] ("When issuing a preliminary injunction pursuant to its powers set forth in section 105(a), a bankruptcy court must consider the traditional factors governing preliminary injunctions issued pursuant to Federal Rules of Civil Procedure 65.").
Id. at 765.
Imposition of injunctive relief under section 105(a) requires application of the traditional tests for injunctive relief.
(1) a substantial likelihood of success on the merits; (2) a substantial threat of irreparable harm if the injunction is not granted; (3) that the threatened injury to the movant outweighs the threatened harm an injunction may cause the party opposing the injunction; and (4) that granting the injunction will not disserve the public interest.
Id. (citation omitted).
In summary, if 11 U.S.C. § 362(a)(3) is utilized to enjoin an action against property of the estate, the traditional tests for injunctive relief are not applied. However, if 11 U.S.C. § 105(a) is the basis for injunctive relief, the traditional test for issuance must be met.
3. Application of Section 362(a)(3)
For the reasons set forth above, all claims derivative of FSW are property of the estate and Pride is enjoined from their pursuit. For the sake of clarity, they include all claims for damages resulting from Pride's allegation of reliance on the FSW Audits in connection with injuries sustained for Rebate Costs and Vendor Guarantees. It also includes Pride's claims for injuries associated with FSW Loans, Payroll, Licensing Marketing or Operating Costs.
4. Application of Section 105(a)
Although the Pride Audit Direct Claims and FSW Audit Direct Claim are not property of the estate, Trustee requests the Court enjoin Pride from asserting those claims under 11 U.S.C. § 105(a).
Section 105(a) of the Bankruptcy Code permits courts to "issue any order, process, or judgment, that is necessary or appropriate to carry out the provisions of" the Bankruptcy Code. In the past, courts have used section 105 to provisionally enjoin third-party actions against non-debtor entities when the prosecution of the claim might interfere with the administration of the reorganizational effort.
In Feld v. Zale Corp. , cited supra at 127, the Fifth Circuit addressed injunction of third-party actions under section 105. In Zale , the creditor sued Zale's directors and *129its directors and officers ("D & O") liability insurer for general damages due to the board's alleged malfeasance. The debtor held identical claims. Because the proceeds of the D & O insurance policy or the individual assets of the board members would flow to the estate and benefit all creditors, the Court enjoined the suit to prohibit one creditor, with generalized damages, from receiving more than others in the same position. This concept has more recently been articulated as the direct versus derivative analysis. However, Zale does not stand for the proposition that direct claims for distinct conduct applicable to only the creditor at issue may be enjoined simply because they compete with the estate for third party resources.
The Fifth Circuit held that in order for a court to exercise power under section 105 subject matter jurisdiction must exist over the matter to be enjoined. Id. at 751 (citations omitted). The Court noted that shared facts do not in and of themselves make the third party action related to the bankruptcy case. Nor does judicial economy justify related to jurisdiction. Id. at 753-754.
[W]e must establish independently that a dispute is part of a bankruptcy case; the existence of power within the bankruptcy case does not imply an expansion of jurisdiction beyond it. To the contrary, it suggests that courts must be particularly carefil in ascertaining the source of their power, lest bankruptcy courts displace state courts for large categories of disputes in which sone[one] ...may be bankrupt. Id. at 755.
In Zale , a settlement between Zale's D & O carrier, certain of its directors and the estate included a provision enjoining any third party from pursuing claims against the insurer. The policy limits were being exhausted through the settlement. National Union Fire Insurance Company ("NUFIC") and Feld (a non-settling director) objected to the settlement because it enjoined them from pursuing the insurer. Both parties alleged claims of bad faith against the insurer, Feld also held claims in contract.9 The Fifth Circuit agreed that the bad faith claims were not subject to injunction because they did not involve property of the estate nor were they claims that could have been brought against the debtor.
As to the claims under contract, the Court found that permanent injunctive relief was improper. However, temporary injunctive might be possible provided the proceeding to be enjoined was "related to" the bankruptcy case under 28 U.S.C. § 1334. In such a case, a temporary injunction of third-party actions "may be proper under unusual circumstances." Id. at 761 (Emphasis supplied , citations omitted).
These circumstances include 1) when the nondebtor and the debtor enjoy such an identity of interests that the suit against the nondebtor is essentially a suit against the debtor, and 2) when the third-party action will have an adverse impact on the debtor's ability to accomplish reorganization." ... If not, a bankruptcy court may not enjoin the third-party action.
Id.
This is a liquidation, not reorganization, case. The administration of the case *130will not be affected by Pride's pursuit against LaPorte. Further, the Pride Audit Direct Claims are unrelated to the bankruptcy case or the claims held by Pride against FSW. Pride holds claims associated with advice given by LaPorte concerning consolidated financial statements. It also seeks damages related to amounts advanced to Saturn, a subsidiary of FSW, but not FSW. Finally, Prides asserts that through a breach of LaPorte's duties to it under the Pride Audits, the ulta vires conduct of its officers or directors was not discovered. It also holds claims based on LaPorte's conduct in connection with the guarantee increase. Conduct specific to Pride and not FSW.
In Zale , the Fifth Circuit found that the distribution of the D & O policy proceeds were sufficiently related to the Zale estate so was to create related to jurisdiction over the policy and those that might seek recompense from its limits. This case is different. The policy in question belongs to a third party, LaPorte, was paid for by LaPorte, and is designed to compensate those with claims against LaPorte. In contrast, the Zale D & O policy belonged to Zale. Its premiums were paid by Zale to insure it against claims against the company for actions of Zale's officers and directors. The claims against LaPorte are based on LaPorte's conduct, not that of the debtor. The assets available to satisfy them are those belonging to LaPorte and do not involve the estate. As a result, the claims held by Pride against LaPorte will not be decided by the claims resolution process in FSW's case. Bankruptcy jurisdiction does not extend to the Pride Direct Claims as they are neither claims against the debtor nor its property.
Trustee argues Pride's pursuit against LaPorte might jeopardize the estate's claims should Pride and Trustee take conflicting positions. He also argues that LaPorte has insufficient insurance and resources to satisfy both Pride's and the estate's claims. Trustee's position argues that irreparable harm may occur to the estate if Pride is allowed to compete with the estate for limited resources. He also contends that most of Pride's alleged damages accruing as a result of the Pride Direct Claims stem from monies advanced to FSW; therefore, they are included in the universe of claims that will be paid should Trustee succeed against LaPorte.10 Trustee argues that as a result, the potential injury to the estate is outweighed by any injury Pride may suffer should its Direct Claims be enjoined.
Trustee asks this Court to exceed the bounds of law. As previously explained, a large portion of Pride's Direct Claims have no relationship to FSW, specifically those related to accounting advice or Saturn. Further, the claims for LaPorte's failure to discover the mismanagement of Pride's officers or directors is also unrelated to FSW's case. Pride and the estate each hold claims against the same third parties and their insurers, and they will by necessity compete for payment from these defendants. However, because neither the patrimony of the third parties nor their insurers are property of the estate and bankruptcy jurisdiction does not extend to these claims, enjoining their progress takes an extraordinary showing of damage to the estate. The power to enjoin third party actions is generally utilized to protect officers or key employees from outside *131litigation while their attention and effort are needed to reorganize a debtor. This case is factually in opposite to those decisions.
The right of a party to pursue its own cause of action cannot be abridged by a bankruptcy court with no interest or jurisdiction over the claim simply because it may compete with the Trustee for recovery.
Trustee also asserts that Pride should be enjoined because in his opinion, Pride cannot succeed on the merits. Trustee invites an examination of Pride's evidence prior to allowing Pride any opportunity to conduct discovery.11 This amounts to prejudging the viability or probability of Pride's success on the merits. Trustee has offered no authority for the assertion that this Court should weigh the merits of Pride's claims as a factor supporting the denial or grant of injunctive relief. The Court declines the invitation to exert control over property belonging to a creditor against an unrelated non-debtor in this factual circumstance.
IV. Conclusion
For the reasons assigned above, the following claims by Pride against LaPorte and related to the FSW Audits are property of the estate, and the automatic stay pursuant to section 362 prohibits Pride from pursuit:
1. Pride's claims for damages resulting from advances $1,204,054.79 to FSW customers for manufacturer rebates earned by FSW but unpaid, Rebate Costs;
2. $3,762,677.53 in loans to FSW, Loans;
3. $50,811.50 in payroll advances to FSW, Payroll Costs;
4. $84,995.79 in advances of cash or resources to FSW for operation of its licensing program, Licensing Costs;
5. $1,258.42 in advances of cash or resources to FSW for operation of its market source operating division, Marketing Costs;
6. $398, 276.53 in advances to FSW for general operating expenses, Operating Costs; and
7. $7,003,733.78 in payments to vendors of FSW on invoices guaranteed by Pride, Vendor Guarantees.
The following claim against LaPorte, although related to the FSW Audits, is not property of the estate and Pride may pursue it: $5,715,061.20 in additional guarantees to Iberia.
Additionally, claims brought by Pride under La. R.S. 37:91(B)(1) for damages sustained as a result of LaPorte's conduct in connection with the Pride Audits may be pursued because they are not property of the estate. These claims include LaPorte's failure to discover and report the alleged unauthorized conduct of Pride's officers in granting guarantees to FSW vendors or funding manufacturer rebates earned by FSW but not yet paid. In addition, LaPorte's failure to report advances to Saturn are directly held by Pride.
Pride may not pursue any claim for its more generalized damages sustained as a result of Loans to FSW, advances of resources or cash to FSW in connection with Payroll, Licensing, or Marketing or Operating Costs. Pride has failed to articulate a claim under LaR.S.37:91 that is sufficiently grounded in the Pride Audits or in LaPorte's knowledge of Pride's reliance on the FSW.
*132The Court will enter a separate Judgment in accord with this Opinion.
The last name of "Mini" is not in the email.
Exh. 35 includes engagement letters dated June 19, 2014, and June 19, 2015, that contain identical language.
Section 544 gives the trustee the power to assert general causes of action on behalf of creditors.
28 U.S.C. § 1334(b) provides:
Except as provided in subsection (e)(2), 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.
The Court found, even though the same transaction was at issue and the same resources were being pursued, if the claim alleged a direct injury to the creditor, it belonged to the creditor. Id. at 1286.
A debtor may only pursue property of the estate while in the position of a debtor-in-possession and even then, only for the benefit of the estate. See Kane v. National Union Fire Ins. Co. , 535 F.3d 380, 385 (5th Cir. 2008) ("[A] trustee, as the representative of the bankruptcy estate, is the real party in interest, and is the only party with standing to prosecute causes of action belonging to the estate once the bankruptcy petition has been filed."). See also 11 U.S.C. § 1107(a) (If no chapter 11 trustee has been appointed, the debtor-in-possession has the rights, powers, and duties of a trustee.).
"When a bankruptcy petition is filed, an automatic stay operates as a self-executing injunction." Campbell v. Countrywide Home Loans, Inc. 545 F.3d 348, 354-55 (5th Cir. 2008).
P-23, p. 32.
NUFIC was the excess carrier. It asserted claims of bad faith against CIGNA, the primary carrier based on CIGNA's agreement to settle for the policy limits. Because the settlement exhausted the primary policy limits, Feld held claims based on CIGNA's bad faith in settling for the primary policy limits as well as breach of contract for leaving him with less coverage.
Even though Pride is a creditor of FSW, its claims against LaPorte will not be resolved in the process of ruling on its proof of claim. They are therefore unrelated to this bankruptcy proceeding. (i.e. Claims against Saturn; for breach of the agreement between Pride and LaPorte; damages based on advice concerning consolidated financial statements; and failure to discover the unauthorized conduct of Pride's officers).
To date, Pride has agreed to forbear from any discovery in connection with the Pride Complaint while the action by Trustee for injunctive relief is pending. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501699/ | Thomas J. Tucker, United States Bankruptcy Judge
These adversary proceedings came before the Court for trial, on May 22, 2018 and on June 5, 2018. Confirming action taken by the Court during the June 5, 2018 day of trial, and for the reasons stated by the Court on the record, the Court entered an Order on June 6, 2018 (Docket # 94 in Adv. No. 17-4534 and Docket # 58 in Adv. No. 17-4535, the "June 6 Order"). The June 6 Order permitted the parties to brief the following question, and set deadlines for the parties to do so:
*133[Whether, as argued by Plaintiffs,] Defendant Olivia Wise waived any attorney-client privilege she may have had with respect to any part of Plaintiff's Exhibit 37, by failing to object or otherwise assert the privilege in any way at any time before the June 5, 2018 day of trial, in response to the Plaintiff United States Trustee's document requests filed and served on March 19, 2018 in McDermott v. Rebeck, et al. , Adv. No. 18-4042 (Document Request No. 1, at Docket ## 41, 42).
Plaintiff Norman Wise and the Defendant each filed timely briefs (Docket ## 95, 96 in Adv. No. 17-4534). Plaintiff McDermott did not file a brief. The Court has considered the briefs, as well as the oral arguments made by counsel during the June 5, 2018 day of trial, and will now rule on the question stated above.
The Court answers the question stated above in the negative. That is, the Court finds and concludes that Defendant did not waive any attorney-client privilege that otherwise existed with respect to Plaintiffs' Exhibit 37, by failing to object or otherwise assert the privilege in any way at any time before the June 5, 2018 day of trial.1
The Court further finds and concludes that:
1. Defendant is not and never has been a party in Adv. No. 18-4042, and Defendant had no duty herself to try to raise, in that adversary proceeding, any claim of privilege with respect to any documents disclosed or produced by Chelsea Rebeck in that adversary proceeding.
2. Subject to certain possible exceptions under the law, Defendant's attorney Chelsea Rebeck at all times has had a duty not to disclose communications between herself and Defendant Olivia Wise that are protected by the attorney-client privilege, without first obtaining the express authorization by Olivia Wise to do so. And there is no evidence presented to date that Olivia Wise ever gave Ms. Rebeck authorization to disclose any such privileged communications to anyone.
3. There is no evidence presented to date that Chelsea Rebeck intended to produce or did produce in discovery, in Adv. No. 18-4042, the Plaintiffs' Exhibit 37 document, in whole or in any part, for the purpose of defending herself from any claim of wrongdoing, or that production of any part of that document in fact was reasonably necessary to defend herself from any claim of wrongdoing.
4. There is no evidence presented to date to show the existence of any exception of the type referred to in Paragraph No. 2 above, that would permit Chelsea Rebeck to produce or disclose any part of the Plaintiffs' Exhibit 37 document, to the extent that document contained or disclosed communications that are protected by the attorney-client privilege.
5. Under the circumstances, the disclosure of the Plaintiffs' Exhibit 37 document by Chelsea Rebeck, in discovery in Adv. No. 18-4042, is not deemed to have been a disclosure of such document by or on behalf of Defendant Olivia Wise, for purposes of Fed. R. Evid. 502(a) or 502(b).
*1346. Defendant Olivia Wise at all times had the right to assume, and to rely on the assumption, that Chelsea Rebeck would not, without Olivia Wise's express permission, disclose or produce to anyone, including in response to discovery in Adv. No. 18-4042, any part of the Plaintiffs' Exhibit 37 document that was protected by the attorney-client privilege, without Ms. Rebeck first timely asserting that privilege, and then being ordered by the Court to produce or disclose such document notwithstanding the assertion of privilege. There was no obligation on the part of either Defendant Olivia Wise or her attorney in the present adversary proceedings (Thomas Morris) to remind Ms. Rebeck of her duty to protect the attorney-client privilege which belonged to Defendant Olivia Wise, or otherwise to police the performance by Ms. Rebeck of such duty.
7. Under the circumstances of this case, Defendant Olivia Wise's assertion of attorney-client privilege with respect to Plaintiffs' Exhibit 37, first made during the June 5, 2018 day of trial, was timely.
8. Defendant may continue to assert that any part of Plaintiffs' Exhibit 37 is protected by the attorney-client privilege, with the exception of the specific part identified in footnote 1 above. And to the extent any such privilege assertions are disputed by either of the Plaintiffs, on any ground other than the waiver ground addressed by this Opinion and Order, the Court will hear the arguments of the parties and will rule to what extent the privilege applies.
IT IS SO RULED AND SO ORDERED.
As Defendant's brief concedes, however, Defendant has waived any attorney-client privilege with respect to certain text messages on unnumbered pages 13-16 of Plaintiffs' Exhibit 37, by seeking and obtaining the admission into evidence of those portions of the exhibit, and by Defendant's June 5, 2018 testimony at trial about them. That was an intentional waiver, to which Fed. R. Evid. 502(a) applies. The Court expresses no opinion at this time about whether or to what extent that intentional waiver extends to other parts of Plaintiffs' Exhibit 37, under Rule 502(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501700/ | Thomas J. Tucker, United States Bankruptcy Judge *137I. Introduction
These two bankruptcy cases require the Court to decide whether certain claims, alleged in a state court lawsuit against two bankruptcy Debtors, were discharged in the Debtors' Chapter 7 bankruptcy cases.
In these cases, the Debtors, Jamal Kalabat and Salam Kalabat, each obtained a discharge. Several years later, the Kalabats (who are brothers) and others were sued in state court, by James A. Akouri and the James A. Akouri Living Trust (the "Akouri Parties"). After the parties litigated in state court for several months, the Akouri Parties filed a second amended complaint. The Kalabats now allege, in this Court, that the second amended complaint asserts claims that were discharged in their bankruptcy cases. The Akouri Parties deny this.
In each of these cases, the Debtor filed a motion entitled "Motion for Civil Contempt and to Enforce Discharge Injunction" (Docket # 53 in Case No. 11-60667 and Docket # 85 in Case No. 11-60831) (together, the "Motions"). The Motions allege the same facts and involve the same issues. Each of the Motions seeks an Order finding the Akouri Parties in contempt, and awarding injunctive and monetary relief, for the Akouri Parties' alleged violations of the discharge injunction under 11 U.S.C. § 524(a)(2). The Akouri Parties oppose the Motions.
The Court held a joint hearing on the Motions, then permitted certain post-hearing filings and briefing by the parties. The Court then took the Motions under advisement.
The Court has considered all the briefs and oral arguments of the parties, and the exhibits and other documents filed by the parties,1 as well as the rest of the record in each of these bankruptcy cases. This Opinion and the orders to follow will constitute the Court's decision on the Motions. For the reasons stated in this Opinion, the Court will deny each of the Motions.
II. Jurisdiction
This Court has subject matter jurisdiction over these contested matters under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). These are core proceedings, under 28 U.S.C. § 157(b)(2)(O).
In addition, these contested matters each fall 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). These are a proceedings "arising under title 11" because they are "created or determined by a statutory provision of title 11," see id. , including Bankruptcy Code § 524(a)(2). And these are proceedings "arising in" a case under title 11, because they are proceedings that "by [their] very nature, could arise only in bankruptcy cases." See Allard v. Coenen , 419 B.R. at 27.
*138III. Facts
The following facts are undisputed.
A. The 2007 loan, guaranties, and security agreement
In 2007, one or both of the Akouri Parties loaned $250,000.00 to two Michigan limited liability companies, named K-LV Investment LLC and K 4 DEVELOPMENT LLC. The loan was evidenced by, among other things, a promissory note dated July 3, 2007 in the amount of $250,000.00 with a stated maturity date of July 3, 2009, under which the borrowers agreed to repay the stated amount, plus interest, by paying to the order of "James A. Akouri Living Trust, dated March 26, 2003."2 Jamal Kalabat and Salam Kalabat each personally guaranteed payment of the loan and promissory note, in a written guaranty agreement dated July 3, 2007 (the "Guaranty Agreement").3 That Guaranty Agreement expressly referred to and guaranteed payment of the $250,000 promissory note dated July 3, 2007, and the guarantees were expressly made by the Kalabats to "James A. Akouri Living Trust, dated March 26, 2003," which is defined as "the 'Lender.' "4
To secure payment of the $250,000.00 loan and their guaranty obligations, Jamal Kalabat and Salam Kalabat each signed a written security agreement, entitled "Membership Interest Security and Pledge Agreement," dated July 2, 2007 (the "Security Agreements").5 In the Security Agreements, the Kalabats each granted a security interest "in favor of JIMMY AKOURI," in (1) their membership interests in a limited liability company called "Birmingham Property, LLC;" and (2) their shares of stock in a corporation named Waterford Hotel, Inc.6
B. The Kalabats' 2011 bankruptcy cases
Jamal Kalabat and Salam Kalabat each filed a Chapter 7 bankruptcy case in 2011, and each obtained a discharge of debts. Thus, the personal liability of Jamal Kalabat and Salam Kalabat to the Akouri Parties, under the 2007 Guaranty Agreement, was discharged in the bankruptcy cases, in 2011.
C. The state court lawsuit filed in 2015 by the Akouri Parties
Several years later, on November 4, *1392015,7 the Akouri Parties filed a lawsuit in the Oakland County, Michigan Circuit Court, captioned James A. Akouri, Individually, and James A. Akouri Living Trust vs. Birmingham Property, LLC, et al. , (Case No. 2015-150003-CB, the "State Court Case"). The defendants were Jamal Kalabat and Salam Kalabat, and others. After several months of litigation, on May 13, 2016, the Akouri Parties filed a second amended complaint (the "Second Amended Complaint"), containing eight counts.8 Five of these counts (Counts I, II, III, VII, and VIII) stated claims against Jamal Kalabat and Salam Kalabat. The three other counts stated claims against an attorney named Laith Yaldoo (Counts IV, V, and VI).
The Kalabats argue that in asserting the five counts against the Kalabats in the Second Amended Complaint, the Akouri Parties sought to collect on the pre-petition debt of the Kalabats under their 2007 Guaranty Agreement of the $250,000.00 loan made by the Akouri Parties. As a result, the Kalabats argue, this action by the Akouri Parties sought to collect on debts that had been discharged in the Kalabats' 2011 bankruptcy cases.
It is therefore necessary to describe these counts in the Second Amended Complaint.
Count I
Count I of the Second Amended Complaint alleges a claim that the Kalabats converted the Akouri Parties' collateral, in the form of the membership interests in Birmingham Property, LLC, which the Kalabats pledged in 2007 as security for their loan guaranties. This count seeks damages for the conversion, including treble damages under Mich. Comp. Laws § 600.2919(a).
Count I alleges that this alleged conversion occurred on or after October 13, 2015, when the Akouri Parties sought to collect on the $250,000.00 loan made in 2007, which was in default. The Akouri Parties sought to realize on their collateral, in the form of the Kalabats' pledged membership interest in Birmingham Property, LLC. This count alleges that on October 13, 2015, the Akouri Parties "sent a notice of default" to Birmingham Property, LLC, directing it to "register the membership interest of Defendants Kalabat in the name of [the Akouri Parties]," and notified Birmingham Property, LLC that "[the Akouri Parties] were entitled to, among other things, receive all distributions and exercise all voting rights relating to the membership interests of Defendants Kalabat in [Birmingham Property, LLC]."9 Count I then alleges that the Kalabats caused "distributions and/or other payments that should have been paid" to the Akouri Parties instead to be paid to an entity owned or controlled by the Kalabats.10 By this conduct, Count I alleges, the Kalabats converted property of the Akouri Parties for their benefit.
Count II
Count II alleges a claim of unjust enrichment against the Kalabats, based on the same facts stated in Count I.
*140Count III
In Count III of the Second Amended Complaint, the Akouri Parties seek to foreclose on their security interest in the Kalabats' shares of stock in Waterford Hotel, Inc., because of the default on the $250,000.00 loan. This count seeks an order directing that the stock be sold, and that the proceeds be applied to pay the $250,000.00 loan, plus interest and attorney fees.11
Count VII
Count VII of the Second Amended Complaint seeks damages for an alleged breach of contract by the Kalabats. This count alleges that the Kalabats made an agreement with the Akouri Parties in May 2015, under which the Kalabats agreed to pay the Akouri Parties $250,000.00 "by May 16, 2016," in exchange for unspecified "consideration" given to the Kalabats by the Akouri Parties.12 This count then alleges that the Kalabats have not paid any part of the $250,000.00, but instead "have repudiated their obligations to do so."13
The Second Amended Complaint does not specify what the "consideration" was for the alleged May 2015 agreement. But the allegation that "consideration" was given by the Akouri Parties clearly implies that they gave something of value, rather than a mere release of the Kalabats' personal liability for their pre-petition debt under their 2007 Guaranty Agreement. That personal liability had been discharged in the Kalabats' bankruptcy cases in 2011, so a release of it in 2015 clearly would not constitute "consideration" as that word is used in the Second Amended Complaint.
Although the Second Amended Complaint does not specify what the "consideration" was for the alleged May 2015 agreement, the Akouri Parties have made clear what it was, in their written response to the Kalabats' Motions and in the hearing on the Motions. They say that the Kalabats' May 2015 promise to pay $250,000.00 was in exchange for the Akouri Parties' releasing their lien in the Kalabats' membership interests in Birmingham Property, LLC. After the Akouri Parties released that lien, they say, the Kalabats failed to pay the promised $250,000.00.
In their written responses to the Kalabats' Motions, the Akouri Parties stated:
Years after receiving a discharge, in May, 2015, [each of] the Debtor[s] sought to obtain clear title to his equity in Birmingham Property, LLC. As a result, the Debtor[s] offered $250,000 in exchange for the Akouri Parties release of their lien in Birmingham Property, LLC. The Akouri Parties, acting in reliance on the Debtor's offer, released their lien. However, no payment was forthcoming.14
Counsel for the Akouri Parties reiterated that this is their breach of contract theory, during the hearing on the Motions.15 And the Kalabats do not dispute that this is what the Akouri Parties are alleging in their breach of contract claim in Count VII of the Second Amended Complaint.
Count VIII
Count VIII seeks reformation of the Security Agreements signed by the Kalabats in 2007. This Count states:
60. The pledge agreements executed in 2007 for [the Akouri Parties'] benefit *141pertinent to [the Akouri Parties'] loan and security for its repayment refer to "Jimmy Akouri", whereas the pertinent promissory note and guarantee refer to the "James A. Akouri Living Trust."
61. In that respect, those documents do not express the true intent of the parties.
62. In order to express the true intent of the parties, the Court can and should reform those documents so that they refer to "James A. Akouri, individually and as trustee of the James A. Akouri Living Trust" or, alternatively, reform the pledge agreements so that they refer and inure to the benefit of that trust and trustee.16
IV. Discussion
A. Applicable law - general principles
Initially, the Court reiterates certain basic points of law about the Chapter 7 discharge injunction and the relief available for a violation of that injunction. As this Court stated in the recent case of Schubiner v. Zolman(In re Schubiner) , 590 B.R. 362, 397-99, Adv. No. 17-4677, 2018 WL 4489454, at *26-27 (Bankr. E.D. Mich., September 18, 2018) :
This Court discussed the law applicable to a violation of the discharge injunction in the case of Holley v. Kresch Oliver, PLLC(In re Holley) , 473 B.R. 212 (Bankr. E.D. Mich. 2012) :
Plaintiff seeks relief for Defendants' violations of the discharge injunction contained in Bankruptcy Code § 524(a)(2). That section states:
(a) A discharge in a case under this title-
...
(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 [debt discharged under section 727] as a personal liability of the debtor, whether or not discharge of such debt is waived[.]
11 U.S.C. § 524(a)(2). The Sixth Circuit has held that no private right of action exists under 11 U.S.C. § 524 for a violation of the discharge injunction. Pertuso v. Ford Motor Credit Co. , 233 F.3d 417, 422-23 (6th Cir.2000). Rather, bankruptcy courts enforce § 524 through civil contempt proceedings. See id. at 422 ; see also Gunter v. Kevin O'Brien & Assocs. Co. LPA (In re Gunter) , 389 B.R. 67, 71 (Bankr. S.D. Ohio 2008) (citing Pertuso , 233 F.3d at 421 )("[A] debtor's only recourse for violation of the discharge injunction is to request that the offending party be held in contempt of court.").
Bankruptcy courts have civil contempt powers. Those powers "flow from Bankruptcy Code § 105(a) and the inherent power of a court to enforce compliance with its lawful orders." In re Walker , 257 B.R. 493, 496 (Bankr. N.D. Ohio 2001) (citations omitted). The United States Court of Appeals for the Sixth Circuit has held that:
In a civil contempt proceeding, the petitioner must prove by clear and convincing evidence that the respondent violated the court's prior order.
A litigant may be held in contempt if his adversary shows by clear and convincing evidence that "he violate(d) a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts with knowledge of the court's order."
*142It is the petitioner's burden ... to make a prima facie showing of a violation, and it is then the responding party's burden to prove an inability to comply....
[T]he test is not whether [respondents] made a good faith effort at compliance but whether "the defendants took all reasonable steps within their power to comply with the court's order."
[G]ood faith is not a defense to civil contempt. Conversely, impossibility would be a defense to contempt, but the [respondent] had the burden of proving impossibility, and that burden is difficult to meet.
Glover v. Johnson , 138 F.3d 229, 244 (6th Cir. 1998) (citations omitted); see also Liberte Capital Grp., LLC v. Capwill , 462 F.3d 543, 550 (6th Cir. 2006) ; Elec. Workers Pension Trust Fund of Local Union # 58, IBEW v. Gary's Elec. Serv. Co. , 340 F.3d 373, 379 (6th Cir. 2003).
In the context of a violation of the discharge injunction, this means that the act must have been willful. The question of whether the violation is willful is based on whether the creditor intended the acts that constituted the violation. The standard does not require proof that the creditor deliberately violated the injunction. Thus, a debtor who alleges a violation of § 524(a)(2) must establish by clear and convincing evidence (1) the creditor violated the discharge injunction and (2) the creditor did so with actual knowledge of the injunction.
In re Frambes , No. 08-22398, 2012 WL 400735, at *5 (Bankr. E.D. Ky. Feb. 7, 2012) (citations omitted).
If a bankruptcy court finds a creditor in civil contempt for violating the discharge injunction, the court may award the debtor compensatory damages, including attorney fees and costs. In re Johnson , 439 B.R. 416, 428 (Bankr. E.D. Mich. 2010), aff'd on other grounds , No. 10-14292, 2011 WL 1983339 (E.D. Mich. May 23, 2011) ; Gunter , 389 B.R. at 71-72 ; In re Perviz , 302 B.R. 357, 370 (Bankr. N.D. Ohio 2003).
473 B.R. at 214-15 (italics in original).
This Court has discretion in deciding whether to award relief, including monetary relief, for a violation of the discharge injunction. See, e.g. , Badovick v. Greenspan(In re Greenspan) , 464 B.R. 61, No. 10-8019, 2011 WL 310703, at *5 (6th Cir. BAP 2011) (internal quotation marks and citation omitted) (the court has "broad discretion ... in selecting an appropriate sanction" for a violation of the discharge injunction); In re Perviz , 302 B.R. 357, 370, 370 n. 4 (Bankr. N.D. Ohio 2003) (sanctions and monetary relief for violations of the discharge injunction are discretionary); Mitchell v. Anderson(In re Mitchell) , 545 B.R. 209, 227-28 (Bankr. N.D. Ohio 2016) (damages for violation of the discharge injunction are "within the Court's discretion;" and holding that even if the defendant violated the discharge injunction, the court would not award any damages to the debtor under the circumstances of that case).
B. The discharge injunction does not prohibit a creditor's efforts to enforce and collect on a post-petition debt, or a creditor's efforts to enforce and collect on a lien securing a pre-petition debt, unless the lien was avoided during the Chapter 7 bankruptcy case.
1. No discharge of post-petition debts
Jamal Kalabat filed his Chapter 7 case on July 29, 2011, and obtained his *143Chapter 7 discharge on November 15, 2011.17 Salam Kalabat filed his Chapter 7 case on August 1, 2011, and obtained his Chapter 7 discharge on December 16, 2011.18 Under Bankruptcy Code § 727(b), therefore, Jamal Kalabat obtained a discharge of all of his debts that "arose before" his petition date of July 29, 2011, and Salam Kalabat obtained a discharge of all of his debts that "arose before" his petition date of August 1, 2011 (the "pre-petition debts"). See 11 U.S.C. § 727(b).19 For Jamal Kalabat and Salam Kalabat each, any debts that arose after his petition date ("post-petition debts"), were not discharged.
Under § 524(a)(2), the discharge injunction prohibits collection efforts on debts that were discharged. Since post-petition debts are not discharged, the discharge injunction does not bar efforts to collect post-petition debts.
2. No discharge of any lien not avoided during the Chapter 7 bankruptcy cases
Furthermore, under the wording of § 524(a)(2), the discharge injunction prohibits efforts to collect discharged, pre-petition debts only "as a personal liability of the debtor." If a creditor had a lien to secure payment of a pre-petition debt before the Chapter 7 bankruptcy, that lien survives, or "rides through" the Chapter 7 bankruptcy and bankruptcy discharge, unless the lien is avoided in the bankruptcy case. And a creditor with such a lien may seek to enforce its lien rights and collect on its secured claim, sometimes called its "in rem claim," after discharge, even if the debtor's personal liability for the creditor's debt was discharged. As this Court explained in In re Johnson , 439 B.R. 416, 428 (Bankr. E.D. Mich. 2010), aff'd. on other grounds , 2011 WL 1983339 (E.D. Mich. 2011),
[A] Chapter 7 bankruptcy discharge does not, in and of itself, discharge a creditor's lien. And actions that merely seek to enforce a creditor's surviving lien are not considered to be actions to collect a debt "as a personal liability of the debtor" within the meaning of the § 524(a)(2) discharge injunction.
It is firmly established that a lien "rides through" bankruptcy unaffected, unless the lien is disallowed or avoided. Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) ; J. Catton Farms, Inc. v. First Nat'l Bank, 779 F.2d 1242 (7th Cir.1985) (Liens pass through bankruptcy unaffected, meaning that a secured creditor may choose to ignore the bankruptcy proceeding and enforce his security interest); Estate of Lellock v. Prudential Ins. Co., 811 F.2d 186 (3rd Cir.1987) (Although underlying debt was discharged in bankruptcy, the lien created before the bankruptcy against Debtor's property to secure that debt survived discharge where the lien was neither disallowed nor avoided); Newman v. First Sec. Bank, 887 F.2d 973 (9th Cir.1989) (If secured creditor chose not to file a claim or otherwise assert any interest in the security during the bankruptcy *144proceedings, the bankruptcy discharge has no effect on the lien); accord In re Tarnow, 749 F.2d 464, 466 (7th Cir.1984) ; In re Braun, 152 B.R. 466 (Bankr.N.D.Ohio 1993) ; In re Hunter, 164 B.R. 738 (Bankr.W.D.Ky.1994) ; In re Kuebler, 156 B.R. 1012 (Bankr.E.D.Ark.1993).
In re Willis, 199 B.R. 153, 154 (Bankr. W.D. Ky. 1995)
See also In re Jackson , 554 B.R. 156, 165 (6th Cir. BAP 2016), aff'd. , No. 16-4021, 2017 WL 8160941 (6th Cir. October 18, 2017) ("The discharge of personal obligations through a Chapter 7 discharge does not terminate a secured creditor's in rem rights unless the creditor's lien was avoided during the bankruptcy.")
C. The alleged violations of the discharge injunction by the Akouri Parties
Having considered all of the arguments of the parties, the Court concludes that none of the counts in the Second Amended Complaint seeks to collect or recover, "as a personal liability of" either of the Kalabats, on any debt that was discharged in the Kalabats' bankruptcy cases. The filing of the Second Amended Complaint, therefore, did not violate the discharge injunction under § 524(a)(2).
The Court will now discuss each of the relevant counts in the Second Amended Complaint, which are described in detail in Part III.C of this Opinion.
1. Count III
In Count III, the Akouri Parties seek to foreclose on their security interest in the Kalabats' shares of stock in Waterford Hotel, Inc., because of the default on the $250,000.00 loan. This count seeks an order directing that the stock be sold, and that the proceeds be applied to pay the $250,000.00 loan, plus interest and attorney fees.
This count merely seeks to enforce and realize upon a lien that the Akouri Parties claim to have in specific assets owned by the Kalabats. Any such lien "rode through" - i.e. , survived - the Kalabats' bankruptcy cases and discharges, because it was not avoided in either of the bankruptcy cases under any of the various Bankruptcy Code provisions that permit the avoidance of liens.20 An effort to enforce such a lien, even though it is done for the purpose of trying to collect on a pre-petition debt, is not prohibited by the § 524(a)(2) discharge injunction, because it is not considered an act to collect on a discharged debt "as a personal liability of the debtor." See In re Johnson , 439 B.R. at 428, quoted in Part IV.B above.
a. The Kalabats' "no lien" argument
The Kalabats contend that Count III violates the discharge injunction, for two reasons. First, they argue that neither of the Akouri Parties ever actually had a valid lien. This is so, the Kalabats say, because the 2007 Security Agreement purported to grant a security interest only to "Jimmy Akouri," and the Kalabats never owed any debt to Jimmy Akouri (aka James Akouri). Rather, the Kalabats' liability on their 2007 Guaranty Agreement was only a debt owing to the James A. Akouri Living Trust. In substance, the Kalabats argue that from the beginning, their 2007 Security Agreements secured no debt at all , because the Kalabats owed no debt to James Akouri individually.
From this premise, the Kalabats argue that Count III does not in fact seek to enforce a lien, even though it purports to do so, because there actually is no lien and *145there never was any lien. As a result, the Kalabats argue, Count III necessarily must be an effort to collect on the discharged debt under the 2007 Guaranty Agreement "as a personal liability of" the Kalabats. Put another way, the Kalabats argue, in substance, that Count III must be an effort to collect on what is in fact an unsecured debt that was discharged, so it violates the discharge injunction.
The Akouri Parties make at least three responses to the Kalabats' argument. One response is to point to Count VIII of the Second Amended Complaint - the reformation count. That count is discussed in Part IV.C.2 of this Opinion, below.
Second, the Akouri Parties argue that because James Akouri was and is the Trustee of the James A. Akouri Living Trust, the Security Agreements' granting of liens to "Jimmy Akouri" should be considered a grant to James Akouri in his representative capacity , as Trustee of the James A. Akouri Living Trust. As such, it was a grant of liens to the Trust, not to James Akouri in his individual capacity. As analogous authority in support of this argument, the Akouri Parties cite Michigan's version of Section 9-503 of the Uniform Commercial Code, Mich. Comp. Laws Ann. § 440.9503. That section states rules for naming the debtor and the secured party in a financing statement. Among other things, it states that "[f]ailure to indicate the representative capacity of a secured party or representative of a secured party does not affect the sufficiency of a financing statement." Mich. Comp. Laws Ann. § 440.9503(4).
As further support of this argument by the Akouri Parties, the Court notes that given the circumstances, documents and facts described in Part III.A of this Opinion, it is clear that all of the parties - including the Kalabats and the Akouri Parties - intended for the 2007 Security Agreements to grant liens that secured payment of the Kalabats' guarantees of payment of the $250,000.00 promissory note, which was made payable to the James A. Akouri Living Trust. These parties obviously did not intend for the 2007 Security Agreements to secure nothing , which is the effect of the outcome now argued by the Kalabats.
The Akouri Parties make a third response to the Kalabats' argument. They argue that for purposes of determining if Count III violates the discharge injunction, it does not matter whether the count is meritorious; rather, it only matters whether the count alleges a claim to enforce a lien, and seeks to enforce a lien.
The Court concludes that it is not necessary for this Court to decide the merits of the Kalabats' contention, that the 2007 Security Agreements were ineffective to actually grant any liens on the Kalabats' property. The Kalabats' argument is a possible defense to Count III of the Second Amended Complaint, which can and should be decided by the state court in the State Court Case, rather than by this Court. The key points for this Court are that (1) Count III clearly and expressly alleges a lien and seeks to enforce that lien, and does nothing more; and (2) if there is a lien as alleged in Count III, it clearly survived the Kalabats' bankruptcy discharges. These things are enough to establish that the Akouri Parties' pleading and prosecution of Count III in the State Court Case is not a violation of the discharge injunction.
b. The Kalabats' "pretext" argument
The Kalabats also argue that in pleading Count III, the Akouri Parties know that they have no hope of actually recovering any money by enforcing their claimed lien. They know this, say the Kalabats, because they know that a competing creditor, Larry *146Yaldoo, has a lien in the same assets claimed by the Akouri Parties as collateral, and that the state court had already ruled that Yaldoo's lien has priority over the lien claimed by the Akouri Parties. From this, the Kalabats argue that even if the Akroui Parties have a lien as they claim, they cannot hope to recover any money by enforcing the lien. For example, the Kalabats' argue that if their stock in Waterford Hotel, Inc. is sold, as Count III seeks, the proceeds of the sale all will go to Yaldoo, and the Akouri Parties will get nothing.
From this, the Kalabats argue that pleading and prosecuting Count III is merely a pretext by which the Akouri Parties are attempting to coerce the Kalabats into paying on the debt that was discharged in their bankruptcy cases. As such, the Kalabats argue, Count III violates the discharge injunction.
In support of this argument, the Kalabats cite the bankruptcy court's decision in the case of In re Jackson , 539 B.R. 327 (Bankr. N.D. Ohio 2015), rev'd. and vacated , 554 B.R. 156 (6th Cir. BAP 2016), aff'd. , No. 16-4021, 2017 WL 8160941 (6th Cir. October 18, 2017). In that case, the bankruptcy court found that a creditor's action in foreclosing on a lien in the debtor's home could not hope to yield any money, because there was no equity to support the lien, and that because of this, the creditor's action was merely a pretext to coerce the debtor into paying a discharged debt. As a result, the bankruptcy court concluded that the creditor's action in enforcing its lien was a violation of the discharge injunction.
The Court finds the bankruptcy court's decision in Jackson unpersuasive, for several reasons. First, as counsel for the Kalabats acknowledges, the bankruptcy court's decision in Jackson was reversed by the Bankruptcy Appellate Panel of the Sixth Circuit. And that reversal by the B.A.P. was later affirmed by the Sixth Circuit. Both of these reviewing courts ruled that the bankruptcy court had abused its discretion in finding a violation of the discharge injunction.
Second, the Akouri Parties correctly point out that it is far from certain that they can obtain no money from foreclosing on their lien, as they seek to do in Count III. This is so because (1) the Akouri Parties dispute that Larry Yaldo has a lien that has priority over the Akouri Parties' lien, and even though the state trial court ruled against them on this issue on a partial summary disposition motion, they still have the right to appeal that disputed decision; (2) the original debt owing to Larry Yaldo has been paid in part, without liquidation of the collateral at issue (the Kalabats' shares of stock in Waterford Hotel, Inc.), and the current amount of that debt is not yet established; and (3) the value of the collateral at issue - the Kalabats' shares of stock in Waterford Hotel, Inc. - has not been established. As the Bankruptcy Appellate Panel noted in Jackson , "the sale price for a foreclosure cannot be known until the sale actually occurs." Jackson , 554 B.R. at 166. From all of this, it is far from certain that the value of the collateral at issue in Count III is not high enough to pay anything on the Akouri Parties' lien, even if that lien is treated as junior to the Yaldo lien.
Third, the Court rejects the Kalabats' "pretext" theory in any event. The theory assumes that a lien creditor's action can violate the discharge injunction simply because it is intended to coerce, and/or that has the effect of coercing, a debtor into paying on a discharged debt. That is a false assumption, because every action of enforcing a lien after discharge has such intent and effect. As the Bankruptcy Appellate Panel noted in the Jackson case,
*147[A]ll foreclosure litigation potentially can induce payments of discharged debt to avoid a foreclosure sale, ....
...
[A]ny exercise of in rem rights includes either the intended or unintended consequence of requiring the debtor to voluntarily cure arrearages, including prepetition arrearages, or face the loss of the collateral.
554 B.R. at 165, 167 (italics in original). If such a coercive intent or effect were enough to establish a violation of the discharge injunction, no creditor whose lien survived a discharge could ever enforce such lien. But this is clearly not the law, as case law shows. See Part IV.B of this Opinion.
Moreover, if the Kalabats' "pretext" theory were adopted, it could limit or prohibit a lien creditor's exercise of its in rem rights in a way that is inconsistent with applicable state law. On the one hand, if applicable state law permits a junior lien creditor to foreclose on a lien even when that will only result in senior lienholders getting paid, then such creditor's right to foreclose in that circumstance is part and parcel of the rights that the junior lien creditor has by virtue of having its lien on the debtor's property. And such lien rights survive the debtor's bankruptcy discharge, unless the lien is avoided in the bankruptcy case. Enforcing such in rem rights therefore is not prohibited by the discharge injunction. On the other hand, if applicable state law does not permit a junior lien creditor to foreclose on a lien when it will yield no money to that creditor, then the creditor's effort to foreclose will fail on the merits under state law. Either way, however, what the lien creditor has done is merely attempt to exercise in rem rights as a lien creditor of the debtor. That attempt is not an act to collect a discharged debt "as a personal liability of the debtor" under § 524(a)(2).
The parties have not briefed or argued about whether Michigan law would permit the Akouri Parties to force a sale of their collateral under Count III, if such a sale would not yield them any money. And, as noted above, it is far from certain that such a sale under Count III would not yield any money for the Akouri Parties. It is for the state court to decide these issues. This bankruptcy court is not the proper court to decide these things, because they are not relevant to deciding whether Count III violates the discharge injunction. It does not.
2. Count VIII
As described in more detail in Part III.C of this Opinion, Count VIII seeks reformation of the Security Agreements signed by the Kalabats in 2007. This count obviously is pleaded in support of Counts I and III, which counts are based on the allegation that under the 2007 Security Agreements, the Akouri Parties have a valid lien in the Kalabats' property. If the state court should decide that the naming of the secured party as "Jimmy Akouri" in the Security Agreements would otherwise render the claimed security interests invalid, Count VIII seeks reformation of the Security Agreements, to expressly name the secured party as the James A. Akouri Living Trust.
The Kalabats argue that in seeking such reformation of the 2007 Security Agreements, Count VIII seeks to create a lien that did not exist as of the dates in 2011 when the Kalabats filed their bankruptcy petitions. They argue that this cannot be done, and even if somehow it could be done now, years after the petition dates, the action of the Akouri Parties in seeking such reformation is an effort to collect on an unsecured, pre-petition debt that was *148discharged in their bankruptcy cases. The Court must reject the Kalabats' arguments about Count VIII.
Under Michigan law, reformation is an equitable remedy that makes the language in a written contract or instrument conform to what the court finds was in fact the agreement of the parties. See generally Ross v. Damm , 271 Mich. 474, 260 N.W. 750, 753 (1935) (Under Michigan common law, where a contract or instrument "does not express the true intent of the parties, equity will reform the instrument so as to express what was actually intended."). Reformation does not create a new contract or new rights; it merely recognizes contractual rights that are deemed to have existed from the beginning. For example, in Howell v. State Farm Fire & Cas.Co. , No. 12-14406, 2014 WL 840094 (E.D. Mich. March 4, 2014) the court stated the following:
Reformation does not create a new contract, but rather makes the written manifestation of the parties' original agreement correspond with their intentions. 76 C.J.S. Reformation of Instruments § 100. It follows then that the reformation of a contract relates back to the date the original contract was executed. Lee State Bank v. McElheny , 227 Mich. 322, 198 N.W. 928, 930 (Mich. 1924) ("Reformation relates back to the date of the mortgage."); see also 76 C.J.S. Reformation of Instruments § 101 ("[T]he reformation of an instrument relates back to the time of the original execution of such instrument."); 366 Am.Jur.2d Reformation of Instruments § 9.
Id. at *3.
In this case, the state court could order the type of reformation sought by Count VIII if the court found that the Kalabats and the Akouri Parties all intended, in the 2007 Security Agreements, for the Kalabats to grant a security interest to the James A. Akouri Living Trust, which was the named lender of the $250,000.00 loan that the Kalabats guaranteed in their 2007 Guaranty Agreement, rather than to James Akouri individually. The intent of the parties to grant a security interest to the James A. Akouri Living Trust seems clear from the wording of the Guaranty Agreement signed by these parties, which is described in Part III.A of this Opinion. In any event, if the state court were to make such a finding about the intent of the parties, and reform the Security Agreements accordingly, that would merely confirm the existence and validity, from the beginning, of the security interests that the Kalabats granted to the James A. Akouri Living Trust in their 2007 Security Agreements. Thus, such reformation would not and could not create either a debt or a security interest; rather, such reformation merely would recognize that such debt or security interest had existed all along.
The Kalabats argue that reformation cannot be used post-petition, to convert a prepetition unsecured creditor into a secured creditor. As they put it in their Motions, "[a] party cannot reform a document after the filing of a bankruptcy. The parties' rights are fixed as of the petition date, and an unsecured creditor cannot 'fix' items postpetition so that it can become a secured creditor."21 In support of this argument, the Kalabats cite State Bank of Toulon v. Covey(In re Duckworth) , 776 F.3d 453 (7th Cir. 2014).
The Duckworth case is distinguishable from this case, and it actually supports the position of the Akouri Parties. Duckworth *149was a Chapter 7 case in which the trustee contended that a bank claiming a security interest was actually an unsecured creditor. Pre-petition, the debtor had borrowed $1.1 million from a bank, and had given the bank a promissory note and signed a security agreement. But the security agreement was dated two days before the loan was made and two days before the promissory note was dated and signed. And "[t]he security agreement said that it secured a note 'in the principal amount of $____ dated December 13, 2008 .' " 776 F.3d at 455 (italics in original). By contrast, the promissory note was dated and signed on December 15, 2008, and there was no promissory note dated December 13, 2008. Id. Because of these discrepancies, the Chapter 7 trustee argued that the bank had no security interest, and had to be treated as an unsecured creditor.
The court of appeals agreed with the trustee, based on the trustee's avoiding powers under the so-called strong-arm provisions of 11 U.S.C. § 544(a). Id. at 458. The Duckworth court discussed reformation in this context. The court noted that "[t]he testimony of both the bank officer who prepared the documents and borrower Duckworth makes clear that the bank made a mistake in preparing the security agreement." Id. at 457-58. Then the court stated that "[w]e are confident that the bank would have been able to obtain reformation-even of an unambiguous agreement-against the original borrower if he had tried to avoid the security agreement based on the mistaken date." Id. at 458 (citations omitted). Thus, the court recognized that the bank could have obtained reformation of the security agreement against the bankruptcy debtor (the original borrower), and thereby have secured status. But the court held that the bank could not use reformation, or parol evidence that would support reformation, against the Chapter 7 trustee . This was because unlike the debtor, the trustee had the strong-arm avoidance powers under § 544(a).22 ibr.US_Case_Law.Schema.Case_Body:v1">See id. at 458-59.
In the present cases, unlike Duckworth , the purportedly secured creditor does not seek to use reformation to correct an error in a security agreement against a Chapter 7 trustee , but rather, only against the bankruptcy debtors (the Kalabats). As noted above, the court of appeals in the Duckworth case clearly indicated that the creditor can seek and obtain reformation post-petition against the bankruptcy debtor, notwithstanding § 544(a).
The Chapter 7 trustees in the Kalabats' cases never tried to avoid any security interest. Reformation, as sought by the Akouri Parties in Count VIII, is not foreclosed *150by the Duckworth case, or by any provision of the Bankruptcy Code.
The Kalabats do not have the same strong-arm avoidance powers under § 544(a) as the Chapter 7 trustee. Duckworth itself indicates this, as discussed above. See 776 F.3d at 458. The Chapter 7 debtor's power to use the trustee's powers to avoid liens is granted by Bankruptcy Code § 522(h), 11 U.S.C. § 522(h). But such power is limited by the combination of §§ 522(g) and 522(h), so as to preclude the Chapter 7 debtor's use of the trustee's avoidance power under § 544(a) when the lien at issue was given as a voluntary transfer by the debtor. Sections 522(g) and (h) state:
(g) Notwithstanding sections 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under section 510(c)(2), 542, 543, 550 , 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if -
(1)(A) such transfer was not a voluntary transfer of such property by the debtor; and
(B) the debtor did not conceal such property; or
(2) the debtor could have avoided such transfer under subsection (f)(1)(B) of this section.
(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to the extent that the debtor could have exempted such property under subsection (g)(1) of this section if the trustee had avoided such transfer, if -
(1) such transfer is avoidable by the trustee under section 544 , 545, 547, 548, 549, or 724(a) of this title or recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
11 U.S.C. §§ 522(g), 522(h) (emphasis added). Because the Kalabats' granting of security interests under the 2007 Security Agreements was a voluntary transfer by them, they cannot seek to avoid such transfers using the Chapter 7 trustee's avoidance powers under § 554(a).
For all of the above reasons, the Akouri Parties' reformation count, Count VIII, is not precluded by the Bankruptcy Code, nor is it a violation of the discharge injunction. Rather, it is merely part of the Akouri Parties' effort to enforce the liens that they claim to have had at all times from 2007 on, in the Kalabats' membership interests in Birmingham Property, LLC and in the Kalabats' shares of stock in Waterford Hotel, Inc. Therefore, Count VIII cannot be viewed as an effort by the Akouri Parties to collect on a discharged debt "as a personal liability" of the Kalabats.
3. Counts I and II
Counts I and II are described in detail in Part III.C of this Opinion. Both counts allege a claim that arose on or after October 13, 2015, more than four years after the Kalabats filed their 2011 bankruptcy cases. Count I is based on actions by the Kalabats that allegedly were done on or after October 13, 2015, which the Akouri Parties allege was a wrongful conversion of their collateral rights, based on their security interest in the Kalabats' membership interests in Birmingham Property, LLC. Count II is an unjust enrichment claim that is based on the same actions by the Kalabats alleged in Count I.
These clearly are post-petition claims, and as such they were not discharged in the Kalabats' 2011 bankruptcy cases. As noted earlier, the Kalabats contend that *151the Akouri Parties had no valid lien under the 2007 Security Agreements, and that the claims are meritless in any event because Larry Yaldoo had a lien in the same assets that had priority over any lien held by the Akouri Parties. If the Kalabats are correct about these things, that would give them a valid defense on the merits to Counts I and II. But it does not mean that the Akouri Parties are somehow asserting claims that arose before the 2011 petition dates in these bankruptcy cases. Rather, Counts I and II are post-petition claims that are part of the Akouri Parties' effort to enforce their in rem rights as secured creditors whose liens survived the Kalabats' bankruptcy discharge. Because these are post-petition claims that were not discharged, the assertion of them by the Akouri Parties does not violate the discharge injunction.
4. Count VII
As described in detail in Part III.C of this Opinion, Count VII alleges a breach of contract, based on an agreement allegedly made in May 2015, almost four years after the Kalabats filed their bankruptcy petitions. The Court concludes that this count alleges a claim that arose in or after May 2015, and therefore that it was a post-petition claim that was not discharged in the 2011 bankruptcy cases.
Count VII alleges that the Kalabats made an agreement with the Akouri Parties in May 2015, under which the Kalabats agreed to pay the Akouri Parties $250,000.00 "by May 16, 2016," in exchange for "consideration." The consideration allegedly given for this alleged promise to pay by the Kalabats was the Akouri Parties' release of their lien in the Kalabats' membership interests in Birmingham Property, LLC. After the Akouri Parties released that lien, they say, the Kalabats failed to pay the promised $250,000.00 and repudiated their agreement.
The Kalabats argue that even though this alleged agreement was made in May 2015, it amounts to a "post-discharge promise to pay a prepetition claim" that was discharged,23 and that an attempt to enforce such a promise violates the discharge injunction. In support of this argument, the Kalabats cite Close v. Edison (In re Close ), Adv. No. 03-0153, 2003 WL 22697825 (Bankr. E.D. Pa., October 29, 2003). But that case is quite unlike this case.
In Close , the creditor made an unsecured loan of $35,000 to the debtor, who later filed bankruptcy. The pre-petition unsecured loan was discharged in the debtor's bankruptcy case. Later, the creditor filed suit in state court to obtain repayment of the loan. The debtor then filed an adversary proceeding in the bankruptcy court, alleging that the creditor's lawsuit violated the discharge injunction. One of the creditor's arguments to the bankruptcy court was that the debtor had made several post-discharge oral promises to repay the $35,000 debt. The creditor argued that these promises were valid post-petition agreements under state law, supported by new consideration. But the only alleged new consideration for the debtor's post-discharge promises to pay was "a moral obligation to pay a discharged debt." Close , 2003 WL 22697825, at *7. The creditor cited "several old Pennsylvania cases for the proposition that a post-discharge promise to pay a prior debt can be enforced under Pennsylvania law which recognizes that a moral obligation to pay a *152discharged debt forms sufficient consideration to make the promise binding." Id. (citations omitted).
The court in Close held that where the consideration for a post-discharge promise to pay is in whole or in part a discharged pre-petition debt, the Bankruptcy Code's requirements applicable to reaffirmation agreements, 11 U.S.C. §§ 524(c) and 524(d), must be met in order for the promise to be enforceable. Id. at *8. The court held that seeking to enforce a post-petition promise to pay such a debt without meeting the reaffirmation agreement requirements would violate the discharge injunction. See id. at *9.
The court in Close acknowledged, but distinguished, several reported cases in which a debtor made a post-discharge agreement to pay money in exchange for a secured creditor giving up, in whole or in part, the enforcement of lien rights that survived the bankruptcy discharge. Id. at *8-9. In those cases, Close reasoned, the debtors "entered into valid post-discharge agreements in which they exchanged payment for something of value, neither of which was based 'in whole or in part' on the discharged debt." Id. at *9. Trying to collect on the debt in those cases is not considered to be enforcing a discharged pre-petition debt, but rather is considered to be enforcing a post-petition debt that was not discharged. See id.
In this case, the Akouri Parties allege that in exchange for the Kalabats' May 2015 promise to pay $250,000.00, they agreed to, and did, release their lien in the Kalabats' membership interests in Birmingham Property, LLC, a lien that survived the Kalabats' 2011 bankruptcy cases. That claim, in Count VII, clearly states a post-petition claim that was not discharged in the Kalabats' 2011 bankruptcy cases. The filing and pursuit of that claim by the Akouri Parties therefore did not violate the discharge injunction.
The Kalabats make certain other arguments that could be defenses to Count VII on the merits. These include (1) a denial that they made the May 2015 agreement alleged by the Akouri Parties; and (2) a denial that the lien that the Akouri Parties released was a valid lien. These and other possible defenses are for the state court to decide, not this Court. They do not bear on whether the breach of contract claim in Count VII is a post-petition claim. It is, so it was not discharged.
V. Conclusion
For the reasons stated in this Opinion, the Court concludes that the Akouri Parties have not violated the discharge injunction arising in the Kalabats' bankruptcy cases. So the Court will enter an order in each of these bankruptcy cases, denying the Debtor's Motion.
Docket ## 53, 55, 77, 78, and 80 in Case No. 11-60667; Docket # 85, 87, 109, 111, and 113 in Case No. 11-60831.
An unsigned copy of the first three pages of this promissory note appears in the exhibits attached to the Motions in each case. (Docket # 53 in Case No. 11-60667, Exhibits at pdf pp. 32-34 of 74; Docket # 85 in Case No. 11-60831, Exhibits at pdf pp. 32-34 of 74). The identity of the two borrowers under the $250,000.00 loan and promissory note is stated in the second paragraph on page 1 of the guaranty agreement dated July 3, 2007, which the Kalabats both signed. A copy of that guaranty agreement (the "Guaranty Agreement"), which is titled "Continuing, Joint and Several Guaranty," appears in the exhibits attached to the Motions in each case. (Docket # 53 in Case No. 11-60667, Exhibits at pdf pp. 56-60 of 74; Docket # 85 in Case No. 11-60831, Exhibits at pdf pp. 56-60 of 74).
As stated in footnote 2 above, a copy of the Guaranty Agreement is in the exhibits attached to the Motions in each case. See the record citations in footnote 2, above.
See Guaranty Agreement at p. 1, first and second paragraphs and at p. 3 ¶ 8.
A copy of the two security agreements (the "Security Agreements"), each of which is titled "Membership Interest Security and Pledge Agreement," appear in the exhibits attached to the Motions in each case. (Docket # 53 in Case No. 11-60667, Exhibits at pdf pp. 36-55 of 74; Docket # 85 in Case No. 11-60831, Exhibits at pdf pp. 36-55 of 74).
See also Amended Schedule D (Docket # 31 in Case No. 60667); Amended Schedule D (Docket # 32 in Case No. 11-60831). Copies of these amended Schedules are included in the exhibits attached to the Motions.
This filing date for the state court lawsuit is derived from the docket sheet attached as Exhibit E-1 to the Supplemental Brief filed in each case by the Akouri Parties (Docket # 78 in Case No. 11-60667; Docket # 111 in Case No. 11-60831).
A copy of the Second Amended Complaint is attached to each of the Motions as an exhibit. (Docket # 53 in Case No. 11-60667, Exhibits at pdf pp. 12-22 of 74; Docket # 85 in Case No. 11-60831, Exhibits at pdf pp. 12-22 of 74).
Second Amended Complaint at ¶ 14.
Id. at ¶ 15.
Id. at ¶¶ 27-28.
Id. at ¶¶ 54-55.
Id. at ¶¶ 54, 55, 57.
Docket # 55 in Case No. 11-60667 at 1; Docket # 87 in Case No. 11-60835 at 1.
See Hearing Tr. (Docket # 82 in Case No. 11-60667) at 31, 37-39.
Second Amended Complaint at ¶¶ 60-62.
Voluntary Petition (Docket # 1 in Case No. 11-60667); Discharge Order (Docket # 45 in Case No. 11-60667).
Voluntary Petition (Docket # 1 in Case No. 11-60831); Discharge Order (Docket # 59 in Case No. 11-60831).
Under § 727(b), with certain exceptions not relevant here, the discharge applies to "all debts that arose before the date of the order for relief under this chapter, ...." In these cases, the date of the order for relief under Chapter 7 was the date on which each debtor filed his voluntary Chapter 7 bankruptcy petition. See 11 U.S.C. § 301(b).
Such lien-avoidance provisions include 11 U.S.C. §§ 522(f), 544, 545, 547, 548, and 549.
Motion (Docket # 53 in Case No. 11-60667) at ¶ 27; Motion (Docket # 85 in Case No. 11-60831) at ¶ 27.
Section 544(a) states:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a).
Motion (Docket # 53 in Case No. 11-60667) at ¶ 22; Motion (Docket # 85 in Case No. 11-60831) at ¶ 22. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501702/ | ALAN M. KOSCHIK, U.S. Bankruptcy Judge
Harold A. Corzin, the duly-appointed Chapter 7 trustee (the "Trustee") in the underlying bankruptcy case from which this adversary proceeding arises, has filed a complaint for determination and avoidance of an allegedly preferential transfer involving the Debtor Jason E. Myers (the "Debtor"), Debtor's father-in-law John Thomas ("Mr. Thomas"), and Defendant Emergency Medical Transport, Inc. (the "Defendant"). In the complaint, the Trustee alleges that, while insolvent, the Debtor transferred an interest in property to the Defendant on account of an antecedent debt on or 90 days before the date the Debtor filed for Chapter 7 relief. (Compl. ¶ 4-9). Thus, the Trustee seeks judgment on his complaint for the amount transferred, $3,756.03. (Compl. ¶ 10-11).
Currently before the Court is Defendant's Motion for Summary Judgment ("Motion"). [Docket No. 26] filed on December 22, 2016. The Trustee filed a Response to Defendant's Motion [Docket No. 29] on January 12, 2017, and Defendant filed a Reply in Support of its Motion [Docket No. 30] on January 27, 2017. In its Motion, the Defendant seeks judgment as a matter of law on the Trustee's complaint, arguing that because the transfer at issue did not concern property of the Debtor, it does not constitute an avoidable preferential transfer under 11 U.S.C. § 547. For the following reasons, Defendant's Motion for Summary Judgment will be granted.
JURISDICTION AND VENUE
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334, 157(a), and Local General Order 2012-7 of the United States District Court for the Northern District of Ohio. Venue is proper pursuant to 28 U.S.C. § 1409(a). Actions to determine, avoid, and recover preferences are core proceedings under 28 U.S.C. § 157(b)(1), (b)(2)(A) and (F) and the Court has authority to enter a final judgment.
SUMMARY JUDGMENT STANDARD
In bankruptcy cases, including adversary proceedings, a party may move for summary judgment at any time before 30 days before the initial date set for an evidentiary hearing on any issue for which summary judgment is sought, unless a different time is set by local rule or the court orders otherwise. Fed. R. Bankr. P. 7056 (otherwise incorporating Fed. R. Civ. P. 56 ); see also Fed. R. Bankr. P. 9014(c). When a party so moves, the court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
*174Fed. R. Civ. P. 56(a) ; see also Celotex Corporation v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A Plaintiff movant must establish all essential elements supporting its claim in this fashion; a defendant must establish that any one (or more) essential elements of Plaintiff's claim fails, or establish all elements of one or more of defendant's affirmative defenses, in order to obtain a defense judgment by summary judgment. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Evidence presented in support of summary judgment is viewed in the light most favorable to the non-moving party, "drawing all reasonable inferences in its favor." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). However, if a moving party meets its burden to establish a lack of genuine dispute as to a material fact, the burden then shifts to the non-moving party to "come forward with evidence which would support a judgment in its favor." Celotex , 477 U.S. at 324, 106 S.Ct. 2548 ; Fed. R. Civ. P. 56(e). In responding in this way to a motion for summary judgment, the non-moving party may not rely on a "mere scintilla of evidence" in support of its opposition to the motion. There must be enough evidence presented in which a fact-finder could reasonably find for the non-moving party. Zenith , 475 U.S. at 586, 106 S.Ct. 1348.
UNDISPUTED FACTUAL BACKGROUND
The parties submitted a stipulation of facts for the court to take under advisement. (Docket No. 23). The following undisputed facts are derived from that stipulation, the deposition of the Debtor (Docket No. 28), and the Court's own docket.
On August 7, 2015, the Defendant Emergency Medical Transport, Inc. obtained a judgment against the Debtor in the Canton Municipal Court in the amount of $2,613.19, plus interest and costs, for funds previously advanced in connection with the Debtor having attended paramedic school while employed by the Defendant. One week later, on August 14, 2015, the Defendant sought court-ordered garnishment of funds located in the Debtor's JPMorgan Chase Bank account in order to satisfy the judgment, which the Canton Municipal Court granted and put into effect on August 19, 2015. The Debtor discussed the garnishment with Mr. Thomas shortly thereafter and, per Debtor's sworn deposition, Mr. Thomas "said that he would help us out by forwarding the money or loaning us the money to pay the judgment that was rendered against us in full...." (Docket No. 28, p. 7).
On August 24, 2015, Mr. Thomas-not the Debtor-purchased a cashier's check from PNC Bank, made payable to the Defendant in the amount of $3,756.03. The funds were drawn from Mr. Thomas's personal account and funds. The Debtor then met with Mr. Thomas at the latter's residence and signed his name alongside Mr. Thomas's on the check per the Defendant's counsel's instructions. Later on August 24, the Debtor delivered the cashier's check to the Defendant's attorneys, Day Ketterer Ltd., and received a receipt. The Defendant accepted the cashier's check as record satisfaction of its judgment against the Debtor on August 31, 2015.
The Debtor, along with his wife, Tiffany Myers, filed for Chapter 7 bankruptcy relief on October 7, 2015 and did not list Mr. Thomas as a creditor in their bankruptcy schedules. Trustee Harold A. Corzin was subsequently appointed as acting trustee *175on behalf of the Debtor's estate and filed the complaint underlying this adversary proceeding on June 16, 2016.
LEGAL ANALYSIS
Section 547(b) of the Bankruptcy Code provides:
(b) Except as provided in subsection (c) 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 filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if-
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by provisions of this title.
11 U.S.C. § 547(b) ; see MBNA America Bank, N.A. v. Meoli (In re Wells ), 561 F.3d 633, 634-35 (6th Cir. 2009) ; Chase Manhattan Mortgage Corp. v. Shapiro (In re Lee ), 530 F.3d 458, 463-64 (6th Cir. 2008).
The parties agree that the only issue before the Court on summary judgment is whether the Debtor ever had a property interest in the cashier's check received by the Defendant.
I. The Debtor Did Not Have a Property Interest in the Cashier's Check.
Section 541(a) of the Bankruptcy Code provides that, save for a few exceptions not relevant here, property of a debtor's estate includes "...all legal or equitable interests of the debtor in property as of the commencement of the case." Though " '[w]hat constitutes a transfer and when it is complete' is a matter of federal law," the contours of property rights and what constitutes an interest in property "are creatures of state law" where no federal law controls. Barnhill v. Johnson , 503 U.S. 393, 397-98, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992) (quoting McKenzie v. Irving Trust Co. , 323 U.S. 365, 369-70, 65 S.Ct. 405, 89 L.Ed. 305 (1945) ). Given that the Code does not define "property" or "interest in property," the Court looks to Ohio law as it pertains to cashier's checks and their attendant property interests.
"In construing questions of state law, a federal court must apply state law in accordance with the controlling decisions of the highest court of the state." Brown v. Cassens Transport Co. , 546 F.3d 347, 363 (6th Cir. 2008) (citing Meridian Mut. Ins. Co. v. Kellman , 197 F.3d 1178, 1181 (6th Cir. 1999) ). However, because the Ohio Supreme Court has not directly addressed the property interests implicated by use of a cashier's check in this context, the Court "may use the decisional law of the state's lower courts" in attempting "to ascertain how [the Ohio Supreme Court] would rule if it were faced with the issue." Meridian Mut. Ins. Co. , 197 F.3d at 1181 (citing Grantham & Mann v. American Safety Prods. , 831 F.2d 596, 608 (6th Cir. 1987) ); see also In re Alam , 359 B.R. 142, 147 (6th Cir. BAP 2006).
*176"[A] cashier's check...is an instrument issued by an authorized officer of a bank and directed to another, evidencing the fact that the payee may demand and receive upon endorsement and presentation to the bank the amount stated on the face of the instrument. Such an instrument is paid from the bank's funds, and liability for payment rests solely on the issuing bank." State ex rel. Babcock v. Perkins , 165 Ohio St. 185, 187, 134 N.E.2d 839 (Ohio 1956). Thus, unlike other bearer instruments, only the payee (i.e. the party made payable on the cashier's check) and the issuing bank maintain cognizable property interests in funds dispersed via cashier's check-the payee is entitled to receive the funds and the issuing bank is obligated to disperse them. See , Cross v. Exchange Bank Co. , 110 Ohio App. 219, 221, 168 N.E.2d 910 (Ohio Ct. App. 1958) ("In the purchase from a bank of a...cashier's check, payable on its face to one other than the purchaser, the bank is the drawer, and the person named therein as the recipient of the amount specified to be transferred is the payee or drawee."). In other words, only the designated payee and the issuing bank maintain rights in, and control over, the funds evidenced by a cashier's check. See Id. The purchaser has no right to countermand payment on the instrument unless the transaction implicates fraud, failure of consideration, or payment is enjoined by court order. Id. ; see also Leo Syntax Auto Sales, Inc. v. Peoples Bank & Sav. Co. , 6 Ohio Misc. 226, 215 N.E.2d 68, 70 (Ohio Com. Pl. 1965) ("It is well settled that the purchaser of a cashier's check payable to one other than the purchaser thereof has no right to countermand payment of the instrument after its issue..."); National City Bank v. Citizens National Bank of Southwest Ohio , No. 20323, 2004 WL 2588182, *2 (Ohio Ct. App. November 12, 2004) ; Dayton Area School E.F.C.U. v. Nath , No. 16956, 1998 WL 906397, **4-5 (Ohio Ct. App. September 4, 1998).
With Ohio law regarding cashier's checks and their attendant property interests in mind, the Court turns to federal bankruptcy law in order to determine whether a transfer constitutes an avoidable preference. See Barnhill , 503 U.S. at 397-98, 112 S.Ct. 1386. In order for a transfer to be deemed an avoidable preference under Section 547, the property transferred must have been "property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings." Begier v. I.R.S. , 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) ; see Spradlin v. Jarvis (In re Tri-City Turf Club, Inc. ), 323 F.3d 439, 443 (6th Cir. 2003). Accordingly, a trustee can only pursue "those legal or equitable interests that the debtor would have had at the time of the petition but for the debtor's transfer of those interests." 5 COLLIER ON BANKRUPTCY , ¶ 547.03[2] (16th Ed. 2018) (quoting Glinka v. Bank of Vermont (In re Kelton Motors, Inc. ), 97 F.3d 22, 25 (2nd Cir. 1996) ).
The transfer via cashier's check at issue in this case involved a third party (Mr. Thomas) and a creditor (Defendant). Typically, a transfer of property between a third party and a creditor is not avoidable as a preference unless the transfer "diminish[es] the fund to which other creditors can legally resort [to] for the payment of their debts." Id. Otherwise known as the "diminution of estate" doctrine, a court tasked with determining whether a third party transfer constitutes a voidable preference "asks whether the debtor controlled the property to the extent that he owned it and thus the transfer diminished his estate." Mandross v. People's Banking Co. (In re Hartley ), 825 F.2d 1067, 1070 (6th Cir. 1987). "[A] voidable preference necessarily *177depletes the debtor's estate; without such a depletion, there cannot be a voidable preference." McLemore v. Third Nat'l Bank in Nashville (In re Montgomery ), 983 F.2d 1389, 1394 (6th Cir. 1993) (citing Hartley , 825 F.2d at 1070 ). Further, "where the borrowed funds [at issue] have been specifically earmarked by the lender for payment to a designated creditor, there is held to be no transfer of property of the debtor even if the funds pass through the debtor's hands in getting to the selected creditor." Id. at 1395 (citing Hartley , 825 F.2d at 1070 ).
While there are some factual differences with the present case, the Court finds Hartley to be controlling. In Hartley , the Sixth Circuit found that a third party's loan to a debtor, earmarked for and directly paid to a creditor, did not constitute a voidable preference for purposes of § 547. Hartley , 825 F.2d at 1068. Instead, Hartley held that the trustee could only seek to recover the value of the collateral offered by the debtor as security for the loan at issue. Id. Further, the Hartley panel looked to which party "controlled the disposition of the funds" and found that the debtor only maintained control over the collateral he offered as security, not over the funds loaned. Id. at 1072.
Here, the Court finds that, even construing the facts in favor of the Trustee, the Debtor maintained little or no control over the funds at issue. Significantly, Mr. Thomas had the issuing bank make the cashier's check payable to the Defendant prior to handing it to the Debtor, an act that, under Ohio law, effectively prevented the funds from ever becoming property of the Debtor or his estate. See Cross , 110 Ohio App. at 221, 168 N.E.2d 910 ; Leo Syntax Auto Sales, Inc. , 215 N.E.2d at 70. Upon Mr. Thomas's purchase of the cashier's check, the only two entities with property interests in the check were the named payee (the Defendant) and the issuing bank. Thus, the Defendant's receipt of the cashier's check does not constitute a voidable preference because, even though it "pass[ed] through the debtor's hands in getting to" the Defendant, the cashier's check never became property of the Debtor given that it was clearly earmarked for payment to the Defendant. See Montgomery , 983 F.2d at 1395. Stated differently, the Debtor's estate has not been diminished by Mr. Thomas's payment to the Defendant because, instead of bettering one creditor at the expense of others, "[t]he transaction merely substituted one creditor for another without loss to the estate." Hartley , 825 F.2d at 1070. By obtaining satisfaction of the judgment debt owed the Defendant, the Debtor now owes Mr. Thomas instead of the Defendant,1 to no detriment of other creditors or the Debtor's estate because the funds transferred would not "have been part of the estate had [they] not been transferred before the commencement of bankruptcy proceedings." Begier , 496 U.S. at 58, 110 S.Ct. 2258.
The Trustee's argument based upon Yoppolo v. MBNA America Bank, N.A. (In re Dilworth ), 560 F.3d 562 (6th Cir. 2009) that the Debtor exerted sufficient control over the funds dispersed via cashier's check is unpersuasive. Unlike the case at hand, where the Debtor delivered to the Defendant a cashier's check drawn from a third party's bank account, the transfer at issue in Dilworth concerned a debtor's balance transfer between two personal credit cards in her name. 560 F.3d at 563. Put simply, Dilworth did not involve a true *178third party transfer and is thus largely inapplicable to the case at bar.
The Trustee asserts that Mr. Thomas would have paid whichever creditor the Debtor chose and that, accordingly, the Debtor "exercised total control" over the funds transferred. However, this argument relies on an unsupported presumption. The Court finds the Trustee's assertion of the Debtor's control to be unconvincing because it involves evidentiary inferences that are wholly unsupported by the record, particularly in light of the Debtor's sworn testimony that Mr. Thomas "said he would help us out...." (Docket No. 28, p. 7); see Dilworth , 560 F.3d at 565 (noting that the defendant bank "never claimed...that anyone other than [the debtor] made" the decision to make the transfer then at issue). Plaintiff has proffered no evidence to create a genuine issue of material fact that would allow the Court to find that Mr. Thomas was coerced or forced by the Debtor into paying the Defendant, such that the Debtor exercised sufficient indirect control over the cashier's check to make the transfer avoidable as a preference.
CONCLUSION
Mr. Thomas's payment and satisfaction of the Debtor's judgment debt via cashier's check did not constitute an avoidable preferential transfer of property because at no point during the transaction did the funds at issue become property that would have been property of the Debtor's estate had the transaction not occurred. Accordingly, because there was never a point where the funds transferred would have become property of the Debtor's Chapter 7 estate if he had filed earlier, they fall outside the purview of the Trustee's avoidance powers and the Defendant is entitled to judgment as a matter of law on the Trustee's complaint.
The Court will enter a separate form of judgment granting the Motion for Summary Judgment consistent with this Memorandum Decision. The Court's Order granting the Motion for Summary Judgment will not be deemed entered until the separate form of Order has been docketed by the Clerk.
IT IS SO ORDERED.
The Court recognizes that the Debtor did not list Mr. Thomas in his Petition and Schedules. However, this fact is irrelevant to whether the cashier's check payment constituted a preference. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501703/ | Jeffery P. Hopkins, United States Bankruptcy Judge
Presently before the Court is the Debtor Lori Smallwood's (the "Debtor") Motion to Vacate Order of Dismissal ("Motion to Vacate") (Doc. 172) and FV-1, Inc.'s ("FV-1") corresponding Objection (Doc. 175). Initially, Trustee Margaret Burks (the "Trustee") also objected. (Doc. 173). However, during the hearing, the Trustee suggested that she would not oppose the Motion to Vacate. After the hearing, the Debtor submitted a Brief in Support of the Motion to Vacate (Doc. 197) and FV-1 submitted its Response (Doc. 198). Thus, the Debtor's Motion to Vacate is squarely before the Court to decide on the merits.
SUMMARY OF FACTS
The Mortgage and Note
On February 12, the Debtor and her former spouse, Kenneth Smallwood, became owners of real property located at 2122 North Gath Road, Sardinia, Ohio (the "Property"). See Adversary Case 13-ap-01001, Doc. 28, Exhibit A. On February 16, 2007, Kenneth Smallwood signed a promissory note payable to Fifth Third Mortgage Company ("Fifth Third") in the amount of $84,525.00 (the "Note"). See 13-ap-01001, Doc. 28, Exhibit A-1. The Debtor did not sign the Note. On February 16, 2007, the Debtor and Kenneth Smallwood executed a mortgage (the "Mortgage") for the Property.1 See 13-ap-01001, Doc. 28, Exhibit A-4. The Mortgage was recorded on June 8, 2007, in the Highland County, Ohio Recorder's Office, Book 674, Page 932-936. See 13-ap-01001, Doc. 28.
On May 9, 2012, Kenneth Smallwood transferred his interest in the Property to the Debtor by quit-claim deed in accordance *181with the terms of a divorce decree issued by the Highland County Court of Common Pleas, Domestic Relations Division. See 13-ap-01001, Doc. 28, Exhibit A-3. On June 18, 2012, Fifth Third filed a foreclosure action in the Highland County Common Pleas Court against the Debtor for defaulting on the Mortgage. See 13-ap-01001, Doc. 28. The Debtor subsequently filed for Chapter 13 relief.
Procedural History
The procedural history of this case is somewhat convoluted but important to understanding the Court's decision.
On August 8, 2012, when the Debtor filed her petition2 seeking bankruptcy relief (Doc. 1), she included with it a Chapter 13 plan. (Doc. 7). Section 30 of the plan provided:
THE PURPORTED MORTGAGE ON THE [PROPERTY] IN FAVOR OF FIFTH THIRD BANK ("CREDITOR"), ITS PREDECESSORS, SUCCESSORS OR ASSIGNS,...SHALL BE AVOIDED AND PAID AS A GENERAL UNSECURED CLAIM UPON THE TIMELY FILING OF A PROOF OF CLAIM. THE PURPORTED MORTGAGE WAS DEFECTIVELY ACKNOWLEDGED AND NOT ENTITLED TO BE OF RECORD DUE TO ITS IMPROPER ACKNOWLEDGMENT AND THEREFORE SHALL BE AVOIDED PURSUANT TO IN RE NOLAN, 365 B.R. 804 (BANKR.S.D.OHIO 2007). DEBTOR'S COUNSEL OR THE CHAPTER 13 TRUSTEE WILL FILE AN ADVERSARY PROCEEDING TO AVOID THIS MORTGAGE.
(Doc. 7). On September 21, 2012, Fifth Third filed an Objection to Confirmation of Plan, asserting that its claim was fully secured by value in the Property. (Doc. 22). On October 5, 2012, Specialized Loan Servicing LLC, as agent for Fifth Third, filed a proof of claim. See Claim No. 7. Fifth Third's proof of claim shows a total debt amount of $85,733.68. (Claim No. 7, Doc. 7-1).
On December 5, 2012, Trustee Margaret Burks (the "Trustee") filed an Objection to Confirmation of Plan. (Doc. 33). The Trustee objected to the plan, in part, because she questioned the ability of the Debtor to avoid Fifth Third's Mortgage on the Property. (Doc. 33). On January 1, 2013, the Debtor filed adversary case 1:13-ap-01001, seeking to avoid the Mortgage through a declaratory judgment (the "Adversary Proceeding"). (13-ap-01001, Doc. 1). On January 7, 2013, the Debtor and Fifth Third entered an Agreed Order Conditionally Resolving Objection to Confirmation of Plan stating the Adversary Proceeding was the appropriate mechanism for determining the validity of Fifth Third's claim. (Doc. 43). As part of the Agreed Order, Fifth Third withdrew its Objection to Confirmation of Plan. The Trustee subsequently withdrew her Objection to Confirmation of Plan. (Doc. 41), and the plan was confirmed on January 8, 2013. (Doc. 44).
On October 5, 2015, the Court issued its opinion on the adversary complaint. (13-ap-01001, Doc. 36). In its ruling, the Court determined that Fifth Third held no lien against the Property. See 13-ap-01001, Docs. 36 and 37. The Adversary Proceeding was closed on October 27, 2015. For the next two years the Debtors' Chapter 13 plan proceeded with some of the normal disruptions experienced by debtors struggling *182to make plan payments until she finally defaulted on her payments.3
The Present Motion and Proceedings
On May 18, 2017, the Debtor's Chapter 13 case was dismissed for failure to make plan payments (the "Dismissal") (Doc. 169). On May 23, 2017, the Debtor filed the Motion to Vacate Order of Dismissal presently before the Court (the "Motion"). (Doc. 172). Both the Trustee and Fifth Third objected to the Motion. See Docs. 173 and 175, respectively. On May 31, 2017, FV-14 filed a Supplemental Objection to the Motion. (Doc. 176).
On July 27, 2017, a hearing was held on the Motion.5 Following the hearing, the Debtor submitted her Brief in Support of Motion to Vacate (Doc. 197), to which FV-1 submitted a Response. (Doc. 198). The Court must now decide whether to grant the Debtor's Motion to Vacate Order of Dismissal under the standards established by F. R. Civ. P. 60(b), made applicable to this proceeding pursuant to Fed. R. Bankr. P. 9024.
Parties' Positions
I. Debtor's Argument
The Debtor's initial written Motion did not cite any legal authority. (Doc. 172). Rather, the Debtor asked the Court to vacate the Dismissal for non-payment because she "suffered a temporary increase in extraordinary living expenses due to funeral costs and expenses of her child's father." (Doc. 172). Subsequent to the evidentiary hearing held on July 27, 2017, the Debtor filed her Brief in Support of Motion to Vacate (the "Brief"). (Doc. 197). In the Brief the Debtor argues: (I) that FV-1 lacks standing to object to the Debtor's Motion; (ii) that the Motion should be granted under Rule 60(b)(1) ; and (iii) that if relief under Rule 60(b)(1) is unavailable, the Motion should be granted under Rule 60(b)(6) for reasons of equity.
II. FV-1's Argument
FV-1 has objected the Debtor's Motion to Vacate on several grounds. Specifically, FV-1 argues: (I) that the Debtor's Motion is improper because she did not appeal the dismissal; (ii) that it has standing to bring the Objection because it is a party with a pecuniary interest; and (iii) that the Debtor has provided insufficient evidence for this Court to provide relief under Rule 60(b). (See Motion to Vacate Hearing, July 27, 2017; Docs. 176 and 198). Subsequent to the Dismissal, FV-1 filed a foreclosure action in the Court of Common Pleas for Highland County, Ohio. See Doc. 198.
LAW
Timing of Motion to Vacate
The Supreme Court has determined that a motion for relief under Rule 60(b) cannot be granted if the movant did not first file an appeal and the time to appeal has expired. See Ackermann v. United States , 340 U.S. 193, 71 S.Ct. 209, 95 L.Ed. 207 (1950). Importantly, this case does not state that an appeal must first be filed if the appeal period has not elapsed. Federal courts have consistently ruled that it is not necessary to appeal a decision before filing a Rule 60(b) motion if the *183appeal period has not expired. As one appeals court observed:
At the time of filing the motion for relief, [the movant] could in the alternative have launched a direct appeal from the dismissal. 9 Wright & Miller, Federal Practice and Procedure: Civil § 2376 (1971). In doing what he did here, it would appear that he followed what we deem ordinarily to be the better practice of bringing to the attention of the trial court at some appropriate time before appeal the errors which it is claimed have been committed. The [trial court] already familiar with the case is thereby given an opportunity to correct any mistakes it might have made and the parties will avoid the expenses and delays involved in appeals.
Beshear v. Weinzapfel , 474 F.2d 127, 130 (7th Cir. 1973). As the Seventh Circuit noted in Beshear , it is actually better practice for counsel of the losing party to file a Rule 60(b) motion prior to an appeal if the appeal period has not elapsed to avoid the added expense and delay of an appeal. Id.
Federal Rule of Bankruptcy Procedure 8002 provides the time for filing notice of appeal. Rule 8002(a)(1) provides: "Except as provided in subdivisions (b) and (c), a notice of appeal must be filed with the bankruptcy clerk within 14 days after entry of the judgment, order, or decree being appealed." Therefore, if the Debtor did not file the Motion within fourteen days of the dismissal, the Motion must be denied on procedural grounds because the appeal time will have already run.
In the case at bar, the Order of Dismissal was entered on May 18, 2017. The fourteen-day appeal period ran until 11:59 p.m. on June 1, 2017. The Debtor filed the Motion on May 23, 2017. As such, the Motion was clearly filed within the fourteen-day period. Thus, the Debtor's Motion to Vacate was timely under the rules.
Standing
Next, Debtor argues that FV-1 does not have standing to bring the Objection because it is not a creditor and it does not have a "pecuniary interest." FV-1, on the other hand, contends, that it does have a pecuniary interest because the decision on this Motion affects its financial interest. The Court need not decide the standing issue, however, because of its decision to grant relief from judgment in this case under Rule 60(b)(6). Therefore, for purposes of this Opinion, the Court will assume that FV-1 does have standing to prosecute the Objection to the Motion to Vacate.
Federal Rule Civil Procedure 60(b)
As discussed, bankruptcy courts are authorized to set aside case dismissal orders under Rule 60(b). In re Geberegeorgis , 310 B.R. 61, 66 (6th Cir. BAP 2004). "[A] party seeking relief from a judgment or an order under Rule 60(b) 'bears the burden of establishing that its prerequisites are satisfied.' " In re Gundrum , 509 B.R. 155, 159 (Bankr. S.D. Ohio 2014), citing In re Brown , 413 B.R. 700, 705 (6th Cir. BAP 2009). In addition, the movant must establish the basis for relief under Rule 60(b) by clear and convincing evidence. Info-Hold, Inc. v. Sound Merch., Inc. , 538 F.3d 448, 454 (6th Cir. 2008).
The Debtor argues that she is entitled to relief under Rule 60(b)(1) or (6). Rule 60(b), in relevant part, provides:
On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; ... or (6) any other reason that justifies relief.
These two subsections are mutually exclusive. See *184In re Jarvis , 405 B.R. 611, 614 (Bankr. N.D. Ohio 2009). Consequently, the Court must separately analyze both.
I. The Debtor is not entitled to relief under Rule 60(b)(1).
Rule 60(b)(1) permits vacating dismissals due to "mistake, inadvertence, surprise, or excusable neglect." Relief under Rule 60(b)(1) is "intended to provide relief to a party in only two instances: (1) when the party has made an excusable litigation mistake or an attorney in the litigation has acted without authority; or (2) when the judge has made a substantive mistake of law or fact in the final judgment or order." Cacevic v. City of Hazel Park , 226 F.3d 483, 490 (6th Cir. 2000) (citations omitted).
The Debtor contends that she made a "mistake" by trusting that her employer would follow the Court's payroll deduction order. The Court is not persuaded that this is the type of mistake that Rule 60(b)(1) was meant to address. The alleged mistake in these proceedings did not transpire from the actions of an attorney or trial judge. Nor is this the kind of excusable litigation mistake by a party which falls under the rubric of Rule 60(b)(1). The plain language of the Rule 60(b)(1) does not extend to the actions of individuals or entities who are not parties, in this case the Debtor's employer.
Accordingly, the Debtor is not entitled to relief under Rule 60(b)(1).
II. The Debtor is entitled to relief under Rule 60(b)(6).
The United States Bankruptcy Appellate Panel of the Sixth Circuit has held that: " Rule 60(b)(6) authorizes vacation of a judgment or order if a court determines, in its sound discretion, that substantial justice would be served if relief were granted." In re Geberegeorgis , 310 B.R. 61, 69 (6th BAP 2004), citing Cincinnati Ins. Co. , 151 F.3d 574, 578 (6th Cir. 1998). Relief under Rule 60(b)(6) is only warranted in "exceptional or extraordinary circumstances" that Rules 60(b)(1)-(5) do not address. Liljeberg v. Health Servs. Acquisition Corp. , 486 U.S. 847, 863, 108 S.Ct. 2194, 100 L.Ed.2d 855 (1988) ; Olle v. Henry & Wright Corp. , 910 F.2d 357, 365 (6th Cir. 1990). The Sixth Circuit has defined "exceptional or extraordinary circumstances" to mean "unusual and extreme situations where principles of equity mandate relief coupled with a showing that absent relief, extreme and undue hardship will result." Valvoline Instant Oil Change Franchising, Inc. v. Autocare Associates, Inc. , No. 98-5041, 1999 WL 98590, at *3 (6th Cir. 1999) (citations omitted).
For the reasons that follow, the Court finds that both equity and the avoidance of extreme undue hardship warrant relief under Rule 60(b)(6). At the outset, the Court recognizes that many cases summarily reject the use of Rule 60(b)(6) as a mechanism for seeking relief from judgment by a party.6 However, a number of cases also have relied on Rule 60(b)(6) in granting relief for reasons of equity.7 In one such case, a bankruptcy court granted relief because of a subsequent decrease in the debtor's expenses and increase in earning potential.8 See *185In re Timmons , 479 B.R. 597 (Bankr. N.D. Ala. 2012). The Timmons court found that the debtor's change in circumstances warranted relief under Rule 60(b)(6), which "is reserved for instances of genuine injustice." Id. , at 609. In so holding, the court found, under the facts presented, that "[t]he debtor and his children should be given this extra chance and should be allowed to remain in their home, so long as they continue to make monthly mortgage payments." Id. The Timmons court also granted a temporary injunction to prevent a creditor from foreclosing on the debtor's residence. Id.
This Court agrees with the rationale expressed in Timmons. Undergirding our nation's bankruptcy laws is the notion that an "honest but unfortunate debtor" ought to be given an opportunity at a "fresh start." See Marrama v. Citizens Bank of Massachusetts , 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). The Court believes that the Debtor should receive a second chance at obtaining the fresh start which the bankruptcy laws have been promulgated to achieve. The Court also finds that the facts in this case presents one of those rare instances where relief under Rule 60(b)(6) is warranted in order to prevent a "genuine injustice" and an undue hardship.
Here, the Debtor lives in a house with her adult son who has special needs and. three minor children. As previously noted, the Debtor's house will surely be foreclosed upon if the protections of the bankruptcy court are removed, given the actions already taken by FV-1 in state court. The Debtor testified credibly that she spent $500 and lost roughly six hours of work for which she did not get paid searching for a guardianship for her special needs son. This added expense was partially responsible for the Debtor's missed plan payment.
More troubling to the Court is the fact that the Debtor, without the Court's permission, incurred $10,0009 to cover the funeral expenses of her child's father. While the Debtor was not legally obligated to undertake those costs, it must be acknowledged that the death of her ex-spouse was beyond her control. Moreover, based on the Debtor's testimony, it appeared that she was sincere and felt morally obligated to assist with her child's father's funeral arrangements to ensure that he received a decent burial. The Court is hesitant to find culpability in the Debtor's decision under these circumstances, especially in light of other factors present which demonstrate the Debtor's sincerity in attempting to repay her creditors.
The Court notes that since the dismissal of her bankruptcy case, the Debtor has increased her income by taking on a second job. By taking the second job, the Debtor now can afford to make the payments in the proposed modified plan that her attorney recently filed on her behalf. (Doc. 186). According to the Trustee, if approved, the Debtor's plan as modified "could complete [ ] within five years of *186confirmation and the Debtor has paid $3,230 since her case was dismissed."10 Importantly, also, the Debtor's plan is 69% complete. In the interest of justice, the Debtor ought to have a chance to see her modified plan to completion.
Under the totality of the circumstances, the Court finds that this is one of those rare instances in which it should exercise its discretion for equitable reasons to allow the Debtor another opportunity. Absent the relief available under Rule 60(b)(6), the Debtor and her children will likely suffer an extreme and undue hardship precipitated by the foreclosure of their home. The Debtor has met her burden of demonstrating by clear and convincing evidence that exceptional and extraordinary circumstances exist. The Court believes that denying the Motion would work a substantial injustice and extraordinary hardship upon the Debtor. If the Debtor later defaults on the modified plan and the case is dismissed FV-1 will be no worse off and can return to state court to complete the foreclosure.
Accordingly, relief under Rule 60(b)(6) is appropriate.
Conclusion
Based on the foregoing, the Motion to Vacate (Doc. 172) is hereby GRANTED under Fed. R. Civ. P. 60(b)(6). The Order of Dismissal of Debt Adjustment Plan (Doc. 169) is hereby vacated pursuant to the terms of this order. A hearing on the Motion to Modify Plan (Doc. 186) filed by Debtor and the Objection (Doc. 190) filed by FV-1 is hereby reset for December 1, 2017 at 10:00 AM. All other terms and conditions expressed in this Court's Order to Set Hearing on Debtor's Motion to Modify Plan (Doc. 191), entered on July 20, 2017, shall apply at the rescheduled hearing. Counsel for the parties should govern themselves accordingly.
IT IS SO ORDERED.
The notary acknowledgment clause on page three of four of the Mortgage only includes the signature of Kenneth Smallwood. (Doc. 28). The Mortgage does not contain a certification of a notary public, or other appropriate state official, acknowledging the Debtor's act of signing the Mortgage, as required under Ohio Law at O.R.C. § 5301.01(A). (Doc. 28). It should also be noted that the Mortgage was recorded out of order; page four of four is actually the second page of the recorded Mortgage.
The case was originally assigned to Judge Perlman. However, on August 29, 2016, the case was reassigned to this Court. (Doc. 126).
The Trustee previously filed five motions to dismiss for the Debtor's failure to make plan payments. See Docs. 49, 65, 78, 107, and 154. However, the parties either entered agreed orders or the Trustee withdrew the motions on each occurrence. See Docs. 59, 69, 83, 121, and 160, respectively.
FV-1 became the holder of the Note through assignment.
Prior to the hearing, the Debtor submitted a Motion to Modify Plan to serve as evidence that the plan could complete within five years. (Doc. 186).
See In re Jarvis , 405 B.R. 611 (Bankr. N.D. Ohio 2009) ; In re Ausmus , 2016 WL 1268301 (W.D. Ky. 2016) ; In re Jawa , Bk. No. 13-25539, 2015 WL 8033762 (9th Cir. BAP 2015).
See In re Long , 22 B.R. 152 (Bankr. D. Me. 1982) ; In re Edwards , 236 B.R. 124 (Bankr. D. N.H. 1999) ; In re Kwiatkowski , 2005 WL 2860329 (Bankr. E.D. Pa. 2005).
The creditor was granted relief from the automatic stay because the debtor was not making mortgage payments. His case was eventually dismissed, in part, because he had filed two previous bankruptcies seeking protection on the same property. However, after the dismissal, the debtor's son moved out of his home to attend college, resulting in a decrease in living expenses. The debtor's business was also awarded a lucrative new contract, resulting in an increase in his revenue. This change allowed the debtor to make the necessary payments subsequent to his case's dismissal.
The Debtor testified that she and her son paid the funeral costs. It is unclear from the testimony or the Brief how much of the $10,000 she contributed.
Frank DiCesare spoke on behalf of the Trustee at the hearing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501705/ | TIMOTHY A. BARNES, Judge.
Before the court is Trustee Marilyn O. Marshall's Objection to Confirmation [Dkt.
*197No. 37] (the "Objection") brought by the chapter 13 trustee (the "Chapter 13 Trustee") in opposition to an amended Chapter 13 Plan dated February 13, 2018 [Dkt. No. 31] (the "Plan") presented by Larry Shelton, the debtor in the above-captioned case (the "Debtor").
The Chapter 13 Trustee objects to the Plan insofar as it is structured to provide payments to a secured creditor beginning as minimal, adequate protection payments and thereafter stepping up those payments to a more fulsome amount-a so-called "step" plan. Here, the increase in payments occurs when payments to the Debtor's counsel, The Semrad Law Firm, LLC ("Semrad"), are scheduled to be complete. The Chapter 13 Trustee alleges that such a payment structure violates the express requirements of chapter 13 plans, exists solely to benefit Semrad and is proposed in bad faith.
For the reasons more fully stated below, the court agrees. The Objection will be sustained and confirmation of the Plan denied.
JURISDICTION
The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1) & (c). Instead, the bankruptcy court must "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." 28 U.S.C. § 157(c)(1).
In addition to the foregoing considerations, a bankruptcy judge must also have constitutional authority to hear and determine a matter. Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or where the matter is either one that falls within the public rights exception, id. , or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g. , Wellness Int'l Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (parties may consent to a bankruptcy court's jurisdiction);
*198Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").
Matters involving confirmation of a debtor's chapter 13 plan may only arise in a bankruptcy case, concern the administration of the bankruptcy estate and are, thus, within the court's core jurisdiction. 28 U.S.C. § 157(b)(2)(A), (L) ; In re Williams , 583 B.R. 453, 455 (Bankr. N.D. Ill. 2018) (Hunt, J.) ("Matters relating to confirmation of a plan are core proceedings under 28 U.S.C. § 157(b)(2)(L)."). The matter is therefore core and within the court's jurisdiction. The Debtor has submitted itself to this core jurisdiction and authority by bringing the above-captioned case.
As a result, this court has jurisdiction, statutory authority and constitutional authority to hear and determine this matter.
PROCEDURAL HISTORY
In considering the Objection, the court has considered the Plan, the prior plans presented by the Debtor, National Form B113 (the "National Plan") upon which each plan was based1 and the Debtor's Response to Trustee's Objection to Confirmation [Dkt. No. 45] (the "Response").
On December 7, 2017, the Debtor presented its original Chapter 13 Plan [Dkt. No. 13] (the "Original Plan").2 The Original Plan contained a provision with an effect similar to the one at issue in the Plan, though with substantially different language used to obtain that effect. See Original Plan § 8.1.
On January 25, 2018, the court conducted the first of four confirmation hearings in this matter (collectively, the "Hearings"), at the time considering the Original Plan. Early in the Hearings, the Chapter 13 Trustee voiced concerns over nonstandard provisions in the Debtor's plans. While the Debtor revised the Original Plan when filing the Plan at issue here, the problematic effect of the nonstandard provisions remains unchanged.
Early in this case Semrad, the Chapter 13 Trustee and the court were also actively engaged in a similar matter, wherein Semrad and other chapter 13 debtors' counsel attempted to change the priority scheme in chapter 13 plans to permit counsel to be paid ahead of other creditors. See In re Gilliam , 582 B.R. 459, 470-75 (Bankr. N.D. Ill. 2018) (Barnes, J.). Because objections to plans must be in writing, see Fed. R. Bankr. P. 3015(f), and because the matters herein turned, at least in part, on the issues in Gilliam , the court continued the matter for an objection to be filed and for Gilliam to be decided.
After the Objection was filed, a briefing schedule was set and, as later modified, complied with by the parties. The Gilliam decision having been rendered on March 28, 2018, after the matter was fully briefed, the court conducted a final confirmation hearing on the Plan. At that hearing on *199May 10, 2018, the matter was taken under advisement.
The court has taken into consideration all of the foregoing, as well as the arguments of the parties at the Hearings. The court has taken judicial notice of the contents of the docket in this case. See Levine v. Egidi , Case No. 93C188, 1993 WL 69146, at *2 (N.D. Ill. Mar. 8, 1993) (authorizing a bankruptcy court to take judicial notice of its own docket); In re Brent , 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 1989) (Goldgar, J.) (recognizing same).
Having considered all of the foregoing, this Memorandum Decision constitutes the court's determination of the matters under advisement.
DISCUSSION
The matter before the court is one of several similar matters recently brought before the bankruptcy courts in this District, wherein counsel for chapter 13 debtors seek to manipulate the priority and payment schemes set forth in chapter 13 cases in order to ensure such counsel's payments. While not the only firm engaging in such practices, Semrad, the counsel herein, has led the way in this behavior.
In the Gilliam matter noted above, Semrad sought to alter the priority scheme in chapter 13 plans to afford Semrad payment in advance of those payments to which it would otherwise be entitled. Gilliam , 582 B.R. at 470-75. In Gilliam and fifty other cases determined by the court concurrently therewith, the court found that Semrad's changes to the priority of payments under chapter 13 plans were solely for Semrad's benefit and potentially harmful to Semrad's clients' interests. Id. As a result, and because Semrad could demonstrate neither client consent nor full disclosure to the court of this self-dealing, the court reduced Semrad's compensation and imposed rigid disclosure requirements of any similar agreements going forward. Id. at 475-77.3
As noted, it is not just Semrad engaging in this behavior before the undersigned. See, e.g. , In re Williams-Hayes , Case No. 17bk27961, 2018 WL 2207897, at *1-5 (Bankr. N.D. Ill. Mar. 28, 2018) (Barnes, J.). Further, it is not just the undersigned that has been required to address these issues. See, e.g. , In re Miceli , 587 B.R. 492, 495 (Bankr. N.D. Ill. 2018) (Lynch, J.) (reduced payments on secured claims); In re Carr , 584 B.R. 268, 275 (Bankr. N.D. Ill. 2018) (Thorne, J.) (same); Williams , 583 B.R. at 456-57 (same); In re Jimmar , Dkt. No. 88, Case No. 17bk11666 (Bankr. N.D. Ill. filed Apr. 13, 2017) (Hunt, J.) (unpublished) (compensation in light of altered priority).
Further, the broader question of law presented herein-reduction of payments to secured creditors under a chapter 13 plan-is also not an issue of first impression in this District, though the courts disagree on the propriety of such practice. Miceli , 587 B.R. at 502 (sustaining objection); Carr , 584 B.R. at 275 (overruling objection); Williams , 583 B.R. at 458 (sustaining objection); In re Hernandez , Case No. 08bk72148, 2009 WL 1024621, at *6 (Bankr. N.D. Ill. Apr. 14, 2009) (Barbosa, J.) (overruling objection); In re Marks , 394 B.R. 198, 201 (Bankr. N.D. Ill. 2008) (Cox, J.) (overruling objection).
In order to understand this variation and the parties' positions, it is necessary to first understand what exactly the Plan proposes.
*200After having done so, the court will consider the Objection in full, including the standing of the Chapter 13 Trustee in this matter.
THE DEBTOR'S "STEP" PLAN
The Plan presented to the court by the Debtor is what is known locally as a step plan. Step plans are plans that set artificially low payments to secured creditors for a period of time immediately following the plan's confirmation, then stepping up those payments to a more fulsome amount later in the term of the plan. During this period, the debtor's payments to the Chapter 13 Trustee remain unchanged.
In cases such as this one, where the step is included for the counsel's benefit, the lower initial amount theoretically frees up funds to pay the debtor's counsel, which allows counsel's fees to be paid more quickly. After counsel fees are paid, the amount paid to the secured creditors increases. There are other, more legitimate, uses of step plans. For example, a debtor might seek to reduce payments to secured creditors for a period to allow multiple secured debts to be paid prior to the maturity of one or more of those debts, then step up payments after the mature debts are no longer being paid.
Disregarding the effect of the step for the moment, the Debtor's Plan requires him to pay $900.00 per month for 60 months to the Chapter 13 Trustee. Plan, at § 2.1. The Plan sets distributions from those plan payments to nonmortgage secured creditors as follows: Ally Financial in the amount of $166.00 per month for a car; and American First Financial in the amount of $20.00 per month for furniture. Plan, at § 3.3.
The step is implemented with the following nonstandard plan provisions:
1. Commencing with the 11/2018 plan payment, Ally Financial will receive set payments in the amount of $775.00 per month.
2. Ally Financial will receive pre-confirmation adequate protection payments in the amount of $166.00 per month.
3. Commencing with the 11/2018 plan payment, American First Financial will receive set payments in the amount of $104.00 per month.
Plan, at § 8.1; see also Plan, at § 1.3 (checking the "Included" box for nonstandard Plan provisions). The net effect of these provisions is that both Ally Financial and American First Financial (the "Secured Creditors") will receive reduced payments at the outset of the Plan ($166.00 and $20.00, respectively),4 which payments will step up to higher payments in November 2018 ($775.00 and $104.00, respectively). The difference of $693.00 (the sum of the initial payments minus the sum of the subsequent payments) per month would presumably then be made available to pay Semrad's counsel fees.
In considering the Objection, the court is mindful that the burden here lies with the Debtor, as the proponent of the plan. In re Love , 957 F.2d 1350, 1354-55 (7th Cir. 1992). In Love , the Seventh Circuit was presented with a motion to dismiss under section 1307, but the parties disagreed over whether it was the movant or the debtor who bore the burden of showing that the case was commenced in good faith. Id. at 1353-55. The Seventh Circuit compared and contrasted the duties of showing good faith under sections 1307 and 1325 and in so doing observed *201that case law with respect to section 1325 generally, see, e.g. , Hardin v. Caldwell (In re Caldwell ), 895 F.2d 1123, 1226 (6th Cir. 1990) ; Chinichian v. Campolongo (In re Chinichian ), 784 F.2d 1440, 1443 (9th Cir. 1986) ; In re McKissie, 103 B.R. 189, 191 (Bankr. N.D. Ill. 1989) (Squires, J.), and the wording of section 1325(a)(3) specifically, 11 U.S.C. § 1325(a)(3) ("has been proposed in good faith"), provide that the burden under section 1325 is on the plan proponent. Love , 957 F.2d at 1355.5
In furtherance of that burden, the Debtor has made legal arguments but has offered no reorganization purpose underlying the step payments. Nonetheless, neither of the Secured Creditors has objected to this treatment. The Chapter 13 Trustee has objected, however, and it is to that Objection that the court now turns.
THE CHAPTER 13 TRUSTEE'S OBJECTION
The Chapter 13 Trustee objects to the Plan on three separate grounds, as follows: (1) alleged noncompliance with section 1325(a)(5)(B)(iii) of the Bankruptcy Code ; (2) alleged lack of good faith under section 1325(a)(3) of the Bankruptcy Code ; and (3) alleged noncompliance with section 1325(a)(1) of the Bankruptcy Code.
The Chapter 13 Trustee's Objection calls into question the propriety of step plans, especially where that step exists solely for the benefit of a debtor's counsel. The court will investigate each of the Chapter 13 Trustee's arguments, in turn.
A. 11 U.S.C. § 1325(a)(5)
The Chapter 13 Trustee's first objection relies on section 1325(a)(5) of the Bankruptcy Code, one of a series of confirmation requirements set forth in section 1325(a). A chapter 13 plan may not be confirmed under this section, unless
(5) 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 *202adequate protection during the period of the plan; or
(C) the debtor surrenders the property securing such claim to such holder
11 U.S.C. § 1325(a)(5) (emphasis added).
The purpose of section 1325(a)(5)(B)(iii)(I) is not set forth in the statute and the legislative history is silent. In re Benedicto , 587 B.R. 573, 576-77 (Bankr. S.D. Fla. 2018). In Benedicto , the court stated:
Judge Carr astutely observes that the legislative history on this particular Bankruptcy Code provision is thin. In re Cochran , 555 B.R. at 901-905. The only congressional report on the amendment to section 1325 is House Report No. 109-31(I) (the "House Report"), which was issued "to accompany [BAPCPA]." H.R. REP. NO. 109-31(I), at 1 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 88. The House Report's discussion of reforms dealing with abuse is notably silent on the issue of balloon payments to restructure mortgage debt in chapter 13 plans. The sections on "Protections for Creditors - In General" and "Protections for Secured Creditors" also say nothing about balloon payments for mortgage cures or modifications. H.R. REP. NO. 109-31(I), at 16-17 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 102-03. Judge Carr accurately notes that "the only formal legislative history" on section 1325(a)(5)(B)(iii)(I), the House Report, "merely echoes the wording of the subsection, without any insight as [to] the purpose of its enactment." In re Cochran , 555 B.R. [892, 902 (Bankr. M.D. Ga. 2016) ] ; see H.R. REP. NO. 109-31(I), at 73 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 141 ("Section 309(c)(1) amends Bankruptcy Code section 1325(a)(5)(B) to require that periodic payments pursuant to a chapter 13 plan with respect to a secured claim be made in equal monthly installments.").
Id.
Without the benefit of guidance from Congress, the court is left to consider the statute's purpose in light of its function, what one court has referred to as "educated speculation." Cochran , 555 B.R. at 901. That purpose appears, as noted above in Benedicto , to be to prevent the manipulation of payments to secured creditors without the consent of the affected creditors. Benedicto , 587 B.R. at 576 ; accord Miceli , 587 B.R. at 502 n.13 (referring to the "nearly universal line of cases which had held that the subsection prohibits balloon payments"). By requiring payments to secured creditors to be in equal monthly payments and not less than the adequate protection owed to the affected creditors, section 1325(a)(5)(B)(iii)(I) prevents debtors from ballooning payments to such creditors (delayed creditors), thereby shifting the risk of early failure of plans to be borne by the delayed creditors while diverting payments from delayed creditors to creditors of less protected status.6
Ballooning of payments and shifting of risk is exactly what the Debtor proposes here, however. As such, without acceptance of the Plan under section 1325(a)(5)(A), the Plan would unquestionably be unconfirmable. So, has that acceptance occurred?
*203When investigating acceptance, one case appears to be central to most of the courts' inquiries- Andrews v. Loheit (In re Andrews ), 49 F.3d 1404, 1408 (9th Cir. 1995). In Andrews , the Ninth Circuit affirmed a bankruptcy appellate panel decision, which in turn affirmed a bankruptcy court's denial of confirmation of a chapter 13 plan. While the denial of confirmation turned on the plan's failure to provide secured creditors adequate protection under section 361, id. at 1406, the issue on appeal was whether the chapter 13 trustee had standing to pursue an objection under section 1325(a)(5) in the absence of objections from creditors. Id. at 1408. The Ninth Circuit concluded that the chapter 13 trustee had standing, but in so doing, stated in dicta that secured creditors who do not object have accepted the plan. Id. at 1409.
Andrews has become the source of a series of cases, none of which rely on its actual holding. These cases take away from Andrews two crucial points of dicta .
The first is that the absence of an objection from a secured creditor constitutes acceptance by that creditor for the purposes of section 1325(a)(5)(A). Andrews , 49 F.3d at 1409 ("Here, § 1325(a)(5) is fulfilled because subsection (A) was satisfied when the holders of the secured claims failed to object. In most instances, failure to object translates into acceptance of the plan by the secured creditor.").
The second is that an objection from a chapter 13 trustee under section 1325(a)(5) alone may be disregarded, as the treatment is personal to the affected creditors and not therefore an issue on which trustees may be heard. Id. ("[W]e find it problematic to confer standing under § 1325(a)(5)."). Andrews was recently followed in this District on both of these points. Carr , 584 B.R. at 275.
Both of those assumptions are problematic.
One problem with relying on Andrews is obvious. Neither of these two points were central to the court's ruling, which determined standing under section 1325(a)(1) for an objection as to whether the plan complied with section 361. Andrews , 49 F.3d at 1406-09. These discussions are therefore dicta and nonbinding. Bank of Am. Nat. Tr. & Sav. Ass'n v. 203 N. LaSalle St. P'ship , 526 U.S. 434, 460, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) (even Supreme Court dicta binds neither that Court nor the lower federal courts); Wilder v. Apfel, 153 F.3d 799, 803 (7th Cir. 1998) ("Dicta are the parts of an opinion that are not binding on a subsequent court, whether as a matter of stare decisis or as a matter of law of the case."). As the Seventh Circuit said in Wilder ,
They are nonbinding for two reasons. First, not being integral elements of the analysis underlying the decision-not being grounded in a concrete legal dispute and anchored by the particular facts of that dispute-they may not express the judges' most careful, focused thinking. Second, to give the inessential parts of an opinion the force of law would give judges too much power, and of an essentially legislative character; we could hardly consider ourselves judges in the Anglo-American tradition were we to interrupt this opinion to offer our thoughts, however well considered, on, say, the hearsay rule, or the Americans with Disabilities Act, or the FELA.
Id.
A second and equally obvious problem is that an opinion from outside of this Circuit is not binding. United States v. Glaser , 14 F.3d 1213, 1216 (7th Cir. 1994) ("Opinions 'bind' only within a vertical hierarchy.").
Andrews is not, therefore, controlling law on the matter. Further, Andrews is *204unpersuasive, as described below, on each of the two central takeaways. It runs contrary to very basic principles of legal jurisprudence, the nature of the Bankruptcy Code itself and the function of trustees in bankruptcy matters. This strikes to the very heart of the matter.
1. Silence as Acceptance under 11 U.S.C. § 1325(a)(5)(A)
For those more used to reorganizations under chapter 11 of the Bankruptcy Code, chapter 13 is a strange bird. Both chapters allow debtors to effectuate plans, which are essentially enforced agreements between debtors and creditors. They achieve that result in materially different ways, however. As Judge Lynch has aptly described this:
In interpreting plans of reorganization in the context of Chapter 11 cases, the Seventh Circuit has stated that "[p]rinciples of contract law apply to interpreting a plan of reorganization." In re Airadigm Communications, Inc., 616 F.3d 642, 664 (7th Cir. 2010). This is because in Chapter 11 a "confirmed plan of reorganization is in effect a contract between the parties and the terms of the plan describe their rights and obligations." Id. See also Ernst & Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753, 755 (7th Cir. 2002). But it is far from clear that a Chapter 13 plan is as analogous to a contract as is a Chapter 11 plan. Unlike in Chapter 11, creditors in Chapter 13 are not entitled to vote on a plan. See 11 U.S.C. § 1126. Also, in Chapter 13 only the debtor may file a plan. 11 U.S.C. § 1321. Therefore, other than the right to object on certain specified bases in the Bankruptcy Code, a Chapter 13 plan is a rather one-sided affair.
In re Turner , 558 B.R. 269, 280 (Bankr. N.D. Ill. 2016) (Lynch, J.).
Chapter 13 was arguably intended as a simplified, cut down approach to reorganizations for individuals with less complex cases and regular income. See H.R. Rep. No. 95-595, at 116-18 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6076, 6078 (describing the need to simplify consumer reorganizations). Eliminating voting, however, in chapter 13 has forced both the Bankruptcy Code and the courts to anticipate what might otherwise be handled in the voting and confirmation process in chapter 11 and instead impose those standards. In chapter 11, for example, a unanimously accepted plan-which acceptance will be gaged based on the requirements of section 1126-might be confirmed even if it otherwise would not satisfy the so-called "absolute priority rule" embodied in section 1129(b). See, e.g. , 11 U.S.C. §§ 1129(a)(7)(A)(i), (a)(8).
Voting is not mandated by statute in chapter 13 cases and thus there is no equivalent to section 1126 in chapter 13.7 As a result, courts are faced with a dilemma *205when asked to determine, as they are in section 1325(a)(5)(A), whether a creditor has "accepted" a chapter 13 plan. By extension, courts are also faced with how to weigh objections in this regard, especially those of chapter 13 trustees where no creditor has objected.
In this context, many courts have concluded that silence by a secured creditor constitutes acceptance for the purpose of section 1325(a)(5)(A).
There is, of course, no question that, in the absence of any objection at all, the court may conclude that the requirements of section 1325(a)(3) have been met without the need for evidence in that regard. The Bankruptcy Rules provide as much. See Fed. R. Bankr. P. 3015(f) ("If no objection is timely filed, the court may determine that the plan has been proposed in good faith and not by any means forbidden by law without receiving evidence on such issues."). No such provision exists, however, within the Bankruptcy Rules with respect to section 1325(a)(1) or, by extension, section 1325(a)(5).
Nonetheless, the Andrews dicta and its progeny stand for the proposition that, in the absence of an objection, the court may conclude that a plan has been accepted. This is a very different thing.
Given how courts often handle motion practice, this conclusion is understandable even if misplaced. In American jurisprudence, the absence of an objection is often significant. In civil matters, provided that due process has been afforded, courts may conclude that the silence of affected parties equates to their acceptance. See, e.g. , Dooley v. Weil (In re Garfinkle ), 672 F.2d 1340, 1347 (11th Cir. 1982) ("Silence or acquiescence may be sufficient conduct to create an estoppel if under the circumstances there was both a duty and opportunity to speak."); cf. In re Kazi , 985 F.2d 318, 322 (7th Cir. 1993) (failure to object in light of duties under Rule 4003 foreclosed that opportunity). Andrews itself, in reaching this conclusion, relies on its own prior precedent regarding plan confirmation and preclusion, not on acceptance itself. Andrews , 49 F.3d at 1406-09 (citing to Lawrence Tractor Co. v. Gregory (In re Gregory ), 705 F.2d 1118, 1121 (9th Cir. 1983) ).
Equating lack of objections, preclusion, or waiver with acceptance is, however, wrong on a number of levels.8
First, voting and objections have different meanings and consequences in bankruptcy matters. Compare 11 U.S.C. § 1129(a)(9), (b) (providing specific treatment predicates to confirming a chapter 11 plan for nonaccepting creditors) with 11 U.S.C. § 1129(a)(15) (providing specific treatment predicates to confirming a chapter 11 plan as to creditors who object to the plan). In chapter 11 cases, acceptance for the purposes of voting may be deemed, see, e.g ., 11 U.S.C. § 1126(f), but such deemed acceptance does not equate to actual *206acceptance for all purposes. See, e.g. , In re SunEdison, Inc. , 576 B.R. 453, 460-61 (Bankr. S.D.N.Y. 2017) (nonvoting creditors were not bound by the third-party release in a chapter 11 plan as affirmative acceptance was required); In re Washington Mut. Inc., 442 B.R. 314, 355 (Bankr. D. Del. 2011) ("inaction" was not a sufficient manifestation of consent to support a release). Thus, even in chapter 11, where creditors are automatically afforded both the opportunity to object to and reject a plan, their silence does not equate to affirmative acceptance of a plan. To conclude that in chapter 13, where creditors have even less of a say, that their silence is of greater effect, is more than problematic. In chapter 13, all creditors have a right to object, 11 U.S.C. § 1324(a), but only secured creditors are asked to accept. 11 U.S.C. §§ 1323(c), 1325(a)(5)(A). Objections and acceptances clearly have different scopes and different purposes.
Second, equating the failure to object to be acceptance runs contrary to the express language of the Bankruptcy Code itself. In interpreting the Bankruptcy Code, the court is required to apply principles of plain language interpretation. Ryan v. United States (In re Ryan ), 725 F.3d 623, 626 (7th Cir. 2013) ("It is the province of the legislature to choose language that maximizes its own purposes, and for the courts to give that language its plain meaning or, where it is ambiguous to interpret it in the manner most consistent with the statutory language as a whole, its purpose, and in a manner that will render it constitutional."). Those principles look to the meaning and structure of the statute itself before looking elsewhere. Here, Congress chose the term "accepted." The plain meaning of "accept," without further context, is either to make a favorable response (by an affirmative act) or to endure without protest or reaction (silence), though the definitions seem to run toward the former, not the latter.9 As either meaning is possible, the language is ambiguous. Multiple plausible interpretations require the court to search beyond the statute's plain language. FTI Consulting, Inc. v. Merit Mgmt. Grp., LP , 830 F.3d 690, 692 (7th Cir. 2016), aff'd and remanded , --- U.S. ----, 138 S.Ct. 883, 200 L.Ed.2d 183 (2018). As a result, the court must turn to the purpose of statute and its context. Id. at 693 (relying on Food & Drug Admin. v. Brown & Williamson Tobacco Corp. , 529 U.S. 120, 133, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000) (courts must interpret a "statute as a symmetrical and coherent regulatory scheme, and fit, if possible, all parts into an harmonious whole") (internal quotation marks and citations omitted); Davis v. Mich. Dep't of Treasury , 489 U.S. 803, 809, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989) ("It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.") ).
Looking at the language in context, it is clear to the court that, even in chapter 13, objections and acceptances are not the same. Congress used both terms in section 1327(a), which states that "[t]he provisions of a confirmed plan bind the debtor and each creditor, ... whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). Equating acceptance with lack of objection renders section 1323(c) nearly incomprehensible. 11 U.S.C. § 1323(c)
*207("Any holder of a secured claim that has accepted or rejected the plan is deemed to have accepted or rejected, as the case may be, the plan as modified, unless the modification provides for a change in the rights of such holder from what such rights were under the plan before modification, and such holder changes such holder's previous acceptance or rejection."). Section 1323(c), by its very wording, shows that Congress knows the difference between actual acceptance and deemed acceptance. Congress most certainly knew how to write section 1325(a)(5)(A) to state expressly that the provision would apply in the absence of the objection, but chose instead to speak in terms of acceptance. See, e.g. , 11 U.S.C. § 327(c) ("unless there is objection by another creditor or the United States trustee"); 11 U.S.C. § 502(a) ("[a] claim or interest ... is deemed allowed unless a party in interest ... objects"); 11 U.S.C. § 1129(a)(15) (providing specific treatment requirements as predicates to confirming a chapter 11 plan as to creditors who object to the plan).
Third, placing the burden with regard to confirmation of a plan on the creditor incorrectly inverts the burdens under section 1325. As noted at the outset, the burden of showing satisfaction of the elements of section 1325 falls on the plan's proponent, in this case, the Debtor. Love , 957 F.2d at 1354-55. As the plan proponent, especially one proposing a nonstandard provision applicable only to specified creditors, the Debtor has the burden of demonstrating acceptance. Forcing a creditor to object to preserve its rights removes that burden from the Debtor. It is not unreasonable or out of the context with the overall statutory theme in chapter 13 to require a debtor to carry its burden by affirmatively seeking acceptance from creditors who a debtor is individually targeting with nonstandard provisions. Cf. Briseno v. Mut. Fed. Savs. & Loan Ass'n (In re Briseno ), 496 B.R. 509, 515 (Bankr. N.D. Ill. 2013) (Baer, J.) (plan proponent bears the burden of establishing value for lien stripping contained in chapter 13 plan); In re Zimmerman , 276 B.R. 598, 603 (Bankr. C.D. Ill. 2001) (setting out the up-front burdens that fall on a debtor as plan proponent with respect to specific lien stripping, even in advance of an objection).
Fourth and perhaps most important, equating the lack of objection to acceptance requires two logical leaps. The court must conclude that somehow preclusion and waiver equate to acceptance. The court must also conclude that the Chapter 13 Trustee's objection must be disregarded.
That former assumption collapses preclusion and waiver into that of acceptance. It is true, as noted above, that the confirmation of a plan may be preclusive on many issues. ReGen Capital I, Inc. v. UAL Corp. (In re UAL Corp. ), 635 F.3d 312, 321 (7th Cir. 2011) ("By failing to object to or appeal the plan's confirmation, [creditor] lost any opportunity to seek an exemption from or to challenge this provision.").
However, holding that the failure to object to a potentially defective plan provision equates to acceptance of that provision runs contrary to the Supreme Court's ruling in United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). In Espinosa , the Supreme Court articulated the importance of bankruptcy courts ensuring that plans are confirmed only if they comply with the Bankruptcy Code. In the context of an unobjected to plan which attempted to discharge student loan debt without demonstrating undue hardship, the Court stated that "[f]ailure to comply with this self-executing requirement should prevent confirmation of the plan even if the creditor fails to object, or to appear in the proceeding *208at all . That is because § 1325(a) instructs a bankruptcy court to confirm a plan only if the court finds, inter alia , that the plan complies with the 'applicable provisions' of the Code." Espinosa , 559 U.S. at 276-77, 130 S.Ct. 1367 (citations omitted) (emphasis added). In light of all of the foregoing, the Supreme Court nonetheless refused to void the confirmation of the plan, finding confirmation to be preclusive. Id. at 278-79. Espinosa 's preclusive decision but stern warnings to the court of its obligation to review plans and admonition that creditors need not object to be protected by the Bankruptcy Code, makes that even where preclusion applies, the court must fulfill its obligation to ensure plan provisions are actually met. Andrews was in error when relied on preclusion to conclude that the failure to object equates to acceptance.
Espinosa is, of course, binding on this court where Andrews is not. Further, Espinosa is fifteen years more recent than Andrews , and much of the case law following Andrews has occurred in between. Nonetheless, some courts have continued to follow Andrews irrespective of the language in Espinosa . See, e.g. , Wachovia Dealer Servs. v. Jones (In re Jones ), 530 F.3d 1284, 1291 (10th Cir. 2008) ("[T]he failure to object constitutes acceptance of the plan."); Austin v. Bankowski , 519 B.R. 559, 563 (D. Mass. 2014) (mentioning Espinosa but providing no explanation of its role in following Andrews ); Scotiabank de Puerto Rico v. Lorenzo (In re Lorenzo ), Case No. 15-011, 2015 WL 4537792, at *6 (1st Cir. BAP July 24, 2015) ("[F]ailure to prosecute its objection constituted acceptance of the plan for purposes of § 1325(a)(5)(A)."); Bronitsky v. Bea (In re Bea ), 533 B.R. 283, 290 (9th Cir. BAP 2015) (rejecting Espinosa 's application to an adequate protection determination under section 1325(a)(5)(B)(iii)(II) as that provision is not self-executing); Carr , 584 B.R. at 274-75 (same); In re Olszewski , 580 B.R. 189, 193 (Bankr. D.S.C. 2017) (mentioning Espinosa but providing no explanation of its role in following Andrews ).
Several courts have broken with Andrews in light of Espinosa . See, e.g. , In re Brown , 559 B.R. 704, 708 (Bankr. N.D. Ind. 2016) ("While a creditor may 'accept' or 'agree to' plan provisions that could not otherwise be imposed upon it, the failure to object is not acceptance. If it were, the Supreme Court's comments in Espinosa would be meaningless.") (citations omitted).
Other courts have never allowed silence as acceptance in this context. In re Northrup , 141 B.R. 171, 173 (N.D. Iowa 1991) (in the context of acceptance under section 1322(a)(2), "the court agrees with the bankruptcy court that an express affirmation of consent is required"); In re Madera , 445 B.R. 509, 514 (Bankr. D.S.C. 2011) (" Section 1325 does not suggest that the absence of an objection equals confirmation, but rather supports the principle of the need for judicial supervision of the plan confirmation process."); In re Montoya , 341 B.R. 41, 46 (Bankr. D. Utah 2006) (rejecting implied acceptance under the facts of that case); In re Ferguson , 27 B.R. 672, 673 (Bankr. S.D. Ohio 1982) (rejecting chapter 13 plan for proposal contained therein to alter treatment to priority creditors without such creditors' express agreement); see also, e.g. , In re Bethoney , 384 B.R. 24 (Bankr. D. Mass. 2008) (following Montoya ); In re Montgomery , 341 B.R. 843 (Bankr. E.D. Ky. 2006) (same).
Both Bea in favor of silence as acceptance and Montoya against are instructive. In Bea , the Bankruptcy Appellate Panel for the Ninth Circuit discussed Espinosa and concluded that it did not apply to the fact driven analysis under section 1325(a)(5)(B)(iii)(II). Bea , 533 B.R. at 290.
*209Such fact-driven analyses are not, in the panel's view, self-executing. Id. ; see also Carr , 584 B.R. at 274-75 (same). That reasoning does not, however, immediately apply to subsection (I) of section 1325(a)(5)(B)(iii). That subsection states that the property distributed under that subsection must be "in the form of periodic payments ... in equal monthly amounts." 11 U.S.C. § 1325(a)(5)(B)(iii)(I). Subsection (I) is not fact driven, but easily ascertainable from the terms of the chapter 13 plan. Further, though the legislative history of subsection (I) is lacking, on its face it appears to prevent the ballooning of secured creditor payments under a plan, exactly what the Debtor is attempting to do here and something that, as a matter of policy, the Chapter 13 Trustee should and must guard against. Espinosa , 559 U.S. at 276-77, 130 S.Ct. 1367 ; In re Escarcega , 573 B.R. 219, 234 (9th Cir. BAP 2017). Bea is not, therefore, persuasive on this issue.
In Montoya , the court found that silence may be deemed acceptance only if the plan is otherwise unobjectionable. It stated that:
It is correct that, if a plan is properly noticed and otherwise meets the requirements of § 1325(a), the Court may deem a secured creditor's silence to constitute acceptance of a plan and the plan may be confirmed. This "implied" acceptance is allowed because Chapter 13, unlike Chapter 11, has no balloting mechanism to evidence acceptance of a proposed plan, and it is only the negative-a filed objection-that evidences the lack of acceptance. When the creditor simply does nothing, the judicial doctrine of "implied" acceptance fills the drafting gap in the Code. The concept of implied acceptance of an otherwise compliant plan, or even voting on similar provisions in Chapter 11, however, is quite different from proposing a plan intentionally inconsistent with the Code and then waiting for the trap to spring on a somnolent creditor. Creditors are entitled to rely on the few unambiguous provisions of the BAPCPA for their treatment. They should not be required to scour every Chapter 13 plan to ensure that provisions of the BAPCPA specifically inapplicable to them will not be inserted in a proposed plan in the debtor's hope that the improper secured creditor treatment will become res judicata.
Montoya , 341 B.R. at 45 (footnotes omitted) (emphasis added).
The Montoya conclusion is striking under the facts at bar, where it is clear that the Debtor here has intentionally proposed a plan inconsistent with section 1325(a)(5)(B)(iii)(I) and, rather than affirmatively seek acceptance by the affected secured creditors, has lain in wait to see if the creditor objects.
Thus while silence might equal acceptance of a chapter 13 plan generally, it is difficult to find it so under the facts at bar. It is even more difficult to do so in light of the Objection from the Chapter 13 Trustee.
2. The Role of the Chapter 13 Trustee
The Bankruptcy Code as we know it today is the product of hard fought reforms in the 1970s. Prior to the enactment of the Bankruptcy Reform Act of 1978 which, when codified, became the Bankruptcy Code, the bankruptcy law of the land was primarily that contained in the Nelson Act, Bankruptcy Act of 1898, Pub. L. No. 55-541, 30 Stat. 544 (superseded by the Bankruptcy Code), as substantially amended in 1938 by the Chandler Act. Bankruptcy Act of 1938, *210Pub. L. No. 75-696, 52 Stat. 840 (same).10
As detailed in the legislative history to the Bankruptcy Code, prior to the Bankruptcy Code's enactment, bankruptcy law was mired in the "horse and buggy" era and had fallen into "disrepair." H.R. Rep. No. 95-595 (1977), 1st Sess. 1977, reprinted in 1978 U.S.C.C.A.N. 5963, 5965 (the "House Report"); see also S. Rep. No. 95-989 (1978). As a result, in 1970 Congress created a commission to study and recommend changes to the bankruptcy laws. House Report, 1978 U.S.C.C.A.N. at 5963. In 1973 the commission filed its final report, id. , which found that the "most severe problem in the bankruptcy administration was the court system." Id. at 5965. The report identified two problems. First, the report noted that the "bankruptcy court ... is not truly and completely a court." It was "not independent." Id. Second, the report noted that bankruptcy judges were required to be too involved in the administration of cases, not truly acting as judges. Id. at 5965-66.
As most are aware, the Bankruptcy Code addressed the former of these two problems by attempting to give "the bankruptcy court the independence it needs to operate in today's complex bankruptcy world." Id. at 5965. While that effort was successful in many respects, in large part it failed. In the past ten years, bankruptcy court authority has been repeatedly and severely eroded by Supreme Court and other jurisprudence. See, e.g. , Stern , 564 U.S. at 464, 131 S.Ct. 2594 (holding that the Bankruptcy Code unconstitutionally vested authority in the bankruptcy courts). Such is the result that bankruptcy courts are no longer certain whether they can hear the simplest and most crucial matters within bankruptcy cases, such as fraudulent conveyance actions.
The Bankruptcy Code addressed the latter problem by attempting to remove the supervisory functions from the judge. House Report, 1978 U.S.C.C.A.N. at 5966. Those functions were transferred in large part to the United States Trustee's Office and the standing chapter 13 trustees. Id. The stated goal was to "involve[ ] the judge only when a dispute arises." Id. This second effort has been largely successful, but for two very important changes. First, the volume of cases heard by bankruptcy judges has risen disproportionately with the number of bankruptcy judges. In 1978, there were approximately 200 bankruptcy judges hearing approximately 227,000 cases. John E. Shepard, The 1981 Bankruptcy Court Time Study , Federal Judicial Center (1982), 33, 49-50, https://www.fjc.gov/sites/default/files/2012/1981Bank.pdf. In 2017, there are approximately 365 bankruptcy judges hearing over 1 million pending cases. U.S. Bankruptcy Courts Federal Judicial Caseload Statistics, Administrative Office of the United States Courts (March 31, 2018), http://www.uscourts.gov/statistics/table/f/federal-judicial-caseload-statistics/2018/03/31. In 2011, prior to the Stern decision, the caseload exceeded 1.5 million. Thus less than twice the number of judges are hearing four times or more cases.
The second change is that the Bankruptcy Code has become enormously more complex while efforts to create uniformity in the national bankruptcy system such as the national chapter 13 plan have been met *211with resistance. The amount of time judges spend on consumer cases has risen dramatically while the courts above rightfully continue to stress the bankruptcy court's duty to scrutinize bankruptcy plans. See, e.g. , Espinosa , 559 U.S. at 277, 130 S.Ct. 1367 (referring to the bankruptcy courts' authority and obligation to require debtors to adhere to the Bankruptcy Code); In re Madison Hotel Assocs. , 749 F.2d 410, 425 (7th Cir. 1984) ("[T]his court has interpreted the identical 'good faith' language contained in 11 U.S.C. § 1325(a)(3) to require the bankruptcy court to review the proposed plan for accuracy and 'a fundamental fairness in dealing with one's creditors.' ") (quoting Ravenot v. Rimgale (In re Rimgale ), 669 F.2d 426, 432-33 (7th Cir. 1982) ).
As a result, the bankruptcy court has become more and more dependent on chapter 13 trustees to raise concerns and objections to chapter 13 plans. Such trustees may, by statute, "appear and be heard at any hearing that concerns ... confirmation of a plan ...." 11 U.S.C. § 1302(b). The wording of this section confers on chapter 13 trustees a right to be heard in matters such as the one at bar. It also, by phrasing the foregoing in the context of "shall," confers an affirmative duty on the trustee. Id. ; Andrews , 49 F.3d at 1408 ; see also In re Foulk , 134 B.R. 929, 931 (Bankr. D. Neb. 1991) ("The trustee must either recommend confirmation or object to confirmation . The chapter 13 standing trustee should thus review all Chapter 13 plans in detail and should file objections to confirmation and claimed exemptions where warranted.") (emphasis added).
It is against this backdrop that the Debtor asks the court to ignore the Objection under section 1325(a)(5)(B), arguing that the Chapter 13 Trustee lacks the standing to be heard on a section that appears to be personal to secured creditors' rights.
With respect to standing,
'[i]n every federal case, the party bringing the suit must establish standing to prosecute the action.' Elk Grove Unified Sch. Dist. v. Newdow , 542 U.S. 1, 11, 124 S.Ct. 2301, 159 L.Ed.2d 98 (2004), abrogated on other grounds by Lexmark Int'l, Inc. v. Static Control Components, Inc. , 572 U.S. 118, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014). When standing is at issue, the central inquiry is 'whether the plaintiff has "alleged such a personal stake in the outcome of the controversy" as to warrant his invocation of federal court jurisdiction and to justify exercise of the court's remedial powers on his behalf.' Simon v. Kentucky Welfare Rights Organization , 426 U.S. 26, 38, 96 S.Ct. 1917, 48 L.Ed.2d 450 (1976), quoting Warth v. Seldin , 422 U.S. 490, 498-99, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) (emphasis omitted).
In re Whitlock-Young , 571 B.R. 795, 803 (Bankr. N.D. Ill. 2017) (Barnes, J.).
In light of these requirements, there is little question that chapter 13 trustees have no traditional standing to be heard under section 1325(a)(5)(B). But the same would hold true for all bankruptcy matters. Chapter 13 trustees have no personal stake in the outcome of bankruptcy matters, including those under section 1325(a)(5)(B).
Instead, chapter 13 trustees have something better. They have an unfettered statutory right to be heard. They need not establish standing to be heard.
Andrews appears to miss this point when it considered standing under section 1325 and concluded that while a trustee has standing to raise a section 1325(a)(5) issue in the context of section 1325(a)(1) -the *212provision that requires that all provisions of the Bankruptcy Code be met in chapter 13 plans-standing under section 1325(a)(5)(B) is "problematic." Andrews , 49 F.3d at 1409. This is not a question of standing at all.
To the extent that Andrews stands for the proposition that chapter 13 trustees may not be heard directly under section 1325(a)(5), it is misguided. That approach diminishes without basis the trustee's right to be heard. The Chapter 13 Trustee has the right to be heard on all matters concerning plan confirmation. 11 U.S.C. § 1302(b). That right applies whether the question is one under section 1325(a)(1), section 1325(a)(5) or otherwise.
What Andrews and the courts that express concern with a trustee's standing under section 1325(a)(5) appear to be doing is trying to find the right framework within which to consider a trustee's objection. The common element in the cases that have discounted a chapter 13 trustee's objection under section 1325(a)(5) seems to be some view that the chapter 13 trustee's role is limited under that section. Andrews, 49 F.3d at 1407 ; Carr , 584 B.R. at 275.
Nothing in the statute, however, leads to that result. Chapter 13 trustees are directed by statute to appear and be heard "at any hearing that concerns ... confirmation of a plan." 11 U.S.C. § 1302(b)(2)(B). In addition, section 1325(b) is expressly predicated on a trustee's ability to object to a plan, and nothing in Bankruptcy Rule 3015, which governs objections, states otherwise. Further, a trustee's role frequently crosses the hypothetical line drawn in these cases between general duties of a trustee and creditor-specific actions. For example, a trustee is expressly authorized by statute and by rule to file claims on behalf of all creditors. 11 U.S.C. § 501(c) ; Fed. R. Bankr. P. 3004 ; see also Yoon v. VanCleef , 498 B.R. 864, 867 (N.D. Ind. 2013) ("The provisions at issue contain no qualifications as to why or to what end the trustee may file such claims. These provisions are clear and unambiguous, and expressly permit the trustee file these claims."). Trustees also act in a representative capacity when they bring avoidance actions or objections to claims. Hope v. Acorn Fin., Inc. , 731 F.3d 1189, 1193 (11th Cir. 2013) ("The trustee, moreover, acts in a representative capacity when she seeks post-confirmation avoidance."). "[T]he primary purpose of the Chapter 13 trustee is not just to serve the interests of the unsecured creditors, but rather, to serve the interests of all creditors." Overbaugh v. Household Bank N.A. (In re Overbaugh ), 559 F.3d 125, 129-30 (2d Cir. 2009) ; Andrews, 49 F.3d at 1407 ; In re Maddox, 15 F.3d 1347, 1355 (5th Cir. 1994).
Put another way, a chapter 13 trustee is permitted to stand in the shoes of creditors-including secured creditors-provided those creditors are not standing in those shoes themselves.
As previously discussed, the bankruptcy courts are overburdened and chapter 13 trustees play a significant role in policing plan confirmations. Many times the trustee is privy to the interactions between the debtor and its creditors that the court is not. Thus, while in the absence of any objection a court might presume a creditor's silence is acceptance, in the face of a chapter 13 trustee's objection, how could it therefore possibly be inappropriate to require the debtor to carry its burden expressly? These are specifically targeted, nonstandard plan provisions. All a debtor need do is confirm the affected creditor's acquiescence and report that to the court. Cf. Fed. R. Bankr. P. 3018 (requiring acceptance of chapter 9 and chapter 11 plans to be in writing, but not providing a similar *213requirement for chapter 13). If that cannot be obtained, all the more reason to find that section 1325(a)(5)(A) is not satisfied.
Further, when a plan provision is proposed in clear contravention of both the express language and purpose of section 1325(a)(5)(B)(iii)(I) for the sole reason to manipulate payments to parties to benefit a debtor's attorney, holding a creditor to a higher standard of actual, express acceptance is appropriate. Montoya , 341 B.R. at 46.
In light of nature of the step proposed here and the Chapter 13 Trustee's objection to the same, the Debtor has failed to carry its burden under section 1325 by failing to demonstrate actual acceptance under 1325(a)(5)(A). As a result, the Objection is well taken and confirmation of the Plan will be denied.
B. 11 U.S.C. § 1325(a)(3)
The Chapter 13 Trustee also asserts that the Plan is not compliant with section 1325(a)(3), the good faith requirement.
"Under section 1325(a)(3), as a condition for confirmation of a chapter 13 plan, the court must find that 'the plan has been proposed in good faith and not by means forbidden by law ...." In re Tabor , 583 B.R. 155, 195 (Bankr. N.D. Ill. 2018) (Barnes, J.).
Those courts that have found the practice engaged in here permissible have focused on the factors of Andrews but not considered that a plan that satisfies the requirements of section 1325(a)(5) (governing treatment of secured claims) might nonetheless violate section 1325(a)(3) (requiring that a plan be proposed in good faith). This is incorrect, as these tests are independent. To hold that satisfaction of section 1325(a)(3) is subsumed into satisfaction of section 1325(a)(5) is to read section 1325(a)(3) out of existence. Thus irrespective of the court's conclusion under section 1325(a)(5), the Plan must meet the good faith requirement of this section.
Good faith, however, is not defined in the statute nor discussed in the legislative history.
The Seventh Circuit has stated that "[i]n determining whether a plan is filed in good faith, the court is tasked with questioning whether the debtor is 'really trying to pay the creditors to the reasonable limit of his ability or is he trying to thwart them?' " In re Schaitz , 913 F.2d 452, 453 (7th Cir. 1990) ; see also Tabor , 583 B.R. at 195. " 'Broadly speaking, the basic inquiry should be whether or not under the circumstances of the case there has been abuse of the provisions, purpose, or spirit of (Chapter 13) in the proposal.' " Rimgale , 669 F.2d at 432 (quoting Tenney v. Terry (In re Terry ), 630 F.2d 634, 635 (8th Cir. 1980) ). "[F]or purposes of determining good faith under ... section 1325(a)(3), the important point of inquiry is the plan itself and whether such plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code." Madison Hotel , 749 F.2d at 425. That must be done on a "case-by-case basis as the courts encounter various problems in the administration of chapter 13's provisions," Rimgale , 669 F.2d at 431 (quotations omitted), and the inquiry should " 'mitigat[e] the danger of abuse.' " In re Smith , 286 F.3d 461, 466 (7th Cir. 2002) (quoting In re Young, 237 F.3d 1168, 1174 (10th Cir. 2001) ).
Factors useful for identifying good faith include (a) whether the proposed plan states the debtor's secured and unsecured debts accurately; (b) whether the proposed plan states debtor's expenses accurately; (c) if the percentage of repayment of unsecured claims is correct; (d) if inaccuracies in the plan, if any, *214amount to an attempt to mislead the bankruptcy court; and (e) whether proposed payments indicate a fundamental fairness in dealing with one's creditors.
Tabor , 583 B.R. at 195-96 (paraphrased from Rimgale , 669 F.2d at 431 ). "These broad sets of factors ultimately merge into a generic 'totality of the circumstances' test." In re Smith , 848 F.2d 813, 818 (7th Cir. 1988) ; Tabor , 583 B.R. at 196.
The totality of the circumstances here is that the step payment in the Plan and the way that the Debtor has sought to enforce it over known creditors is not fundamentally fair. It is not in keeping with the objectives and the purposes of the Bankruptcy Code.
This is an example of what the court was concerned with in Montoya . Semrad, on behalf of its client, the Debtor, has proposed a plan that it knows or should know violates both the express provisions and intention of section 1325(a)(5)(B)(iii)(I). As per past practice, Semrad lay in wait to see if the Plan gave rise to an objection from a Secured Creditor, or, as was noted in Montoya , the Plan could catch those creditors sleeping. If an objection had occurred, by Semrad's own admission, it would have removed the provision if it could not reach an agreement with the objecting creditor. By doing so, the Debtor (or Semrad) seeks to delay payment to the Debtor's Secured Creditors without even attempting to procure those creditors' acceptance under section 1325(a)(5)(A). That delay heightens the risks borne by such delayed creditors, solely to reduce risk and accelerate payment to another creditor, Semrad.
It should also be noted that, in advising the Debtor to proceed in this manner, Semrad has prioritized its desire to be paid over the best interests of the Debtor, its client. As this court observed previously in Gilliam , provisions such as those at bar here are harmful to the client. Not only does the delay in payment under the Plan shift risk to the Debtor's delayed creditors, but it leaves unpaid longer a debt that, in the event of failure of the debtor's bankruptcy plan, because it is secured, has superior rights outside of bankruptcy. This could leave the debtor in a worse position that had it not filed for bankruptcy.11 Further, delay in confirming a plan because of such provisions leaves open longer the possibility that a preconfirmation default may occur. As the court observed in Gilliam , "the applicable law is less flexible with respect to preconfirmation defaults than it is with respect to postconfirmation ones." Gilliam , 582 B.R. at 470.
These risks and harms are borne by the Debtor for no reason other than to prefer payment to Semrad. Id. at 464 ("[T]he additions are asserted for the benefit of the attorneys alone, not the debtors in whose plans they are contained ...."). "[T]he plan provisions themselves and any effort spent on the plan provisions by Semrad were of no benefit to the estate in question." Id. at 471.
As a result, the court simply cannot conclude that the Plan deals with the Debtor's creditors with fundamental fairness. It creates a problem with administration such as anticipated in Rimgale for no valid bankruptcy purpose.
Thus even if this Plan were to satisfy section 1325(a)(5), it is not proposed in good faith. As a result, the Objection is well taken under this ground as well and confirmation of the Plan will be denied.
*215C. 11 U.S.C. § 1325(a)(1)
Finally, the Chapter 13 Trustee asserts that the Plan does not comply with section 1325(a)(1).
Section 1325(a)(1) requires the Plan to comply "with the provisions of this chapter and with other applicable provisions of this title." 11 U.S.C. § 1325(a)(1). The section, put plainly, is a catch all provision which ensures that chapter 13 plans comply both with the requirements laid out in chapter 13 and the rest of the Bankruptcy Code.
Because this court has concluded that the Plan violates sections 1325(a)(3) and 1325(a)(5), section 1325(a)(1) is also not satisfied. The Plan may not be confirmed.
THE DEBTOR'S RESPONSE
All but one of the arguments raised by the Debtor in the Response have been discussed above. One, however, remains open and goes to the heart of Semrad's misunderstanding of this matter.
In the Response, the Debtor argues that there is nothing wrong with the Plan's proposal because section 1326 permits claims such as those by Semrad to be paid before the claims of other creditors. Section 1326 states, in pertinent part, that some claims shall be paid "[b]efore or at the time of each payment to creditors under the plan." 11 U.S.C. § 1326(b).
While this argument is more persuasive in the context of the prioritization of payments handled in Gilliam as opposed to the step payments discussed here, it is ultimately unpersuasive in both contexts. As Judge Lynch pointed out in Miceli , there is no conflict between sections 1325(a)(5)(B) and 1326(b). Miceli , 587 B.R. at 497-98. Section 1326(b)'s optionality does not override the requirements of section 1326(a)(5)(B). In cases where there are no secured creditors, section 1326(b) allows the payments to attorneys to occur before the payments to unsecured creditors. However, when there are in fact secured creditors, stepping and therefore delaying payments to secured creditors cannot occur without the consent of the secured creditors, and thus without that consent, the payments under section 1326(b) will happen at the time of the payment to such creditors.
In either case, that is not the crux of the court's ruling today. Remember that it is the payment scheme set forth in the National Plan that Semrad is attempting to change with nonstandard plan provisions. The National Plan follows the payment structure required by the Bankruptcy Code. Does section 1326 allow for a different structure in certain circumstances? Yes, that is one of the points of allowing nonstandard plan provisions. Does the fact that one Bankruptcy Code section permits an action override the specific restraints in another? Of course not. There are uses of the timing set forth in section 1326 that do not offend section 1325(a)(5). But those that do are impermissible.
The ruling today is limited to the question of what constitutes acceptance in light of a chapter 13 trustee's objection to nonstandard plan provisions under section 1325(a)(5), where no express acceptance has been provided to meet the debtor's burden thereunder. It is also about the inherent lack of good faith in pursuing such a plan, which is a determination independent from the statutory permissibility of the proposed provisions in a vacuum.
CONCLUSION
For all of the foregoing reasons, it is the court's conclusion that the Objection is well taken. As a result and by an order entered concurrently with this Memorandum Decision, confirmation of the Debtor's Plan will be denied.
ORDER
This matter comes before the court on Trustee Marilyn O. Marshall's Objection to *216Confirmation [Dkt. No. 37] (the "Objection") brought by the chapter 13 trustee in opposition to an amended Chapter 13 Plan dated February 13, 2018 [Dkt. No. 31] (the "Plan") presented by Larry Shelton, the debtor in the above-captioned case. The court, having jurisdiction over the subject matter, all necessary parties appearing at the confirmation hearings that took place, including the final hearing on May 10, 2018 where the matter was taken under advisement; the court having considered the arguments of all parties in their filings and at the hearings; and in accordance with the Memorandum Decision of the court in this matter issued concurrently herewith wherein the court found that the Objection was well taken,
NOW, THEREFORE, IT IS HEREBY ORDERED:
The Objection is SUSTAINED. Confirmation of the Plan is DENIED.
The National Plan was promulgated by the Judicial Conference of the United States, effective December 1, 2017, applicable to cases filed on or after that date. Pursuant to Rule 3015.1 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), judicial districts each have the authority to adopt in lieu of the National Plan a local plan, so long as that local plan complies with the requirements of the Bankruptcy Code and Bankruptcy Rules. The Northern District of Illinois did not adopt a local plan and this case was commenced on December 1, 2017. As such, the National Plan applies in this case.
Also on December 7, 2017, the Debtor filed four amended plans [Dkt. Nos. 15-18], an amended plan docketed in error [Dkt. No. 20] and a Chapter 13 Plan/Modified Plan "Redocketed to Send Notice" [Dkt. No. 21]. With respect to the matter before the court, each of these appears to be the same as the Original Plan.
In Gilliam , the court expressly reserved judgment on whether the nonstandard plan provisions were permissible components of chapter 13 plans, determining instead the practice's impropriety solely in the context of the self-serving nature of the changes and client and court disclosure regarding compensation. Gilliam , 582 B.R. at 464, n.3.
Ally Financial's postconfirmation, pre-step payment is equal to its preconfirmation adequate protection payments. Thus the Plan proposed to pay only adequate protection to Ally Financial at the outset and nothing on Ally Financial's underlying claim.
While Love 's determination was that the burden under section 1307 differs from the one under section 1325, the discussion in Love accurately reflects the state of the law here in the Seventh Circuit as to burdens under section 1325. In re Edmonds , 444 B.R. 898, 902 (Bankr. E.D. Wis. 2010) ("The burden of proof is upon the debtors, as the plan proponents, to prove all of the elements of a confirmable plan."); In re Jongsma , 402 B.R. 858, 871 (Bankr. N.D. Ind. 2009) ("[T]he debtor bears the ultimate burden of proof as to satisfaction of the confirmation criteria of 11 U.S.C. § 1325(a)."); In re Brown , 332 B.R. 562, 564 (Bankr. N.D. Ill. 2005) (Hollis, J.) ("As the plan proponent, the Trustee bears the burden to prove the conditions for confirmation of the modified plan over Brown's objection."); In re Famisaran , 224 B.R. 886, 892 (Bankr. N.D. Ill. 1998) (Squires, J.) ("The Debtors have the burden of proof and persuasion for confirmation of their Chapter 13 plan under the statutory requirements of 11 U.S.C. §§ 1325 and 1326."). But see In re Colon , 561 B.R. 682, 686 (Bankr. N.D. Ill. 2016) (Thorne, J.) (citing Love 's conclusion under section 1307 as controlling under section 1325, despite Love 's analysis to the contrary); see also In re Hill , 585 B.R. 520, 526 (Bankr. N.D. Ill. 2018) (Schmetterer, J.) (same, relying on Colon ).
Some courts have read this section differently to mean that it requires debtors to make the same monthly payment under the plan for the life of the plan. See In re Erwin , 376 B.R. 897, 902 (Bankr. C.D. Ill. 2007). Such a reading defies the plain meaning of "distributions" in the section. This court agrees with Judge Lynch in Miceli that such a reading is "strained." Miceli , 587 B.R. at 499. As neither party has addressed this reading of the statute, the court need not consider it here.
Bankruptcy Rule 3018, which governs voting in chapter 9 and chapter 11 cases, was originally intended to also provide guidance in chapter 13 cases. See 1983 Committee Advisory Note to Fed. R. Bankr. P. 3018 ("This rule applies in chapter 9, 11 and 13 cases under the Code. The references in the rule to equity security holders will not, however, be relevant in chapter 9 or 13 cases. The rule will be of little utility in a chapter 13 case because only secured creditors may be requested to vote on a plan; unsecured creditors are not entitled to vote; see § 1325(a)(4), (5) of the Code."). Though Rule 3018, by amendment, removed reference to chapter 13 in its title in 1993, there appears to have been no statutory amendment precipitating that change to the Rule. Nonetheless, some treatises still speak to voting in chapter 13 cases by secured creditors. See, e.g., Keith M. Lundin, LUNDIN ON CHAPTER 13, §§ 74.3, 74.4, https://www.lundinonchapter13.com/Home/DisplaySectionContent?sectionNumber=74.3 [& 74.4].
Not included in this analysis is the fact that equating silence with acceptance also runs contrary to one of the most basic precepts of contract law, that absent special circumstances, silence does not equal acceptance. Restatement (Second) of Contracts § 69 (1981) ; see also In re Harvey , 213 F.3d 318, 320 (7th Cir. 2000) ("[B]ankruptcy plans are to be treated as contracts and interpreted under state law ...."); In re Kimball Hill, Inc. , 565 B.R. 878, 888 (Bankr. N.D. Ill. 2017) (Barnes, J.) (same); see also First Nat. Bank of Chicago v. Atl. Tele-Network Co. , 946 F.2d 516, 519 (7th Cir. 1991) ("The law ordinarily treats silence as rejection, not acceptance, of an offer ...."). Bankruptcy plans are, after all, contracts.
Because bankruptcy plans, though interpreted under contract law, are first formed under the requirements of the Bankruptcy Code itself, it is not necessary to consider here how a contractual analysis might play out.
Accept , Black's Law Dictionary (3d ed. 1933) ("Means something more than to receive, meaning to adopt, to agree to carry out provisions, to keep and retain."); Accept , Ballentine's Law Dictionary (3d ed. 1969) ("To receive with the intent to retain; to give assent.").
An astute observer will note that, combined with the Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (as codified, the Bankruptcy Code), the bankruptcy laws of this country have been substantively rewritten every 40 years. Disregarding the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (which did more to require such an overhaul than avert it), the last major overhaul was 40 years ago this November.
These initial, small payments to a delayed creditor may be less than the prepetition contract payments for the debt. Therefore, if the debtor's case is dismissed before a time in which the payments to the delayed creditor "catch up" to the prepetition contract payments, the debtor is automatically in default under the terms of the contract to the delayed creditor even if the debtor had been current with the terms of the bankruptcy plan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501706/ | Susan V. Kelley, Chief U.S. Bankruptcy Judge
This motion for partial summary judgment filed by the University of Wisconsin Oshkosh Foundation, Inc. presents the central question in the Foundation's bankruptcy case: whether the State of Wisconsin is liable to the Foundation based on assurances the University of Wisconsin Oshkosh1 gave to the Foundation. As both parties recognize, this is a breach of contract case, and the outcome turns on whether the contracts at issue violate the Wisconsin Constitution and are thus void and unenforceable.
I. FACTUAL AND LEGAL BACKGROUND
The University's former Chancellor, Richard Wells, wanted to pursue several projects, including the construction of two biodigesters and a welcome and conference center. (Docket No. 37-2 ¶ 2; the "Mulloy Affidavit.") Because of significant University budget cuts, "the Board of Regents encouraged UW campuses to become more entrepreneurial to make do with less." (Id. ¶ 4.d.) Part of this effort involved enlisting the Foundation's financial support to fund the desired projects. (Id. )
The parties structured the transactions so that the Foundation would incur the debt to fund the projects. The Chancellor and Thomas Sonnleitner, the University's former Vice Chancellor for Administrative Services, signed several memoranda of understanding in favor of the Foundation (the "MOU"). In the MOU, the University agreed to cover any deficit incurred by the Foundation on the construction projects, as well as any deficit incurred in the payment of debt service and operational expenses of the biodigesters. Both the Chancellor and Vice Chancellor stated at a Foundation board meeting that they had authority to guarantee debts the Foundation would incur. (Mulloy Affidavit ¶ 8.) Deborah Durcan, the Vice President of Financial Affairs for the University of Wisconsin System, was present when the Chancellor and Vice Chancellor made their promises to the Foundation, and she did *220not dissent or raise any concern about the guaranties. (Id. ¶ 8.c.) The University also provided guaranties to lenders. The Vice Chancellor signed several letters agreeing that the University would make debt service payments in the event the Foundation was unable to do so. According to bank officers, the banks relied on these promises in extending credit to the Foundation. (Docket Nos. 37-4 and 37-5.)
The University and UW-Oshkosh Foundation Rosendale Biodigester, LLC, an LLC the Foundation created to own one of the biodigesters, also entered into a use agreement allowing the University to use the biodigester as a student laboratory. Under the terms of the agreement, the University agreed to pay rent to the LLC, which would assist it in meeting its financial obligations. (Docket No. 37-2 at 13-15.) The University Vice Chancellor signed the use agreement.
When the Foundation was unable to pay its debts, in part because the revenues from the biodigesters did not meet expectations, the Foundation requested that the University honor its commitments. (Mulloy Affidavit ¶¶ 20-21.) The University refused, and the Foundation ultimately filed this Chapter 11 case. As summarized in the Court's prior decision denying the State's motion for summary judgment,2 the Foundation filed this adversary proceeding against the State to enforce the commitments as property of the bankruptcy estate. The State responded with a motion to dismiss, claiming that any obligations allegedly due from the State are void under the Wisconsin Constitution. The Court denied the motion to dismiss, finding an applicable exception in the constitution for "public debt." (Docket No. 18.) The State then filed a motion for summary judgment, which the Court also denied.
The Foundation has now filed the instant motion for partial summary judgment. It seeks judgment on its breach of contract claim, arguing that the University breached enforceable obligations established in (1) the MOU between the University and the Foundation; (2) guaranties made by the University to banks; and (3) the use agreement between the University and the LLC that owned the Rosendale biodigester. According to the Foundation, the Court should use its equitable powers to include attorneys' fees and professional fees in any award. The Foundation also requests that the Court enter final judgment on the breach of contract claim pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, incorporated in adversary proceedings by Bankruptcy Rule 7054. (Docket No. 39 at 1.) The State does not take issue with the operative facts stated by the Foundation, but vigorously denies that the Foundation is entitled to a judgment based on applicable law.
II. JURISDICTION
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b) and the order of reference from the district court entered pursuant to 28 U.S.C. § 157(a). The State does not dispute that this is a core proceeding that the Court may hear and determine under 28 U.S.C. § 157(b)(2)(E) and (O) as a proceeding for turnover of property of the bankruptcy estate and a proceeding affecting the adjustment of the debtor-creditor relationship. Although the claims in the Complaint are statutorily core proceedings, the bankruptcy court is constitutionally prohibited from finally determining some of them without the parties' consent. See *221Wellness Int'l Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) ; Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). However, the State consented to entry of final judgment by this Court. (Docket No. 4 at 1.)
III. DISCUSSION
The parties agree that this is a breach of contract action. The State concedes that the MOU formed a contract between the Foundation and the University, stating that "this is not a circumstance where the Court needs to analyze whether there was an offer, acceptance, and consideration, or a meeting of the minds." (Docket No. 38 at 3.) Rather, the State contends that the contracts are legally unenforceable because the Wisconsin Constitution prohibits guaranties of the type established in the MOU.3 The State makes the same arguments that the Court considered and rejected in denying its motion for summary judgment, and the Court again rejects them for the same reasons.
A. Summary judgment standard.
Summary judgment is appropriate if the pleadings and affidavits on file show there is no genuine dispute as to any material fact and the moving party can establish it is entitled to judgment as a matter of law. See Fed. R. Bankr. P. 7056 ; Fed. R. Civ. P. 56. Material facts are "facts that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In evaluating a motion for summary judgment, the Court views all facts and draws all inferences in the light most favorable to the non-moving party. Id. at 255, 106 S.Ct. 2505.
B. The MOU are valid, enforceable contracts.
The Wisconsin Constitution permits the State to "contract public debt ... [t]o acquire, construct, develop, extend, enlarge or improve land, waters, property, highways, railways, buildings, equipment or facilities for public purposes." Article VIII, Section 7(2)(a) (emphasis added). There is no question that the construction of facilities designed to serve the University's students and the surrounding community serves a public purpose. The biodigester facilities signified a move towards the use of renewable resources and provided educational opportunities for students, and the welcome and conference center enhanced the campus. Rather, the State argues that the obligations incurred in the MOU are not "public debt" because they do not satisfy the definition of public debt in enabling legislation, and the University did not follow appropriate statutory procedures in entering into the MOU. According to the State, these deficiencies render the agreements void and unenforceable.
Relevantly for the purpose of this adversary proceeding, section 18.01(4) of the Wisconsin Statutes defines "public debt" as "every voluntary, unconditional undertaking by the state, other than an operating note, to repay a sum certain...." Two requirements are disputed here: whether *222the MOU commit the State to an "unconditional undertaking" for a "sum certain." As the Court previously determined, the MOU meet both of these criteria, at least as to a portion of the damages claimed by the Foundation. Further, because of a savings provision contained in the statute, the State's failure to follow the contracting procedures of Chapter 18 does not affect the enforceability of the debt.
C. The State's undertaking was unconditional and for a sum certain.
The three transactions followed a similar structure, although the exact sequence of events varied. The undisputed goal of the transactions was for the Foundation to finance projects benefitting the University. The Foundation created and is the sole member of three single-purpose LLCs that own the welcome and conference center and the two biodigesters.4 The LLCs, in one case in conjunction with the Foundation, executed promissory notes in favor of the City of Oshkosh and Town of Rosendale, which the municipalities funded through issuing bonds. The Foundation provided guaranties to several banks, which purchased the bonds, and the notes were assigned to the banks.
To help facilitate the transactions, the University provided assurances of payment to both the Foundation and to the banks. Two MOU from the Chancellor and Vice Chancellor to the Foundation recited various benefits that the Foundation provided to the University and agreed that in consideration, the University would cover any deficit the Foundation incurred in the operation of the biodigester facilities and the payment of debt service. The third MOU was a blanket MOU under which the University agreed to cover any deficit incurred by the Foundation in support of projects the Foundation financed for the University, including property acquisition and renovation, construction, research and curriculum enhancement programs, and green initiatives. The University also provided guaranties to the banks, agreeing to make the required debt service payments on the bonds should revenues from the biodigester projects be insufficient to service the operational budget and debt service or should the Foundation be unable to raise the pledges necessary to service the welcome and conference center debt.
The University's obligation to the Foundation as evidenced by the MOU was both unconditional and for a sum certain. No contingency needed to occur to trigger the University's liability to the Foundation. Additionally, the amount of the University's liability to the Foundation was fixed by the Foundation's liability to the lenders. The amount of the University's guaranties to the banks matched the Foundation's liability as a guarantor or a borrower in the transactions. However, to the extent the MOU purported to obligate the University to cover operating deficits and expenses of the biodigesters, the obligations do not constitute sums certain, and do not fall within the definition of public debt.
1. The Witzel Biodigester
As part of the Witzel biodigester transaction, a letter to Wells Fargo Securities, LLC ("Wells Fargo") dated September 22, 2010 and signed by the Vice Chancellor recited that the City of Oshkosh would issue $3.7 million in bonds, to be purchased by Wells Fargo. In the letter, the University agreed "that if the revenues from operation of the Facility are insufficient to service the operational budget and debt *223service on the Bonds, that the University will support the operations of the Facility and the payment of debt service on the Bonds." (Docket No. 37-2 at 17.) The Foundation and the Witzel Biodigester, LLC signed a promissory note agreeing to pay the debt. (An unexecuted copy of the note and assignment to Wells Fargo appears at Docket No. 37-2 at 25-27.)
The June 2012 MOU signed by the Chancellor and Vice Chancellor confirms the University's commitments to pay for the Witzel biodigester. In that MOU, the University agreed
that if the revenues from the operation of the Facility [the Witzel biodigester facility] are insufficient to service the operational budget and debt service on the loan, that the University will cover any deficit that is incurred by the Foundation in support of the operations of the Facility and the payment of debt service.
(Docket No. 37-2 at 10; the "Witzel Biodigester MOU.")
Focusing on this portion of the text, the Witzel Biodigester MOU constitutes the University's agreement to cover payment of the debt service to Wells Fargo on the $3.7 million note. This obligation was both unconditional and for a sum certain. Nothing was required to trigger the State's obligation. The Court rejects the State's argument that the obligation was "conditioned" on "deficits of the Foundation." (Docket No. 38 at 5.) The State's liability under the MOU was absolute and unconditional, and was not subject to conditions precedent such as the bank's notice of default or unsatisfied collection efforts against the Foundation. The amount of the State's liability may have been limited by the amount of operational deficits, but that is not the same as finding that the State's commitment was conditional as opposed to absolute.
The State's obligation to cover the debt service also is a "sum certain." The debt service liability is fixed by the terms of the note. The balance due can be readily determined by mathematical calculation, as demonstrated by the affidavit of Martin Cowie, the Foundation's chief financial officer. He used a billing statement from Wells Fargo to determine the amount currently owing, $1,676,000. (Docket No. 37-3 at ¶¶ 4.d. and 11.a; "Cowie Affidavit.")
Section 18.07(1) of the Wisconsin statutes declares that notwithstanding any provision of the definition of negotiable instrument in section 403.104 to the contrary, all written promises to pay a public debt are negotiable instruments. See Wis. Stat. § 18.01(3) (defining "evidence of indebtedness"). Because of this declaration, Uniform Commercial Code definitions are relevant, but not binding, in construing the definition of "public debt." According to section 403.104, "negotiable instrument" means an "unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order" if certain conditions apply. The $3.7 million note on the Witzel biodigester certainly meets the definition of negotiable instrument, and the University's promise to pay that note in the MOU (by agreeing to cover "debt service") is an unconditional promise to pay a fixed amount of money and a "sum certain." The amount was readily determinable at the time the MOU was entered into and is easily calculated today. Accordingly, the obligation in the MOU to pay this note meets the definition of public debt in section 18.01.
In briefing, the State focuses primarily on the part of the MOU that refers to servicing the Foundation's operational budget and fails to address directly the argument that as to the agreement to cover *224debt service, the original promissory note determined the amount of the obligation. (Docket No. 38 at 3-5.) (The State also fails to cite any authority supporting its understanding of the meaning of "sum certain" as used in the definition of "public debt.") In contrast to the University's agreement to pay the Wells Fargo note, the Court agrees that the amount of the obligation established in the agreement to cover operating deficits is not readily determinable. On the date the MOU was signed, the amount of this obligation was purely speculative. Now, Mr. Cowie has calculated this amount as $973,174.69. (Cowie Affidavit, ¶ 11.b.) Apparently, the amount includes loans the Foundation made to Witzel Biodigester, LLC "to pay operating costs and debt payments," as well as reimbursements made from the LLC to the Foundation. (Id. ) Unlike with respect to the Wells Fargo note, the total amount of the State's potential liability was open-ended and could not readily be established from the face of the document. See Koshick v. State , 2005 WI App 232, ¶ 12, 287 Wis.2d 608, 616, 706 N.W.2d 174, 178 (denying concert promoter's claims against the State because "[t]he lost profits and the incurred expenses he seeks to recover are not liquidated; they cannot be readily determined from the terms of the alleged contract or from fixed data or mathematical computation."). Therefore, the Court concludes that the obligation to reimburse the Foundation's operating deficits on the Witzel biodigester was not a sum certain. As a result, the operating deficit obligation is not a public debt entitled to the protections of section 18.14.
2. The Rosendale Biodigester
The Rosendale biodigester transaction was similar to the Witzel biodigester transaction, and the Court reaches the same conclusions as to the nature of the State's obligations as a public debt. In a June 2012 MOU signed by the Chancellor and Vice Chancellor, the University agreed
that if the revenues from the operation of the Facility [the Rosendale biodigester facility] are insufficient to service the operational budget and debt service on the loan, that the University will cover any deficit that is incurred by the Foundation in support of the operations of the Facility and the payment of debt service.
(Docket No. 37-2 at 11; the "Rosendale Biodigester MOU.") As contemplated, Rosendale Biodigester, LLC borrowed the funds to construct the facility and then sought to refinance the debt. In a November 19, 2015 letter to First Business Bank signed by the Vice Chancellor, the University agreed that "if the revenues from the operation of the Facility are insufficient to service the operational budget and debt service on the Bonds ... the University will support the operations of the Facility, the payment of debt service on the Bonds and any other liability owed by the Borrower to the Purchaser." (Docket No. 37-2 at 21.) The letter stated that it used terms as defined in the bond agreement. In December 2015, Rosendale Biodigester, LLC executed a promissory note for $6,771,096.01, which was assigned to First Business Bank. (Docket No. 37-2 at 28-30.) The Foundation guaranteed this debt. (Docket No. 37-2 at 31-40.) The amount of the State's obligation was clearly set by the amount of the bond issuance, the promissory note and the Foundation's guaranty, and the obligation was not conditioned on the occurrence of any event. According to Mr. Cowie's affidavit, counsel for First Business Bank provided a payoff amount for the note, including principal, interest through April 20, 2018, late charges and fees. (Cowie Affidavit ¶ 4.a.) The Affidavit states that this amount is $7,708,841.32. (Id. ¶ 9.) This amount is a "sum certain" that was readily calculable *225from the face of available documents at the time of the transaction. The note bears the elements of negotiability under the U.C.C., and the obligation to cover the note payments under the MOU constitutes a public debt.
Like the Witzel Biodigester MOU, the Rosendale Biodigester MOU contained a promise that the University would cover any deficit the Foundation incurred in support of the operations of the biodigester. This amount totals $1,212,800 and represents loans made "to cover costs of operating the biodigester, such as paying payroll and other ordinary operating expenses, as well as debt payments." (Cowie Affidavit ¶ 9.b.) These obligations, which were not liquidated nor ascertainable at the time the University entered into the transaction, are not sums certain and do not qualify as public debt.
Mr. Cowie's affidavit also includes $678,000 in unsecured liability to "Bioferm." (Id. ¶ 9.d.) As explained in the affidavit, "this amount represents the balance of a no-interest agreement the Foundation assumed. The original agreement was between the University and Bioferm to pay for costs incurred to put the Rosendale Biodigester online and compensate Bioferm for its assistance operating the biodigester." (Id. ) A letter dated December 20, 2012 from the Bioferm president to the University and signed by the Vice Chancellor indicated that the parties were unable to finalize plans for payment of the contract balance but concurred in their "mutual intent to proceed in good faith to develop such plans and procedures for the recovery of the margin." (Docket No. 37-2 at 23.) In a letter dated September 19, 2016 from the Foundation's chairman to BioFerm USA, Inc., the Foundation stated it would assume the University's obligation. (Docket No. 37-2 at 49.) The Foundation contends that the Rosendale Biodigester MOU extends to this amount as a debt relating to the operation of the biodigester that the Foundation was unable to pay, but the argument for tying this obligation into the breach of contract claim against the State is tenuous at best. The December 20, 2012 letter concedes that the University and Bioferm were unable to reach agreement on repayment of the debt. While the Foundation's assumption of the debt appears enforceable, the purported inclusion of the obligation under the blanket of the MOU is another matter, because the University declined to reach agreement on its alleged liability to Bioferm. Given the background of this obligation, the Court concludes that the Bioferm debt is not a public debt that can be enforced against the State in this breach of contract action.
3. The Welcome and Conference Center
Finally, the Foundation financed the construction of a welcome and conference center. Although the Foundation has not submitted a memorandum of understanding specific to this project, in a blanket June 2012 MOU signed by the Chancellor and Vice Chancellor, the University agreed
that if revenues from projects and initiatives taken on by the Foundation are not sufficient to cover project/program expenses, the University will cover any deficit that is incurred by the Foundation in support of said projects. Furthermore, the University agrees to compensate and make whole, on an annual basis, the Foundation for any cost overruns attendant to the above referenced projects and initiatives ["property acquisition and renovation, new construction, research and curriculum enhancement programs, program expansion and new programs, and 'green' initiatives"]. (Docket No. 37-2 at 9.) A letter to Bank First National dated January 18, 2013 and signed by the Vice Chancellor recited *226that the City of Oshkosh would issue $10 million in bonds to assist the Foundation in constructing the welcome and conference center, and the bonds would be purchased by Bank First National. The University agreed that if the Foundation was unable to raise additional pledges to service the debt, it would "make the required debt service payments on the Bonds and any other liability owed by the Borrower [defined as the UW Oshkosh Foundation Alumni Welcome and Conference Center, LLC] to the Purchaser [defined as Bank First National]." (Docket No. 37-2 at 22.) The Welcome Center, LLC executed a promissory note in favor of the City agreeing to pay this debt, and the note was assigned to Bank First National. (Docket No. 37-2 at 41-43.) The Foundation guaranteed the debt. (Docket No. 37-2 at 44-48.) Here again, the University accepted responsibility for the $10 million debt, and the amount owed was easily determined at the inception of the transaction and can be readily calculated today. Counsel for Bank First National provided Mr. Cowie with a payoff figure of $5,996,463.24. (Cowie Affidavit ¶¶ 4.b. and 10.) For the same reasons that the note obligations related to the Witzel Biodigester MOU and Rosendale Biodigester MOU qualify as public debts, this obligation is a sum certain that the University unconditionally promised to pay.
D. Although the debt did not comply with the procedures of Chapter 18, section 18.14 validates the debt.
The State argues that it must follow procedures set forth in section 18.06 in order for debt to qualify as "public debt" as defined in section 18.01(4). Because the University did not do so in this case, the State argues the contracts are unenforceable. The Court rejects this argument, as before, because Chapter 18 of the Wisconsin Statutes contains a provision validating debt that is otherwise "public debt" but does not comply with the relevant procedures. Section 18.14(1) provides:
Notwithstanding any defects, irregularities, lack of power or failure to comply with any statute or any act of the commission, all public debt contracted or attempted to be contracted after December 7, 1969 is declared to be valid and entitled to the pledge made by s. 18.12; all instruments given after December 7, 1969 to evidence such debt are declared to be binding, legal, valid, enforceable and incontestable in accordance with their terms; and all proceedings taken and certifications and determinations made after December 7, 1969 to authorize, issue, sell, execute, deliver or enter into such debt or such instruments are validated, ratified, approved and confirmed.
The State again encourages the Court to read a transitional element into the statute that does not appear in its text, arguing that the provision is absurd unless it is read in this way. The State explains that after it obtained permission to incur public debt in 1969, the Wisconsin legislature adopted Chapter 18 "for the purpose of establishing the standards and procedures for selling state bonds." (Docket No. 38 at 8.) In 1973, the legislature replaced the Bond Board with the State Building Commission. According to the State, the purpose of section 18.14 was "ensuring that the debt incurred under Bond Board procedures would be honored as public debt and entitled to the protection of the pledge that Wis. Stat. § 18.12 makes-that such debt is protected by the full faith and credit of the state." (Id. ) On the State's reading, the fact that section 18.13(2) excuses compliance with procedures a claimant would otherwise need to follow to *227bring an action on a claim also provides support for the idea that the legislature would not have expanded the universe of public debt to include debt contracted once the Building Commission was in place. According to the State, the legislature would not have extended the State's waiver of sovereign immunity that far.
In interpreting statutes, Wisconsin "cases generally adhere to a methodology that relies primarily on intrinsic sources of statutory meaning and confines resort to extrinsic sources of legislative intent to cases in which the statutory language is ambiguous." State ex rel. Kalal v. Circuit Court for Dane Cty. , 2004 WI 58, ¶ 43, 271 Wis.2d 633, 662, 681 N.W.2d 110, 123. In interpreting the statute, the Court "assume[s] that the legislature's intent is expressed in the statutory language. Extrinsic evidence of legislative intent may become relevant to statutory interpretation in some circumstances, but is not the primary focus of inquiry. It is the enacted law, not the unenacted intent, that is binding on the public." Id. ¶ 44. Accordingly, the Court begins with the language of the statute and ends there if the language is plain. Id. ¶ 45. Courts interpret statutory language in the context in which it is used, "reasonably, to avoid absurd or unreasonable results," and to give reasonable effect to every word. Id. ¶ 46. "If this process of analysis yields a plain, clear statutory meaning, then there is no ambiguity, and the statute is applied according to this ascertainment of its meaning." Id.
The State's theory as to the intent behind section 18.14 runs counter to the plain language of the statute. Section 18.14 comes near the end of the subchapter titled "State Debt," after section 18.06, which prescribes the procedures that are to be followed in contracting public debt. The text of the statute contains no temporal limitation, and the plain meaning reading of the statute as a permanent savings provision does not render the rest of the chapter irrelevant.
The State's interpretation rests entirely on speculation about what the legislature intended, and it cites no legislative history supporting its argument, nor was the Court able to locate any. There are legitimate policy reasons behind a permanent savings provision like section 18.14(1).5 One reason would be to encourage parties to make credit available to the state by assuring them that public debt will be valid even if the State fails to comply with Chapter 18's procedures. A provision of Chapter 946 provides support for this interpretation of the statute. Section 946.13(1) makes it a crime for a public officer or employee to participate in the making of a public contract in which the officer or employee has a private pecuniary interest. Section 946.13(3) voids any contract entered into in violation of the statute, except a contract creating public debt "as defined in s. 18.01 (4), if the requirements of s. 18.14 (1) have been met." Wis. Stat. § 946.13(6). Section 946.13 has been amended several times, including as recently as 2009, and various provisions of Chapter 18 have been amended numerous times. It is highly improbable that the legislature could have reviewed Chapter 18 without recognizing the alleged problems with the language of section 18.14. As the State notes, there are legitimate policy reasons behind the legislative requirements for incurring public debt, like ensuring that debt that will be repaid by Wisconsin *228taxpayers is incurred responsibly and for proper purposes. However, there are legitimate policy reasons supporting the enactment of a permanent savings provision, and it would be inappropriate to conclude that the plain meaning of section 18.14 is absurd. The Court will not substitute its judgment for the intent expressed in the language of the statute as the legislature enacted it.
E. The Foundation is not a third-party beneficiary entitled to enforce alleged guaranties from the University to banks.
In its briefing, the Foundation argues that it ought to be able to enforce guaranties made by the University to several banks as a third-party beneficiary to the guaranties. A party may enforce a contract to which it is not a party if the "contracting parties intended to 'directly and primarily' benefit" the third party. Becker v. Crispell-Snyder, Inc. , 2009 WI App 24, ¶ 11, 316 Wis.2d 359, 367, 763 N.W.2d 192, 196. The party "proves its third-party beneficiary status by pointing to specific language in the contract establishing intent." Id. According to the Foundation, the benefit it received from the alleged guaranties was that the University would pay the banks in the event the Foundation could not.
The Foundation's argument fails because the direct and primary beneficiary of the University's agreements with the banks was the banks, and the intended beneficiary of the transaction as a whole was the University and its students. The purpose of the guaranties was to induce the banks to make the bond purchases so that the Foundation could pursue a variety of projects benefitting the University. This is expressly stated in all of the guaranties, which were made in consideration of the benefits accruing to the University and its students and in pursuit of the University's educational mission. In order for a party to qualify as a third-party beneficiary, "[t]he benefit proven must be direct; an indirect benefit incidental to the primary contractual purpose is insufficient." Id. Although the Foundation might benefit if the University paid debt that the Foundation incurred, this is an incidental consequence of the guaranty. The main concern of the transaction was not to benefit the Foundation by ensuring its debts were paid. Rather, it was financing the projects that benefitted the University.
The Foundation cited no cases in which a principal obligor was deemed the third party beneficiary of a guaranty. The Court's research uncovered examples, but only when the guarantor agreed to waive specific rights against the principal. In Linnemann v. Post (In re Mission Bay Ski & Bike, Inc.) , 398 B.R. 250, 255 (Bankr. N.D. Ill. 2008), the guarantor expressly waived its subrogation and reimbursement rights against the principal, and the court found that the principal was a third party beneficiary entitled to enforce that waiver. Here, however, the University's agreements with the banks contain no specific language establishing this intent. The Foundation essentially seeks to "enforce" the guaranty on behalf of the banks, yet as the State observes, the banks have filed their own actions seeking payment under the alleged guaranties. (Docket No. 38 at 11.)
F. The Foundation may not enforce the Rosendale Biodigester Use Agreement because it is neither a party to the agreement nor a third-party beneficiary.
The Foundation also argues that it ought to be able to enforce the use agreement between the University and Rosendale Biodigester, LLC. Although it *229is not entirely clear from the record, apparently Rosendale Biodigester, LLC leased land for the biodigester from subsidiaries of Milk Source, LLC. (See Mulloy Affidavit ¶¶ 15-16.) Then Rosendale Biodigester, LLC entered into the use agreement with the University under which the University would use the biodigester "as a learning living laboratory for UW Oshkosh students, staff and guests or such other agency." (Docket No. 37-2 at 13.)6 In exchange, the University agreed to pay a "minimum of five hundred and forty-five thousand dollars ($545,000.00) or higher to meet the Lessor's financial obligations." (Id. ) According to the Cowie Affidavit, $158,182.01 of unpaid base rent is owed to Milk Source, presumably an obligation of Rosendale Biodigester, LLC. ¶ 9.c.
The State makes several arguments that the agreement is void under the Wisconsin Constitution. The Court need not reach these arguments because the Foundation does not have standing to enforce any rights established in the agreement. The Foundation was not a party to the agreement, and Rosendale Biodigester, LLC is not a debtor in these bankruptcy proceedings. The Foundation argues that it is a third-party beneficiary of the agreement because Rosendale Biodigester, LLC is wholly owned and controlled by the Foundation. Additionally, the Foundation asserts the facts that the University guaranteed the debt for construction of the biodigester and entered into the Rosendale Biodigester MOU show that the University's goal was to ensure the Foundation did not incur additional expense if the biodigester was not profitable. These arguments fail because as stated in the use agreement, the University and Rosendale Biodigester, LLC, the parties to the agreement, intended to benefit the University's students by allowing them to use the biodigester for educational purposes. They did not intend to directly and primarily benefit the Foundation. Even if the Court found that the use agreement obligations could be covered under the blanket of the Rosendale MOU, the obligations are too speculative to meet the requirement of a "sum certain."
G. The Foundation is not entitled to an award of attorneys' fees and professional fees.
The Foundation initially argued that the MOU entitled it to an award of attorneys' fees and professional fees but later acknowledged that the MOU cannot support such an award and withdrew the request. (Docket No. 37-1 at 15-16; Docket No. 39 at 5.) However, the Foundation maintains that the Court can and should use its equitable powers to award fees to the Foundation. The case the Foundation cites holds that under Wisconsin law, courts may award attorneys' fees as an equitable remedy "in exceptional cases and for dominating reasons of justice." Nationstar Mortg. LLC v. Stafsholt , 2018 WI 21, ¶ 24, 380 Wis.2d 284, 297, 908 N.W.2d 784, 790 (quoting Sprague v. Ticonic Nat'l Bank , 307 U.S. 161, 167, 59 S.Ct. 777, 83 L.Ed. 1184 (1939) ).
Even assuming Stafsholt permits an award of attorneys' fees in a breach of contract action such as the one here, the Foundation has not established any reason to depart from the traditional American Rule that each party to litigation is responsible *230for its own attorneys' fees. This is hardly a case where the State has used the court system in an attempt to "extort" something from the Foundation to which the State is not entitled. See Stafsholt , 2018 WI 21, ¶ 37, 380 Wis.2d 284, 908 N.W.2d 784. The conduct of the Chancellor and the Vice Chancellor in allegedly acting outside of the scope of their authority by making promises to the Foundation may have been egregious, but other pending legal proceedings will determine the consequences for these former officials. This case raises novel questions about interpretation of the Wisconsin Constitution and related statutes. There is nothing egregious about the State's position that the agreements were unenforceable or its refusal to pay the Foundation substantial sums of money without a final legal determination about its obligations.
IV. CONCLUSION
In sum, through the MOU and transactions with the Foundation and its lenders, the University created enforceable contracts to service the debt incurred by the Foundation. Because this undertaking was voluntary, unconditional and for a sum certain, the State incurred public debt through the transactions. Although the University did not follow the proper contracting procedures, the savings clause in Chapter 18 validates the contracts. Judgment for the Foundation on its breach of contract claim and an award of damages is appropriate to the extent the damages represent amounts that were readily determinable from the face of the documents comprising these transactions. According to a chart attached to the Cowie affidavit, this amount is $15,022,419.58, consisting of $7,349,956.34 for the First Business Bank loan,7 $5,996,463.24 for the Bank First National loan, and $1,676,000.00 for the Wells Fargo loan. To the extent the MOU covered other unliquidated operating deficits, the Court concludes those are not a "sum certain" that meet the definition of public debt. Because the obligations do not constitute public debt, the savings clause of section 18.14 does not apply to protect the liability.
The Foundation has asked the Court to direct entry of final judgment on its breach of contract claim pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, incorporated in bankruptcy proceedings by Bankruptcy Rule 7054. The rule states that "When an action presents more than one claim for relief ... the court may direct entry of a final judgment as to one or more, but fewer than all, claims ... only if the court expressly determines that there is no just reason for delay." In order for judgment under Rule 54(b) to be appropriate, the decision "must be a 'judgment' in the sense that it is a decision upon a cognizable claim for relief, and it must be 'final' in the sense that it is 'an ultimate disposition of an individual claim entered in the course of a multiple claims action.' " Curtiss-Wright Corp. v. Gen. Elec. Co. , 446 U.S. 1, 7, 100 S.Ct. 1460, 64 L.Ed.2d 1 (1980) (quoting Sears, Roebuck & Co. v. Mackey , 351 U.S. 427, 436, 76 S.Ct. 895, 100 L.Ed. 1297 (1956) ). In determining whether there is no just reason to delay an appeal, courts consider "judicial administrative interests as well as the equities involved." Id. at 8, 100 S.Ct. 1460. The Court agrees with the Foundation that in this adversary proceeding, there is no just reason to delay entry of a *231final judgment on Count I of the complaint under the provisions of Rule 54(b). The Court will enter a separate judgment consistent with this decision pursuant to Rule 58 of the Federal Rules of Civil Procedure.
The Foundation brought this adversary proceeding against the Board of Regents of the University of Wisconsin System. The Board of Regents is the State administrative agency responsible for governing the University of Wisconsin System. See Wis. Stat. §§ 15.91, 36.09. This decision will refer to the "State" as the party to the proceeding. It will refer to the University of Wisconsin Oshkosh as the "University" in discussion of actions taken by officers of the University of Wisconsin Oshkosh.
Univ. of Wis. Oshkosh Found., Inc. v. Bd. of Regents of the Univ. of Wis. Sys. (In re Univ. of Wis. Oshkosh Found., Inc.) , 586 B.R. 458 (Bankr. E.D. Wis. 2018) (Docket No. 32).
In previous proceedings, the State asserted that sovereign immunity barred certain claims asserted by the Foundation. The State no longer asserts this argument for purposes of the present motion. Docket No. 38 at 9 n.10:
Because suit against the State is possible if certain conditions-precedent are met, the State waived asserting compliance with these conditions-precedent as a means to expediting the resolution of this case. As to all claims the Foundation has raised in this case, other than the breach of contract claim , the Board of Regents maintains that the State has sovereign immunity from suit for the reasons set forth in its briefs in support of summary judgment. (Dkt. 26:10-17; Dkt. 30:1-8.)
For convenience, UW-Oshkosh Foundation-Witzel, LLC will be referred to as "Witzel Biodigester, LLC" and UW-Oshkosh Foundation Rosendale Biodigester, LLC will be referred to as "Rosendale Biodigester, LLC."
The Court adopts the reasoning it gave in denying the State's Motion for Summary Judgment. See Univ. of Wis. Oshkosh Found., Inc. v. Bd. of Regents of the Univ. of Wis. Sys. (In re Univ. of Wis. Oshkosh Found., Inc.) , 586 B.R. 458 (Bankr. E.D. Wis. 2018) (Docket No. 32).
In earlier proceedings, the State submitted a Use Agreement dated October 13, 2014 with a term ending June 30, 2015. (Docket No. 28.) The State refers to this agreement in its briefing. However, the agreement filed with the instant motion is dated November 18, 2015 with a term extending into 2020 and appears to be the document on which the Foundation relies.
The Cowie Affidavit actually gives two different totals for this obligation. This total is taken from the chart attached as Exhibit A to the Affidavit as the Affidavit states: "The amount in Exhibit A was provided to the Foundation by First Business Bank." (Cowie Affidavit at ¶ 9.a.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501707/ | Phyllis M. Jones, United States Bankruptcy Judge
Before the Court is the Complaint filed by Bruce and Linda Dantzler ("Dantzlers ") objecting to the discharge of Denny and Pamela Zulpo, who are joint debtors in this voluntary Chapter 7 bankruptcy case ("Debtors "). The Debtors timely answered the complaint.
The Dantzlers base their objection to the Debtors' discharge on three provisions of Section 727 of Title 11 of the United States Bankruptcy Code: Section 727(a)(3) (failing to keep or preserve recorded information from which the debtor's financial condition might be ascertained); Section 727(a)(2)(A) and (B) (transferring property with intent to hinder, delay, or defraud creditors); and Section 727(a)(4)(A) (knowingly making false oaths in connection with the bankruptcy case).
After a trial on the merits on January 8, 2018, the Court took the matter under advisement. For the reasons stated in the following Memorandum Opinion, the Debtors' discharge is denied.
I. Jurisdiction
The Court has jurisdiction pursuant to 28 U.S.C. § 1334. The matter before the Court is a core proceeding under 28 U.S.C. § 157(b)(2)(J), and the Court may enter a final order. The parties have expressly consented to the entry of a final order by this Court on all claims and causes of action asserted in this adversary proceeding. (Agreed Pre-Trial Order, Doc. No. 11). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
II. Background
The Debtors are stone masons by occupation, but also provide lawn care and handyman services when the opportunity for such work presents itself. The two have been married since 2008. Mrs. Zulpo did not graduate from high school but has earned a graduate equivalency degree. Mr. *236Zulpo's education is not shown by the record.
In 1995, Mr. Zulpo was involved in a head-on collision with an all-terrain vehicle and suffered a brain injury as a result. Mr. Zulpo testified that the accident initially left him with paralysis on his right side, but that disability gradually subsided. However, he also suffered an impaired memory which persists, and as a result his recall of recent events is sometimes faulty.
Prior to bankruptcy, Bruce and Linda Dantzler, the plaintiffs in this adversary proceeding, hired the Zulpos to complete a series of stone-work projects at their home over a period of several months in 2012. Mr. Dantzler testified that a year after completion of the various projects, the mortar in some areas began to crumble. He contacted the Zulpos, who offered to patch the affected areas, but Mr. Dantzler was dissatisfied with their proposed solution and ultimately filed suit against the Zulpos in 2014 in the Pulaski County Circuit Court ("State Court Lawsuit ").
After a trial on the merits of the State Court Lawsuit on June 8, 2016, the Dantzlers were awarded a judgment against the Zulpos for $41,075.31, which included $29,500.00 for payments the Dantzlers made to the Zulpos for their work, as well as other costs and fees. (Ex. 1).1 After entry of the judgment on July 12, 2016, the Zulpos each submitted a schedule of assets (the "Schedule of Assets " or collectively, the "Schedules of Assets ") as required by the circuit court.2 (Ex. 2). In a subsequent order entered October 17, 2016, the circuit court questioned the completeness and veracity of the Zulpos' State Court Schedules of Assets and ordered them to supplement the schedules within twenty days. (Ex. 43). The State Court Schedules of Assets will be more fully discussed in a subsequent portion of this Opinion.
The Zulpos did not amend their State Court Schedules of Assets as directed by the circuit court. Instead, on November 3, 2016, they filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code. (Ex. 3). On March 31, 2017, the Dantzlers filed the instant adversary proceeding objecting to the Debtors' discharge. (Ex. 8).
III. Burden of Proof
The Dantzlers, as the individuals objecting to the Debtors' discharge under Section 727 bear the burden of proving by a preponderance of the evidence that discharge should be denied. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010) (quoting Khalil v. Developers Sur. & Indem. Co. (In re Khalil) , 379 B.R. 163, 172 (9th Cir. BAP 2007) ).
Denial of a debtor's discharge has been described as "a harsh remedy," and, consequently, the provisions governing discharge denial " 'are strictly construed in favor of the debtor.' " Kaler v. Charles (In re Charles) , 474 B.R. 680, 683 (8th Cir. BAP 2012) (quoting Korte v. Internal Revenue Serv. (In re Korte), 262 B.R. 464, 471 (8th Cir. BAP 2001) ).
IV. Section 727(a)(3) - Failure to Keep Records
The Dantzlers argue that they have requested certain documents and other recorded information from which the Debtors' financial condition or business transactions might be ascertained but that these materials have not been produced.
*237They further contend that such failure is unjustified, prevents the Debtors' creditors from understanding the Debtors' finances and business transactions, and is a basis to deny their discharge.
The Debtors acknowledged during the trial that they have made errors in their bankruptcy filings and that they are not good record keepers, but they argue that they did not purposely hide or conceal records from their creditors. Their attorney argued on their behalf that they are terrible business people but not terrible people and should not lose their discharge for lack of sophistication or education.
The relevant statute provides that a debtor's discharge will be denied if "the debtor has ... 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 ...." 11 U.S.C. § 727(a)(3) (2012).
Section 727(a)(3) does not impose an element of intent in failing to provide adequate records. Floret, L.L.C. v. Sendecky (In re Sendecky), 283 B.R. 760, 764 (8th Cir. BAP 2002) ; St. Francis Cnty. Farmers Ass'n v. Wright (In re Wright), 353 B.R. 627, 649 (Bankr. E.D. Ark. 2006) (citing Norwest Bank Minn. v. Pulos (In re Pulos), 168 B.R. 682 (Bankr. D. Minn. 1994) and First State Bank of Newport v. Beshears (In re Beshears), 196 B.R. 468 (Bankr. E.D. Ark. 1996) ). Rather, the standard under this provision is one of reasonableness. Davis v. Wolfe (In re Wolfe), 232 B.R. 741, 745 (8th Cir. BAP 1999). Accordingly, the debtor is required "to take such steps as ordinary fair dealing and common caution dictate to enable the creditors to learn what he did with his estate." In re Wright , 353 B.R. at 649 (quoting In re Beshears, 196 B.R. at 474 ).
Creditors must be provided with enough information to track a debtor's financial dealings with substantial completeness and accuracy for a reasonable period leading up to the bankruptcy filing. Grau Contractors, Inc. v. Pierce (In re Pierce), 287 B.R. 457, 461 (Bankr. E.D. Mo. 2002) (citing In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1990) ).
The party objecting to discharge under Section 727(a)(3) has the initial burden of demonstrating that "the debtor failed to keep and preserve his financial records and that this failure prevented the party from ascertaining the debtor's financial condition." In re Wright, 353 B.R. at 649 (citing Womble v. Pher Partners (In re Womble), 108 F. App'x 993 (5th Cir. 2004) ). If the party objecting to discharge establishes that the debtor's records are inadequate, the burden of production shifts to the debtor "to offer a justification for his record keeping (or lack thereof)." McDermott v. Swanson (In re Swanson), 476 B.R. 236 (8th Cir. BAP 2012) (debtor must show that his record keeping was reasonable under the circumstances).
(A) Adequacy of the Records Produced
The first issue to resolve is whether the Dantzlers established an inadequacy of the Debtors' records such that the Debtors' present financial condition and business transactions for a reasonable period in the past cannot be ascertained. In making this determination, the Court considered evidence of the Debtors' business income as reflected on their federal and state income tax returns for the years 2012 through 2016, the schedules and statements filed in the bankruptcy case, their bank statements, and their records of cash receipts and disbursements related to their *238business. Also relevant to the Court's determination were the Dantzlers' records of their payments to the Debtors for stone masonry work performed in 2012.
(1) 2016 Tax Returns
The Debtors' 2016 federal income tax return reflects that the Debtors' only income in 2016 was business income. (Ex. 24). The return includes Schedule C - Profit or Loss from Business - showing gross receipts and sales of $13,858.00, cost of goods sold of $3,100.00, gross profit of $10,758.00, and other business expenses including automobile expenses, insurance, repairs, and cell phone costs totaling $7,361.00. (Ex. 24). The Debtors' resulting net business income after subtracting the various business expenses was $3,397.00. (Ex. 24). The Debtors' 2016 state income tax return reflects identical numbers for gross and net business income. (Ex. 24).
Both returns were prepared by a tax preparer. The returns are not dated but presumably were filed after the Debtors' bankruptcy filing on November 3, 2016.
(2) Bankruptcy Schedules and Statements
The 2016 tax returns are inconsistent with Schedule I of the Debtors' bankruptcy schedules and their Statement of Financial Affairs. On Schedule I, filed on November 8, 2016, the Debtors' net monthly income is listed as $3,436.96, which calculates to $41,243.52 a year in net income. (Ex. 5 at 24).3 By contrast, the Debtors' Statement of Financial Affairs listed $32,000.00 in gross income for January 1, 2016 to the petition filing on November 3, 2016. (Ex. 5 at 28). Neither the gross nor the net figure is remotely comparable to the gross and net income figures reported on the 2016 tax returns.
When testifying at trial about his filings in the bankruptcy case, Mr. Zulpo stated that the Schedule I income was incorrect, asserting that "I don't make money like that." (Tr. at 41). He testified that because his work is sporadic he was uncertain about what his income was at the time he filed for bankruptcy. He also admitted that "[w]e do not keep up with our receipts or what we do half the time." (Tr. at 42). Therefore, he "guesstimated" his income as stated on Schedule I. (Tr. at 93). He said the gross income amounts for the years 2014-2016 on his Statement of Financial Affairs were also guesses. Similarly, when Mr. Zulpo was questioned about the Means Test at trial, he stated that he did not recall this part of the schedules and that the numbers were inaccurate. (Tr. at 50). As of the date of the trial, the Debtors had not amended either their schedules or their 2016 tax returns to reconcile the differences between the income figures.
(3) Bank Accounts
No additional light is shed on the Debtors' financial condition and business transactions by reviewing the Debtors' bank records. The Debtors provided statements and deposit slips related to a checking account at Arvest Bank and a savings account at Simmons Bank. The bank statements reflect a total of $12,195.00 in deposits into the Arvest checking account in *2392016. (Ex. 42). Of that sum, only three deposits, totaling $1,100.00, were designated as check deposits on the deposit slips. (Ex. 27). The drawers of the checks are not disclosed in the statements or on the deposit slips. The remaining deposits are cash deposits without any indication of the sources of the cash. (Ex. 27).
The account debits reflect a few payments for gasoline, lumber, and hardware or rentals that could conceivably have been business-related. Four of these were payments to Hum's Hardware and Rental and Weiss Do-It-Best Lumber Company that were accounted for as business expenses under Exhibit 25, the Debtors' cash receipts and expenses. (Exs. 25, 27). However, the vast majority of the debits appear to be related to personal expenses such as groceries and sundries, utilities, restaurant meals, and entertainment. (Ex. 27).
The account does not reflect the source of the deposits and except for the four payments to Hum's and Weiss, no account debits can be definitely linked to business expenses. (Exs. 25, 27). Thus, this account provides minimal information about the Debtors' sources of income or business transactions.
Similarly, the Simmons savings account provides little useful information about the Debtors' financial condition. Statements dated March 31, May 31, June 30, September 30, and December 30, 2016, were introduced into the record. (Ex. 28). In April 2016 there was a deposit of $800.00 and in May 2016 there was a deposit of $1,300.00. (Ex. 28). Virtually all of these funds were subsequently withdrawn by ATM transactions in May and June. (Ex. 28). The ending balance on the June 30, 2016, statement was $11.84. (Ex. 28.). The ending balances on the subsequent statements were $3.16 (September) and $.00 (December). (Ex. 28). The account statements provide no information about the source of the deposits or how the withdrawn funds were used.
(4) Cash Receipt Books and Expenses
In terms of reflecting the Debtors' business transactions, the most potentially useful documents admitted into evidence were copies of cash receipts verifying payments to the Debtors and the merchant receipts and invoices reflecting expenditures for materials and supplies. These records evidence income and expenses for work performed from approximately April to October 2016, the period immediately preceding the bankruptcy filing. (Ex. 25). Mr. Dantzler testified that these documents were all the records of work-related cash receipts and payments the Debtors supplied to them, despite the Dantzlers having requested cash receipts for the years 2012 through 2016. (Ex. 10).
Mrs. Zulpo testified that she thought she had supplied all the cash receipt books requested, including those from 2014 and 2015. She stated she provided several cash receipt books to her counsel's paralegal. Only receipts from approximately seven months in 2016 were offered and admitted into evidence. (Ex. 25). She also testified that she keeps the books for the business, admitting that she is "very bad" at bookkeeping. (Tr. at 176). In collecting the cash receipt books to compile information about the Debtors' financial condition, she testified, "I had to dig through my house and look for them.... I went through the trucks and looked under seats and behind the seats .... One bill book actually ... was all crumpled up and chewed up." (Tr. at 176). About the missing cash receipt books, Mr. Zulpo testified, "We probably got them, we can't find them, because we lay stuff everywhere." (Tr. at 72).
Using the cash receipts from 2016 produced by the Debtors, the Dantzlers calculated that the Debtors grossed a total of $28,104.64 during the seven-month period.
*240The Court's calculation was that the Debtors received $28,704.64 during the seven month period, including receipts for materials and labor but omitting balances remaining due of $650.00 charged to Winrock Grass Farm and $1,600.00 charged to David Bauman. (Ex. 25). After deducting the documented expenses totaling $8,739.304 for materials and supplies, the net income resulting for the seven month period is $19,965.34, an average monthly net income of $2,852.19.
The gross and net figures derived from these calculations are inconsistent with the $3,436.96 net monthly income reported on Schedule I and the $32,000.00 in gross income disclosed on the Statement of Financial Affairs. Moreover, the Debtors' cash receipts for the seven months in 2016 calculated above to be $28,704.64 greatly exceed the $13,858.00 in gross receipts reported for the entire year on the 2016 federal and state tax returns.
Mr. Zulpo attributed some of the discrepancies to overhead expenses not included in the cash receipt estimates. He stated that when he quotes a price for a job, the quote includes the cost of labor and materials, but not gasoline and other, unspecified expenses.5 Mr. Zulpo said the amount left after paying expenses for materials and labor must then cover these other, unspecified expenses. He stated that the net income figures on the schedules and forms do not reflect true net income because the unspecified expenses have not been deducted. No business-related expenses are itemized on Schedule J. He did not explain why these other expenses could not have been considered since the Debtors were able to later itemize $7,361.00 in such expenses on their 2016 tax return.
Mr. Dantzler testified that based on his personal observation when the Debtors worked for him in 2012, the Debtors conducted their work-related finances on a cash basis. Mrs. Zulpo verified that until the Debtors opened a bank account in 2015, they had done business on a "strictly cash" basis. (Tr. at 175). Apparently, even with bank accounts, they continued to receive cash payments or convert payments to cash that they then used to pay most of their business expenses and possibly some personal expenses, depositing the rest in their bank account for personal use.
(5) Records from Previous Years
Records from previous years establish a similar pattern of unexplained discrepancies and lack of documentation. No cash receipt books for work performed prior to April of 2016 were introduced into the record.
On Schedule C of their 2015 tax return, the Debtors reported gross receipts of $7,167.00, the total from the Debtors' 1099 schedule showing income of $1,000.00 from Grande Maumelle Sailing Club ("GMSC ") and $6,167.00 from Rich Mountain. (Ex. 23). However, the Debtors' Statement of Financial Affairs filed in the bankruptcy case shows gross income of $38,400.00 in 2015, a figure Mr. Zulpo now asserts is inaccurate. (Ex. 5). By contrast with the $7,167.00 in gross receipts in 2015, the *241Debtors' Arvest checking account for the months of March through December 2015 reflects a total of $9,389.97 in deposits for the ten-month period that the account was open. (Ex. 26).
On Schedule C of the Debtors' 2014 tax return, gross receipts from business are listed at $1,200.00, the amount of income reflected on Form 1099. (Ex. 22). In contrast, the Debtors' Statement of Financial Affairs lists gross income for 2014 at $38,400.00. (Ex 5). Mrs. Zulpo testified that the Debtors were dealing in cash until 2015. There are no bank records for 2014 and no other documents to enable a reconciliation of the 2014 tax return and the Statement of Financial Affairs.
The Debtors' 2013 tax return reflects total gross receipts of $7,358.00 on Schedule C, the same amount reflected on the 1099 schedule showing work performed for two parties. (Ex. 21). No other sources of income were reported and there is no other documentation in the record to substantiate the Debtors' financial condition or business transactions.
Schedule C of the Debtors' 2012 tax return showed gross receipts of $2,359.00. (Ex. 20). Attached to the return is a Form 1099 reflecting income in the same amount. Mr. Dantzler, who is not listed on the Form 1099, testified that the Debtors' 2012 income reported on the tax return is "grossly understated" based on what Mr. Dantzler paid them that year. (Tr. at 127). Introduced into evidence were copies of invoices and checks for work performed by the Debtors for the Dantzlers from March 29 to December 11, 2012, in the total amount of $29,511.00. (Exs. 29, 49). The income from the Dantzler job is not reflected on the Debtors' 2012 tax return.
Although it is evident from the tax returns for 2012 to 2015, Mrs. Zulpo also admitted in her testimony that the only income the Debtors reported as income on their tax returns was income reported on 1099 forms. (Tr. at 172). She also admitted that the tax returns do not accurately reflect their gross receipts. (Tr. at 172).
(B) Standard of Reasonableness
As the facts and circumstances prove, the Debtors' contradictory, incomplete, and demonstrably false records fail to meet the standard of reasonableness required by the statute. By Mr. Zulpo's own admission, income figures reflected on Schedule I, the Means Test, and the Statement of Financial Affairs are inaccurate, and, therefore, creditors cannot rely on them for information about the Debtors' financial condition. Furthermore, the schedules and statements are inconsistent with the 2016 tax returns and the tax returns themselves are contradicted by the bank statements and cash receipts and disbursement records.
The cash receipt books for seven months in 2016 show only a partial picture of what payments were made to the Debtors in 2016 and no such records were produced for a reasonable period prior to bankruptcy. Because the Debtors conducted their business transactions in cash, they should have created some type of written record of all their expenses and disbursements but such records are either incomplete or nonexistent.
Moreover, by Mrs. Zulpo's own admission, the income reflected on the tax returns through 2016 do not accurately state the Debtors' gross receipts from their business.
For all the foregoing reasons, the Court finds that the Debtors have failed to keep and preserve adequate financial records to enable creditors to ascertain the Debtors' financial condition or business transactions.
*242(C) Justification for Inadequate Record Keeping
The Dantzlers have met their burden to prove that the Debtors have failed to keep and preserve adequate financial records and that this failure has prevented them from ascertaining the Debtors' financial condition or business transactions. The burden of production shifts to the Debtors "to offer a justification for [their] record keeping (or lack thereof)." In re Swanson, 476 B.R. at 240 (debtor must show that his record keeping was reasonable under the circumstances).
Among the justifications offered for the Debtors' inadequate records are that their work is sporadic and that they are unsophisticated in terms of business experience. The Court will also consider whether Mr. Zulpo's memory problems could have been a justification for bookkeeping inadequacies.
Addressing first the issue of sporadic work, the Court agrees that a small business like the one operated by the Debtors provides varying amounts of income depending on opportunities for work. Weather is also a factor contributing to the sporadic nature of their trade. However, the issue here is not that the Debtors' earnings vary from month to month or season to season, but rather, whether they can document such earnings. Recognizing that operating a small business generally requires considerably more record keeping than that required of a wage earner or salaried worker, the Court nevertheless concludes that the extra burden is not a justification for failure to keep adequate records.
The Court accepts the Debtors' contention that they are unsophisticated business people. However, despite their level of sophistication, they have exhibited the ability to record written documentation of their stone-work estimates, the payment draws for each job, the cost of materials for the jobs, and the overhead expenses of the business. Their failure, in part, is in not adequately preserving the records they prepared, as the statute requires. To comply with the duty to produce records, a debtor must first preserve them. Peterson v. Scott (In re Scott), 172 F.3d 959, 969 (7th Cir. 1999) (statute requires debtor to both "keep" and "preserve" records). Each debtor acknowledged in testimony that their cash receipt books were strewn about their residence and their trucks in a haphazard fashion. As a result, cash receipt books could only be produced for seven months in 2016.
Furthermore, despite his memory problems, Mr. Zulpo's testimony demonstrated that he is an integral part of the business and has input in preparing the estimates for each project. Mr. Zulpo also showed that he was aware of and acquiesced in Mrs. Zulpo's careless approach to bookkeeping. The Court concludes that the Debtors did not produce cash receipt books for earlier periods because they did not make the effort to preserve them, not because they are unsophisticated and not because Mr. Zulpo suffers from memory problems.
In addition, the Debtors offered no justification for the most glaring problems posed by their records: the discrepancies between the calculations derived from the cash receipt books and the 2016 tax returns. A comparison of those records indicates to this Court that the tax returns for 2016 are false. The records also reflect that the tax returns for previous years are likely false, including only the gross receipts reported on related 1099s.
The Court concludes the Debtors have offered no credible justification for their carelessness or the discrepancies between various types of records. These impediments *243have effectively deterred their creditors from being able to ascertain the Debtors' business transactions and financial condition. The argument that the Debtors did not purposely hide or conceal records from their creditors misses the mark as to Section 727(a)(3) because intent is not an element of this provision. The standard is whether the Debtors' record keeping was reasonable under the circumstances, and the Court determines that it was not.
For the foregoing reasons, the Dantzlers have proven that the Debtors have failed to provide records from which creditors may ascertain their financial condition and business transactions without justification. Pursuant to Section 727(a)(3), the Debtors' discharge will be denied.
V. Section 727(a)(2)(A) & (B) - Fraudulent Transfers and Concealment
The Dantzlers allege that the Debtors have concealed or transferred property with intent to hinder, delay, or defraud creditors either within one year before the filing of the petition or after the filing of the petition. They assert that the Debtors have intentionally concealed their ownership of a black 2005 Chevrolet pickup truck bearing license number 326 UXL ("2005 Chevrolet truck "), or alternatively, that the Debtors failed to disclose a transfer of the vehicle with intent to hinder, delay, or defraud creditors.6
The Debtors' attorney argued at trial that Mrs. Zulpo purchased the 2005 Chevrolet truck at the request of her son, Quinton Richter, with his funds. Consequently, they believe they never owned the vehicle even though it was temporarily titled in the Debtors' names. Accordingly, they argue they could not have formed an intent to conceal ownership.
The applicable provisions are subparts (A) and (B) to Section 727(a)(2) of the Bankruptcy Code. Under Section 727(a)(2)(A), the party seeking denial of a Chapter 7 debtor's discharge must prove the following four elements:
(1) that the act complained of was done within one year before the petition date; (2) the act was that of the debtor; (3) the act consisted of a transfer, removal, destruction, or concealment of the debtor's property; and (4) the act was done with an intent to hinder, delay, or defraud either a creditor or officer of the estate.
McDermott v. Petersen (In re Petersen), 564 B.R. 636, 645 (Bankr. D. Minn. 2017) (citing 11 U.S.C. § 727(a)(2)(A) ; Kaler v. Craig (In re Craig) , 195 B.R. 443, 449 (Bankr. D.N.D. 1996) ). The elements of Section 727(a)(2)(B) are identical except that the act complained of must have occurred after the petition filing and involves property of the estate. Id. at 647.
A history of the title to the 2005 Chevrolet truck was established through a set of documents procured from the Arkansas Department of Finance and Administration and admitted into evidence as Exhibit 9. Various documents in Exhibit 9 refer to the same vehicle, identified by Vehicle Identification Number 2GCEK13T351182185 ("VIN "). This is the only VIN referred to by the Exhibit 9 documents.
Elizabeth and Jackson Whitbeck owned the 2005 Chevrolet truck until they sold it to Butterfield Investments in October 2013. (Ex. 9). A duplicate title was issued to Butterfield Investments on July 22, *2442016. (Ex. 9). The title was subsequently assigned to Pam or Denny Zulpo with a bill of sale showing a sale date of August 31, 2016. (Ex. 9). A new title was issued and title was transferred to the Zulpos on September 29, 2016. (Ex. 9). The Zulpos then assigned the title to Richter and listed the date of the sale to Richter as June 12, 2016, more than two months prior to the date of the sale from Butterfield to the Zulpos. (Ex. 9).
On November 23, 2016, Richter signed an Affidavit of Non Use, stating that even though thirty days had passed since the date of the transfer of the vehicle to him without his having registered the vehicle, it had not been operated on any street, road or highway in Arkansas. (Ex. 9). The truck was assessed by Richter on the same date, and the Vehicle History List names Richter as owner of the vehicle as of November 23, 2016. (Exs. 46, Ex. 9). A title was issued to Richter on December 12, 2016. (Ex. 9).
Mr. Zulpo testified that the 2005 Chevrolet truck belonged to his stepson, Quinton Richter, who had given Mrs. Zulpo the funds to purchase the vehicle while he was working out of town. Mr. Zulpo stated that when his wife bought the truck, the seller "signed it over to her" so she took possession and then transferred it to Richter because he was, in fact, the owner. (Tr. at 89).
Mrs. Zulpo corroborated Mr. Zulpo's testimony. Although conceding that the motor vehicle records support a conclusion that the Zulpos owned the vehicle at some point, she denied that was the case. She testified that she purchased the truck for her son with his money but she received the title on the vehicle from Butterfield Investments because the seller assumed she was the buyer. She testified that in filling out the sale date to Richter on the back of the title issued September 29, 2016, she "put the June date on there ... because that's when ... we first originally started everything." (Tr. at 170).
Other evidence related to the vehicle includes a document titled "SFPP Account Status" generated by State Farm Insurance, Mrs. Zulpo's automobile insurer. (Ex. 18). Dated December 27, 2016, it details the payment history on Mrs. Zulpo's automobile insurance policies and reflects coverage for the 2005 Chevrolet truck for six months, from July 2016 through December 2016. (Ex. 18).
When asked about the insurance for a truck the Debtors purport not to own, Mr. Zulpo stated that even though Richter owns the vehicle, the Debtors insure the 2005 Chevrolet truck because they can buy the insurance cheaper than Richter, who is twenty-five and single. He stated that Richter reimburses them for the cost of the insurance. However, Richter's assessment of personal property on November 23, 2016, reveals that he assessed, among other vehicles, a 2014 Dodge and a 2016 Chevrolet, neither of which is insured under the Debtors' insurance policies. (Exs. 46, 18).
At the meeting of creditors on December 8, 2016, the Debtors did not mention the transaction involving the 2005 Chevrolet truck, although the subject of the truck did arise. When the Dantzlers' attorney asked Mr. Zulpo which of the five vehicles listed on the bankruptcy schedules he drives, Mr. Zulpo answered, "The '05 Chevrolet. It's paid for." (Ex. 11 at 20). The attorney was confused by the response because no '05 Chevrolet was listed on the schedules and, therefore, he asked, "The-the what?" to which Mr. Zulpo repeated his answer, "05 Chevrolet." (Ex. 11 at 20). At that point Mrs. Zulpo interjected, "We don't have an '05 Chevrolet." (Ex. 11 at 20).
*245Later in the testimony at the creditors' meeting, counsel asked again, "The black 2005. Who owns that vehicle?" (Ex. 11 at 29). Mr. Zulpo stammered, "Well, I don't - I didn't say - the white one." (Ex. 11 at 29). Counsel then asked, "So you don't drive a black 2005 truck?" (Ex. 11 at 20). Mr. Zulpo stated in response, "my helper ... had one ... that I drove because mine was broke down, but other than that." (Ex. 11 at 20).
Thus, when counsel asked Mr. Zulpo point blank about the owner of the black 2005 truck at the first meeting, Mr. Zulpo failed to explain that Mrs. Zulpo had recently purchased a 2005 Chevrolet truck and transferred it to her son. Instead Mr. Zulpo gave an evasive answer. In testimony at trial, Mrs. Zulpo conceded the Debtors were evasive at the creditors' meeting, but also testified that at the time of the meeting, Mr. Zulpo was borrowing a 2005 Chevrolet pickup belonging to a neighbor, Johnny Hurst, and that was the source of the confusion. She stated that she and her husband did not disclose a vehicle on loan from Johnny Hurst on their schedules because their attorney's paralegal probably did not use the word "borrowed" when she conferred with them about their Statement of Financial Affairs. Neither debtor explained why Mr. Zulpo added the irrelevant information "It's paid for" to describe a 2005 Chevrolet pickup he was borrowing from a neighbor.
There was also evidence of the Debtors' continuing use of the 2005 Chevrolet truck after the Debtors assigned title to the 2005 Chevrolet truck to Richter. Mr. Dantzler submitted into evidence five exhibits, each consisting of a set of photographs he took in August through October of 2017. Each photograph depicts the exterior of the Debtors' residence on Blue Gill Road with a black Chevrolet pickup truck in the foreground. (Exs. 37-41). In each of the photographs taken in August of 2017, the truck bears a sign that says "Stone Work & Repair, Free Estimates" and a telephone number. (Exs. 37-39). The photographs taken in September and October 2017 show the same Chevrolet pickup truck but the "Stone Work and Repair" sign is missing.
Mrs. Zulpo did not deny that the Chevrolet pickup truck in the photographs was the same truck she had purchased from Butterfield Investments and transferred to her son. She stated that her son let her borrow the 2005 Chevrolet truck three or four months prior to the trial on January 8, 2018, so that Mr. Zulpo could work on a project without having to use her truck. She testified that the signs on the 2005 Chevrolet truck are magnetic and are easily removable. She stated that when her husband borrows her son's truck or uses her truck for work, he attaches the signs for advertising purposes.
Considering the testimony and documentary evidence related to the 2005 Chevrolet truck, the Court must conclude that the Dantzlers have proved every element of Section 727(a)(2)(A) as demonstrated in the following discussion.
(A) Prepetition Purchase and Transfer
First, the act complained of, concealing an asset, began with the truck purchase, which took place within one year before the filing of the petition as required by Section 727(a)(2)(A). The purchase of the 2005 Chevrolet truck occurred either on June 12, 2016, which Mrs. Zulpo indicated was the sale date on the bill of sale to Richter from Mrs. Zulpo, or on August 31, 2016, the sale date recorded by Butterfield Investments on its bill of sale to the Zulpos. A title was issued reflecting "Pam or Denny Zulpo" as the owners of the 2005 Chevrolet truck on September 29, 2016.
*246Title to the 2005 Chevrolet truck was assigned to Richter by Mrs. Zulpo by her signature on the assignment portion of the September 29, 2016, title. Mrs. Zulpo back dated the assignment to June 12, 2016. Mrs. Zulpo explained she used the June date because that is when everything started. She stated she lost the original title given to her by Butterfield Investments and that Butterfield had to apply for and give her another title. The Debtors stated in their Answer that they transferred title to the vehicle to Richter "shortly after acquiring it." (Answer ¶ 9). The 2005 Chevrolet truck was not listed on the Debtors' State Court Schedules of Assets dated October 11, 2016, filed in the State Court Lawsuit, nor in the Debtors' schedules filed in their bankruptcy case on November 8, 2016. (Exs. 2, 5). Although Richter did not apply for the title to be reissued in his name until November 23, 2016, and title was not reissued in his name until December 12, 2016, both dates being after the bankruptcy was filed, the weight of the evidence supports a finding that both the Debtors' purchase of the 2005 Chevrolet truck and their assignment of their interest in the 2005 Chevrolet truck to Richter occurred within one year before the petition date of November 3, 2016, within the time period required by Section 727(a)(2)(A).
(B) Act of the Debtors
Second, the act complained of was an act of the Debtors. They testified they purchased the 2005 Chevrolet truck for Richter using his funds, they are listed as the buyers of the property by Butterfield Investments, the Debtors were issued a title to the 2005 Chevrolet truck, Mrs. Zulpo is shown as the seller to Richter on the back of the title, and Mrs. Zulpo assigned the title to Richter.
(C) Concealment
Third, the act consisted of a concealment of the Debtors' property. Concealment, unlike the other proscribed actions in the statute, is a continuing event. In re Craig, 195 B.R. at 449. The general definition of concealment is "the transfer of legal title to property to a third party with the retention of a secret interest by the Bankrupt." Sears v. Sears, 863 F.3d 980, 984 (8th Cir. 2017). Asset concealment exists " 'where the interest of the debtor in property is not apparent but where actual or beneficial enjoyment of the property continued.' " In re Petersen , 564 B.R. at 645 (quoting In re Korte, 262 B.R. at 472 ).
In the instant case, after the truck was sold to the Debtors, a title was issued to them on September 29, 2016. On November 23, 2016, Richter signed an Affidavit of Non Use, stating that even though thirty days had passed since the date of the transfer of the vehicle to him without his having registered the vehicle, it had not been operated on any street, road or highway in Arkansas. The Vehicle History List names Richter as owner of the vehicle as of November 23, 2016, and title was issued to him on December 12, 2016.
Despite these various occurrences, the Debtors did not list the truck on their schedules as property of the estate or, under their version of events, list it on the Statement of Financial Affairs as property they transferred prepetition. The Dantzlers might never have known about the existence of the truck purchase had Mr. Zulpo not inadvertently disclosed at the creditors' meeting on December 8, 2016, that he drove a "paid for" 2005 Chevrolet, a vehicle not listed on the schedules or in the Statement of Financial Affairs. Particularly suspicious at the creditors' meeting was the fact that the Debtors attempted to cover Mr. Zulpo's blunder with an explanation *247that Mr. Zulpo had gotten confused because a neighbor or helper had such a truck, which Mr. Zulpo sometimes borrowed.
Mr. Zulpo's inadvertent admission that he drove the 2005 Chevrolet is evidence that the Zulpos retained the benefit and use of the truck despite the fact that they continued to conceal that interest from their creditors and had transferred title to Richter. From the record it appears that it was not until the Dantzlers filed this adversary proceeding that they finally admitted that they had bought and transferred a 2005 Chevrolet truck to Richter prepetition. If the original transaction had truly been a mere accommodation for their son, the time to set the record straight was at the creditors' meeting where they were testifying under oath.
(D) Intent to Hinder, Delay or Defraud
Fourth, as the following discussion will detail, the evidence demonstrates that the concealment was done with an intent to hinder, delay, or defraud either a creditor or officer of the estate. Courts have recognized the difficulty in proving actual fraudulent intent by direct evidence, but have held that such intent may be inferred " 'from the facts and circumstances of the debtor's conduct.' " Helena Chemical Co. v. Richmond (In re Richmond), 429 B.R. 263, 304 (Bankr. E.D. Ark. 2010) (quoting In re Korte, 262 B.R. at 473 ).
Such facts and circumstances are most commonly referred to as "badges of fraud." Luker v. Eubanks (In re Eubanks), 444 B.R. 415, 422-23 (Bankr. E.D. Ark. 2010) (citing In re Richmond, 429 B.R. at 305 ). Courts generally require a "confluence" of several badges of fraud for a presumption of fraudulent intent to arise. Id. (citing Kelly v. Armstrong, 206 F.3d 794, 798 (8th Cir. 2000) and City Nat'l Bank of Fort Smith v. Bateman (In re Bateman), 646 F.2d 1220, 1223 (8th Cir. 1981) ). The existence of a single badge of fraud is insufficient to establish fraudulent intent. In re Eubanks , 444 B.R. at 422. However, if the presumption arises, the burden of production shifts to the debtor to show a " 'legitimate supervening purpose' " of the transfer. Id. at 423 (quoting Armstrong , 206 F.3d at 798 ).
The phrase "intent to hinder, delay, or defraud" is repeated in several Bankruptcy Code provisions, including Section 727(a)(2) (objection to discharge), Section 548(a)(1)(A) (trustee's avoidance of fraudulent transfers), and Section 522(o) (limiting exemptions in fraudulently transferred property). Courts have applied the inferential "badges of fraud" approach to determine whether a debtor acted with fraudulent intent, regardless of which of these provisions is being construed. In re Richmond, 429 B.R. at 304 (construing Section 727(a)(2) ); In re Eubanks, 444 B.R. at 422-23 (construing Section 548) ; Addison v. Seaver (In re Addison), 540 F.3d 805, 811-12 (8th Cir. 2008) (construing Section 522(o) ).
In the case of In re Richmond , the court detailed a list of eleven7 indicia *248to consider when determining whether a debtor acted with the intent to hinder, delay, or defraud for purposes of Section 727(a)(2). In re Richmond, 429 B.R. at 305 (citing First State Bank of Munich v. Braathen (In re Braathen), 364 B.R. 688, 697 (Bankr. D.N.D. 2006) ).
Of the eleven considerations listed in Richmond , the following circumstances are relevant to the instant case: the relationship between transferor and transferee; retention of possession, benefit or use of the property in question; secrecy of the conveyance; the existence or cumulative effect of pattern or series of transactions or course of conduct after the pendency or threat of suit; and general chronology of events and transactions under inquiry. In re Richmond, 429 B.R. at 305. Each will be addressed in turn.
First, a familial relationship exists between the Debtors and Richter, the transferee. He is the adult son of Mrs. Zulpo, and she claims to have been purchasing the truck for him with his funds because he was out of town for work and not available to complete the transaction himself. Mrs. Zulpo did not explain why it was so urgent to purchase the truck while Richter was out of town instead of waiting until he returned from a work assignment to purchase the truck himself. Richter did not testify at the trial to corroborate the story.
Additionally, the Debtors appear to be retaining the benefit, use, or possession of the truck. Although the Debtors allege that Richter owns the 2005 Chevrolet truck, the Debtors do not deny using it with some frequency for business purposes. The photographs of the 2005 Chevrolet truck showed it was parked at the Debtors' residence in the early morning hours on five different days from August 1 to October 31, 2017, indicating continuing use of the vehicle. On several of those occasions it bore the Debtor's stone mason magnetic sign and on one occasion the bed of the truck contained a wheel barrow, a piece of equipment the Debtors use in their stone mason operation. Mrs. Zulpo's explanation was that her husband borrowed the 2005 Chevrolet truck for a period of time to use for work. At the very least, the photographs evidence that the Debtors frequently have possession and control over the truck.
Moreover, buying insurance for an automobile is a necessary incident to ownership, and the Debtors, not Richter, insure the truck. The evidence revealed that for six months, both before and after the bankruptcy filing in 2016, Mrs. Zulpo insured the 2005 Chevrolet truck. She testified she insures the truck for her son and he reimburses her because she can get a less expensive premium rate. However, Richter's personal property assessment dated November 23, 2016, shows Richter assessed several vehicles, boats, and trailers that the Debtors did not insure.
Also important in showing the existence of intent to defraud by concealment is a course of conduct engaged in by the Debtors that is related to the State Court Lawsuit, which was filed in 2014, tried on June 8, 2016, and concluded by a judgment against the Debtors on July 12, 2016. This badge of fraud will be considered in tandem with the chronology of relevant events surrounding the State Court Lawsuit and subsequent bankruptcy.
*249After the suit was filed, the Debtors took actions to insulate their personal property from the Dantzlers' collection efforts if the Debtors were to lose the case. Two Pulaski County Personal Property Assessments by Mrs. Zulpo, both dated May 31, 2016, evidence an intent to create a false impression that the Debtors owned no personal property valuable enough to help satisfy a judgment. (Exs. 15, 44). The assessments occurred between January 1 and May 31, 2016, which is after the State Court Lawsuit was filed in 2014 but prior to the trial and entry of judgment.
Exhibit 15 is the property assessment for property subsequently listed as assets in the Debtors' bankruptcy. This property included the same five vehicles, boats and motors, and the trailers that are reflected on the Debtors' Schedule A/B and listed as exemptions under Schedule C. (Exs. 5, 15).8 The assessment reflects that except for the Mercury Mystique and the 1981 Ford truck, each piece of property bears the notation "Final 5/31/2016." (Ex. 15). Exhibit 44 is another 2016 personal property assessment by Mrs. Zulpo with an account number, assessment date, and comments beneath the heading that are identical to the first property assessment. (Ex. 44). However, the second property assessment lists only the Mercury Mystique and the 1981 Ford pickup truck as personal property to be assessed, neither of which is in working condition, according to Mr. Zulpo's testimony.
Richter's personal property assessment, dated November 23, 2016, reflects most of the property removed from Mrs. Zulpo's first May 31, 2016 assessment. (Ex. 46). Of the property described as "final" and removed from Mrs. Zulpo's first May 31, 2016 assessment, only the 1970 Duracraft boat and Evinrude motor and the 2011 utility trailer have not been transferred to Richter's November 23, 2016 personal property assessment. (Exs. 15, 46).
None of the items formerly assessed by Mrs. Zulpo on May 31, 2016, had been previously assessed by Richter, as evidenced by his January 21, 2015 personal property assessment. (Ex. 45). Richter's 2017 personal property assessment dated June 7, 2017, also reflects the same items that were formerly assessed by Mrs. Zulpo on May 31, 2016. (Ex. 47). The comments to Richter's 2017 personal property assessment state, "6/7/2017/PKB: In office per assessed by Pam Zulpo (Mom) assessed w/ penalty." (Ex. 47). The 2005 Chevrolet truck had not been listed on either of the Debtors' assessments in May of 2016, but it was reflected for the first time on Richter's November 23, 2016 assessment, the same date he registered the vehicle.
Related to the shifting of assets between property assessments, the Zulpos did not list ownership in any vehicles in their State Court Schedules of Assets, including the 2005 Chevrolet truck or the personal property removed from their May 31, 2016, assessment. In a subsequent order entered October 17, 2016, the circuit court questioned the completeness and veracity of the Zulpos' State Court Schedules of Assets and ordered them to supplement the schedules within twenty days. (Ex. 43).
Instead of filing supplements, the Debtors filed for bankruptcy on November 3, 2016. In their schedules filed on November 8, 2016, they listed their ownership interest in the personal property they had previously shifted from their property assessment to that of their son, but they did not list the 2005 Chevrolet truck on their *250schedules. Once under the protection of the Bankruptcy Code, the Debtors exempted the same property that was then being assessed under Richter's name. The property has remained on Richter's 2017 tax assessment, along with the 2005 Chevrolet truck, as evidenced by Richter's 2017 personal property assessment. (Ex. 47).
The Debtors' attempts to hide their interests in the various pieces of personal property by manipulating the property assessments establishes a pattern of deceit or fraudulent course of conduct with respect to the state court judgment. That course of conduct encompasses the 2005 Chevrolet truck as well. The Court infers the purchase of the 2005 Chevrolet truck occurred around the time of the trial on June 8, 2016, consistent with the Debtors' representations about the date of the sale on June 12, 2016. Like their other personal property, the Debtors were attempting to conceal their ownership of the truck so it would not be subject to a judgment in the State Court Lawsuit.
The Court concludes that the facts and circumstances discussed above establish a conflation of five of the badges of fraud or indicia of fraud commonly used to prove intent to hinder, delay, or defraud creditors. The Debtors' continuing concealment of their possessory interest in the 2005 Chevrolet truck was done with intent to hinder, delay, or defraud their creditors, beginning with concealment in the face of a judgment and continuing throughout the bankruptcy case.
(E) Debtors' Burden of Proof - Legitimate Supervening Purpose
The burden now shifts to the Debtors to produce a legitimate supervening purpose for the transfer of the property to overcome the presumption that their concealment was done with intent to defraud. In re Eubanks, 444 B.R. at 423 (quoting Armstrong, 206 F.3d at 798 ).
The Debtors never produced evidence to substantiate their allegation that their son provided the purchase money for the truck or that the truck was meant for his use and not theirs. They never explained with any credibility why, if Richter bought the property, he was not shown as the buyer on the bill of sale from Butterfield. Nor did they attempt to explain why they transferred vehicles, boats, motors, and trailers to Richter prior to judgment being entered in the State Court Lawsuit.
Moreover, the Debtors gave conflicting testimony regarding their vehicle ownership at the January 2018 trial. Mr. Zulpo stated that he drove the 2001 Chevrolet and Mrs. Zulpo drove the 2003 Dodge and that of the five vehicles listed on their schedules, these were the only two automobiles that were operational. Mr. Zulpo further testified that four or five months prior to the trial, the Debtors had sold the 2003 Dodge to pay attorney's fees but that he still drives the 2001 Chevrolet. He did not disclose the buyer of the 2003 Dodge, but it is listed on Richter's 2017 personal property assessment.
Contradicting that testimony, Mrs. Zulpo testified that Mr. Zulpo borrows the 2005 Chevrolet truck from Richter so that he does not have to use her 2003 Dodge for work, implying that at the time of trial the Debtors still owned the 2003 Dodge, but also that Mr. Zulpo has no vehicle other than the 2003 Dodge or the 2005 Chevrolet to use for work. Their conflicting stories coupled with the other acts of concealment in this case lead the Court to conclude that the Debtors' statements lack credibility.
The Debtors having failed to produce evidence to rebut the presumption of fraudulent intent, the Court finds that the Dantzlers have proved each of the four *251elements of concealment with intent to defraud under Section 727(a)(2)(A), and the Debtors' discharge will be denied on that basis.
Having denied the Debtors' discharge under Section 727(a)(2)(A), the Court declines at this time to consider whether the Debtors' discharge should also be denied under Section 727(a)(2)(B).
VI. Section 727(a)(4) - False Oaths
The Dantzlers allege in their complaint that the Debtors have repeatedly and knowingly made false oaths or accounts on the bankruptcy petition, schedules, Statement of Financial Affairs, and sworn testimony at the first meeting. They argue, therefore, that the Debtors' discharge should be denied pursuant to Section 727(a)(4) of the Bankruptcy Code.
They allege that the following instances of inaccuracies and omissions constitute false oaths by the Debtors: failing to acknowledge they operate a business; stating their debts were primarily consumer debts; asserting they are joint owners of the property on Blue Gill Drive in Roland, Arkansas; concealing an interest in 2.1 acres of real estate on Julio Road in Pulaski County, Arkansas (the "Julio Road Property "); concealing ownership and/or transfer of the 2005 Chevrolet truck; omitting ownership of electronics; omitting equipment used in a business or trade; inaccurately stating taxes owed for personal property and income; failing to disclose a transfer of a 2001 Dodge 2500 truck; and testifying falsely about their previous bankruptcies.
The Debtors' attorney addressed each of these instances of false oaths in the answer to the complaint. He further stated at trial that the Debtors have tried to be truthful and explain discrepancies but they did not always understand the meaning of a question posed to them and trusted their attorney to represent the information they provided in the proper way. He added that even if all the information omitted from the schedules had been included, the resulting payout to creditors would not change.
The applicable statute provides that a discharge will be granted unless "the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account." 11 U.S.C. § 727(a)(4)(A) (2012). This provision helps to ensure " 'full and complete disclosure of any and all apparent interests of any kind.' " In re Korte, 262 B.R. at 474 (quoting Fokkena v. Tripp (In re Tripp ), 224 B.R. 95, 98 (Bankr. N.D. Iowa 1998) ). "The debtor's 'petition, including schedules and statements, must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get the facts.' " Id. (quoting Cepelak v. Sears (In re Sears) , 246 B.R. 341, 347 (8th Cir. BAP 2000) ).
Under Section 727(a)(4)(A), the plaintiff must prove five elements: (1) " 'the Debtor made a statement under oath; (2) the statement was false; (3) the Debtor knew the statement was false; (4) the Debtor made the statement with fraudulent intent; and (5) the statement related materially to the Debtor's bankruptcy case.' " In re Charles , 474 B.R. at 684 (quoting Lincoln Sav. Bank v. Freese (In re Freese), 460 B.R. 733, 738 (8th Cir. BAP 2011) ). Each element will be addressed in turn.
(A) Debtors' Oaths
A debtor's schedules and statements filed in his bankruptcy case are signed under penalty of perjury and, therefore, constitute oaths for purposes of Section 727(a)(4)(A). Similarly, a debtor's testimony at the meeting of creditors is *252given under oath. In re Charles , 474 B.R. at 684.
The evidence presented at trial demonstrates that each of the Debtors signed the joint bankruptcy petition, schedules, and statements under penalty of perjury. (Exs. 4, 5, 6, 11). Furthermore, they swore to tell the truth at their meeting of creditors on December 8, 2016. (Ex. 11 at 3). At their meeting of creditors, the Debtors said they knew that they had prepared and signed the schedules and Statement of Financial Affairs under oath. (Ex. 11 at 10). They also stated they believed all the testimony given at the meeting of creditors was true and correct. (Ex. 11 at 39).
The Court finds that each instance of false statement detailed in the Dantzlers' complaint relates to information either supplied or incorrectly omitted by the Debtors in their bankruptcy schedules and statements or to statements made by the Debtors at the meeting of creditors. As such, the Dantzlers have demonstrated that the instances complained of were made under an oath or account as required by the statute.
(B) False Statements
The Dantzlers allege that notwithstanding the Debtors' oaths to tell the truth, their testimony at the first meeting and the Debtors' information in their bankruptcy filings reflect numerous false statements knowingly made by the Debtors. They argue that many of the discrepancies in the schedules came to light at the first meeting of creditors but the Debtors failed to correct their bankruptcy filings, forcing the Dantzlers to file an adversary proceeding. The Dantzlers further contend that even though many of the misrepresentations are relatively minor, the overwhelming number of them evidence a lack of honest effort, a disregard for their oaths, and an intent to mislead and conceal.
At trial, Mr. Zulpo acknowledged signing his petition, stating that his attorney explained to him that it was important to give accurate information. Although Mrs. Zulpo is the bookkeeper in the family, Mr. Zulpo stated that he understood that both he and his spouse were equally responsible for supplying correct information. According to Mr. Zulpo's testimony, both of the Debtors supplied the information required by the bankruptcy petition.
Mrs. Zulpo testified that when the Debtors were preparing to file for bankruptcy, their counsel's employee read the questions from the various bankruptcy forms to the two of them, and she and her husband then supplied the required information while the employee entered the information into a computer program. She stated that she understood that her answers were given under penalty of perjury but also admitted that now she knows her statements and schedules contain inaccuracies.
In addition to inaccuracies, an omission of an asset can constitute a false oath. Cadle Co. v. Pratt (In re Pratt), 411 F.3d 561, 566 (5th Cir. 2005) (citing Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992) ). The Court has reviewed the inaccuracies and omissions complained of by the Dantzlers and must agree that in each instance, the information provided by the Debtors is false.
(C) Material False Oaths Made Knowingly and Fraudulently
The third, fourth, and fifth elements of the statute require that the false oaths were made knowingly and with fraudulent intent, and that they relate materially to the bankruptcy case. These three elements require an inquiry into the particular circumstances surrounding each of the false oaths before a debtor's discharge will be denied.
*253The elements of knowing a statement is false and making the statement with fraudulent intent must be separately proven. Merena v. Merena (In re Merena) , 413 B.R. 792, 815-16 (Bankr. D. Mont. 2009). The term "knowingly" requires that the debtor acted deliberately and consciously. Id. at 816.
The intent element in the false oath provision is broader than that applied under Section 727(a)(2)(A) because the objects of the fraud are not limited to creditors or officers of the estate. 6 COLLIER ON BANKRUPTCY ¶ 727.04 [1][a] (Richard Levin & Henry J. Sommer eds., 16th ed.). Fraudulent intent under the false oath provision can be established by circumstantial evidence, and " 'statements made with reckless indifference to the truth are regarded as intentionally false.' " In re Korte, 262 B.R. at 474 (quoting Golden Star Tire, Inc. v. Smith (In re Smith), 161 B.R. 989, 992 (Bankr. E.D. Ark. 1993) ). The Dantzlers argued at trial that the sheer magnitude of inaccuracies and omissions amount to proof of the Debtors' intent to deceive. They further contended that the Debtors' failure to amend their false schedules after the meeting of creditors and after they received the exhibits to be presented at trial also prove fraudulent intent as to many of the allegations in the complaint.
In applying this statute the Court recognizes that false oaths are not fraudulent per se . "A debtor will not be denied discharge if a false statement is due to mere mistake or inadvertence ... [and] an honest error or mere inaccuracy is not a proper basis for denial of discharge." Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1294-95 (10th Cir. 1997) (citing Nat'l Bank of Pittsburg v. Butler (In re Butler), 38 B.R. 884, 889 (Bankr. D. Kan. 1984) and Drewes v. Magnuson (In re Magnuson), 113 B.R. 555, 559 (Bankr. D.N.D. 1989) ); see also In re Craig , 195 B.R. at 451 ("mere carelessness or sloppy schedule preparation without attendant fraudulent intent will not support an action under § 727(a)(4)" (citing Garcia v. Coombs (In re Coombs), 193 B.R. 557 (Bankr. S.D. Cal. 1996) ) ).
The Court will first apply the three remaining statutory elements to the three omissions focused on at trial by the Dantzlers: the Julio Road Property, the 2005 Chevrolet truck, and the 2001 Dodge 2500.
(1) Julio Road Property
The Dantzlers alleged in their complaint that the Debtors failed to disclose Mr. Zulpo's interest in the Julio Road Property that he jointly owns with his father, Julio J. Zulpo. Counsel for the Debtors argued that Mr. Zulpo believed he would inherit the Julio Road Property from his father after the death of both his father and stepmother but did not understand he held a present ownership interest to disclose on his bankruptcy petition.
The Debtors did, however, disclose an ownership interest in the Julio Road Property to the Circuit Court of Pulaski County less than a month prior to the Debtors' bankruptcy filing in Mr. Zulpo's State Court Schedule of Assets. (Ex. 2). Mr. Zulpo's State Court Schedule of Assets listed assets consisting of cash on hand, two bank accounts, and real estate at 18801 Julio Road in Roland, Arkansas, described as a "Joint intrest [sic] with Father Julio Zulpo After Father's Death." (Ex. 2).
Twenty-three days after submitting this State Court Schedule of Assets to the circuit court, the Debtors filed for bankruptcy on November 3, 2016. (Ex. 3). On their schedules and Statement of Financial Affairs filed five days later on November 8, 2016, the only real estate interest disclosed by their bankruptcy Schedule A/B was in the property at 25120 Blue Gill Drive *254where the Debtors currently reside. (Ex. 5).
At the meeting of creditors on December 8, 2016, the Debtors denied owning any real estate other than that listed in the schedules and also denied receiving a deed to the Julio Road Property from Mr. Zulpo's father. (Ex. 11 at 29).
At trial on January 8, 2018, the Dantzlers introduced a copy of a warranty deed in which the grantor, Julio J. Zulpo, conveyed approximately 2.1 acres of land in Pulaski County, Arkansas, to himself and Denny Ray Zulpo as joint tenants with right of survivorship. The deed reserves a life estate in Betty Faye Zulpo, Julio Zulpo's wife. (Ex. 12). It was signed on August 9, 2011, by Julio and Betty Zulpo and by the Debtor, Denny Ray Zulpo. (Ex. 12).
Mr. Zulpo testified at trial that he did not list the Julio Road Property on his bankruptcy schedules because it will not belong to him until his father and stepmother pass away. He admitted that at the creditors' meeting he did not disclose the fact that he could inherit the property. His explanation was that he did not disclose the interest because he was not asked about it. He said after conferring with his attorney he came to understand that the deed conveyed to him a present interest in the property but that was not his understanding when he filed his bankruptcy schedules.
Mrs. Zulpo testified that she prepared the State Court Schedules of Assets for her husband and herself, and she listed the Julio Road Property on his State Court Schedule of Assets. Each debtor signed his or her separate State Court Schedule of Assets under oath. (Ex. 2). Mrs. Zulpo admitted that Mr. Zulpo's interest in the property was disclosed in his State Court Schedule of Assets but not on the subsequently filed bankruptcy schedules. Like her husband, she testified that she had been confused about whether Mr. Zulpo held a present joint interest in the Julio Road Property, but had learned since their bankruptcy filing that he did.
The Debtors did not, however, appear to be confused about whether to disclose Mr. Zulpo's interest in the property when they submitted his State Court Schedule of Assets filed twenty-eight days prior to omitting the property from the bankruptcy schedules. From this circumstance, the Court draws the inference that the Debtors knew the property was an asset to be disclosed in their bankruptcy case but that they intended to conceal it so that it would not be administered for the benefit of creditors. Thus, the Court concludes the Debtors made false oaths regarding the property in both their meeting of creditors and in Schedule A/B of their bankruptcy schedules, and they did so knowingly and fraudulently.
Furthermore, the fact that the property was not disclosed in the bankruptcy schedules is an omission that relates materially to the Debtors' bankruptcy case. Courts have found "[t]he threshold to materiality is fairly low: '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.' " In re Sears, 246 B.R. at 347 (quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984) ).
In the instant case, Mr. Zulpo holds a joint tenancy with right of survivorship in the Julio Road Property. Generally, "[a] joint tenancy is a present estate in which both joint tenants are seized of the real estate."
*255First Nat'l Bank & Trust Co. of Rogers v. Estate of Hummel, 25 Ark. App. 313, 316, 758 S.W.2d 418, 420 (1988) (citing Miller v. Riegler, 243 Ark. 251, 419 S.W.2d 599 (1967) ). Whether the particular conditions placed on this conveyance by Mr. Zulpo's father change the nature of the conveyance to that of a testamentary disposition is a matter to be examined by the trustee and the creditors in this bankruptcy. See, e.g. , Ransom v. Ransom, 202 Ark. 123, 149 S.W.2d 937, 939 (1941) (discussing the difference between a deed as a present conveyance and a deed used as a testamentary disposition). Questions about whether assets are or are not property of the estate are issues for the trustee or the court, not the debtor, to decide. Home Serv. Oil Co. v. Cecil (In re Cecil), 542 B.R. 447, 454-55 (8th Cir. BAP 2015). The Debtors' failure to disclose this interest precluded an investigation into the nature of the property. The subject matter of the false oath concerns discovery of an asset, and, as such, is material.
For the foregoing reasons, the Debtors' discharge will be denied for omitting the Julio Road Property from their schedules and giving false testimony related to the property at the meeting of creditors.
(2) 2005 Chevrolet Silverado Truck
The Court has determined that the Debtors' discharge will be denied pursuant to Section 727(a)(2)(A) because the 2005 Chevrolet truck was fraudulently concealed. Additionally, the Dantzlers argue that the Debtors' failure to disclose the truck and its transfer amounts to a false oath pursuant to Section 727(a)(4).
Despite having purchased and receiving title to the 2005 Chevrolet truck a few months prior to their bankruptcy filing, the Debtors did not disclose their ownership on their bankruptcy schedules. (Ex. 5). They have alleged they purchased the truck for Mrs. Zulpo's son, Quinton Richter, using his funds for the purchase, but the property was not shown to have been transferred to Richter as required by Question 18 of the Debtors' Statement of Financial Affairs. (Ex. 5, Statement of Financial Affairs, Question 18).
Furthermore, the Debtors denied holding or controlling any property that someone else owns, including property they might have borrowed. (Ex. 5, Statement of Financial Affairs, Question 23). Additionally, the Debtors did not disclose that they gave any gifts totaling more than $600.00 per person during the two years prior to bankruptcy. (Ex. 5, Statement of Financial Affairs, Question 13). They also failed to disclose their purchase of the truck and its transfer at the meeting of creditors. (Ex. 11).
Through this proof and other facts adduced pursuant to their claim under Section 727(a)(2)(A), the Dantzlers have established that the Debtors have made multiple false statements under oath regarding the 2005 Chevrolet truck and that the statements, being deliberate and intentional, were knowingly made. The Debtors have never wavered from their story that the 2005 Chevrolet truck belongs to Richter, despite all the evidence to the contrary. Their consistency, in this instance, proves they deliberately and intentionally omitted mention of the 2005 Chevrolet truck from the schedules.
The Court has recognized numerous badges of fraud in connection with finding that the Debtors concealed the 2005 Chevrolet truck with intent to defraud creditors. These same badges of fraud establish that the Debtors made false oaths with fraudulent intent. In re Merena, 413 B.R. at 815 (badges of fraud may establish the necessary intent to make a false oath) (citing Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 64 (9th Cir. BAP 1999) ).
Moreover, the omission is material to the bankruptcy case in that it bears a *256relationship to the Debtors' estate and concerns the discovery of assets. The trustee in the case, among others, should have been made aware of the circumstances surrounding the 2005 Chevrolet truck to determine whether the purported transfer could have been avoided and the asset liquidated for the benefit of creditors.
The Dantzlers having proved each of the five elements constituting false oaths as they relate to the 2005 Chevrolet truck, the Debtors' discharge is denied.
(3) 2001 Dodge 2500 Truck
On their Statement of Financial Affairs, the Debtors stated that during the two-year period before the bankruptcy filing, they did not transfer any property to anyone other than in the ordinary course of business. (Ex. 5, Statement of Financial Affairs, Question 18). Similarly, at their meeting of creditors they stated in response to questioning that they had not transferred any real or personal property in the past three years. (Ex. 11 at 5).
However, the Debtors' personal property assessments reflect that they assessed a 2001 Dodge 2500 truck in 2014 and 2015 but not in 2016. (Exs. 13, 14 & 15). Furthermore, the Debtors paid State Farm Mutual Automobile Insurance Company for an insurance policy on a 2001 Dodge 2500 for coverage from October 14, 2015 to April 14, 2016. (Ex. 16). The Debtors did not list ownership of a 2001 Dodge truck on their Schedule A/B. (Ex. 5).
The Dantzlers argue that the Debtors either transferred the truck within the two-year period or they still own the vehicle but did not disclose it on Schedule A/B. Thus, according to the Dantzlers, either the Debtors' Schedule A/B or their testimony at the meeting of creditors and answer on the Statement of Financial Affairs constitute false oaths regarding this property.
At the trial, Mr. Zulpo testified somewhat tentatively that they sold the truck "a couple of years ago" prior to the bankruptcy filing. (Tr. at 63). Mrs. Zulpo stated on direct examination that the truck was sold for $500.00 sometime prior to bankruptcy when the weather was warm. She further testified that the Debtors had purchased the truck from her deceased father's estate, that her husband had subsequently wrecked it, and that it was "all bashed in on the right-hand side." (Tr. at 180). Upon cross examination, she stated that the sale date "could be two [years] or more, truthfully" prior to bankruptcy. (Tr. at 180).
The Dantzlers have established through the property assessments and insurance policy that the Debtors maintained an interest in the 2001 Dodge truck within the two-year period prior to bankruptcy. Both Debtors agreed the truck was sold prior to bankruptcy and Mrs. Zulpo speculated that it could have been sold two years before bankruptcy. Neither testified regarding whether the truck was sold prior to three years before bankruptcy, pursuant to the question posed at the meeting of creditors.
Considered together, the 2015 property assessment, the insurance policy for October 2015 to April 2016, and a lack of any explanation regarding these two pieces of evidence convince the Court that the Debtors owned the property at some point in 2015 and sold it in that year. Accordingly, the Debtors' assertions on the Statement of Financial Affairs and at the meeting of creditors were false statements because the transfer of the truck within the two-year prepetition period was not disclosed.
The issue remains, however, whether the omission of the transfer was done by mistake or inadvertence rather than knowingly and with the intent to defraud or with reckless indifference. Unlike the numerous *257badges of fraud that characterize the concealment of the 2005 Chevrolet truck, discussed above, there are no circumstances or course of conduct surrounding the transfer of the 2001 Dodge truck or its omission from the bankruptcy schedules and statements to indicate knowing omission with fraudulent intent.
That being the case, it is unnecessary for the Court to discuss the issue of whether the omission of the transfer was material to the bankruptcy. The Dantzlers have failed to carry their burden of proof as to whether the omission of this piece of property warrants denial of discharge for false oath.
(4) Other Omissions and Inaccuracies
The Dantzlers allege that numerous other inaccuracies and omissions in the bankruptcy schedules and statements and at the meeting of creditors constitute false oaths by the Debtors. The Court has examined each of these and found that each allegation does involve inaccuracies or omissions that were stated or submitted under oath by the Debtors.
However, it must also be established that the Debtors knew such oaths were false, that their oaths were made with fraudulent intent, and that the subject matter of the oath is material to the bankruptcy case. At trial where the Debtors attempted to explain these false statements, their explanations often reflected carelessness, inadvertence, mistake, or miscommunication, but not fraud. Closely analyzing each remaining allegation for proof of every element would unduly lengthen this opinion and is unnecessary, the Court having already denied the Debtors' discharge for failing to keep and preserve records, concealing property with intent to defraud, and making false oaths regarding two omissions. For the same reason, the Court declines to conclude that the sheer number of inaccuracies and omissions is proof that the Debtors knew their statements were false and that they made them with fraudulent intent.
VII. Conclusion
For the foregoing reasons, the Dantzlers have carried their burden of proof and their objection to the Debtors' discharge is sustained. The Debtors failed to keep and preserve records from which their financial condition could be ascertained, concealed the purchase and transfer of the 2005 Chevrolet truck with intent to defraud the trustee and creditors, and knowingly and fraudulently made material false oaths in connection with the bankruptcy case.
Therefore, the Debtors' discharge is denied pursuant to Section 727(a)(3), Section 727(a)(2)(A), and Section 727(a)(4).
IT IS SO ORDERED.
All references to exhibits are to the plaintiffs' exhibits introduced at trial. No exhibits were introduced by the defendants.
Each of the Debtors submitted his or her separate Schedule of Assets verified before a Notary Public on October 11, 2016, and filed with the clerk of court. (Ex. 2).
The Debtors also disclosed their current monthly income on Forms 122A-1 & A-2 ("Means Test "). (Ex. 6). The documents show average net monthly income of $4,136.96. (Ex. 6). A note in Schedule I explains that the income determined by the Means Test differed from that in Schedule I, which more closely reflected a twelve month average while the Means Test was based on a six month average with significantly greater income than normal in one particular month. This difference skewed the Means Test income calculation. (Ex. 5 at 24). The Court accepts this explanation as it relates to a comparison of income stated in Schedule I and the Means Test.
One of the receipts in Exhibit 25 is from Home Depot in the amount of $719.48 for a "recall." It is unclear to the Court whether this receipt is for a business expense, or whether it is evidence of a credit given to the Debtors. There was no testimony adduced at trial about the receipt. The Court has construed the evidence in the light most favorable to the Debtors and therefore included the $719.48 in the calculation of expenses.
These additional expenses appear to be reflected on Schedule C of the 2016 federal tax return and include car and truck expenses, insurance, repairs, and cell phone. They totaled $7,361.00 in 2016. (Ex. 24).
They further allege that the Debtors concealed Mr. Zulpo's interest in 2.1 acres of real estate on Julio Road in Pulaski County, Arkansas. The Court finds this allegation is more properly considered under Section 727(a)(4) and will address this property in the discussion concerning false oaths.
The eleven factors are:
(1) lack or inadequacy of consideration; (2) family, friendship or other close relationship between transferor and transferee; (3) retention of possession, benefit or use of the property in question; (4) financial condition of the transferor prior to and after the transaction; (5) conveyance of all the debtor's property; (6) secrecy of the conveyance; (7) existence of trust or trust relationship; (8) existence or cumulative effect of pattern or series of transactions or course of conduct after the pendency or threat of suit; (9) instrument affecting the transfer suspiciously states it is bona fide; (10) debtor makes voluntary gift to family member; and (11) general chronology of events and transactions under inquiry.
In re Richmond , 429 B.R. at 305.
The list includes a 1999 Mercury Mystique, 1981 Ford Pickup, 2003 Dodge 1500, 1973 Ford Pickup, 2001 Chevrolet 1500, 1970 Evinrude motor, 1995 Fuliner boat, 1974 Duracraft boat, 1970 Duracraft boat, 1965 boat trailer, and 2011 homemade utility trailer. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501708/ | STUART M. BERNSTEIN, United States Bankruptcy Judge:
The Plaintiff, Salvatore LaMonica ("Trustee"), the trustee of the administratively consolidated estates of TransCare Corporation and numerous debtor-affiliates (collectively, "TransCare" or the "Estate"), commenced this adversary proceeding to recover damages from the defendants under several theories discussed below. The non-individual defendants have moved to dismiss all or a portion of many of the Trustee's claims. (See Memorandum of Law in Support of Motion to Dismiss , dated May 4, 2018 ("Defendants' Memo ") (ECF Doc. # 11)1 ; see also Defendants'
*276Reply to Plaintiff's Opposition to Defendants' Partial Motion to Dismiss Certain Claims Asserted in the Chapter 7 Trustee's Adversary Complaint , dated June 18, 2018 ("Defendants' Reply ") (ECF Doc. # 17.) ) The Trustee opposes the motion. (See Plaintiff's Opposition to Defendants' Partial Motion to Dismiss , dated June 11, 2018 ("Plaintiff's Opposition ") (ECF Doc. # 16.) ) For the reasons that follow, the motion is granted in part and denied in part, and the Trustee is granted leave to amend.
BACKGROUND2
TransCare provided emergency medical transportation services to hospitals and municipalities throughout the Northeast and disability transportation services for municipal authorities, such as the New York City Transit Authority ("MTA"). (¶ 1.) The Defendant Lynn Tilton was the sole member of TransCare's Board of Directors, (¶¶ 2, 10), and the sole owner, chief executive officer and principal/manager of the "Patriarch" family of companies. (¶ 10; see ¶¶ 13-21.) As used in the Complaint , the term "Patriarch" refers to all of the Defendants (collectively, the "Patriarch Defendants") other than Tilton, and includes the following entities: Patriarch Partners Agency Services, LLC ("PPAS"), Patriarch Partners, LLC, Patriarch Partners Management Group, LLC ("PPMG"), Ark II CLO 2001-1, Limited ("Ark II"), Ark Investment Partners II, L.P. ("Ark Partners"), LD Investments, LLC, Patriarch Partners II, LLC, Patriarch Partners III, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC, Transcendence Transit, Inc., and Transcendence Transit II, Inc. (¶ 4 n. 2.) The Complaint alleges that Patriarch operated wholly under Tilton's control and pursuant to her directives "as a wholly-integrated entity." (¶ 34.)
A. The Lending Agreements
By a Credit Agreement dated August 4, 2003 ("Credit Agreement"),3 TransCare issued debt obligations to eight lenders (collectively, the "Original Lenders"). Two of the Original Lenders were the Patriarch Defendants, Ark II and Ark Partners. (Credit Agreement § 5.4, Schedule 1.0.) The other six Original Lenders were First Dominion Funding I, First Dominion Funding II, CSAM Funding II, CSAM Funding III, Atrium CDO and Zohar CDO 2003-1, Limited. (Id. ) Each Original Lender appointed PPAS as the Administrative Agent to act on its behalf consistent with the terms of the Credit Agreement, and to exercise the powers reasonably incidental thereto. (¶ 11; Credit Agreement § 11.1.) According to the Complaint , TransCare granted PPAS a senior secured lien on all of its assets, (¶ 29), although the Credit Agreement suggests that the Original Lenders were the secured parties and PPAS was their agent with respect to their liens. (See Credit Agreement §§ 11.10, 11.12.)
The Credit Agreement was amended by Amendment 22, dated as of January 25, 2013. While the amendment did not modify the material terms of the Credit Agreement, *277it was signed by a different group of lenders (the "Lenders"). In addition to PPAS, which signed as Administrative Agent, the Lenders included the Defendant Ark Partners and Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited and Zohar III, Limited (collectively, the "Zohar Entities"). The Defendant Tilton signed on behalf of PPAS, Ark Partners and the Zohar Entities as manager of each Lender. Notably, Ark II was no longer listed as one of the Lenders, and the schedule of outstanding loans as of January 8, 2013 attached to Amendment 22 did not list any outstanding loans owed to Ark II. The form of Amendment 22 provided to the Court included signature lines for two additional lenders, First Dominion Funding I and Credit Suisse Alternative Capital, Inc., but their signatures did not appear on the document.
Under the Credit Agreement, TransCare agreed to pay principal and interest to PPAS in installments for the benefit of the Lenders according to a schedule set forth in the Credit Agreement. (See Credit Agreement §§ 2.3, 5.1, 5.4, Schedule 1.0.) All payments were to be made to PPAS "prior to 12:00 noon, New York City time, on the due date thereof" to be distributed to the Lenders on a pro rata basis. (Id. § 5.9(a), (c).) PPAS was authorized to waive certain conditions with the written consent of the "Required Lenders," but could not modify the time or amount of the payments due under the Credit Agreement without the consent of each affected Lender. The Credit Agreement provided, in pertinent part:
The Required Lenders may, or, with the written consent of the Required Lenders ... the Administrative Agent may ... waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; ... provided, however ... that no such waiver and no such amendment, supplement or modification shall ... reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof ... without the consent of each Lender affected thereby ....
(Id. § 12.1 (emphasis in original).)
The Complaint avers that the Credit Agreement and the amendments to the Credit Agreement were not the product of arm's length transactions because Tilton controlled both Patriarch and TransCare. (¶ 31.) TransCare does not contend, however, that the Original Lenders did not fund the loan or that the terms of the Credit Agreement were unfair.4
*278On October 13, 2006, TransCare entered into a revolving credit facility with Wells Fargo, N.A. ("Wells Fargo") to fund the operations of the company. (¶ 32.) The same day, Wells Fargo and PPAS entered into an inter-creditor agreement pursuant to which PPAS recognized Wells Fargo's first lien on all of TransCare's assets and accounts receivable, including TransCare's right to payment under its "MTA Contract." (¶ 32.) The MTA Contract, under which TransCare provided paratransit services for MTA customers using vehicles leased from the MTA, was TransCare's most profitable business unit. (¶¶ 32, 41.) PPAS took a first lien position on TransCare's vehicles and certain miscellaneous physical assets only, and agreed it would not take any action to foreclose or otherwise enforce any liens junior to Wells Fargo. (¶ 33.)
B. The Deterioration of TransCare's Financial Condition and the Defendants' Mismanagement and Self-Dealing
The gravamen of the Complaint concerns Tilton's response to TransCare's deteriorating financial condition, and charges mismanagement and two forms of self-dealing that overlap. First, she continued to insist that TransCare make interest payments under the Credit Agreement even though PPAS had the authority to waive the interest payments and TransCare lacked the funds to meet its operational and employee obligations. Second, she continued to rebuff suggestions to sell and offers to purchase TransCare's assets to meet its liquidity needs. Third, and arguably instead, she stole a corporate opportunity by causing the most valuable TransCare's assets to be transferred to affiliates through a strict foreclosure, and then crediting TransCare's outstanding debt under the Credit Agreement in an amount substantially less than the value of the foreclosed assets.
Between 2012 and 2014, the Debtor had net revenues of approximately $130 million and positive EBITDA, (¶ 40), and in 2012, PPAS modified the Credit Agreement to provide TransCare with an additional $2 million. (¶ 40.) Nevertheless, TransCare's costs grew and it lost clients because of its inability to invest in new vehicles. (¶ 40.) TransCare's executives were told that not paying bills on time and in full was the "Patriarch way." (¶ 40 (quotation marks in original).) As a result, TransCare's payables grew, and critical vendors went unpaid. (¶ 40.) During the same period, TransCare paid over $11 million to PPAS on account of the loans. (¶ 40.)
In early 2015, the MTA indicated its reluctance to renew the MTA Contract, scheduled to expire that summer, due to TransCare's deteriorating financial condition, and particularly, TransCare's inability to obtain replacement parts for the MTA vehicles. (¶ 41.) On February 4, 2015, TransCare executives warned Tilton that the company lacked cash to make payroll *279the following day, and faced a projected $6.7 million shortfall by the end of March. (¶ 42.)
On February 5, 2015, Glenn Leland, TransCare's CEO, advised Patriarch of a potential resolution to TransCare's financial problems. National Express had communicated an interest in purchasing TransCare's MTA Contract and paratransit business for between $15 million and $18 million. (¶¶ 43, 44.)5 National Express offered an immediate non-refundable deposit in the amount of $1.7 million to begin negotiations. (¶ 44.) In response, Tilton contacted Leland directly and berated him for exploring a sale option. (¶ 45.) Brian Stephen, a lawyer employed at Patriarch but claiming to represent TransCare's Board, (¶ 37), told Leland that he "had no authority to even discuss sale options of any assets with any company," and "claimed that TransCare would not receive any of the potential sale proceeds because 'Lynn has other debts.' " (¶ 45.) Finally, Jean-Luc Pelissier, an Executive Managing Director of Patriarch, (¶ 38), told Leland "that under no circumstances could he attempt to raise funds by exploring potential sales." (¶ 45.) Around the same time, RCA Ambulance Service expressed to Tilton its interest in acquiring TransCare, but she refused to authorize TransCare executives to consider the offer. (¶ 46.)
On February 18, 2015, Leland drafted a stabilization plan, noted that TransCare was not a viable ongoing concern without an immediate cash infusion and repeated the prospect of a sale of the MTA business for between $14 million and $17 million as a source of immediate financing. (¶¶ 47, 48.) Tilton again refused to allow TransCare to explore a sale, but nevertheless authorized Patriarch to lend funds to TransCare so that it could make payroll. (¶ 49.)
In June 2015, TransCare's executives again warned Tilton that the company risked missing payroll and needed to recapitalize immediately, suggested borrowing, and warned that it lacked the funds needed to pay PPAS, make payroll and pay other expenditures. (¶¶ 50, 51.) TransCare was informed that Tilton, as sole member of TransCare's board, insisted that TransCare make the interest payment to PPAS, and reminded TransCare that PPMG was not the only lender. (¶¶ 51, 52.) In response, Leland advised Patriarch that TransCare could not maintain its critical supply chain and insurance if it had to pay the interest and continue to postpone back payroll tax deposits. (¶ 53.)
In July 2015, TransCare missed payroll after bouncing a check to pay for insurance, and was warned by the New York Department of Health that the failure to provide immediate assurances to fund payroll would result in the shutdown of TransCare's operations. (¶ 54.) Leland informed Patriarch of offers to buy all or parts of TransCare from two separate national ambulance companies, as well as a "Letter of Intent" from National Express offering to buy the MTA business for $6 million to $7 million and a $2 million assumption of liabilities, but was instructed by Tilton's son-in-law, Scott Whalen, to make it "clear" that TransCare was not for sale. (¶¶ 55-60.) On July 8 and 16, Tilton caused "Patriarch" to lend over $1.3 million to TransCare to fund payroll, bounced checks, and immediate needs. (¶ 61.)
Leland's warnings, and Patriarch's demand for interest payments and rejection of sale proposals, as well as Patriarch's *280other cash flow initiatives, such as forcing the employees to pay for their own fuel and withholding the payment of payroll taxes to the IRS, continued throughout the summer and into the late fall. (See ¶¶ 63-71.)
By December 16, 2015, Tilton advised Wells Fargo that she had determined to sell TransCare. (¶ 73.) Two days later, Patriarch analyst Michael Greenberg advised Tilton that the MTA Contract was worth between $22 million and $36 million, a figure "vastly more" than the amount needed to pay employees and recapitalize TransCare. (¶ 74.) In January 2016, Leland quit, and Tilton hired Carl Marks & Co. ("Carl Marks") as restructuring advisors to TransCare, and told Carl Marks to report directly to her. (¶ 76.) By a credit agreement dated January 15, 2016 (the "Ark Credit Agreement"), Ark II committed to make $6.5 million available to TransCare Corporation for working capital and general corporate purposes, but did not make the promised amount available. (¶¶ 77-78.) TransCare provided guarantees and liens to Ark II in connection with the Ark Credit Agreement. (¶ 77.)
C. The Strict Foreclosure and the Bankruptcy
On February 9, 2016, Tilton's personal attorneys contacted the firm of Curtis Mallet-Prevost, Colt & Mosle LLP ("Curtis Mallet") about the need to immediately file chapter 11 bankruptcy cases for TransCare. (¶ 80.) In the meantime, also on February 9, 2016, Pelissier contacted the MTA and represented that the owner of TransCare wished to transfer the MTA Contract to a different entity. (¶ 79.)
The next day, February 10, Tilton incorporated two new Delaware entities: Transcendence Transit, Inc., and a wholly-owned subsidiary called Transcendence Transit II, Inc. ("Transcendence II"). Transcendence II would take over TransCare's MTA Contract and other paratransit operations. (¶¶ 81, 83.) That same day, Carl Marks provided Patriarch with financial projections showing that with TransCare's assets, Transcendence II would earn $22.7 million in revenue and $1.5 million in EBIDTA. (¶ 82.) Greenberg, the Patriarch analyst, pegged the revenues at $25 million from the MTA Contract and $31 million from its other paratransit operations. (¶ 83.)
Tilton's plan was to be effectuated through a secret foreclosure of TransCare's assets. (See ¶¶ 84-85.) On February 14, 2016, Pelissier submitted a detailed plan to TransCare's executives to prepare to transfer TransCare's lucrative MTA paratransit business as well as several other lucrative ambulance divisions. (¶ 86.) On February 18, 2016, TransCare signed an engagement agreement with Curtis Mallet to file the chapter 7 cases. (¶ 87.) All the while, Patriarch refused to fund TransCare's payroll taxes or reserve for them, and by February 24, 2016, TransCare owed approximately $1.148 million in payroll taxes for 2016, plus at least $172,000 in penalties and interest. (¶ 88.) When Carl Marks advised Tilton that TransCare lacked the funds necessary to pay payroll, 401(k) obligations, and outstanding payroll taxes from earlier pay dates as well as other critical expenses, Tilton chastised Carl Marks for seeking her direction and instead told Carl Marks to "make decisions on what needs to be paid." (¶ 88.)
On February 24, 2016, Patriarch, through a process controlled by Tilton, purported to strictly foreclose on TransCare's assets and assume TransCare's rights and obligations under the MTA Contract in satisfaction of $10 million of the amounts owed under the Credit Agreement. (¶¶ 90-93.) Ultimately, however, Tilton's rescue plan fell apart. (¶ 94.) On February *28124, 2016, she directed TransCare to file for chapter 7 bankruptcy, (¶ 89), and it did that same day.
One day later, and notwithstanding the automatic stay, Stephen advised TransCare executives to secure the assets. (¶ 95.) Later that evening, Pelissier instructed TransCare's executives to transfer TransCare's accounts receivable server out of TransCare's warehouse, but TransCare's vice president refused, rejected Patriarch's offer to join Transcendence, and alerted the Trustee. (¶ 96.)
D. The Proofs of Claim
Four Patriarch Defendants filed proofs of claim.6 PPAS filed a secured claim in the sum of $35,090,492.76 based on the Credit Agreement. The claim reflects a $10 million credit relating to the acceptance of collateral resulting from the strict foreclosure. PPMG filed an unsecured claim in the sum of $2,038,515.87 owed under a Management Services Agreement. Ark II filed a secured claim in the sum of $1,077,966.97 based on outstanding indebtedness under the Ark Credit Agreement. The amount of the claim reflects a $789,457.00 credit representing the proceeds of collateral sales by the Trustee. Patriarch Partners, LLC filed an unsecured claim in the sum of $2,587.98 based on unpaid expenses.
E. The Ien Adversary Proceeding
On the heels of the bankruptcy filing, one of TransCare's former employees commenced an adversary proceeding alleging violations of the federal and New York WARN Acts. (See Complaint in Ien v. TransCare Corp. et al. ("Ian "), dated March 1, 2016 ("Ien Complaint ") (ECF Adv. Proc. No. 16-01033 Doc. # 1).) The defendants included TransCare, Tilton, and several Patriarch Defendants: Patriarch Partners, LLC, ARK CLO 2001-1 Limited, Ark Partners and Patriarch Partners III, LLC. The Ien Complaint charged that the non-individual defendants, under the de facto control of Tilton, caused the shutting down of TransCare and the termination without warning or cause of approximately 1,700 employees by refusing to fund TransCare's operations and attempting to transfer those operations to newly created entities. (Ien Complaint ¶¶ 47-49.) The Ien Complaint also asserted claims against all defendants for unpaid wages under New York, Maryland and Pennsylvania law. (Id. ¶¶ 101-14.)
In his Answer to Adversary Class Action Complaint , dated June 3, 2016 ("Trustee Answer ") (ECF Adv. Proc. No. 16-01033 Doc. # 24), the Trustee generally denied the material allegations in the Ien Complaint and asserted several affirmative defenses. These included that "the Debtors were unable to give such notice because, pursuant to 29 U.S.C. § 2102(b)(2)(A) and upon information and belief, the terminations were caused by business circumstances that were not reasonably foreseeable at the time that notice would have been required," (Trustee Answer , pp. 18-19; accord pp. 19-20), and "as of the time notice would have been required, the Debtors were actively seeking capital and/or business which, if obtained, would have enabled the Debtors to avoid or postpone the closing or layoff and the Debtors reasonably and in good faith believed that giving the required notice would have precluded them from obtaining the needed capital and/or business." (Id. , p. 19; accord id. , p. 20.)
*282Other WARN Act class actions were subsequently filed but were dismissed in light of the pendency of Ien , (see Memorandum Decision Granting Motion to Dismiss Subsequently Filed Adversary Proceeding and Appointing Interim Class Counsel , dated May 23, 2016 (ECF Adv. Proc. No. 16-01033 Doc. # 22) ), or leave to intervene in Ien was denied. (Order , dated Oct. 11, 2016 (ECF Adv. Proc. No. 16-01033 Doc. # 45).) Three classes were certified in Ien , Shameeka Ien was appointed Class Representative for each class, and Outten & Golden, LLP, was appointed Class Counsel for each class. (Order Certifying Classes and Granting Related Relief , dated Oct. 24, 2016 (ECF Adv. Proc. No. 16-01033 Doc. # 46).) Since then, the parties have been engaging in discovery and preparing for trial.
F. This Adversary Proceeding
Approximately two years later, on February 22, 2018, the Trustee filed the Complaint commencing this adversary proceeding. The Complaint asserts the following nine claims for relief:
Count Defendants Nature of Claim 1 (¶¶ 97-102) Tilton Tilton breach her fiduciary duties of loyalty and good faith by "actively impeding" TransCare's attempts to monetize its assets, stripping TransCare of assets for the benefit of Tilton, Patriarch, and her other companies, and subjectively or objectively knowing that her actions exposed TransCare to liability under the federal and New York WARN Acts. 2 (¶¶ 103-105) Patriarch Patriarch aided and abetted Tilton's breaches of her fiduciary duties. 3 (¶¶ 106-111) PPAS, Ark II, PPMG, These defendants' claims should be equitably Patriarch Partners, LLC subordinated on the grounds that they participated in and benefited from Patriarch's inequitable conduct causing injury to the creditors of TransCare and giving Patriarch an unfair advantage. 4 (¶¶ 112-116) PPAS, Ark II These defendants' claims should be recharacterized on the grounds that loans they advanced were in fact and should be deemed to be capital contributions and not debt. 5 (¶¶ 117-121) PPAS, Ark II, PPMG, These defendants' claims and liens are subject to Patriarch Partners, LLC set-off and should be disallowed, inter alia, under Bankruptcy Code § 502(d) on the ground that they are not properly documented. Additionally, to the extent their liens are avoided, subject to set off or invalidated, the estates are entitled to disgorgement of all post-petition *283payments, retention of all funds that would otherwise be subject to the liens and the preservation of the liens for the estate. 6 (¶¶ 122-126) Patriarch Lender liability, common law breach of fiduciary duty and common law assumption of control based on Patriarch's "complete domination of the finances, policy, and business practices of TransCare," including causing TransCare to make decisions that, inter alia, denied TransCare the ability to explore asset sales, resulting in unpaid claims, the loss of proceeds, and inability to continue TransCare as a going concern. 7 (¶¶ 127-131) Tilton and Patriarch Actual fraudulent transfer under the Bankruptcy Code and New York law based on the purported strict foreclosure of certain of TransCare's assets. 8 (¶¶ 132-135) Tilton and Patriarch Recovery of avoided transfers from all defendants as initial transferees, immediate or mediate transferees, or the entities for whose benefit the avoided transfers were made. 9 (¶¶ 136-138) Tilton and Patriarch Civil contempt based on violations of automatic stay relating to the post-petition attempts to consummate the strict foreclosure and to obtain TransCare's property.
The Defendants seek dismissal of all or part of several Counts in the Complaint based on lack of standing under Article III of the United States Constitution, failure to state a claim based on improper group pleading, failure to allege a legally sufficient claim, failure to allege inequitable conduct, and failure to sufficiently plead avoidance and recovery claims.7 The Trustee opposes the motion.
DISCUSSION
A. Lack of Standing
The party invoking federal jurisdiction bears the burden of establishing its standing. Lujan v. Defenders of Wildlife , 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). "[T]he question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues. This inquiry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise." Warth v. Seldin , 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). Constitutional, or Article III standing, "imports justiciability: whether the plaintiff has made out a 'case or controversy' between himself and the defendant within the meaning of Art. III." Id. "To establish injury in fact, a plaintiff must show that he or she suffered 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.' " Spokeo, Inc. v. Robins , --- U.S. ----, 136 S.Ct. 1540, 1548, 194 L.Ed.2d 635 (2016) (quoting Lujan , 504 U.S. at 560, 112 S.Ct. 2130 ); accord *284Davis v. Fed. Election Comm'n , 554 U.S. 724, 733, 128 S.Ct. 2759, 171 L.Ed.2d 737 (2008). If the alleged injury is too hypothetical, abstract or speculative, there is no case or controversy. See Baur v. Veneman , 352 F.3d 625, 631-32 (2d Cir. 2003). The Second Circuit has described the burden of pleading an injury-in-fact as a "low threshold." John v. Whole Foods Market Group, Inc. , 858 F.3d 732, 736 (2d Cir. 2017) ; W.C. Capital Mgmt., LLC v. UBS Sec., LLC , 711 F.3d 322, 329 (2d Cir. 2013) (quoting Ross v. Bank of Am., N.A. , 524 F.3d 217, 222 (2d Cir. 2008). The plaintiff does not have to show the certainty of harm; standing may be "based on a 'substantial risk' that the harm will occur, which may prompt plaintiffs to reasonably incur costs to mitigate or avoid that harm." Clapper v. Amnesty Int'l USA , 568 U.S. 398, 414 n.5, 133 S.Ct. 1138, 185 L.Ed.2d 264 (2013) (quoting Monsanto Co. v. Geertson Seed Farms , 561 U.S. 139, 153-54, 130 S.Ct. 2743, 177 L.Ed.2d 461 (2010) ).
The Defendants argue that the Trustee has failed to demonstrate Article III standing with respect to Count I (Breach of the Fiduciary Duty of Loyalty and Good Faith), Count II (Aiding and Abetting Breach of the Fiduciary Duty of Loyalty), and Count VI (Lender Liability, Common Law Breach of Fiduciary Duty, and Common Law Assumption of Control) to the extent the claims are premised on alleged WARN Act liability.8 As discussed, the Estate is currently a defendant in WARN Act litigation pending before me in Ien. The Complaint in this adversary proceeding alleges that the Defendants' actions have subjected the estate only to "potential" WARN Act liability under federal and New York law, (¶ 101, "TransCare's estates currently face only 'potential liability under the WARN Act and NY WARN Act,' " Defendants' Memo at ¶ 45 (quoting Complaint at ¶ 101) (emphasis in Defendants' Memo ) ), and in addition, the Trustee has explicitly denied WARN Act liability in Ien. (Defendants' Memo at ¶ 46.) The Defendants also contend that where damages are dependent upon an outcome in separate pending litigation, the plaintiff must show that liability in that action is "certainly impending" or there is a "substantial risk" the alleged injury will occur.
The Defendants' argument lacks merit. The Trustee asserts the Estate's potential WARN Act liability to its former employees as an element of the Estate's damages. Similarly, he alleges additional injuries proximately caused by the Defendants' misuse of the Estate's employees, their mismanagement of TransCare, the theft of TransCare's corporate opportunity, and ultimately, TransCare's descent into bankruptcy. All of the acts giving rise to the Defendants' liability have occurred and the Trustee's claims have accrued, making their liability disputed rather than contingent. See BLACK'S LAW DICTIONARY 302 (10th ed. 2014) (defining a contingent claim as "[a] claim that has not yet accrued *285and is dependent on some future event that may never happen"). Like the WARN Act claims, the Defendants' liability for the accrued, disputed claims asserted in the Complaint will be determined by this Court.
But even if the Estate's disputed WARN Act claims are contingent on the outcome of Ien , a contingent liability can constitute a concrete, injury-in-fact, Clinton v. City of New York , 524 U.S. 417, 430-31, 118 S.Ct. 2091, 141 L.Ed.2d 393 (1998) ; Carter v. HealthPort Techs., LLC , 822 F.3d 47, 55 (2d Cir. 2016) ; Associated Indem. Corp. v. Fairchild Indus., Inc. , 961 F.2d 32, 35 (2d Cir. 1992), including a disputed liability that is dependent on the outcome of litigation involving the legal consequences of events that have already occurred. See Spiro v. Healthport Techs., LLC , 73 F.Supp.3d 259, 269 (S.D.N.Y. 2014). "[T]he difference between an abstract question and a 'controversy' is one of degree." Am. Mach. & Metals v. De Bothezat Impeller Co. , 166 F.2d 535, 536 (2d Cir. 1948) (citation omitted). In discussing whether a case or controversy exists under the Declaratory Judgment Act, the Supreme Court has explained that
[T]he question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.
Maryland Cas. Co. v. Pacific Coal & Oil Co. , 312 U.S. 270, 273, 61 S.Ct. 510, 85 L.Ed. 826 (1941).
Where liability depends on a contingency, a court must focus on "the practical likelihood that the contingencies will occur." Associated Indem. Corp. , 961 F.2d at 35 (internal quotation marks and citation omitted). If all the acts giving rise to liability have already occurred, i.e., the claim has accrued, it is more likely that the dispute will be sufficiently concrete to present an actual case or controversy. Dow Jones & Co. v. Harrods, Ltd. , 237 F.Supp.2d 394, 406-07 (S.D.N.Y. 2002) ("[A] touchstone to guide the probe for sufficient immediacy and reality is whether the declaratory relief sought relates to a dispute where the alleged liability has already accrued or the threatened risk occurred, or rather whether the feared legal consequence remains a mere possibility, or even probability of some contingency that may or may not come to pass."), aff'd , 346 F.3d 357 (2d Cir. 2003). Here, the Complaint alleges facts regarding the abrupt cessation of TransCare's operations and the termination of its approximately 1,700 employees on February 24, 2016. All of the events giving rise to the Defendants' liability, if any, have already occurred, and as noted, the Trustee's claims have accrued. Moreover, the Complaint paints a picture of a "substantial risk" that the Estate will face WARN Act liability neither conjectural nor speculative.
The Defendants have cited several cases for the proposition that a case or controversy does not exist where the plaintiff's claim is contingent on the outcome of litigation pending in a different court. (Defendant's Brief ¶ 47-48); San Diego Unified Port District v. Monsanto Co. , 309 F.Supp.3d 854 (S.D. Cal. 2018) ; Whitney Lane Holdings, LLC v. Sgambettera & Assocs., P.C. , No. 08-CV-2966 (JS)(AKT), 2010 WL 4259797 (E.D.N.Y. Sept. 8, 2010) ; Pall v. KPMG, LLP , Civ. No. 3:03CV00842(AWT), 2006 WL 2800064 (D. Conn. Sept. 29, 2006) ; Plantronics, Inc. v. United States , No. 88 Civ. 1892, 1990 WL 3202 (S.D.N.Y. Jan. 9, 1990). This is not, however, a hard and fast rule; as noted, the fact that liability is contingent on a future determination by a governmental authority does not automatically mean that *286there is no case or controversy. For example, in Denney v. Deutsche Bank AG , 443 F.3d 253 (2d Cir. 2006), the plaintiffs brought a class action against defendants who designed and marketed an allegedly fraudulent tax strategy. Certain defendants contended that the class included members who had not suffered any assessments or adverse consequences, and therefore, lacked Article III standing. Id. at 262. In rejecting this argument, the Court observed that an injury-in-fact is not the same as a cause of action:
[A]n injury-in-fact differs from a "legal interest"; an injury-in-fact need not be capable of sustaining a valid cause of action under applicable tort law. An injury-in-fact may simply be the fear or anxiety of future harm. For example, exposure to toxic or harmful substances has been held sufficient to satisfy the Article III injury-in-fact requirement even without physical symptoms of injury caused by the exposure, and even though exposure alone may not provide sufficient ground for a claim under state tort law.
Id. at 264-65.
The Court held that the risk of a tax assessment coupled with the expenses incurred in avoiding adverse tax consequences were sufficient to support standing:
Additionally, those members who completed a tax transaction but have not yet been audited still run the risk of being assessed a penalty under an exception to the statute of limitations.... They have also taken costly and time-consuming steps to rectify errors in their past or future tax filings, and paid fees for the advice; these costs are not offset (for standing purposes) by the taxes saved by implementing the tax strategies challenged by the IRS. Similarly, those members who did not complete a tax transaction nonetheless took some steps in reliance on the advice, which-as per the complaint-entailed time and money. Accordingly, each Denney class member has suffered an injury-in-fact.
Id. at 265 ; accord 7AA CHARLES ALAN WRIGHT & ARTHUR R. MILLER , FED. PRAC. & PROC. CIV. § 1785.1 (3d ed. 2018) ("If plaintiff can show that there is a possibility that defendant's conduct may have a future effect, even if injury has not yet occurred, the court may hold that standing has been satisfied.")
The contingent nature of a judicial determination of liability is not different from a possible tax assessment by the IRS. Furthermore, the estate has already expended funds as a result of the potential WARN Act liability by defending Ien. In its first (and only) interim fee application covering the period February 25, 2016 to December 31, 2016 (ECF Case No. 16-10407 Doc. # 379), the Trustee's counsel, LaMonica Herbst & Maniscalco, LLP, sought an award of interim compensation in the sum of $806,732.75, (id. at 1), of which $12,410.50 was attributable to WARN Act litigation. (ECF Case No. 16-10407 Doc. # 379-1, at ECF pp. 18-22 of 370.)9 Additional services relating to the WARN Act litigations were interspersed throughout the firm's time records. (Id. ECF pp. 22, 61, 125, 292, and 293 of 370.) The Trustee's counsel reduced the request to $779,711.50, and the Court awarded $623,769.20, or 80%, and authorized the Trustee to pay it. (Order Granting Applications for Allowance of the Interim Compensation and Reimbursement of Expenses *287of the Chapter 7 Trustee and His Retained Professionals , dated Mar. 8, 2017 (ECF Case No. 16-10407 Doc. # 412).) Thus, some portion of the fees sought in connection with the WARN Act litigation have already been paid on an interim basis, and additional proceedings requiring additional legal services have occurred in Ien after December 31, 2016.
The Defendants cite San Diego Unified Port District v. Monsanto Co. , 309 F.Supp.3d 854, for the proposition that the payment of litigation expenses cannot provide the concrete injury necessary for Article III standing. (Defendants' Reply ¶ 24.) This overstates Monsanto 's holding. Monsanto stands for the proposition that litigation expenses cannot be used to manufacture standing. Monsanto , 309 F.Supp.3d at 866 ("An organization suing on its own behalf ... cannot manufacture the injury by incurring litigation costs or simply choosing to spend money fixing a problem that otherwise would not affect the organization at all." (quoting La Asociacion de Trabajadores de Lake Forest v. City of Lake Forest , 624 F.3d 1083, 1088 (9th Cir. 2010) ) ). Conversely, litigation expenses can confer Article III standing where the litigation is not manufactured to create standing. Nnebe v. Daus, 644 F.3d 147, 157 (2d Cir. 2011) ; see Mental Disability Law Clinic, Touro Law Ctr. v. Hogan , 519 F. App'x 714, 716 (2d Cir. 2013) (summary order) ("[A]n organization is not deprived of standing solely because some of the expenses that provide a basis for standing were dedicated to litigating the very action in which the defendant challenges the organization's standing.") Here, the Trustee has been compelled to expend Estate resources to defend against WARN Act liability allegedly resulting from the Defendants' conduct.
B. Group Pleading
The Patriarch Defendants seek to dismiss Count II (aiding and abetting), Count VI (lender liability), Count VII (actual fraudulent transfer), VIII (recovery of avoided transfers) and Count IX (violation of the automatic stay)10 for failure to comply with Rule 8 of the Federal Rules of Civil Procedure11 or plead fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure on the ground that these claims lump the Patriarch Defendants through group pleading and fail to specify which one did what. (Defendants' Memo ¶¶ 52-63.) "The group pleading doctrine is an exception to the requirement that the fraudulent acts of each defendant be identified separately in the complaint." Elliott Assocs., L.P. v. Hayes , 141 F.Supp.2d 344, 354 (S.D.N.Y. 2000), aff'd , 26 F. App'x 83 (2d Cir. 2002) ; accord Goldin Assocs., L.L.C. v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 00 Civ. 8688(WHP), 2003 WL 22218643, *4 (S.D.N.Y. Sept. 25, 2003). It was developed to meet "the rigors of Rule 9(b), which requires that averments of fraud be made with particularity." In re BISYS Sec. Litig , 397 F.Supp.2d 430, 438 (S.D.N.Y. 2005), reconsideration denied , *288No. 04 Civ. 3840(LAK), 2005 WL 3078482 (S.D.N.Y. Nov. 16, 2005). Courts allow group pleading where the plaintiffs charge that the officers and directors with day-to-day responsibility for a corporation's operations committed fraud through the utterance of corporate group statements such as SEC filings and press releases. Id. at 438, 440-41 ; accord DeAngelis v. Corzine , 17 F.Supp.3d 270, 281 (S.D.N.Y. 2014) ; Polar Int'l Brokerage Corp. v. Reeve , 108 F.Supp.2d 225, 237 (S.D.N.Y. 2000) ; In re Oxford Health Plans, Inc. , 187 F.R.D. 133, 142 (S.D.N.Y. 1999). To invoke the doctrine, the complaint must allege facts showing that the defendant was "a corporate insider with direct involvement in day-to-day affairs, within the entity issuing the statement." DeAngelis v. Corzine , 17 F.Supp.3d at 281 ; see also BISYS , 397 F.Supp.2d at 440-41.
As such, the group pleading doctrine is extremely limited in scope and only applies to group-published documents. DeAngelis v. Corzine , 17 F.Supp.3d at 281 ; Camofi Master LDC v. Riptide Worldwide, Inc., No. 10 Civ. 4020(CM), 2011 WL 1197659, at *6 (S.D.N.Y. Mar. 25, 2011) ; Goldin Assocs. , 2003 WL 22218643, at *5 ; Elliott Assocs., L.P. v. Hayes , 141 F.Supp.2d at 354. Group pleading does not allow a plaintiff to circumvent the requirement of Rule 8 that the complaint give a defendant "fair notice of what the plaintiff's claim is and the ground upon which it rests." Atuahene v. City of Hartford , 10 F. App'x 33, 34 (2d Cir. 2001) (internal quotation marks and citation omitted) (summary order). "By lumping all the defendants together in each claim and providing no factual basis to distinguish their conduct," a complaint fails to satisfy the minimum pleading standard required by Rule 8. Id. ; accord Genesee Cty. Employees' Ret. Sys. v. Thornburg Mortg. Sec. Tr. 2006-3 , 825 F.Supp.2d 1082, 1202 (D.N.M. 2011) ("A plaintiff has an obligation to 'make clear exactly who is alleged to have done what to whom, to provide each individual with fair notice as to the basis of the claims against him or her, as distinguished from collective allegations against' all the bad actors." (quoting Robbins v. Oklahoma , 519 F.3d 1242, 1249-50 (10th Cir. 2008) ) (emphasis in original) ).
The group pleading doctrine is inapplicable in this case. Tilton is the only individual defendant; the Complaint does not name any other officers and directors. Furthermore, the Complaint does not plead a common law fraud claim or base any claim on a group statement issued by any entity. The Trustee nevertheless asserts that group pleading is appropriate because the Complaint alleges that all of the Patriarch entities "operated in concert with each other as an integrated whole, and operated through the same narrow cast of human beings." (Plaintiff's Opposition ¶ 32.) This conclusory assertion essentially alleges that the Patriarch Defendants were alter egos of Tilton.12 "Generally ... piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was *289used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury." Morris v. N.Y. State Dept. of Taxation & Fin., 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157, 1160-61 (1993) ; accord Am. Federated Title Corp. v. GFI Mgmt. Servs., Inc. 716 F. App'x 23, 28 (2d Cir. 2017) (summary order). At oral argument, however, the Trustee acknowledged that he was not contending that Tilton and the Patriarch Defendants were alter egos. (Hr'g Tr. 30:19-25, June 21, 2018 (ECF Doc. # 21).)
The Trustee's authorities do not support a different result. In Jackson v. First Fed. Sav. of Ark., F.A. , 709 F.Supp. 863 (E.D. Ark. 1988), the Court permitted group pleading where plaintiff-acquirers of bank stock brought federal securities law and state claims against the officers and directors of the bank based on the issuance of false and misleading proxy statements and circulars. Id. at 867 ("The gravamen of these actions is that the proxy statements and offering circulars failed to disclose material facts concerning problem real estate loans and other difficulties.") The use of group pleading was consistent with the rule that permits the use of the doctrine when the plaintiff sues corporate officers and directors based on group-issued statements by the corporation.
In Dover Ltd. v. A.B. Watley, Inc. , No. 04 Civ. 7366(FM), 2006 WL 2987054 (S.D.N.Y. Oct. 18, 2006), the District Court denied a motion to dismiss an alter ego claim asserted against several defendants based on allegations of inter-relatedness and common control. Id. at *10. As just stated, however, the Trustee is not asserting that the Tilton/Patriarch corporate veil should be pierced.
Finally, in Moore v. GMAC Mortg., LLC , Civ. A. No. 07-4296, 2008 WL 11348439 (E.D. Pa. Mar. 4, 2008), the plaintiff alleged that the two corporate defendants, referred to collectively as "GMAC," engaged in an illegal kickback scheme. One of the defendants moved to dismiss, contending that the complaint did not sufficiently allege that it, as opposed to the other defendant, should be held liable for the alleged conduct. Id. at *1. The Court denied the motion, observing that although the plaintiff failed to distinguish between the two defendants, it clearly alleged that both participated in the alleged conspiracy to disguise kickbacks. Id. at *2. Here, however, the Complaint does not attribute any specific acts to any Patriarch Defendant other than PPAS and Transcendence II, and it is not clear from the face of the Complaint what the other Patriarch Defendants supposedly did wrong.
Although the Trustee may not use group pleading, the Complaint alleges specific conduct by or attributable to Patriarch Defendants PPAS, Ark Partners and Transcendence II. As noted, the gravamen of the Complaint is that Tilton breached her fiduciary duties by failing to waive the payment of interest under the Credit Agreement, at least on behalf of the Lenders she controlled, mismanaging TransCare and its finances, and ultimately, seizing a corporate opportunity by causing the strict foreclosure of its assets rather than selling those assets to a third party at a higher price. Specifically, the Complaint alleges that Tilton, through PPAS, insisted on the payment of interest from TransCare and collected substantial sums under the Credit Agreement at times when TransCare was unable to meet its obligations. (¶¶ 30, 40, 51, 62.) In addition, the Complaint alleges that PPAS strictly foreclosed its security interest in certain TransCare assets, (¶¶ 90-93), and its proof of claim credited TransCare in the amount of $10 million as a result of the strict foreclosure. (Plaintiff's Opposition , Ex. B, ECF pp. 5-10 of 32.) Under the Credit *290Agreement, and not later than January 8, 2013, PPAS acted as the Administrative Agent for Ark Partners, and presumably collected interest and foreclosed on TransCare's assets as its agent as well as agent for the other Lenders.13 The Complaint also suggests that Transcendence II took an assignment of TransCare's MTA contract as part of Tilton's plan to assume control of TransCare's business. (See ¶¶ 83, 92-93.)
Accordingly, the Complaint fails to state a claim for relief against the Patriarch Defendants, other than PPAS, Ark Partners and Transcendence II, to the extent it lumps the Patriarch Defendants together without informing each defendant of the conduct that renders it liable. Accordingly, Counts II and VI through IX are dismissed as to these other Patriarch Defendants. This is not meant to imply that the Complaint otherwise states a legally sufficient claim against PPAS, Ark Partners or Transcendence II under these Counts.
C. Avoidance, Recovery and Disallowance
The Defendants seek to dismiss the avoidance and recovery counts (Counts VII and VIII, respectively) arising from the strict foreclosure as against all Defendants except PPAS because the Complaint fails to identify any other initial or subsequent transferees. In addition, PPMG and Patriarch Partners, LLC request dismissal of Count V, which seeks to disallow their claims under 11 U.S.C. § 502(d), on the ground that the Complaint does not allege a legally sufficient avoidance claim against these Defendants.14 The Complaint alleges that a transfer of TransCare's property occurred on February 24, 2016 as a result of the strict foreclosure.15 As noted, the Complaint also implies that Transcendence II received an assignment of the MTA contracts in connection with the strict foreclosure. Accordingly, Counts VII and VIII will be dismissed as to all Defendants other than PPAS, Ark Partners and Transcendence II, and Count V will be dismissed as to PPMG and Patriarch Partners, LLC because it does not state a basis to disallow their claims.
D. Lender Liability
Count VI (Lender Liability, Common Law Breach of Fiduciary Duty, Common Law Assumption of Control) asserts that Patriarch dominated and controlled TransCare, Patriarch used its control to make transfers and decisions that rendered TransCare unable to pay its expenses, including wages, and prevented TransCare from continuing in business, resulting in at least $10 million in damages. The Court has already dismissed this Count as to all *291Patriarch Defendants other than PPAS, Ark Partners and Transcendence II.
The Defendants argue, in a footnote, that the entire claim should be dismissed because New York does not recognize a claim for lender liability. (Defendants' Memo ¶ 61 n.14 (citing Post-Effective Date Comm. of the Estate of E. End Dev., LLC v. Amalgamated Bank (In re E. End Dev., LLC) , Adv. Proc. No. 13-8081-reg, 2017 WL 1277443, at *3 (Bankr. E.D.N.Y. Apr. 4, 2017) ; Cary Oil Co., Inc. v. MG Ref. & Mktg., Inc. , 90 F.Supp.2d 401, 418 (S.D.N.Y. 2000) ("Lender liability is not an independent cause of action, but a term that refers to the imposition of traditional contract or tort liability on a bank or other financial institution.").) The Trustee responds that the Defendants are quibbling, as "lender liability" is a common way of referring to imposition of liability on a lender under theories of breach of fiduciary duty and assumption of control. (Plaintiff's Opposition ¶ 37 (citing In re E. End Dev. , 2017 WL 1277443 ; Official Comm. of Unsecured Creditors v. Austin Fin. Servs., Inc. (In re KDI Holdings, Inc. ), 277 B.R. 493, 515-16 (Bankr. S.D.N.Y. 1999) ); see also Indus. Tech. Ventures LP v. Pleasant T. Rowland Revocable Trust , 688 F.Supp.2d 229, 239 (W.D.N.Y. 2010).)
A Court need not consider arguments relegated to a footnote. F.T.C. v. Tax Club, Inc. , 994 F.Supp.2d 461, 471 n.1 (S.D.N.Y. 2014) ("It is well settled ... that a court need not consider arguments relegated to footnotes ...."); Primmer v. CBS Studios, Inc. , 667 F.Supp.2d 248, 256 n.4 (S.D.N.Y. 2009) ("Because the argument is made wholly in a footnote ..., the [c]ourt may choose to disregard it."). Given the unsettled nature of the issue and its relegation to a footnote, the Court declines to consider it, and the Defendants' motion to dismiss Count VI as to the remaining Patriarch Defendants is denied.16
E. Equitable Subordination
Count III seeks to equitably subordinate the claims filed by PPAS, Ark II, PPMG and Patriarch Partners, LLC. Patriarch Partners, LLC moves to dismiss the latter claim on the ground that the Complaint fails to allege inequitable conduct. (Defendants' Memo ¶ 82.) I agree.
Bankruptcy Code § 510(c) authorizes a bankruptcy court to equitably subordinate a valid claim, viz. , reorder its priority, where "the conduct of the claimant in relation to other creditors is or was such that it would be unjust or unfair to permit the claimant to share pro rata with the other claimants of equal status." Mishkin v. Siclari (In re Adler, Coleman Clearing Corp.), 277 B.R. 520, 563 (S.D.N.Y. 2002) ; see also Enron Corp. v. Ave. Special Situations Fund II, LP (In re Enron Corp.) , 333 B.R. 205, 217-21 (Bankr. S.D.N.Y. 2005). The party seeking equitable subordination must show that (1) the claimant engaged in inequitable conduct, (2) the conduct injured creditors or conferred an unfair advantage and (3) equitable subordination of the claim is consistent with bankruptcy law. Lehman Bros. Holdings, Inc. v. JP Morgan Chase Bank, N.A. (In re Lehman Bros. Holdings, Inc. ), 541 B.R. 551, 582 (S.D.N.Y. 2015) ; Vargas Realty Enters., Inc. v. CFA W. 111 Street, L.L.C. (In re Vargas Realty Enters., Inc. ), 440 B.R. 224, 240 (S.D.N.Y. 2010) ; 80Nassau Assocs. v. Crossland Fed. Sav. Bank (In re 80 Nassau Assocs.) , 169 B.R. 832, 837 (Bankr. S.D.N.Y. 1994).
The Court has already dismissed this claim as to Patriarch Partners, LLC based on the Trustee's misuse of the group pleading doctrine. Many of the Patriarch *292Defendants have "Patriarch Partners" as part of their names, (see ¶ 4 n.2), and references in the Complaint to Patriarch Partners do not indicate which defendant was intended by the Trustee. The only specific allegations in the Complaint regarding Patriarch Partners, LLC are that it is a Delaware limited liability company whose website describes it as an "investment firm," (¶ 14), and along with several other Patriarch Defendants made representations in the United States District Court for the Eastern District of New York that " 'TransCare's term loan lenders' foreclosed on the MTA Contract." (¶ 90 n. 7.) Since the Complaint does not identify any inequitable conduct by Patriarch Partners, LLC, the motion to dismiss Count III as to Patriarch Partners, LLC is granted for this additional reason.
F. LEAVE TO AMEND
At the end of his opposition memorandum, the Trustee requests leave to amend "should the Court think it desirable for more detail to be provided at the pleading stage." (Plaintiff's Memo p. 25.) Rule 15 directs that "[t]he court should freely give leave [to amend] when justice so requires." FED. R. CIV. P. 15(a)(2) ; accord Foman v. Davis , 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). The Court has concluded for various reasons that the Complaint fails to state claims against the majority of the Patriarch Defendants, and the Trustee may be able to cure these deficiencies through an amendment of the Complaint. In addition, the Defendants have not opposed his request. Accordingly, the Trustee is granted thirty days from the date of this order to serve and file his amended complaint.
So ordered.
"ECF" refers to the electronic docket in this adversary proceeding.
Unless otherwise stated, the facts are derived from the allegations in the unsealed Complaint , dated Feb. 21, 2018 ("Complaint ") (ECF Doc. # 4.) The parenthetical "(¶)" followed by a number refers to paragraphs in the Complaint.
Excerpts from the Credit Agreement were attached as Exhibit A to the Declaration of Nicole A. Eichberger, Esq. in Support of Defendants' Motion to Dismiss , filed May 4, 2018 ("Eichberger Declaration ") (ECF Doc. # 12.) At the Court's request, the parties provided the complete Credit Agreement and two amendments.
The Trustee further argued at the hearing that Tilton should be estopped from arguing that she was not authorized to waive or modify payments of interest under the Credit Agreement because she took the opposite position in an SEC administrative proceeding, which was decided in her favor. Lynn Tilton, Exchange Act Release No. 1182, 2017 WL 4297256 (ALJ Sept. 27, 2017) ("SEC Opinion "). The Parties were given leave to brief the issue. (See Trustee's Letter, dated June 28, 2018 (ECF Doc. # 18); Defendant's Letter, dated July 9, 2018 (ECF Doc. # 20).) The respondents before the SEC were Patriarch Partners, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, and Patriarch Partners XV, LLC ("Patriarch Collateral Managers," together with Tilton, the "SEC Respondents"). The issue before the SEC administrative law judge was whether the SEC Respondents had violated the antifraud provisions of the Investment Advisers Act of 1940, § 206(1), (2) and (4), 15 U.S.C.A. § 80b-6, by making material misrepresentations and omissions to the institutional investors in three collateralized loan obligation funds managed by the Patriarch Collateral Mangers, namely, the Zohar Entities. Through the Patriarch Collateral Managers, Tilton used the monies in the Zohar Entities to buy or make loans to mid-sized distressed companies ("Portfolio Companies"). The SEC Opinion contains findings that Tilton would often decide to defer and accrue interest payments owed by the Portfolio Companies, and did so at times through "amendment by course of performance" rather than by a signed document. SEC Opinion , at *19. She "made the ultimate decision on when to accept less than the contractual rate of interest due from the Portfolio Companies." Id. However, the SEC Opinion does not state whether TransCare was one of the Portfolio Companies whose interest payments were deferred, and given the allegations in the Complaint , it probably was not. Furthermore, even if Tilton, through PPAS, could defer the payment of interest allocable to the Lenders she controlled, PPAS could not waive the interest payments due to the unaffiliated Lenders without their consent.
The Complaint is unclear whether the purchase of the MTA Contract and the paratransit business were cumulative, and would result in as much as $18 million, or two different transactions that would produce as much as $36 million.
Copies of the four proofs of claim are attached as Exhibit B to the Plaintiff's Opposition.
At times, the Defendants' Memo goes outside the "four corners" of the Complaint and includes additional facts that challenge the Trustee's theory of the case, and in particular, attributes TransCare's financial failure to Wells Fargo's "destructive actions" and extols Tilton's "extraordinary efforts" to prevent a shutdown of TransCare's most profitable business lines or a fire sale of its assets. The Court will disregard these additional alleged facts in assessing the legal sufficiency of the Complaint.
Prudential standing encompasses "the general prohibition on a litigant's raising another person's legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in the representative branches, and the requirement that a plaintiff's complaint fall within the zone of interests protected by the law invoked." Lexmark Int'l, Inc. v. Static Control Components, Inc. , 572 U.S. 118, 126, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014) (quoting Elk Grove Unified Sch. Dist. v. Newdow , 542 U.S. 1, 12, 124 S.Ct. 2301, 159 L.Ed.2d 98 (2004) (quoting Allen v. Wright , 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984) ) ); accord Devlin v. Scardelletti , 536 U.S. 1, 7, 122 S.Ct. 2005, 153 L.Ed.2d 27 (2002). The Defendants do not contest the Trustee's prudential standing, and I conclude that he has shown it. He seeks to redress injuries to the Estate caused by the allegedly wrongful acts of the Defendants.
"ECF pp." refers to the numbers imprinted at the top of each page by the Court's CM/ECF system.
Count IX also includes a request to avoid the post-petition transfers through the alleged strict foreclosure. (¶¶ 137-38.) The Complaint does not, however, assert a separate claim under Bankruptcy Code § 549.
Rule 8 provides in pertinent part:
(a) Claims for Relief. A pleading that states a claim for relief must contain:
....
(2) a short and plain statement of the claim showing that the pleader is entitled to relief ....
(d) Pleading to be Concise and Direct; Alternative Statements; Inconsistency.
(1) In General. Each allegation must be simple, concise, and direct....
The Trustee also argues that Tilton's knowledge is imputed to all of the Patriarch entities, and the Federal Rules do not require Plaintiff "to tell Tilton what [Tilton] already knows, namely which entity she used to carry out which facet of the scheme." (Plaintiff's Opposition ¶ 35.) The question of imputation of knowledge aside, the argument makes no sense. On that theory, every defendant knows what he or she did wrong, and the complaint does not have to tell the defendant what the defendant already knows. Nevertheless, it is the plaintiff's burden to give the defendant fair notice of the claim and the ground on which it is based. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
The Complaint does not allege any facts implying wrongful conduct relating to the Credit Agreement at the time that Ark II was one of the Original Lenders.
Count V also seeks to disallow these claims on the ground that they are subject to set off. (¶ 118.) It is not clear whether the Complaint is referring to set off under 11 U.S.C. § 553, which would trigger disallowance under 11 U.S.C. § 502(d), or a state law defense of set off, which might reduce the allowed amount of the secured claim and the corresponding voiding of the amount of its lien, 11 U.S.C. § 506(d), but would not result in a disallowance under 11 U.S.C. § 502(d).
The Trustee questions whether a strict foreclosure actually occurred. (¶ 128; see ¶ 90.) Count VII pleads that if the strict foreclosure resulted in a transfer of TransCare's assets, the transfer was fraudulent. (¶ 131) ("Therefore, to the extent Patriarch and Tilton's scheme was successful, the Trustee seeks to avoid these transfers of TransCare's property to the Defendants as actual fraudulent transfers pursuant to Bankruptcy Code Sections 548(a)(1)(A) and 544(b) and N.Y. Debtor & Creditor Law Section 276.")
For the same reason, the Court declines to consider the separate request to dismiss Count IX, which alleges a violation of the automatic stay, in its entirety. The Defendants' argument is relegated to a footnote. (See Defendants' Memo ¶ 79 n.17.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501709/ | MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE
This is the final version of a bench decision that was read into the record on October 24, 2018. It contains my rulings and findings following a trial in the adversary proceeding commenced by Music Mix Mobile, LLC and nine other plaintiffs, which is adversary proceeding number 15-01392.
Background
This proceeding was filed in connection with the bankruptcy case of Stage Presence, Inc. The claims arise out of a televised benefit concert in Washington, D.C. that was held on April 13, 2010 for the benefit of a charity known as Childhelp, Inc. Plaintiffs provided services in connection with that concert for which they claim they were not paid.
The named defendants originally included Stage Presence; plus three individuals named Allen Newman, Matthew Weiner and Gregory Marquette; plus an entity named One for Each Island Ltd. Stage Presence is the entity that hired plaintiffs to provide services in connection with the Childhelp concert. Mr. Newman is the sole owner of Stage Presence. Mr. Newman, Mr. Weiner and Mr. Marquette were producers of the benefit concert (the "Producers"). One for Each Island was the entity that contracted with Childhelp to put the benefit concert together. However, the parties agreed at trial that the formation of One for Each Island, though contemplated at one time, never actually was completed. As a result, the entity has never existed. As a non-existent entity it cannot be and is not a party to these proceedings.
Stage Presence does not dispute that it owes money to the plaintiffs, and its trustee did not participate in the trial. As the result of prior motions I dismissed all of the claims against Mr. Weiner and Mr. Marquette, and all but one of the claims against Mr. Newman. The only remaining claim against Mr. Newman is the plaintiffs' claim that Mr. Newman should be held liable for the debts owed by Stage Presence based on "alter ego" or "piercing the corporate veil" theories. These contentions were the subject of a trial that was conducted on October 11 and 12, 2018.
*296Jurisdiction and Power to Render a Final Decision
At an earlier stage of these proceedings the parties agreed that all of the relevant claims were at least "related to" the Stage Presence bankruptcy case, and the parties consented to a final determination of all claims by this Court. See Statement Consenting to Jurisdiction, Docket No. 39; Statement Consenting to Jurisdiction, Docket No. 40; Statement Regarding Consent to Entry of Orders or Judgment in Core Proceeding, Docket No. 41; Statement Regarding the Ct's Jurisdiction, Docket No. 43. Mr. Newman nevertheless argued at a later time, when summary judgment motions were filed, that this court lacked jurisdiction. It is plain, though, that the claims asserted here are "related to" the Stage Presence bankruptcy and to the claims asserted in the Stage Presence bankruptcy case.
As I will explain in a few moments, the New York courts have held that the "alter ego" theories that are being pursued here are not independent causes of action, but instead are remedies that may be pursued against a company's owners (or perhaps other people) in the collection of debts owed by a company. In that respect Mr. Newman's alleged liability depends entirely on the existence of a liability owed by Stage Presence itself. There is no allegation here that Mr. Newman personally guaranteed any of Stage Presence's obligations, or that plaintiffs contracted with Mr. Newman personally.
In addition, it is well-settled that "a civil proceeding is related to a title 11 case if the action's outcome might have any conceivable effect on the bankrupt estate." Residential Funding Co., LLC v. UBS Real Estate Secs. Inc. (In re Residential Capital, LLC) , 515 B.R. 52, 63 n.12 (Bankr. S.D.N.Y. 2014) (citing Parmalat Capital Fin. Ltd. v. Bank of Am. Corp. , 639 F.3d 572, 579 (2d Cir. 2011) ). Here, of course, if Mr. Newman were to be held liable, and if he were to satisfy the underlying debts, that would directly affect the bankruptcy estate, as the payments by Mr. Newman would satisfy the obligations and cancel the debts. I therefore hold, just as the parties initially conceded, that there is subject matter jurisdiction over this proceeding.
I also hold that I have the power to make a final determination by virtue of the express written consents that the parties originally filed. A consent to a final determination by the bankruptcy court may not be withdrawn except upon a showing of good cause. See Capuccio v. Capuccio (In re Capuccio) , 558 B.R. 461, 464-65 (Bankr. W.D. Okla. 2016), and cases cited therein. Here, the consents that were filed expressly committed the parties' disputes to final resolution by the bankruptcy court. This court then proceeded to make final rulings as to a number of claims and a number of parties, including as to certain of the claims against Mr. Newman. I denied the motion to dismiss as to the alter ego claims, and the parties then completed their discovery. It was only at the time that trial approached, and during summary judgment arguments, that Mr. Newman suddenly objected to a final decision in this court.
It would not have been just to allow Mr. Newman to revoke his prior consent, at a late stage in the case and after other final rulings had been made on other claims, just because Mr. Newman had second thoughts as to where and when he would like the remaining claim to be decided. Consents to final determinations by this Court would be rendered meaningless if they could be withdrawn because a party does not like the way a litigation is progressing, or because the party's tactical *297judgments have changed, or because the party has changed its mind. "Good cause" to revoke a consent requires something much more than a mere change of heart, and that is all that we had in this case.
The Evidence at Trial
The parties offered the live testimony of three witnesses. The first witness was Mitch Maketansky of Music Mix Mobile, which is one of the plaintiffs. The second witness was Alan Kelman, who was employed by Stage Presence to help organize the production of the benefit concert and who arranged for other plaintiffs to provide services. The third witness was Mr. Newman himself. I also received a number of exhibits in evidence, including some portions of prior deposition testimony.
I have listened carefully to the testimony, and reviewed all of the exhibits in evidence, in making the decisions I am announcing today. I want to make clear that while the three witnesses who appeared at trial certainly have different outlooks on the underlying events, and while the outcome of the trial can only favor one side and not the other, I nevertheless believe that each witness testified honestly as to what he recalls and what he believes about the underlying circumstances, without attempting to be evasive or misleading. I commend the witnesses for that, and I appreciate how they conducted themselves.
I also want to make clear that counsel made well-organized presentations, and that my decision today is based on the merits of the evidence that I have heard and on the requirements of the applicable law, and it is not in any way to be taken as a comment on the performance of the attorneys.
For the reasons I will explain, I have decided that plaintiffs have failed to prove their claims, and that Mr. Newman is not personally liable for the debts that Stage Presence owes to the plaintiffs.
Applicable Law
Before discussing the evidence I will first review the elements of the plaintiffs' claim. The first step is to identify the law that is applicable to this proceeding.
Stage Presence is a New York corporation. However, the benefit concert took place in Washington, D.C. I have previously held that at least some of the original claims that were asserted (namely, statutory claims by employees for failure to pay wages) were governed by the laws of the District of Columbia, because that is where the employees provided their services.
The claims before me now are based on Stage Presence's failure to meet contractual obligations. The contracts at issue, pursuant to which plaintiffs agreed to provide services to Stage Presence, apparently were not in writing. There was no evidence at trial that would allow me to determine whether the contracts were made in New York or elsewhere.
Nevertheless, in their prior submissions the parties have relied entirely on New York law in discussing the issues that are to be decided here. See, e.g. , Pls.' Mem. of Law in Support of Pls.' Mot. for Summ. J., Docket No. 86; see also Def's Mem. of Law in Support of Def's Mot. for Summ. J., Docket No. 89-4. Since the parties agree on the application of New York law, I will apply New York law in making my rulings.
Plaintiffs' Right to Pursue Alter Ego Remedies
The theories on which a corporation's owner may be held liable for the corporation's debts are sometimes referred to as "alter ego" theories or as "piercing the corporate veil" theories. There is some disagreement among courts as to whether these actually are two distinct theories. See, e.g. , *298Bd. of Trustees, Sheet Metal Workers' Nat. Pension Fund v. Elite Erectors, Inc. , 212 F.3d 1031, 1038 (7th Cir. 2000). In Sheet Metal Workers' National Pension Fund , the Seventh Circuit Court of Appeals held that "alter ego" theories are premised on direct liability, whereas "veil piercing" theories are equitable in nature and are a form of vicarious liability. Id. More particularly, the "alter ego" theory is that the corporation has no real separate existence and therefore that the corporation and its owner are one and the same person. On the other hand, the "veil piercing" theory is that an owner abused the corporate form to accomplish some kind of fraud or injustice, in which case equity will look past the corporate form, and will disregard it, to prevent the fraud or injustice from being accomplished.
However, under New York law "alter ego" and "veil piercing" theories are really the same. The federal courts have long held that under New York law, the concepts of alter ego liability and veil-piercing liability "are indistinguishable, do not lead to different results, and should be treated as interchangeable." See Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc. , 933 F.2d 131, 138 (2d Cir. 1991) ; see also MWH Int'l, Inc. v. Inversora Murten, S.A. , No. 11-cv-2444, 2015 WL 728097 at *11, 2015 U.S. Dist. LEXIS 24129 at *35-36 (S.D.N.Y. Feb. 11, 2015). The Passalacqua decision was entered in 1991, but more recent decisions by the New York Court of Appeals have continued to treat the alter ego and veil piercing theories as being subject to the same substantive requirements. See, e.g. , Cortlandt St. Recovery Corp. v. Bonderman , 31 N.Y.3d 30, 73 N.Y.S.3d 95, 96 N.E.3d 191, 203-05 (2018) ; TNS Holdings, Inc. v. MKI Sec. Corp. , 92 N.Y.2d 335, 680 N.Y.S.2d 891, 703 N.E.2d 749, 751 (1998).
Having determined that under New York law there is no difference between the "alter ego" and "veil piercing" contentions, the next issue to consider is whether the plaintiffs have the right to pursue those contentions.
An issue that frequently arises in bankruptcy cases is whether "alter ego" claims belong to creditors or instead belong solely to the bankruptcy estate. In this case, for example, Mr. Newman sought summary judgment after the conversion of the Stage Presence case to chapter 7, on the theory that only the chapter 7 trustee could pursue an alter ego claim and that the chapter 7 trustee had elected not to do so. Courts that have considered this issue have discussed whether the "alter ego claim" is one that is "particularized" to an individual creditor, or whether instead the claim is of general applicability, such that all creditors would be affected the same way if the claim were to succeed. See, e.g. , JMK Const. Group, Ltd. v. Queens Borough Pub. Library (In re JMK Const. Group, Ltd.) , 502 B.R. 396, 405 (Bankr. S.D.N.Y. 2013), and cases cited therein. On this theory, the Second Circuit Court of Appeals recently rejected an effort by personal injury claimants to assert alter ego liability against Kerr-McGee based on actions by a former subsidiary. See Tronox Worldwide LLC v. Kerr-McGee Corp. (In re Tronox Inc.) , 855 F.3d 84 (2d Cir. 2017). In Tronox , the Second Circuit held that the alleged liability of Kerr-McGee did not arise from its own conduct, but instead from its alleged status as an alter ego (or more precisely as an alleged corporate successor to an alleged corporate alter ego). Id. at 105. The Court ruled that any harm that was alleged would have been generally applicable to all Tronox creditors, and that as a result only the bankruptcy trustee could pursue the claim. Id. at 100, 107.
It is important to note that in Tronox the alter ego claims were not governed by New York law, but the test affirmed by *299Tronox is the same test that has been used by other courts in deciding whether claims under New York law belong to the trustee or to individual creditors.
Obviously I am bound by the Second Circuit's decision in Tronox . However, to be candid I personally have difficulty reconciling the standard that was used in the Tronox decision, and that has been applied in other decisions, with two other relevant lines of authority.
First, the New York Court of Appeals has made clear that under New York law an "alter ego" or "veil piercing" argument is not a separate, stand-alone cause of action. See Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157, 1160-61 (1993). Instead, piercing the corporate veil, or awarding alter ego relief, is a remedy that a plaintiff may pursue to collect a claim against a company. Id. The Second Circuit Court of Appeals has recognized and enforced this holding, as have the district courts in this district. See, e.g. , Cordius Trust v. Kummerfeld , 153 Fed. Appx. 761, 762-63 (2d Cir. 2005) (holding that a veil-piercing claim is not a separate cause of action independent of the underlying claim against the corporation); see also Network Enters., Inc. v. Reality Racing, Inc. , No. 09 Civ. 4664, 2010 WL 3529237 at *4 (S.D.N.Y. Aug. 24, 2010).
Treating alter ego and veil piercing theories purely as remedies, however, seems inconsistent with the case law that addresses the issue of whether an alter ego "claim" belongs to individual creditors as opposed to a bankruptcy trustee. Those cases effectively treat alter ego arguments as "claims," and even tend to use that language in deciding who owns and may assert the "claims." If "alter ego" theories and "veil piercing" theories are not separate claims at all, and instead are just remedies for other claims, then it is difficult to see how they could belong exclusively to a bankruptcy estate. I understand the theory under which a "claim" may belong to an estate. But I know of no theory under which a "remedy" belongs exclusively to an estate, even when the estate does not own the claim to which the remedy is relevant. So long as the underlying creditor claim belongs to an individual creditor, it is hard to understand why an alter ego "remedy" would not also belong to that creditor.
A distinction might make sense in this regard if New York courts treated alter ego claims differently from veil piercing claims, as the Seventh Circuit does. Sheet Metal Workers' Nat. Pension Fund , 212 F.3d at 1038. Perhaps in that context an "alter ego" claim - one that treats an owner as the same person as the corporation - might be the equivalent of a claim with "generalized" effect, whereas a "veil piercing" claim would depend on the equities of individual cases and might more likely just be a "remedy" belonging to individual creditors. But the New York decisions do not recognize such a distinction, leading to the problems that I have described above.
Second, the Tronox decision and other cases not only discuss alter ego arguments as though they are claims, but also seem to presume that a trustee has clear authority to pursue such claims whenever the claims would have a "generalized" effect on all creditors. This approach, however, seems inconsistent with the Second Circuit's decision in Picard v. JP Morgan Chase Bank & Co. (In re Bernard L. Madoff Inv. Sec. LLC) , 721 F.3d 54 (2d Cir. 2013), where the court held that a trustee does not generally have a right to assert claims that creditors could have asserted, even if they are claims that would affect all creditors or that would benefit all creditors in the same manner.
*300Picard involved the case of Bernard L. Madoff Investment Securities (otherwise known as "BLMIS"), which is a case under the Securities Investor Protection Act and not the Bankruptcy Code. But the Second Circuit noted in its decision that the Securities Investor Protection Act gives a trustee essentially the same power as the Bankruptcy Code would provide, and in making its decision the Court relied heavily on its finding that the same rules would apply in the BLMIS case as would apply in a bankruptcy case. Id. at 58, 74-75.
The trustee for BLMIS sought to pursue claims against financial institutions that allegedly had aided and abetted Bernard Madoff in the commission of his fraud. The trustee argued that the defendants' wrongful acts had affected all creditors generally and that the trustee therefore should be able to pursue the claims. However, the Court of Appeals rejected the notion that the "common" or "general" nature of a trustee's claim was enough to confer standing. The Court noted that the trustee's argument would be inconsistent with prior decisions that confirmed that trustees may not bring claims on behalf of creditors. Id. at 58 (citing Shearson Lehman Hutton, Inc. v. Wagoner , 944 F.2d 114 (2d Cir. 1991) ).
The BLMIS Trustee argued to the Second Circuit that the Court's own prior decision in St. Paul Fire & Marine Insurance Co. v. PepsiCo , 884 F.2d 688 (2d Cir. 1989), stood for the proposition that the trustee may assert an alter ego claim that would benefit all creditors generally. Picard , 721 F.3d at 70. Indeed, that is how many courts have interpreted and applied the St. Paul decision. But the Court of Appeals rejected this argument in Picard . It held that the decision in St. Paul only resolved the "specific question" of whether a creditor could bring an alter ego claim against the debtor's parent when the debtor itself also possessed and had the right to pursue such a claim under state law. Id. The Court of Appeals concluded in Picard that the St. Paul decision does not define whether claims belong to an estate in the first place. Id. Instead, St. Paul was just a ruling that if claims do belong to the bankruptcy estate, then only the trustee, and not creditors, may assert the claims. Id.
Under the Picard decision, the mere existence of a "general" effect on creditors would not be enough to give a trustee standing to pursue an "alter ego" claim, even if the alter ego theory were a separate "claim." Instead, one would need to consider whether the trustee has been given that right, either because of powers granted by the Bankruptcy Code or because of rights inherited from the corporation itself. Unfortunately this leads me to another area of the case law where some of the older holdings seem to be at odds with more recent authority. There are many cases in which courts have held that a bankruptcy trustee is entitled to assert "alter ego" claims under New York law. But in many respects these rulings seem inconsistent with the Picard decision.
For example, in In re Keene Corp. , 164 B.R. 844, 851 (Bankr. S.D.N.Y. 1994), the court held that under New York law a "trustee" has standing to assert alter ego claims and that creditors are precluded from doing so unless the claims have been abandoned. The Keene decision cited three prior federal court decisions in support of that holding: Gosconcert v. Hillyer , 158 B.R. 24, 28 (S.D.N.Y. 1993) ; Goldhaber v. Tri-Equities, Inc. , 112 B.R. 593, 596 (Bankr. S.D.N.Y. 1990) ; and Green v. Bate Records, Inc. (In re 10th Ave. Record Distribs.) , 97 B.R. 163, 166 (S.D.N.Y. 1989). Gosconcert also cited only to other federal decisions; in fact, the real claim in Gosconcert was that a third party had taken assets that belonged to the debtor, and *301that claim clearly was properly asserted by the trustee, not by someone else. Goldhaber held that under New York law, a trustee may bring "an alter ego cause of action" on behalf of a debtor in order to collect property for the benefit of other creditors, but in support of that proposition it relied on the decision in In re 10th Ave. Record Distributors . In In re 10th Ave. Record Distributors , however, the court just held that, by analogy to fraudulent transfer claims and other rights, a trustee has authority to pursue an alter ego claim if doing so would benefit all creditors generally. Id. at 167. As noted above, that is inconsistent with the more recent Picard decision, as well as with the notion that alter ego theories are remedies, not claims.
Mannuccio v. Cabrini Medical Center (In re Cabrini Medical Center) , 489 B.R. 7, 16 n.73 (S.D.N.Y. 2012), is another decision that holds that a trustee may assert alter ego claims. In support of that proposition the Cabrini decision cited to Gruber v. Victor , No. 95 Civ. 2285, 1996 WL 492991, at *10 (S.D.N.Y. Aug. 28, 1996), which in turn cited to the state court decision in Corcoran v. Hall , 149 A.D.2d 165, 545 N.Y.S.2d 278 (1st Dept. 1989). But in the Corcoran decision, the court merely cited to prior federal court decisions for the proposition that as a matter of federal bankruptcy law, a trustee may assert any claim that would benefit all creditors. More recently, the Picard decision holds that a "general[ized]" effect is not enough, and that a trustee can only pursue claims that it has authority to pursue under the Bankruptcy Code or that the debtor itself could have pursued. 721 F.3d at 70-71. The New York court's decision in Corcoran cannot be relied upon as authority for the proposition that under New York state law a trustee may pursue an alter ego theory, because Corcoran relied entirely on prior federal authority (not on New York law), and the prior federal authority on which Corcoran relied does not appear to be valid after the Picard decision.
These are important issues that ought to be clarified and that I am confident will be clarified in future decisions. Fortunately, I do not need to resolve them in this particular case. I have previously held that the plaintiffs' theory in this case was particular to them, and did not constitute a claim that belonged to the trustee.
As set forth in the pretrial order, plaintiffs argue that Mr. Newman was the sole owner and had complete control of Stage Presence, and that in connection with the Childhelp benefit concert he allegedly used Stage Presence to incur liabilities in connection with Mr. Newman's personal business. More particularly, they allege that Mr. Newman caused Stage Presence to acquire services and goods from the plaintiffs for use in connection with a program for which Mr. Newman and others were Producers and for which Stage Presence itself had no contractual role. They further argue that Mr. Newman knew that the Producers did not, or might not, have the necessary financing for the benefit program, and that using Stage Presence to hire workers and vendors was an improper and inequitable use of the corporation to shift the risk of non-funding from the Producers to the creditors of Stage Presence. They argue that this constituted an injustice as well as a fraud in connection with the Childhelp benefit, on the theory that Mr. Newman allegedly misrepresented the funding risks to Plaintiffs. Finally, plaintiffs argue that corporate formalities were not observed and that the separate existence of Stage Presence was not respected vis-à-vis Mr. Newman and vis-à-vis other entities in which Mr. Newman had ownership interests. On those grounds plaintiffs contend that Mr. Newman personally *302should be held liable for the unpaid debts that Stage Presence owes to the plaintiffs.
The claims that plaintiffs have made are particular to the Childhelp concert. Plaintiffs do not allege that each and every obligation that Stage Presence ever incurred was fraudulent or was incurred with an unjust purpose. Their claims, if found to have merit, would benefit only those creditors who have asserted claims in connection with the Childhelp benefit program. Other potential creditors - such as tax creditors, for example, or anyone who might have a claim relating to a prior show - would receive no benefit from such rulings.
Accordingly, no matter how I view the underlying claims or remedies, and no matter how I view the potential problems under the case law that I have described above, it seems clear to me that the claims being asserted here are particularized to the plaintiffs and do not belong to the chapter 7 trustee.
Having made those preliminary comments, I will now turn to the elements of the alter ego contentions and the evidence at trial.
Evaluation of Plaintiffs' Alter Ego Contentions
Under New York law, the separate existence and status of a corporation is not lightly disregarded. Gartner v. Snyder , 607 F.2d 582, 586 (2d Cir. 1979). As the New York Court of Appeals held in Matter of Morris v. New York State Department of Taxation & Finance , 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157, 1160 (1993), in the ordinary case "it is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners." In fact, the very nature and purpose of conducting business through a corporation is to shield the owners from direct liability for the debts incurred in connection with that business. Accordingly, an owner ordinarily is not liable for the debts incurred by a corporation.
Plaintiffs may pierce the corporate veil, and impose liability on an owner, where the evidence shows that the owner exercised complete domination over the corporation with respect to the transaction at issue such that the corporation had no separate identity, and that such domination was used to commit a fraud or a wrong against the plaintiffs that resulted in injury to the plaintiffs. See Matter of Morris, 603 N.Y.S.2d 807, 623 N.E.2d at 1160-61. In Morris the court made clear that while complete domination of a corporation is required in order to pierce the corporate veil, it is not enough by itself. Instead, "some showing of a wrongful or unjust act toward plaintiff is required." Id. , 603 N.Y.S.2d 807, 623 N.E.2d at 1161.
Prior decisions have identified a number of non-exclusive factors that may be considered in deciding whether a corporation has been completely dominated by its owner to the point where the corporation has no separate identity. Many of the factors listed in prior cases are phrased in terms that assume that one corporation is owned by another, and so I have paraphrased the factors here. They include:
• The absence of the formalities that are part of corporate existence (for example, the issuance of stock, election of directors, and keeping of corporate records);
• Inadequate capitalization;
• Whether funds are put in and taken out of the corporation for personal rather than corporate purposes;
• Overlaps in ownership, officers, directors and personnel;
• Common office space, address and telephone numbers;
*303• The amount of business discretion displayed by the allegedly dominated corporation;
• Whether the related corporation dealt with its owner or other related corporations at arm's-length;
• Whether the corporation was treated as an independent profit center;
• The payment or guarantee of debts by the dominated corporation in favor of its owner or other related corporations; and
• Whether the corporation in question had property that was used by the owner just as though it belonged to the owner.
See Wm. Passalacqua Builders, 933 F.2d at 139.
While these are factors that may be considered, however, they cannot be applied in a vacuum, and the court must conduct a broad-based inquiry into the totality of the facts to determine if the party seeking to pierce the corporate veil has established an improper domination of the corporation. Id. ; see also American Protein Corp. v. AB Volvo , 844 F.2d 56, 60 (2d Cir. 1988) ; Ng v. Adler (In re Adler) , 467 B.R. 279, 286-87 (Bankr. E.D.N.Y. 2012). The New York Court of Appeals made clear in Morris that the decision whether to pierce the corporate veil must be based on the "attendant facts and equities" of each separate case, and cannot be reduced to a set of formulas and factors with pre-determined weights. See Matter of Morris, 603 N.Y.S.2d 807, 623 N.E.2d at 1160-61.
The uncontradicted evidence at trial showed that Stage Presence was incorporated in 1985. It originally had two owners, but has been owned only by Mr. Newman since approximately 1987 or 1988. It has acted as a "below-the-line" contractor to arrange crew and equipment for various productions. It has not always had its own offices, but during many years it did have its own offices.
Stage Presence may have had more than one director at the time of its formation, but for some time Mr. Newman has been the sole director and the sole employee. No formal director meetings have been held for some time, and no formal shareholder meetings have been held for some time. However, Stage Presence has always retained counsel to provide legal advice, and accountants to assist with bookkeeping and financial questions. The accountants may also at some point have served as treasurers of Stage Presence, though on this particular point the testimony was not clear.
Stage Presence filed all of its required tax returns and maintained its corporate franchise. It kept its own separate books and records with the assistance of outside accountants. The outside accountants prepared annual financial statements for Stage Presence. Stage Presence always had bank accounts, and they were always separate from Mr. Newman's accounts. Stage Presence did not commingle funds with Mr. Newman. It did not pay personal expenses on behalf of Mr. Newman. It made some distributions to Mr. Newman, just as any corporation does if it has excess funds, but it did so only after a review by the outside accountants and a determination of what funds could safely be distributed in light of upcoming potential cash needs.
Stage Presence obtained funding for its projects from some combination of retained cash or payments by advertising agencies, sponsors or other persons. It always contracted in its own name. Stage Presence hired payroll processing firms to handle payments to employees in connection with individual jobs. It also purchased insurance in its own name and for its own account. All licenses and permits needed *304for productions were obtained in the name of Stage Presence itself.
On the whole I do not find that this is evidence that is sufficient to support the kind of "domination" that is envisioned by the New York courts before a corporate veil can be pierced. From a financial, business and operating perspective the evidence shows that the separate corporate existence of Stage Presence was scrupulously guarded and observed. Similarly, the evidence shows that the assets and liabilities of Stage Presence were never commingled with those of Mr. Newman.
It is true that Stage Presence did what Mr. Newman told it to do. But corporations always do what their owners tell them to do, or at least they should do so. In fact, many courts have held that it is the duty of a corporation to further the interests and wishes of its owners. See, e.g. , Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P. , 906 A.2d 168, 173 (Del. Chancery 2006) (holding that a parent corporation had the right to cause its subsidiary to incur debts to support the parent's business because "[w]holly-owned subsidiary corporations are expected to operate for the benefit of their parent corporations; that is why they are created") If the fact that a corporation served its owner's interests were enough to establish a wrongful "domination" of the corporation, then the corporate form would never be respected.
Plaintiffs have offered into evidence a finding in a prior District Court litigation against Mr. Newman and Stage Presence holding that "[t]he corporation does not observe the corporate formalities." But no further specifics were set forth in those findings as to which formalities had not been observed, and in which respects. It was admitted during the trial in this case that Stage Presence had only one director during the relevant time, did not hold directors' or shareholders' meetings and therefore did not have minutes of such meetings, had only one employee, and had only one decision maker (namely, Mr. Newman). But "in the case of closely-held corporations these facts are not uncommon," and usually they should be treated as merely "neutral" considerations in determining whether to pierce the veil of a closely-held corporation. See In re Adler , 467 B.R. at 291 ; see also Cardell Fin. Corp. v. Suchodolski Assocs. Inc., No. 09 Civ. 6148, 2012 WL 12932049, at *25 (S.D.N.Y. July 17, 2017) (noting that overlaps in an owner's roles are "common-place among closely-held corporations of this type and thus do[ ] not weigh significantly in favor of a finding of domination and control" for purposes of alter ego analysis); William Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir. 1989) (noting that in small privately held corporations "the trappings of sophisticated corporate life are rarely present" and warning that courts should be careful about the weight to be given to this factor if in other respects the separate corporate existence was honored).
I find that, in this case, the absence of other directors, or of regular directors' meetings, or of directors' minutes, is a sign of sloppiness, rather than an indication that the separate existence of Stage Presence was or should be ignored. As I have noted, the evidence showed that in all important operational and financial respects the separate existence of Stage Presence was honored and fully respected. See, e.g. , Krause v. Eihab Human Servs. , No. 10 CV 898, 2015 WL 4645210 at *17, 2015 U.S. Dist. LEXIS 101820 at *45 (E.D.N.Y. Aug. 4, 2015) (noting that the corporation in that case "lacked a level of professional polish that would be desired from a well-run organization" but that on the whole the evidence fell short of showing that the *305corporation was so dominated that it "had no existence of its own"); Tycoons Worldwide Group (Thailand) Pub. Co., Ltd. v. JBL Supply Inc. , 721 F.Supp.2d 194, 206 (S.D.N.Y. 2010) (disregarding a failure to observe corporate formalities where adequate books and records were kept, corporate funds were not commingled with funds of the owner, the owner did not siphon off corporate funds for personal use, and the evidence did not support a conclusion that the corporation was just a "dummy" for the individual owner).
Furthermore, the fact that Mr. Newman was the only director and the only employee is not an unusual feature of small, closely-held corporations and is not an adequate reason to disregard the separate existence of the corporation. In fact, even among large corporate families a complete overlap of officers and directors does not justify piercing the corporate veil. American Protein Corp. v. AB Volvo , 844 F.2d 56, 60 (2d Cir. 1988).
Plaintiffs have offered into evidence a finding in the same prior District Court litigation to the effect that Stage Presence "is undercapitalized and has failed to pay wages and other debts that have been due and owing since April 13, 2010." However, this finding just suggests that at the time of the District Court litigation Stage Presence did not have enough money to pay its debts. The record at the trial before me shows that Stage Presence operated for more than 25 years and paid all its debts with the exception of those incurred in connection with the Childhelp benefit. It is certainly true that Stage Presence did not have enough resources on its own to pay those obligations, but as I will explain in a moment that is entirely due to the fact that other parties defaulted on their promises to provide such funding.
Undercapitalization alone generally is insufficient to warrant piercing of the corporate veil. Tycoons Worldwide Group (Thailand) Pub. Co. v. JBL Supply Inc. , 721 F.Supp.2d 194, 206-07 (S.D.N.Y. 2010) ; McDarren v. Marvel Entertainment Group , No. 94 Civ. 0910, 1995 WL 214482 at *9, 1995 U.S. Dist. LEXIS 4649 at *9 (S.D.N.Y. Apr. 11, 1995) (holding that "under New York law, undercapitalization alone is insufficient to pierce the corporate veil"); see also Gartner v. Snyder , 607 F.2d 582, 588 (2d Cir. 1979). This is particularly true where, as here, the corporation is adequately capitalized at its outset and runs successfully as a business enterprise for many years, only to ultimately find itself in financial trouble, and where the other evidence compels the conclusion that the separate identity of the corporation was respected. If the corporate form were to be disregarded whenever a corporation could not pay its debts, then the corporate form would never be respected in a bankruptcy case. The relevant question is whether a corporation's separate existence was respected. There are cases in which a failure to capitalize a company (particularly at the outset of its business) may suggest an intent to ignore the company's separate existence, but as I will explain in a moment the financial troubles that occurred here are the result of a breach of a loan agreement, not a disregard of corporate form.
I note that while the District Court made the general factual findings described above concerning the observation of "corporate formalities" and the "undercapitalized" state of Stage Presence after April 2010, the District Court also held in a later decision in that same prior case that other factors had to be considered in deciding whether the corporate veil would be pierced, and it denied requests for the entry of summary judgment on those issues. This ruling further made clear that the limited findings that were cited were *306not sufficient, by themselves, to justify piercing the corporate veil.
I find based on all the evidence that the separate corporate existence of Stage Presence was honored and recognized and that there was an absence of the type of domination and disregard of corporate form that would be needed to sustain the remedy of piercing the corporate veil. I also find that there is nothing in the evidence that supports the contention that the separate corporate existence of Stage Presence was used to perpetrate a fraud or an injustice in dealings with the plaintiffs.
Plaintiffs have argued that since Mr. Newman and others were the Producers for the Childhelp program it was wrongful of them to use Stage Presence to hire workers and production crews and vendors to assist in the production. However, there is nothing about Mr. Newman's designation as the "Producer" of the program, in contracts with Childhelp, that required him personally to employ laborers, camera crews and other support providers. There is absolutely no reason why Mr. Newman was not permitted to use somebody else, including Stage Presence, as the contracting entity. This was the role that Stage Presence had played in many prior productions, and the business role that it was well suited to play in connection with the Childhelp benefit concert.
The mere fact that Mr. Newman employed Stage Presence as the contracting entity was not itself in any way an abuse of the privilege of doing business in the corporate form. That is the whole reason why Stage Presence existed, and it was a legitimate reason. See, e.g. , Trenga Realty v. Tiseo , 117 A.D.2d 951, 951-52, 499 N.Y.S.2d 262 (App. Div. 3d Dep't 1986) (holding that "[i]t is widely held that a corporation may be organized for the very purpose of avoiding personal liability provided the corporation really exists and is doing business as permitted by law").
Plaintiffs knew and understood that they were entering into contracts with Stage Presence. There is no allegation that they ever thought otherwise, and certainly no evidence that they ever thought otherwise. They did not ask for a personal guaranty from Mr. Newman, and there is no evidence that any of them ever expected Mr. Newman personally to pay the amounts that Stage Presence owed to them.
Plaintiffs argue that the contract with Childhelp was in the name of One for Each Island, which did not exist. They also note that the only contract that purported to entitle the Producers to the payment of fees for their services was the contract with One for Each Island, but that Stage Presence had allegedly listed those Producer fees as debts in the schedules of liabilities that Stage Presence filed in its bankruptcy case. It certainly would have been better if Mr. Newman had executed contracts with Childhelp that spelled out what Stage Presence's rights and obligations were in connection with the concert. But upon consideration of all the evidence I find that this, too, is an example of sloppiness rather than evidence that the separate corporate existence of Stage Presence was ignored or that it should be disregarded by me. This is particularly true because I also find, as I will explain further below, that Mr. Newman reasonably believed he had arranged funding, in the form of a loan agreement with Stage Presence itself as the named beneficiary, and that would have allowed Stage Presence to pay its obligations if the loan agreement had been honored.
The contracts that are most important here - namely, plaintiffs' own contracts (which admittedly were with Stage Presence) and the contract for the funding of the show - were in the name of Stage *307Presence. If Stage Presence has problems making payment, that has nothing to do with the lack of a formal contract between Stage Presence and Childhelp. The problems are entirely due to the fact that Geneve International Trust did not provide the funding that it promised. As to the Producers' Fees: whether the lack of documentation affects the Producers' right to fees, and whether it is a reason why the trustee might consider objections to the Producers' claims for fees against Stage Presence, is a separate issue that is not before me today.
Plaintiffs' counsel also elicited testimony to the effect that Mr. Maketansky was not told that the funding was not yet locked in, or that other entities in addition to Stage Presence might be involved in the production. However, there is no evidence that any of the plaintiffs ever asked, or that plaintiffs were even interested in the financial arrangements. Instead, the evidence shows that they trusted Stage Presence and Mr. Newman as a result of prior business dealings. The evidence shows, in short, that plaintiffs believed that if Mr. Newman was confident in the funding, that was good enough for them. Plaintiffs were understandably disappointed when Stage Presence could not pay them, but that does not mean that Mr. Newman defrauded them or treated them unjustly.
At several other times during the trial plaintiffs' counsel elicited testimony to the effect that Mr. Newman did not tell other people that the financing for the benefit concert was problematic. Again, however, there is no evidence that plaintiffs ever asked about the financing, or showed any interest in it. Furthermore, the evidence actually showed that Mr. Newman was open in sharing information about the funding arrangements with Mr. Kelman (who hired the plaintiffs), and that Mr. Newman only proceeded with the concert once he believed that financing was in place.
More particularly: One of the original ideas was to try to fund the benefit concert by arranging sponsors. However, the uncontradicted evidence at trial was that the sponsorship idea was abandoned after it became clear that it would not succeed. In fact, the uncontradicted evidence is that Mr. Newman sought to cancel, or at least to postpone, the benefit concert once it became clear that sponsorships could not be counted on to provide funding. At that time the representatives of Childhelp suggested that Steven Menner might be able to arrange funding. Mr. Menner in fact did offer to provide funding. He offered to do so through an entity called Geneve International Trust. Mr. Menner provided evidence of Geneve's financial wherewithal, introduced Mr. Newman and others to Geneve's counsel (Mr. Bartholomew), and Geneve then executed a non-recourse loan agreement under which Geneve would provide funding to Stage Presence.
The evidence shows that Mr. Newman, and Mr. Kelman, did not proceed to hire the plaintiffs until after having received Geneve's promise to execute a loan agreement in amounts that plainly were sufficient to pay the expenses of the show. Plaintiffs contended that Mr. Kelman was misled, but he was not. In fact, Mr. Kelman acknowledged that he approved the hiring of the plaintiffs after seeing the emails as to the promissory note and upcoming loan agreement to be provided by Geneve, even though he also knew that the funding had not yet been actually received and that the documentation was not yet in place.
Plaintiffs complained that Mr. Newman allegedly had not shared with them information about the original plans to obtain funding from potential sponsors. However, there is no evidence that they ever asked.
*308Furthermore, as noted above an entirely different funding plan was in place at the time plaintiffs were actually engaged to move forward with the concert.
Plaintiffs also advanced the theory that the proposed funding from Geneve was a sham, and that Newman allegedly knew it. It is clear from the evidence that Geneve and Menner failed to honor their commitments, and the strong implication from the evidence is that they lied to Mr. Newman and Stage Presence in this respect. In this regard, the evidence shows that Mr. Newman and Stage Presence were the victims of fraud, not the perpetrators of it. There is no evidence that Mr. Newman thought the funding was illusory. Even the plaintiffs' own witnesses testified that they thought that Mr. Newman had merely been mistaken about the financing, and not that he had intentionally deceived them about it.
Plaintiffs cited to an email in which one of the Producers, Mr. Marquette, mentioned that it was important to "show" a television network and potential sponsors that funding was in place. Plaintiffs argued at trial that the use of the word "show" somehow suggested that the loan agreement was intended only to be a sham, and only as something that could be used to misrepresent the status of funding to other parties. After considering all the evidence I reject this interpretation. I find, based on the evidence and my assessment of the credibility of the witnesses, that Mr. Newman actually believed that the funding had been arranged, that Geneve was committed to provide it, that Geneve had the ability to provide it, and that Geneve would provide it.
Plaintiffs contended that additional debts to some of the plaintiffs were incurred several weeks after the benefit concert and in connection with the post-production process, at a time when there had already been delays in the Geneve funding. Plaintiffs argued that by this time Mr. Newman allegedly knew that the funding was a hoax, but I find that is simply not the case. I find that Mr. Newman continued to believe that the funding would be forthcoming. Furthermore, it was reasonable to complete the post-production work on the television recording, because a failure to do so might actually have provided Geneve with an excuse to back out of its promised loan.
Plaintiffs also argued that Mr. Kelman had not been informed of the funding delays when the post-production work was authorized, but in fact the testimony at trial showed that Mr. Kelman was aware of them, and that he approved the post-production work despite the delays in funding. Mr. Maketansky also testified that he was aware that there were funding problems at the time the post-production work was done, and he elected to go forward - not because Mr. Newman misled him in any way, but because Mr. Maketansky was confident in Mr. Newman's judgment as to whether the financing was forthcoming.
Plaintiffs argued that Mr. Newman never should have believed Geneve, and that he ought to have known that certain evidence of financial resources that Geneve provided had been faked. But in deciding whether Mr. Newman used Stage Presence to accomplish a fraud or injustice the question is what Mr. Newman actually believed, not what plaintiffs think he should have believed or might have believed in hindsight. There is no evidence that Newman actually believed the funding was questionable or would fail, or that he actually thought that Geneve did not have the necessary resources.
Finally, plaintiffs contended at trial that the copy of the loan agreement that Geneve signed in favor of Stage Presence was *309itself a fake. They point to a declaration that Mr. Newman signed in 2010 that attached a copy of a similar loan agreement executed in favor of an entity known as Anguilla Music Production and Publishing ("AMPP") rather than Stage Presence. They introduced testimony by Mr. Newman during a hearing in another case in the District Court, in 2010, to the effect that the loan agreement was with AMPP and not with Stage Presence. See Pl.'s Ex. 8, H'rg Tr. 24:19-25:20. Plaintiffs also asked me to take judicial notice of the fact that Geneve moved to dismiss a complaint against it on the ground that the loan agreement had been made in favor of AMPP and not Stage Presence, and that the version of the loan agreement that was executed in favor of Stage Presence was not offered in Court until after that motion was filed.
Mr. Newman testified at trial that the execution of the loan agreement in favor of AMPP in April 2010 had been a mistake, that he had immediately had it re-executed in favor of Stage Presence, and that the Stage Presence loan agreement was in effect at the time of the benefit concert. I agree with plaintiffs that if this were the case it is very difficult to understand just why the AMPP version of the agreement was attached to Mr. Newman's prior declaration, and why it was referenced in the testimony that he gave in the District Court in October 2010.
But while I am very troubled by those facts, I find based on all of the evidence that the agreement in favor of Stage Presence was in fact executed and was enforceable. The strongest evidence of this fact is what happened in the litigation against Geneve International Trust.
The original complaint in the action against Geneve International Trust, of which plaintiffs have asked me to take judicial notice, alleged expressly that Geneve had executed a $5 million loan agreement in favor of Stage Presence itself. See Complaint, Adv. Pro. No. 12-01561, Docket No. 1, at ¶ 11. Defendants moved to dismiss the contract claim on the ground that no copy of a loan agreement had been attached to the complaint. Geneve also moved to dismiss fraud claims and argued that there was no jurisdiction over Geneve. Defendants also submitted a declaration by Mr. Bartholomew to the effect that he was not aware of any contract ever signed by Geneve with any entity. See Decl. of Ronald L. Bartholomew, Adv. Pro. No. 12-01561, Docket No. 4-11 at ¶ 8.
In connection with the motion to dismiss Geneve submitted copies of a prior declaration by Mr. Newman in the District Court litigation that attached the AMPP agreement. Judge Gropper noted at oral argument that it was not clear if this was the agreement the parties were relying upon but that in any event the contract claim needed to be repleaded. Stage Presence then filed an amended complaint on September 20, 2012 that attached a copy of the loan agreement that Geneve had executed in favor of Stage Presence. Geneve then renewed its motion to dismiss. Notably, in that motion Geneve did not deny the authenticity of the Stage Presence agreement that was attached to the amended complaint. Instead, Geneve argued that the contract was not enforceable due to an alleged lack of consideration, an alleged lack of specificity, an alleged disparity in the names of the benefit concerts to be funded, and other arguments.
When the motion to dismiss was argued before Judge Gropper, Ms. Connolly appeared. (Ms. Connolly was the attorney for the plaintiffs in the prior District Court litigation and is the attorney for the plaintiffs in this proceeding.) Ms. Connolly informed the court that in the District Court litigation the separate version of the loan *310agreement, in favor of AMPP, had been produced. Judge Gropper asked if there was an explanation, but noted that issues as to the authenticity of the agreement were not before him at that time. He then denied the motion to dismiss.
I cannot emphasize enough that the only person who appeared to contest the authenticity of the Stage Presence loan agreement at this hearing was Ms. Connolly, who was not a party to the proceedings. Geneve itself did not contest the authenticity of the agreement. Nor did Mr. Bartholomew, the trustee of Geneve whose signature appears on the document.
Geneve and Bartholomew never did file answers to the amended complaint. They defaulted, and then the parties stipulated that the defaults would be vacated and the disputes would be referred to arbitration. The uncontradicted testimony at trial was that the defendants never challenged the validity and authenticity of the Stage Presence agreement during the arbitration. Furthermore, plaintiffs offered into evidence a copy of the arbitrator's decision. In that decision the arbitrator noted that the defendants had argued that the agreement was merely a preliminary agreement or was otherwise not sufficiently specific to be enforced, but at no point in his opinion is there any hint that the defendants (including Mr. Bartholomew himself) ever denied that the agreement had been signed in favor of Stage Presence. The arbitrator rejected the asserted defenses and held that the loan agreement in favor of Stage Presence was valid and enforceable.
I find based on this evidence that the Stage Presence loan agreement was not a fake and was not contrived after the fact. Geneve and Bartholomew certainly had every incentive to make that argument if the agreement had been faked, but all the evidence that I have suggests that they never did so. Instead, the loan agreement was found to be valid and enforceable in the arbitration action that was pursued, and the person who executed it on behalf of Geneve does not appear ever to have contested its authenticity.
I find, based on all the evidence, that the Stage Presence version of the loan agreement did exist, that it was executed in April 2010, that Mr. Newman and Stage Presence proceeded with the Childhelp concert in reliance on that loan agreement and in the honest belief that Geneve would honor the agreement. The fact that Stage Presence could not ultimately collect sufficient funds from Geneve to pay Stage Presence's debts had to do partly with the fact that Stage Presence had not sufficiently verified its damages during the arbitration, but far more importantly with the fact that it could not execute a judgment against Geneve.
Conclusion
In summary, I find that the evidence did not show any improper domination of Stage Presence or any fraud, or any intent to deceive, or any actual or intended misuse of Stage Presence. Plaintiffs understandably are upset that they have not been paid. They seem to be sincere in their belief that Mr. Newman somehow should rectify that situation. The gist of their contention seems to be that they think Mr. Newman, as a Producer, has a moral responsibility to ensure that they are paid. But plaintiffs knowingly contracted with Stage Presence, not Mr. Newman. They asked for no personal guarantees and did not believe Mr. Newman had given any such personal guarantees. They may believe it is an injustice if Mr. Newman is not personally liable for Stage Presence's debts, but that limited liability is the whole reason why corporations are formed. It does not work an injustice to enforce that limited liability in a case, such as here, where the facts at trial do not support the *311contention that the corporate form should be disregarded.
An order will be entered, allowing plaintiffs' claims against Stage Presence but dismissing the alter ego claims against Mr. Newman. Together with this Court's prior rulings as to other claims and other defendants this order will finally resolve all claims asserted in the Music Mix adversary proceeding, and accordingly a final judgment will also be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501710/ | Jeffery P. Hopkins, United States Bankruptcy Judge
In September 2009, Debtors David Lee and Betsy Thurman Haltermon (the "Debtors" or referred to singularly as the "Debtor" when discussing Debtor David Haltermon) filed a Chapter 7 petition seeking protection from their creditors (Doc. 1). They obtained a discharge on January 12, 2010, which resulted in all prepetition debts owed to their creditors, whether they were scheduled or not, being discharged (Doc. 14). Years later, one of the creditors holding a prepetition unsecured claim against the Debtors, Dr. Lawrence Kurtzman ("Kurtzman"), filed a pro se action in state court seeking to collect on the debt. Debtors have filed the present Motion for Contempt (the "Motion for Contempt") (Doc. 19) seeking to enforce the discharge injunction and an order requiring Kurtzman to pay them monetary damages for having violated the discharge order. See 11 U.S.C. § 105(a) ; 11 U.S.C. § 524(a)(2), and 11 U.S.C. § 727. Complicating matters further, Debtors and Kurtzman had been in business together and co-debtors on certain business debt prior to the bankruptcy. After the bankruptcy, Debtors and Kurtzman continued to maintain a relationship and financial ties.
*314Kurtzman filed a Response (Doc. 23) denying that he violated § 524(a)(2). At first, Kurtzman claimed that he was unaware that the debt had been discharged in bankruptcy. In the alternative, Kurtzman asserted that he had been clueless about Debtors' bankruptcy altogether. Debtors filed a Reply challenging Kurtzman's asserted lack of knowledge about the bankruptcy or discharge of the debt (Doc. 26). The Court held an evidentiary hearing on May 9, 2017. After which, Debtors filed a Post-Hearing Brief (Doc. 34) and Kurtzman filed a Post-Hearing Memorandum (Doc. 33) and Response to the Post-Hearing Brief (Doc. 35).
JURISDICTION
The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference entered in this District. Pursuant to 28 U.S.C. § 157(b)(A) and (O), this is a core proceeding in which the Court possesses the authority to enter final judgment. This memorandum constitutes this Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052.
FINDINGS OF FACTS
On September 24, 2009, Debtors filed a joint petition seeking relief from their creditors under Chapter 7. (Doc. 1). The petition stated that Mrs. Haltermon owed a creditor identified as Kurtzman on a debt of $10,000 for a personal loan. See Doc. 1, Schedule F. The purpose for the personal loan was not disclosed on the record. The Schedule also listed Kurtzman, and an individual named, Tome Kurtzman, presumably one of his relatives, and JJM Property Management, LLC, as co-debtors on a different obligation owed to McCormick 101, LLC. See Doc. 1, Schedule H. On January 12, 2010, Debtors received a discharge of all their prepetition obligations under 11 U.S.C. § 727 (the "Discharge Order"). (Doc. 14). On January 15, 2010, the Discharge Order was sent via first class mail to all creditors listed in the creditor matrix, including Kurtzman at his address located at 7439 E. Aracoma Drive, Cincinnati, Ohio 45237-2325. (Doc. 15).
On November 3, 2015, almost six years after the Discharge Order, Kurtzman's non-bankruptcy attorney, Matthew J. Hammer, an associate with the Deters Law Firm, who claims that he was unaware of Debtors' bankruptcy, emailed a letter to Debtor David Haltermon seeking to collect an "obligation on [an] agreement" on behalf of Kurtzman.1 See Doc. 19, Exhibit A. The letter provided Debtors with an ultimatum and reads as follows: "You have until next Monday to contact Dr. Kurtzman and make arrangements to resolve your obligation on your agreement. It is shameful what you have done. It is inexcusable you have ignored him. If you do not reach him to resolve, we not only sue you [sic], we publicly humiliate you [sic] by any means necessary, including social media/news. I don't bluff. Contact him. If not, so be it." (Emphasis in original). The letter did not provide any details regarding the nature of the obligation or the date the debt was incurred. Not surprisingly, *315the Debtors and Kurtzman never reached any resolution.
On January 14, 2016, Kurtzman filed a pro se complaint against Debtor David Haltermon in the Court of Common Pleas for Hamilton County (the "state court action"). Case No. A1600231. The complaint was filed just two months after Debtor received attorney Hammer's threatening email and letter. In the state court action, Kurtzman alleged that he had loaned Debtor $20,000 and that Debtor defaulted entirely on repayment. See Doc. 19, Exhibit B. Paragraph 6 of the state court complaint refers to a check Kurtzman purportedly wrote to Debtor evidencing the $20,000 loan. See Doc. 28-5. However, the state court complaint did not attach a copy of the check, nor did it disclose the date when the loan was made by Kurtzman or any of its terms or conditions.
On September 30, 2016, Debtor's attorney, who also represents him in the bankruptcy case, filed a notice of appearance in the state court action. (Doc. 30-4). In the answer to the state court complaint, Debtor's attorney asserted several affirmative defenses. See Doc. 19, Exhibit C. Debtor's tenth defense, in particular, states, "Kurtzman is barred from bringing this action by order of a court of competent jurisdiction." Id. None of the affirmative defenses contained specific language that the state court action was barred by the bankruptcy discharge.2 See Ohio R. Civ. P. 8(c).
Three months later, on January 24, 2017, the state court conducted a scheduling conference. See Docs. 30-6 and 32. Both attorneys appeared at the conference on behalf of their respective clients.3 On that same day, attorney Hammer served Plaintiff's Answers to Defendant's First Set of Interrogatories, Request for Production of Documents, and Request for Admission to Plaintiff Lawrence C. Kurtzman M.D. (Doc. 28-8) upon Debtor's counsel in the state court action. In that discovery request, Debtor's counsel had asked for a copy of Kurtzman's $20,000 check referred to in Paragraph 6 in the state court complaint. See Doc. 19. According to Kurtzman, he was unable to locate a copy of the check but stated it was drawn on a Fifth Third Bank account. Id. However, on March 11, 2017, after Debtor's attorney subpoenaed Fifth Third Bank's records, he discovered that Kurtzman's last account at the bank had been closed in 2008-well before Debtors' Chapter 7 bankruptcy filing on September, 24, 2009-making the debt alleged in the state court action a prepetition obligation subject to the Discharge Order. See Doc. 28-11.
On March 13, 2017, immediately upon learning of the discharge, attorney Hammer filed a Notice of Voluntary Dismissal and Kurtzman's state court action was later dismissed with prejudice. See Doc. 32. On that same day, Debtors filed the Motion for Contempt currently before this Court. At the hearing held on the Motion, the parties filed a Stipulation of Facts. (Doc. 32). Importantly, Paragraph 12 of the Joint Stipulation of Facts states: "The loan that was the subject of Case No. A1600231 [the state court action] was *316made by Dr. Kurtzman to Debtor prior to September 24, 2009." Id. However, Kurtzman testified in an affidavit that he had "no recollection of ever receiving [the Discharge Order]" related to Debtors' Chapter 7 bankruptcy petition. See Affidavit attached to Response in Opposition of the Motion for Contempt (Doc. 23-1). Yet, evidence introduced at trial showed that the Discharge Order was mailed to Kurtzman's residence by the Bankruptcy Noticing Center on January 15, 2010. (Doc. 28-2). Moreover, evidence also revealed that Kurtzman had been a co-defendant with Debtor in another state court action McCormick 101, LLC v. JJM Property Management, LLC, et al. (Case No. AO901737). See Docs. 28-3 and 28-4. In that litigation, Kurtzman along with the other co-defendants were served on October 5, 2009 with a suggestion of bankruptcy by the plaintiffs informing them of Debtor's September 24, 2009 Chapter 7 petition. (Doc. 28-3).
CONCLUSIONS OF LAW
A. Kurtzman violated the discharge injunction.
Under § 727(b), a debtor is discharged "from all debts that arose before the date of the order for relief under this chapter."4 Further, § 524(a)(2) provides that a discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any [discharged] debt as a personal liability of the debtor, whether or not such debt is waived."5 Section 524 does not include a mechanism that allows for a private right of action to enforce the discharge injunction. See Pertuso v. Ford Motor Credit Co. , 233 F.3d 417, 423 (6th Cir. 2000). Rather, "a debtor's only recourse for violation of the discharge injunction is to request that the offending party be held in contempt of court." In re Gunter , 389 B.R. 67, 71 (Bankr. S.D. Ohio 2008). A court may award damages and attorney fees to the debtor if contempt is present. Id. ; see also TWM Mfg. Co. v. Dura Corp. , 722 F.2d 1261, 1273 (6th Cir. 1983) ("The award of attorney's fees and expenses to a successful movant may be appropriate in a civil contempt proceeding."); In re Duling , 360 B.R. 643, 645 (Bankr. N.D. Ohio 2006) ("The sanctions imposed by a court may include an award of damages to the debtor, including reasonable attorney fees.").
In order to prevail in a civil contempt proceeding, a debtor must demonstrate that the defendant: "(i) violated the discharge injunction (and thus the order granting discharge) and (ii) did so with knowledge that the injunction was in place." In re Gunter , 389 B.R. at 72. Further, "the [debtor] bears the burden of proving both elements-violation and knowledge-by clear and convincing evidence." Id. In the Sixth Circuit, a debtor must demonstrate that the creditor had actual knowledge of the injunction. The mailbox rule provides that actual knowledge may be imputed onto the intended recipient under certain circumstances. Under that rule, "a presumption of receipt arises upon proof that the item was addressed properly, had sufficient postage, and was deposited in the mail." Id. at n. 6, quoting In re Yoder , 758 F.2d 1114, 1118 (6th Cir. 1985).
In this case, Debtors have demonstrated that Kurtzman violated the discharge injunction. In the Joint Stipulation of Facts (Doc. 32), the parties stated that the "loan that was the subject of Case No. A1600231 [the state court action] was made by *317Kurtzman to Debtor prior to [the petition date]." Under the circumstances, Kurtzman's loan to Debtor was discharged in the bankruptcy case. A discharge from bankruptcy "discharges the debtor from all debts that arose before the date of the order for relief under this chapter, and any liability on a claim that is determined under section 502 of this title as if such claim had arisen before commencement of the case[.]" § 727(b). When Kurtzman initiated the pro se state court action in an attempt to collect on the loan, a prepetition debt, his conduct fell within the ambit of § 524(a)(2). Thus, the Court holds that Debtors have established, by clear and convincing evidence, that Kurtzman violated the discharge injunction.
B. Kurtzman violated the Discharge Order with knowledge that the injunction was in place.
Next, the Court must determine whether Debtors have proven that when Kurtzman filed the state court action seeking to collect the debt in January 2016, he had actual knowledge of the Discharge Order entered in January 2010. To prevail on this element, Debtors must demonstrate by clear and convincing evidence that Kurtzman not only violated the discharge injunction (or order granting discharge), but also that he did so with knowledge that the injunction was in place. See In re Gunter , 389 B.R. at 71.
Under the facts presented, the Court concludes that Kurtzman had actual knowledge of Debtor's discharge. As noted, "a presumption of receipt [of a mailing] arises upon proof that the item was addressed properly, had sufficient postage, and was deposited in the mail." In re Gunter , 389 B.R. at 72 n. 6, quoting In re Yoder , 758 F.2d 1114, 1118 (6th Cir. 1985). The evidence adduced at the May 9, 2017 hearing clearly showed that on January 15, 2010, the Discharge Order was served by first class mail on the creditor matrix, including Lawrence C. Kurtzman and Lawrence Kurtzman at the following address: 7439 E Aracoma Drive, Cincinnati, OH 45237-2325. See Doc. 15. At trial, Kurtzman admitted that he had lived at that address during all relevant periods before and after Debtors' bankruptcy case was filed. None of the testimony or evidence presented at the hearing demonstrated that notice of Debtors' discharge failed to arrive at Kurtzman's residence or that the notice had been returned to sender undeliverable. Kurtzman's statement in his affidavit that he had no recollection of receiving the Discharge Order is not enough to overcome the presumption presented by the mailbox rule. See In re Yoder , 758 F.2d 1114, 1118 (6th Cir. 1985) ("The common law has long recognized that an item properly mailed was received by the addressee."); Fed. R. Evid. 301 ("[T]he party against whom a presumption is directed has the burden of producing evidence to rebut the presumption."). Consequently, the Court finds that a presumption of receipt of the discharge notice arises under the mailbox rule and that the addressee, Kurtzman, received a copy of the Discharge Order.
Additional evidence presented at trial also compels the Court towards this conclusion. Kurtzman testified that he had assisted Debtors with their personal finances, including paying the couple's bills, lending them a cell phone to use and directing money from the couple's bank account which Kurtzman had been given access to in order to pay on a car loan for a vehicle Kurtzman had sold to them. See Doc. 23-1. Apparently, Debtors financial ties to Kurtzman which began before the *318bankruptcy continued afterwards.6 Kurtzman did not dispute Debtor's account of those facts.
Other evidence also clearly points to Kurtzman having had notice of Debtor's bankruptcy filing prior to the mailing of the Discharge Order on January 15, 2010. Debtor testified credibly that he discussed filing bankruptcy with Kurtzman after discovering that he might also be found personally liable in the McCormick 101, LLC vs. JJM Property Management, LLC, et al. (Case No. A0901737) (see Docs. 28-3 and 28-4) litigation where the two had been co-defendants together. Indeed, the evidence reveals that on October 5, 2009, the plaintiffs in the McCormick 101, LLC v. JJM Property Management, LLC, et al. litigation served Kurtzman, as one of the co-defendants, with a suggestion of bankruptcy which had a copy of Debtor's bankruptcy notice conspicuously attached. See Doc. 28-3. The notice informed all the parties in that litigation that Debtors had sought bankruptcy protection and would, therefore, be dismissed from the lawsuit. Id. That lawsuit ended in judgment being granted against Kurtzman and the other co-defendants in the amount of $845,726.24. See Doc. 28-4. The filing of the suggestion of bankruptcy and the subsequent mailing of the Discharge Order to Kurtzman's home offer compelling proof. From the totality of events, the Court finds that Kurtzman had actual knowledge of Debtor's bankruptcy filing as early as October 5, 2009, and certainly not later than January 15, 2010.
To counter the evidence that he had received notice of the bankruptcy, Kurtzman first contends that the $20,000 debt was not discharged because it was not accurately listed in Debtors' schedules. See Doc. 23. Debtors listed the debt to Kurtzman in Schedule F as an unsecured claim for only $10,000 on a personal loan. (Doc. 30-1). Kurtzman further argues that, even if the debt was discharged, he did not have actual knowledge of the discharge until March 13, 2017, when the Motion for Contempt was filed. See Doc. 23. In addition, Kurtzman contends that a § 524(a)(2) violation requires a showing that he actually knew he was attempting to collect a discharged debt. Id. Finally, Kurtzman argues that if the Court does find him in contempt, he objects to the amount of attorney fees that Debtors have requested on the grounds that it would constitute a windfall. See Doc. 35.
In In re Madaj , 149 F.3d 467, 469 (6th Cir. 1998), the Sixth Circuit held that "a discharge under 11 U.S.C. § 727 discharges every prepetition debt, without regard to whether a proof of claim has been filed, unless that debt is specifically excepted from discharge under 11 U.S.C. § 523." In In re Madaj , the creditors argued *319that because the debtors failed to inform them of the bankruptcy or list their claim in the schedules, the debt in question was not discharged. In rejecting that argument, the Sixth Circuit reasoned: "Even if, as we shall assume for the sake of argument, the Debtors purposely failed to list the debt in an attempt to defraud the Creditors, this action did not (and could not) work some perverse alchemy to change the innocent loan into a fraudulent debt of the type that is covered by § 523(a)(2), (4) or (6) and therefore excepted from discharge pursuant to § 523(a)(3)(A)." Id. at 471.
The complaint filed in state court avers that Kurtzman was seeking to collect an "obligation on [an] agreement." See Doc. 19, Exhibit A. Nothing in the complaint suggests that the loan at issue was a fraudulently incurred debt. As such, the debt was not of the type covered by § 523(a)(2), (4) or (6) and therefore was not excepted from discharge. Thus, under In re Madaj , Kurtzman's argument that his unscheduled $20,000 debt was not discharged in Debtors' Chapter 7 bankruptcy case is without merit.
The Court also rejects Kurtzman's plausible deniability defense. As noted, Kurtzman was seeking in the state court to collect on an "obligation on [an] agreement," minimally satisfying the requirement of a short and plain statement showing entitlement to relief. Yet, during discovery in the state court action and with assistance from attorney Hammer who prepared his responses, Kurtzman refused to provide basic details about the debt. When Debtor's attorney propounded questions in discovery seeking documents related to the debt, none of the responses were very helpful or particularly informative. Indeed, Plaintiff's Answers to Defendant's First Set of Interrogatories, Request for Production of Documents, and Request for Admission to Plaintiff Lawrence C. Kurtzman M.D., which were prepared by attorney Hammer, do not offer any clue about the nature of the debt, or more importantly, the timing of when the debt arose. Virtually all of Kurtzman's answers to discovery refer to a string of emails attached to Plaintiff's Answers to Interrogatories, none of which express the terms of a contract or agreement or give a basic description of when the debt was incurred. In all, most of the responses to discovery contain language similar to Kurtzman's answers to Document Request No. 8. In that request, Kurtzman had been asked to produce a copy of the check allegedly paid to Debtors. In response, Kurtzman ambiguously states: "Plaintiff is conducting a reasonable and diligent search of those files that are reasonably expected to contain the requested information. To the extent that the Requests purport to require more, Plaintiffs object to the Requests on the grounds that compliance would impose an undue burden or expense." See Doc. 28-8.
The Court concludes that Kurtzman's feigned ignorance about the nature of the debt and when it arose strains credulity.7 Juxtaposed against Kurtzman's *320contention that he did not have actual knowledge of the Discharge Order until March 13, 2017, when the Motion for Contempt was filed, the evidence clearly reveals that Kurtzman received notice of Debtor's bankruptcy filing as early as October 5, 2009, while being sued as a co-defendant with Debtor in the McCormick 101, LLC v. JJM Property Management, LLC, et al. litigation and, again, around January 15, 2010, when the Discharge Order was mailed to his residence by the Bankruptcy Noticing Center. See Case No. A0901737; see also Docs. 28-3 and 28-4.
Based on the totality of circumstances, Debtors have demonstrated by clear and convincing evidence that Kurtzman had actual knowledge of the order of relief. See In re Zilog, Inc. , 450 F.3d 996, 1007 (9th Cir. 2006) (holding that "knowledge of the [discharge] injunction is a question of fact that can normally be resolved only after an evidentiary hearing."). The Court concludes also that Kurtzman violated the Discharge Order with actual knowledge that the injunction was in place. Thus, Kurtzman's attempts to collect the discharged debt violated § 524(a)(2), and was contemptuous in nature.8
C. Remedy
Having found that Kurtzman violated the discharge injunction, the Court must next determine whether to grant Debtor's request for an award damages, including attorney fees and punitive damages as a sanction under 11 U.S.C. § 105(a). See In re Miller , 282 F.3d 874 (6th Cir. 2002). In a recent case, In re Mitchell , 545 B.R. 209 (Bankr. N.D. Ohio 2016), Judge Arthur Harris summarized in very clear expression the applicable law:
"If contempt is established, the injured party may be able to recover damages as a sanction for the contempt." In re Caravona , 347 B.R. 259, 267 (Bankr. N.D. Ohio 2006) (citing Chambers v. Greenpoint Credit (In re Chambers) , 324 B.R. 326, 329 (Bankr. N.D. Ohio 2005) ). Additionally, the Court may award "attorney fees to an debtor injured by a contemptible violation of the discharge injunction." In re Chambers , 324 B.R. at 329-30 (discussing Miller v. Chateau Communities, Inc. (In re Miller) , 282 F.3d 874 (6th Cir. 2002) ). Generally, damages in contempt proceedings are meant to vindicate the affront to a court order, and not compensate private harm, but "[t]he modern trend in civil contempt proceedings is for courts to award actual damages for violations of § 524's discharge injunction, and, where necessary to effectuate the purposes of the discharge injunction, a debtor may be entitled to reasonable attorney fees." Lassiter v. Moser (In re Moser) , Nos. 09-8067, 09-8068, 464 B.R. 61, 2010 WL 4721239, *5 (6th Cir. BAP Nov. 23, 2010) (quoting *321Miles v. Clarke (In re Miles) , 357 B.R. 446, 450 (Bankr. W.D. Ky. 2006) ). However, as with damages for violations of the automatic stay, debtors have a duty to mitigate damages when faced with violations of the discharge injunction, and the debtor must establish that any attorney fees are reasonable. Not only does Bankruptcy Rule 9011 prohibit actions brought for "any improper purpose, such as ... to cause unnecessary delay or needless increase in the cost of litigation[,]" but it is inherently improper for debtors "to view violations [of the discharge injunction] as a profit-making endeavor." Duling , 360 B.R. at 645-47 (discussing reasonableness of attorney fees and debtor's duty to mitigate damages for violations of the discharge injunction). An award of damages for a violation of the discharge injunction is within the Court's discretion. In re Perviz , 302 B.R. 357, 370 (Bankr. N.D. Ohio 2003).
In re Mitchell , 545 B.R. at 226-27.
Before a bankruptcy court may award a debtor damages for a creditor's violation of the discharge injunction, actual evidence of loss must be presented. In re Mayer , 254 B.R. 396, 398 (Bankr. N.D. Ohio 2000). A debtor must prove his injury by a preponderance of the evidence. In re McCool , 446 B.R. 819, 823-24 (Bankr. N.D. Ohio 2010). The debtor must support his claim of actual injury by establishing "adequate proof" and cannot rely on speculation. Id. at 824, quoting Archer v. Macomb Cnty. Bank , 853 F.2d 497, 499-500 (6th Cir. 1988).
1. Punitive Damages
Bankruptcy courts rarely award punitive damages for violations of the discharge injunction. These are appropriate only "where there is some sort of nefarious or otherwise malevolent conduct." In re Perviz , 302 B.R. 357, 372 (Bankr. N.D. Ohio 2003). Normally, punitive damages are awarded when a creditor who has violated the discharge injunction has demonstrated "a complete and utter disrespect for the bankruptcy laws." Id. at 372. Based on the evidence presented in this case, the Court does not believe that punitive damages are warranted.
2. Attorney Fees
Debtors have asked the Court for an award of attorney fees totaling $5,000. (Doc 34).9 The attorney fees request covers legal services provided in the state court and bankruptcy court proceedings. Attached to Debtor's Post Hearing Brief are time records showing services provided by four attorneys and one paralegal associated with the law firm Minnillo & Jenkins Co., covering the periods between September 22, 2016, and May 9, 2017. Id.
Citing In re Duling , 360 B.R. 643, 647 (Bankr. N.D. Ohio 2006), Kurtzman contends that Debtor may only obtain attorney fees such that they are reasonable and not a "profit making endeavor." According to Kurtzman's counsel, "All the time and expense could have easily been avoided by debtor's attorney promptly sent [sic] a fax, text message, email, or made a phone call to Mr. Hammer advising that the debt that was the subject of the state court action was probably discharged." (Doc. 35). Kurtzman contends that, if attorney fees are awarded, the Court should limit the fees to only $450 and deny Debtor's request *322for damages altogether for lost wages or travel expenses.
Based on Debtor's attorney's itemization of attorney fees, counsel contends that he did not have actual knowledge that the loan Kurtzman had been pursuing in state court was a prepetition obligation until, March 11, 2017. That was also the date when Debtor's counsel began drafting the Motion for Contempt. See Doc. 34. However, it is beyond peradventure to conclude that Debtor's attorney had an inkling as early as October 27, 2016 that Kurtzman's state court action was barred by the discharge injunction.
Debtor's answer to Kurtzman's complaint, filed on October 27, 2016, certainly foretold his attorney's well-founded suspicion. As noted, Debtor's attorney asserted an affirmative defense contending that "Plaintiff is barred from bringing this action by order of a court of competent jurisdiction." That Debtor's counsel did not utter the exact language contained in Ohio Civ. R. 8(c) to express that the debt had actually been "discharg[ed] in bankruptcy" is of no moment. The Court believes based on the record established in this case that Debtor's counsel's use of inexact language to assert the affirmative defense was, at best, an attempt to have it avoid detection by attorney Hammer (a relatively new lawyer inexperienced in bankruptcy practice) and, at worst, an attempt to provide cover for Debtor's attorney to be able to make a colorable claim that Kurtzman had been put on notice of the bankruptcy but opted instead to continue violating the discharge injunction. Whatever Debtor's attorney's motivation for withholding information that the debt might have been discharged in Debtors' bankruptcy, he had a duty to mitigate damages which meant that he should have immediately alerted attorney Hammer with the suggestion of bankruptcy on October 27, 2016, or perhaps, on January 24, 2017, at the scheduling conference in state court which attorney Hammer also attended.
Rather than explicitly raise the bankruptcy discharge affirmative defense in the state court action early, Debtor's counsel continued to litigate for another five months after October 2016. Had the suggestion of bankruptcy been promptly communicated, attorney Hammer would have had, at a minimum, a duty to investigate the matter.10 Precious judicial resources in *323the state court might also have been preserved, not to mention the savings of attorney fees and reduction of stress to Debtor that could have resulted.
Under the circumstances, Debtor's attorney's contention that he failed to realize until March 11, 2017 that the state court litigation was over an obligation that had been incurred prepetition seems implausible. More surprising, however, is the fact that Debtor's attorney, according to the time records, immediately began drafting the Motion for Contempt upon discovering that the debt had been incurred prepetition. See Doc. 34. It appears from all the statements and actions exhibited by counsel in this case, that a compelling reason for Debtor's attorney's decision to withhold the suggestion of bankruptcy in October 2016 in the Answer, and again, at the January 2017 status conference in the state court action, was his desire to maximize the recovery of damages and attorney fees rather than take additional steps needed extrajudicially to resolve the violation of the discharge injunction in a non-litigious manner.11
Were these the only facts under consideration, the Court might very well deny Debtor's request for attorney fees incurred beyond October 27, 2016, or certainly those incurred after the January 24, 2017 status conference. However, because of the conduct exhibited by attorney Hammer in the state court litigation is inextricably linked to and, in large part, gave rise to the need to file the Motion for Contempt, the Court concludes that Debtors are entitled to attorney fees up to and including March 10, 2017.
Paragraph 6 of the Joint Stipulation of Facts (Doc. 32) states, in part, that "Matthew J. Hammer and The Deters Law Firm, P.S.C. noticed their entry of appearance as counsel for plaintiff in [the state court action Case No. A1600231] on March 25, 2016." However, the record clearly reflects that attorney Hammer began representing Kurtzman in the state court action sometime before January 24, 2016. Attorney Hammer signed the certificate of service on January 24, 2016 to Plaintiff's Answers to Defendant's First Set of Interrogatories, Request for Production of Documents, and Request for Admission to Plaintiff Lawrence C. Kurtzman M.D. - just fourteen days after the state court action was filed on January 10, 2016. See Doc. 28-8. Thus, it is clear that Kurtzman was being assisted and receiving legal advice from attorney Hammer within days of his filing the pro se complaint, if not before. In fact, the evidence certainly suggests that attorney Hammer began representing Kurtzman in connection with the state court action well before January 24, 2017 based on the date of the November 3, 2015 letter he emailed to Debtor threatening him with a lawsuit.
*324The Court concludes that proper steps were not taken by Debtor's counsel to mitigate damages. On the other hand, however, Debtor's counsel should not have been forced to find out after months of discovery that the debt at the center of the dispute in the state court litigation was a prepetition obligation subject to the January 12, 2010 Discharge Order. Some attorney fees against Kurtzman are warranted in light of his absolute disregard of the discharge injunction with knowledge of the bankruptcy, but not in the amount requested by Debtor's counsel. Even though Debtor's attorney has reduced the request for attorney fees from $9,395 to $5,000, the Court fails to see how the entire $5,000 prayed for in the Motion as amended is reasonable. The vast majority of the billing records consist of two categories: (1) client meetings, preparing the answer and discovery, attending proceedings and communicating with attorney Hammer in connection with the state court action conducted between September 22, 2016 and March 10, 2017; and (2) communicating with attorney Hammer in connection with the Motion for Contempt, researching, drafting, and revising the Motion for Contempt and related pleadings and preparing exhibits, witnesses and attending the hearing. See Doc. 34.
As far as the state court litigation is concerned, the Court finds that only the attorney fees up to and including March 10, 2017 were reasonably incurred. It was unreasonable for Debtor's attorney to immediately begin drafting the Motion for Contempt on March 11, 2017-the day after discovering Kurtzman's state court lawsuit had been over a prepetition obligation. Within days of receiving notice of the discharge, on March 13, 2017, Kurtzman's attorney promptly dismissed the state court action. Debtor's attorney afforded no time to take measure of the situation, mitigate damages, and see if a settlement could be reached. Under the circumstances, the Court will limit the fees awarded to the reasonable value of services provided in the state court litigation and those legal services that should have been sufficient to resolve this matter before the Motion for Contempt was filed.
Debtor's counsel expended a total of 15 hours (13.7 by attorneys and 1.3 by a paralegal) defending the lawsuit in the state court litigation. The Court deems that an appropriate and reasonable billing rate for experienced bankruptcy attorneys in this area is $250 per hour; an appropriate and reasonable billing rate for experienced paralegals in this area is $100 per hour. Multiplying these rates by the number of hours Debtor's attorney and paralegals spent working on the state court litigation, the Court finds $3,555.00 is a reasonable attorney fee award. However, the attorney fees will also be reduced by $225 for a charge representing a "status and strategy" interoffice meeting between two of Debtor's attorneys that occurred on September 22, 2016. As for the attorney fees incurred after March 10, 2017, the Court will award Debtors an additional $125 for the drafting of the Stipulation of Facts. Thus, the total amount of attorney fees awarded against Kurtzman for his contemptible conduct is $3,455.00.
3. Actual Damages
Debtor testified that he missed three total days as a result of defending against the state court action and the subsequent bankruptcy Motion. He further stated that he was paid $35 per hour for eight hours and $55 per hour for sixteen hours. Debtor failed to offer into evidence any earning statements or pay stubs, corroborating his claims of lost wages. Nor was evidence introduced showing that Debtor was forced to use vacation days, *325sick leave or personal days without pay in order to attend court proceedings. Because Debtor failed to meet his burden of establishing actual injury by adequate proof, Debtor's request for payment of lost wages will be denied as speculative. See, e.g. , In re Bolen , 295 B.R. 803, 810-11 (Bankr. D. S.C. 2002).
CONCLUSION
Based on the foregoing, the Court finds that the creditor, Dr. Lawrence Kurtzman, violated the discharge injunction and did so with knowledge that it was in place. It is ORDERED that Dr. Lawrence Kurtzman pay Debtors a total of $3,455.00. The Motion for Contempt (Doc. 19) is hereby GRANTED . All other damages, compensatory, punitive or otherwise requested by the Debtors are DENIED .
IT IS SO ORDERED .
Matthew J. Hammer and the Deters Law Firm represented Kurtzman in the state court action. Kurtzman's attorney, Hammer and the Deters Law Firm are represented by different counsel in connection with the Motion for Contempt. At the hearing held on May 9, 2017, this Court orally ruled from the bench that, based on the evidence presented, attorney Hammer and his firm would not be sanctioned for violating the discharge injunction as prescribed by § 524(a)(2). However, the Court also expressed its displeasure with the conduct exhibited by attorney Hammer, a matter which will be dealt with more thoroughly later in this opinion.
According to Debtor's attorney, at the time he filed the Answer, neither he nor Debtor knew the origin or details of the Kurtzman loan being prosecuted in the state court action. Debtor contends that as far as he knew the loan could have been for a prepetition debt-in which case it would have been discharged in the bankruptcy-or for a new debt incurred postpetition.
Attorney Hammer's signatures appearing on the Affidavit attached to Response in Opposition to the Motion for Contempt (Doc. 23-2) and the Scheduling Order (Doc. 30-6) are identical, indicating that he attended the scheduling conference in the state court along with Debtor's attorney.
See 11 U.S.C. § 727(b).
See 11 U.S.C. § 524(a)(2).
Kurtzman testified that he sold Debtor a car on March 24, 2013, which would have been three years after the January 12, 2010 Discharge Order. The November 3, 2015 letter that threatened Debtor with suit that attorney Hammer sent may very well have been directed at the debt on the car loan. Subsequent to the letter, Hammer filed a second lawsuit on behalf of Kurtzman against Debtors in the state Municipal Court on December 7, 2015. See (Doc. 23-1). In that lawsuit, Kurtzman was seeking damages on the loan for the postpetition sale of the car on which Debtors defaulted. However, attorney Hammer did not specify in the November 2015 letter which loan the threat of the suit was being directed towards. Thus, Debtor had no way of knowing whether the November 2015 letter pertained to the purported $20,000 prepetition debt Kurtzman was pursuing in Common Pleas Court or the postpetition car loan that would later be pursued in Municipal Court in December, 2015. At bottom, Hammer had an obligation to identify in the November 3, 2015 letter which debt he was seeking payment for from Debtor in order to insulate his client from charges of violating the Discharge Order.
Kurtzman may have been attempting to treat the debt and Debtor's alleged postpetition promises to repay as some form of reaffirmation. It is well known that a debtor may voluntarily repay a discharged debt. § 524(f). However, strict compliance with § 524(c) and (d) is required to enforce a reaffirmation agreement on a debt otherwise dischargeable. "Reaffirmation agreements that fail to comply fully have been held void and unenforceable." In re Husain , 364 B.R. 211, 214 (Bankr. E.D. Va. 2007) ; see also Republic Bank of California, NA v. Getzoff (In re Getzoff) , 180 B.R. 572, 573-75 (9th Cir. BAP 1995) (a postpetition guarantee executed by a Chapter 7 debtor was not enforceable because no attempt had been made to obtain court approval or otherwise comply with the reaffirmation standards).
In the Post-Hearing Memorandum of Respondent Lawrence C. Kurtzman, M.D. (Doc. 33), Kurtzman suggests that the Court must find his actions "evince[ed] a contumacious frame of mind" to find a violation of the discharge injunction. In so arguing, Kurtzman erroneously conflates knowledge with malevolent intent. However, "in order to support a motion for civil contempt, a plaintiff has the burden of establishing by clear and convincing evidence that [the defendant] violated a definite and specific order of the court requiring [the defendant] to perform or refrain from performing a particular act or acts with knowledge of the court's order....There is no requirement to show intent beyond knowledge of the order "(emphasis added)." In re Mitchell , 545 B.R. 209, 226-27 (Bankr. N.D. Ohio 2016), quoting CFE Racing Products, Inc. v. BMF Wheels, Inc. , 793 F.3d 571, 598 (6th Cir. 2015) (emphasis added) (internal citations and quotation marks omitted).
In the Motion, Debtor originally sought payment of damages for attorney fees in the amount of $9,395.00 (Doc. 19). In the Post Hearing Brief (Doc. 34), Debtors' attorney amended the Motion stating "Debtor requests an award of actual damages, including attorney fees, of $5,000.00. Additionally, punitive damages and/or sanctions are appropriate and necessary given the willfulness of Dr. Kurtzman's conduct." Id.
The threatening letter, dated November 3, 2015 (Doc 28-7), attorney Hammer emailed to Debtor coupled with other sharp practices he exhibited while representing Kurtzman in the state court action which are linked to the Motion for Contempt, at best, demonstrate seriously poor judgment and, at worst, conduct sanctionable under the Ohio Rules of Professional Conduct and Rules of Civil Procedure. See , e.g., Rule 3.1 of the Ohio Rules of Professional Conduct ("a lawyer shall not bring or defend a proceeding, or assert or controvert an issue in a proceeding, unless there is a basis in law and fact for doing so that is not frivolous ")(Emphasis added); Ohio Civil Procedure Rule 11 ("The signature of an attorney ... constitutes a certificate by the attorney ... that the attorney ... has read the document; that to the best of the attorney's ... knowledge, information and belief there is good ground to support it; and that it is not interposed for delay"); and, Ohio Civil Procedure Rule 37(A)(3) ("A party seeking discovery may move for an order compelling an answer... [or] production[.] (4) For purposes of division (A) of this rule, an evasive or incomplete answer or response shall be treated as failure to answer or respond." ) (Emphasis supplied). Although the Court does not here hold attorney Hammer or the Deters Law Firm in civil contempt, the two are admonished to correct their conduct in future cases when appearing before this Court. Attorney Hammer's conduct went well beyond unprofessional crossing over into the category of reprehensible behavior. Should attorney Hammer or the Deters Law Firm appear again in this Court exhibiting such behavior it will be severely dealt with severely. See LBR 2090-2 ("[T]he Rules of Professional Conduct adopted by the Ohio Supreme Court apply in this Court.").
Debtor's attorney had very little incentive to explicitly interpose the "discharge in bankruptcy" affirmative defense, pursuant to Ohio Civ. R. 8, and much to gain in the form of the potential recovery of additional damages in the event that Kurtzman or his attorney missed recognizing that the defense had been raised. The assertion of standard affirmative defenses in an answer to a complaint which later turn out to be inapplicable is common practice among attorneys and does not constitute sanctionable conduct under Ohio Civ. R. 11. See Armatas v. Cleveland Clinic Foundation, et al. , No. 2016CA00123, 2016 WL 5940863 (Ohio Ct. App. Oct. 11, 2016) ("In accordance with Civ.R. 8, appellees admitted a number of matters in their answer and raised standard affirmative defenses, in short and plain terms, in response to appellant's lengthy 17 page complaint. We concur with appellees that appellees and their counsel were not, at such stage of the proceedings, required to engage in the level of investigation that would be appropriate during discovery."). Id. 2016 WL 5940863 at *5. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501712/ | Dow, Bankruptcy Judge
Debtor Richelle Page appeals from the Bankruptcy Court's order granting summary judgment in favor of the National Collegiate Student Loan Trust ("NCSLT") and denying Debtor's motion for summary judgment seeking a discharge of her NCSLT debt pursuant to 11 U.S.C. § 523(a)(8). For the reasons that follow, we reverse and remand.
FACTUAL BACKGROUND
The Debtor attended St. Louis Community College in the spring semester of 2006, and paid for her tuition with financial aid. In response to a loan "preapproval notice" she received from Chase Bank ("Chase"), the Debtor executed a Loan Request/Credit Agreement (the "Agreement") requesting a $30,000 loan through the "Education One Undergraduate Loan" program. She acknowledged as part of the agreement that she would be responsible for repaying any funds which were not used for educational expenses related to the community college. The instruction sheet directed applicants to submit the agreement either by regular mail or expedited delivery to The Educational Resources *336Institute, Inc. ("TERI"), a non-profit organization.
The loan proceeds were disbursed to the Debtor (the "Debt" or the "Loan"). The Loan was subsequently sold to NCSLT. Despite the restriction in the Agreement, the Debtor used the proceeds to pay for non-educational expenses.
The Debtor filed bankruptcy in 2010. She listed the Debt in her Schedules. The bankruptcy court entered a discharge order providing that certain debts, including those for most student loans, were not discharged. Six years later, the Debtor filed her complaint seeking a determination that her student loan debt was not excepted from discharge. The NCSLT moved for summary judgment and the Debtor filed her own motion for summary judgment. The bankruptcy court granted summary judgment in favor of NCSLT and ordered that the Debt be excepted from discharge pursuant to § 523(a)(8). Specifically, the court concluded that there was no genuine issue of material fact in dispute as to whether the Loan was an "educational loan" and as to whether TERI "funded" the Loan (program) for purposes of § 523(a)(8)(A)(i). The Debtor appeals.
STANDARD OF REVIEW
We review the Bankruptcy Court's determination of nondischargeability de novo . Educational Credit Management Corporation v. Jesperson , 571 F.3d 775, 779 (8th Cir. 2009). Findings of fact on which the legal conclusions are based are reviewed for clear error. Id.
DISCUSSION
Was the Loan an "educational loan" as contemplated by § 523(a)(8) ?
Section 523(a)(8) of the Bankruptcy Code provides for certain exceptions to discharge, including an educational loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution. 11 U.S.C. § 523(a)(8)(A)(i). The Debtor states in her Brief on appeal that the Loan was not an "educational loan" but rather a routinely dischargeable consumer loan because of its alleged attributes (e.g. , Chase's security interest in the Loan, the requirement of co-signers, and a substantial origination fee). However, the Debtor cited no cases holding that the commercial features described disqualify a loan from being an "educational loan" under § 523(a)(8).
Rather than focus on a loan's features, courts routinely look to the purpose of a loan to determine whether it is "educational." See, e.g. , In re Murphy , 282 F.3d 868 (5th Cir. 2002) ; In re Jean-Baptiste , 584 B.R. 574, 585 (Bankr. E.D.N.Y. 2018) ; In re Busson-Sokolik , 635 F.3d 261, 266 (7th Cir. 2011). The debtor in Busson-Sokolik challenged whether the loan could be properly considered "educational" as required to bring it within § 523(a)(8)(A). The court applied the purpose test and found that the following facts established that the loan was indeed educational: the loan was part of a package that included scholarship and grant money toward completion of the debtor's education at the school, the promissory note was signed while the debtor was a student, the debtor had to be a student to be eligible for the loan, and the loan proceeds were deposited into the debtor's student account at the school. Id. at 267. The bankruptcy court here applied a similar analysis and concluded that there was no genuine issue of material fact in dispute as to whether the Debt was for an "educational loan" based largely on the many education-related terms in the Agreement: identification as an "Undergraduate Loan," made through *337the "Education One" Loan Program, covering an "Academic Year," while debtor is enrolled at a specific "School." In addition, NCSLT's witness attested that the Loan was "for educational purposes." We agree that the court made ample findings based on undisputed facts to support its conclusion that the Loan was an "educational loan" within the meaning of § 523(a)(8)(A).
Did the bankruptcy court err in drawing the inference in NCSLT's favor that TERI funded the program?
The Debtor also argues on appeal that the bankruptcy court erroneously inferred (in NCSLT's favor) that TERI expended resources in processing some of the bank's mail and thereby funded the loan program, stating since "TERI served in a plenary capacity as the sole entity to which loan documents were submitted," it expended its resources on the administration of the loan program and thereby funded it. The Debtor asserts that the bankruptcy court reduced the meaning of "funded" so that any entity that plays even a marginal role in a loan program can be said to have funded it.
When considering a motion for summary judgment, the court is required to review the record and draw all reasonable inferences in favor of the non-movant. Foster v. Johns-Manville Sales Corp. , 787 F.2d 390, 391-92 (8th Cir. 1986). These inferences must then be considered in light of any competing inferences. See, e.g. , In re Sunnyside Timber, LLC , 413 B.R. 352, 363 (Bankr. W.D. La. 2009) (if a reasonable trier of fact could find that the defendants engaged in collusive conduct after considering any inferences of non-collusive conduct supported by the evidence, the court should not grant summary judgment). Where the parties file cross-motions, the standards by which the Court decides the motions do not change. Livingston v. South Dakota State Medical Holding Co., Inc. , 411 F.Supp.2d 1161, 1163 (D.S.D. 2006) (citing Heublein Inc. v. United States , 996 F.2d 1455, 1461 (2nd Cir.1993) ). Each motion must be evaluated independently, "taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration." Id. In this case, both parties filed competing summary judgment motions, so the question before us is whether the inference drawn by the court (that TERI funded the program) was appropriate, reasonable and supported by the evidence.
The widely-held view among courts considering this issue is that the definition of "funded" should not require that actual money be placed in some type of account. In re Gakinya , 364 B.R. 366, 374 (Bankr. W.D. Mo. 2007). Instead, the test adopted by many courts is whether the nonprofit entity played any meaningful part in procurement of the loans under the program.1 In re O'Brien , 299 B.R. 725, 730 (Bankr. S.D.N.Y. 2003) (citing In re Hammarstrom , 95 B.R. 160, 165 (Bankr. N.D. Cal. 1989) ("Congress intended to include within section 523(a)(8) all loans made under a program in which a nonprofit institution plays any meaningful part in providing funds.") ). See also In re Sears , 393 B.R. 678, 680-81 (Bankr. W.D. Mo. 2008) (rather *338than focus on financial role of the nonprofit, courts should place emphasis on the institution's degree of involvement in administrative functions of the program). The cases applying the so-called "meaningful part" test hinge on whether the non-profit entity committed financial resources to the loan program, or contributed something of value to make the program successful. See, e.g. , In re Merchant , 958 F.2d 738 (6th Cir. 1992) (non-profit's agreement to purchase all defaulted student loans from for-profit lender held to be sufficient); In re Pilcher , 149 B.R. 595 (9th Cir. BAP 1993) (sufficient that some participants of the loan program were nonprofit institutions).
A number of courts have held that a non-profit institution's guarantee of the loans is sufficient to constitute a "meaningful contribution" by the nonprofit. See, e.g. , In re McClain , 272 B.R. 42 (Bankr. D.N.H. 2002) ; In re Jean-Baptiste , 584 B.R. at 584 (loans ultimately purchased or guaranteed by non-profit entities generally excepted from discharge).2 The parties in this case disputed whether TERI in fact guaranteed this Loan. In the affidavit of Bradley Luke, custodian of records for NCSLT, he states that the Loan was guaranteed by TERI. The Debtor moved to strike that statement. The bankruptcy court denied the motion to strike as moot, stating that the court did not rely on that statement in rendering judgment.3 The bankruptcy court declined to resolve the issue and adjudicated summary judgment without making that determination. It concluded that TERI played a meaningful part in the program regardless of whether it guaranteed the Loan.
The only role mentioned by the court was that "TERI served in a plenary or near-plenary capacity as the sole entity to which loan documents were submitted to the Loan Program by regular mail or overnight delivery." While the instructions for submitting the application provided a P.O Box Number and address for TERI, the facsimile number was not identified as TERI's. It is unclear, therefore, whether TERI received all of the loan applications. In addition, the bankruptcy court admitted that the record did not reflect the method by which the Debtor submitted her Agreement - just that it was submitted. Also, NCSLT does not assert that it was TERI employees who processed the applications, merely that TERI spent money on the facilities where the processing occurred.
In general, any evidence presented in connection with § 523(a)(8) must be viewed with the Congressional intent that exceptions to discharge be narrowly construed against the creditor and liberally in favor of the debtor in order to provide the debtor with comprehensive relief from the burden of his indebtedness. In re Olson , 454 B.R. 466, 472 (Bankr. W.D. Mo. 2011). This principle applies equally to student loan exceptions to discharge. See, e.g. , In re Johnson , 215 B.R. 750, 753 (Bankr. E.D. Mo. 1997), aff'd, 218 B.R. 449 (8th Cir. BAP 1998) (applying, in the context of student loan debt, the well-established principal that exceptions to discharge are to be narrowly construed).
*339Here, the bankruptcy court's broad construction of the term "funded" is inconsistent with Congress' intent that exceptions to discharge be narrowly construed. The evidence on which the bankruptcy court's conclusion that TERI funded the Loan is based is scanty. It was not established that TERI guaranteed the loans, processed the loans, or even received all the loans. TERI merely provided an address to which applications could be delivered, and that is not sufficient to support the inference that TERI "funded" this loan program. Further, that inference was drawn in favor of NCSLT, the movant, rather than the Debtor as legally required.
We are not in a position to make a factual finding on the issue of TERI's guarantee of the Loan since the bankruptcy court declined to make that finding. We, therefore, remand this issue to the court for that determination and its legal significance to the Loan's dischargeability.
CONCLUSION
Based on the record below and considering the established case law on the meaning of "educational loan," we hold that the bankruptcy court did not err in characterizing the Debtor's Loan as an "educational loan" within the meaning of § 523(a)(8)(A)(i). However, we conclude that the bankruptcy court's inference in NCST's favor that TERI "funded" the loan program was not reasonable as it was not supported by the evidence. We, therefore, reverse and remand the issue regarding TERI's guarantee of the Loan and funding of the program for further consideration in accordance with this opinion.
Accordingly, the judgment of the bankruptcy court is reversed and remanded.
At least one court has concluded that the "meaningful part" test should not be applied. In re Pilcher , 149 B.R. 595, 600 (9th Cir. BAP 1993) ("The addition of the meaningfulness requirement is purely a judicial creation. No qualifying language was included by Congress to establish minimum levels of participation."). The issue of whether the bankruptcy court erred in applying the "meaningful part" test is not before this Panel. However, regardless of whether that test is applied, there is insufficient evidence to support a finding that TERI funded this loan program.
But see In re Wiley , 579 B.R. 1 (Bankr. D. Me. 2017) (holding that guarantee by nonprofit institution is not, by itself, enough). This is the minority view.
In addition, there was guaranty language in Paragraph L.11 of the Agreement: "I acknowledge that the requested loan is subject to the limit on dischargeability in bankruptcy contained in Section 523(a)(8) of the United States Bankruptcy Code. Specifically, I understand that you have purchased a guaranty of this loan, and that the loan is guaranteed by [TERI], a non-profit institution." It is unclear if the bankruptcy court considered this acknowledgment, as it made no mention of it in its opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501713/ | The matter before us is Appellant-Cross Appellee Lariat Companies, Inc.'s ("Lariat") Motion for Rehearing and Alternative Motion for Stay of Mandate. For the reasons that follow, we deny both Lariat's motion and its alternative motion.
As Lariat notes in its motion, "[t]he purpose of a petition for rehearing ... is to direct the Court's attention to some material matter of law or fact which it has overlooked in deciding a case, and which, had it been given consideration, would probably have brought about a different *340result." Yankton Sioux Tribe v. Podhradsky , 606 F.3d 985, 990 (8th Cir. 2010) (citations omitted).
Lariat argues we departed from the issues briefed by the parties, which in turn led us to commit three reversible errors. We disagree.
In her brief,1 Debtor argued her liability under the Minnesota Uniform Fraudulent Transfer Act was derivative of her spouse's liability to Lariat2 and Lariat was only entitled to recover from her the lesser of the value of the assets transferred from Debtor's spouse to Debtor or the amount necessary to satisfy Lariat's underlying claim against Debtor's spouse. This was the issue presented to us, and this was the issue we decided in Debtor's favor.
The amount necessary to satisfy Lariat's underlying claim was not at issue: The bankruptcy court found Debtor's spouse had paid the full amount of Lariat's claim against him, and Lariat did not challenge that finding. Consequently, while Debtor may have muddled the issue somewhat with her separate (and wholly unnecessary) argument that Lariat's acceptance of Debtor's spouse's check in payment of Lariat's claim against him constituted an accord and satisfaction, we simply applied the undisputed facts to the issue presented.
As for our perceived errors, Lariat first argues the state court rejected Debtor's argument that her spouse's bankruptcy discharge effectively eliminated Lariat's claim against her and denied her request to vacate the fraudulent transfer judgment against her.3 This was not Debtor's argument on appeal: In her brief, Debtor clearly stated she did not claim her spouse's discharge eliminated Lariat's claim against her. Nor was it the issue we addressed: We did not discuss-much less rely on-Debtor's spouse's discharge in reaching our conclusion.
Lariat next suggests the discharge of a fraudulent transferor in bankruptcy does not discharge or otherwise exonerate a fraudulent transferee of her liability arising from the fraudulent transfer. We did not hold otherwise.
Finally, Lariat suggests 11 U.S.C. § 502(b)(6), upon which the bankruptcy court relied to "cap" Lariat's claim against Debtor's spouse in his bankruptcy case, confers no benefit on Debtor in her bankruptcy case. Again, we did not hold otherwise. We specifically declined to address this issue, because it was unnecessary to do so in light of our holding that Lariat no longer had a claim against Debtor. And we see no good reason to revisit our decision not to address it.
With respect to its alternative motion, Lariat has not demonstrated there is a fair prospect it will prevail on the merits, it is likely to suffer irreparable harm in the absence of a stay, or the balance of the equities, including the public interest, warrants the imposition of a stay. See John Doe I v. Miller , 418 F.3d 950, 951 (8th Cir. 2005) (citations omitted).
*341For all these reasons, we deny both Lariat's motion for rehearing and its alternative motion for stay of mandate.
The relevant portion of Debtor's brief is headed, "APPELLANT'S CLAIM HAS BEEN PAID IN FULL AND IS NOT ENFORCEABLE AGAINST THE APPELLEE." (Emphasis added.)
While Lariat seems to believe otherwise, we see no meaningful distinction between Debtor's description of her liability to Lariat as derivative of her spouse's liability to Lariat and our description of Debtor's spouse's liability to Lariat as a "predicate claim."
Lariat suggests we may have been unaware of the state court's decision. This is true, because neither Lariat nor Debtor called this decision to our attention or suggested it had any bearing on this appeal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501715/ | Mary Jo Heston, U.S. Bankruptcy Judge
This matter came before the Court for hearing on August 16, 2018, on Plaintiff's Motion for Summary Judgment for Avoidance and Recovery of Fraudulent Transfer and Post-petition Transfer ("Motion"), filed by Kathryn Ellis, Trustee ("Trustee") of the Estate of Ingrim Family LLC ("Debtor"). The Court previously entered an Order on Motion for Summary Judgment for Avoidance and Recovery of Preferential Transfers on August 8, 2017 ("2017 Order"). The 2017 Order grants the Trustee summary judgment on its cause of action for avoidance of preferential transfers in the amount of $7,000, which was subsequently enumerated as First Cause of Action in the Plaintiff's First Amended Complaint for Avoidance and Recovery of Preferential and Fraudulent Transfers Pursuant to 11 U.S.C. §§ 547(b)1 , 548, 549, 550 and 551 ("Amended Complaint"). The 2017 Order is currently on appeal to the Bankruptcy Appellate Panel for the Ninth Circuit (BAP).2 The Amended Complaint also asserts a Second Cause of Action to avoid a fraudulent transfer of $8,500 under § 548 and a Third Cause of Action to avoid the transfer/disposition of a point of sale device and neon sign under § 549. The Second and Third Causes of Action are the subject of the Trustee's Motion and addressed in this Memorandum Decision.
At the August 16, 2018 hearing, the Court determined that the Trustee established it was entitled to summary judgment on the unopposed claim made pursuant to § 549(a) to avoid the postpetition transfer/disposition of the point of sale device with the undisputed value of $5,000. Regarding the Trustee's unopposed claim to avoid the postpetition transfer/disposition of a neon sign made pursuant to *371§ 549(a), the Court determined that the Trustee established the elements of the claim, but granted Lee and Jane Doe Ingrim ("Defendants") additional time to file objective evidence of the sign's value to overcome the Debtor's scheduled value and 341 meeting testimony of the Debtor's principal that the sign was worth $7,000. The Trustee was granted time to respond. Regarding the Trustee's undisputed claim to avoid the transfer of $8,500 pursuant to § 548(a)(1), the Court determined that the Trustee established the elements of this claim except insolvency. The Court granted the Trustee additional time to provide such evidence, with time for the Defendants to respond. The Court incorporates by reference its oral ruling made at the August 16, 2018 hearing, pursuant to Fed. R. Bank. P. 7052.
The Trustee timely filed an additional memorandum and evidence addressing insolvency under § 548(a), to which the Defendants did not respond. The Defendants timely filed additional information regarding the change in the sign's value from its earlier represented value, to which the Trustee responded. Based on the evidence, arguments of counsel, and pleadings submitted, the Court makes the following findings of fact and conclusions of law.
A. Fragile financial condition under § 548(a)(1)(B)(ii)
In the Trustee's Motion and at the August 16, 2018 hearing, the Trustee argued that the Debtor was insolvent at the time it transferred $8,500 to the Defendants, or became insolvent as a result of the transfer, pursuant to § 548(a)(1)(B)(ii)(I). In the Supplemental Memorandum Re: Insolvency in Support of Motion for Summary Judgment, the Trustee relies on § 548(a)(1)(B)(ii)(III) to establish the last element for its claim under § 548(a)(1)(B). This section requires a plaintiff to establish that the debtor "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." "[C]ourts have held that the intent requirement can be inferred where the facts and circumstances surrounding the transaction show that the debtor could not have reasonably believed that it would be able to pay its debts as they matured." WRT Creditors Liquidation Trust v. WRT Bankr. Litig. Master File Defs. (In re WRT Energy Corp.), 282 B.R. 343, 415 (Bankr. W.D. La. 2001).
As with the other elements of this claim, the Defendants have presented no evidence pertaining to the insolvency element opposing summary judgment. Even when the nonmoving party fails to oppose, however, the burden remains with the moving party to prove that it is entitled to the relief requested. Borough v. Rogstad (In re Rogstad), 126 F.3d 1224, 1227 (9th Cir.1997).
The Trustee has presented sufficient evidence that the Debtor could not have reasonably believed that it would be able to pay its debts as they matured when the Debtor transferred $8,500 to the Defendants. The transfer at issue occurred on February 28, 2014. According to the Debtor's federal tax return for 2013 (Form 1065 U.S. Return of Partnership Income), the Debtor had an ordinary business loss of $3,085 in 2013. Ellis Decl. Ex. 1, ECF No. 120. Less than three months prior to the transfer, on November 1, 2013, the Debtor took out a business loan of $25,000 with Security State Bank. Id. Ex. 2. As part of that agreement, Security State Bank was granted a security interest in "All Inventory and Equipment" of the Debtor. Ellis Decl. Ex. 6, ECF No. 25. On February 7, 2014, the Debtor accessed the line of credit up the maximum amount available. Ellis Decl. Ex. 4, ECF No. 120. According to *372the check register for the Debtor's account at Anchor Bank, the Debtor's account was overdrawn as of February 25, 2014, three days prior to the transfer. The Debtor's account was again overdrawn on March 7, 21, April 12, 15-18, May 22-23, July 11, and 17, 2014, until another loan was taken out by the Debtor in the amount of $35,000 on July 24, 2014. Id. Ex. 5.
Furthermore, at the time of the transfer, the Debtor was delinquent in its payments to the Washington State Liquor and Cannabis Board. According to audit findings by the Washington State Liquor and Cannabis Board, the Debtor misreported for the 2nd Quarter 2012 through 1st Quarter 2014, resulting in total fees and penalties of $22,569.61 due through the end of that quarter. Dotson Decl. 2:6-8, ECF No. 121. At the time of the transfer, the Debtor also had an outstanding lease obligation through May 31, 2017, requiring a rental payment of $5,000 per month. See Ellis Decl. Ex. 5 at 27 ¶ 2.1, ECF No. 25. The Debtor was unable to afford its lease obligation at least as of July 2014 and stopped making payments to the Washington State Liquor and Cannabis Board in August 2014, with the last payment made on August 6, 2014. Ellis Decl. Ex. 6 at 9, ECF No. 120; Dotson Decl. 4-5, ECF No. 121.
Based on the admissible evidence before the Court, at the time of the transfer, all of the Debtor's assets were encumbered by a loan with Security State Bank and the Debtor was operating at a net loss. Additionally, the Debtor was delinquent on its taxes to the Washington State Liquor and Cannabis Board, consistently overdrawn on its bank account, and struggling to make a payment of $5,000 per month on a lease with an outstanding obligation of at least $180,000. The Trustee has presented sufficient evidence to establish that as of the time of the $8,500 transfer to the Defendants, the Debtor could not have reasonably believed that it would be able to pay its debts as they matured. The Trustee is entitled to summary judgment avoiding the $8,500 transfer pursuant to § 548(a)(1)(B).
B. Neon sign's value
Section 549(a) provides that a trustee "may avoid a transfer of property of the estate--(1) that occurs after the commencement of the case; and ... (2)(B) that is not authorized under this title or by the court." It is undisputed that the sign was listed on the Debtor's Schedule B as property of the estate. It is also undisputed that Defendant Lee Ingrim admitted in his deposition taken December 13, 2017, that he disposed of the sign postpetition. See Ellis Decl. Ex. 4 at 33, ECF No. 112. Based on these undisputed facts, the Court determined at the August 16, 2018 hearing that the Trustee is entitled to summary judgment avoiding the transfer of the neon sign pursuant to § 549.
Section 550 provides that the Trustee may therefore "recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property" from the Defendants. The Defendants admit that they disposed of the sign postpetition without court authority. As the Trustee cannot recover the sign itself, the Trustee is entitled to a monetary judgment for the value of the sign. See USAA Fed. Savs. Bank v. Thacker (In re Taylor), 599 F.3d 880, 890 (9th Cir. 2010) (purpose of § 550(a) is to restore the estate to the position it would have occupied had the property not been transferred).
When the value of property is recovered, as opposed to the property itself, the term "value" refers to fair market value. Joseph v. Madray (In re Brun), 360 B.R. 669, 674 (Bankr. C.D. Cal. 2007). At the August 16, 2018 hearing, the Court *373gave the Defendants additional time to present objective evidence of the sign's value, including pictures, invoices, and depreciation schedules. In response, the Defendants submitted the unsigned declaration of Duane Taylor, alleging that the sign was a custom sign, rendering it of "no value, except as scrap, to anyone else." Taylor Decl. 1:20-22, ECF No. 123. Defendant Lee Ingrim also submitted a supplemental declaration now alleging that he, rather than the Debtor, originally purchased the sign, and attaching an invoice for a "sign deposit" of $4,000. The sign, however, remains listed on the Debtor's Schedule A/B as property of the estate, both in the original schedules and unsigned amended schedules, which also attach a letter from Mr. Taylor opining that the sign has no value except for scrap metal.
The evidence presented by the Defendants is insufficient to create an issue of material fact as to the value of the sign. A court can only consider admissible evidence in ruling on a motion for summary judgment. Fed. R. Civ. P. 56(c) ; Beyene v. Coleman Sec. Servs., Inc., 854 F.2d 1179, 1181 (9th Cir. 1988). The declaration of Mr. Taylor at ECF No. 123 is unsigned and therefore cannot be considered. Regarding Mr. Taylor's prior declaration at ECF No. 116, this also does not provide evidence from which a fair market value can be determined. His two-sentence declaration merely states that he inspected the sign and that it had no value except for scrap metal. Mr. Taylor's declaration does not provide his qualifications to value the sign, the date of the inspection, or any sign specifications like size, color, or material, or even what would constitute "scrap metal." In short, even taking all inferences in the nonmoving party's favor, this declaration does not raise an issue of material fact as to the sign's value. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The same is true of the invoice attached to Lee Ingrim's declaration. Taking all inferences in the Defendants' favor, such invoice merely establishes that a sign was purchased from a certain vendor in March 2011 and that a deposit of $4,000 was paid. No admissible evidence has been presented as to the total amount paid, nor was the purchased sign described or identified.
The Defendants have failed to provide the Court with any admissible evidence from which it can determine the "fair market value" of the sign. The only evidence before the Court from which the value of the sign can be ascertained for purposes of § 550 are the Debtor's schedules and the transcript of Defendant Jana Ingrim's testimony at the 341 meeting of creditors. According to Schedule B filed with the petition and signed by Ms. Ingrim under penalty of perjury as Managing Member of the Debtor, the value of the sign as of the petition date was $7,000. Ms. Ingrim confirmed that value at the 341 meeting held July 28, 2015. Ellis Decl. Ex. 1 at 6-7, ECF No. 125. Although the Debtor attempted to amend Schedules A/B to change the value of the sign to $1 after the Trustee sought to avoid the transfer, these schedules are not signed and will not be considered. See Rule 1008; Searles v. Riley (In re Searles), 317 B.R. 368, 377 (9th Cir. BAP 2004) (schedules must be verified or contain an unsworn declaration under penalty of perjury).
Furthermore, statements in bankruptcy schedules that are executed under penalty of perjury, when offered against a debtor, are eligible as judicial admissions. In re Rolland, 317 B.R. 402, 421 (Bankr. C.D. Cal. 2004).
"Judicial admissions are formal admissions in the pleadings which have the effect of withdrawing a fact from issue *374and dispensing wholly with the need for proof of the fact." Am. Title Inc. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1998) (quoting In re Fordson Eng'g Corp., 25 B.R. 506, 509 (Bankr. E.D. Mich. 1982) ). Judicial admissions are conclusively binding on the party who made them. Am. Title Ins., 861 F.2d at 226 ; Fordson, 25 B.R. at 509. Even when schedules are amended, the old schedules are subject to consideration by the court as evidentiary admissions. [In re] Kaskel, 269 B.R. [709] at 715 [ (Bankr. D. Idaho 2001) ] ; [In re] Bohrer, 266 B.R. [200] at 201 [ (Bankr. N.D. Cal. 2001) ].
Rolland, 317 B.R. at 421-22.
Here, the Defendants admit that they are insiders of the Debtor. Answer 1, ECF No. 105. Ms. Ingrim testified that she read the schedules before signing them under penalty of perjury, and the information contained in them was true. Ellis Decl., Ex. 1 at 6, ECF No. 125. Schedule B places a value of $7,000 on the sign, and the Defendants, who are insiders of the Debtor and prepared the schedules, should be bound by the originally represented value under the circumstances of this case. Additionally, despite the Court allowing the Defendants additional time to provide objective evidence of value, the Defendants have not submitted any admissible evidence contrary to the value listed in the schedules. Based on the record before it, and taking all inferences in the Defendants' favor, the Court finds that the value of the sign disposed of by the Defendants postpetition is $7,000.
C. Spoliation
The Trustee also raised spoliation as a means for binding the Defendants to the values placed on the sign and point of sale device in the Debtor's bankruptcy schedules for purposes of § 550. As set forth above, it was not necessary for the Court to rely on spoliation in determining the value of either asset. However, the Trustee also asks this Court to find that spoliation warrants an award of sanctions in this case, including attorney fees.
"Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2nd Cir. 1999) ; Apple Inc. v. Samsung Elecs. Co., 888 F.Supp.2d 976, 989 (N.D. Cal. 2012). In cases filed in federal court, federal law governs the rules that apply to, and the range of sanctions a federal court may impose for, the spoliation of evidence. Adkins v. Wolever, 554 F.3d 650, 652 (6th Cir. 2009).
Federal courts have broad discretion in determining the appropriate sanction for the spoliation of evidence. Adkins, 554 F.3d at 652. Sanctions a court may impose include dismissing a case, granting summary judgment, and instructing a jury that it may make an adverse inference against the spoliating party based on its spoliation of the evidence. Adkins, 554 F.3d at 653. The "determination of an appropriate sanction for spoliation 'is confined to the sound discretion of the trial judge, and is assessed on a case-by-case basis.' " Reinsdorf v. Skechers U.S.A., Inc., 296 F.R.D. 604, 626 (C.D. Cal. 2013) (quoting Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d. Cir. 2001) ).
It is undisputed that the Defendants disposed of the sign and point of sale device postpetition. The bare fact that evidence has been altered or destroyed, however, " 'does not necessarily mean that the party has engaged in sanction-worthy spoliation.' " Reinsdorf, 296 F.R.D. at 626 *375(quoting Ashton v. Knight Transp., Inc., 772 F.Supp.2d 772, 799-800 (N.D. Tex. 2011) ). While in the Ninth Circuit a party's destruction of evidence need not be in bad faith to warrant sanctions, " 'a party's motive or degree of fault in destroying evidence is relevant to what sanction, if any, is imposed.' " Reinsdorf, 296 F.R.D. at 627 (quoting In re Napster, Inc. Copyright Litigation, 462 F.Supp.2d 1060, 1066-67 (N.D. Cal. 2006) ). In determining whether to impose sanctions for the destruction of evidence, courts apply the following three-part test:
A party seeking an adverse inference instruction (or other sanctions) based on the spoliation of evidence must establish the following three elements: (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a "culpable state of mind" and (3) that the evidence was "relevant" to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.
Reinsdorf, 296 F.R.D. at 626 (quoting Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003) ).
The Trustee has not established the necessary culpable state of mind in disposing of estate assets that would warrant the imposition of sanctions in this case. In Mr. Ingrim's Declaration filed in response to the Motion, the Defendant stated that he stored the sign for 36 months, the Trustee did not inquire about the sign until 2018, and he believed the sign became his after expiration of the lease with the Debtor. Resp. Ex. 1, ECF No. 116. Mr. Ingrim stated in his deposition that the point of sales device was similarly held and then eventually thrown away. Ellis Decl. Ex. 4 at 33, ECF No. 112. Although the disposition of these assets postpetition were unauthorized, the Bankruptcy Code allows the Trustee to avoid the transfers under § 549 and obtain a monetary judgment under § 550 for their value. The evidence does not establish that the Defendants' actions rise to the level of sanctionable conduct warranting an additional judgment against the Defendants for the Plaintiff's attorneys fees. For similar reasons, the Court also disagrees with the Plaintiff that an award of fees is warranted under the Court's inherent authority under § 105.
Accordingly, the Trustee's Motion for Summary Judgment is granted as to the Trustee's claim under § 548 to avoid the transfer of $8,500 made on February 28, 2014. The Trustee's Motion for Summary Judgment is also granted as to the Trustee's claims under § 549 to avoid the transfers/disposition of the point of sale device and the neon sign and to recover the value of the point of sale device in the amount of $5,000 and $7,000 for the sign under § 550. The Trustee's motion for sanctions is denied.
Unless otherwise indicated, all chapter, section and rule references are to the Federal Bankruptcy Code, 11 U.S.C. §§ 101 -1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001 -9037.
Oral argument of this appeal is scheduled before the BAP on October 25, 2018. BAP No. WW-17-1241-TaBKu. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501716/ | Dale L. Somers, United States Chief Bankruptcy Judge
The question is whether this case was filed in good faith. Karbank Holdings, LLC (Karbank), a creditor of Debtor Regional Evangelical Alliance of Churches, Inc. (Debtor), alleges that it was not and has moved to dismiss this case, or alternatively for relief from stay (the Motion).1 Prepetition Karbank sued Debtor and others in state court to enforce a Right of First Negotiation and First Refusal Agreement (Rights Agreement) with Debtor, which granted Karbank certain rights to purchase real property owned by Debtor. The state court found that the Rights Agreement had been breached by Debtor's transfer of the Property to Diversified Acquisitions, Inc. (Diversified). Before the court ruled on the remedy to which Karbank was entitled, which the parties anticipated would have allowed Karbank to purchase the property for considerably less than market value, Diversified transferred the property to Debtor. The next day, Debtor filed for relief under Chapter 11. Karbank responded with the Motion.
An evidentiary hearing on the Motion was held on August 15, 2018.2 At the close of trial, the Court requested the parties to brief the applicability of the Rooker-Feldman doctrine to this controversy. Those briefs have been received. After considering the record, testimony, exhibits, briefs, and arguments of counsel, the Court finds that this case should be dismissed because it was not filed in good faith, as that term is understood in the bankruptcy context.
I. Findings of Fact
Debtor is "a church planting alliance, committed to planting and overseeing missional parishes (churches),"3 which are self-sufficient churches under the authority of Debtor. Craig McElvain is the executive director of Debtor. In the summer or fall of 2013, Debtor purchased real property located at 7501 Belinder Street in Prairie Village, Kansas (the Property) for approximately $1.2 million. Approximately $950,000 of the purchase price was financed *379by the Bank of Prairie Village. The Property was used as a parish, known as Reach in the Village, and the down payment was financed, in part, by loans from individuals. Craig McElvain became seriously ill in late spring of 2015 and was unable to attend to the affairs of Debtor during his illness. In December 2015, Reach in the Village was dissolved. The Property ceased to be used for religious services and is not currently occupied.
On July 27, 2015, Debtor and Karbank executed a Parking Lot Lease that granted Karbank, which has offices on 75th Street across the street from the Property, the right to use 60 of the 350 parking spaces on the Property. Karbank paid $70,000 in lieu of periodic rent and offset the cost of repairing, repaving, and striping a portion of the parking lot.
Contemporaneous to the execution of the Parking Lot Lease, Debtor and Karbank entered into the Rights Agreement. A memorandum of the agreement was recorded with the Register of Deeds in Johnson County, Kansas. Generally, the Rights Agreement requires Debtor to give notice to Karbank of any proposed sale of the Property and granted Karbank an exclusive right for a period of 30 days after such notice to give notice that it would purchase the Property on the terms in the offer.
The Parking Lot Lease and the Rights Agreement were signed by three individuals, as Trustees of Debtor. David Christie was one of those trustees. David Christie also negotiated both agreements on behalf of Debtor. Craig McElvain and David Christie have been friends since childhood.
In the fall of 2015 it was determined that the unoccupied Property should be sold or leased. On November 1, 2015, Debtor entered into a Commercial Exclusive Right to Represent Seller/Landlord Agreement with Christie Development Associates, LLC, a company wholly owned by David Christie. It granted Christie Development the exclusive right to market and sell the Property for the period beginning on November 1, 2015 through February 1, 2017 for the price of $1.5 million. After December 2015, David Christie took over management of the Property.
In the fall of 2016, Debtor's loan from the Bank of Prairie Village (the Bank) was maturing, and the Bank gave notice that it would not renew the obligation. David Christie negotiated with the Bank for Diversified, a company owned 80% by David Christie and 20% by Matt Pennington, to purchase the loan for the outstanding balance of $909,163.24. The Bank and Diversified entered into a Loan Sale Agreement dated November 6, 2015, and an amendment of that agreement extending the closing date to December 28, 2015. The transaction closed, and the note, together with the security documents, were transferred to Diversified.
On December 28, 2015, Diversified and Debtor entered in to a Loan Modification and Deed-in-Lieu Agreement. It extended the maturity date of the loan, then owned by Diversified, to May 1, 2016. Executed but undated copies of a Special Warranty Deed in Lieu of Foreclosure transferring ownership of the Property from Debtor to Diversified and an Affidavit Regarding Deed in Lieu of Foreclosure were attached as exhibits to the agreement. The affidavit recites that the deed- in-lieu is an absolute conveyance of title to the Property and is not intended as a mortgage, that Debtor acted freely and voluntarily, and that the value of the consideration was equal to or greater than the value of the Property.
From December 28, 2015 to June 1, 2016, attempts were made to sell the Property to a religious organization, but no qualified buyers were located. On June 1, *3802016, the modified note was in default and Diversified, in lieu of foreclosure, was granted title to the Property. The Special Warranty Deed-In-Lieu of Foreclosure was dated June 1, 2016 and filed with the Johnson County Register of Deeds on June 17, 2016.
Approximately two weeks later, on July 1, 2016, Pendev, LLC, owned 100% by Matt Pennington, who also had a 20% interest in Diversified, offered to purchase the Property from Diversified for $2.1 million. The purchase contract states that closing was subject to waiver by Karbank of its rights under the Rights Agreement. On July 1, 2016, Christie Development sent a letter to Karbank, stating it was giving notice of a proposed sale as required by the Rights Agreement and enclosing a copy of the Pendev contract. Karbank requested a title commitment and became aware of the transfer of the Property from Debtor to Diversified.
On July 29, 2016, Karbank filed a Petition for Temporary Restraining Order, Injunction and Damages in Johnson Court District Court against Debtor, Pendev, and Diversified. The counts for temporary restraining order and injunction sought an order "prohibiting Diversified from conveying the ... Property to any person or entity."4 The claims against Debtor included the allegation that the Rights Agreement was breached when the Property was transferred to by Debtor to Diversified by the Special Warranty Deed. As remedies, Karbank sought specific performance or, in the alternative, damages. A Temporary Restraining Order was issued the same day. It stated, "A order is necessary to restrain Pendev LLC and Diversified Acquisitions LLC from taking any further action regarding the sale and purchase of the ... Property."5
A hearing on the request for injunction was set for August 5, 2016, by which time Pendev had withdrawn its offer to purchase. At that hearing, Debtor and Diversified were represented by the same counsel who stated that his clients were "not going to try to sell or do anything with the property until we figure out the answers to the questions; and we either have an agreement with the plaintiff or your judgment."6 The court directed the parties to upload any agreement to modify the temporary restraining order, but no such order was ever presented. Debtor and Diversified engaged in almost two full years of discovery and contested litigation. Karbank, Pendev, Debtor, and Diversified all moved for summary judgment. On March 26, 2018, the court granted Karbank's motion in part, denied Debtor's and Diversified's motions, but granted Pendev's motion.
In its memorandum decision granting Karbank' motion for summary judgment in part, the state court found that the Rights Agreement applied to the deed-in-lieu transfer from Debtor to Diversified and a breach occurred because Karbank did not receive notice as required by the Rights Agreement and did not learn of the transfer until it had the title to the Property examined after being informed of the proposed sale by Diversified to Pendev. However, the court denied summary judgment on the remedy for breach because, under both the specific performance and damages alternatives, it "must be able to calculate the dollar amount Karbank would have been able to pay to exercise its refusal right and buy the property"7 and it *381lacked sufficient facts to make that determination. On March 29, 2018, Karbank filed a supplemental motion for summary judgment stating additional facts supporting its position that $912,444.84 was due on the loan held by Diversified when Debtor deeded the Property to Diversified.8 Neither Debtor nor Diversified filed a timely response, and on May 11, 2018, Karbank filed a motion to deem the supplemental motion submitted for decision.
After the court's grant of summary judgment on March 26, 2018, the attorney who was counsel for both Diversified and Debtor, advised Debtor to accept a conveyance of the Property from Diversified and introduced Craig McElvain to Edward J. Nazar, an attorney who became Debtor's bankruptcy counsel. Matt Pennington, the 20% owner of Diversified, was not consulted. On May 30, 2018, Debtor, by Craig McElvain, and Diversified, by David Christie, executed a Compromise and Settlement Agreement. It defined a dispute between Debtor and Diversified arising from the June 1, 2016 transfer of the Property to Diversified by deed-in-lieu of foreclosure. It stated in part that "[t]he deed purports to convey title to the ...Property concerning a mortgage indebtedness in the estimated sum of $912,444.84;" that the Johnson County Appraiser valued the Property at $1,919,730.00; and that Debtor intends to file a petition for relief under Chapter 11, in part, to recover the Property pursuant to § 548.9 After describing the dispute, the settlement agreement provides that it shall be settled by conveyance of the Property to Debtor, subject to all mortgages, liens, and encumbrances of record. The Limited Warranty Deed conveying the Property from Diversified to Debtor was recorded on May 31, 2018.
Debtor filed for relief under Chapter 11 the following day, June 1, 2018. David Christie donated $20,000 to Debtor for payment of attorney fees. Edward J. Nazar, Debtor's bankruptcy counsel, filed an entry of appearance as counsel for Debtor in the state court. The attorney who had represented Debtor in state court continued to represent Diversified in that proceeding and entered his appearance as counsel for Diversified in this case. Notice of the bankruptcy filing was filed in state court, and the proceedings against Debtor and Diversified were stayed.
Debtor's petition states that its business is single asset real estate. Craig McElvain testified that although church services have not been held at the Property since 2015, Debtor continues to operate a seminary in Kansas City (although the seminary is no longer accredited) and a division called AIM, which develops written and internet materials. There are currently two Reach parishes in north Kansas City and house parishes in Johnson County. Attempts to plant additional parishes continues.
According to the schedules, on the date of filing, Debtor's assets, in addition to the Property valued at $1,919,730.00, were approximately $700 cash; accounts receivable of $7,000; and office equipment valued at $30,000. Debtor has not filed tax returns since 2015. The claims deadline has past. Johnson County filed a $65,426.85 claim for 2017 real estate taxes. Although the IRS filed a $6,241.41 claim for FICA and withholding taxes, an amendment reduced the claim to zero. There are two wage claimants, Craig McElvain for $67,333 and David Hinkey for $2,000. A claim of $13,047.36 was filed for payment of an equipment lease. A former tenant of the *382Property has filed a claim for a $4,299 rent deposit. There are three claims in the total amount of approximately $104,000 for payment of promissory notes for money loaned by individuals, one of whom is Craig McElvain's mother, to Debtor in September 2012, when Debtor was raising funds for purchase of the Property. Craig McElvain has filed a proof of claim for $219,682.54 for payment of a 2104 promissory note of Reach in the Village. Diversified has filed a secured claim for $1,323,565.28, and Karbank has filed a claim for an unknown amount.
As of the date of filing, Debtor's income for the year was less than $1,000. Debtor is seeking donations of $20,000 to maintain the Property. Its June and July operating reports state cash income was $989.86 and $2,757.15 and disbursements were $142 and of $487 in the respective months.
On June 15, 2018, Karbank filed its motion for dismissal, or in the alternative, for relief from stay to pursue the state-court litigation against Debtor. On July 11, 2018, Debtor filed its motion to reject the Rights Agreement with Karbank under 11 U.S.C. § 36510 and for approval of bid procedures to sell the Property under § 363.
II. Positions of the Parties
Karbank asserts that the filing of this bankruptcy is a "classic attempt to thwart a creditor's victory in state-court litigation."11 According to Karbank, after the entry of summary judgment in its favor, Debtor abandoned the state-court litigation and attempted to reverse the conveyance giving rise to the breach by Diversified's re-deeding of the Property back to Debtor and then immediately filing for bankruptcy relief. According to Karbank, "[t]here is nothing to reorganize."12 Karbank argues that the case should be dismissed for cause under § 1112(b) because there is: continuing diminution of the estate and the absence of a reasonable likelihood of rehabilitation; a lack of good faith; the conveyance of the Property from Diversified to Debtor on the eve of bankruptcy was a fraudulent conveyance and clear indicia of bad faith; and, in the alternative, cause exists for granting relief from the automatic stay.
Debtor argues that its "purpose in filing this bankruptcy action is merely to carry out a sale of the Property at an arm's length basis to achieve the highest and best value for creditors and parties in interest."13 According to Debtor, the practical effect of dismissal would be to return the Property to state court to allow Karbank to assert its right to the Property at a price well below its value. But Debtor suggests this may be procedurally difficult because Debtor has acquired the Property from Diversified and effectively rendered moot the allegation that the Property was conveyed to Diversified in violation of the Rights Agreement.
III. Discussion
A. The Rooker-Feldman doctrine does not prohibit the Court from exercising jurisdiction.
The Rooker-Feldman doctrine "is a jurisdictional prohibition on lower federal courts exercising appellate jurisdiction over state-court judgments."14 Its name derives from two decisions of the *383United States Supreme Court, Rooker v. Fidelity Trust Co.15 and District of Columbia Court of Appeals v. Feldman.16 The doctrine is grounded upon the reasoning that "when Congress vested the Supreme Court with appellate jurisdiction over state-court judgments, it implied that the lower federal courts lacked authority to review state-court judicial proceedings."17 In other words, no federal court other than the Supreme Court may entertain a proceeding to reverse or modify a judgment of a state court.
Because Debtor proposes to use this bankruptcy case to avoid the state-court decision that it breached the Rights Agreement when it transferred the Property to Diversified by a deed-in-lieu of foreclosure, it would seem that the Rooker- Feldman doctrine might apply.18 But the doctrine is very narrowly construed. It is "confined to ... cases brought by state-court losers complaining of injuries caused by state-court judgments."19 Rooker-Feldman prohibits only an action in lower federal courts that "tries to modify or set aside a state-court judgment because the proceedings should not have led to that judgment."20 Seeking relief inconsistent with the state-court judgment is not within the doctrine. Attempts to relitigate an issue are governed by preclusion principles, not the Rooker-Feldman doctrine.21
When filing this case and then attempting to avoid the Rights Agreement under § 363 and to sell the Property under § 365, Debtor is not seeking to achieve results inconsistent with the state-court ruling. It is not complaining of an injury caused by the state-court ruling or arguing that the state-court ruling was erroneous. The Rooker-Feldman doctrine does not apply to divest this Court of jurisdiction.
B. The case should he dismissed because it was not filed in good faith.
Dismissal of a Chapter 11 case is addressed by § 1112(b)(1). It provides:
(b)(1) Except as provided in paragraph (2) [prohibiting conversion or dismissal when there are unusual circumstances] and subsection (c) [prohibiting conversion to Chapter 7 as to certain debtors], on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.
Subsection (b)(4) is a nonexclusive list of circumstances constituting cause to dismiss, *384such as failure to maintain appropriate insurance that poses a risk to the estate or the public and failure to comply with an order of the court. "[A]s reflected in the enumerated bases for cause in section 1112(b)(4), the cause standard continually measures the value of maintaining the process, and also polices the diligence of the debtor or other plan proponent to ensure the process is proceeding with all deliberate speed and in accordance with the requirements of applicable law."22 In addition, it is well established in the Tenth Circuit, and other circuits, "that a Chapter 11 petition must be filed in good faith, and if not, dismissal is an appropriate remedy."23 "In contrast to testing the debtor's prospects of reorganization, the good faith standard focuses directly on the subjective intentions of the debtor and the proper use of the bankruptcy system."24 A bankruptcy court's authority to dismiss a case filed in bad faith is found not only in § 1112(b) but also in a court's "inherent authority to prevent access to the courts which would constitute an abuse of the judicial process."25 The requirement of good faith protects the integrity of the bankruptcy system by limiting access to its "powerful equitable weapons" to those with clean hands.26
Whether a bankruptcy case has been filed in good faith is a factual issue. There is no particular test for determining if a case has been filed in good faith.27 "Rarely do the facts of one case easily dovetail into factors created based upon the facts of a prior case."28 The totality of the circumstances of each case dictate the relevant considerations. One circumstance often identified when addressing the filing of cases in bad faith is the "new debtor syndrome" where property that is the subject of litigation is transferred to a new entity and the new entity files for relief under Chapter 11 for the purpose of defeating the creditor's state law remedies.29
"Ultimately, '[t]he determination of whether a bankruptcy case has been filed in good faith is a matter left to the sound discretion of the bankruptcy court.' "30 When a motion to dismiss challenges a debtor's good faith when filing the *385petition, the moving party must make a prima facie showing of the debtor's lack of good faith. The burden then shifts to the debtor to show good faith.31
1. Debtor filed for relief under Chapter 11 to thwart Karbank's remedy for breach of contract in the state-court action.
The transactions regarding the Property and the Rights Agreement clearly evidence Debtor's intent to use the Chapter 11 bankruptcy case as a means to defeat Karbank's state law remedies for breach of the Rights Agreement. On March 26, 2018, the state court granted summary judgment to Karbank finding that the Rights Agreement applied to the deed-in-lieu transaction whereby Diversified obtained title to the Property and that a breach occurred when Karbank did not receive notice of the intended transfer in accord with the agreement. In the same order, the state court denied summary judgment on the remedy due Karbank because the court lacked facts necessary to make that determination. On March 29, 2018, Karbank filed a supplemental motion for summary judgment stating additional facts supporting its position that $912,444,84 was due on the loan held by Diversified when Debtor deeded the Property to Diversified, such that a remedy for breach of the Rights Agreement was for Karbank to acquire the Property for that amount. Neither Debtor nor Diversified responded, and on May 11, 2018, Karbank filed a motion to deem the supplemental motion submitted for decision. Karbank reasonably expected a ruling in the near future that it was entitled to purchase the Property for approximately $912,000.
Debtor responded by filing a petition for relief under Chapter 11 on June 1, 2018. Standing alone, this timing is suspicious, but the actions taken before the filing leave no doubt of Debtor's intent to thwart Karbank's obtaining the Property under the terms of the Rights Agreement. Because when the state court found that Debtor had breached the Rights Agreement, Diversified, not Debtor, owned the Property, the full benefit of the Bankruptcy Code would not have been obtained if Debtor had simply filed for bankruptcy relief. Therefore, Debtor and Diversified developed a clever plan to make bankruptcy protection more effective. They arranged to transfer the Property to Debtor, without Debtor being required to fund the transfer. Although throughout the state-court litigation Debtor and Diversified, who were represented by the same counsel, consistently took the position that the transfer by deed-in-lieu of foreclosure from Debtor to Diversified was a valid transaction, on May 30, 2018, they executed a settlement agreement stating that Debtor had a cause of action for fraudulent transfer against Diversified arising from the deed-in-lieu transaction and that the dispute would be settled by transferring the Property to Debtor. A limited warranty deed accomplishing that transfer was filed on May 30, 2018.32 Debtor, now the owner of the Property, filed its Chapter 11 petition the next day. As a result, the Property was arguably property of the bankruptcy estate and the stay extended to the Property, as well as to Debtor.
*386Apart from the transactions with Karbank and Diversified related to the Property and the state-court case, Debtor had no reason to file for bankruptcy relief. No creditors were pressing for payment. It had no federal tax liability. Since in 2015 Diversified had purchased Debtor's note secured by the Property and in 2016 Debtor had given Diversified a deed-in-lieu of foreclosure, Debtor had no secured debt to restructure. Debtor's largest unsecured debt was owed to an insider. Debtor has no business to reorganize and no valuable assets, until Diversified conveyed the Property to Debtor on the day before the filing of the petition.
The motions filed by Debtor in this case further confirm that the purpose when filing the bankruptcy was to preclude enforcement of remedy for breach of the Rights Agreement. On July 11, 2018, Debtor filed a motion to reject the Rights Agreement and the Parking Lot Lease under § 365. On the same day, Debtor also filed a motion to establish bid procedures for sale of the Property under § 363.
The testimony supports the conclusion that the transactions evidence intent to escape the remedy to be imposed by the state court. Craig McElvain confirmed that there were no discussions about Diversified transferring the Property back to Debtor until after the state-court's finding that Debtor had breached the Rights Agreement.33 David Christie, on whose advice Debtor and Craig McElvain relied with respect to the Property transactions, testified in a deposition that he would do whatever he could within the confines of the law to "make sure that the Karbank family does not own [the] property."34
This case falls within the category of bad faith cases labeled " 'new debtor syndrome,' where property is transferred to a new entity and the new entity is placed in a Chapter 11 case for the purpose of defeating creditors' remedies under state law."35 It is similar to Natural Land Corp. v. Baker Farms, Inc. (In re Natural Land Corp.).36 In that case, two individuals purchased land from Baker Farms, giving the seller a note and mortgage for most of the purchase price. Default occurred, and a foreclosure action was filed. The foreclosure court entered a final judgment in favor of Baker Farms in the amount of $841,141.50 and provided, if the judgment was not paid within three days, the property would be sold at public sale. On the day the judgment was entered, the individuals sold the property to Natural Land, allegedly for $1,000,000, and Natural Land promptly filed for relief under Chapter 11, resulting in a stay of the foreclosure suit. Baker Farms moved to dismiss for lack of good faith. The bankruptcy court found that Natural Land was a mere shell, paid nothing for the property (other than assuming the foreclosure judgment debt and giving a note), and had misused the bankruptcy process. The dismissal was appealed to the district court, which affirmed, and then to the Eleventh Circuit, which also affirmed. It stated:
The district court found that Natural Land acquired the subject property on the very date the state court entered its foreclosure order, certainly an event to be viewed with some suspicion. Furthermore, the court found that Natural Land never had any paid employees, that it had never previously engaged in business, that it had no legitimate creditors *387(other than those it acquired when it bought the subject property), and that it had held no assets until it acquired the subject property. Based on these findings, the court concluded that Natural Land had filed its petition for reorganization merely to frustrate Baker Farms' collection efforts. We find nothing in the record that leads us to doubt these conclusions, and therefore affirm the dismissal of Natural Land's petition for reorganization.37
In this case, the Property was conveyed to Debtor solely for the purpose of thwarting Karbank's recovery in the state-court litigation. When the state court made its ruling, the Property was owned by Diversified, but Debtor was a party to the Rights agreement. Debtor's bankruptcy could not effectively thwart Karbank's anticipated judgment unless Debtor also owned the Property. But Debtor had no assets and no source of credit to enable it to purchase the Property, so the fraudulent transfer settlement was created to enable Debtor to acquire title to the Property without payment. The stated consideration was settlement of an alleged claim that the 2016 deed-in-lieu transfer of the Property to Diversified was fraudulent, but that contention is diametrically opposed to the positions that Debtor and Diversified had taken during the two year state-court litigation, where both Debtor and Diversified argued that the transfer was a bona fide transfer by deed in lieu of foreclosure.
The Court concludes that Karbank has shown that Debtor's case was not filed in good faith. There is nothing sinister in Debtor's attempt to use the Bankruptcy Code to evade the state-court ruling. Other than success on rehearing or appeal of the state-court ruling, it was only avenue available to Debtor at the time to possibly realize the full value of the Property. However, the interpretation of the Bankruptcy Code and the facts of this case require a bad faith finding.
2. Debtor has not sustained its burden to prove good faith.
To justify the prepetition transfer of the Property from Diversified to Debtor immediately before the Chapter 11 petition was filed, Debtor states that it "ultimately recognized that the value of the Property grossly exceeded"38 the approximately $909,000 paid by Diversified to obtain the note and mortgage from Bank. But Debtor had known the value exceeded the debt when the transfer was made in 2016. The November 1, 2015 listing agreement whereby Diversified Development Associates was granted the exclusive right to market and sell the Property listed the price of $1.5 million. Further, the understanding was that when the Property was sold, Diversified/David Christie would recover their purchase price and costs, with the remainder going to Debtor.39
Debtor contends its "motives in filing this case are ultimately to obtain the highest and best price available [for the Property] for the benefit of third party creditors."40 Of course, thwarting of Karbank's remedy for Debtor's breach of the Rights Agreement is an inherent consequence of a sale within the bankruptcy case. To argue that Debtor intended only to benefit third party creditors is not credible. Debtor's contention ignores the fact that it had no creditors who were pressing Debtor for payment before the bankruptcy was filed.
*388It also ignores the fact that Diversified has filed a secured proof of claim for $1,323,565.28. Assuming a sale in the bankruptcy case, after payment of Diversified's claim, Karbank's claim, real estate taxes, the costs of sale, and the administrative claims, there would be little left for other creditors.
Further, review of the schedules negates the contention that the petition was filed in good faith. Debtor's only asset of any significance is the Property.41 Debtor's Schedule A/B lists additional assets of $727.64 cash, accounts receivable of approximately $7,000, no investments, no inventory, and $30,000 of office equipment. David Christie donated $20,000 to Debtor for attorneys fees and costs of filing the bankruptcy. Debtor has insufficient income to fund a Chapter 11 case. Debtor's statement of financial affairs reports income from donations (not from operations of a business) of $1,727.34 for the portion of 2018 prior to filing, $29,106.44 for 2017, and $95,713.50 for 2016. Debtor's postpetition income for July, 2018 was donations of $2757.15.
Debtor is not a candidate for rehabilitation under Chapter 11. Debtor is not conducting any business. It has not utilized the Property for over two years. Debtor's only expenses for July, 2018 were $487, comprised of mowing services, the U S. Trustee fee, and small service fees. Craig McElvain on behalf of Debtor continues to offer an unaccredited seminary program and to seek to plant house parishes, but apparently these activities do not generate income or require expenditures.
Debtor has no employees. Craig McElvain is the executive director of Debtor. He is not being paid a salary. There is no evidence of other individuals who would be considered employees.
Debtor has few creditors. Only twelve proofs of claim have been filed, and the bar date is past. Debtor's primary creditors are Diversified and Karbank. Diversified asserts a claim for approximately $1,320,000, secured by the Property. Karbank has filed a claim for an unknown amount based upon the Parking Lot Agreement and the Rights Agreement. There are three unsecured claims totaling approximately $104,000 for loans from individuals associated with Debtor who financed the down payment when the Property was purchased by Debtor in 2012. Craig McElvain, an insider, has filed an unsecured claim for approximately $220,000, apparently for money loaned. There are no trade creditor claims. The only tax claim is for approximately $65,000 for 2017 real estate taxes. The only claim related to the conduct of business is approximately $13,000 due on a copier lease. There are two claims for wages earned totaling approximately $69,000. A former tenant of the Property filed a claim for $4,299 for return of a security deposit.
Debtor has not shown that this case was filed in good faith.
3. This case should be dismissed rather than converted to Chapter 7.
To the extent this Court's finding that this case was not filed in good faith constitutes "cause" under § 1129(b), the Court is directed to consider whether dismissal or conversion to Chapter 7 is in *389the best interests of creditors and the estate. The Code does not define the phrase best interests of creditors and the estate. The standard "implies a balancing test to be applied through case-by-case analysis. In the end the determination is a matter for sound judicial discretion."42 The Court must consider the impact of each option.43
A respected commentator identifies ten factors for consideration. They are:
(1) whether some creditors received preferential payments, whether equality of distribution would be better served by conversion rather than dismissal; (2) whether there would be a loss of rights granted in the case if it were dismissed rather than converted; (3) whether the debtor would simply file a further case upon dismissal; (4) the ability of the trustee in a chapter 7 case to reach assets for the benefit of creditors; (5) in assessing the interest of the estate, whether conversion or dismissal of the estate would maximize the estate's value as an economic enterprise; (6) whether any remaining issues would be better resolved outside the bankruptcy forum; (7) whether the estate consists of a "single asset,"; (8) whether the debtor had engaged in misconduct and whether creditors are in need of a chapter 7 case to protect their interests; (9) whether a plan has been confirmed and whether any property remains in the estate to be administered; and (10) whether the appointment of a trustee is desirable to supervise the estate and address possible environmental and safety concerns.44
An affirmative answer to the first five factors would support conversion rather than dismissal, but the circumstances identified in those factors are not present in this case. Rather, factors six and seven are relevant and support dismissal. The issues in this case concerning rights in the Property and the Rights Agreement are better determined by the state court, where litigation of these matters has been pending for two years. As to factor seven, this is a single asset case and, more importantly, is a two party dispute about that asset. As to factor eight, although Debtor engaged in misconduct, in the sense that the case was not filed in good faith, such conduct has not created a need for protecting creditors through use of Chapter 7. As to factor nine, a plan has not been confirmed. There is no prospect of rehabilitation, and liquidation in Chapter 7 would provide little, if any, benefit to creditors. The answer to factor ten is no. Appointment of a Chapter 7 Trustee to supervise the estate does not appear desirable, and there are no environmental or safety concerns.
After considering the alternatives, the Court finds that dismissal is in the best interests of creditors and the estate. This is a two party dispute. The bankruptcy was filed as a litigation tactic to thwart Karbank's recovery in the state-court litigation. Dismissal will allow Karbank to seek the remedy to which it is entitled under the Rights Agreement without having to litigate the bankruptcy roadblocks which Debtor would erect if this case were not dismissed.
*3904. Cause exists to grant Karbank's motion for relief from stay.
Karbank moved to dismiss this case, or in the alternative, for relief from stay. Generally, courts hold that "the filing of a Chapter 11 case in bad faith is 'cause' for termination of the automatic stay under § 362(d)(1)."45 If this case were not dismissed, Karbank would be entitled to relief from stay.
IV. Conclusion
For the foregoing reasons, the Court finds that this case was not filed in good faith. The transfer of the Property from Diversified to Debtor shortly before the expected ruling in the state court granting Karbank a remedy for Debtor's breach of the Rights Agreement and Debtor's filing of the Chapter 11 petition the following day were a creative plan to thwart Karbank's recovery. But that plan has the characteristics of a "new debtor syndrome" bad faith filing. The case is therefore subject to dismissal as not having been filed to accomplish the purposes of the Bankruptcy Code.
Judgment
Judgment is hereby entered granting Karbank Holdings, LLC's Motion to Dismiss. The judgment based on this ruling will become effective when it is entered on the docket for this case, as provided by Federal Rule of Bankruptcy Procedure 9021.
It is so Ordered.
Doc. 25. This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and §§ 1334(a) and (b) and the Amended Standing Order of Reference of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's Bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective June 24, 2013. D. Kan. Standing Order No. 13-1, printed in D. Kan. Rules of Practice and Procedure (March 2018). A motion to dismiss and for relief from stay is a core proceeding that this Court may hear and determine as provided in 28 U.S.C.§ 157(b)(2)(A) and (G). There is no objection to venue or jurisdiction over the parties. Further, in the Pretrial Order (doc. 93) Debtor consents to the jurisdiction of the Court to hear all dispositive motions filed by Karbank, but Karbank did not consent to the jurisdiction of the Court "to the extent that the Court's orders alter or amend the orders already entered" in the state-court litigation. Doc. 93 at 2.
Debtor appears by Edward J. Nazar of Hinkle Law Firm, LLC. Karbank appears by Colin N. Gothan of Evans & Mullinix, P.A. and T. Bradley Manson of Manson Karbank McClaflin. There are no other appearances.
Exh. 39 at 1.
Exh. 18 at 14.
Exh. 19 at 2.
Exh. 32 at 5.
Exh. 20 at 17.
Exh. 21 at 4.
Exh. 37 at 1-2.
Future references to the Bankruptcy Code in the text will be to the section number only.
Doc. 94 at 1.
Id. at 2.
Doc. 29 at 9.
Campbell v. City of Spencer, 682 F.3d 1278, 1281 (10th Cir. 2012).
263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923).
460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983).
Campbell, 682 F.3d at 1281.
When supporting application of the Rooker- Feldman doctrine, Karbank argues that the doctrine precludes this Court's jurisdiction even though the state-court ruling granting summary judgment was not a final judgement. Doc. 113 at 9-10. The Court does not address the question of whether a final appealable judgment is a necessary because the general principles of the doctrine demonstrate that it is not applicable here.
Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005).
Mayotte v. U S. Bank Nat'l Ass'n, 880 F.3d 1169, 1174 (10th Cir. 2018) (emphasis in original).
Id. at 1175.
Collier on Bankruptcy ¶ 1112.07[1] (Richard Levin & Henry J. Sommer eds.-in-chief, 16th ed. 2018).
Pacific Rim Inv., LLP v. Oriam, LLC (In re Pacific Rim Inv., LLP), 243 B.R. 768, 771 (D. Colo. 2000) (citing Udall v. FDIC (In re Nursery Land Dev., Inc.), 91 F.3d 1414 (10th Cir. 1996) ).
7 Collier on Bankruptcy at ¶ 1112.07[1].
In re Pacific Rim Inv., LLP, 243 B.R. at 771.
Little Creek Dev. Co. v. Commonwealth Mortg. Co. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir. 1986).
Compare Matter of Grieshop, 63 B.R. 657, 663 (D.N.D. Ind. 1986) (listing fourteen factors "which tend to recur in bankruptcy petitions in which good faith is an issue") with In re Nursery Land Dev., Inc., 91 F.3d at 1416 (10th Cir. 1996) (identifying seven factors that "constitute classic badges of a bad faith bankruptcy filing") and In re Forest Hill Funeral Home & Mem'l Park-East, LLC, 364 B.R. 808, 820 (Bankr. E.D. Okla. 2007) (listing eight factors but cautioning that "[w]hile the use of factors or lists ... is helpful and appears to simplify the issues, one must be wary not to become too reliant on such lists").
In re Forest Hill Funeral Home & Mem'l Park-East, LLC, 364 B.R. at 821.
Id. at 820. See In re Little Creek Dev. Co., 779 F.2d at 1073, n.3 (citing numerous "new debtor syndrome" cases).
In re Forest Hill Funeral Home & Mem'l Park, 364 B.R. at 821 (quoting In re Nichols II, 223 B.R. 353, 359 (Bankr. N.D. Okla. 1998) ).
In re Auld, No. 14-20424, 2014 WL 2780302, at *7 (Bankr. D. Kan. June 11, 2014).
Karbank contends, as further evidence of bad faith, that this transfer was fraudulent, in violation of an order of the Johnson County District Court, and contrary to the oral representation made by counsel for Debtor and Diversified at the hearing on the request for injunction. The Court declines to make any findings on this contention.
Doc. 109 at 41(transcript of August 15, 2018 trial).
Id. at 158.
In re Forest Hill Funeral Home and Mem'l Park, 364 B.R. at 820.
825 F.2d 296 (11th Cir. 1987).
825 F.2d at 298-99.
Doc. 29 at 2.
Doc. 109 at 134.
Doc. 29 at 8.
Karbank contends that the May 30, 2018 transfer from Diversified to Debtor was fraudulent and in violation of a state-court injunction, so the Debtors's interest is only bare legal title.
In re Staff Inv. Co., 146 B.R. 256, 260 (Bankr. E.D. Ca. 1992).
Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d 240, 243 (4th Cir. 1994).
7 Collier on Bankruptcy at ¶ 1112.04[7].
In re Pacific Rim Inv., LLP, 243 B.R. at 772. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501717/ | Wendy L. Hagenau, U.S. Bankruptcy Court Judge
THIS MATTER is before the Court on Plaintiff's Motion for Summary Judgment (the "Motion"). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J), and the Court has jurisdiction over the proceeding pursuant to 28 U.S.C. §§ 1334 and 157.
I. FACTS
Defendant and others hosted and promoted events at nightclubs and other venues in the Atlanta area. Defendant sent blast texts to encourage others to attend these events. Between December 2012 and November 2015, Defendant used an automated system to send Plaintiff 112 text messages promoting such events. Plaintiff responded to the messages and requested Defendant to stop contacting him; he also registered on the national "do-not-call" registry. Defendant continued to contact Plaintiff.
In August 2015, Plaintiff named Defendant as a defendant in a lawsuit in DeKalb County Superior Court and alleged Defendant violated the Telephone Consumer Protection Act (the "TCPA")'s "robocall" and do not call restrictions by repeatedly sending him text messages after he asked Defendant to stop contacting him. No judgment was entered against Defendant, and the lawsuit was administratively closed on March 29, 2018.
Defendant filed a petition under chapter 7 of the Bankruptcy Code on April 4, 2017. Plaintiff filed the complaint on July 3, 2017 *394seeking a determination a debt owed to him is nondischargeable pursuant to section 523(a)(6) of the Bankruptcy Code and to deny Defendant a discharge pursuant to sections 727(a)(2), (a)(3), (a)(4), and (a)(5) of the Bankruptcy Code. On July 16, 2018, Plaintiff filed the Motion. Plaintiff asks the Court to find Defendant liable under the TCPA in the amount of $112,000 in actual damages, to treble the damages to $336,000, and to determine the claim is nondischargeable pursuant to section 523(a)(6). Plaintiff also seeks to deny Defendant a discharge pursuant to section 727(a)(3) of the Bankruptcy Code for failing to keep records of compensation he received in exchange for promoting events. Defendant responded to the Motion, Plaintiff filed a reply in support of the Motion, and Defendant filed a sur-reply. For the reasons stated below, the Court denies the Motion.
II. 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) ; Fed. R. Civ. P. 56(c) ; Fed. R. Bankr. P. 7056(c). "The substantive law [applicable to the case] will identify which facts are material." 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 has the burden of proving there are no disputes as to any material facts. Hairston v. Gainesville Sun Pub. Co., 9 F.3d 913, 918 (11th Cir. 1993). A factual dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. The party moving for summary judgment has "the initial responsibility of informing the ... court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits if any' which it believes demonstrate the absence of a genuine issue of material fact." U.S. v. Four Parcels of Real Prop., 941 F.2d 1428, 1437 (11th Cir. 1991) (citing Celotex Corp., 477 U.S. at 323, 106 S.Ct. at 2553 ). What is required of the moving party, however, varies depending on whether the moving party has the ultimate burden of proof on the issue at trial. Once this burden is met, the nonmoving party cannot merely rely on allegations or denials in its own pleadings. See Fed. R. Civ. P. 56(e). Rather, the nonmoving party must present specific facts to demonstrate there is a genuine dispute over material facts. Hairston, 9 F.3d at 918. When reviewing a motion for summary judgment, a court must examine the evidence in the light most favorable to the nonmoving party and all reasonable doubts and inferences should be resolved in favor of the nonmoving party. Id.
III. DISCUSSION
a. The undisputed facts do not prove by a preponderance of the evidence Defendant committed a willful and malicious injury within the meaning of section 523(a)(6)
Plaintiff contends he has a claim that is nondischargeable as a matter of law pursuant to section 523(a)(6) of the Bankruptcy Code. A presumption exists that all debts owed by the debtor are dischargeable unless the party contending otherwise proves nondischargeability. 11 U.S.C. § 727(b). The purpose of this "fresh start" is to protect the "honest but unfortunate" debtors.
*395U.S. v. Fretz (In re Fretz), 244 F.3d 1323, 1326 (11th Cir. 2001). The burden is on the creditor to prove an exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 680 (11th Cir. 1993). Courts should narrowly construe exceptions to discharge against the creditor and in favor of the debtor. Equitable Bank v. Miller (In re Miller), 39 F.3d 301 (11th Cir. 1994) ; St. Laurent, 991 F.2d at 680.
Section 523(a)(6) excepts from discharge an individual's debts incurred by "willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). Section 523(a)(6) generally relates to torts and "may apply to a broad range of conduct causing harm to people ... subject to the limitation the injury be "willful and malicious." ' 4 Alan N. Resnik & Henry J. Sommer, Collier on Bankruptcy ¶ 523.12 (16th ed. 2017).
The term "willful" means intentional and deliberate; "malicious" means "wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill will." Lee v. Ikner (In re Ikner), 883 F.2d 986, 991 (11th Cir. 1989) ; Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1263 (11th Cir. 1988), abrogated on other grounds by Grogan v. Garner, 498 U.S. 279 10, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; Sunco Sales, Inc. v. Latch (In re Latch), 820 F.2d 1163, 1166 n.4 (11th Cir. 1987). The debtor, through his acts, must have actually intended the 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). In other words, the debtor must have "desired the injury caused by his conduct." Atlanta Contract Glazing, Inc. v. Swofford (In re Swofford), Case No 08-20892-REB, AP No. 08-2053, 2008 WL 7842040, at *2, 2008 Bankr. LEXIS 3900 at *2 (Bankr. N.D. Ga. Dec. 23, 2008). Not every intentional tort falls within the gamut of section 523(a)(6), Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 604 (5th Cir. 1998) ("[m]erely because a tort is classified as intentional does not mean that any injury caused by the tortfeasor is willful"), and conduct that is reckless is simply not enough to obtain relief under section 523(a)(6). Smith v. Burgos (In re Burgos), Nos. 14-12874-WHD, 15-1020-WHD, 2015 WL 9435398, at *2, 2015 Bankr. LEXIS 4311, at *6 (Bankr. N.D. Ga. Nov. 9, 2015). The plaintiff must show the debtor "had a subjective motive to inflict injury or believed his conduct was substantially certain to cause injury." Hot Shot Kids, Inc. v. Pervis (In re Pervis), 512 B.R. 348, 376 (Bankr. N.D. Ga. 2014). The debtor's subjective intent may be inferred from surrounding circumstances. Id.
Plaintiff contends Defendant willfully and maliciously injured him and violated the TCPA by repeatedly sending him text messages. Defendant concedes he may have acted recklessly in sending blast texts, but argues he did not send the messages to cause injury and he did not know the texts would inflict injury and, accordingly, his conduct does not meet the standard of section 523(a)(6).
The TCPA "was enacted to address certain invasive practices related to 'unrestricted telemarketing,' and is designed to protect consumers from receiving unwanted and intrusive telephone calls." Schweitzer v. Comenity Bank, 866 F.3d 1273, 1276 (11th Cir. 2017) (citing Mims v. Arrow Fin. Servs., LLC, 565 U.S. 368, 372, 132 S.Ct. 740, 181 L.Ed.2d 881 (2012) ). The TCPA makes it unlawful to use "any automatic telephone dialing system or an artificial or prerecorded voice" to call "any telephone number assigned to a ... cellular telephone service," without *396the express consent of the party being called. 47 U.S.C. § 227(b)(1).
The TCPA creates a private right of action under which a party can bring suit to recover its "actual monetary loss" or "to receive $500 in damages" per violation, whichever is greater. 47 U.S.C. § 227(b)(3)(B). The TCPA is essentially a strict liability statute - it does not require any intent or actual injury for liability. The statute also allows a court to increase the compensatory award by up to three times in cases of willful or knowing violations. 47 U.S.C. §§ 227(b)(3) & 227(c)(5) ; see also Am. Home Servs., Inc. v. A Fast Sign Co., Inc., 322 Ga.App. 791, 747 S.E.2d 205, 208-09 (2012) (affirming treble damages under the TCPA). The statute does not require a trebling, but it permits an increase up to three times. See Alea London Ltd. v. Am. Home Servs., Inc., 638 F.3d 768, 776 (11th Cir. 2011).
In Baltimore-Washington Telephone Co. v. Horne (In re Horne), Adv. No. 10-4238, 2012 WL 3023968, 2012 Bankr. LEXIS 3449 (Bankr. E.D. Tex. filed Apr. 11, 2012), a creditor filed a motion for summary judgment seeking a determination a debt owed by the debtor was excepted from the debtor's discharge pursuant to section 523(a)(6). The creditor held a judgment in which the state court found the defendant violated the TCPA and the Maryland Telephone Consumer Protection Act and the violations were repeated, willful, and knowing violations. The bankruptcy court found there was no genuine issue as to any material fact that the damages awarded to the creditor under the TCPA and Maryland state law were nondischargeable pursuant to section 523(a)(6) and granted the creditor's motion.
Conversely, in Alan Bau Invs. v. Horne (In re Horne), Nos. 10-42625, 10-4239, 2012 WL 1205796, 2012 Bankr. LEXIS 1577 (Bankr. E.D. Tex. Apr. 11, 2012), the plaintiffs held a default judgment against the debtor based on violations of the TCPA and sought a determination the judgment was nondischargeable pursuant to section 523(a)(6). The bankruptcy court found the plaintiffs failed to demonstrate by a preponderance of the evidence the debtor either deliberately or intentionally inflicted injury on them or the debtor's actions created an objective substantial certainty of harm to plaintiffs. The court found plaintiffs failed to sustain their burden of proof to show the debt arose from a "willful and malicious injury" as contemplated by section 523(a)(6). The court noted the debtor had violated the TCPA in other instances and might not be a sympathetic figure but, nevertheless, exceptions to discharge must be protected and the burden of proof properly sustained.
In this case, as in Horne, Plaintiff has failed to demonstrate that the undisputed facts show by a preponderance of the evidence Defendant willfully and maliciously injured him. There has been no adjudication Defendant willfully and knowingly violated the TCPA; in fact, there has been no determination Defendant violated the TCPA at all. Defendant concedes he may have acted recklessly in sending Plaintiff blast texts, but he disputes he sent the messages to cause Plaintiff injury and Plaintiff has not established Defendant desired to injure him when he sent him the messages. Thus, disputed issues of fact remain including whether Defendant had a subjective motive to injure Plaintiff or believed his conduct was substantially certain to cause injury to Plaintiff. Accordingly, summary judgment is not warranted under section 523(a)(6).
b. The undisputed facts do not prove Defendant failed to provide, maintain, and preserve adequate records under section 727(a)(3)
Plaintiff seeks to deny Defendant a discharge under *397section 727(a)(3) of the Bankruptcy Code. One of the fundamental goals of the Bankruptcy Code is to relieve the "honest but unfortunate debtor" of his indebtedness, allowing him to make a financial "fresh start." Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994). The Supreme Court has stated "a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.' " Grogan, 498 U.S. at 286, 111 S.Ct. 654 (internal quotations and citations omitted). This fresh start is primarily accomplished through the discharge of debt. See S. Rep. No. 95-989, at 7 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5793 ( section 727 is central to the fresh start policy). Generally, a chapter 7 debtor receives a complete discharge from most prepetition debts pursuant to section 727(b) of the Bankruptcy Code.1
Nonetheless, "[t]here is no constitutional right to obtain a discharge in bankruptcy, ... [It] is a legislatively created benefit ...." U.S. v. Kras, 409 U.S. 434, 446-47, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973) ; Siegel v. Weldon (In re Weldon), 184 B.R. 710, 712 (Bankr. D.S.C. 1995) (discharge is not a matter of right, but rather a statutory privilege for honest debtors). The Bankruptcy Code limits the opportunity for a completely unencumbered new beginning to the "honest but unfortunate debtor," Grogan, 498 U.S. at 287, 111 S.Ct. 654, and section 727(a) of the Bankruptcy Code may be utilized to deny a discharge to dishonest debtors, however unfortunate. S. Rep. No. 95-989, at 7 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5793.
Because "the basic objectives underlying the hope of bankruptcy [is to] afford a bankrupt a new chance," Hughes v. Lieberman (In re Hughes), 873 F.2d 262, 263 (11th Cir. 1989), discharge provisions are construed liberally in favor of the debtor and strictly against the objecting party. Hunerwadel v. Dulock (In re Dulock), 250 B.R. 147, 153 (Bankr. N.D. Ga. 2000). The party objecting to discharge bears the burden of proving, by a preponderance of the evidence, the debtor's discharge should be denied. Fed. R. Bankr. P. 4005 ; In re Matus, 303 B.R. 660, 671 (Bankr. N.D. Ga. 2004). Moreover, "[t]he grounds for denial of discharge must be proven specifically, and the proof must be directed at the transfer or concealment alleged. A debtor should not be denied a discharge on 'general equitable considerations.' " Dulock, 250 B.R. at 153 (citing Rice v. Matthews, 342 F.2d 301, 304 (5th Cir. 1965) ).
Plaintiff seeks to deny Debtor's discharge pursuant to section 727(a)(3) of the Bankruptcy Code, which provides a debtor must provide, maintain, and preserve adequate records. Section 727(a)(3) states:
The court shall grant the debtor a discharge, unless-
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified *398under all of the circumstances of the case[.]
11 U.S.C. § 727(a)(3). The policy underlying section 727(a)(3) is to ensure the trustee and the creditors receive sufficient information to effectively enable them "to trace the debtor's financial history, to ascertain the debtor's financial condition, and to reconstruct the debtor's business transactions." Kohn v. Frommann (In re Frommann), 153 B.R. 113, 116 (Bankr. E.D.N.Y. 1993) (internal citations omitted). To construct a prima facie case under section 727(a)(3), the creditor objecting to discharge must show (1) the debtor failed to provide, maintain, and preserve adequate records, and (2) such failure makes it impossible to ascertain the debtor's financial condition and material business transactions. Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3d Cir. 1992) ; see also Butler v. Liu (In re Liu), 288 B.R. 155, 161 (Bankr. N.D. Ga. 2002). If the creditor satisfies his burden on these factors, the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records. In re Cox, 41 F.3d 1294, 1297 (9th Cir. 1994) ; Meridian Bank, 958 F.2d at 1230-31.
The Bankruptcy Code does not require a debtor seeking a discharge to maintain any specific documents, nor does it require an impeccable system of bookkeeping. Meridian Bank, 958 F.2d at 1230 ; In re Decker, 595 F.2d 185, 187 (3d Cir. 1979). Whether a debtor's records are sufficient is within the court's discretion, and courts will not deny a debtor his discharge simply because a plaintiff does not like that books or records were kept in certain way. See Mercantile Peninsula Bank v. French (In re French), 499 F.3d 345, 354-55 (4th Cir. 2007) (explaining perfect records are not required). For example, in Chaudhry v. Usoskin (In re Usoskin), 56 B.R. 805 (Bankr. E.D.N.Y. 1985), the debtor provided invoices, receipts, a box full of cancelled checks, and bank statements. Id. at 816. A creditor objected to the debtor's discharge under section 727(a)(3). The court explained bankruptcy law requires a debtor keep and preserve records from which his financial condition can be ascertained; a debtor is not required to keep receipts in any specific form. That the creditor may have been dissatisfied with the records produced did not mean they were insufficient. Id. at 815-16 ; see also Underhill, 82 F.2d 258, 259 (2d Cir.), cert. denied , 299 U.S. 546, 57 S.Ct. 9, 81 L.Ed. 402 (1936) ("the law ... does not require that [records] shall be kept in any special form of accounts"). Even if a debtor keeps no books, the debtor should receive a discharge if the debtor's financial condition and business transactions can be ascertained from available records. 6 Collier on Bankruptcy ¶ 727.03[3][c].
The burden is on the plaintiff to point to specific records that were not kept and to demonstrate why such records were necessary to ascertain the debtor's financial affairs. Robertson v. Dennis (In re Dennis), 330 F.3d 696, 703 (5th Cir. 2003) ; Lansdowne v. Cox (In re Cox), 41 F.3d 1294, 1296 (9th Cir. 1994) (it is the creditor's burden to show the debtor failed to maintain and preserve adequate records). A court will not deny a debtor a discharge where the plaintiff fails to identify missing documents. Barristers Abstract Corp. v. Caulfield (In re Caulfield), 192 B.R. 808 (Bankr. E.D.N.Y. 1996). For example, in Olympic Coast Inv., Inc. v. Wright (In re Wright), 364 B.R. 51 (Bankr. D. Mont. 2007), the creditor stated in conclusory fashion the debtors' documents were inadequate. The bankruptcy court concluded the creditor failed to satisfy its burden to show the debtors failed to keep and preserve adequate business records; the district court agreed. It was the creditor's *399burden to show the debtors' records did not suffice, and the creditor failed to offer any evidence and argument on the point. Olympic Coast Inv., Inc. v. Wright (In re Wright), No. CV 07-053-GF-SHE, 2008 WL 160828, at *1-2, 2008 U.S. Dist. LEXIS 3347, at *3-4 (D. Mont. Jan. 15, 2008), aff'd 340 Fed. Appx. 422, 423-424 (9th Cir. 2009).
Plaintiff has not met his burden to show the debtor failed to maintain and preserve adequate records. Plaintiff contends Defendant failed to keep records of compensation he received in exchange for promoting events. Even if such records were not maintained, however, Plaintiff has not established with undisputed facts that such records were necessary to ascertain the debtor's financial affairs. Further, Defendant contends he did not keep records relating to his efforts to promote events because he promoted events as a hobby, not as a business. Plaintiff has failed to establish there is no genuine issue of material fact the debtor failed to provide, maintain, and preserve adequate records and such failure makes it impossible to ascertain the debtor's financial condition and material business transactions. Accordingly, summary judgment is not warranted under section 727(a)(3) claim.
IV. CONCLUSION
For the reasons stated above,
IT IS ORDERED the Motion is DENIED .
Section 727(b) provides: "Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter ...." 11 U.S.C. § 727(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501718/ | JUDGMENT OF DISMISSAL
F. Lee Bailey (the "Debtor") filed a notice of appeal with respect to the bankruptcy court's January 10, 2018 order (the "Order") sustaining the objection by the United States of America, Internal Revenue Service (the "IRS"), to plan confirmation to the extent the objection raised "subject matter jurisdiction and sovereign immunity issues." The basis for the IRS's objection as to those issues was that the Debtor's interest in future pension and Social Security income did not constitute property of the bankruptcy estate and, therefore, the bankruptcy court lacked subject matter jurisdiction to value the Debtor's interest in future pension income under § 506(a), and there was no statutory waiver of sovereign immunity under § 106.1
On July 24, 2018, the Panel entered an Order to Show Cause directing the Debtor to demonstrate why this appeal should not be dismissed for lack of jurisdiction as the Order is not a final, appealable order. On August 14, 2018, the Debtor filed a response to the Order to Show Cause, arguing that the Order is final and therefore he is entitled to appeal as of right. Alternatively, the Debtor asks the Panel to grant leave to appeal. The IRS also filed a response to the Order to Show Cause, stating that the Order is interlocutory but also urging the Panel to grant leave to appeal.
For the reasons set forth below, the Panel concludes that the Order is not final and that no exception to the final judgment rule confers appellate jurisdiction on this Panel. Accordingly, this appeal is DISMISSED.
BACKGROUND
I. The Debtor's Federal Tax Liens
On August 7, 2013, the IRS filed two separate Notices of Federal Tax Lien with the Registry of Deeds for Cumberland County, Maine, as to Debtor's federal income tax liabilities for tax years 1993 and 1994 in the total amount of $840,718.00, and for tax years 1995 through 2001 in the total amount of $3,689,291.67. The IRS also filed both Notices of Federal Tax Lien with the Maine Secretary of State on August 5, 2013.
II. The Debtor's Chapter 7 Bankruptcy Case
In June 2016, the Debtor filed a chapter 7 petition. On his bankruptcy schedules, the Debtor listed the IRS as a secured creditor with a claim in the amount of *404$5,198,930.92 for federal tax debts for the years 1993 through 2001. The Debtor received a discharge in his chapter 7 case in October 2016, which eliminated his personal obligation to repay the IRS for its claims for tax years 1993 through 2001. It is undisputed that the IRS's liens on the Debtor's personal property survived the chapter 7 case.
III. The Debtor's Chapter 13 Bankruptcy Case
The Debtor filed a chapter 13 petition in June 2017. On his bankruptcy schedules, the Debtor listed the IRS as a creditor with a $4,450.00 claim, secured by the Debtor's interest in three pensions-(1) a Screen Actors Guild ("SAG") pension, (2) an American Federation of Radio & Television Artists ("AFRTA") pension; and (3) a United Airlines ("UAL") pension. He also indicated that he received monthly income from the three pensions as follows: (1) $702.00 per month from the SAG pension; (2) $225.00 per month from the AFRTA pension; and (3) $556.00 per month from at the UAL pension. He also reported that he received $1,786.00 per month in Social Security benefits.
A. The Relief from Stay Motion
On August 9, 2017, the IRS filed a Motion for Relief from Stay ("Relief from Stay Motion"), seeking to enforce its federal tax liens on the Debtor's pension accounts and Social Security benefits. After a hearing on the Relief from Stay Motion, the bankruptcy court, on October 3, 2017, entered an order and memorandum opinion granting the Relief from Stay Motion. Thereafter, the IRS served notices of levy on the Social Security Administration and the three pension administrators.
B. Proposed Chapter 13 Plan and IRS's Objection
The Debtor filed a Chapter 13 Plan (the "Plan"), providing for monthly payments to the chapter 13 trustee of $313.00 for 54 months, and proposing a lump-sum payment to the IRS based on the present value of the Debtor's rights to future pension plan payments and future Social Security benefits.
The IRS objected to the Plan, arguing that it should not be confirmed because: (1) the Plan was not filed in good faith; (2) the petition was not filed in good faith; (3) the Plan was not feasible; and (4) the Plan did not provide proper treatment of the IRS's secured claim. With respect to the last issue, the IRS asserted that the Debtor's rights to pension plan payments and Social Security benefits were not property of the bankruptcy estate and, as a result, the bankruptcy court did not have "jurisdiction to value the pension rights under § 506(a)." In response, the Debtor countered that his pension and Social Security income was property of the estate, and that the bankruptcy court had "jurisdiction and authority under § 506(a)" to value the IRS's tax liens.
Thereafter, the bankruptcy court requested that both the Debtor and the IRS submit briefs as to the following two legal issues: (1) whether the bankruptcy court had subject matter jurisdiction to determine the value of the Debtor's rights to pension plan payments and Social Security benefits for purposes of determining the IRS's secured claim under § 506(a); and (2) whether sovereign immunity was statutorily waived under § 106. Both parties submitted the required briefs.
In its brief, the IRS argued that the Debtor's rights to future pension plan payments and future Social Security benefits (as distinguishable from any pension and Social Security payments actually received) were not property of the bankruptcy estate under § 541 and, as a result, *405they could not form the basis for the IRS's secured claim under § 506(a).2 Thus, the IRS claimed, the bankruptcy court did not have subject matter jurisdiction to value the Debtor's rights to future pension and Social Security benefits. Furthermore, the IRS argued that, because the Debtor's interest in the pension and Social Security benefits was not property of the estate, there was no statutory waiver of sovereign immunity under § 106(a)(1) which would permit the bankruptcy court to value the Debtor's rights to future pension and Social Security payments.3
In his brief, the Debtor argued that his rights to pension plan payments and Social Security benefits were property of the estate "as to the IRS, since the IRS liens [we]re effective against all property pursuant to 26 U.S.C. [§] 6321." As the pension income and Social Security payments were property of the estate, the Debtor contended, the bankruptcy court had subject matter jurisdiction to determine the value of the IRS liens pursuant to § 506(a). For the same reasons, the Debtor argued, § 106(a)(1) abrogated any sovereign immunity defense by the IRS, as a governmental entity.
C. The Bankruptcy Court's Ruling
Following submission of these briefs by the parties, the court held a hearing on January 10, 2018. At that hearing, the bankruptcy court concluded as follows: (1) the Debtor's interest in the pension payments was the right to future income and, as such, was not property of the estate; (2) the bankruptcy court, therefore, did not have "subject matter jurisdiction to value the [D]ebtor's rights to future pension [payments]"; and (3) the IRS's sovereign immunity was not "abrogated" under § 106 as nothing contained within that section "allows the [c]ourt to value collateral that is not the property of the estate[ ]."
D. The Appeal
On January 24, 2018, the Debtor filed a notice of appeal with respect to the Order. Upon the Debtor's request, the bankruptcy court issued an order certifying the Order for a direct appeal to the United States Court of Appeals for the First Circuit (the "First Circuit"). Thereafter, the Debtor filed with the First Circuit a petition for permission to take a direct appeal to that court. On June 26, 2018, the First Circuit issued a Judgment in which it denied the petition for a direct appeal.
On July 24, 2018, the Panel entered an Order to Show Cause directing the Debtor to demonstrate why this appeal should not be dismissed for lack of jurisdiction as an order sustaining a creditor's objection to plan confirmation, without confirming a plan or dismissing the case, is not a final, appealable order. The Debtor filed a response to the Order to Show Cause, arguing that the Order is a final, appealable order. According to the Debtor, the ruling on appeal "is not simply the sustaining of the Appellee's objection to confirmation of the Debtor's Chapter 13 Plan." Rather, the Debtor asserts, he is appealing the bankruptcy court's rulings that: (1) his pension *406benefits are not property of the estate; (2) that the court did not have subject matter jurisdiction to value the IRS's liens on his pension benefits pursuant to § 506(a); and (3) that the IRS's sovereign immunity was not waived pursuant to § 106(a)(1). These questions of law, the Debtor maintains, are "discrete disputes" relating to the value of the IRS's secured claim that are "immediately appealable." In the alternative, the Debtor asserts, leave to appeal is warranted under 28 U.S.C. § 158(a)(3) and Bankruptcy Rule 8004(d) because all of the requirements for discretionary interlocutory appeal are met-(1) the Order involves a controlling question of law (2) as to which there is a substantial ground for difference of opinion, and (3) an immediate appeal will materially advance the ultimate termination of the litigation.4
Although not required to by the terms of the Order to Show Cause, the IRS also filed a response to the Order to Show Cause, acknowledging that the Order is interlocutory because: (1) the bankruptcy court has not made a final determination regarding the valuation of its claim; and (2) the valuation issue before the court was not raised by "a free-standing [Bankruptcy] Rule 3012 motion or raised as part of a claim objection and instead was one component or claim within the plan confirmation process."5 Nonetheless, the IRS also urges the Panel to grant leave to appeal because "[t]he issue is purely legal and jurisdictional and quite separate and different from the remaining valuation issue," and the "legal issue is novel and important as it could recur." Moreover, the IRS contends, an immediate appeal "will facilitate the ultimate termination of the proceedings since waiting until after confirmation may require starting the plan process all over again after an appeal from a final order."
DISCUSSION
I. Final Orders: Appealable as of Right
"Pursuant to 28 U.S.C. §§ 158(a) and (b), the Panel may hear appeals from 'final judgments, orders, and decrees,' ... or 'with leave of the court, from interlocutory 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) ; 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) ).
"A decision is final if it ends the li[ti]gation on the merits and leaves nothing for the court to do but execute the judgment." In re Bank of New Eng. Corp., 218 B.R. at 646 (citations omitted) (internal quotations omitted). As the Supreme Court stated, "orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case." Bullard, 135 S.Ct. at 1692 (citation omitted) (internal quotation omitted); see also Morse v. Rudler (In re Rudler), 576 F.3d 37, 43 (1st Cir. 2009) (stating *407that to be final, "a bankruptcy order need not resolve all of the issues in the proceeding, but it must finally dispose of all the issues pertaining to a discrete dispute within the larger proceeding") (citation omitted). In contrast, an interlocutory order "only decides some intervening matter pertaining to the cause, and [ ] requires further steps to be taken in order to enable the court to adjudicate the cause on the merits." In re Bank of New Eng. Corp., 218 B.R. at 646 (citations omitted) (internal quotations omitted).
In the Order to Show Cause, the Panel observed that the U.S. Supreme Court has ruled that an order denying or withholding confirmation of a plan of reorganization is not a final order which is appealable as of right because such an order does not conclude the "confirmation process." Bullard, 135 S.Ct. at 1693. The Supreme Court reasoned that, in the context of chapter 13 plans:
The relevant proceeding is the process of attempting to arrive at an approved plan that would allow the bankruptcy to move forward. This is so, first and foremost, because only plan confirmation-or case dismissal-alters the status quo and fixes the rights and obligations of the parties. When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. 11 U.S.C. § 1327(a). Confirmation has preclusive effect, foreclosing relitigation of "any issue actually litigated by the parties and any issue necessarily determined by the confirmation order."
....
Denial of confirmation with leave to amend, by contrast, changes little. The automatic stay persists. The parties' rights and obligations remain unsettled. The trustee continues to collect funds from the debtor in anticipation of a different plan's eventual confirmation. The possibility of discharge lives on. "Final" does not describe this state of affairs. An order denying confirmation does rule out the specific arrangement of relief embodied in a particular plan. But that alone does not make the denial final ....
Id. at 1692-93 (citations omitted).
The Supreme Court acknowledged that sometimes "a question will be important enough that it should be addressed immediately." Id. at 1695. Indeed, the Court noted that the issue in Bullard"could well fit the bill" because it "presented a pure question of law that had divided bankruptcy courts in the First Circuit and would make a substantial financial difference to the parties." Id. But, the Court stated, "neither the significance of the issue nor its purely legal nature warranted a more flexible finality standard; the availability of interlocutory review, such as that provided under § 158(d)(2) and § 1292, was sufficient to address this concern." Gugliuzza v. Fed. Trade Comm'n (In re Gugliuzza), 852 F.3d 884, 893 (9th Cir. 2017) (citing Bullard, 135 S.Ct. at 1695 ).
Although the Debtor, during the course of the proceedings below, acknowledged that the Order is interlocutory, he now attempts to characterize it as final.6 The Debtor argues that the ruling on appeal "is not simply the sustaining of the Appellee's objection to confirmation of the Debtor's Chapter 13 Plan." Rather, the Debtor asserts, he is appealing the bankruptcy court's rulings that: (1) his pension benefits are not property of the estate; (2) that the court did not have subject matter jurisdiction *408to value the IRS's liens on his pension benefits pursuant to § 506(a); and (3) that the IRS's sovereign immunity was not waived pursuant to § 106(a)(1). These questions of law, the Debtor maintains, are "discrete disputes" regarding the IRS's secured claim that are "immediately appealable." According to the Debtor, the "proceeding here was not the process of attempting to confirm the Debtor's Chapter 13 Plan ...." Instead, "the proceeding ... concerned the discrete legal issues that the [b]ankruptcy [c]ourt asked the parties to brief" and the bankruptcy court's "resolution of those questions of law ... satisfies the finality requirement[.]" The Debtor does not address Bullard or make any attempt to distinguish this case from Bullard by citing other legal support for his claim of finality.
Mindful of the Supreme Court's guidance in Bullard, the Panel concludes that the Order is not a final, appealable order. Although the Order may have resolved certain legal issues-namely, whether the Debtor's interest in his pension benefits was property of the estate, whether the court had subject matter jurisdiction to value the IRS's liens on his pension benefits pursuant to § 506(a), and whether the IRS's sovereign immunity was waived pursuant to § 106(a)(1) -it did not conclusively resolve the entire dispute between the parties. These determinations are, instead, steps along the way toward a final disposition. The bankruptcy court did not make a determination under § 506(a), nor did it finally adjudicate the value of the IRS's claim. The valuation issue before the court was neither raised by a Bankruptcy Rule 3012 motion nor raised as part of a claim objection. Rather, it was one component or claim within the plan confirmation process. Thus, more remains to be done, both with respect to the valuation of the IRS's claim, and with respect to plan confirmation.
Consequently, the Order is not appealable as of right, and the appropriate inquiry is whether there is a basis to accept jurisdiction over this interlocutory appeal. Leave to appeal may issue if the appeal satisfies the § 158(a)(3) criteria governing review of interlocutory orders.
II. Interlocutory Orders: Appealable with Leave
The Panel has discretionary authority to grant leave to appeal from certain interlocutory orders pursuant to § 158(a)(3). That statute provides: "The district courts of the United States shall have jurisdiction to hear appeals ... with leave of the court, from other interlocutory orders and decrees[.]" 28 U.S.C. § 158(a)(3).7 Although § 158(a)(3) establishes the Panel's jurisdiction to hear appeals of interlocutory bankruptcy court orders, "it does not set forth standards or criteria for deciding when that jurisdiction should be exercised." Canadian Pac. Ry. Co. v. Keach, 1:17-cv-00278-JDL, 2017 WL 4845733, at *3 (D. Me. Oct. 26, 2017) (citing In re Bank of New Eng. Corp., 218 B.R. at 652 ). Courts have therefore turned, by analogy, "to the analysis used under ... § 1292(b) [ ], the statute governing ... interlocutory appeals from orders of the district courts to the circuit courts of appeal." Id. (citing In re Bank of New Eng. Corp., 218 B.R. at 652 ); see also Rodriguez-Borges v. Lugo-Mender, 938 F.Supp.2d 202, 212 (D.P.R. 2013) ;
*409Nickless v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (In re Advanced RISC Corp.), 317 B.R. 455, 456 (D. Mass. 2004) (considering § 1292(b) factors); JBI v. Dirs. & Officers of JBI (In re Jackson Brook Inst., Inc.), 280 B.R. 1, 4 (D. Me. 2002) (same); Ne. Sav., F.A. v. Geremia (In re Kalian), 191 B.R. 275, 277 (D.R.I. 1996) (same). The basis for the § 1292(b) analogy is found in § 158(c)(2)'s directive that an appeal from a bankruptcy court order "shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts ...." 28 U.S.C. § 158(c)(2) ; see also First Owners' Ass'n of Forty Six Hundred v. Gordon Props., LLC, 470 B.R. 364, 371 (E.D. Va. 2012). Accordingly, "the § 1292(b) criteria provide appropriate guidance for (and limitation of) our exercises of discretionary jurisdiction under § 158(a)(3)." In re Bank of New Eng. Corp., 218 B.R. at 652 (footnote omitted).
" Section 1292(b) permits appellate review of 'certain interlocutory orders, decrees and judgments ... to allow appeals from orders other than final judgments when they have a final and irreparable effect on the rights of the parties.' " Id. at 652 n.17 (quoting Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 545, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949) ). The First Circuit has stated that leave to appeal "should be used sparingly and only in exceptional circumstances[.]" In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007, 1010 n.1 (1st Cir. 1988) (citation omitted) (internal quotations omitted).
When determining whether to exercise its discretion to review an interlocutory appeal, the Panel considers the following § 1292(b) factors: (1) whether the order involves a controlling question of law; (2) as to which there is substantial ground for difference of opinion; and (3) whether an immediate appeal from the order might materially advance the ultimate termination of the litigation.8 Bank of New Eng. Corp., 218 B.R. at 652 ; see also In re Advanced RISC Corp., 317 B.R. at 456. The party seeking the interlocutory appeal-here, the Debtor-has the burden of establishing all three elements. WM Capital Partners 53, LLC v. Allied Fin., Inc., No. 17-2015 (ADC), 2018 WL 1704474, at *2 (D.P.R. Mar. 30, 2018) (citations omitted). We address each element in turn.
A. Controlling Question of Law
A "controlling issue of law" is one where the issue on appeal effectively controls the outcome of the case. See HSBC Bank USA v. Handel (In re Handel), 240 B.R. 798, 801 n.5 (1st Cir. BAP 1999). "If a party can be successful on alternative grounds or asserted theories that are not controlled by a question of law, then the question asserted is not controlling." Canadian Pac. Ry. Co., 2017 WL 4845733, at *3-4, 2017 U.S. Dist. LEXIS 177452, at *8 (D. Me. Oct. 26, 2017) (citing Jackson Brook, 280 B.R. at 5 ). Moreover, a question of law may be controlling "if reversal on interlocutory appeal might save *410time for the district court, and time and expense for the litigants." Id. (citations omitted) (internal quotations omitted).
The legal issue presented in this case is whether the Debtor's interest in future pension payments is property of the estate as to the IRS such that it can form the basis for the IRS's secured claim under § 506(a). The bankruptcy court's rulings that it lacked subject matter jurisdiction to value the Debtor's interest in future pension income under § 506(a), and that there was no statutory waiver of sovereign immunity under § 106, stemmed directly from its legal conclusion that the Debtor's interests in future pension and Social Security payments are not property of the estate. Therefore, the legal question of whether the Debtor's interest in future pension payments is property of the estate is controlling in this case because it determines the bankruptcy court's jurisdiction to value the Debtor's interest in future pension income for § 506(a) purposes.
Therefore, the first § 1292(b) factor for an interlocutory appeal is satisfied, and our analysis advances to the second prong.
B. Substantial Ground for Difference of Opinion
To warrant interlocutory review, the order on appeal must also involve a legal issue on which there is a substantial ground for difference of opinion. It is well established in the First Circuit that a substantial ground for difference of opinion occurs only in "rare cases" where an interlocutory appeal presents one or more " 'difficult and pivotal questions of law not settled by controlling authority.' " In re Bank of New Eng. Corp., 218 B.R. at 653 (quoting McGillicuddy v. Clements, 746 F.2d 76, 76 n.1 (1st Cir. 1984), and citing In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d at 1010 n.1 ); see also Caraballo-Seda v. Municipality of Hormigueros, 395 F.3d 7, 9 (1st Cir. 2005) ; Watson v. Boyajian (In re Watson), 309 B.R. 652, 660 (1st Cir. BAP 2004).
"In determining whether an interlocutory appeal is warranted, the critical issue is whether there is a substantial ground for a difference of opinion with respect to issues of law raised by the parties; it is not whether the plaintiffs disagree with the court's ruling." Hidalgo-Vélez v. San Juan Asset Mgmt., Inc., No. 11-cv-02175-SJM, 2013 WL 1089745, at *5 (D.P.R. Mar. 15, 2013), vacated on other grounds, 758 F.3d 98 (1st Cir. 2014) (citations omitted). "Even when the issue is controlling, it is rare that a substantial ground for difference of opinion exists." Huntsman Advanced Materials, LLC v. Onebeacon Am. Ins. Co., No. 08-229-E-WFD, 2010 WL 11531288, at *2 (D. Idaho Sept. 22, 2010) Thus, it is essential to understand the meaning of "substantial ground for difference of opinion" when deciding whether to permit § 1292(b) interlocutory review. In the absence of a statutory definition of this phrase, decisional law from within this circuit provides guidance regarding the parameters of a "substantial ground for difference of opinion." For example, in Caraballo-Seda, the First Circuit found no substantial ground for difference of opinion where there were two district court opinions with similar holdings on the controlling issue. 395 F.3d at 9. In another case, a Massachusetts district court denied interlocutory review where there was no "blazing split" among the circuits on the controlling issue and the party seeking review was relying on a "controversial twenty-five year old opinion." In re Lupron Mktg. & Sales Practices Litig., 313 F.Supp.2d 8, 12 (D. Mass. 2004) (internal quotations omitted). Similarly, in *411Kehoe v. Smolar, No. 73-1506-MA, 1982 WL 1574, at *2 (D. Mass. Mar. 3, 1982), a Massachusetts district court found that a substantial ground for difference of opinion was absent, reasoning in part that the circuits were not "badly split." On the other hand, some courts have ruled that a "substantial ground for difference of opinion" existed in situations where: (1) "case law to date demonstrate[d] marked litigant confusion and disagreement," Natale v. Pfizer, Inc., 379 F.Supp.2d 161, 182 (D. Mass. 2005) ; (2) there was "stark division among the [ ] circuits," Canty v. Old Rochester Reg'l Sch. Dist., 54 F.Supp.2d 66, 77 (D. Mass. 1999) ; or (3) the circuits were split and the court followed the minority view, Rodriquez v. Banco Cent., 917 F.2d 664, 665 (1st Cir. 1990). As one commentator noted, "[l]ack of circuit decisional law, together with 'confusion' in other decisions in other cases or circuits, has been found to provide the necessary substantial grounds for difference of opinion." Tory Weigand, Discretionary Interlocutory Appeals Under 28 U.S.C. § 1292(b) : A First Circuit Survey and Review, Roger Williams U.L. Rev., Winter 2014, at 207 & n.131, 132 (citing among others, Philip Morris, Inc. v. Harshbarger, 957 F.Supp. 327, 330 (D. Mass. 1997) (stating issue was not resolved by any directly controlling authority); Cabral v. Sullivan, 757 F.Supp. 107, 111 (D. Mass. 1991) (noting issue was matter of first impression in the circuit); Miara v. First Allmerica Fin. Life Ins. Co., 379 F.Supp.2d 20, 48 (D. Mass. 2005) ).
Here, the Debtor argues that there is a substantial ground for difference of opinion because courts have rendered differing views as to "whether retirement benefits, such as the Debtor's pension benefits at issue in the instant case, constitute property of the estate with regard to IRS tax liens[.]" Moreover, the Debtor maintains, "neither the Supreme Court nor the First Circuit ha[ve] definitely addressed the questions of law at issue in this appeal." According to the Debtor, "[t]he lack of controlling precedent in this Circuit ... all but ensures that this controversy will arise again in future bankruptcy cases."
The Debtor correctly asserts that previously there was division among the courts on the controlling issue of whether a debtor's interest in an ERISA-qualified pension plan was property of the estate. In 1992, the Supreme Court, in Patterson v. Shumate, 504 U.S. 753, 765, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992), ruled that a debtor's interest in an ERISA-qualified plan is excluded from the bankruptcy estate pursuant to § 541(c)(2). In reaching that conclusion, the Supreme Court stated that the anti-alienation restriction in an ERISA-qualified plan is a "restriction on the transfer of a beneficial interest of the debtor in a trust," which is enforceable under "applicable nonbankruptcy law" for purposes of § 541(c)(2) and, therefore, a debtor's interest in such a plan is not property of the estate. Id. at 760, 112 S.Ct. 2242.
After Patterson, courts were split on the issue of whether a debtor's interest in an ERISA-qualified pension plan should be treated as property of the bankruptcy estate for the limited purpose of securing the IRS's claim. Some courts held that, while a debtor's interest in a pension plan is not reachable by private creditors and therefore is not part of the bankruptcy estate as to those creditors, the debtor's interest should be considered part of the estate for the sole purpose of securing a federal tax claim. See, e.g., In re Berry, 268 B.R. 819, 825 (Bankr. E.D. Tenn. 2001) ; Jones v. IRS (In re Jones ), 206 B.R. 614, 621 (Bankr. D.D.C. 1997) ; In re Lyons, 148 B.R. 88, 93 (Bankr. D.D.C. 1992). These courts reasoned that, because an anti-alienation provision in a pension plan is ineffective against the IRS outside of bankruptcy, a debtor's interest in such a plan is not excluded from the estate as to the IRS and can form the basis for the *412IRS's secured claim. Under this approach, a debtor's interest in a pension plan "would in effect have a split personality by remaining property of the estate for purposes of federal tax claims even though it is not property of the estate for purposes of other creditors' claims." In re Jones, 206 B.R. at 621.
Other courts rejected the so-called "split personality" characterization and held that a chapter 13 debtor's interest in a pension plan cannot secure the claims of the IRS. See, e.g., IRS v. Wingfield (In re Wingfield), 284 B.R. 787, 790 (E.D. Va. 2002) ; Persky v. United States (In re Persky), No. Civ. A. 98-2729, 1998 WL 695311, at *6 (E.D. Pa. Oct. 5, 1998) ; In re Keyes, 255 B.R. 819, 822 (Bankr. E.D. Va. 2000) ; In re Wilson, 206 B.R. 808, 810 (Bankr. W.D.N.C. 1996). A number of these courts reasoned that, "[w]hile it is clear that an asset of the debtor is subject to the IRS lien as provided for by statute, there is simply no statutory authority for granting it a 'split personality' to include it in the bankruptcy estate simply for purposes of securing the IRS's lien." In re Keyes, 255 B.R. at 822 ; see also In re Wingfield, 284 B.R. at 790 (citing In re Keyes, supra ). According to these courts, the Supreme Court's ruling in Patterson is clear that ERISA-qualified plans do not become part of the bankruptcy estate under any circumstances.
The disagreement among the courts seems to have dissolved in 2003, however, when the Ninth Circuit adopted the latter approach in IRS v. Snyder, 343 F.3d 1171, 1178 (9th Cir. 2003), ruling that an anti-alienation clause in a debtor's pension plan prevented the debtor's interest in the plan from being included in the bankruptcy with respect to all creditors, including the IRS. The Snyder court noted the prior split of authority, but concluded that, because the anti-alienation clause in the debtor's ERISA plan was enforceable under nonbankruptcy law against everyone except the IRS, that was enough to prevent the debtor's interest in the plan from transferring to the bankruptcy estate as to any creditor. Id. at 1179. According to the Ninth Circuit, "looking at the specific creditor seeking secured status and asking whether the trust's anti-alienation clause would be enforceable against that creditor in particular ... misconceives the character of §§ 506(a) and 541." Id. at 1178. Section 541 describes "what property shall be included in a bankruptcy estate," not "the treatment particular creditors shall receive in the course of bankruptcy proceedings." Id."Subsection (2) carves out an exception to § 541(a)(1) and (c)(1). It provides that trust anti-alienation provisions otherwise enforceable under nonbankruptcy law will operate in a bankruptcy case to prevent the transfer of the debtor's interest in the trust to the bankruptcy estate." Id."The fact that the clause may be unenforceable against the IRS is neither here nor there." Id. (citation omitted). "The question is whether the anti-alienation clause prevents the transfer of the debtor's interest in the pension to the bankruptcy estate , not to the IRS, or to any other specific creditor." Id. Thus, the court concluded, because the anti-alienation clause in the debtor's ERISA plan was enforceable under nonbankruptcy law against everyone except the IRS, this prevented the transfer of the debtor's interest in the plan to the bankruptcy estate. Id. at 1178-79.
It appears that most (if not all) courts addressing the issue post- Snyder have adopted the reasoning set forth in Snyder. See, e.g., In re Richardson, 307 B.R. 485, 489-90 (Bankr. D. Md. 2004) (adopting the Snyder reasoning and ruling that "under the plain language of [§] 541(c)(2) and in accordance with the decision reached in Patterson v. Shumate, [the debtor]'s interest *413in his ERISA-qualified pension fund was never transferred to the Debtors' bankruptcy estate" and "cannot be the basis for ... an allowed secured claim"); In re Grant, 301 B.R. 464, 467-68 (Bankr. E.D. Va. 2003) (adopting the reasoning of Snyder, and holding that the debtors' interest in their ERISA-qualified pension plans was not property of the bankruptcy estate for the purpose of establishing a secured claim by the IRS); In re Robinson, 301 B.R. 461, 463-64 (Bankr. E.D. Va. 2003) (same); accord In re Gill, No. 07-00358, 2007 WL 2990564, at *1 n.2 (Bankr. D.D.C. Oct. 11, 2007) (noting that "the holding of more recent cases ... is that the account is not property of the estate even with respect to the IRS as a creditor holding a lien on the account) (emphasis added). Significantly, the Debtor has not cited any post- Snyder authority to the contrary. Thus, although the courts were split pre- Snyder, there does not appear to be a continuing dispute amongst the courts after Snyder .
In urging the Panel to grant this interlocutory appeal, the parties point out that the First Circuit has not decided this precise issue, and that the legal issue presented is "novel and important as it could recur." This argument is unpersuasive. Simply because the First Circuit has not ruled on the question does not qualify the issue as one for which there is substantial disagreement. See Admiral Ins. Co. v. Willson (In re Cent. La. Grain Co-op, Inc.), 489 B.R. 403, 412 (W.D. La. 2013) ("Simply because a court is the first to rule on a question ... does not qualify the issue as one over which there is substantial disagreement.") (citation, internal quotations, and emphasis omitted). "[M]ere presence of a disputed issue that is a question of first impression, standing alone, is insufficient to demonstrate a substantial ground for difference of opinion." Flor v. Bot Fin. Corp. (In re Flor), 79 F.3d 281, 284 (2d Cir. 1996) (citations omitted); see also Lucas v. Bell Trans, 2009 WL 3336112, at *4 (D. Nev. Oct. 14, 2009) (stating whether a matter is of first impression is not controlling, where the issue is one of straightforward statutory interpretation). "If questions of first impression alone were sufficient to warrant ... an immediate appeal," courts of appeals "would be besieged with piecemeal interlocutory appeals." Shaup v. Frederickson, No. 97-7260, 1998 WL 800321, at *3 (E.D. Pa. Nov. 17, 1998). "[I]t is the duty of the district judge ... to analyze the strength of the arguments in opposition to the challenged ruling when deciding whether the issue for appeal is truly one on which there is a substantial ground for dispute." In re Flor, 79 F.3d at 284 (citation omitted) (internal quotations omitted).
Further, courts have cautioned that the "novelty" of the issue is not enough to establish a substantial ground for difference of opinion and that "the issue must relate to the actual legal principle itself, not the application of that principle to a particular set of facts." United Air Lines Inc. v. Gregory, 716 F.Supp.2d 79, 92 (D. Mass. 2010). While the First Circuit has considered the novelty of an issue as one of the factors to consider in deciding whether to accept an interlocutory appeal, novelty standing alone has not been enough. The First Circuit has also considered the importance of the issue and whether the circumstances were sufficiently out of the ordinary to satisfy the statutory prerequisites. In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d at 1010 n.1 ; Donatelli v. Nat'l Hockey League, 893 F.2d 459, 461 (1st Cir. 1990) (allowing interlocutory appeal because court was "impressed by the issue's novelty and importance"); see also Abtox Inc. v. Exitron Corp., 888 F.Supp. 6, 7 (D. Mass. 1995)
*414(noting novelty of question plus its importance as supporting certification of interlocutory appeal). Regardless of whether the novelty of the issue presented is viewed as one of the determinants of interlocutory review, the issue in this case cannot be considered novel where it has been addressed by courts since at least 1992.
Here, although the First Circuit has yet to address the question, there is no longer a "stark" or "bad" split among the courts that have addressed the issue since 2003. Since Snyder, courts have consistently ruled that a debtor's interest in an ERISA-qualified pension fund does not constitute property of the debtor's bankruptcy estate, and cannot be the basis for establishing a secured claim by the IRS. See, e.g., In re Richardson, supra ; In re Grant, supra ; In reRobinson, supra ; In re Gill, supra. Moreover, there is circuit law on the issue (albeit not from the First Circuit) and there is no confusion amongst the courts which have more recently addressed the issue.
In light of the foregoing, the Debtor has not demonstrated that there is a "substantial ground for difference of opinion." As the Debtor has failed to satisfy one of the three necessary § 1292(b) factors, immediate review of the Order is not warranted. Therefore, we need not consider the third factor-whether an immediate appeal will materially advance the ultimate termination of the litigation. See Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, (In re Madoff), No. 17-CV-2959 (VEC), 2017 WL 4417701, at *3 n.5 (S.D.N.Y. Oct. 3, 2017) (stating that because the § 1292(b) factors are "conjunctive," where one factor is not satisfied, the court did not need to address the other factors).
CONCLUSION
Having concluded that the Order is interlocutory and that the Debtor has not satisfied the § 1292(b) criteria, the Panel declines to exercise its discretion to consider this appeal under § 158(a)(3).9 Therefore, this appeal is DISMISSED.
Unless expressly stated otherwise, all references to "Bankruptcy Code" or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101, et seq. All references to "Bankruptcy Rule" are to the Federal Rules of Bankruptcy Procedure.
Section 506(a) provides, in relevant part, that: "An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ...." 11 U.S.C. § 541(a) (emphasis added). Essentially, § 506(a) authorizes the court to value property only to the extent it is property of the bankruptcy estate.
Section 106(a) provides: "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 ... [among other sections] 506[.]" 11 U.S.C. § 106(a).
As discussed later, 28 U.S.C. § 158(a)(3) establishes the Panel's jurisdiction to hear appeals of interlocutory bankruptcy court orders, and Bankruptcy Rule 8004(d) provides that the Panel may treat a notice of appeal as a motion for leave to appeal. The three-prong test articulated by the Debtor stems from 28 U.S.C. § 1292(b), which is the statute governing interlocutory appeals from orders of the district courts to the circuit courts of appeal. The Panel generally applies this three-prong test when determining whether to exercise its discretion to hear an interlocutory appeal.
Bankruptcy Rule 3012(b) provides, in relevant part: "[A] request to determine the amount of a secured claim may be made by motion, in a claim objection, or in a plan filed in a ... chapter 13 case." Fed. R. Bankr. P. 3012(b).
For example, after the bankruptcy court issued its ruling, the Debtor's counsel indicated that he was unsure whether the Debtor would appeal, but stated, "[i]f so, we can file a motion for interlocutory appeal." (emphasis added).
A limited set of interlocutory orders issued by bankruptcy judges are immediately appealable as of right, without leave. See 28 U.S.C. § 158(a)(2). Section 158(a)(2) addresses orders related to the exclusivity periods under 11 U.S.C. § 1121(d). That statute is not implicated here.
Some courts note an additional element to the interlocutory appeal analysis, the existence of "exceptional circumstances." See, e.g., State Ins. Fund Corp. v. Medsci Diagnostics, Inc., No. 10-2239 (JAF), 2012 WL 827116, at *3 (D.P.R. Mar. 9, 2012) (denying leave to appeal because elements of § 1292(b) were not met, and because the case presented "no exceptional circumstances that would merit [ ] a grant of leave [to appeal]"); Foreign Car Ctr. v. Salem Suede, Inc. (In re Salem Suede, Inc.), 221 B.R. 586, 599 (D. Mass. 1998) (considering whether there was an "exceptional condition or consideration" that the court "should take into account in deciding whether to assert its discretionary jurisdiction"); IBI Sec. Serv., Inc. v. Nat'l Westminster Bank USA (In re IBI Sec. Serv., Inc.), 174 B.R. 664, 669-71 (E.D.N.Y. 1994).
Although the collateral order doctrine also permits discretionary review of interlocutory orders, the Debtor has not argued any of the factors required under that doctrine. To be appealable under the collateral order doctrine, the order must: "(1) conclusively determine the disputed question, (2) resolve an important issue completely separate from the merits of the action, and (3) be effectively unreviewable on appeal from a final judgment [on the remaining counts]." U.S. Fid. & Guar. Co. v. Arch Ins. Co., 578 F.3d 45, 55 (1st Cir. 2009) (quoting Will v. Hallock, 546 U.S. 345, 349, 126 S.Ct. 952, 163 L.Ed.2d 836 (2006) ). Nor has the Debtor argued that interlocutory review is warranted under the Forgay-Conrad doctrine, which "bestow[s] appellate jurisdiction over interlocutory orders when 'irreparable injury' to the aggrieved party may attend delaying appellate review until the litigation is over." In re Bank of New Eng. Corp., 218 B.R. at 649 n.8 (citation omitted). We, therefore, decline to exercise jurisdiction under either doctrine. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501719/ | Per Curiam.
*419Homeowners, Sheila DeWitt and Joseph DeWitt (collectively, the "DeWitts"), appeal from the bankruptcy court's Memorandum Opinion and Final Judgment (collectively, the "Judgment") determining that the obligation allegedly owed to them by their builder, Edward T. Stewart, Jr. ("Stewart"), is dischargeable in bankruptcy.2 The DeWitts contend that the bankruptcy court should have excepted Stewart's alleged obligation from discharge pursuant to § 523(a)(2)(A) and § 523(a)(6).3 The record establishes that the DeWitts satisfied their burden of proving: (1) all of the necessary elements for a claim of nondischargeability under § 523(a)(2)(A); and (2) that Stewart should be personally liable for the debt owed to them by Boardwalk by piercing Boardwalk's corporate veil under New Hampshire law. Accordingly, we REVERSE the Judgment as to § 523(a)(2)(A) and REMAND to the bankruptcy court for further proceedings consistent with this opinion.4
BACKGROUND
I. Introduction
Stewart is the owner of Data Industries, Inc., which did business as Boardwalk North ("Boardwalk"), a company specializing in home remodeling. In June 2013, the DeWitts entered into a contract with Boardwalk, whereby Boardwalk agreed to renovate the DeWitts' New Hampshire home for $1,649,936.5 The contract included a three-page payment schedule based on the "start of" certain construction milestones.6 At the commencement of each of these specified milestones, the contract required the DeWitts to pay to Boardwalk the sum of $41,931.81. The contract did not explicitly state, however, how the milestone payments were to be disbursed or allocated.
Pursuant to a change order executed on August 2, 2013 (the "Change Order"), the contract amount was reduced to $1,300,000. One year later, when the project was only 45% complete, and after the DeWitts had paid Boardwalk a total of $1,175,350, Boardwalk abandoned the project. In September 2014, Boardwalk filed a petition for chapter 7 relief. Stewart's own chapter 7 bankruptcy petition followed several months later. The DeWitts have since paid a new contractor an additional $730,000 to complete the project, far more than the remaining contract balance of $175,755. The DeWitts filed a proof of claim in Stewart's case, indicating that they held an unsecured claim in the amount of $558,335.28.
II. Bankruptcy Proceedings
A. The Amended Complaint
On May 26, 2015, the DeWitts commenced an adversary proceeding against *420Stewart with a thirteen-count complaint which they subsequently amended (the "Amended Complaint").7 In the Amended Complaint, the DeWitts alleged that Stewart, the sole shareholder, president, and treasurer of Boardwalk, operated that company as his "alter ego ... to perpetrate injustice and fraud upon" them. The DeWitts further alleged that Stewart "made numerous false representations to induce [them] into a contract with" Boardwalk, "misappropriated [their] advance payments and deposits ..., paid his personal expenses with those funds, and utilized Boardwalk['s] bank account as his own personal checking account." Accordingly, they claimed the "fiction" that Boardwalk was independent of Stewart "should be disregarded" and Stewart "should be held personally liable for Boardwalk['s] breaches of contract, breaches of the covenant of good faith and fair dealing, negligence, conversion, fraudulent misrepresentations, and violations of [N.H. Rev. Stat. Ann. §] 358-A" (New Hampshire's Consumer Protection Act). They also sought a determination that Stewart was not entitled to a discharge in bankruptcy pursuant to § 727 or, alternatively, that Stewart's debt to them was not dischargeable pursuant to § 523.
In support of these claims, the DeWitts further alleged, in pertinent part:
(1) "In or about April 2013, [Stewart] met with the DeWitts concerning the renovation and addition to their home. [Stewart] personally represented that he had the skill, experience, and manpower to deliver a first-class Project by July 2014. [Stewart] personally represented that he had strong relationships with subcontractors and materials suppliers."
(2) "The DeWitts hired Boardwalk .... The Contract was modified pursuant to an August 2, 2013 agreed change order ... reducing the total contract amount to $1,300,000."
(3) "At the time of signing the Contract, [Stewart] requested, and the DeWitts paid, a $200,000 down payment."
(4) "Unbeknownst to the DeWitts, [Stewart] immediately began to misappropriate the DeWitts' deposit."
(5) "On or about August 29, 2013, Boardwalk [ ] began work on the Project. [Stewart] required the DeWitts to make 'up front' installment payments tied to various "milestones." [Stewart] personally represented to the DeWitts that paying in advance for work would allow him to negotiate the best possible prices with subcontractors and would save the DeWitts substantial sums of money. In reliance on [Stewart's] representations, the DeWitts made such installment payments, never refusing to pay for a milestone once work had been started. [Stewart's] representations, however[,] were false."
(6) "[Stewart] also proposed that the DeWitts could receive up to $20,000 in prepaid milestone 'discounts' in exchange for an additional $172,000 up-front deposit, which the DeWitts made. This deposit was in addition to the $200,000 deposit the DeWitts initially paid. The Contract required that Boardwalk ... would pay all subcontractors and material suppliers for labor and materials used on the Project, and would hold the DeWitts' funds in trust for use on their Project. Instead, [Stewart] used *421the DeWitts' deposits and advance milestone payments to pay debts unrelated to the Project, including the [Stewart's] personal obligations and expenses."
(7) "On July 18, 2014, one of Boardwalk['s] subcontractors, Manning Drywall, sent the DeWitts a notice of intent to file a mechanic's lien against the Project."
(8) "On July 22, 2014, the DeWitts met with [Stewart]. At that meeting, [Stewart] stated that [he] was in the process of 'recapitalizing the company' but gave no indication that the Project would not be completed."
(9) "Manning Drywall filed a lien against the Project ...."
(10) "On or about July 24, 2014, [Stewart] notified the DeWitts by email that any financial difficulties had been resolved, and reiterated that Boardwalk intended to return to the Project to complete the work [ ]."
(11) "[T]his representation that financial difficulties had been resolved was false ...."
(12) "The last day any person from Boardwalk [ ] was onsite performing substantive construction work was August 11, 2014. [Stewart] refused to return to the Project to complete construction and abandoned the Project."
Based on the foregoing allegations, the DeWitts asserted seven counts under state law, four § 523(a) counts, and two § 727(a) counts. See note 4, supra. After substantial winnowing of the issues, the bankruptcy court tried only two counts of the Amended Complaint-Count VIII, the § 523(a)(2)(A) claim, and Count XI, the § 523(a)(6) claim.8
B. The Trial
A summary of each witness's testimony on direct examination follows in the same order it was presented at trial.
1. Sheila DeWitt
Sheila DeWitt ("Mrs. DeWitt"), a scientist with a Ph.D. in chemistry, testified regarding a variety of topics, ranging from the seeds of the parties' relationship to the numerous ways in which the DeWitts claim Stewart misrepresented his ability, *422Boardwalk's financial condition, and the purpose of the DeWitts' payments. She began by explaining that when she and her husband, Joseph DeWitt ("Mr. DeWitt"), moved to New Hampshire in 2000, they purchased a house suitable for their community "outreach," including serving meals to homeless individuals. Because the DeWitts' expanding community work eventually demanded more space, they embarked upon a home renovation project in 2013.
The DeWitts set a renovation budget of $700,000 to $1,000,000 and searched for a contractor. In March 2013, they met Stewart at a New Hampshire home show, where he had set up a booth for Boardwalk. During their first conversation with Stewart, the DeWitts described their renovation project as "large scale," and Stewart responded that he was "well qualified" for such an undertaking.
The DeWitts subsequently began a "[due] diligence process," which included sending emails to potential contractors containing a set of questions drafted by Mrs. DeWitt. On March 23, 2013, Stewart received one of Mrs. DeWitt's "vetting" emails, which included the following inquiries: (1) "What were your annual revenues and number of jobs for 2011 and 2012 (separated by year)?"; and (2) "What are your revenue projections for 2013 (without [the] DeWitt project)?"
On March 24, 2013, Stewart responded that for the year 2011, Boardwalk's revenues were $2,300,000. For the same period, however, Stewart's financial records for Boardwalk later disclosed during the course of discovery showed revenue of $1,948,000, and Boardwalk's tax return indicated revenue of $1,946,000. For the year 2012, Stewart reported to Mrs. DeWitt that Boardwalk had revenues of $1,700,000. Yet, Boardwalk's 2012 tax return for that year later revealed income of $1,500,000. Stewart further disclosed to Mrs. DeWitt that Boardwalk's income for the first quarter of 2013 was $1,200,000, while Stewart's financial records for that period showed income of approximately $335,000. Moreover, Stewart "indicated that his company was doing extremely well," that "[h]e had a large and experienced team, [and] a long and healthy track record of success in building high-end homes," and that the DeWitts "should have trust and confidence in him and his team." In addition, Stewart represented that he had "excellent relationships" with subcontractors.9 Mrs. DeWitt testified that, had the DeWitts known Boardwalk's actual revenues, they would have selected a different contractor.
Mrs. DeWitt's testimony then shifted to the documents which memorialized the parties' agreements. The first was a "design fee purchase agree[ment]" (the "Design Agreement") executed by the parties on April 19, 2013, pursuant to which Stewart (on behalf of Boardwalk) agreed to furnish a design proposal to the DeWitts at a cost of $2,895. The Design Agreement indicated an anticipated price range of $700,000 to $1,000,000 for completion of the project, and called for a "Good Faith Deposit" of "approximately 10-15% of the estimated [s]elling price of project." Appended to the agreement was a document captioned "DeWitt Design Parameters," which similarly indicated a price range of $700,000 to $1,000,000.
On June 26, 2013, the DeWitts paid Stewart "a good faith deposit" of $200,000 (the "first deposit"). This deposit significantly exceeded the amount called for in *423the Design Agreement. The DeWitts voluntarily increased the amount of the required deposit "in a good faith effort to continue a relationship with Boardwalk ...." They were eager "to start out on the right foot" and believed that the first deposit would be applied to their project.
The DeWitts saw the "final contract" for the first time on June 27, 2013-the day after they paid the $200,000 deposit. On that date, Stewart presented them with a Purchase Agreement which recited a project price of $1,649,936.10 Mrs. DeWitt explained that they were "shock[ed]" by this figure. With respect to payment, the Purchase Agreement provided: "Payments to be made as the work progresses as per the Payment Schedule which is attached and made part of this Contract." The Payment Schedule listed 12 "milestones," each linked to a $41,932 payment. Mrs. DeWitt testified that, when she and her husband saw the Purchase Agreement, they wanted "to walk away," but "felt trapped." They went forward despite their hesitations.
During the course of the next six weeks, the DeWitts and Stewart's team met on several occasions in order to "come up with alternative proposals." On August 2, 2013, the parties executed the Change Order, which reduced the price of the project to $1,300,000. Like the Purchase Agreement, the Change Order linked the payment schedule with the "start of milestones." Stewart explained to the DeWitts that the purpose of the "milestone payment" approach was to "leverage subcontractors, vendors and other resources that he needed ... so that he could move [the project] forward in a timely fashion."
On August 27, 2013, at Stewart's request, the DeWitts made a second "good faith deposit" in the amount of $172,000 (the "second deposit") and the parties executed another payment schedule. Mrs. DeWitt testified that Stewart said this second deposit would increase "efficiency on [the] project and ensure it was done." With respect to this deposit, her attorney inquired:
Q. [W]here did you understand that money was going to be spent?
A. On our project.
Q. He told you that?
A. Yes.
Q. And did you have any reason initially to believe that that was not true?
A. No, not at all.
Notations on the August 27, 2013 Payment Schedule indicated that two of the progress payments (both paid on August 27, 2013) had been reduced from $40,619 to $38,588, reflecting a discount for prepayment.
As of August 27, 2013, work on the project had not yet begun, although the DeWitts had already paid Stewart about $450,000-consisting of the first deposit of $200,000, the second deposit of $172,000, and two prepaid milestone payments of $38,588 each. Work on the project site did not commence until two days later. Mrs. DeWitt testified that, according to Stewart, the prepayment of the milestones would enable him to hire subcontractors at a discount which he would "pass ... on" to the DeWitts.
When her attorney again asked, "What were you told was going to happen with your money?" Mrs. DeWitt answered:
A. We were told the money would be used for our project.
Q. To fund your project?
A. To fund our project.
*424Q. Would you have given this amount of money in advance to any contractor if you knew it was going to pay old bills?
A. Never.
Q. Did you rely on Mr. Stewart's statement that you were, in fact, funding your own project?
A. We did.
Q. Did you rely on that in terms of agreeing to this payment schedule?
A. We did.
A. Did you rely on that statement in terms of following the payment schedule?
A. Yes.
Mrs. DeWitt further testified that she later learned Stewart had actually spent a portion of the $450,000 they paid-namely, $196,000-on jobs other than theirs. She repeated that she "never" would have paid the $450,000 if she had known Stewart was not using this sum to fund their own project. However, the DeWitts continued to make the prepayments upon request, believing that Stewart was applying the money exclusively to their project. For example, after the commencement of the project, on September 26, 2013, the DeWitts made two additional milestone payments totaling $77,176. Mrs. DeWitt stated that they continued "to funnel money into Boardwalk" because they "felt trapped and wanted to ... get the project done." They subsequently learned, however, that Stewart used $51,000 out of the $77,176 paid "on other expenses of Boardwalk." Throughout her direct examination, Mrs. DeWitt consistently testified that she and her husband had been told their payments were "going to [their] project" and that they would not have continued to pay money to Boardwalk if they had known that the payments "were actually being used to pay old bills."
Although the DeWitts prepaid every milestone days or even weeks in advance, there were still project delays. Mrs. DeWitt testified that when they inquired about the cause for the delays, they were told Boardwalk "couldn't get the ... subcontractors for the job." After Stewart had remained out of sight for eight months, he and Brian Lessard, a Boardwalk employee, finally met with the DeWitts and informed them that Boardwalk needed up to $360,000 to finish the project, even though the remaining balance due on their account at that time should have been $175,000.
Mrs. DeWitt then testified to a number of events which reflected Boardwalk's deteriorating financial condition. For example, on July 18, 2014, one of Boardwalk's subcontractors, Manning Drywall, sent the DeWitts a notice of intent to file a mechanics lien against the project. By then, the DeWitts had paid over $1,000,000 and their home was in shambles. On or about July 23, 2014, Manning Drywall filed a mechanics lien and two other subcontractors, Concord Lumber and Wetherbee Plumbing and Heating, soon followed suit.
On July 24, 2014, Stewart notified the DeWitts that Boardwalk had "resolved" its financial difficulties and work on the project would resume. On July 30, 2014, the parties had a final meeting, during which Stewart asked the DeWitts if they would "consider a mutual termination" of their agreement. The DeWitts declined. On August 15, 2014, Boardwalk abandoned the project and, shortly thereafter, Stewart sent the DeWitts an "As Built Policy Invoice," indicating that the DeWitts owed an additional $183,629, even though they had "already paid in advance" for work that had not been performed.
These developments prompted the DeWitts to hire a new contractor, Hutter Construction ("Hutter"), who completed the project for $598,450.
*4252. Brian Lessard
Brian Lessard testified that he was employed by Boardwalk from 2006 through 2014-first, as its lead carpenter, then as its field site supervisor, and as its production manager. He ultimately became its vice president of operations. In 2013, when work on the DeWitts' project began, Lessard served as Boardwalk's vice president of operations, in charge of quality control. When questioned about Boardwalk's financial health as of April 2013, Lessard answered that the company was "struggling" and that it "had a deficit." He described some of Boardwalk's relationships with subcontractors as "strained" or even "bad." According to Lessard, Boardwalk had been charging some of its expenses to the personal credit card of Stewart's wife, Linda ("Mrs. Stewart").
Consistent with Mrs. DeWitt's testimony, Lessard testified that he informed Boardwalk's clients that milestone payments enabled them to "finance" or "fund" their own projects. Lessard conceded that, in fact, milestone payments were collected to fund Boardwalk's business and improve its cash flow.
In addition, Lessard testified regarding an email he sent to the DeWitts in which he used the word, "leverage." Specifically, on March 4, 2014, Lessard wrote:
As far as the pre-payment goes, as you [can] imagine in order for us to offer this discount the idea is that we are leveraging your money to save money. So we would need to leverage your money for more th[a]n a couple days to [offset] the ($20,000.00 [overall] ) discount being applied. This program was designed with the intention that there would be multiple payments made at a time and that would allow us plenty of time to leverage and save money, with time being the catch. Having the benefit of your funds for a mere few days in return for such a large amount of money would be ill advised by even the most liberal accounts ... which is what he [Ed] believes the spirit of that agreement was all about, he said.[11 ]
Lessard admitted that even though he told the DeWitts their payments were being "leveraged" with subcontractors to save money, this actually never occurred. According to Lessard, Stewart instructed him to "find ways to start the milestones," even if not in the DeWitts' "best interests," in order to "keep the business moving forward" and "keep the company alive." In fact, even though the DeWitts had consistently prepaid the milestone payments, Boardwalk still had difficulty obtaining timely delivery of materials to the DeWitts' site. Lessard admitted that when the DeWitts inquired about the resulting project delays, he never informed them that Boardwalk's financial condition was "the root of the problem."
Lessard testified that he regretted Boardwalk's treatment of the DeWitts, stating:
A. "I'm not proud of the conduct of myself or the guys -- things were asked of the guys in the field to do or say."
Q. ... "Give me an example." ...
A. "Being elusive or deceitful."
Q. ..."In what sense were you or your guys or other Boardwalk ... employees elusive and deceitful?" ...
A. ...[We were] blowing a lot of smoke and clouds [ ]"
Q. ..."To cover up the company's own financial problems" ... ?
A. "Yeah."[12 ]
*426Despite all of the foregoing difficulties, Lessard testified, he had believed that Boardwalk would nonetheless finish the DeWitts' project.
3. Linda Stewart
Mrs. Stewart testified that she had worked for her husband in an administrative capacity since 1998. According to Mrs. Stewart, from 2009 to 2012, neither she nor her husband took a salary from Boardwalk. In May 2013, shortly after receiving a chapter 7 discharge in her personal bankruptcy case, Mrs. Stewart started receiving a $1,500 weekly salary from Boardwalk, which soon increased to $2,000.
Mrs. Stewart testified that in 2008, she and her husband obtained a $450,000 line of credit secured by their New Hampshire residence and applied a portion of the loan proceeds to Boardwalk's obligations and the remaining proceeds toward the purchase of a second home in Florida.
4. Lars Traffie
Lars Traffie, president and CEO of Hutter, testified as an expert in the fields of residential construction, construction management, construction sequencing, construction billing, and construction industry standards. Traffie testified that the standard billing practice in the construction industry is to "bill on a monthly basis based on the percentage completed and ... installed." According to Traffie, unlike Boardwalk, Hutter did not bill in advance for work not yet performed, unless a particular project required special fabrication of an item.
Traffie testified that based on his initial site visit in August 2014, he estimated the DeWitt project to be 45% complete. Upon his inspection, he discovered the structural integrity of the house was "challenged," certain tasks were not sequenced properly, the master bedroom plumbing was not properly connected to the septic system, doors and windows had been installed without sealant, flashing was missing, and the roof had to be torn off. He stated that "the sequencing was so inexplicable" that one could conclude it was "motivated by payment schedules." He quoted the DeWitts a price of $628,000 to finish the project.
5. Peter Pike
Peter Pike ("Pike"), a certified public accountant, testified that since 2010 or 2011, when he began working with Boardwalk, the company was always on the "fringe of insolvency." He further testified that in February 2013 (only two months before Stewart met the DeWitts), Boardwalk was "starting to come unraveled" and the situation was "dire." At that time, Boardwalk had sustained net operating losses for several consecutive years. In February 2014, Pike met with Stewart to discuss cash flow issues and a possible bankruptcy filing.13
6. Edward T. Stewart, Jr.
During his testimony, Stewart acknowledged that: he had never informed the DeWitts that Boardwalk was struggling; the Purchase Agreement was the largest contract he had ever signed; and he had given Mrs. DeWitt incorrect revenue figures for Boardwalk. Stewart agreed with Pike's testimony that Boardwalk "had perpetual cash flow issues." In an effort to explain the discrepancy between the "numbers" he gave Mrs. DeWitt and Boardwalk's true financial condition, he testified:
At the time, I was answering with my sales hat on, if you will, and salespeople *427always think in terms of not revenue but in terms of sales.... So my answer was based [not] on revenue ... but sales.
Although Stewart admitted that when Boardwalk contracted with the DeWitts, a number of its subcontractors had already stopped extending credit to Boardwalk, he nonetheless insisted that he had good relationships with vendors and subcontractors. He claimed that he was "flabbergasted" when he received the notice of mechanics lien from Manning Drywall.
A significant portion of Stewart's examination at trial was aimed at eliciting from him what he meant by "funding" one's project. Stewart agreed that he had informed the DeWitts their milestone payments were intended "to fund their own project." On direct examination by his own attorney, Stewart testified that he used the milestone payment approach as a "way to fund the project as you went through it." He stated: "We always explain to the customer that these milestones were never intended to be completion points in time but rather the start of things. And again, they were just approximate times that we would ask for money throughout the project. "
Stewart admitted that he used the DeWitts' monies to operate Boardwalk but denied that he had told the DeWitts their milestone payments would be applied exclusively to their project. "I've never told any client that," he insisted. He explained that when he received milestone payments from customers, he "just deposited them into the general company account."
Stewart's testimony about the purpose of the second deposit was inconsistent. First, he disagreed that the $172,000 payment had anything to do with the DeWitts' eligibility for prepayment discounts, characterizing it, instead, as a "good faith deposit part 2." He later conceded, however, that the second deposit was the price of obtaining a 5% discount on milestone payments.
Lastly, Stewart testified that, in August 2014 (i.e., the same month he abandoned the project), he borrowed $50,000 from his 401(k) retirement account to apply toward Boardwalk's obligations.
7. Joseph DeWitt
Mr. DeWitt testified that if he had known the truth about Boardwalk's financial condition, "[Boardwalk] would have dropped out of the running." Mr. DeWitt reiterated that Stewart described his business as "booming," and that he had the ability to "get any subcontractors that he wanted." He also testified that Stewart assured him that he could complete the project within the DeWitts' budget of $700,000 to $1,000,000, but that it would "be closer to a million." Later, according to Mr. DeWitt, Stewart confessed to him that the project never could have been finished for $1,000,000.
Mr. DeWitt described his meeting with Stewart on June 27, 2013-the day after the DeWitts paid Boardwalk $200,000 by wire transfer. During that meeting, Stewart revealed the price of $1,649,000 and Mr. DeWitt was "stunned." When the DeWitts asked why the price was so high, Stewart blamed it on the DeWitts' add-ons. Yet, according to Mr. DeWitt, the parties had gone through a "process of take things out, take things out ...." When the DeWitts did add something, and asked about the cost of the change, Stewart would say: "Joe, you can't tell until you get to the end of the project."
Mr. DeWitt testified that toward the end of July 2013, when the DeWitts met with Stewart, they announced they were "done" and stated that they wanted their "money back." Stewart, in turn, asked: "What will it take to save this project and what's the most you'll spend on this." This resulted in *428a revised budget of $1,300,000. According to Mr. DeWitt, Stewart responded: "We can do a house for that amount of money but we have to sign right now ...."
Mr. DeWitt also testified that the second deposit was "money to secure the prepaid discount." He explained his understanding of the milestone payment schedule as follows:
A. The milestone schedule [ ] was set up [so] that we would pay money to [Stewart] in advance so he could use that money to leverage to get contractors to get any subsidy needed to get the equipment on site .... [Stewart] explained it so that he didn't have to have a big inventory of stuff and we didn't have to have delays to get stuff. He could have stuff just in time.
Q. [ ] Did he tell you what was going to happen with your money?
A. He was going to use it to fund our project. He was going to leverage that ... to get people to do the work.
C. Memorandum Opinion
The bankruptcy court began the analysis set forth in its 44-page Memorandum Opinion by "assum[ing], without deciding, that [Boardwalk's] corporate veil has been pierced." DeWitt v. Stewart (In re Stewart), Adv. Pro. No. 15-1032-JMD, 2017 WL 3601196, at *9 (Bankr. D.N.H. Aug. 18, 2017). The court reasoned:
Both the New Hampshire veil-piercing standard and the elements [of] § 523(a)(2)(A) and (a)(6) ... involve fraud and injustice generally. Under the specific facts of this case, the Court believes that it would be difficult to find the elements of the § 523(a) claims satisfied but not the elements of the veil-piercing standard. This assumption allows the Court to cut straight to the heart of the dispute between the parties-if Stewart's debts to the DeWitts are dischargeable, including those that would be imputed to him via veil-piercing-whether the corporate veil should actually be pierced is beside the point. Accordingly ... the Court shall refer to either the actions of [Boardwalk] or Stewart interchangeably.
Id. (footnote omitted).
1. Section 523(a)(2)(A)
The bankruptcy court concluded that "any liability Stewart owes to the DeWitts should not be excepted from discharge pursuant to § 523(a)(2)(A)." Id. at *20. In support, the bankruptcy court made extensive findings of fact, including the following:
(1) The DeWitts "failed to present sufficient evidence for the Court to find that Stewart intended to deceive [them] with his statements in [the March 24, 2013] email[ ]." Id. at *11.
(2) "The revenue numbers themselves do not support an inference of an intent to deceive. These numbers provided were approximations, as Stewart indicates in his answer to M[r]s. DeWitt's first question." Id.
(3) "[T]he revenue figures Stewart provided are [not] different enough from the gross taxable income amounts for them not to be reasonable approximations." Id.
(4) "[T]here is no evidence that Stewart was specifically aware of the revenue numbers as stated in the 2011 tax returns, or in his company's QuickBooks records. The 2012 and 2013 tax returns are dated seven and twelve months after the March 24, 2013 email. These returns do not establish that Stewart had knowledge of their contents in March 2013." Id.
(5) "The evidence is insufficient to demonstrate that Stewart was trying to *429deceive the DeWitts by offering [the projected revenue number for 2013] .... Stewart's explanation that he had his 'sales hat' on when answering the revenue questions and came up with the numbers by thinking of 'pipeline' sales is plausible ...." Id.
(6) "The DeWitts have presented insufficient evidence for the Court to conclude that they actually relied on the revenue emails in making their decision to form a business relationship with [Boardwalk]." Id. at *12.
(7) "[T]he DeWitts essentially disregarded their own due diligence efforts ...." Id.
(8) "[I]t [is] incredible that the DeWitts were not aware that their project was a significant undertaking for [Boardwalk]. The DeWitts presented no evidence that [Boardwalk] or Stewart attempted to hide the size and scope of their business ...." Id. at *12 n.47.
(9) "[T]he facts the DeWitts argue are material nondisclosures [ (including Boardwalk's "bad financial condition" and "relationships with subcontractors") ] were peripheral background to the transaction, at best. Despite their arguments, the DeWitts did not ask the type of questions that would have caused the general financial condition of [Boardwalk] to become a central feature of the transaction." Id. at *12.
(10) "The Court has already found that Stewart's statements in the March 24, 2013 email about [Boardwalk's] revenue did not constitute statements regarding [Boardwalk's] general financial condition. See DeWitt v. Stewart (In re Stewart), 2016 BNH 010, 7-9, [2017 WL 4402217]." Id.
(11) "Ms. Stewart's personal bankruptcy is [not] even arguably related to the essence of the transaction between the DeWitts and [Boardwalk.]" Id.
(12) "In the context of a sales pitch, telling a customer that relationships with subcontractors were 'excellent' when in reality the relationships were 'good' with some exceptions does not rise to the level of a fraudulent misrepresentation." Id. at *13.
(13) "There is insufficient evidence in the record for the Court to conclude that this proposition was actually false or that Stewart intended to deceive the DeWitts by using the terms 'excellent' and 'good' interchangeably." Id.
(14) "The evidence is insufficient to find that Stewart's statements about using payment proceeds to fund the project rise to the level of a fraudulent misrepresentation. The Court cannot conclude that Stewart either intended to convey false information to the DeWitts or to deceive them. The statements about using the proceeds to fund the project were too general for the Court to conclude that they were false." Id. at *14.
(15) "The Court finds that it is entirely possible that Stewart was telling the DeWitts that they needed to pay up front because [Boardwalk] did not have the capital to fund the project ...." Id.
(16) "Stewart made no representation that the proceeds of the project would be used exclusively for the DeWitt project." Id. at *15.
(17) "Stewart's statements about 'leveraging' subcontractors, either those he made personally to the DeWitts or indirectly in the various emails on the subject[,] are not sufficient to render a debt nondischargeable under § 523(a)(2)(A)." Id.
(18) "[T]here is no evidence that the DeWitts actually relied on the leveraging statements. The evidence shows that the DeWitts made the prepayments to *430receive a discount up front. [Boardwalk] did in fact give them the discount." Id.
(19) "[T]he evidence does not support the conclusion that Stewart intended to mislead the DeWitts when he discussed leveraging subcontractors. Rather, the Court finds that Stewart was simply providing an explanation of why [Boardwalk] was offering the discount." Id.
(20) "Th[e] evidence is insufficient for the Court to conclude that Stewart either knew that [Boardwalk] would not be able to complete the project or recklessly disregarded the truth of that fact with an intent to deceive the DeWitts." Id. at *16.
(21) Stewart's transfer of $50,000 in August 2014 from his 401(k) retirement account "is not consistent with the state of mind of someone who is acting intentionally or recklessly to deceive." Id.
(22) "[W]hen Lessard testified that he thought the project would be finished until the day [Boardwalk] closed its doors, his testimony was straightforward and believable." Id.
(23) "The evidence does not support the DeWitts' overall narrative." Id. at *17.
(24) "[T]he evidence does not support a finding that Stewart made any specific representations that [Boardwalk] would use the proceeds exclusively on the project. The Purchase Agreement is silent on this subject and the payment structure is divided into equal amounts .... [T]he Court finds no basis to conclude that [Boardwalk's] use of funds was part of a fraudulent scheme." Id.
(25) "[It] does [not] appear that Stewart was using [Boardwalk] funds for any kind of self-dealing scheme." Id.
(26) "[T]he evidence supported Stewart's claim that proceeds of a home equity loan on the Florida home had been used to aid [Boardwalk]." Id. at *18.
(27) "The evidence does not support the conclusion that [Boardwalk] fraudulently sequenced the project for the purpose of forcing the DeWitts to make additional payments on the project. Rather, the evidence shows that the DeWitts consistently were willing to make substantial prepayments ... to obtain a discount." Id.
(28) "[T]he overall course of dealing is not indicative of actual fraud." Id. at *20.
(29) "The evidence is insufficient for the Court to conclude it more likely than not that Stewart devised a complex scheme to draw in the DeWitts, using their payment stream as revenue to keep his business propped up and feed his personal spending habit." Id.
2. Section 523(a)(6)
The bankruptcy court concluded that "Stewart lacked the intent required to find willfulness" under § 523(a)(6) and ruled that any liability Stewart owed to the DeWitts should not be excepted from discharge pursuant to § 523(a)(6). Id. at *21. The court reasoned that there was no evidence Stewart was "substantially certain that the DeWitt project would fail" or that he "ever became substantially certain he would cause the DeWitts injury." Id.
3. Remaining Counts
The court disposed of the remaining Counts of the Amended Complaint as follows:
As a result of this ruling and the Court's rulings on the Debtor's Motion for Summary Judgment and Motion for Judgment on Partial Findings, the DeWitts' claims against the Defendant will be dischargeable. These rulings also render the DeWitts' claims in Counts I-VII moot, as they are claims for damages against the Debtor that are dischargeable. In the context of a fully administered *431chapter 7 case, there is no further relief that the Court may afford the DeWitts as creditors of the bankruptcy estate. Accordingly, the Court will enter a separate final judgment in favor of the Defendant on all counts.
Id. (footnotes omitted).
D. Final Judgment
In the Final Judgment which the court entered contemporaneously with the Memorandum Opinion, it ruled:
(1) For the reasons set forth in the Court's memorandum opinion of even[ ] date, judgment is entered in favor of the Defendant on Counts I-VII and Counts VIII and XI;
(2) For the reasons set forth in the August 18, 2016 opinion (Doc. No. 46) judgment is entered in favor of the Defendant on Counts IX and X;
(3) For the reasons set forth in the Court's order of February 22, 2017 (Doc. No. 75), judgment is entered in favor of the Defendant on Counts XII and XIII; [and]
(4) Each party shall bear its own fees and costs.
POSITIONS OF THE PARTIES ON APPEAL
I. DeWitts
On appeal, the DeWitts argue that Stewart engaged in all three forms of misconduct under § 523(a)(2)(A)-fraudulent misrepresentation, false pretenses, and actual fraud. They maintain that the "trial court committed plain factual errors, as well as misinterpreted or misapplied the applicable law." The DeWitts' assertions of error focus on the bankruptcy court's finding that Stewart did not misrepresent how he was going to use their funds. They contend that in order to obtain deposits and prepayments which he used to fund his business, Stewart falsely represented that their money would be used to: (1) "fund" their project; and (2) "leverage" subcontractors. They claim, further, that Stewart intended for them to rely on his misrepresentations, they actually did rely on his misrepresentations, their reliance was justifiable, and they were harmed.
Moreover, in support of their § 523(a)(2)(A) claim, the DeWitts argue that "courts routinely refuse to grant a discharge where contractors have falsely represented their intent to use a creditor's funds for the creditor's project." The DeWitts ask the Panel: (1) to reverse the bankruptcy court's decision and "find that the debt is excepted from discharge ..."; and (2) for such other relief as the Panel "determine[s] is just."
II. Stewart
Stewart argues the bankruptcy court correctly ruled that the DeWitts had not satisfied their burden under § 523(a)(2)(A). He maintains that the parties had different understandings of the words "fund" and "leverage." With respect to his use of the word "fund," Stewart contends that the bankruptcy court correctly found: (1) his statements were "too general to conclude that they were false"; and (2) his alleged "mis-sequencing" of the project did not prove that his statements regarding "funding" the project were false. Stewart also argues he did not make any misrepresentations regarding the "leveraging" of subcontractors, asserting that the bankruptcy court correctly found that the DeWitts received the promised discount in exchange for their prepayments.
JURISDICTION
A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits, even if not raised by the litigants.
*432Rivera Siaca v. DCC Operating, Inc. (In re Olympic Mills Corp.), 333 B.R. 540, 546-47 (1st Cir. BAP 2005) (citation omitted). "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) ; 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) ). A bankruptcy court's judgment determining dischargeability is a final, reviewable order. Cambio v. Mattera (In re Cambio), 353 B.R. 30, 31 n.1 (1st Cir. BAP 2004) (citations omitted). Therefore, the Panel has jurisdiction to hear this appeal.
STANDARD OF REVIEW
The Panel reviews findings of fact for clear error and conclusions of law de novo. Douglas v. Kosinski (In re Kosinski), 424 B.R. 599, 607 (1st Cir. BAP 2010) (citations omitted). Determinations regarding elements of an action under § 523(a)(2) are findings of fact reviewed for clear error. Bellas Pavers, LLC v. Stewart (In re Stewart), BAP No. MB 12-017, 2012 WL 5189048, at *5 (1st Cir. BAP Oct. 18, 2012) (citations omitted); see also Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997). This standard is satisfied when, "upon whole-record-review, an inquiring court form[s] a strong, unyielding belief that a mistake has been made." United States v. Nuñez, 852 F.3d 141, 144 (1st Cir. 2017) (citation omitted) (internal quotations omitted); see also Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 69 (1st Cir. 2012) (citation omitted). While deference is accorded to the trial court's findings that depend on the credibility of witnesses:
"factors other than demeanor and inflection go into the decision whether or not to believe a witness. Documents or objective evidence may contradict the witness' story; or the story itself may be so internally inconsistent or implausible on its face that a reasonable factfinder would not credit it. Where such factors are present, the court of appeals may well find clear error even in a finding purportedly based on a credibility determination."
Palmacci, 121 F.3d at 785 (quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ).
DISCUSSION
I. The § 523(a)(2)(A) Standard Governing Exceptions to Discharge
Section 523(a)(2)(A) excepts from discharge debts obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]" 11 U.S.C. § 523(a)(2)(A). "Exceptions to discharge are narrowly construed in furtherance of the Bankruptcy Code's fresh start policy, and, for that reason, the claimant must show that his claim comes squarely within an exception enumerated in Bankruptcy Code § 523(a)." Palmacci, 121 F.3d at 786 (citations omitted) (internal quotations omitted).
"An action under § 523(a)(2)(A) involves three distinct categories of misconduct-false pretenses, false representation, or actual fraud-albeit with elements that overlap." Privitera v. Curran (In re Curran), 554 B.R. 272, 284 (1st Cir. BAP 2016) (emphasis added) (citations omitted), aff'd, 855 F.3d 19 (1st Cir. 2017).
A. False Representation
In order to establish that a debt is nondischargeable under § 523(a)(2)(A) due to a false representation, the plaintiff must *433show by a preponderance of the evidence that:
1) the debtor made a knowingly false representation or one made in reckless disregard of the truth, 2) the debtor intended to deceive, 3) the debtor intended to induce the creditor to rely upon the false statement, 4) the creditor actually relied upon the false statement, 5) the creditor's reliance was justifiable, and 6) the reliance upon the false statement caused damage.
In re Goguen, 691 F.3d at 66 (citation omitted) (internal quotations omitted). "If the creditor fails to establish any one of the six elements, then the court must reject its claim." Falcone v. Ragonese (In re Ragonese), 505 B.R. 605, 613 (1st Cir. BAP 2014) (citing Palmacci, 121 F.3d at 787 ).
"A false representation is an express misrepresentation[.]" Zacharakis v. Melo (In re Melo), 558 B.R. 521, 559 (Bankr. D. Mass. 2016) (citation omitted). "[T]he concept of misrepresentation includes a false representation as to one's intention, such as a promise to act." Palmacci, 121 F.3d at 786. As the First Circuit explained: "A representation of the maker's own intention to do ... a particular thing is fraudulent if he does not have that intention at the time he makes the representation." Id. (citations omitted) (internal quotations omitted).
"Intent to deceive presents a factual question which courts determine by considering a variety of factors, including the debtor's financial condition at the time the representations were made ...." Mangano v. Grenier (In re Grenier), Adv. Pro. No. 07-1131, 2009 WL 763352, at *9 (Bankr. D. Mass. Mar. 19, 2009) (citation omitted). "Because the intent to defraud is rarely proven by direct evidence, courts assess this element using a totality of the circumstances approach to discern the debtor's subjective intent." Whitcomb v. Smith (In re Smith), 572 B.R. 1, 16 (1st Cir. BAP 2017) (citing Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 764 (1st Cir. 1994) ). "[A] debtor's fraudulent intent can be inferred if the totality of the circumstances presents a picture of deceptive conduct by the debtor." In re Stewart, 2012 WL 5189048, at *8 ; see also Robin Singh Educ. Servs., Inc. v. McCarthy (In re McCarthy), 488 B.R. 814, 826 (1st Cir. BAP 2013) (stating fraudulent intent may be "inferred from a course of conduct") (citations omitted). "The focus [ ] should be on whether the surrounding circumstances or the debtor's actions appear so inconsistent with [his] self-serving statement of intent that the proof leads the court to disbelieve the debtor." In re Stewart, 2012 WL 5189048, at *9 (citations omitted) (internal quotations omitted).
"The element of reliance has two parts." Meads v. Ribeiro (In re Ribeiro), Adv. Pro. No. 11-1188, 2014 WL 2780027, at *10 (Bankr. D. Mass. June 19, 2014). "The party upon whom the misrepresentation is practiced must actually have relied on the false pretense o[r] false representation, and that reliance must have been justifiable (but need not have been reasonable)." Id."Reliance is justifiable if the falsity of the representation would not have been readily apparent to the person to whom it was made." Id. (citing Field v. Mans, 516 U.S. 59, 70-72, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ). "The rationale for placing this relatively low burden on the victim of the misrepresentation is rooted in the common law rule that the victim's contributory negligence is not a defense to an intentional tort." Sanford Inst. for Sav. v. Gallo, 156 F.3d 71, 74 (1st Cir. 1998) (citations omitted). "In such circumstances, the equities weigh in favor of giving the benefit of the doubt to the victim, careless as it may have been, and even though it *434could have been more diligent and conducted an investigation." Id.
B. False Pretenses
The requirements for false pretenses are largely the same as those for false representation, "except that [the] requirement of a false representation is replaced by a requirement of a false pretense, which is an implied misrepresentation or a false impression created by conduct of the debtor." In reCurran, 554 B.R. at 285 (citation omitted) (internal quotations omitted). "[W]hen the circumstances imply a particular set of facts, and one party knows the facts to be otherwise, that party may have a duty to correct what would otherwise be a false impression." Merchs. Nat'l Bank of Winona v. Moen (In re Moen), 238 B.R. 785, 791 (8th Cir. BAP 1999).
C. Actual Fraud
"Actual fraud," the third form of misconduct specified in § 523(a)(2)(A), is not limited to fraud effected by misrepresentations on the debtor's part. Babin v. Stepanian (In re Stepanian), 545 B.R. 424, 430 (Bankr. D. Mass. 2015) (citing Sauer Inc. v. Lawson (In re Lawson), 791 F.3d 214, 220 (1st Cir. 2015) ); see also Husky Int'l Elecs., Inc. v. Ritz, --- U.S. ----, 136 S.Ct. 1581, 1590, 194 L.Ed.2d 655 (2016) (stating actual fraud encompasses fraudulent conveyance schemes as well as inducement-based fraud). "Rather, actual fraud in this statutory context includes conduct such as fraudulent interference with property rights, a tort quite distinct from the utterance of misrepresentations." In re Stepanian, 545 B.R. at 430-31 (citations omitted).
II. The § 523(a)(2)(A) Standard Applied
A. The False Representation Element: Whether Stewart Made any Express Misrepresentations
The issue at the heart of this appeal is whether the record establishes that the DeWitts demonstrated the presence of a false representation (other than a statement respecting the debtor's or an insider's financial condition)14 by a preponderance of the evidence. On appeal, Stewart does not meaningfully challenge the DeWitts' assertions regarding the presence of the remaining § 523(a)(2)(A) elements. Our task is to examine Stewart's conduct within the framework of the legal principles set forth above. From the record before us, several categories of misrepresentations by Stewart emerge, including his representations that: (1) he could complete the DeWitts' project within their budget; (2) the DeWitts' deposits would be applied to their project; and (3) the DeWitts' milestone payments would be used to "fund" their project and "leverage" subcontractors.
1. The False Representations Regarding the Budget and the First Deposit
The record demonstrates that, from the outset, the DeWitts were clear and consistent regarding their renovation budget-$700,000 to $1,000,000. They expressed their desire to complete the renovation within this price range to Stewart during their early communications with him and the budget became a term of the Design Agreement. Stewart not only assured the DeWitts that Boardwalk could complete the renovation within their budget but, according to his own testimony, he also *435helped the DeWitts establish that budget. The DeWitts were unaware at this time-and Stewart did not disclose-that Boardwalk was already coming "unraveled" and the situation was "dire"; nor did Stewart reveal that any of his relationships with subcontractors were strained. Instead, Stewart described his business as "booming." Persuaded in this manner that Boardwalk could not only complete their project, but do so within their budget, the parties' business relationship advanced; in April 2013, they executed the Design Agreement, which again identified the agreed-upon budget as $700,000 to $1,000,000 and included the DeWitt Design Parameters, echoing the same budget (while still failing to specify costs associated with the various line items). Pursuant to the terms of the Design Agreement, the DeWitts paid Boardwalk not only $2,895 to produce a design within budget, but also a $200,000 deposit. On June 26, 2013, the day after receiving the deposit, Stewart presented the DeWitts with a contract for the "shock[ing]" sum of $1,649,936, and then proceeded to use that deposit for purposes other than the DeWitt project. In fact, construction on the DeWitt site did not begin until a couple of months later and, by that time, the first deposit had been significantly dissipated. Based on this record, we conclude that Stewart misrepresented Boardwalk's ability to complete the DeWitts' renovation within budget and the purpose of the first deposit, in order to extract the deposit from them and to induce them to engage Boardwalk.
2. The False Representations Regarding the Second Deposit
On August 27, 2013-still prior to the commencement of any construction work-the DeWitts paid yet another deposit, this time in the amount of $172,000. The DeWitts both testified that Stewart explained that the second deposit was intended "to secure the prepaid discount." Stewart testified, alternately, that the second deposit was another "good faith deposit" and that the deposit would entitle the DeWitts to receive a 5% discount on prepaid milestone payments. Regardless of whether the second deposit is denominated as a "good faith deposit" or as consideration for a discount, one thing is clear and undisputed: Stewart did not use the entire deposit for the DeWitts' project and, much like the first deposit, the second was largely consumed by the time work on the site commenced. Given these circumstances, we conclude that the second deposit was procured through Stewart's fraudulent misrepresentations.
3. The False Representations Regarding Milestone Payments
Mrs. DeWitt repeatedly testified that Stewart informed the DeWitts their money was being applied to their own project. Stewart told her he would use their milestone payments to "leverage subcontractors," and that their monies would "fund" their project. When Mrs. DeWitt asked Stewart what was meant by "milestone payment," he answered that "it was money to go into [their] project to leverage subcontractors, vendors and other resources that he needed to do [the] project so that he could move it forward in a timely fashion."
Mrs. DeWitt's testimony was amply corroborated by other witnesses, including Mr. DeWitt, Lessard, and even Stewart. Mr. DeWitt reiterated throughout his direct examination that Stewart said he would use the DeWitts' payments to "fund" their project and "leverage" subcontractors. Mr. DeWitt recalled that Stewart told him that the milestone payments would also enable Stewart to acquire product "just in time."
*436While Stewart denied stating that he would use the DeWitts' money exclusively on their project, he admitted that he told the DeWitts that their money would "fund" their project. Stewart also admitted that Boardwalk had experienced "cash flow issues" since 2008 and that he used the DeWitts' money to operate Boardwalk.
Lessard similarly testified: in 2013, Boardwalk was financially stressed; Boardwalk used the DeWitts' milestone payments to pay "old bills"; Stewart directed him to find ways to start milestones-even if not in the DeWitts' best interest-in order to generate milestone payments; Lessard told clients that milestone payments were intended to "leverage" subcontractors and to "fund" or "finance" their own projects; no "leveraging" of subcontractors occurred; Boardwalk was simply trying to improve its own cash flow with the DeWitts' payments; and, notwithstanding receipt of the DeWitts' milestone payments, Boardwalk was still unable to obtain certain goods and services timely, which resulted in project delays.
In addition, Traffie testified that the manner in which the project had been sequenced (or, more accurately, "mis-sequenced") suggested that certain tasks were commenced simply to generate milestone payments. For example, floor tile had been installed before HVAC work was completed, painting began before carpentry work was complete, and wallboard installed before electrical work was finished in the area of installation.
Based on the foregoing, the bankruptcy court's findings and conclusions supporting its decision that the DeWitts had not satisfied § 523(a)(2)(A)'s requirement of a fraudulent misrepresentation are irreconcilable with the evidence adduced at trial, and especially the bankruptcy court's findings that:
(1) Boardwalk's "bad financial condition" and "relationships with subcontractors" were "peripheral to the transaction, at best." In re Stewart, 2017 WL 3601196, at *12.
(2) "Under the circumstances, terms like 'excellent' and 'good' were both indicative of the general proposition that [Boardwalk] had good working relationships with most of its subcontractors. There is insufficient evidence in the record for the Court to conclude that this proposition was actually false or that Stewart intended to deceive the DeWitts by using the terms 'excellent' and 'good' interchangeably." Id. at *13.
(3) "The evidence is insufficient to find that Stewart's statements about using payment proceeds to fund the project rise to the level of a fraudulent misrepresentation. The Court cannot conclude that Stewart either intended to convey false information to the DeWitts or to deceive them. The statements about using the proceeds to fund the project were too general for the Court to conclude that they were false." Id. at *14.
(4) "Stewart made no representation that the proceeds of the project would be used exclusively for the DeWitt project." Id. at *15.
(5) "Stewart's statements about 'leveraging' subcontractors, either those he made personally to the DeWitts or indirectly in the various emails on the subject are not sufficient to render a debt nondischargeable under § 523(a)(2)(A)." Id.
(6) "As to [Boardwalk's] overall use of the proceeds of the DeWitts' payments on the project, the evidence does not support a finding that Stewart made any specific representations that [Boardwalk] would use the proceeds exclusively on the project. The Purchase Agreement is silent on this subject and the payment *437structure is divided into equal amounts .... [T]he Court finds no basis to conclude that [Boardwalk's] use of funds was part of a fraudulent scheme." Id. at *17.
(7) "There is no dispute that a good portion of the proceeds did go into the project." Id. at *14.
(8) "[I]t is entirely possible that Stewart was telling the DeWitts that they needed to pay up front because [Boardwalk] did not have the capital to fund the project without payments made at the start of the different phases of the project. This explanation carries an entirely different meaning than if Stewart had told the DeWitts that [Boardwalk] would use the milestone payments exclusively for their project. Under the circumstances, the Court finds it more likely that Stewart was explaining that [Boardwalk] would not be able to perform the project without the milestone payment scheme." Id.
(9) "There was nothing fraudulent about Stewart proceeding under the impression that the parties had a deal and using the [first] deposit.... Stewart made no representation that the proceeds of the project would be used exclusively for the DeWitt project." Id. at *15.
(10) "[T]he evidence [is] insufficient to find that Stewart used the Design Agreement as the hook of some larger fraudulent scheme. Id. at *14.
(11) "[T]he evidence does not support the conclusion that [Boardwalk] fraudulently sequenced the project for the purpose of forcing the DeWitts to make additional payments on the project." Id. at *18.
(12) "[T]he overall course of dealing is not indicative of actual fraud. The evidence is insufficient for the Court to conclude it more likely than not that Stewart devised a complex scheme to draw in the DeWitts using their payment stream as revenue to keep his business propped up ...." Id. at *20.
The above factual findings are contrary to the testimony of the DeWitts, Lessard, Pike, Traffie, and Stewart, himself. Moreover, the record does not support the bankruptcy court's essential findings that Stewart did not make any misrepresentations about the use of the DeWitts' funds (both the deposits and the milestone payments), the status of his relationships with his subcontractors, or the condition of Boardwalk's business. Rather, the record demonstrates that the DeWitts proved it is more likely than not that Stewart explicitly misrepresented that he would use their money only on their project and/or to leverage subcontractors on their project.15 Furthermore, it is clear from the record that, when Stewart characterized Boardwalk's business as "booming," its business was actually struggling and its relationships with a number subcontractors were strained due to nonpayment or late payment. With respect to these relationships, the question is not -as the bankruptcy court put it-whether they were "good" or "excellent," but rather, whether they were fair or poor. Stewart, himself, conceded that a number of subcontractors had already stopped extending credit to Boardwalk by the time Boardwalk contracted with the DeWitts. Lessard described Boardwalk's relationships with its subcontractors as "strained" when the DeWitt project began. And, by summer 2014, three subcontractors had obtained mechanics *438liens against the DeWitts' project. Boardwalk's desperate financial condition, as evidenced by its poor relationships with subcontractors and the testimony of its accountant, compels the inference that Stewart requested milestone payments and deposits to procure funds for the benefit of Boardwalk, rather than for the DeWitts' project.
In finding that Stewart made no misrepresentations regarding the use of the DeWitts' payments, the bankruptcy court committed several clear errors. First, it excessively discounted the testimony of the DeWitts, seemingly in favor of Stewart's testimony that he transferred $50,000 in August 2014 from his 401(k) retirement account to Boardwalk. It does not necessarily follow from Stewart's attempt to rescue his own company, however, that he had been honest in his dealings with the DeWitts.
Second, in evaluating the collective testimony of the DeWitts, Stewart, and Lessard, the bankruptcy court appears to have ignored the plain meaning of the word, "fund," which, in its verb form, means "to allocate or provide funds for ... a project ...." Fund Definition, Dictionary.com, http://dictionary, reference.com/browse/fund (last visited September 24, 2018). It also disregarded the ordinary meaning of "deposit"-"anything given as security or in part payment." Deposit Definition, Dictionary.com, http://dictionary, reference.com/browse/fund (last visited September 24, 2018). Moreover, the cumulative testimony of the DeWitts, Stewart, and Lessard, persuades us that when Stewart told the DeWitts their payments would "fund" their project and when he requested deposits, he intended to communicate to the DeWitts that their monies would be applied solely to their project.
Third, without offering any explanation, the bankruptcy court wholly ignored the testimony of Lessard that relationships with subcontractors were strained, as well as Pike's testimony that Boardwalk's financial condition was "dire" as of February 2013, and that the company had been on the fringe of insolvency for years.
B. Alleged False Pretenses: Whether Stewart Made any Implied Misrepresentations
Even assuming, arguendo , that Stewart did not expressly represent that he was going to use the DeWitts' funds exclusively on their project, the bankruptcy court erred by ignoring the question of whether he impliedly made such a representation. Indeed, the DeWitts alleged false pretenses as a theory of liability in the Amended Complaint. It is well established that an overt representation is not required by § 523(a)(2)(A). In re Melo, 558 B.R. at 559. An implied misrepresentation of conduct intended to create a false representation constitutes a false pretense for § 523(a)(2)(A) purposes. Id.
Although the bankruptcy court acknowledged that false pretenses may be actionable under § 523(a)(2)(A), it failed to examine whether Stewart, by his conduct, was guilty of an implied misrepresentation. This is a critical omission under the circumstances of this case.
Cases considering the question of implied misrepresentation have often "turned on whether the funds were 'entrusted' for a specific purpose." Fensick v. Segala (In re Segala), 133 B.R. 261, 264 (Bankr. D. Mass. 1991) (excepting advances paid by homeowners to debtor-builder from discharge pursuant to § 523(a)(2)(A), reasoning he impliedly represented he would use those proceeds in the construction of their home). As the bankruptcy court stated in Segala:
*439If funds are deemed to have been entrusted to the debtor for a specific purpose, the debtor is regarded as impliedly representing his intention to use the funds accordingly. Failure to use the funds would be evidence of a misrepresentation of that intent under § 523(a)(2)(A).
...
Here, the Debtor did not represent that specific debts had been incurred which required payment. He instead said only that he needed funds to continue the job. But the substance is the same, at least in the particular circumstances here. I find that in requesting the funds and in saying what he did, the Debtor impliedly represented that the funds would be used on the job, and that the Plaintiffs relied on that representation.
Id. (citation omitted); see also Merchs. Nat'l Bank & Trust Co. of Indianapolis v. Pappas (In re Pappas), 661 F.2d 82, 86 (7th Cir. 1981) (stating "where the [debtor] is entrusted with money to be used for a specific purpose, and he has no apparent intention of using the money for that purpose, then a misrepresentation clearly exists upon which a debt can be properly held nondischargeable").
Based on the foregoing authority, the bankruptcy court should have considered whether, in representing to the DeWitts that they would "fund" their own project and that their milestone payments and deposits would be used to "leverage subcontractors," Stewart was, at a minimum, impliedly representing that their monies would be used exclusively on their project. We conclude that even if Stewart did not explicitly represent he would apply the DeWitts' monies exclusively to their project, the record, viewed as a whole, supports a conclusion that he impliedly made such false representations. The bankruptcy court committed clear error when: (1) it did not analyze whether Stewart obtained the DeWitts' money through false pretenses; and (2) it did not find that the DeWitts proved that Stewart obtained their money through false pretenses.
C. The Intent to Deceive Element
The most compelling evidence regarding Stewart's intent to deceive is Lessard's testimony that he was "not proud" of his conduct or that of the other Boardwalk employees in connection with the DeWitt project. He admitted that they had been "elusive or deceitful," that they were "blowing a lot of smoke and clouds" to conceal Boardwalk's financial problems, and that Stewart directed them to start milestones for the purpose of generating payments for Boardwalk's benefit. He also testified that leveraging of subcontractors never occurred.
This evidence contradicts the bankruptcy court's findings that: Stewart "[n]either intended to convey false information to the DeWitts [n]or to deceive them"; and that Stewart did not "intend[ ] to mislead the DeWitts when he discussed leveraging subcontractors." Based on the totality of this record, we have "a strong, unyielding belief that a mistake has been made." United States v. Nuñez, 852 F.3d at 144. Stewart's statements regarding his intended application of the DeWitts' funds, his plans to use their monies to leverage subcontractors, and his representation regarding his relationships with subcontractors, were all made with the intent to deceive.
D. The Reliance Element
On appeal, Stewart does not challenge the DeWitts' assertion that they relied on his false representations. Therefore, he has waived on appeal any issue relating to the elements of actual and justifiable reliance.
*44016 Hamilton v. Dineen, 17 F. App'x 7, 8 (1st Cir. 2001) (stating "failure to argue an issue on appeal waives that issue") (citation omitted).17
E. The Injury Element
Because it concluded that Stewart was not guilty of any misrepresentations, the bankruptcy court did not make any findings regarding the injury element. Nonetheless, the record amply supports a conclusion that the DeWitts-who paid 90% of the contract price for a renovation project only 45% complete-suffered harm. Indeed, on appeal, Stewart does not challenge the DeWitts' assertion that they were harmed, except that he maintains that any harm was not deliberate.
F. The DeWitts Satisfied Their Burden
In light of the record reviewed in its entirety, the bankruptcy court's account of the evidence is implausible. The foregoing analysis establishes that the DeWitts proved, by a preponderance of the evidence, that: (1) Stewart explicitly misrepresented that he would use their money only on their project, that making milestone payments in advance would enable him to leverage subcontractors for the benefit of their project, and that he had excellent relationships with subcontractors; (2) Stewart intended to deceive the DeWitts; (3) Stewart intended to induce the DeWitts to rely on his misrepresentations; (4) the DeWitts actually relied on Stewart's misrepresentations; (5) the DeWitts' reliance was justifiable; and (6) the DeWitts were harmed. Thus, the appellate record demonstrates that each and every element of § 523(a)(2)(A) is present and has been proven, and that the bankruptcy court committed clear error when it concluded that "any liability Stewart owes to the DeWitts should not be excepted from discharge pursuant to § 523(a)(2)(A)."
III. Piercing the Corporate Veil
Although we conclude that the bankruptcy court committed reversible error when it determined that Stewart did not make any false representations, that conclusion does not automatically result in a determination that Stewart owes a nondischargeable obligation to the DeWitts. We are still left with the issue of Boardwalk's corporate status and whether Stewart, under a veil-piercing theory, has personal liability to the DeWitts that may be excepted from discharge under § 523(a)(2)(A). As noted, supra, that statute provides that "[a] discharge under section 727 ... does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent *441obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]" 11 U.S.C. § 523(a)(2)(A) (emphasis added).
Under New Hampshire law, corporate officers, directors, and shareholders are not liable for a corporation's debts. See Antaeus Enters., Inc. v. Davidson, 774 F.Supp.2d 409, 415 (D.N.H. 2011). A plaintiff seeking to impose individual liability on them must, therefore, first pierce the corporate veil. See id. Thus, to succeed on their claim for a discharge exception against Stewart under § 523(a)(2)(A), the DeWitts must show that he is personally liable to them for Boardwalk's obligation by piercing Boardwalk's corporate veil consistent with New Hampshire law. "When [New Hampshire] courts pierce the corporate veil, they 'assess individual liability where the owners have used the corporate identity to promote injustice or fraud.' " New Eng. Homes, Inc. v. R.J. Guarnaccia Irrevocable Trust, 150 N.H. 732, 846 A.2d 502, 506 (2004) (quoting Norwood Grp. v. Phillips, 149 N.H. 722, 828 A.2d 300 (2003) ). "They 'disregard the fiction that the corporation is independent of its stockholders and treat the stockholders as the corporation's alter egos.' " Id. (quoting Norwood Grp., 828 A.2d at 302 ) (internal quotations omitted). "New Hampshire courts do not 'hesitate[ ] to disregard the fiction of the corporation' when circumstances would lead to an inequitable result." Terren v. Butler, 134 N.H. 635, 597 A.2d 69, 72 (1991) (citation omitted).
"Given this standard," the bankruptcy court "assume[d], without deciding," that Boardwalk's corporate veil had been pierced. In re Stewart, 2017 WL 3601196, at *9. The court reasoned that "[b]oth the New Hampshire veil-piercing standard and the elements [of] § 523(a)(2)(A) and (a)(6)... involve fraud and injustice, generally." "Under the specific facts of this case," the bankruptcy court further observed, "it would be difficult to find the elements of the § 523(a) claim satisfied but not the elements of the veil piercing-standard." In re Stewart, 2017 WL 3601196, at *9 (footnote omitted). We agree.
In addition to demonstrating that the DeWitts satisfied their burden under § 523(a)(2)(A), the record before us provides a sufficient basis to support a conclusion that Stewart used the corporate identity of Boardwalk to promote an injustice and/or a fraud on the DeWitts. Moreover, the record establishes that Stewart was the sole officer, director and shareholder of Boardwalk. From the inception of his relationship with the DeWitts, Stewart used the corporate identity of Boardwalk to induce the DeWitts into doing business with him through Boardwalk. Indeed, when the parties first met, Stewart was promoting Boardwalk at a booth he erected at a home show. At that time, Stewart represented that Boardwalk was well qualified to undertake a renovation project of the magnitude of the DeWitts', that Boardwalk's business was thriving, and that Boardwalk had the ability to retain subcontractors. On the basis of Boardwalk's purported professional and financial qualifications, the DeWitts entered into both the Design Agreement and the Purchase Agreement with Boardwalk, and paid all of the milestone payments and deposits to Boardwalk. Stewart then deposited those monies into Boardwalk's general account and, instead of applying those sums solely to the DeWitts' project, he used a significant portion to satisfy the corporate obligations of Boardwalk, to pay himself a salary, and to pay his wife's credit card debt. Thus, the record shows that Stewart used Boardwalk's corporate form to promote an injustice against the DeWitts. Under these circumstances, the record supports piercing Boardwalk's corporate veil under New Hampshire law.
*442CONCLUSION
Based on the foregoing, we REVERSE the Judgment as to Counts I and VIII,18 and REMAND to the bankruptcy court for further proceedings consistent with this opinion, including, but not limited to, the entry of judgment in favor of the DeWitts as to those Counts.19
As discussed, infra, although the DeWitts contracted with Boardwalk North ("Boardwalk"), in the underlying adversary proceeding they sought to impose personal liability upon Stewart by piercing Boardwalk's corporate veil.
Unless otherwise noted, all references to "Bankruptcy Code" or to specific statutory sections are to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101 etseq.
Because we conclude the record establishes that the DeWitts satisfied their burden under § 523(a)(2)(A), we do not examine the propriety of the bankruptcy court's findings and rulings under § 523(a)(6).
Throughout this opinion, dollar amounts are frequently rounded to the nearest dollar.
These milestones included, for example, the "start of master bedroom addition demolition," the "start of master bedroom addition excavation," the "start of kitchen cabinets installation," and the "start of kitchen appliance delivery," to name a few.
The counts in the Amended Complaint are: (I) piercing the corporate veil; (II) breach of contract; (III) breach of covenant of good faith and fair dealing; (IV) negligence; (V) conversion; (VI) fraudulent misrepresentation and actual fraud; (VII) violation of N.H. Rev. Stat. Ann. § 358-A; (VIII) § 523(a)(2)(A); (IX) § 523(a)(2)(B); (X) § 523(a)(4); (XI) § 523(a)(6); (XII) § 727(a)(2); and (XIII) § 727(a)(4).
For the sake of clarity, some explanation regarding the narrowing of issues for trial is required. On August 18, 2016, the bankruptcy court granted Stewart's motion for summary judgment as to Counts IX (§ 523(a)(2)(B) ) and X (§ 523(a)(4) ), but deferred entering a final judgment on those Counts until after trial. (The Final Judgment which is the subject of this appeal includes Counts IX and X, as discussed on page 429-30, infra ). On November 22, 2016, the court further pared the claims under consideration when it issued a scheduling order that deferred the trial on the state law counts, based on jurisdictional concerns. That order provided:
The Court will hear the §§ 523 and 727 counts first. At that time, the Court will hear all evidence necessary to determine whether the Debtor is entitled to a discharge and whether the Debtor's debts to the Plaintiffs are dischargeable. During this first phase of the trial the Court will not hear evidence that is exclusively relevant to the state law counts and will not hear evidence on the liquidation of the amount of any money damages. All evidence relating to the state law counts and any evidence necessary for the Court to enter a money judgment in favor of the Plaintiffs will be deferred until the second phase of the trial. At the conclusion of the first phase of the trial, the Court will enter a ruling on the §§ 523 and 727 counts and will thereafter schedule the second phase of the trial if the Court finds it necessary and appropriate.
On February 23, 2017, the bankruptcy court entered an order granting Stewart's motion for judgment on partial findings with respect to the DeWitts' claims under § 727(a)(2) (Count XII) and § 727(a)(4) (Count XIII), and denying that motion with respect to the DeWitts' claims under § 523(a)(2)(A) (Count VIII) and § 523(a)(6) (Count XI).
See testimony of Brian Lessard, infra, indicating those relationships were actually strained.
Although Mrs. DeWitt testified that the contract price was $1,650,000, the actual price stated on the Purchase Agreement was $1,649,936.
The DeWitts claim that this email was "ghost-written" by Stewart.
This testimony is an excerpt from Lessard's deposition, which he read into the record upon request during the trial.
The record is unclear as to whether the contemplated bankruptcy filing was for Boardwalk as well as Stewart, individually.
As noted, supra, the bankruptcy court granted summary judgment in favor of Stewart on Count IX, the DeWitts' § 523(a)(2)(B) claim. See n.8.
See Bezanson v. Fleet Bank-NH, 29 F.3d 16, 21 (1st Cir. 1994) (associating the "more-likely-than-not prospect" with the preponderance of the evidence standard) (citation omitted) (internal quotations omitted).
Because the bankruptcy court found that actual reliance was lacking, it never reached the question of whether the DeWitts' reliance was justifiable.
Even if we did not deem the reliance issue waived, we would still conclude-contrary to the bankruptcy court's finding-that the DeWitts satisfied their burden regarding the reliance element. There is abundant unrebutted evidence in the record to support the DeWitts' claim that they actually relied on Stewart's misrepresentations, and that their reliance was justifiable. The DeWitts repeatedly testified that they would not have hired Boardwalk had they understood its true financial condition and that they would not have made payments had they known their money was not being applied exclusively to their project. Furthermore, in concluding that the DeWitts did not satisfy their burden on the reliance element, the bankruptcy court overlooked the First Circuit's guidance in Goguen, supra. There, the First Circuit observed that a misrepresentation that induces the creditor to "stay[ ] the course" rather than "exercise a right arising from the contract may make the debtor's debt nondischargeable." In re Goguen, 691 F.3d at 69, 70 (citing Field v. Mans, 157 F.3d 35, 39, 42-46 (1st Cir. 1998) ).
As the DeWitts have not addressed Counts II through VII, IX, X, XII, and XIII in their statement of issues on appeal, in their brief, or during oral argument, their appeal as to those Counts is waived. See Tower v. Leslie-Brown, 326 F.3d 290, 299 (1st Cir. 2003) ("[W]e have made it abundantly clear that failure to brief an argument does, in fact, constitute waiver for purposes of appeal.") (citations omitted); see also Above-All Transp., Inc. v. Fraher (In re Fraher), BAP No. MB 16-026, 2017 WL 715059, at *4 (1st Cir. BAP Feb. 21, 2017) ("Failure to list an issue in the statement of issues and/or to brief the issue with reasoned arguments may [ ] result in waiver.") (citations omitted). Moreover, a determination of the other Counts is unnecessary in light of this ruling.
An issue confronting the bankruptcy court on remand is the question of damages, see In re Cambio, 353 B.R. at 32-34, and whether the bankruptcy court should: (1) enter a monetary judgment for the DeWitts in the amount of their proof of claim; (2) conduct a hearing to assess damages; or (3) direct the DeWitts to proceed to obtain an assessment of damages in state court. We do not opine here as to which option the bankruptcy court should pursue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501720/ | HONORABLE ELIZABETH S. STONG, UNITED STATES BANKRUPTCY JUDGE
Introduction
Robert L. Geltzer, the Chapter 7 Trustee of the Estate of Estella Brizinova and Edward Soshkin, aka Eduard Soshkin (together, the "Debtors"), commenced this adversary proceeding by filing a complaint (the "Complaint"), against defendants Estella Brizinova and Edward Soshkin. The Trustee seeks to recover alleged estate property that, he asserts, the Defendants have improperly refused to turn over, in violation of Bankruptcy Code Section 542. The Trustee also seeks declaratory relief, injunctive relief, and compensatory and punitive damages pursuant to Bankruptcy Code Sections 362(a) and 362(k), based on the Defendants' alleged transfer of estate property in violation of the automatic stay. And the Trustee seeks an award of compensatory and punitive damages based on a theory of common law conversion.
As this Court has discussed previously *450in Geltzer v. Brizinova (In re Brizinova) , 554 B.R. 64 (Bankr. E.D.N.Y. 2016) (" Brizinova I "), the Trustee alleges that pursuant to Section 542, the Defendants are required to turn over post-petition sale proceeds in the amount of $250,000 (the "Post-Petition Sale Proceeds") from ENSI Consulting, Inc. ("ENSI"), an auto supply parts company listed by the Debtors on Schedule B - Personal Property as owned one hundred percent by Ms. Brizinova. The Trustee also alleges that the estate is entitled to recover damages under Bankruptcy Code Sections 362(a) and 362(k) for violations of the automatic stay arising from the Defendants' post-petition transfer of some or all of their interest in ENSI. And the Trustee alleges that the Defendants willfully and knowingly converted estate property, damaging the estate in the amount of $250,000, and seeks an award of punitive damages in an amount to be determined by this Court.
This is the Defendants' second attempt to obtain an order dismissing the Complaint. In Brizinova I , this Court denied the Defendants' motion to dismiss (the "Motion to Dismiss"), and sustained the Trustee's turnover and stay violation claims. Brizinova I , 554 B.R. at 88. The Court also denied in part the Motion to Dismiss with respect to the Trustee's conversion claim, to the extent that he sought to recover the Defendants' ownership interest in ENSI. But the Court dismissed the conversion claim with respect to conversion of the Post-Petition Sale Proceeds, on grounds that the Trustee did "not adequately allege[ ] that the Defendants converted specifically identifiable funds." Brizinova I , 554 B.R. at 87. The Court granted leave to replead, but the Trustee did not do so.
Thereafter, the Trustee commenced an adversary proceeding by filing a complaint against Zlata Soshkin, aka Zlata Polukhina, the Defendants' daughter-in-law, (the "Soshkin Complaint") seeking to recover the Post-Petition Sale Proceeds (the "Soshkin Adversary"). Geltzer v. Soshkin (In re Brizinova) , Adv. Pro. No. 17-01157, ECF No. 1. There too, the Trustee asserted claims for turnover, stay violations, and conversion of the Post-Petition Sale Proceeds. Ms. Soshkin moved to dismiss the Soshkin Complaint, and argued, for the first time, that the property at issue is property of another entity, not property of the estate, and on July 20, 2018, the Court entered an order dismissing the Soshkin Complaint, and granting the Trustee leave to replead. In re Brizinova , Adv. Pro. No. 17-01157, ECF No. 20 (the "Soshkin Decision").
Now, asserting these new grounds, the Defendants again seek to dismiss the Complaint in this adversary proceeding. They move for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), made applicable here by Federal Rule of Bankruptcy Procedure 7012, and for the entry of an order dismissing the Complaint for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(h), also made applicable here by Federal Rule of Bankruptcy Procedure 7012.
The questions posed by this motion are whether this Court has subject matter jurisdiction over the Complaint, and if so, whether the Defendants are entitled to judgment on the pleadings on the claims for turnover of property of the estate, violations of the automatic stay, and conversion of estate property.
For the reasons set forth below, the Defendants' motion is granted.
Background
Procedural History
As noted, this is the second time that the Court has been asked to adjudicate a dispositive motion by the Defendants in *451this adversary proceeding, and familiarity with the proceedings is assumed.
A brief background narrative sets the scene. The Defendants are husband and wife who filed this joint bankruptcy petition on April 24, 2012. The Trustee was appointed on that date. On Schedule B, the Defendants indicate that as of the petition date, Ms. Brizinova held one hundred percent of the stock of ENSI, a New York corporation. According to Schedule B, the value of Ms. Brizinova's interest in the ENSI shares as of the petition date was zero. The Defendants' Statement of Financial Affairs states that ENSI was a business "in which the debtor owned 5 percent or more of the voting or equity securities within six years immediately preceding the commencement of this case." Petition at 37, ECF No. 1 (Statement of Financial Affairs). On Schedule I - Current Income of Individual Debtor(s), the Defendants indicate that Mr. Soshkin was employed by ENSI as a bookkeeper and customer service representative, and had been so employed for the past ten years. Also on Schedule I, the Defendants indicate that Ms. Brizinova was a packer for ENSI, and had similarly held that position for ten years. On the Statement of Financial Affairs, the Defendants indicate that between 2010 and 2012, they together received income from ENSI's operations in the total amount of $19,620. The Defendants received a discharge more than six years ago, on July 24, 2012.
On March 13, 2014, the Trustee commenced an adversary proceeding against Nick Soshkin and Igor Soshkin, the Defendants' sons, seeking to recover allegedly fraudulent transfers by the Defendants to their sons of certain interests in real and personal property located in Florida. The parties resolved the Trustee's claims by entering into a stipulation of settlement, which was approved by this Court on December 12, 2014. This action followed some six months later.
The Allegations of the Complaint
On June 23, 2015, more than three years after the petition date, the Trustee commenced this adversary proceeding. The Trustee alleges that prior to the petition date, Ms. Brizinova held a one hundred percent ownership interest in ENSI which, as the Defendants testified at the Section 341 meeting of creditors, was in the business of selling auto parts over the internet. According to the Trustee, subsequent to the petition date, the Defendants continued to operate ENSI on at least two websites, autoaccessorystore.com and mimousa.com , and generated the Post-Petition Sale Proceeds from the operation of those websites. The Trustee alleges that those Post-Petition Sale Proceeds are property of the Defendants' estate, and that despite his demands, the Defendants have not turned them over to the Trustee.
In his First Claim for Relief, asserted under Bankruptcy Code Section 542, the Trustee alleges that the Post-Petition Sale Proceeds are estate property that the Defendants have failed to turn over notwithstanding his demand. He seeks an order directing the Defendants to turn over the Post-Petition Sale Proceeds, in an amount to be proven at trial, which the Trustee estimates to be at least $250,000, plus interest.
In his Second Claim for Relief, asserted under Bankruptcy Code Sections 362(a) and 362(k), the Trustee alleges, upon information and belief, that despite the Defendants' knowledge that the bankruptcy estate had become the owner of their interest in ENSI, they transferred to one or more unnamed third parties some or all of their interest in ENSI, together with some or all of the Post-Petition Sale Proceeds, after the petition date. The Trustee further alleges that the Defendants took *452these actions willfully and "with their full knowledge" that their actions violated the automatic stay. Compl. ¶ 20, ECF No. 1. The Trustee seeks a declaratory judgment that the Defendants violated the automatic stay; an order enforcing the stay and enjoining the Defendants from making further transfers of the estate's interest in ENSI, including the Post-Petition Sale Proceeds; and damages under Bankruptcy Code Section 362(k) in an estimated amount of $250,000, plus interest and punitive damages.
In his Third Claim for Relief, asserted under the common law doctrine of conversion, the Trustee alleges, upon information and belief, that as a result of the Defendants' actions, they "willfully, knowingly, and wrongly" converted property belonging to the Defendants' estate, "namely the estate's 100% interest in ENSI and in the ... Post-Petition Sale Proceeds, to the exclusion and detriment of the Trustee, and have therefore improperly exercised dominion and control over such property." Compl. ¶ 23. The Trustee seeks damages in an amount to be determined at trial, in an estimated amount of $250,000, plus interest, and punitive damages.
This Motion for Judgment
On May 30, 2018, the Defendants filed a motion for judgment on the pleadings dismissing this adversary proceeding (the "Motion for Judgment"). As Ms. Soshkin argued in her motion to dismiss the Soshkin Complaint, the Defendants argue here that the corporate assets of ENSI are not assets of the Debtors and do not form any part of the estate, but belong to ENSI, an independent corporation that is not a debtor. The Defendants argue that, although they did not raise this defense in the Motion to Dismiss, they are permitted by Federal Rule of Civil Procedure 12(c) to assert it now. The Defendants argue that " 'a defense of failure to state a claim may be raised in a Rule 12(c) motion for judgment on the pleadings, and when this occurs the court simply treats the motion as if it were a motion to dismiss.' " Mot. for Judg. at 1, ECF No. 103-1 (quoting Nat'l Ass'n of Pharm. Mfrs., Inc. v. Ayerst Labs. , 850 F.2d 904, 909 n.2 (2d Cir. 1988) ). The Defendants also argue that the law of the case doctrine is inapplicable here, because the denial of the motion to dismiss in Brizinova I is an "interim, or tentative ruling[ ]," and as such "do[es] not establish a law of the case." Reply at 4, ECF No. 116.
The Defendants also argue that the Court lacks subject matter jurisdiction over the Complaint, that there is no bankruptcy jurisdiction over non-debtor ENSI, and that the Trustee lacks standing to recover the Post-Petition Sale Proceeds, because the property of ENSI does not belong to the estate. And the Defendants note that " Rule 12(h)(3) allows a Rule 12(b)(1) motion to be raised 'at any time' in the litigation." Reply at 7 (citation omitted). According to the Defendants, "[t]here is no actual controversy here [because] there is no estate asset involved," so "there is no jurisdiction." Reply at 9. The Defendants assert that "[s]ince the alleged sale proceeds happen[ ] to be that of a third party and not a debtor ... [t]he court [lacks] subject matter jurisdiction." Reply at 6. And "parties ... may not waive objections to subject matter jurisdiction by consenting to federal jurisdiction where it does not in fact exist." Id.
Separately, the Defendants argue that "[t]he plaintiff disavowed the entire case" when he filed the Soshkin Complaint. Mot. for Judg. at 6. The Defendants assert that the Trustee has "in the most unequivocal ways, disavowed [his] claims against the defendants by instituting the second complaint against the defendants' daughter in law." Mot. for Judg. at 8. They assert that *453"tossing the blame, from one party to the other, is a classic example of judicial estoppel," and that it is time to "hold the trustee accountable to his acts and stances" by invoking that doctrine " 'to protect the judicial system from being whipsawed with inconsistent arguments.' " Mot. for Judg. at 7 (citation omitted).
The Trustee's Opposition
The Trustee opposes the Motion for Judgment. He responds that the Defendants did not argue in the Motion to Dismiss that the Post-Petition Sale Proceeds were not property of the estate, and that "[m]ore importantly, this Court made holdings in [ Brizinova I ] that the Trustee had adequately alleged that such proceeds were property of the bankruptcy estate - holdings which constitute the law of this adversary proceeding." Opp. Mem. at 2, ECF No. 111. And the Trustee argues that in addition, "pertinent case law ... clearly demonstrates that the [Post-Petition Sale Proceeds] constitute property of the Debtors' bankruptcy estate." Opp. Mem. at 3.
In addition, the Trustee asserts that this Court has subject matter jurisdiction over this adversary proceeding because in Brizinova I , "this Court explicitly held that it had jurisdiction over the Trustee's claims for turnover, conversion, and violation of the automatic stay." Opp. Mem. at 8. And the Trustee asserts that the Defendants' jurisdictional argument is based on the "clearly erroneous assertion" that the Post-Petition Sale Proceeds are not property of the estate. Opp. Mem. at 8.
The Supplemental Briefing
On July 30, 2018, the Court held a preliminary hearing on the Motion for Judgment, and set August 10, 2018, as the date by when the Defendants "may file a supplementary memorandum of law," and August 24, 2018, as the date by when "the Plaintiff may file a supplementary memorandum of law." Scheduling Order, ECF No. 118.
On August 9, 2018, the Defendants filed a supplemental brief titled "Amended Motion for Summary Judgment" (the "Supplemental Memorandum"). Like the Motion for Judgment, it seeks an order dismissing this Complaint. Supp. Mem., ECF No. 121. Thereafter, on August 22, 2018, the Plaintiff filed a supplemental memorandum of law in opposition, ECF No. 122, and on August 23, 2018, the Defendants filed a reply, ECF No. 123.
In the Supplemental Memorandum, the Defendants supplement the record with legal authority and argument in support of the Motion for Judgment. But they also attempt to request additional relief, and submit an "Affirmation in Support of Summary Judgment." Supp. Mem. at 1, ECF No. 121-1. There, for the first time, the Defendants seek summary judgment dismissing the Complaint, on grounds that there are no genuine issues of material fact and that the Defendants are entitled to judgment as a matter of law.
The Trustee opposes the additional relief sought in the Supplemental Memorandum, on grounds, among others, that the Defendants are precluded from seeking such relief after the expiration of the Court's May 16, 2018 deadline. The Trustee also argues that even if the Defendants could seek summary judgment at this stage in these proceedings, "their supplemental papers fall woefully short of what is required for such a motion," because they are not supported by a separate statement of undisputed material facts as required by the Local Bankruptcy Rules for this District, or evidence in the form of an affirmation or affidavit. Pl's Supp. Mem. at 3-4.
The opportunity to submit supplemental briefing permitted the parties to augment their legal arguments with respect to the Motion for Judgment, particularly in light *454of the Court's Soshkin Decision. It did not permit the parties to expand their request for relief. The Defendants elected to seek dismissal of the Complaint pursuant to Rules 12(c) and 12(h), the parties availed themselves of opportunities to brief the issues raised by the Motion for Judgment, and the deadline to seek summary judgment has passed.
For these reasons, the Court declines to deem the Defendants' Supplemental Memorandum as a motion for summary judgment.
The Hearings
On July 30, 2018 and September 17, 2018, Court held pretrial conferences and heard argument on the Motion for Judgment at which the Trustee and the Defendants, each by counsel, appeared and were heard. At the September 17, 2018 hearing, the parties waived further argument, and the Court closed the record and reserved decision
Discussion
Jurisdiction
The Defendants assert that the Court lacks subject matter jurisdiction to determine this dispute because "ENSI has not filed for bankruptcy." Mot. for Judg. at 5. They also assert that the Trustee "lacks standing, as the property of [ ] ENSI did not belong to the estate," and so he has not suffered an injury. Id. The Defendants argue that as a result, there is no " 'case or controversy' between himself and the defendants within the meaning of Art. III." Mot. for Judg. at 6 (quoting Warth v. Seldin , 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) ). And although the Trustee consents to the entry of a final order by this Court, the Defendants do not.
The Trustee responds that this Court has jurisdiction to determine this dispute, based on the holding in Brizinova I , applicable statutory law, and the law of the case doctrine.
As a unit of the United States District Court for the Eastern District of New York, this Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E). And as a core matter, this Court has constitutional authority to enter a final judgment, because the Trustee's claims stem "from the bankruptcy itself." Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
And a Chapter 7 trustee has standing to assert claims for turnover, stay violations, and conversion, because Bankruptcy Code Section 704 imposes duties on a trustee "to collect and reduce to money the property of the estate" and to "investigate the financial affairs of the debtor," among others. 11 U.S.C. § 704(a). This statutory imperative gives a Chapter 7 trustee standing to pursue claims for the benefit of the estate, and satisfies the requirement that to have standing, "a plaintiff must have more than 'a general interest common to all members of the public.' " Lance v. Coffman , 549 U.S. 437, 440, 127 S.Ct. 1194, 167 L.Ed.2d 29 (2007) (quoting Ex parte Levitt , 302 U.S. 633, 634, 58 S.Ct. 1, 82 L.Ed. 493 (1937) ).
For these reasons, this Court has jurisdiction and the authority to consider and enter judgment on these claims under 28 U.S.C. § 1334(b) and the Standing Order of Reference dated August 28, 1986, as amended by Order dated December 5, 2012, of the United States District Court for the Eastern District of New York.
The Law of the Case
The Court considers the Trustee's argument that based on the decision in Brizinova I and the law of the case doctrine, the Court must conclude that the Trustee's *455claims for turnover and conversion of estate property are adequately pleaded, and that the Motion for Judgment must be denied.
The law of the case doctrine " 'does not rigidly bind a court to its former decisions, but is only addressed to its good sense.' " Zdanok v. Glidden Co. , 327 F.2d 944, 952-53 (2d Cir. 1964) (quoting Higgins v. California Prune & Apricot Grower, Inc. , 3 F.2d 896, 898 (2d Cir. 1924) (L. Hand, J.) ). As the Supreme Court has observed, "[t]he doctrine 'expresses the practice of courts generally to refuse to reopen what has been decided,' but it does not 'limit [courts'] power.' " Musacchio v. United States , --- U.S. ----, 136 S.Ct. 709, 716, 193 L.Ed.2d 639 (2016) (quoting Messenger v. Anderson , 225 U.S. 436, 444, 32 S.Ct. 739, 56 L.Ed. 1152 (1912) ).
The Second Circuit recently noted "that [the doctrine of law of the case] is not a rule that bars courts from reconsidering prior rulings, but is rather 'a discretionary rule of practice [that] generally does not limit a court's power to reconsider an issue.' " Colvin v. Keen , 900 F.3d 63, 68 (2d Cir. 2018) (quoting In re PCH Assocs. , 949 F.2d 585, 592 (2d Cir. 1991) ). The Second Circuit also noted that "when a court ... faces the question whether to depart from its own prior ruling, the court has wide discretion to make whichever decision it thinks preferable." Keen , 900 F.3d at 73.
The law of the case doctrine is discretionary in nature, and pragmatic in application. And as one authority explains, "the law of the case doctrine expresses the general rule that courts will not reopen issues that have already been decided." 18 J. Moore, J. Lucas, T. Currier, Moore's Federal Practice - Civil , § 134.21[1] (2018). To similar effect, "although a court has the power to revisit its own decisions ... it should not do so absent extraordinary circumstances showing that the prior decision was clearly wrong and would work a manifest injustice. These principles must be applied with common sense." Id.
A range of circumstances have been cited by courts seeking to determine whether to apply the law of the case doctrine. Two considerations stand out as fundamental: whether there is identity of parties between the prior and subsequent matters; and whether the prior decision is a final one.
As to the question of identity of the parties, courts consistently find that this is necessary for the doctrine to apply. As one court has explained:
The "law of the case" doctrine is that a decision at one stage of a litigation can in the Court's discretion be determined to be binding precedent in following stages of the same litigation or to different lawsuits between the parties . See In re PCH Associates , 949 F.2d 585, 592 (2d Cir. 1991). However, the law of the case doctrine is inapplicable to the instant action. This is not the same litigation or a different litigation between the same parties.
Ackerman v. Schultz (In re Schultz) , 250 B.R. 22, 29 (Bankr. E.D.N.Y. 2000).
As to the question of entry of a final order, the Supreme Court long ago noted that "[w]e think that [the law of the case doctrine] requires a final judgment to sustain the application of the rule ... just as it does for the kindred rule of res judicata." United States v. U.S. Smelting Co. , 339 U.S. 186, 198-99, 70 S.Ct. 537, 94 L.Ed. 750 (1950). For these reasons, courts have declined to apply the doctrine when the prior order denied a motion to dismiss and "refus[ed] to grant summary judgment." GAF Corp. v. Circle Floor Co. , 329 F.Supp. 823, 826-27 (S.D.N.Y. 1971). As one court *456explained, "the deni[al of a] motion to dismiss ... by definition is not a final order. The decision allowed the case to continue to trial - it was not a final order ending the case." Datiz v. Int'l Recovery Assocs. , 2017 WL 59085, at *2, 2017 U.S. Dist. LEXIS 2477 at *5 (E.D.N.Y. Jan. 4, 2017).
Here, it is plain from these considerations that Brizinova I does not supply the law of the case for this adversary proceeding. Although there is identity of parties here, there is no final judgment, because the decision in Brizinova I determined the Debtors' Motion to Dismiss by granting leave to replead with respect to one claim, and denying it in all other respects. As previously noted, "the deni[al of a] motion to dismiss ... by definition is not a final order" because "[t]he decision allowed the case to continue to trial - it was not a final order ending the case." Datiz , 2017 WL 59085, at *2, 2017 U.S. Dist. LEXIS 2477, at *5. That is, the Court's decision in Brizinova I did not end the case, but rather "allowed the case to continue to trial," or, as here, to further dispositive motion practice.
For these reasons, neither the decision in Brizinova I nor the law of the case doctrine requires the conclusion that the Motion for Judgment must be denied.
Judicial Estoppel
Judicial estoppel is an equitable doctrine which "prevents a party from asserting a factual position in one legal proceeding that is contrary to a position that it successfully advanced in another proceeding." Rodal v. Anesthesia Grp. of Onondaga, P.C. , 369 F.3d 113, 118 (2d Cir. 2004) (internal citation omitted). As the Supreme Court has stated:
Where a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.
New Hampshire v. Maine , 532 U.S. 742, 749, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (internal citation omitted). The Supreme Court concluded that "[a]bsent success in a prior proceeding, a party's later inconsistent position introduces no risk of inconsistent court determinations, and thus poses little threat to judicial integrity." New Hampshire v. Maine , 532 U.S. at 750-51, 121 S.Ct. 1808 (internal quotation and citation omitted).
The Second Circuit has stated that "judicial estoppel, unlike other equitable doctrines, is concerned with 'the integrity of the judicial process ... [as opposed to] fairness between the parties.' " Adelphia Recovery Trust v. HSBC Bank USA, NA (In re Adelphia Recovery Trust) , 634 F.3d 678, 698 (2d Cir. 2011) (quoting OSRecovery, Inc. v. One Groupe Intl., Inc. , 462 F.3d 87, 93 n.3 (2d Cir. 2006) ). But "judicial estoppel is not a mechanical rule ... [because] '[e]quity eschews mechanical rules.' " Clark v. All Acquisition, LLC , 886 F.3d 261, 266 (2d Cir. 2018) (quoting Holmberg v. Armbrecht , 327 U.S. 392, 396, 66 S.Ct. 582, 90 L.Ed. 743 (1946) ). As the Second Circuit observed, "[w]hile the doctrine functions generally to bar litigants from taking inconsistent positions in successive suits, 'the exact criteria for invoking judicial estoppel will vary based on specific factual contexts.' " Clark , 886 F.3d at 265 (2d Cir. 2018) (quoting Adelphia Recovery Trust v. Goldman, Sachs & Co. , 748 F.3d 110, 116 (2d Cir. 2014) ).
The Second Circuit has also stated that "[a] party invoking judicial estoppel must show that (1) the party against whom the estoppel is asserted took an inconsistent position in a prior proceeding and (2) that position was adopted by *457the first tribunal in some manner, such as by rendering a favorable judgment." Robinson v. Concentra Health Servs., Inc. , 781 F.3d 42, 45 (2d Cir. 2015) (internal quotation marks and citation omitted). As the court explained, "in considering whether to apply judicial estoppel a court must focus on the conduct of the party to be estopped, not the party seeking estoppel.... [I]t is unfair advantage to the potentially prejudiced party's adversary that is the touchstone of the doctrine." In re Adelphia , 634 F.3d at 698-99. And because it is a harsh remedy, "[b]efore judicially estopping a litigant, a court must inquire into whether the particular factual circumstances of a case 'tip the balance of equities in favor of' " applying that doctrine. Clark , 886 F.3d at 266-67 (quoting New Hampshire v. Maine , 532 U.S. at 751, 121 S.Ct. 1808 ).
The Defendants urge this Court to apply the judicial estoppel doctrine to bar the Trustee's claims and dismiss the Complaint, on grounds, in substance, that when he commenced the Soshkin Adversary to recover the Post-Petition Sale Proceeds from Ms. Soshkin, the Trustee "disavowed" his claims to recover the same property from the Defendants. Mot. for Judg. at 8. They argue that the Trustee "shifted gears" when he commenced the Soshkin Adversary, "blaming [Ms. Soshkin] for the same act" that he attributes to the Defendants, and "indirectly reject[ed his] earlier claims against the defendants." Mot. for Judg. at 7. They also argue that "there are no material disputed facts here," and that two "lawsuit[s] complaining of the same conduct" effectively "toss[ ] the blame from one party to the other," presenting "a classic example of judicial estoppel." Mot. for Judg. at 6-7.
Here, the record shows that the Trustee has commenced two adversary proceedings by filing complaints to recover the Post-Petition Sale Proceeds, this action and the Soshkin Adversary. The two complaints contain similar allegations, and seek to recover the same asset - the Post-Petition Sale Proceeds - from different defendants.1 But at this stage in these proceedings, the Defendants have not shown that the Trustee's allegations give him an "unfair advantage" that triggers the application of the judicial estoppel doctrine.
Similarly, the Defendants have not shown that this Court rendered a judgment favorable to the Trustee that created an unfair advantage for him, because although the Trustee's claims were largely sustained in Brizinova I , the Court did not determine the merits of the claims, and did not render a judgment favorable to the Trustee, the party sought to be estopped. Certainly the Trustee "may not ultimately recover under both [legal theories,]" but for these reasons too, dismissal at the pleadings stage is not warranted here based on the judicial estoppel doctrine. Transcience Corp. v. Big Time Toys, LLC , 50 F.Supp.3d 441, 452 (S.D.N.Y. 2014).
Turning to the adequacy of the Trustee's claims on this motion for judgment on the pleadings, the Court must assess the Trustee's claims according to the framework provided by Federal Rules of Civil Procedure 8(a), 12(c), and 12(h), made applicable here by Bankruptcy Rules 7008 and 7012. These rules set forth the standards applicable to stating a claim for relief.
Pleading Requirements Under Federal Rule of Civil Procedure 8(a)
As this Court has noted, Federal Rule of Civil Procedure 8(a) requires that *458a pleading contain " 'a short and plain statement of the claim showing that the pleader is entitled to relief.' " In re Brizinova , 554 B.R. at 74 (quoting Fed. R. Civ. P. 8(a)(2) ). In Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), the Supreme Court stated that under this rule, "a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly , 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).
Thereafter, in Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), the Supreme Court set forth a two-step approach for courts to follow when deciding a motion to dismiss. First, a court should "identify[ ] pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. "While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Id. Thus, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ).
Second, "[w]hen 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." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ). "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of 'entitlement to relief.' " Id. (quoting Twombly , 550 U.S. at 557, 127 S.Ct. 1955 ).
Pleading Requirements Under Federal Rule of Civil Procedure 12(c)
Pursuant to Federal Rule of Civil Procedure 12(h), "a defense of failure to state a claim may be raised in a Rule 12(c) motion for judgment on the pleadings, and when this occurs the court simply treats the motion as if it were a motion to dismiss." Ayerst Labs. , 850 F.2d at 909 n.2. Rule 12(c) permits a party to seek dismissal of a claim "[a]fter the pleadings are closed - but early enough not to delay trial," by moving for judgment on the pleadings. Fed. R. Civ. P. 12(c).
The Second Circuit has stated that "[t]he standard for addressing a Rule 12(c) motion for judgment on the pleadings is the same as that for a Rule 12(b)(6) motion to dismiss for failure to state a claim.... In each case, the court must accept as true the complaint's factual allegations and draw all inferences in the plaintiff's favor." Cleveland v. Caplaw Enters. , 448 F.3d 518, 521 (2d Cir. 2006) (internal quotations and citations omitted). See Schwab v. Smalls , 435 F. App'x 37, 39 (2d Cir. 2011) (applying the Iqbal standard to a Rule 12(c) motion because the standard for deciding a motion for judgment on the pleadings is the same as for deciding a motion to dismiss under Rule 12(b)(6) ). In addition, "[o]n a [ Rule] 12(c) motion, the court considers 'the complaint, the answer, any written documents attached to them, and any matter of which the court can take judicial notice for the factual background of the case.' " L-7 Designs, Inc. v. Old Navy, LLC , 647 F.3d 419, 422 (2d Cir. 2011) (quoting Roberts v. Babkiewicz , 582 F.3d 418, 419 (2d Cir. 2009) ).
*459The primary distinction between motions made under Rule 12(b)(6) and Rule 12(c) is one of timing. As one respected treatise explains:
If the motion is filed before the answer, the court may treat it as a motion to dismiss under Rule 12(b)(6). Conversely, a motion to dismiss filed after the pleadings close will be treated as a motion for judgment on the pleadings. In fact, any distinction between [a Rule 12(b)(6) motion and a Rule 12(c) motion] is purely semantic because the same standard applies to motions made under either subsection.
2 Moore's Federal Practice at § 12.38.
Applying the standard articulated by the Supreme Court in Twombly , to survive a motion to dismiss under Rule 12(b)(6) or Rule 12(c), a complaint must allege "enough facts to state a claim to relief that is plausible on its face." Twombly , 550 U.S. at 570, 127 S.Ct. 1955. As the Supreme Court explained, "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly , 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).
When considering a motion to dismiss under either Rule 12(b)(6) or Rule 12(c), a court should accept " 'all [well-pleaded] factual allegations as true and draw[ ] all reasonable inferences in the plaintiff's favor.' " DiFolco v. MSNBC Cable, L.L.C. , 622 F.3d 104, 110-11 (2d Cir. 2010) (quoting Shomo v. City of New York , 579 F.3d 176, 183 (2d Cir. 2009) ). A court is not required to accept as true those allegations that amount to no more than legal conclusions. Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ; Twombly , 550 U.S. at 555, 127 S.Ct. 1955.
Property of the Estate and Proceeds Under the Bankruptcy Code
Bankruptcy Code Section 541(a) provides that the bankruptcy estate consists of "[a]ll legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). Bankruptcy Code Section 541(a)(6) further states that property of the estate includes the "[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor." 11 U.S.C. § 541(a)(6).
The definition of property of the estate is interpreted broadly, and " 'every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of [ Section] 541.' " Chartschlaa v. Nationwide Mut. Ins. Co. , 538 F.3d 116, 122 (2d Cir. 2008) (quoting In re Yonikus , 996 F.2d 866, 869 (7th Cir. 1993) ). And "[t]he broad definition of property of the estate clearly encompasses a debtor's interest in another corporation's stock." In re Arcapita Bank B.S.C.(c) , 2014 WL 2109931, at *2 (Bankr. S.D.N.Y. May 20, 2014) (citation omitted). But the Bankruptcy Code does not define "proceeds," few courts have addressed the question in reported decisions, and some of those that have define "proceeds" simply by using the term itself.
"Proceeds" of estate property are also property of the estate. As the Collier treatise notes, "if the estate sells ... inventory or other property, the revenue will become property of the estate as 'proceeds, product, offspring, rent, or profits of or from property of the estate,' as provided under section 541(a)(6)." 5 Collier on Bankruptcy ¶ 541.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2018). That is, "revenue" from the sale of estate property is also estate property. This makes sense, because the change in an asset's form from one type, such as real estate or shares of a corporation, to another, such as cash, should not lead to a *460change in whether it is a part of a debtor's bankruptcy estate.
To this effect, courts have found proceeds to include " 'whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds,' " including a right to payment under a contract entered into before the bankruptcy case was filed. In re Saxton , 1988 WL 1571475, at *2 (Bankr. D. Iowa 1988) (quoting Iowa Code § 554.9306(a) ). There, the bankruptcy court concluded that payments owed under a contract entered into pre-petition were proceeds because they were received as part of the contract. In re Saxton , 1988 WL 1571475, at *2.
Other courts have found proceeds to include:
• residual commissions earned pre-petition but paid post-petition, see In re Bosack , 454 B.R. 625 (Bankr. W.D. Pa. 2011) ;
• proceeds from the post-petition sale of the debtor's real property, see In re Steel Wheels Transp., LLC , 2011 WL 5900958 (Bankr. D.N.J. Oct. 28, 2011) ;
• stock options not exercisable until post-petition, see In re Michener , 342 B.R. 428, 429 (Bankr. D. Del. 2006), and In re Taronji , 174 B.R. 964, 967 (Bankr. N.D. Ill. 1994) ; and
• life insurance policy proceeds where the insured dies after the bankruptcy case is filed, see In re No. 1 Con-Struct Corp. , 88 B.R. 452, 453 (Bankr. S.D. Fla. 1988).
Whether the Defendants Are Entitled to Judgment on the Trustee's Claim for Turnover Under Bankruptcy Code Section 542(a)
The Trustee's First Claim for Relief is for turnover of property under Bankruptcy Code Section 542(a). By this claim, the Trustee seeks to recover the Post-Petition Sale Proceeds from the Defendants. Section 542(a) provides:
[A]n entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
11 U.S.C. § 542(a). As noted above, "a defense of failure to state a claim may be raised in a Rule 12(c) motion for judgment on the pleadings, and when this occurs the court simply treats the motion as if it were a motion to dismiss." Ayerst Labs. , 850 F.2d at 909 n.2.
The Trustee must allege three elements to state a claim under Section 542(a). These are: " '(1) the property is in the possession, custody or control of another entity; (2) the property can be used in accordance with the provisions of section 363; and (3) the property has more than inconsequential value to the debtor's estate.' " Kramer v. Mahia (In re Khan) , 2014 WL 4956676, at *22 (Bankr. E.D.N.Y. Sept. 30, 2014) (quoting Zazzali v. Minert (In re DBSI, Inc. ), 468 B.R. 663, 669 (Bankr. D. Del. 2011) ). The Court considers each of these elements in turn.
Whether the Trustee Adequately Alleges that the Property at Issue Is in the Possession, Custody or Control of Another Entity
The first element that the Trustee must allege to state a Section 542(a) claim is that the property at issue is in the possession, custody or control of another entity.
*461The Defendants argue, in substance, that the Trustee does not - and cannot - adequately allege this element of his turnover claim because the property at issue is not property of the estate. They do not dispute the Trustee's allegations that the bankruptcy estate owns a one hundred percent interest in the ENSI shares. But the Defendants argue that the Trustee's assertions are "flawed" because "[t]he corporate assets of ENSI ... are not the asset of the debtors, but belong to an independent company, thus do not form any part[ ] of the estate." Mot. for Judg. at 1.
The Trustee responds that in Brizinova I , "this Court made holdings ... that the Trustee had adequately alleged that such proceeds were property of the bankruptcy estate," and that "these holdings ... on this issue constitute the law of this adversary proceeding." Opp. Mem. at 3. In addition, the Trustee responds that under applicable law, the Post-Petition Sale Proceeds "constitute property of the Debtor's bankruptcy estate." Id.
Here, a review of the Complaint shows that the Trustee alleges, among other things, that "the bankruptcy estate [is] the rightful owner of the 100% interest in ENSI since the Petition Date, and that the sale proceeds derived from ENSI's post-Petition Date business operations ... constitute property of the Debtors' estate, [and] none of the Post-Petition Sale Proceeds have ever been turned over to the Trustee by the Defendants." Compl. ¶ 13. That is, the Trustee alleges that the property at issue - the Post-Petition Sale Proceeds generated from ENSI - is in the possession, custody, or control of the Defendants.
For these reasons, and based on the entire record, the Court concludes that Trustee adequately alleges the first element of a claim under Section 542 for turnover, that the property at issue is in the possession, custody or control of another entity, because he alleges that the Post-Petition Sale Proceeds are in the possession of the Defendants.
Whether the Trustee Adequately Alleges that the Property at Issue Is Property that He May Use, Sell, or Lease
The second element that the Trustee must allege to state a Section 542(a) claim is that the property at issue is property that the Trustee may use, sell, or lease under Bankruptcy Code Section 363. Such property is defined broadly by Section 541 and includes "all legal or equitable interests of the debtor in property as of the commencement of the case" as well as "[p]roceeds, product, offspring, rents, or profits of or from property of the estate." 11 U.S.C. § 541(a)(1), (a)(6). And as this Court has found, this element is adequately pleaded where the plaintiff seeks the turnover of property of the estate that can be put to use in connection with the administration of the estate , including paying the claims of creditors and the costs of administration of the estate. In re Brizinova , 554 B.R. at 77.
The Defendants argue in substance that "the debtors' estate did not comprise the assets of the corporate entity," and thus the Post-Petition Sale Proceeds are not property of the estate that the Trustee may use, sell, or lease. Mot. for Judg. at 2.
The Trustee responds that the Post-Petition Sale Proceeds are property of the Debtors' estate, and points to this Court's holdings in Brizinova I as support for this view.
As noted above, and as this Court stated in the Soshkin Decision, Bankruptcy Code Section 541 provides the framework to determine whether property is "property of the estate." With these concepts in mind, whether the second element of the Trustee's *462claim is adequately alleged turns on whether proceeds from the sale of ENSI assets - the Post-Petition Sale Proceeds - are "proceeds" of property of the estate as contemplated by Section 541(a)(6).
It is beyond doubt that where a debtor owns the shares of a corporation, a sale of those shares for cash or other consideration results in "proceeds." In such a transaction, all that has occurred is that property of the estate has changed from one form - shares of stock - to another form - cash or other consideration. But the parties have not cited, and the Court has not found, controlling or persuasive authority to support the Trustee's assertion that in these circumstances, the proceeds of a sale of a non-debtor corporation's assets should be afforded the same treatment as the proceeds of a sale of its shares .
This is consistent with principles that are long and well established. Courts in New York recognize that there is a difference between ownership of a corporation's shares and ownership of its assets. Long ago, the New York Court of Appeals observed:
[T]he corporation in respect of corporate property and rights is entirely distinct from the stockholders who are the ultimate or equitable owners of its assets ... even complete ownership of capital stock does not operate to transfer the title to corporate property and ... ownership of capital stock is by no means identical with or equivalent to ownership of corporate property.
Brock v. Poor , 216 N.Y. 387, 401, 111 N.E. 229 (1915).
To similar effect, the Second Circuit found that under New York law, "shareholders do not hold legal title to any of the corporation's assets. Instead, the corporation - the entity itself - is vested with the title." U.S. v. Wallach , 935 F.2d 445, 462 (2d Cir. 1991) (citing 5A Fletcher Cyclopedia of the Law of Private Corps. § 2213, at 323 (Perm. ed. 1990) ).
And as Chief Judge Craig noted:
A corporation has a separate identity from its owners and, therefore, assets held by corporate entities are not property of an individual shareholder's bankruptcy estate ... Rather, the ownership interest is property of the shareholder's bankruptcy estate.
Pereira v. Dieffenbacher (In re Dieffenbacher) , 556 B.R. 79, 85 (Bankr. E.D.N.Y. 2016) (quotation and internal citation omitted).
Applying these principles here, Debtor Brizinova's ownership of ENSI's shares does not give her legal title to, or an ownership interest in, ENSI's assets , because ENSI has legal title to, and owns, those assets. And if she does not have a "legal or equitable interest[ ]" in ENSI's assets, then they are not property of her estate under Bankruptcy Code Section 541(a), and the Trustee is not entitled to seek their turnover under Bankruptcy Code Sections 542 and 541(a)(6).
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the second element of a claim under Bankruptcy Code Section 542 for turnover of the Post-Petition Sale Proceeds, that the property at issue is property that the Trustee may use under Bankruptcy Code Section 363 as "proceeds of or from property of the estate."
Whether the Trustee Adequately Alleges that the Property at Issue Is of More than Inconsequential Value to the Estate
The third element that the Trustee must allege to state a Section 542(a) claim is that the property at issue is of *463greater than inconsequential value to the Defendants' bankruptcy estate.
The Defendants argue, in substance, that the Post-Petition Sale Proceeds are of inconsequential value to this bankruptcy estate because they are not property of the estate.
The Trustee responds, in substance, that the Post-Petition Sale Proceeds are property of the estate, and alleges in the Complaint that their value is at least $250,000.
There is no single test to determine whether property is of greater than inconsequential value to a debtor's Chapter 7 estate. One method noted by courts is to compare the amount of claims filed in a debtor's bankruptcy case to the value of the property that the trustee seeks to recover. Calvin v. Wells Fargo Bank, N.A. (In re Calvin) , 329 B.R. 589, 598 (Bankr. S.D. Tex. 2005) (concluding that where the value of the property sought to be turned over represented seven percent of all claims, that was "not an insignificant portion" and the property was not of inconsequential value to the estate). Another is to show that "some method of sale holds a reasonable prospect of a meaningful recovery in excess of" the debtor's exemption in the asset. In re Burgio , 441 B.R. 218, 221 (Bankr. W.D.N.Y. 2010).
Here, a review of the Complaint shows that the Trustee alleges, among other things, that the Post-Petition Sale Proceeds are "currently estimated to be not less than $250,000." Compl. ¶ 17. And the claims register shows that some $92,000 in unsecured claims have been filed. That is, the Post-Petition Sale Proceeds that the Trustee seeks to recover would be sufficient to pay all of the filed claims in this case. Under any appropriate measure, the Post-Petition Sale Proceeds are of greater than inconsequential value to the estate.
For these reasons, and based on the entire record, the Court concludes that the Trustee adequately alleges the third element of a claim under Section 542 for turnover of the Post-Petition Sale Proceeds, that the property at issue - if it were property of the estate - has more than inconsequential value to the debtor's estate.
* * *
In sum, the Court has carefully considered each of the arguments advanced by the Defendants with respect to whether the Trustee adequately alleges the First Claim for Relief, for turnover of the Post-Petition Sale Proceeds under Bankruptcy Code Section 542(a). The Court concludes that the Trustee adequately alleges the first element of his claim, that the property is in the possession, custody, or control of another entity. And the Court concludes that the Trustee adequately alleges the third element of his claim, that the Post-Petition Sale Proceeds would have value to the estate.
But the Court concludes that the Trustee does not adequately allege the second element of his turnover claim, because he does not adequately allege that the Post-Petition Sale Proceeds are property of the estate, and the Trustee is entitled to use only such property.
For these reasons, and based on the entire record, the Defendants' Motion for Judgment on the Trustee's First Claim for Relief, for turnover of the Post-Petition Sale Proceeds, is granted.
Whether the Defendants Are Entitled to Judgment on the Trustee's Claim for Violation of the Automatic Stay Under Bankruptcy Code Section 362(a)
The Trustee's Second Claim for Relief seeks a declaratory judgment, an injunction, and actual and punitive damages pursuant *464to Section 362(a), arising from the Defendants' violations of the automatic stay by "transferr[ing] to one or more third parties subsequent to the Petition Date some or all of the interest in ENSI and some or all of the Post-Petition Sale Proceeds." Compl. ¶ 20. Section 362(a) provides that "a [bankruptcy] petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities ... of any act to ... exercise control over property of the estate." 11 U.S.C. § 362(a)(3). Actions in violation of the automatic stay may trigger serious consequences, including an award of "actual damages, including costs and attorneys' fees, and, in appropriate circumstances ... punitive damages." 11 U.S.C. § 362(k). Here again, the Court reviews the claim applying the standards for failure to state a claim. Ayerst Labs. , 850 F.2d at 909 n.2.
The Trustee must allege three elements to state a claim based upon a violation of the automatic stay. These are first, that the automatic stay was in effect at the time of the alleged violation; second, that the property at issue was property of the estate; and third, that the conduct in question constitutes a violation of the automatic stay.
Whether the Trustee Adequately Alleges that the Automatic Stay Was In Effect at the Time of the Alleged Violation
The first element that the Trustee must allege to state a claim based upon a violation of the automatic stay is that the automatic stay was in effect at the time of the alleged violation.
The Defendants argue, in substance, that the Trustee cannot state a plausible claim for violation of the automatic stay because the Post-Petition Sale Proceeds are not property of the estate, but of ENSI. Because ENSI is not a debtor, there was no stay with respect to that entity, and if there is no stay, there can be no violation.
The Trustee responds by referring to this Court's ruling in Brizinova I , sustaining his stay violation claim, and asserts that pursuant to the law of the case doctrine, the Motion for Judgment should be denied.
The starting point for any claim for relief arising from a stay violation is the language of the Bankruptcy Code. Section 362(a) provides that a "petition filed under ... this title ... operates as a stay, applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3).
The automatic stay "is effective immediately upon the filing of the petition ... and any proceedings or actions described in section 362(a)(1) are void and without vitality if they occur after the automatic stay takes effect." Rexnord Holdings, Inc. v. Bidermann , 21 F.3d 522, 527 (2d Cir. 1994) (citing 48th St. Steakhouse, Inc. v. Rockefeller Grp., Inc. (In re 48th St. Steakhouse, Inc. ), 835 F.2d 427, 431 (2d Cir. 1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988) ) (internal citations omitted).
Here, a review of the Complaint shows that the Trustee alleges, among other things, that after the Defendants filed their bankruptcy case - and therefore after the automatic stay was in effect - they continued to operate ENSI, receive proceeds from those operations, and transfer some or all of those proceeds to others. The Complaint states:
[T]he Defendants had knowledge that as of the Petition Date, the Trustee, on behalf of the debtor's bankruptcy estate, had become the owner of Brizinova's 100% interest in ENSI and was entitled *465to a turnover of all Post-Petition Sale Proceeds therefrom, Defendants, upon information and belief, transferred to one or more third parties subsequent to the Petition Date some or all of the interest in ENSI and some or all of the Post-Petition Sale Proceeds.
Compl. ¶ 19. That is, the Trustee alleges that because of the bankruptcy filing, the automatic stay was in effect when the Defendants took steps to exercise control over and transfer the property at issue, in the form of the Post-Petition Sale Proceeds, after they filed their bankruptcy case, when the automatic stay was in effect.
For these reasons, and based on the entire record, the Court concludes that the Trustee adequately alleges the first element of a claim under Section 362 for a stay violation, that the automatic stay was in effect at the time of the alleged violation.
Whether the Trustee Adequately Alleges that the Property at Issue Was Property of the Estate
The second element that the Trustee must allege to state a claim based upon a violation of the automatic stay is that the property at issue was property of the estate.
Here again, the Defendants argue, in substance, that the Trustee cannot state a plausible claim for violation of the automatic stay because this element requires the Trustee to allege that the property at issue - the Post-Petition Sale Proceeds - is property of the estate, and here, ENSI is not a debtor, and its assets are not estate property.
And here again, the Trustee responds, in substance, that he has adequately alleged this claim for many of the same reasons that he has adequately asserted his Section 542(a) turnover claim, that the Court sustained this claim in Brizinova I , and that relevant case law and the law of the case doctrine require this claim again to be sustained.
Here, a review of the Complaint shows that the Trustee alleges, among other things, that after the Defendants filed their bankruptcy case, they continued to operate ENSI, receive proceeds from those operations, and transfer some or all of those proceeds to others. The Complaint states:
Notwithstanding that the Defendants had knowledge that as of the Petition Date, the Trustee, on behalf of the debtor's bankruptcy estate, had become the owner of Brizinova's 100% interest in ENSI and was entitled to a turnover of all Post-Petition Sale Proceeds therefrom, Defendants, upon information and belief, transferred to one or more third parties subsequent to the Petition Date some or all of the interest in ENSI and some or all of the Post-Petition Sale Proceeds.
Compl. ¶ 19. That is, the Trustee alleges that after the petition date, the Defendants transferred "some or all of their interest in ENSI and some or all" of the property at issue - the Post-Petition Sale Proceeds - to a third party or parties, and that the Post-Petition Sale Proceeds come from the operation of ENSI which, in turn, was owned by the Defendants and became estate property upon the filing of the Defendants' bankruptcy case. Id. But as noted above, and as this Court held in Soshkin , the assets of ENSI belong to ENSI, not the Defendants, and are not property of the estate. And because ENSI is not a debtor, the post-petition transfer of ENSI assets did not violate the automatic stay, because it does not apply to ENSI.
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the *466second element of a claim under Section 362 for a stay violation, that the property at issue was property of the estate.
Whether the Trustee Adequately Alleges that the Conduct in Question Violates the Automatic Stay
The third element that the Trustee must allege to state a claim based upon a violation of the automatic stay is that the conduct in question violates the automatic stay.
The Defendants similarly argue, in substance, that the Trustee cannot state a plausible claim for violation of the automatic stay because ENSI is not a debtor.
The Trustee similarly responds, in substance, that he adequately alleges this claim for many of the same reasons that he adequately asserts his Section 542(a) turnover claim, and that the Complaint adequately identifies conduct, including retention and transfers of the Post-Petition Sale Proceeds, that violates the automatic stay.
Here, a review of the Complaint shows that the Trustee alleges, among other things, that after the Defendants filed their bankruptcy case, they continued to operate ENSI, receive proceeds from those operations, and transfer some or all of those proceeds to others. The Complaint states:
[T]he Defendants had knowledge that as of the Petition Date, the Trustee, on behalf of the debtor's bankruptcy estate, had become the owner of Brizinova's 100% interest in ENSI and was entitled to a turnover of all Post-Petition Sale Proceeds therefrom, Defendants, upon information and belief, transferred to one or more third parties subsequent to the Petition Date some or all of the interest in ENSI and some or all of the Post-Petition Sale Proceeds.
Compl. ¶ 19. That is, the Trustee alleges that the Defendants have retained or transferred property that is property of the estate, and as such, that they have exercised control over property of the estate, in violation of Section 362(a)(3). But here too, because ENSI is not a debtor, and because the Trustee does not adequately allege that the Post-Petition Sale Proceeds are "proceeds of or from property of the estate," he does not adequately allege the third element of his claim under Bankruptcy Code Section 362 for a stay violation, that the conduct in question violates the automatic stay, because actions with respect to property that is not property of the estate simply do not violate the automatic stay.
* * *
In sum, the Court has carefully considered each of the arguments advanced by the Defendants with respect to whether the Trustee adequately alleges the Second Claim for Relief, for a declaratory judgment that they violated the automatic stay, an order enforcing the stay and enjoining further transfers of the Post-Petition Sale Proceeds, damages in the amount of at least $250,000, plus interest. The Court concludes that the Trustee adequately alleges the first element of his stay violation claim, that the automatic stay was in effect at the time of the alleged violation. But the Trustee does not adequately allege the second element of this claim, that the property at issue was property of the estate, or the third element of this claim, that the conduct in question violates the automatic stay.
For these reasons, and based on the entire record, the Defendants' Motion for Judgment on the Trustee's Second Claim for Relief, for violations of the automatic stay, is granted.
Whether the Defendants Are Entitled to Judgment on the Trustee's Claim for Conversion
The Trustee's Third Claim for Relief is for conversion of estate property under *467New York common law. By this claim, the Trustee seeks to recover "the estate's 100% interest in ENSI and in the Post-Petition Sale Proceeds" from the Defendants. Compl. ¶ 23.2 And here too, the Court looks to the standards for whether a plausible claim for relief is stated. Ayerst Labs. , 850 F.2d at 909 n. 2.
The Trustee must allege two elements to state a conversion claim under New York law. These are: "first ... legal ownership or an immediate superior right of possession to a specific identifiable thing (i.e., specific money); and, second ... that the defendant exercised unauthorized dominion over the thing in question, to the exclusion of the plaintiff's rights." AMF Inc. v. Algo Distribs., Ltd. , 48 A.D.2d 352, 356-57, 369 N.Y.S.2d 460 (N.Y. App. Div. 2d Dep't 1975) (citation omitted).
Whether the Trustee Adequately Alleges that the Estate Had Title to a Specific Identifiable Thing or a Right to Its Possession
The first element that the Trustee must allege to state a conversion claim is that the estate had legal ownership of, or a right to possess, a specific identifiable thing, here, the Post-Petition Sale Proceeds. This element has two parts: a plaintiff must allege (1) title or a right to possess (2) a specifically identifiable thing.
Here too, the Defendants argue that this element cannot be satisfied with respect to the Post-Petition Sale Proceeds because the proceeds from the sale of ENSI assets are not property of the estate, and so the Trustee cannot allege that he had title or a right to possess them.
And here too, the Trustee responds that based on this Court's holdings in Brizinova I , applicable case law, and the law of the case doctrine, he adequately alleges a claim for conversion of the Post-Petition Sale Proceeds.
It is plain that "in a Chapter 7 bankruptcy, a trustee has the general duties of gathering the estate assets, liquidating them, distributing the proceeds to creditors, and closing the estate." In re Smith , 426 B.R. 435, 440-41 (E.D.N.Y. 2010) (citing United States v. Shadduck , 112 F.3d 523, 531 (1st Cir. 1997) ), aff'd , 645 F.3d 186 (2d Cir. 2011). And as this Court has previously stated, "[t]he Bankruptcy Code provides tools for trustees to marshal the assets of an estate." In re Khan , 2014 WL 4956676, at *22. But first, the property at issue must be property of the estate.
For the reasons stated above and in the Soshkin Decision, although the ENSI shares are property of the estate, the ENSI assets , including the Post-Petition Sale Proceeds, are property of ENSI, and not property of the estate. And for the same reasons that the Trustee does not adequately allege that the Post-Petition Sale Proceeds are "proceeds of or from property of the estate," he also does not adequately allege that he had title or a right to possess the Post-Petition Sale Proceeds.
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the first element of his conversion claim, that the Trustee had title to or a right to possess the Post-Petition Sale Proceeds.
*468Whether the Trustee Adequately Alleges that the Defendants Converted Specifically Identifiable Estate Property
The second element that the Trustee must allege to state a conversion claim under New York law is that the Defendants converted specifically identifiable property.
As with the first element of this claim, the Defendants argue, in substance, that it is not adequately pleaded with respect to the Post-Petition Sale Proceeds because this property does not exist in the form of a potential asset of the estate, so that it cannot amount to specifically identified property sufficient to satisfy this element of a conversion claim.
And similarly, the Trustee responds that for the reasons stated in Brizinova I , applicable case law, and the law of the case doctrine, his allegations with respect to this element are adequate.
Under New York law, "it is well-settled ... that an action for the conversion of monies is 'insufficient as a matter of law unless it is alleged that the money converted was in specific tangible funds of which the claimant was the owner and entitled to immediate possession.' " In re Musicland Holding Corp. , 386 B.R. 428, 440 (S.D.N.Y. 2008) (quoting Ehrlich v. Howe, 848 F.Supp. 482, 492 (S.D.N.Y. 1994) ), aff'd , 318 F. App'x 36 (2d Cir. 2009). As one court explained, "the money must be 'described or identified in the same manner as a specific chattel.' " Glob. View Ltd. Venture Capital v. Great Cent. Basin Expl., L.L.C. , 288 F. Supp. 2d 473, 480 (S.D.N.Y. 2003). Dismissal may be appropriate where the funds at issue were not "a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question." Mfrs. Hanover Tr. Co. v. Chem. Bank , 160 A.D.2d 113, 124, 559 N.Y.S.2d 704 (N.Y. App. Div. 1st Dep't 1990). See, e.g., Alzheimer's Disease Res. Ctr., Inc. v. Alzheimer's Disease & Related Disorders Ass'n, Inc. , 981 F.Supp.2d 153, 164 (E.D.N.Y. 2013) (finding that funds intended for the claimant but directed to the defendant were not sufficiently identifiable, could not "be distinguished as [a] specific chattel," and could not be recovered in a conversion action).
A review of the Complaint shows that the Trustee alleges that the Defendants converted "the estate's ... interest ... in the Post-Petition Sale Proceeds ... in an amount to be determined at trial, currently estimated to be not less than $250,000." Compl. ¶¶ 23, 24. But here too, for the reasons stated above and in the Soshkin Decision, because the Post-Petition Sale Proceeds are assets of ENSI, and not assets of the Debtors, those proceeds are not property of the estate.
For these reasons, and based on the entire record, the Court concludes that the Trustee does not adequately allege the second element of his conversion claim, that the Defendants converted specifically identified property of the estate, because the Post-Petition Sale Proceeds are property of ENSI, and not property of the estate.
* * *
In sum, the Court has carefully considered each of the arguments advanced by the Defendants with respect to whether the Trustee adequately alleges the Third Claim for Relief, for conversion. The Court concludes that the Trustee does not adequately allege the first element of his conversion claim, that he had title to or a right to possess the Post-Petition Sale Proceeds. The Court also concludes that the Trustee does not adequately allege the second element of his conversion claim, *469that the Defendants converted specifically identified estate property.
For these reasons, and based on the entire record, the Defendants' Motion for Judgment on the Trustee's Third Claim for Relief, for conversion of the Post-Petition Sale Proceeds, is granted.
Conclusion
The Court concludes that with respect to the Trustee's First Claim for Relief, for turnover pursuant to Section 542(a), the Defendants have shown that the Trustee has not adequately alleged the necessary elements of a turnover claim under Bankruptcy Code Section 542(a). Therefore, the Motion for Judgment is granted as to this claim.
The Court concludes that with respect to the Trustee's Second Claim for Relief, for violation of the automatic stay pursuant to Section 362(a), the Defendants have shown that the Trustee has not adequately alleged the necessary elements of a claim under Bankruptcy Code Section 362(a). Therefore, the Motion for Judgment is granted as to this claim.
The Court concludes that with respect to the Trustee's Third Claim for Relief, for conversion of the Post-Petition Sale Proceeds, the Defendants also have met their burden to show that the Trustee has not adequately alleged the necessary elements of a conversion claim with respect to those proceeds. Therefore, the Motion for Judgment is granted as to this claim as well.
An order in accordance with this Memorandum Decision shall be entered simultaneously herewith.
The Court notes that here, the Trustee seeks to recover "an amount not less than $250,000" from the Defendants, while in the Soshkin Adversary, the Trustee sought to recover "at least $42,431.66." Compl. ¶ 4, Soshkin Compl. ¶ 12.
At the argument held before this Court on September 17, 2018, the Trustee withdrew his claim for conversion with respect to the ENSI shares. Transcript of Record at 8:21-9:3, Geltzer v. Brizinova , Case No. 15-01073 (Sept. 17, 2018) (ECF No. 125) ("The Court: ... In the context of ... Geltzer versus Brizinova, adversary proceeding, 15-1073, does the trustee withdraw his claim for conversion with respect to the [ENSI] shares?; Mr. Wolf: Yes."). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501724/ | ERIC L. FRANK, U.S. BANKRUPTCY JUDGE
I. INTRODUCTION
In this adversary proceeding, Chicago Title Insurance Co. ("Chicago Title") seeks a determination that the debt owed by Debtor Tatyana Mazik ("the Debtor") is nondischargeable under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6). Pursuant to Fed. R. Civ. P. 12(b)(6), the Debtor filed a motion to dismiss the adversary complaint ("the Motion"). The Motion is based primarily on three (3) grounds:
(1) the untimely filing of Chicago Title's Complaint under nonbankruptcy law;
(2) the untimely filing of the Complaint under federal bankruptcy law; and
(3) failure to state facts alleging a valid claim against the Debtor.
For the reasons explained below, the Motion will be granted, and the Complaint dismissed. However, Chicago Title will be granted leave to amend to assert a claim under 11 U.S.C. § 523(a)(3).
II. PROCEDURAL HISTORY
Prior to commencing this bankruptcy case, the Debtor filed an earlier case, under chapter 7, on March 28, 2017, docketed at Bky. No. 17-12125 ("the Prior Case").
On June 30, 2017, Chicago Title filed an adversary proceeding in the Prior Case, alleging that the debt arising from two (2) promissory notes it holds ("the Notes") was nondischargeable under § 523(a)(2) and (a)(6). (Adv. No. 17-188). The Prior Case was dismissed on August 9, 2017 after the Debtor failed to attend several § 341 meetings of creditors. As a result, thereafter, the adversary proceeding was also dismissed.
The Debtor filed the present chapter 13 bankruptcy case on January 31, 2018.
On February 23, 2018, the court issued the Notice of Chapter 13 Bankruptcy Case (Official Form 309I) ("the § 341 Notice"). The § 341 Notice set April 4, 2018 as the date for the meeting of creditors and fixed June 3, 2018 as the deadline to file a complaint challenging the dischargeability of a debt under 11 U.S.C. § 523(a)(2), § 523(a)(4) and § 1328(f). See Fed. R. Bankr. P. 4007(c) (nondischargeability *607complaints under § 523(a)(2) or (a)(4) must be filed "no later than 60 days after the first date set for the meeting of creditors").1
On July 2, 2018, Chicago Title filed the instant adversary complaint ("the Complaint") and a motion to enlarge time to file a proof of claim (Bky. No. 18-10643, Doc. # 47).2
On July 16, 2018, the Debtor filed the Motion. (Adv. No. 18-151, Doc. # 9). Chicago Title responded to the Motion on August 7, 2018. (Adv. No. 18-151, Doc. # 13).
III. MOTION TO DISMISS STANDARD
The Debtor moves to dismiss the Complaint for failure to state a claim. Fed. R. Civ. P. 12(b)(6) is applicable in adversary proceedings under Fed. R. Bankr. P. 7012. I have previously discussed the legal standard for a motion to dismiss:
A motion to dismiss under Fed. R. Civ. P. 12(b)(6) tests the legal sufficiency of the factual allegations of a complaint, see Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993), and determines whether the plaintiff is entitled to offer evidence to support the claims, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 n.8, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A defendant is entitled to dismissal of a complaint only if the plaintiff has not pled enough facts to state a claim to relief that is plausible on its face. Twombly, 550 U.S. at 547, 127 S.Ct. 1955. A claim is facially plausible where the facts set forth in the complaint allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
In evaluating the plausibility of the plaintiff's claim, the court conducts a context-specific evaluation of the complaint, drawing from its judicial experience and common sense. See, e.g., Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009) ; In re Universal Marketing, Inc., 460 B.R. 828, 834 (Bankr. E.D. Pa. 2011) (citing authorities). In doing so, the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, viewing them in the light most favorable to the plaintiff. See, e.g., Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984) ; Taliaferro v. Darby Township Zoning Board, 458 F.3d 181, 188 (3d Cir. 2006). But, the court is not bound to accept as true a legal conclusion couched as a factual allegation. Twombly, 550 U.S. at 555, 127 S.Ct. 1955 ; Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.
The Third Circuit Court of Appeals has condensed these principles into a three (3) part test:
First, the court must take note of the elements a plaintiff must plead to state a claim. Second, the court should identify allegations that, because they are no more than conclusions, *608are not entitled to the assumption of truth. Finally, where there are well-pled factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.
Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010) (quotations and citations omitted).
In assessing a Rule 12(b)(6) motion, the court may "consider the allegations in the complaint, exhibits attached to the complaint and matters of public record ... [as well as] 'undisputedly authentic' documents where the plaintiff's claims are based on the documents and the defendant has attached a copy of the document to the motion to dismiss. Unite Nat'l Ret. Fund v. Rosal Sportswear, Inc., 2007 WL 2713051, at *4 (M.D. Pa. Sept. 14, 2007) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993) ); see also In re Angulo, 2010 WL 1727999, at *12 n. 1 (Bankr. E.D. Pa. Apr. 23, 2010).
In re Boltz-Rubinstein, 574 B.R. 542, 547-48 (Bankr. E.D. Pa. 2017).
IV. FACTS
In the Complaint, Chicago Title alleges that the Debtor's husband, Yuriy Mazik ("Mr. Mazik"), brokered the purchase of a property at 102 Horseshoe Lane, North Wales, Pennsylvania (the "First Property"). Mr. Mazik initially told the purchasers - the Shapiros - that he was a licensed real estate agent. However, on the closing date, Mr. Mazik revealed that in fact he was not licensed either to broker the sale or to obtain a mortgage on behalf of the Shapiros. Therefore, the sale of the First Property to the Shapiros was not completed as planned. Rather, the First Property was purchased by the Debtor, who took out a mortgage on the property, financed in part by the Shapiro's $40,000 deposit. In an odd arrangement, the Shapiros lived in the First Property and paid the Debtor's mortgage until, in 2008, the Shapiros were able to obtain their own mortgage; at that time, the Shapiros purchased the First Property from the Debtor.
The Debtor's mortgage financing was provided by America's Wholesale Lender ("America's Wholesale"). The Debtor signed a note ("the Horseshoe Lane Note") and mortgage for $391,400.00. Chicago Title insured America's Wholesale in this lending transaction.
Chicago Title alleges that due to the fraud and collusion of Mr. Mazik, the Debtor, and the settlement agent, America's Wholesale's mortgage on the First Property was not recorded. Because the America's Wholesale mortgage was unrecorded, its loan was not paid off at closing when the Shapiros purchased the First Property from the Debtor. Instead, the proceeds were received by the Debtor.
In 2005, the Debtor and Mr. Mazik purchased another property located at 1477 Rockwell Road, Abington, Pennsylvania ("the Second Property"). The Debtor and Mr. Mazik financed this purchase with another mortgage from America's Wholesale, and the Debtor signed the associated $216,000.00 note ("the Rockwell Road Note") (collectively with the Horseshoe Lane Note, "the Notes"). Chicago Title also insured America's Wholesale in the transaction.
Again, Chicago Title alleges that the Debtor, her husband, and their settlement agent colluded to insure that the Rockwell Road mortgage was not recorded.
In 2006, the Debtor and Mr. Mazik sold the Second Property. The unrecorded mortgage was not paid off at closing and the Debtor and Mr. Mazik received the *609loan proceeds. They continued to make monthly payments on the Rockwell Road Note until 2009.
The mortgages and their associated Notes were sold to Bank of America, which later discovered that the mortgages were unrecorded and had been primed by the properly-recorded mortgages of the subsequent purchasers. Bank of America tendered a title insurance claim to Chicago Title, which accepted coverage in 2015. Chicago Title paid the amount of the Notes to Bank of America, and Bank of America assigned the Notes to Chicago Title.
Both Notes are in default and have been for some time. Both have been rendered unsecured by the failure to record the mortgages. With fees, costs and interest added to the unpaid principal, the Debtor owes more than $1 million on the Notes.
V. DISCUSSION
The Debtor makes three (3) arguments in support of dismissal of the Complaint:
1. The underlying claim against the Debtor is unenforceable because the statute of limitations under applicable nonbankruptcy law expired prior to the commencement of this bankruptcy case.3
2. The Complaint is untimely under the rules of this court, i.e., Fed. R. Bankr. P. 4007(c).
3. The Complaint does not state a claim against the Debtor; at best, it might state a claim against her husband.
A. Statute of Limitations - State Law
Implicit in a determination that a debt is nondischargeable under 11 U.S.C. § 523(a) is the requirement that there be an enforceable debt under applicable nonbankruptcy law. "An action to determine the dischargeability of a debt under § 523(a) has two components .... The first step requires that the creditor establish that a debt is in fact owed by the debtor." In re August, 448 B.R. 331, 346-47 (Bankr. E.D. Pa. 2011) (quoting In re Bundick, 303 B.R. 90, 103 (Bankr. E.D. Va. 2003) ); accord In re Ivie, 587 B.R. 729, 736 (Bankr. D. Idaho 2018).
The Debtor alleges that the debt arising from the Notes is unenforceable because the applicable statute of limitations has expired.4
*610Pennsylvania imposes a four (4) year statute of limitations on contract claims. 42 Pa.C.S.A. § 5525(a). The limitation period begins to run on the date of the breach. E.g., Romeo & Sons, Inc. v. P.C. Yezbak & Son, Inc., 539 Pa. 390, 652 A.2d 830, 832 (1995) ; Himrod v. Kimberly, 219 Pa. 546, 552, 69 A. 72 (1908). For installment contracts, a new cause of action on each installment accrues when that installment is missed. Resolution Tr. Corp. v. Koock, 867 F.Supp. 284, 288 (E.D. Pa. 1994). When an acceleration clause has been properly exercised by the lender, the statute of limitations on the lender's right to collect the accelerated balance due (as opposed to the separate claims that arise each time there is a missed installment) begins to run from the date that the borrower fails to pay the accelerated balance as required by the note. See Prop. Acceptance Corp. v. Zitin, 2007 WL 2343869, at *1 (E.D. Pa. Aug. 15, 2007).
In this proceeding, the Notes are installment contracts with acceleration clauses. The Complaint pleads that the Horseshoe Lane Note was accelerated by Chicago Title in mid-2015. (Compl. ¶ 38). The Complaint also allows me to infer that the Rockwell Road Note has not yet been accelerated, but there have been installment defaults that would allow Chicago Title to accelerate. (Compl. ¶¶ 53, 61).
Based on the allegations in the Complaint, neither Note was accelerated more than four (4) years before the commencement of the bankruptcy case. Therefore, I cannot conclude that the statute of limitations has run on Chicago Title's claim against the Debtor.5
B. The Deadline in the Federal Rules of Bankruptcy Procedure
1.
The Debtor moves to dismiss the Complaint because it was not timely filed under the rules of court.
Complaints alleging nondischargeability under 11 U.S.C. §§ 523(a)(2), (4) or (6) are governed by § 523(c)(1), which provides for exclusive bankruptcy court jurisdiction of such nondischargeability determinations. E.g., Judd v. Wolfe, 78 F.3d 110, 114 (3d Cir. 1996) ; In re McCabe, 543 B.R. 182, 188 (Bankr. E.D. Pa. 2015).6
Further, § 523(c) complaints - i.e., complaints under §§ 523(a)(2), (4) or (6) - are subject to the filing deadlines in Fed. R. Bankr. P. 4007(c). Rule 4007(c) provides that a creditor must file a § 523(c) complaint "no later than sixty (60) days after the first date set for the meeting of creditors under § 341(a)." Id.
In this case, the deadline imposed by Rule 4007(c) expired on June 4, 2018, twenty-eight (28) days before Chicago Title filed its Complaint. Thus, as the Debtor contends, the Complaint is facially untimely.
In response, Chicago Title argues that even if the Complaint was not filed according to the initial deadline, some mechanism - tolling, equity, permissive extension - applies in this case, so the Complaint should be deemed timely.7
*6112.
Chicago Title initially invokes Fed. R. Bankr. P. 9006(b) - in effect, asking me to consider its response to the Motion as a request for enlargement of time under Rule 4007(c).
Rule 9006(b) generally permits the enlargement of time for various actions in bankruptcy cases upon a showing of either "cause" or "excusable neglect" (depending on whether the enlargement request is made before or after the deadline). However, Rule 9006 also identifies certain matters in which the deadline can be extended only according to the terms specified in other Federal Rules of Bankruptcy Procedure. Compare Fed. R. Bankr. P. 9006(b)(1)with Fed. R. Bankr. P. 9006(b)(3).
Rule 9006(b)(3) expressly provides that the time for taking action under Rule 4007(c) - i.e., the deadline for filing a complaint to determine dischargeability - may be enlarged only to the extent and under the conditions stated in Rule 4007(c). Rule 9006(b)(3)"precludes the bankruptcy court from granting late-filed motions to extend the [filing] period" beyond the conditions permitted by Rule 4007(c). In re Weinberg, 197 F. App'x 182, 186 (3d Cir. 2006) (nonprecedential) (citing In re Cruz, 323 B.R. 827, 831 (1st Cir. BAP 2005) (internal quotations omitted) ); accord In re Heyden, 570 B.R. 489, 492-93 (Bankr. W.D. Pa. 2017).
Rule 4007(c) permits extension of the deadline by motion "filed before the time has expired." Id. The plain language of Rule 4007(c)"unambiguously requires...a motion for an extension of time... be filed on or before expiration of the date established for the filing of" a nondischargeability complaint under § 523(c). Weinberg, 197 F. App'x at 185-86.
Chicago Title's request for an extension of the Rule 4007(c) deadline in its response to the Motion was made after the expiration of the deadline. Thus, through its deference to Rule 4007(c), Rule 9006 provides no remedy to Chicago Title.
3.
Next, Chicago Title asserts that the Rule 4007(c) deadline should be equitably tolled because the Debtor failed to provide Chicago Title with notice of the bankruptcy case and the deadline for filing a nondischargeability complaint until a scant few days before the deadline.
The equitable tolling doctrine generally "stops the running of a limitations period;" but whether the deadline fixed by Rule 4007(c) is subject to this doctrine is "less clear." In re Fellheimer, 443 B.R. 355, 370-72 (Bankr. E.D. Pa. 2010) ; see generally In re Canonico, 2017 WL 3318840, at *3-4 (Bankr. D.N.J. June 16, 2017).
Courts are divided on this issue, and there is no binding case law in this circuit. Compare In re Benedict, 90 F.3d 50 (2d Cir. 1996) (applying equitable tolling) with *612In re Alton, 837 F.2d 457, 459 (11th Cir. 1988) (no equitable tolling of Rule 4007(c) deadlines); Neeley v. Murchison, 815 F.2d 345, 346-47 (5th Cir. 1987) (same); see also Equitable Tolling of Federal Rules of Bankruptcy Procedure, Rule 4007(c), Providing 60-Day Deadline for Filing Dischargeability Complaints, 40 A.L.R. Fed. 2d 541 (2009).8
I need not reach the issue here. Even if equitable tolling may be applied under Rule 4007(c), I decline to apply the doctrine because Chicago Title has an adequate remedy at law. See Justice v. United States, 6 F.3d 1474, 1480 (11th Cir. 1993) (under "traditional principles of equity jurisprudence" equitable tolling is inappropriate if there is an adequate remedy at law); Taylor v. Carroll, 2004 WL 1151552, at *6 (D. Del. May 14, 2004) (same).
As explained in the next two (2) sections of this Memorandum, even after dismissal of the Complaint, Chicago Title has an alternative and adequate remedy: invoking 11 U.S.C. § 523(a)(3) to assert its claims under § 523(a)(2)(A) and § 523(a)(6).
C. Section 523(a)(3)(B) Does Not Provide A Basis for Extending the Rule 4007(c) Deadline
Finally, Chicago Title invokes 11 U.S.C. § 523(a)(3)(B), an exception to the chapter 7 discharge,9 which provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt -
...
(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit-
...
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request ....
Chicago Title argues that section 523(a)(3)(B)"excuses a creditor who does not receive notice of the pendency of a bankruptcy case in time to file a timely non-dischargeability action from the 60-day deadline imposed by Rule 4007(c) for claims referenced under 523 (a)(2), (4), or (6)." (Response ¶ 6, 7).
There is some authority that is consistent with Chicago Title's position that § 523(a)(3)(B) provides a mechanism for relief from the Rule 4007(c) deadline.10
*613However, the majority, and correct, view is that Rule 4007(c) and § 523(a)(3)(B) operate independently; the Code section does not serve as grounds for extending the deadline in the court rule.
Section 523(a)(3)(B) is a cause of action, not an excuse from deadlines. As one court observed, if a creditor does not receive notice, the "remedy lies in section 523(a)(3)(B) rather than an untimely motion to extend" under Rule 4007(c). In re Joyner, 2009 WL 1490844, at *1 (Bankr. M.D.N.C. May 27, 2009) ; accord In re Stapp, 2017 WL 3601225 (Bankr. S.D. Ind. Aug. 21, 2017) ; In re Sieger, 360 B.R. 653, 656 (Bankr. N.D. Ohio 2007) ; Am. Standard Ins. Co. of Wisconsin v. Bakehorn, 147 B.R. 480, 484 (N.D. Ind. 1992).
In other words, the court lacks authority under the rules of court to extend the Rule 4007(c) deadline, but the statute, § 523(a)(3), gives the creditor deprived of notice of the deadline the opportunity to assert nondischargeability claims arising under § 523(a)(2), (4) and (6) as subcomponents of a § 523(a)(3) claim.11 And, because § 523(a)(3) is not among the Code provisions referenced in § 523(c), there is no deadline in the Federal Rules of Bankruptcy Procedure for filing a § 523(a)(3) complaint. E.g., In re Menk, 241 B.R. 896, 915 (9th Cir. BAP 1999).12
Consequently, § 523(a)(3)(B) does not provide grounds to permit the late filing of Chicago Title's Complaint.
D. The Complaint Will Be Dismissed With Leave to Amend
Based on the discussion above, I conclude that the Complaint must be dismissed because it was not timely filed. The next question is whether Chicago Title should be granted leave to file an amended complaint.
It is well settled that a court should grant a plaintiff leave to amend "unless an amendment would be inequitable or futile." Alston v. Parker, 363 F.3d 229, 235 (3d Cir. 2004).
Here, while Chicago Title may not proceed under 11 U.S.C. § 523(a)(2)(A) or § 523(a)(6), it may be able to obtain the relief it seeks under § 523(a)(3)(B).13 As explained below, providing Chicago Title *614the opportunity to amend the Complaint appears neither inequitable nor futile.
A § 523(a)(3)(B) claim has two (2) major elements:
(1) the underlying debt "is of a kind" specified in § 523(a)(2), (4) or (6).14 and
(2) the debtor's failure properly to list and schedule a creditor must have deprived the creditor of notice of the deadlines to timely file a proof of claim and a nondischargeability complaint.
The Complaint describes in detail a scheme designed to deprive Chicago Title's predecessor-in-interest of its bargained for secured position against the real property owned and then sold by the Debtor and her spouse, and the financial detriment Chicago Title suffered as a result of the alleged fraudulent or willful and malicious conduct. An extended discussion is not required to explain my conclusion that the facts alleged state a claim for relief under either 11 U.S.C. § 523(a)(2)(A) or § 523(a)(6).15
On the other hand, the Complaint lacks any allegations to support the lack of notice element of a § 523(a)(3)(B) claim. However, in light of the representations made in Chicago Title's response to the Motion, as well as the evidence presented at the hearing on its motion to extend the deadline for filing a proof of claim, it is certainly possible that Chicago Title can supplement the allegations in the Complaint with the additional allegations necessary to state a claim under 11 U.S.C. § 523(a)(3),16 thereby resuscitating its § 523(a)(2)(A) and § 523(a)(6) nondischargeability claims.17
VI. CONCLUSION
For the reasons stated above, the Debtor's Motion will be granted. Chicago Title's nondischargeability claims under § 523(a)(2) and (6) claims are not adequately pled; they are untimely and must be dismissed. However, I will grant Chicago Title leave to amend if it wishes to pursue an alternate nondischargeability theory under § 523(a)(3).
June 3, 2018 was a Sunday. Therefore, the deadline for filing a nondischargeability complaint was Monday, June 4, 2018. See Fed. R. Bankr. P. 9006(a)(1)(c) ; In re Aloia, 496 B.R. 366, 373 n.3 (Bankr. E.D. Pa. 2013).
Chicago Title alleges that it received no notice of the instant bankruptcy. As a result, on March 14, 2018, after the commencement of the bankruptcy case, it filed a civil action to collect upon the Notes in federal district court. (See No. 18-CV-1116-CDJ (E.D. Pa.) ). On May 21, 2018, the Debtor's co-defendants in the district court case filed a suggestion of bankruptcy. Thus, Chicago Title had notice of the Debtor's current bankruptcy on May 21, 2018, two (2) weeks prior to the expiration of the June 4, 2018 deadline for filing a nondischargeability complaint.
The statute of limitations is not listed in Rule 12(b) as a defense that may be raised in a motion to dismiss. Thus, on their face, the Federal Rules of Civil Procedure require that affirmative defenses, such as the statute of limitations, be pled in the answer. However, in this Circuit, a limitations defense may be made by a Rule 12(b)(6) motion if the limitations bar is apparent on the face of the complaint. In re Pocius, 499 B.R. 472, 473 (Bankr. E.D. Pa. 2013) (citing authorities).
Arguably, there is a distinction between the nature of the defense to the underlying claim in August and the defense raised here. In August, the debtor asserted that the underlying debt (a gambling debt incurred at a New Jersey casino) was unenforceable as a matter of public policy and statute in Pennsylvania. In other words, the debtor's argument in August was that the claim itself was not cognizable under applicable nonbankruptcy law -- in effect, that the claim simply did not exist. The statute of limitations defense raised by the Debtor in this adversary proceeding arguably differs in that it does not go to the inherent legitimacy of the debt memorialized by the Notes. The statute of limitations is an affirmative defense that is waivable and the expiration of the limitations deadline does not extinguish the creditor's claim. See In re Keeler, 440 B.R. 354, 364-65 (Bankr. E.D. Pa. 2009).
That said, considering that the Debtor is aware of the affirmative defense and can be expected to raise it, the distinction I have drawn appears immaterial. What would be the point of determining the debt to be nondischargeable only to have the Debtor successfully defend against an enforcement action in state court?
Based on this analysis, it is unnecessary to consider additional factors that may toll the statute of limitations, such as the automatic stay imposed in the Prior Case. See 42 Pa.C.S.A. § 5535 ; see also 11 U.S.C. § 108.
There are some exceptions to the bankruptcy court's exclusive jurisdiction that are not applicable here. See 11 U.S.C. § 523(c)(2).
As stated earlier, on the same day that Chicago Title filed this adversary complaint, it filed a motion to enlarge the time for filing a proof of claim. The hearing on that motion was held and concluded on September 25, 2018 and the matter is presently under advisement.
At the September 25, 2018 hearing, Chicago Title offered evidence that, on March 14, 2018, it filed a civil action in federal district court to collect upon the Notes. (See No. 18-CV-1116-CDJ (E.D. Pa.) ). Chicago Title maintains that, thereafter, the Debtor failed to give it notice of her bankruptcy filing. On May 21, 2018, the Debtor's codefendants in the District Court case filed a suggestion of bankruptcy that referenced the Debtor's bankruptcy. Chicago Title asserts that this was the first notice it received of the bankruptcy case.
Technically, this evidence is not part of the record in this adversary proceeding. However, I will consider it in evaluating whether Chicago Title should be granted leave to amend.
The Third Circuit offers only general guidance about when equitable tolling should be applied, if the underlying deadline is susceptible to tolling. Equitable tolling is an "extraordinary remedy," and should only be granted "(1) where the defendant has actively misled the plaintiff respecting the plaintiff's cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum." Hedges v. United States, 404 F.3d 744, 751 (3d Cir. 2005) (citing Robinson v. Dalton, 107 F.3d 1018, 1022 (3d Cir. 1997) ).
On its face, § 523(a)(3)(B) has no applicability in a chapter 13 case, such as this one, in which the debtor seeks a discharge under 11 U.S.C. § 1328(a). However, § 1328(a)(3) incorporates § 523(a)(3)(B) as an exception to a chapter 13 discharge.
See In re Ozarowski, 2006 WL 3694547, at *6 (Bankr. D.N.J. Dec. 12, 2006) ; In re Eliscu, 85 B.R. 480, 481 (Bankr. N.D. Ill. 1988) (dictum); In re Galvin, 50 B.R. 583, 586 (Bankr. D.R.I. 1985) ; see also In re Feagins, 439 B.R. 165, 177 (Bankr. D. Haw. 2010) (stating, perhaps in unintentionally overbroad terms, "section 523(a)(3)(B) indefinitely extends the time to file a complaint under sections 523(a)(2), (4), or (6)").
There is some division regarding the further application of this principle.
In order to obtain a nondischargeability determination under § 523(a)(3), some courts require only that a creditor not provided with notice of the § 523(c) filing deadline establish only that it holds a "colorable" claim under § 523(a)(2), (4) or (6) ; other courts require that the creditor prove the merits of the § 523(a)(2), (4) or (6) claim. Compare In re Haga, 131 B.R. 320, 323-25 (Bankr. W.D. Tex. 1991) (discussing various lines of cases and adopting the "colorable" claim approach) with In re Stambaugh, 533 B.R. 449, 457-58 (Bankr. M.D. Pa. 2015) (discussing Haga and reaching the opposite conclusion); In re Jones, 296 B.R. 447, 449-50 (Bankr. M.D. Tenn. 2003) (same).
Also, unlike proceedings under § 523(a)(2), (4) and (6), the bankruptcy court has only concurrent (not exclusive) jurisdiction over claims under § 523(a)(3). E.g., In re Real, 2018 WL 2059603, at *5 (Bankr. M.D. Fla. Apr. 30, 2018) ; In re Money Center of America, Inc., 2017 WL 3971826, at *2 (Bankr. D. Dela. Sept. 8, 2017) ; In re Manning, 2012 WL 2328236, at *2-3 (Bankr. D. Colo. June 19, 2012).
I recognize that Chicago Title did not plead a § 523(a)(3)(B) claim in the Complaint. However, in evaluating whether leave to amend should be granted, I am guided in part by the fundamental policy under Fed. R. Bankr. P. 12(b)(6) - that the court is to determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief. See Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008). Here, by the simple expedient of invoking a different subsection of the operative Code provision and, as explained in the text, infra, supplementing the factual allegations of the Complaint, Chicago Title may well be able to state a cognizable claim for relief. In exercising my discretion, I consider it appropriate to give the Plaintiff that opportunity.
Chicago Title does not raise a claim under § 523(a)(4). I will not further discuss that provision.
I have not overlooked the Debtor's additional argument that the facts in the Complaint at best state a claim against her husband, not the Debtor. I disagree with this characterization of the Complaint, which adequately describes the Debtor as an active participant in the alleged fraudulent scheme. (See Complaint ¶¶ 17, 21, 29, 44, 46).
I have already noted that the hearing on Chicago Title's motion to enlarge the time to file a proof of claim has been concluded and that the matter is under advisement. See n.7, supra. Query whether Chicago Title's pursuit of an enlargement of time to file a proof of claim affects its potential claim under § 523(a)(3)(B) ?
I note that, absent the applicability of § 523(a)(3), Chicago Title could not state a claim under § 523(a)(6). The applicable provision governing exceptions to discharge, 11 U.S.C. § 1328(a), does not incorporate § 523(a)(6) by reference, see 11 U.S.C. § 1328(a)(2) ; and the closest analogue, § 1328(a)(4), limits the discharge exception for willful or malicious conduct to "injury by the debtor that caused personal injury to an individual or the death of an individual." However, § 1328(a)(2) does incorporate § 523(a)(3) by reference and that section expands the scope of the discharge exception to include § 523(a)(6). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501725/ | Cupit/Moak Motion
Cupit/Moak contend that they have priority over MCF and WAG because they hold a "valid and enforceable agreement with Flechas that gives them legal priority over any of the subsequent claims of these creditors."26 Cupit/Moak contend that the Uniform Commercial Code (UCC) does not apply to their Contract, or if it does, their Contract is exempt from the UCC.
Consequently, out of the $2,000,000.00 (Simon Litigation Funds), Cupit/Moak claim they are entitled to the total amount of $231,050.00. This figure includes $131,250.00 as 15% of Flechas' 50% contingent fee from the Simon Litigation plus the original $99,800.00 loaned to Flechas via the Cupit/Moak Contract.
MCF Motion
MCF disputes Cupit/Moak's claim that they have a valid first lien on the Simon Litigation Funds. MCF alleges that the UCC does apply to the Cupit/Moak Contract. MCF asserts that even though Cupit/Moak entered into the Cupit/Moak Contract with Flechas before MCF entered into its contract with the Debtor, MCF has a valid first lien on the Simon Litigation Funds because unlike Cupit/Moak, MCF perfected its security interest in the Simon Litigation Funds with the filing of UCC-1 financing statements.
WAG Joinder
On July 17, 2018, WAG, LLC's Amended Combined Response to Motions for Summary Judgment filed by Defendants Bobby Moak and Danny Cupit, Dudley Guice, and MCF AF, LLC (Adv. Dkt. # 184) (WAG Joinder) was filed. In the WAG Joinder, WAG joined the MCF Motion with respect to MCF's position that MCF has a superior lien over Cupit/Moak, but "vehemently disputes the 'fact' set forth in the MCF Motion and MCF Brief that MCF possesses a 'first, perfected, secured lien and [the interpleaded funds] should be distributed to MCF AF.' "27 Rather, WAG contends that MCS Capital, LLC has a first lien on the Simon Litigation Funds. Since the WAG Contract states that WAG's interest "shall be limited to fees remaining AFTER MCS Capital, LLC has been paid[,]"28 WAG contends this provision gives it priority over MCF. After the final response was filed to the WAG Joinder, the Court took the matter under advisement.
District Court Litigation
As mentioned previously, in addition to litigation in Jefferson County, Mississippi, the parties were involved in litigation before the Honorable Daniel P. Jordan, III, in the United States District Court for the Southern District of Mississippi.29 On May 8, 2015, an Agreed Order (Dkt. # 184) was entered in this Court holding the two bankruptcy cases in abeyance and allowing the parties to litigate the issue of lien priority among the various claimants before Judge Jordan.30
*647After much litigation in District Court, WAG, MCF, and Cupit/Moak each entered into settlement agreements with the Debtor and Flechas in the District Court Litigation. On October 19, 2016, the Agreed Final Judgment in Favor of WAG, LLC (Dt. Crt. Dkt. No. 318) (WAG Judgment) was entered. In the WAG Judgment, WAG was granted a final judgment against the Debtor, Flechas, and The Flechas Law Firm, PLLC, jointly and severally, in the amount of $137,500.00 plus post-judgment interest. The WAG Judgment further states that it is nondischargeable.
On November 7, 2016, the Agreed Final Judgment (Dt. Crt. Dkt. No. 320) (Cupit/Moak Judgment) was entered. In the Cupit/Moak Judgment, Cupit/Moak were awarded a final judgment against Flechas in the amount of $125,000.00 plus post-judgment interest. The judgment further states that "[t]his judgment shall constitute a lien and/or security interest on such portion of Flechas' attorney [sic] fees from the [Simon Litigation] assigned to Moak and Cupit to the same extent that the initial assignment was considered as a lien and/or security interest against said fees."31
On July 20, 2017, the Agreed Findings of Fact, Conclusions of Law and Final Judgment in Favor of MCF AF LLC (Dt. Crt. Dkt. No. 323) (MCF Judgment) was entered. In the MCF Judgment, MCF was granted a final judgment against the Debtor, Flechas, and The Flechas Law Firm, PLLC, jointly and severally, in the amount of $400,000.00 plus post-judgment interest. The MCF Judgment further states that it is nondischargeable.
CONCLUSIONS OF LAW
I. Jurisdiction
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(1) and (2)(K).
II. Summary Judgment Standards
Rule 56 of the Federal Rules of Civil Procedure,32 as amended effective December 1, 2010,33 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." Fed. R. Civ. P. 56(a). When considering a motion for summary judgment, "the court does not weigh the evidence to determine the truth of the matter asserted but simply determines whether a genuine issue for trial exists, and '[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.' Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)."
*648Newton v. Bank of America (In re Greene), 2011 WL 864971, at *4 (Bankr. E.D. Tenn. March 11, 2011).
"The moving party bears the burden of showing the ... court that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett , 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)." Hart v. Hairston, 343 F.3d 762, 764 (5th Cir. 2003).
Once a motion for summary judgment is pled and properly supported, the burden shifts to the non-moving party to prove that there are genuine disputes as to material facts by "citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations, ... admissions, interrogatory answers, or other materials."34 Or the non-moving party may "show[ ] that the materials cited do not establish the absence ... of a genuine dispute."35 When proving that there are genuine disputes as to material facts, the non-moving party cannot rely "solely on allegations or denials contained in the pleadings or 'mere scintilla of evidence in support of the nonmoving party will not be sufficient.' Nye v. CSX Transp., Inc., 437 F.3d 556, 563 (6th Cir. 2006) ; See also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986)." Newton, 2011 WL 864971, at *4. "[T]he nonmovant must submit or identify evidence in the record to show the existence of a genuine issue of material fact as to each element of the cause of action." Malacara v. Garber, 353 F.3d 393, 404 (5th Cir. 2003). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.' " Matsushita, 106 S.Ct. at 1356 (citations omitted).
When considering a motion for summary judgment, the court must view the pleadings and evidentiary material, and the reasonable inferences to be drawn therefrom, in the light most favorable to the non-moving party, and the motion should be granted only where there is no genuine issue of material fact. Thatcher v. Brennan , 657 F.Supp. 6, 7 (S.D. Miss. 1986), aff'd , 816 F.2d 675 (5th Cir. 1987) (citing Walker v. U-Haul Co. of Miss. , 734 F.2d 1068, 1070-71 (5th Cir. 1984) ); See also Matshushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356-57, 89 L.Ed.2d 538, 553 (1986). The court must decide 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." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986).
III. Application to the Case at Bar
A. Judgments
As a preliminary matter, the Court must address the effect of the agreed judgments Cupit/Moak, MCF, and WAG entered into in the District Court Litigation. The bankruptcy cases of Flechas and the Debtor were held in abeyance to allow the parties to litigate the validity and extent of their liens. Before the District Court Litigation went to trial before Judge Jordan, all of the parties entered into agreed judgements and/settlements:
(1) The Cupit/Moak Judgment, awarded Cupit/Moak a final judgment against Flechas in the amount of $125,000.00 plus post-judgment interest;
(2) The WAG Judgment granted WAG a final judgment against the Debtor, *649Flechas, and The Flechas Law Firm, PLLC, jointly and severally, in the amount of $137,500.00 plus post-judgment interest; and
(3) The MCF Judgment granted MCF a final judgment against the Debtor, Flechas, and The Flechas Law Firm, PLLC, jointly and severally, in the amount of $400,000.00 plus post-judgment interest.
Black's Law Dictionary defines a judgment as "[a] court's final determination of the rights and obligations of the parties in a case."36 Jones v. Bd. of Sup. of the La. Univ. Syst. , Case No. 14-2304, 2016 WL 5362700, at *2, n.1 (E.D. La. Sept. 26, 2016). An agreed judgment is defined as "[a] settlement that becomes a court judgment when the judge sanctions it. • In effect, an agreed judgment is merely a contract acknowledged in open court and ordered to be recorded, but it binds the parties as fully as other judgments."37
In the Court of Appeals for the Fifth Circuit, the fact that a judgment resolving a dispute is reached by agreement rather than after a hearing on the merits does not mean that the judgment has no res judicata effect. "An agreed judgment is entitled to full res judicata effect. United States v. International Building Co. , 345 U.S. 502, 505-06, 73 S.Ct. 807, 809, 97 L.Ed. 1182 (1953) ; Jones v. Texas Tech Univ. , 656 F.2d 1137, 1144 (5th Cir.1981) ; Kaspar Wire Works, Inc. v. Leco Engineering & Mach., Inc. , 575 F.2d 530, 538-39 (5th Cir. 1978)." United States v. Shanbaum , 10 F.3d 305, 313-14 (5th Cir. 1994).
Consequently, when Cupit/Moak, MCF, and WAG settled their claims in District Court and entered into agreed final judgments, the extent and validity of their claims against the Debtor and/or Flechas were finally determined and memorialized in the judgments.
B. Priority
Once the validity and extent of the claims of Cupit/Moak, MCF, and WAG were established in the District Court Litigation, the parties returned to the Bankruptcy Court to have the issue of the priority of their claims adjudicated. The parties all agree that the Cupit/Moak Contract is first in time, but then the question arises of whether Cupit/Moak have first priority.
The parties have thoroughly briefed the issues which they believe relate to who has first priority. The main arguments the parties have briefed are: (1) whether Article 9 of the U.C.C. applies to the Cupit/Moak Contract; (2) if Article 9 applies, is the Cupit/Moak Contract an account or an instrument ; and (3) does any provision of Article 9 exclude the Cupit/Moak Contract from the filing requirements of Article 9.
The Court, however, believes the question of which party has first priority should not be decided on the basis of whether the U.C.C. or common law applies. Rather, the Court finds that the priority of the parties can be determined upon an examination of the Employment Contracts and the contracts Cupit/Moak, MCF, and WAG entered into with the Debtor and/or Flechas.
1. Breach of Contract
It is undisputed that the Debtor and Flechas entered into written contracts with Cupit/Moak, MCF, and WAG. The issue then becomes whether Flechas and the Debtor have breached the contracts with Cupit/Moak, MCF, and WAG.
*650Under Mississippi law, in order to establish a breach of contract, Cupit/Moak, MCF, and WAG each have the separate burden of proving: "(1) the existence of a valid and binding contract between it and [Flechas and/or the Debtor], (2) that [Flechas and/or the Debtor] breached the contract to which it was a party, and (3) that [Cupit/Moak, MCF, and WAG were] damaged monetarily." United Plumbing & Heating Co., Inc. v. AmSouth Bank, 30 So.3d 343, 347, (¶ 12) (Miss. App. 2009) (citation omitted).
It is evident that the parties have proven the second and third element: that Flechas and/or the Debtor's failure to pay was a breach of the contracts with Cupit/Moak, MCF, and WAG and that Cupit/Moak, MCF, and WAG each suffered monetary damages as a result of the breach. Therefore, in order to establish a breach of contract and to be entitled to damages, the parties must establish the first element-the existence of a valid and binding contract between the parties.
In order to prove the existence of a valid and binding contract, "Mississippi law is clear that, 'in order to maintain an action to enforce a breach of contract or to recover damages growing out of a breach, a relationship of privity of contract must exist between the party damaged and the party sought to be held liable for the breach.' Allgood v. Bradford, 473 So.2d 402, 415 (Miss. 1985) (citing Burns v. Washington Savings, 251 Miss. 789, 171 So.2d 322, 324 (1965) )."38
Upon examination of the Employment Contracts the Simon Litigation plaintiffs signed, each contract39 states that the plaintiff "hereby employ the law firm of Flechas & Associated , [sic] P.A. "Attorney", to represent me in my claim against Texaco/Chevron."40 The contracts are signed on behalf of Flechas & Associates, P.A. by Eduardo Flechas. In order to determine whether privity of contract exists, the Court must examine each contract.
2. Contract Interpretation
Under Mississippi law, when interpreting a contract, a court must undertake a three-step analysis of the contract:
We generally apply a three-step analysis when reviewing contract interpretation. Royer Homes of Miss., Inc. v. Chandeleur Homes, Inc. , 857 So.2d 748, 752 (¶ 10) (Miss.2003). The first step requires that we determine whether the contract is ambiguous. Id. If it is not, we must "accept the plain meaning of a contract as the intent of the parties." Ferrara v. Walters , 919 So.2d 876, 882 (¶ 13) (Miss.2005) (citations omitted). If we cannot ascertain the contract's meaning and the parties' intent within the contract's "four corners," we apply the " 'canons' of contract construction." Cherokee Ins. Co. v. Babin , 37 So.3d 45, 48 (¶ 8) (Miss.2010). If the meaning of the contract is still ambiguous, we turn to extrinsic evidence. Royer Homes , 857 So.2d at 753 (¶ 11).
Martindale v. Hortman Harlow Bassi Robinson & McDaniel PLLC , 119 So.3d 338, 342 (Miss. Ct. App. 2012).
*651Applying the first step to the three contracts before the Court, the Court finds that none of the three (3) contracts are ambiguous. Therefore, the Court must " 'accept the plain meaning of [the contracts] as the intention of the parties.' " Id. (citation omitted).
a. Cupit/Moak
Looking to the Cupit/Moak Contract, the contract is "between Eduardo A. Flechas ("Flechas"), Danny Cupit ("Cupit"), and Robert W. "Bobby" Moak ("Moak")."41 Likewise, the Cupit/Moak Judgment is against Eduardo A. Flechas only.42
The plain reading of the Cupit/Moak Contract is that it is between Cupit/Moak and Flechas. Therefore, Cupit/Moak has privity of contract with Flechas and has a claim against Flechas for breach of the Cupit/Moak Contract.
Cupit/Moak does not, however, have privity of contract with the entity entitled to the attorney's fees from the Simon Litigation-the Debtor. The Debtor (Flechas & Associates, P.A.) is the party that entered into the Employment Contracts with the Simon Litigation plaintiffs and the party that is entitled to the attorney's fees from the Simon Litigation. As the only party to the Employment Contracts, only the Debtor could enter into a contract to assign a percentage of the attorney's fees from the Simon Litigation. While Flechas may be the only member of the Debtor, "[a] corporation is [an] entity separate and distinct from its stockholders. Ill. Cent. RR. v. Miss. Cotton Seed Prod., Co., 166 Miss. 579, 148 So. 371, 372 (1933)." Rosson v. McFarland , 962 So.2d 1279, 1284, (¶ 22) (Miss. 2007).43
The Court finds " 'no contract, statute, or law that would establish that [Flechas & Associates, P.A.] had a duty to ... pay money to [Cupit/Moak,] a party it was not obligated to pay.' " United Plumbing, 30 So.3d at 347. (quoting trial judge). Since, Cupit/Moak does not have privity of contract with the Debtor, Cupit/Moak does not have a valid and binding contract with the Debtor. Consequently, Cupit/Moak does not have a lien on any attorney's fee earned by the Debtor in the Simon Litigation.
b. MCF/WAG
Unlike the Cupit/Moak Contract, both the MCF Contract and the WAG Contract are with the Debtor, Flechas & Associates, P.A.44 Therefore, both MCF and WAG have privity of contract with the Debtor and have met all three elements to establish a breach of contract claim against the Debtor. The Court must now determine whether MCF or WAG has first priority.
WAG agrees with MCF that MCF "is properly perfected and that is [sic] stands ahead of Moak/Cupit's place in the line of lien priority....[however] WAG contends that MCS Capital, LLC ("MCS") hold the priority position among creditors"45 on the *652Simon Litigation Funds.46 WAG contends that since the WAG Contract states that WAG's interest "shall be limited to fees remaining AFTER MCS Capital, LLC has been paid[,]"47 WAG has priority over MCF. WAG does not cite any authority to support its position that it has priority over MCF via MCS Capital, LLC.
MCF disagrees and asserts that it has priority over MCS Capital, LLC and WAG. MCF states that before MCF filed its motion for summary judgment, MCF and MCS Capital, LLC reached a settlement with regard to claim priority over the Simon Litigation Funds. Therefore, MCF states that MCS Capital, LLC is no longer asserting a claim to the Simon Litigation Funds.48
The Court acknowledges that an order has not been entered memorializing the settlement between MCS Capital, LLC and MCF. The Scheduling Order for Dispositive Motions (Adv. Dkt. # 159) was, however, served on MCS Capital, LLC (see Adv. Dkt. # 160). MCS Capital, LLC did not file a dispositive motion claiming an interest in the Simon Litigation Funds nor has MCS Capital, LLC filed pleadings in response to any of the summary judgment motions which were filed in this adversary proceeding.
Due to MCS Capital, LLC's lack of participation in the motions before the Court, the Court finds that MCS Capital, LLC is no longer claiming an interest in the Simon Litigation Funds. Consequently, the Court does not find WAG's argument that MCS Capital, LLC has a first priority on the Simon Litigation Funds to be persuasive.
Since the MCF Contract was entered into on March 15, 2011, and as conceded by WAG,49 was properly perfected with the filing of a Financing Statement fourteen (14) months before the WAG Contract was signed, the Court finds that MCF holds a valid first lien on the Simon Litigation Funds.
CONCLUSION
None of the parties have shown the existence of "disputes over facts that might affect the outcome of the suit under the governing law [in order to] properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. Consequently, the Court must grant summary judgment as a matter of law.
In order to establish a breach of contract, the parties have to show a valid and binding contract, a breach of that contract, and damages. It is undisputed that Cupit/Moak, MCF, and WAG had valid and binding contracts, but the pivotal question is with whom. The Cupit/Moak Contract is a valid and binding contract with Flechas. The MCF Contract and WAG Contract are valid and binding contracts with the Debtor.
*653The Employment Contracts were not signed by Flechas in his individual capacity. Since the Employment Contracts were between the Simon Litigation plaintiffs and the Debtor, the Debtor is the only party who could enter into a contract to sell or assign the attorney's fees associated with the Employment Contracts. Cupit/Moak do not have privity of contract with the Debtor, therefore, Cupit/Moak do not have a lien on the fees earned by the Debtor in the Simon Litigation. Therefore, as a matter of law, the Cupit/Moak Motion should be denied.
The MCF Contract and Financing Statement pre-date the WAG Contract. The Court finds that WAG cannot "piggy-back" on MCS Capital, LLC's contract with Flechas and the Debtor in order to gain priority over MCF. For these reasons, the Court finds that summary judgment should be granted as a matter of law in favor of MCF and that MCF has a first priority lien on the $240,295.29 interplead into the registry of the Court.
To the extent the Court has not addressed any of the parties' other arguments or positions, it has considered them and determined that they would not alter the result.
A separate judgment consistent with this opinion will be entered in accordance with Rule 7054 of the Federal Rules of Bankruptcy Procedure.
SO ORDERED
Motion of Bobby Moak and Danny E. Cupit for Summary Judgment , Adv. Pro. # 1700006EE, Adv. Dkt. # 161, p. 11, ¶ 34, June 8, 2018.
WAG, LLC's Amended Combined Response to Motions for Summary Judgment filed by Defendants Bobby Moak and Danny Cupit, Dudley Guice, and MCF AF, LLC , Adv. Pro. No. 1700006EE, Adv. Dkt. # 184, p. 2, July 17, 2018.
Id. at Adv. Dkt. # 184-1, p. 3.
Dt. Crt. Case No. 3:13-cv-00621-DPJ-FKB.
Several subsequent orders were entered allowing the parties to litigate the validity, priority, and extent of the creditors claims against the Debtor and Flechas. See Dkt. # 200 and Dkt. # 203 in case number 1303549EE.
Agreed Final Judgment, Dt. Crt. Case No. 3:13-cv-00621-DPJ-FKB, Dt. Ct. Dkt. # 320, p. 2, Nov. 7, 2016.
Federal Rule of Civil Procedure 56 is made applicable to bankruptcy proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056.
The Notes of Advisory Committee to the 2010 amendments state that the standard for granting a motion for summary judgment has not changed, that is, there must be no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law. Further, "[t]he amendments will not affect continuing development of the decisional law construing and applying these phrases."
Fed. R. Bankr. P. 7056(c)(1)(A).
Fed. R. Bankr. P. 7056(c)(1)(B).
JUDGMENT, Black's Law Dictionary (10th ed. 2014).
Id.
Saucier v. Coldwell Banker JME Realty, 644 F.Supp.2d 769, 780 (S.D. Miss. 2007).
The Simon Litigation was filed by a total of five (5) plaintiffs. Attached to a brief by MCF are copies of four (4) of the five (5) contracts. (The contract with Ken'Driana Gibbs is not included.) With no proof to the contrary, the Court presumes the Gibbs contract is identical to the other contracts.
MCF AF, LLC's Reply Memorandum in Support of Its Motion for Summary Judgment , Adv. Pro. No. 1700006EE, Adv. Dkt. # 182-2, Exhibit 2, (July 6, 2018) (emphasis added).
Affidavit of Robert W. "Bobby" Moak , Adv. Proc. No. 1700006EE, Adv. Dkt. # 161-1, Exhibit A-1, p. 1 (June 8, 2018).
Agreed Final Judgment, Dt. Crt. Case No. 3:13-cv-00621-DPJ-FKB, Dt. Ct. Dkt. # 320, p. 2, Nov. 7, 2016.
"The Mississippi Business Corporation Act applies to professional corporations, both domestic and foreign, to the extent not inconsistent with the provisions of this chapter." Miss. Code. Ann. § 79-10-3 (1972).
The WAG Contract is also with Eduardo Flechas, Esq.
WAG, LLC's Amended Combined Response to Motions for Summary Judgment filed by Defendants Bobby Moak and Danny Cupit, Dudley Guice, and MCF AF, LLC , Adv. Pro. No. 1700006EE, Adv. Dkt. # 184, p. 2, July 17, 2018.
Attached to the MCS Capital, LLC Proof of Claim (Claim Dkt. # 12-1) is a copy of the MCS Capital, LLC contract. The first line of the contract states that it is between "Eduardo Flechas, Esq., individually, and Flechas & Associates, P.A. and MCS Capital LLC."
Id. at Adv. Dkt. # 184-1, p. 3.
MCF AF LLC's Supplement to Its Reply Memorandum in Support of Its Motion for Summary Judgment, Adv. Pro. No. 1700006EE, Adv. Dkt. # 186, p. 2, July 26, 2018.
WAG, LLC's Amended Combined Response to Motions for Summary Judgment filed by Defendants Bobby Moak and Danny Cupit, Dudley Guice, and MCF AF, LLC , Adv. Pro. No. 1700006EE, Adv. Dkt. # 184, p. 2, July 17, 2018. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501785/ | Among other requirements, the attorney must agree to accept only the amounts specified in the guidelines as "presumptively reasonable." Nothing in the guidelines permits the attorney to pass on to the client, or to receive from the estate, the general excise tax on the presumptively reasonable fee.
In addition, the attorney and the client must sign a Rights and Responsibilities Agreement in a prescribed form.8 This *795agreement has lengthy and detailed provisions about attorneys' fees. These provisions do not permit an attorney opting in to the no-look fee process to pass on the general excise tax to the client or the estate.
Therefore, attorneys who opt in to the no-look fee process in chapter 13 cases may not pass on the general excise tax to their debtor clients (or the estate). The guidelines do not permit them to do so and the clients have not agreed to such treatment.
I am prepared to confirm the plan in this case only if the debtor's attorney agrees to eliminate the passed-on general excise tax from counsel's fee request.
The trustee shall submit a proposed order, in the usual form, either confirming or denying confirmation of the plan, depending on whether counsel is willing to adjust the compensation request as indicated.
SO ORDERED.
This form is also available on the court's website. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501786/ | TERRY L. MYERS, CHIEF U. S. BANKRUPTCY JUDGE
INTRODUCTION
James R. Zazzali ("Plaintiff") is the trustee for the jointly-administered estates of DBSI, Inc., an Idaho corporation ("DBSI"), and certain DBSI affiliated debtors and consolidated non-debtors. Plaintiff is also the litigation trustee for the DBSI Estate Litigation Trust formed under a confirmed chapter 11 plan, and charged inter alia with pursuing transfer avoidance actions.
*800In November 2010, Plaintiff filed the complaint commencing this action against Marty Goldsmith ("Defendant").1 Plaintiff seeks to avoid certain transfers under § 548(a)(1) and (2), and under Idaho state law made applicable under § 544(b), and to obtain recovery under § 550.2 This adversary proceeding was filed in the District of Delaware and venue was subsequently transferred to this Court in October 2012.
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (2)(H) and (O) in which this Court enters final orders and judgment.3
This Decision constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052.4
FACTS
A. Overview
The Delaware Bankruptcy Court substantively consolidated numerous DBSI debtor and non-debtor entities after finding, among other things, that they operated as a single economic enterprise with largely overlapping officers, directors, members, and general partners.5 The primary and parent entity at bankruptcy was DBSI, Inc., the successor as of 2008 to DBSI Housing Inc. Doug Swenson was the majority owner and principal executive of DBSI and its predecessor.
As the Delaware court also found, "DBSI and its related entities were involved in three main spheres of business activity: the syndication and sale to investors of tenant-in-common interests in real estate, the purchase of real estate, and investments in technology companies." Zazzali v. Mott (In re DBSI, Inc.) , 447 B.R. 243, 245 (Bankr. D. Del. 2011).6 That court also rendered, in connection with confirmation, findings and conclusions including "that 'DBSI ran its business and entities as a unified enterprise under common ownership and control' with a 'small *801group of insiders [who] employed that control to raise cash, commingle it, and then distribute it as needs presented.' " Id. (quoting confirmation order); see also Ex. 315 at 14.
The parties are in general agreement with the Delaware court, and others, that DBSI and its many related entities, under the control of Doug Swenson, his sons Jeremy and David Swenson, Gary Bringhurst and Mark Ellison, were engaged in a massive Ponzi scheme. As Defendant's closing brief concedes:
In this case, there is substantial evidence, which Goldsmith does not dispute, that beginning in 2005, certain entities within the DBSI group were operating with the characteristics of a Ponzi scheme .... [T]he operation of the Ponzi centered on three investment units sold by DBSI as either securities through security markets or as interests in real estate through real estate markets: (1) promissory notes, both secured and unsecured; (b) [sic ] bonds, usually secured; and (3) TICs or tenant in common units. The largest of the three was the TIC investment unit, with DBSI entities selling a whopping $1.2 billion in TIC units in one year. The problem was not in the sale of the TIC units, it was what was done with the proceeds of later TIC sales that created the Ponzi.
The Ponzi scheme on the notes, bonds and TICs of DBSI occurred when later investment units were created and sold to new investors ostensibly to raising [sic ] new funds to investment [sic ] in legitimate real estate investments. Instead, the new funds raised would be used to repay or redeem earlier investors at what had become unsupported rates of return that had been promised.
Doc. No. 353 at 13.7
B. The adversary proceeding
The transaction underlying this litigation was the purchase of certain Idaho real estate from Defendant. As this Court noted in a prior decision, Plaintiff asserts that Defendant received around $29 million in exchange for selling approximately 180 acres of real property located in Ada County, Idaho (the "Property" or, at times, the "Tanana Valley Property") that was worth substantially less. Zazzali v. Goldsmith (In re DBSI Inc.) , 2013 WL 1498365, *1 (Bankr. D. Idaho Apr. 11, 2013).8 Plaintiff contends DBSI was in desperate need of additional real property to "TIC out" to investors in order to keep the Ponzi alive, and was willing to pay more than fair market value for this property in order to obtain it for such purpose. Id. at *6-7.
The Court strongly encouraged a mediation process in this litigation, which ultimately was unsuccessful.9 Thereafter, the Court, with the concurrence of the parties, scheduled the trial in two phases. Phase I, tried on September 11-14, 2017, dealt with the value of the Tanana Valley Property. That phase was resolved through entry of oral findings of fact and conclusions of law on November 8, 2017, which are incorporated fully by reference, and here generally summarized.
*8021. Phase I and the valuation ruling
The Property was mostly undeveloped ground located at the southeast corner of Meridian Road and Victory Road in Meridian, Ada County, Idaho. On October 21, 2005, the owners of the Property (the Caven L.O.M. Trust and the Caven Foundation) sold the Property to Justin Martin or his assigns for $19,200,000. Martin, who is Defendant's half-brother, conveyed the Property to Defendant by deed executed that same day, though the deed was later recorded in June 2006. Between the execution and the recording of this deed, Defendant entered into a Purchase and Sale Agreement ("PSA") on April 17, 2006 with Kastera, LLC ("Kastera") as the purchaser. Ex. 101.10 Under the PSA, Defendant contracted to sell the Property-which he had acquired just six months earlier for $19,200,000-for a total price of $35,804,500. This amount was to be paid through earnest money of $3,400,000 in the form of a note from Kastera, guaranteed by Kastera's owners, Doug Swenson and Thomas Var Reeve, with a due date of September 10, 2006, and the balance of $32,404,500 was to be paid at closing, scheduled in October 2006. Id. ; see also Ex. 103 (note), Exs. 108, 109 (guarantees).
The Property was in a "rural urban transition" zone, and Defendant-a local real estate developer-had already applied for annexation into the city of Meridian and for preliminary plat approval for a residential subdivision. The PSA required Defendant to obtain, before closing and at his cost, "acceptable entitlements" (i.e. , actual annexation and preliminary plat approval). In August of 2006, Defendant achieved annexation. However, that same month, Reeve had discussions with Defendant about Kastera's inability to meet the earnest money deadline, or to close as scheduled. See , e.g. , Ex. 204.11
By an agreement reached in September 2006, and based on a payment of $500,000 to Defendant, the maturity date of the earnest money note was extended one month to October 10, 2006. Ex. 105. On that new due date, a check in the amount of $2,980,258.54 was paid by Kastera, LLC to Defendant. Ex. 110. As addressed in the Phase I decision, this amount represented the balance owed on the earnest money note after adjusting for the prior partial payment and accrued interest.
A September 13, 2006 "second amendment" to the PSA set a January 27, 2007 closing date. Ex. 106 at 2.12 But as that date approached, a January 22, 2007 letter from Reeve advised Defendant that Kastera would not close at the $35,804,500 figure but, instead, offered to purchase the Property for a total of $24,000,000 inclusive of the earnest money. Ex. 133.13 Following negotiations, a February 19, 2007 "third amendment" to the PSA established that the balance of the purchase price to be paid at closing (i.e. , in addition to the earnest money paid in October 2006) would be $25,400,000. It also provided that the January 2007 closing would be extended to February 26, 2007. Ex. 140.
The transaction closed on that day, and the final price paid for the Tanana Valley Property under the terms of the third *803amended PSA, comprised of earnest money of $3,400,000 and a final payment of $25,400,000, was $28,800,000.14
The Court, in its November 17, 2017 Phase I decision, found that the value of the Property, as of February 26, 2007, was $25,480,000.15
2. Phase II
All other issues were reserved for Phase II. Trial was held on February 26-28 and March 1-2, 2018. The matter was taken under advisement upon the submission of closing briefs on March 16, 2018.
C. DBSI's TIC business and operations
The testimony of multiple witnesses and hundreds of documents established how DBSI and its numerous subsidiaries, closely-owned and other related entities, operated.
In confirming the Second Amended Joint Chapter 11 Plan for the DBSI entities, the Delaware court in October 2010 summarized:
25. Prior to the Petition Date, the DBSI enterprise was separated into three main spheres of activity:
(a) the syndication and sale to investors of TIC interests in real estate ("TIC Investment"). Offering documentation reflects that the marketability of those interests rested on (i) their qualification under Internal Revenue Code § 1031 as a tax-minimization device for sheltering capital gains in commercial real estate, and (ii) guarantees given by DBSI of a steady return on investments;
(b) the purchase of real estate at various stages of development for ultimate sale to the TIC Investors; and
(c) investment in the Technology Companies.
26. Underlying these various business activities were a number of fund-raising entities. These issued debt instruments such as notes and bonds, or offered participation shares in limited liability companies through private placement offerings to qualified investors (collectively the "Note/Bond/Fund Entities"). Investors in the Note/Bond/Fund Entities provided capital for the other three areas of the DBSI enterprise (the "Note/Bond/Fund Investments").
Ex. 315 at 13-14.
The structure of DBSI's TIC operation involved the acquisition by a DBSI entity of real property, often an income producing property (e.g. , a retail shopping center, office park or building). Investors willing to purchase a fractional interest in the property were then solicited. Simultaneously, a DBSI entity (as a "master lessee") entered into a "master lease" with the TIC investors in/owners of the property. This master lessee leased the property from the TIC investors and then subleased it to commercial tenants; collected rent from those tenants; paid the operating expenses of the property; and paid the debt service to the lender who financed acquisition of the property, which lender was typically secured by a mortgage on that property. The TIC owners were assured a fixed monthly payment reflecting a return *804on their investment. The evidence indicated that the agreements with TIC investors obligated the DBSI master lessee to ensure the property was leased to sublessees, that tenant improvements were made, and that the property's expenses were paid.16 DBSI promoted the financial strength of this structure by touting DBSI's real estate experience and its professional management of the acquired properties being leased.
1. McKinlay and Bringhurst testimony
Matthew McKinlay was a former accounting manager at DBSI and reported to Matt Duckett, DBSI's vice president of finance and accounting. McKinlay's testimony demonstrated significant and detailed knowledge of the business records and operations of all DBSI entities, having worked with the books and accounting records on a daily basis and being the current custodian of DBSI records.17
McKinlay explained that DBSI Housing (later DBSI, Inc.) was the controlling parent entity for hundreds of other entities, and how it created and managed a business process that utilized DBSI-controlled subsidiaries and related entities to acquire real estate for sale to investors who would buy the fractional (TIC) ownership interests. The sale of these TIC interests occurred through a "real estate channel" under a DBSI entity, FOR 1031, LLC ("FOR 1031"), which sold those interests through real estate brokers. TIC interests were also sold through a "securities channel" under DBSI Securities Corp. ("DBSI Securities").18
McKinlay was involved in the DBSI chapter 11 plan as it was developed, and was involved in the administration of the confirmed plan. He validated the accuracy of the finding that, inter alia , supported substantive consolidation of all the debtors' estates as one estate:
27. DBSI ran its businesses and entities as a unified enterprise under common ownership and control. A small group of insiders employed that control to raise cash, commingle it, and then distribute it as needs presented, without regard for source or restrictions on use. The practice of running DBSI as a unified enterprise caused investors to rely upon the purported financial strength and competence of the unified enterprise in deciding to invest in various DBSI projects. The Chapter 11 Trustee's factual investigation revealed transactions of fantastic and tortured complexity. These inter-entity transactions cannot practically be unraveled. Based upon the proofs submitted by the Plan Proponents, the Court finds that it is impossible to truly trace and separate cash obtained from the Note/Bond/Fund Entities and cash obtained from TIC Investments, just as it is impossible to separate cash used to pay Note/Bond/Fund Entities' obligations from cash used to pay TIC Investment obligations. Moreover, a great many transfers of cash and properties between DBSI entities were either constructively or actually fraudulent or otherwise gave rise to claims between the DBSI entities. Any *805attempt to trace all the different transfers and litigate the competing rights and claims among the DBSI entities would involve years of contentious litigation and, ultimately, administratively bankrupt most if not all of the Debtors' estates.
Ex. 315 at 14-15.
McKinlay described DBSI as being the "mothership" to which all subsidiaries reported, and that Doug Swenson at all times held the majority ownership in DBSI. McKinlay testified that Doug Swenson controlled the ultimate decisions on all DBSI matters-including the final decisions in "cash management meetings," which determined where and how available funds would be used on a global DBSI basis.
McKinlay had a team of employees that fielded TIC investor calls and handled investor relations. Among other things, they received many questions about the use of the accountable reserves for purposes other than the limited ones required or allowed under the agreements. But, in fact, while a portion of TIC investments had been "booked" as accountable reserves, that cash was never actually segregated. This component of the TIC investors' payments was used by DBSI wherever it was needed.19 By the time of bankruptcy, it was fully exhausted.20
McKinlay also explained that DBSI had a notes and bond business which raised funds that could be used to buy real estate. DBSI was the sole owner of DBSI 2005 Secured Notes Corporation ("DBSI 2005 Notes"), DBSI 2006 Secured Notes Corporation ("DBSI 2006 Notes"), and DBSI 2006 Land Opportunity Fund LLC ("DBSI 2006 LOF").21 As noted in the confirmation ruling by the Delaware court, the TIC investments and the note/bond investments were structured differently. The TIC investors had an interest in real property (albeit fractional) and the note and bond fund investors had a payment obligation from a DBSI entity that may have held debt or equity interests in other DBSI real estate entities. Ex. 315 at 18.
Gary Bringhurst joined FOR 1031 in 2003. In 2005, DBSI Discovery Real Estate Services ("DDRS") was formed as a joint venture between FOR 1031 and DBSI Securities to handle their operational issues. Bringhurst became the president and CEO of DDRS in 2005.
*806Bringhurst explained that cash management meetings were held at DBSI starting toward the end of 2005. These meetings were attended by Doug Swenson, Jeremy and David Swenson,22 Reeve as president of Kastera,23 Bringhurst, and DBSI's controller Paris Cole. The meetings dealt with cash availability and needs on a "global" DBSI basis, and a "cash sheet" would show the real estate that needed to be bought or sold, funding requirements for operations, and similar data.24 The ultimate decisions as to the use of cash were made by Doug Swenson.
The frequency of the cash meetings accelerated from monthly to weekly as cash needs increased but its availability tightened. The cash situation became increasingly problematic from early 2006 on. Cash was needed to obtain additional property for the TIC program, make the ongoing required payments to existing TIC investors, meet the operational needs of the existing TIC properties, and fund Stellar Technologies, Inc. ("Stellar"), the holding company for DBSI's significant investments in technology companies.25
Additionally, in July 2007, the SEC issued a notice that TICs were securities that could be sold only through licensed broker dealers, with appropriate PPM. As a result, FOR 1031 ceased selling TICs, but TICs were still being sold in the securities channel via DBSI Securities.
In summary, DBSI's income came from TIC sales, and also from sales of bond and note interests.26 DBSI also satisfied its *807incessant need for cash by using the accountable reserves that had been created in prior TIC sales, but it did so contrary to the contractual restrictions on use of such reserves.
As noted, the TIC investors were entitled to ongoing payments. According to Bringhurst, the ability to pay those investors was contingent on DBSI obtaining new TIC properties and soliciting new investors but that was never disclosed to either the old or new investors.
Bringhurst also described the monthly "asset management meetings" attended by Doug Swenson, Bringhurst, Duckett, Brian Olsen (the COO of DDRS), and DDRS's Michael Attiani (responsible for master lease portfolio management on the property side) and Steve Winger (similar responsibility from the leasing side), both of whom reported to Olsen. These meetings established that DBSI's master lease portfolio, managed by DDRS, was hemorrhaging money. While investors had received some information as to portfolio or asset performance, that ceased around the end of 2005 when the portfolio as a whole ceased to perform profitably.27 The December 2005 asset management report showed a year-end cash flow loss of $8.7 million. Ex. 329 at 3.28 The December 2006 report showed the year-end loss had doubled to $16.6 million. Ex. 336 at 3. And the December 2007 report showed the loss had doubled again, to $38 million. Ex. 333 at 2.29
Bringhurst acknowledged that, throughout this period, investors were given a misleading picture of DBSI's financial health. However, notwithstanding that misleading information, investors were becoming increasingly concerned.
One such investor, Bil Marvel, wrote to Doug Swenson in March 2007, explaining that he owned TIC interests in fifteen properties and, according to 2006 year end statements, only two made money in that year, and that the total dollar loss on the other thirteen properties was $4.37 million in 2006.30 Ex. 1033. He also noted that three of these properties had negative NOI (net operating income). He raised serious concerns over the losses, downhill performance, and absence of any communications from DBSI. Id. DDRS's March 8, 2007 response to Marvel, Ex. 1034, blamed poor performance on a loss of major tenants and reduced cash flow until the properties were re-leased. It also asserted that the properties in which Marvel had invested "were among the worst performing properties" in the portfolio during 2006 and the "overall operating cash flow during 2006 of all the properties in [the]
*808portfolio was appreciably better than the overall operating cash flow of [Marvel's] properties alone." Id. Bringhurst testified that this letter was neither honest nor accurate.31 As was mentioned above, the forecasted operating cash flow loss for 2006 was $19.1 million, but that projection was exceeded by an additional $5.7 million.
On February 26, 2013, Bringhurst entered into a plea agreement, Ex. 317, pleading guilty to the charge of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and 15 U.S.C. §§ 77q and 77x. He agreed to cooperate in the United States' criminal prosecution of Doug Swenson, David Swenson, Jeremy Swenson, and DBSI's general counsel Mark Ellison, and he testified at their trial held before the United States District Court for the District of Idaho.32 Bringhurst explained that he had chosen this course because, upon reflection, he realized the investors not only wanted but were entitled to truthful information, they did not get it, and he had an opportunity to do something about it, but did not. Bringhurst also testified as to the accuracy of the "factual basis" recited in the plea agreement that both he and the government agreed would be proven beyond a reasonable doubt at trial. Id. at 4-9.33
The Court found McKinlay and Bringhurst to be knowledgeable witnesses; their testimony was detailed and credible and is entitled to significant weight.
D. Miller's investigation and report
Gil Miller is well qualified as an expert.34 He testified at length with regard to his investigation of the financial condition and transactions of DBSI and its affiliated limited partnerships, corporations and other business entities.
Miller found that the DBSI businesses and enterprise operated as one economic unit under the common ownership and control of a small number of individuals led by Doug Swenson. The "DBSI Group" consisted of hundreds of entities under the control of Swenson and these insiders.35 These individuals made decisions on a global basis, as demonstrated by, among other things, the weekly cash meetings *809assessing the cash needs of the entities collectively and allocating funds without regard to the source of the cash or restrictions on its use.
Miller addressed the DBSI Group's insolvency on a consolidated basis. He explained that this was not only how DBSI operated, but that accounting rules require such an approach when over 50% of an entity was owned by another.36 He concluded the DBSI Group was insolvent on a balance sheet basis from December 31, 2004 (a negative $77 million) through December 31, 2008 (a negative $296 million). Ex. 362; see also Exs. 363-367. He concluded there was no evidence of solvency at any time between those dates.37
Miller also concluded, consistent with the testimony of Bringhurst and McKinlay, that the decisions of Doug Swenson to invest heavily and continually in the technology companies was a material factor in the insolvency.
Miller testified that as early as January 2005 DBSI became dependent upon new investor money.38 He concluded DBSI was operating as a Ponzi scheme-a type of financial fraud where new investor money is required and used to pay old investors-since at least January 1, 2005.39 He identified the specific characteristics of a Ponzi scheme, and he found them all present in DBSI's operations.40
Miller explained there were three primary factors that led to DBSI's dependence on new investor money and its misuse of old investor money including the accountable reserves: (1) the sale of $1.2 billion of TIC interests in 2004 and significant continued TIC sales thereafter, which increased the DBSI Group's master lease obligations, debt service obligations, and TIC investor payments; (2) the ongoing misuse of investor funds to make continual and significant investments in technology companies that generated no income or profit; and (3) the existence of obligations to real estate limited partnership investors dating back to the 1990's.
Miller's conclusions were solidly based, capably defended, and persuasive. His testimony on both direct and cross-examination was precise. His mastery of the huge amount of financial material and documentation was evident. His testimony is entitled to, and is accorded, significant weight.41
E. The Idaho Criminal Case
A superceding indictment was entered on May 17, 2013, in the Idaho Criminal Case against Douglas Swenson, David and *810Jeremy Swenson, and DBSI counsel Mark Ellison. Ex. 1001. Following trial, a jury verdict was rendered on April 14, 2014, finding each of these defendants guilty on multiple counts. Ex. 318. Judgments were entered of record on August 24, 2014, reflecting the Court's imposition of judgment on August 20, 2014. See Exs. 319A (Douglas Swenson); 319B (Mark Ellison); 319C (Jeremy Swenson); 319D (David Swenson).42 The Ninth Circuit Court of Appeals affirmed the convictions of each defendant for securities fraud, and of Doug Swenson for wire fraud. Ex. 1009 (unpublished decision of Aug. 15, 2017).
F. Kastera
Kastera was formed in 2005, and owned by Doug Swenson (67%) and Var Reeve (33%).43 It was capitalized at $6,000,000. Swenson and DBSI's general counsel, Ellison, advised Reeve that, in order to solve a separate tax consequence facing Reeve, Swenson had decided to "loan" Reeve $2,000,000 which Reeve was then to use to pay for his 1/3 interest in Kastera.44 The funds were never received or held by Reeve, and the capitalization was accomplished solely by documents and book entries.45
Kastera, according to Bringhurst, had employees, office facilities, a bank account, payroll, and filed tax returns.46 Kastera was envisioned, at least by Reeve, as being a company that would acquire real estate for development. It built 25 homes in 2005 and was exceeding that rate in 2006. Kastera was not a DBSI debtor or consolidated non-debtor in the chapter 11.47 Miller also noted that Kastera's initial capitalization was not in cash but rather by book entries characterizing FOR 1031's funding of Kastera as a "distribution" to Swenson.
Kastera obtained from DBSI entities the funds it needed to acquire properties. McKinlay indicated Kastera was never a cash source but was instead a cash destination and obtained its cash from DBSI sources. For example, he testified that DBSI bonds and notes were sources for the capital Kastera required to buy real estate, and that Kastera was responsible for over 72% of the total borrowing in 2007 from DBSI 2006 Notes. See Ex. 1258.48
*811Reeve testified that Kastera did not use non-DBSI third-party financing for its acquisitions.49 And the evidence established that Swenson personally exercised significant control over Kastera and its decisions.50 As an example, Reeve recounted that Kastera had acquired a parcel of property for $3.5 million and immediately received offers to sell it for between $5 and $9 million. While Reeve thought Kastera should sell it and realize that profit, Doug Swenson did not, and Swenson's decision controlled.51
In his testimony Reeve acknowledged that Kastera in 2006 and 2007 could not have self-financed its proposed purchase of the Tanana Valley Property, and that the funds necessary to accomplish that purchase (like other Kastera purchases) would have to come from DBSI. Bringhurst testified that he did not recall any source of funding for Kastera acquisitions other than DBSI, and that Reeve had to attend the cash meetings to seek such funds. Kastera was capitalized through, and was dependent for its operational financing upon, DBSI.
Reeve envisioned Kastera as a development and home building company that acquired property for those purposes, and not as a vehicle for acquiring properties that would be used for sale to TIC investors. However, Kastera properties financed by DBSI or DBSI entities were TIC'd out, and Reeve indicated Doug Swenson "called those shots." Swenson made the decisions as to which properties would be used in the TIC portfolio and which ones Kastera could develop with DBSI financing.52
Tom Morris was general counsel for Kastera from August 2005 to November 2008. Though he reported to Reeve, he had significant interaction with DBSI and its general counsel, Ellison. Morris, like Reeve, described Kastera's "vision" as becoming the primary home builder in the Boise and Meridian area. He became involved with DBSI because of the close relationship between it and Kastera, including Doug Swenson's majority ownership of Kastera. According to Morris, Kastera would identify a property or project it wanted to develop, and would obtain the money it needed to purchase that property from a DBSI entity.53 Morris said Kastera would enter into purchase agreements without having arranged financing, *812but only if Swenson had "green-lighted" the deal. He noted that Swenson also did not like "flipping" parcels acquired by Kastera, even if they could be quickly turned for profit. As Morris stated, "all decisions went through Doug."54
G. The Tanana Valley transaction
The underlying PSA for the Tanana Valley Property was between Kastera as the purchaser and Defendant as the seller. The PSA required a short term $3,400,000 earnest money promissory note by Kastera, guaranteed by its owners Doug Swenson and Reeve, with the balance of the funds due at closing. Ex. 103 (note); Exs. 108, 109 (guarantees).55
After Reeve advised Defendant that Kastera could not meet the deadlines required under the PSA, an "extension payment" of $500,000 was made on the earnest money note, and an extended date of October 10, 2006, was set for payment of the balance of the earnest money. Ex. 105 (second amendment to PSA).56 On October 10, 2006, Defendant was paid $2,980,258.54 as the balance of the earnest money owed. Ex. 110.57
The $2,980,258.54 payment to Defendant was made by a Kastera check. Ex. 110. The funds required for this payment were obtained by Kastera from DBSI 2006 LOF. Exs. 111-113 (reflecting $3,000,000 transferred by DBSI 2006 LOF by wire to DBSI Housing then by wire to Kastera which issued the check to Defendant).58
The balance of the purchase price under the amended PSA, after the satisfaction of the earnest money note, was $25,400,000. Ex. 140 (third amendment to PSA) at 1. Just prior to and in connection with the closing on February 26, 2007, Kastera transferred all its interests under the PSA to DBSI Tanana Valley LLC ("DBSI-TV"), an entity which had been formed *813four days earlier to take title to the Property.59
Exhibit 155, the purchaser's closing statement, reflects a "contract sales price" of $28,800,000 (a figure comprised of an earnest money credit of $3,400,000 and closing amount of $25,400,000). This statement also showed a "new loan" to the purchaser, DBSI-TV, in the amount of $26,350,000, in order to fund the transaction. Id. ; see also Ex. 146 (promissory note of DBSI-TV to DBSI 2006 Notes for $26,350,000). A mortgage was recorded the day of the closing under which DBSI-TV secured that obligation to DBSI 2006 Notes with the Property. Ex. 148. Morris indicated the $26,350,000 figure represented 85% of a $31,000,000 appraisal60 and reflected an attempt to borrow the maximum amount possible.
The $26,350,000 borrowed was transferred by DBSI 2006 Notes through DBSI Redemption Reserve ("DRR")61 and then went by wire transfer to the title company, Title One, for disbursement to Defendant or third parties on his behalf. Exs. 111, 114, 155. Internally, DBSI treated the funding as a loan from DBSI 2006 Notes to DBSI-TV, secured by the Property, and with that loan guaranteed by DBSI. Exs. 145-155.
Defendant's approved closing statement reflected that from the $28,800,000 contract purchase price, he was credited with having received the $3,400,000 earnest money. He also, from the funds that were provided to the title company, (1) had $14,202,232.87 applied to pay off his underlying mortgage to the benefit of Washington Federal; (2) had his closing expenses of $40,977.08 satisfied; and (3) was paid a balance of $11,156,790.05. These distributions at closing to or for the benefit of Defendant totaled $25,400,000. Ex. 208.62
As mentioned earlier, in asserting an avoidable transfer, Plaintiff contends Defendant should be liable for all the funds he received in the transaction or, alternatively, at least liable for the "$2.92 million differential between the final purchase price for Tanana Valley and its fair market value." See Doc. No. 354 at 56; see also *814Doc. No. 308 (brief) at 1 (arguing Defendant received from DBSI sources a total of $28,400,000 (i.e. , $ 25,400,000 at closing, and $3,000,000 in satisfaction of the Earnest Money Note63 ), and in return transferred the Property worth $25,480,000-the Court's value determination in Phase I-thus resulting in a $2,920,000 difference).
Notwithstanding these positional statements, the details of the transaction indicate Defendant received $2,980,258.54 in the earnest money transfer (with Kastera retaining the other $19,741.46 of the $3,000,000 that was borrowed from DBSI 2006 LOF). In the closing, Defendant received amounts totaling $25,400,000. Of the total funds of $26,350,000 provided by DBSI 2006 Notes, $953,510.58 remained, which was applied toward the repayment of DBSI 2006 LOF's loan of the funds needed to satisfy the earnest money. See supra note 62.
The approach taken by counsel for both parties to simplify the nature of the transfers and their discussions about the amount of Defendant's potential liability was perfectly understandable. However, in the context of determining that liability, precision is important. From the evidence and the foregoing summary, the Court determines that the amounts originating from the two DBSI entities and transferred to or to the benefit of Defendant consist of $2,980,258.54 in October 2006 and $25,400,000 in February 2007. These total $28,380,258.54. The value of the Property at the time of transfer in February 2007 as found by the Court in Phase I was $25,480,000. The difference (or "delta" as counsel often referred to it) is $2,900,258.54.
H. Post-closing TIC sales
The transaction with Defendant closed on February 26, 2007. Six months later, DBSI commenced selling TIC interests in the Tanana Valley Property with the first of the "Cavanaugh" PPM offerings. Ex. 400 (Cavanaugh PPM dated September 26, 2007).64 This reflected DBSI's intended and actualized use of the Property, now titled in DBSI-TV. Morris indicated that Kastera, though developing the Property as a Kastera "project," did not agree with using the Property for TIC investments. He stated "we didn't like it, but it wasn't our call."
I. Additional evidence related to Defendant's knowledge
Defendant's original plan for the Tanana Valley Property was to get the entitlements and develop it, not to sell it. But Martin had learned that Kastera was interested in buying property in the area and relayed that information to Defendant, who was already generally aware of Kastera as being a "large" home builder in the area. Defendant knew Kastera had constructed 20 to 30 homes, including a large "parade" home. He was aware that Kastera was looking for development ground as well as building lots and was buying a lot of property.65
*815Defendant said he had "little to no" knowledge of DBSI, but became aware by the time of the PSA that Kastera could get money or financing from DBSI. However he had no exposure to either Reeve or Swenson until just prior to negotiating the PSA.
The use of an earnest money note, with Reeve and Swenson as guarantors, had initially raised some concern, but Defendant said he "got over it." He could see that aspect as being a reasonable part of an agreement structure which included his own need to obtain preliminary entitlements. Defendant also did "some work" in his office, including a limited internet search of Swenson which suggested to him that Swenson "was worth some money." He therefore accepted the earnest money note, and the personal guarantees of that note, as a component of the deal.
Defendant's real estate attorney, Brian McColl, drafted the initial PSA, note, and guarantees. He explained that the guarantees were an important aspect of the transaction, because the earnest money was in the form of a note, not cash, and the note had to be paid in September. However, as he testified, the guarantees were by individuals "who I had every reason to believe had significant wealth."
Defendant's August 14, 2006 memo to file, Ex. 204, notes that he met with Reeve and Tom Morris66 "of Kastera Homes and DBSI" on August 8 and at that time learned that the PSA's earnest money and closing deadlines could not be met. Defendant was told there were issues related to Kastera's obtaining the necessary financing. Defendant noted in this memo that he was told the "Bond was not out and there was a SEC restriction."67
On September 11, 2006, one day after the earnest money note was due, Defendant, McColl and Martin met with Doug Swenson, Reeve and Morris. The testimony of Defendant, Reeve, McColl and Morris, corroborated by Morris' notes,68 reflect that Kastera's principals, Swenson and Reeve, requested an extension on the payment of the balance of the note then due, and also an extension of closing under the PSA until the end of January 2007.
As McColl explained at trial, he and Defendant were told at that meeting, by Swenson, that the funding to be used for Kastera's purchase of the Property was being obtained through a bond, and they were assured the bond would be issued in a couple of weeks. However, they were told that, after such issuance, a cooling-off period would follow, and then the broker-dealers would do their due diligence and follow that with actual sales which would generate the funds needed to close.
Defendant agreed to extend the due date on the note for 30 days (to October 10) in return for an immediate payment of $500,000 and Swenson's assurance he would honor the note and pay the $3.4 million earnest money even if the transaction did not ultimately close. In addition to the note extension, the parties also agreed to extend the closing date to January 27, 2007.69 As a component of these accommodations, *816Defendant was allowed to take back-up offers in the interim.
On September 12, 2006, the $500,000 was paid.70 In McColl's view, meeting with Kastera's principals face to face, receiving $500,000 cash for the extension, and having control of the documentation, ameliorated his normal concerns when buyers want to buy more time on a transaction.71 The $2,980,258.54 balance due on the earnest money note was thereafter paid by a Kastera check on October 10 as required. Ex. 110. There was no evidence Defendant knew the source of the money Kastera used to pay for the extension even though he generally knew Kastera was relying on financing from DBSI in order to fund the transaction. McColl testified that knowledge of DBSI 2006 LOF's involvement only came during litigation.
Defendant said that later in October, Kastera started "making noises" about potentially not being able to close as scheduled. He viewed this as an attempt to "soften him up" for an additional modification. McColl then wrote a November 8 letter to Morris warning that a failure to close would result in Defendant's pursuit of all remedies and damages.72 He also noted that, at the time the extension of closing to January 27, 2007, was being negotiated, Defendant had made it clear he needed to close the sale by the end of January because the proceeds were required in order to meet a closing date for his purchase of other real property. Thus, McColl argued, the damages would be significant. However, McColl did not discourage Kastera's communication of an alternative proposal which it had mentioned previously.73
Following further negotiations between counsel,74 the agreement was reached on February 19 under which, in addition to the already paid earnest money, $25,400,000 would be paid to Defendant on February 26 to close.75
On the closing date, McColl learned that title would be taken by DBSI-TV, not Kastera.76 This required the form of the deed he had drafted to be changed. However, McColl explained, the taking of title in a special purpose entity was not unusual, and simply required him to perform his due diligence to ensure the entity had been properly created and its organizational documents properly filed. McColl also learned, as the transaction closed, that DBSI-TV's funding of the closing amount was obtained through financing from DBSI 2006 Notes under a promissory note/mortgage structure. However, McColl and Defendant both testified that how the buyer put together its financing and could afford to close was not significant. None of this, in McColl's or Defendant's view, raised any particular concerns.
The transaction closed as described earlier.
DISCUSSION AND DISPOSITION
A. Overview
Plaintiff's action focuses on what it has characterized as the "Earnest Money Transfer" and the "Closing Transfer." The former consists of the DBSI 2006 LOF
*817transfer of $3 million by wire to DBSI, a wire transfer of the same by DBSI to Kastera, and a transfer via check by Kastera of $2,980,258.54 to Defendant, all on October 10, 2006, which satisfied the balance then due on the earnest money note. The latter consists of the DBSI 2006 Notes' intrabank transfer of $26,350,000 to DRR, and a wire transfer of the same amount by DRR to Title One Corp. on DBSI-TV's behalf and for application at closing, and Title One Corp.'s payment to Defendant of $25,400,000 on February 26, 2007, satisfying the obligations due at closing. Plaintiff contends the total of these two transfers to or to the benefit of Defendant is an amount greater than the $25,480,000 value of the Tanana Valley Property as found in Phase I. Plaintiff seeks recovery of the total $28.4 million transferred77 or, alternatively, recovery of what it has consistently referred to as the $2.92 million difference or "delta."78
B. The causes of action
1. Actual fraud
Section 548(a)(1)(A) provides, in relevant part:
The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition date, if the debtor voluntarily or involuntarily-(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted[.]
Plaintiff, as the Litigation Trustee for the DBSI Litigation Trust, exercises the avoiding powers of a trustee. Plaintiff bears the burden of proving, by a preponderance of the evidence, all of these statutory elements. Hopkins v. Crystal 2G Ranch, Inc. (In re Crystal) , 513 B.R. 413, 418 (Bankr. D. Idaho 2014).
While this provision is limited to transfers within 2 years of the petition date, § 544(b) allows a trustee to avoid any transfer of a debtor's property that occurred earlier if it would be avoidable under applicable law. Barclay v. Mackenzie (In re AFI Holding, Inc.) , 525 F.3d 700, 703 (9th Cir. 2008) (citing In re Acequia, Inc. , 34 F.3d 800, 809 (9th Cir. 1994) ).79 Here, the applicable state law is found in Idaho Code § 55-906, and the Uniform Voidable Transactions Act, Idaho Code §§ 55-910, et seq. , including Idaho Code § 55-913(1)(a) (transfers with actual intent to hinder, delay or defraud any creditor). Use of § 544(b) allows an extended look-back period allowing avoidance of such transfers that were made within four years prior to the bankruptcy filing. See Idaho Code § 55-918(1) (providing that causes of action under Idaho Code § 55-913(1)(a) are extinguished unless action is brought within 4 years); see generally *818Decker v. Tramiel (In re JTS Corp.) , 617 F.3d 1102, 1111 (9th Cir. 2010) (discussing genesis and operation of §§ 544(b) and 548); see also DBSI , 869 F.3d at 1008.80
Plaintiff's Counts 1, 3 and 6 seek avoidance of transfers on the basis of "actual fraud." Under Count 1, Plaintiff relies on § 548(a)(1)(A) in regard to the Closing Transfer on February 26, 2007, as such date is within the two year period.81 Under Count 3 and Count 6, Plaintiff relies on § 544(b) and the incorporated Idaho statutes to avoid the Earnest Money Transfer on October 10, 2006, a date within the four years preceding the petition date. Under each of these counts, Plaintiff seeks to impose liability on Defendant under § 550 and preservation of the avoided transfer for the benefit of the estate under § 551.82
C. There was a single transaction
Defendant, emphasizing Plaintiff's terms "Earnest Money Transfer" and "Closing Transfer," contends that each was a separate transaction. As just one example, Defendant's closing argument states:
In any event, the October earnest money deposit was not part of the contract that closed in February of 2007. The balance of the earnest money deposit of $3 million[83 ] was part of the original contract that was signed in April of 2006. That agreement was breached in November of 2006 and repudiated. When it was repudiated, both Goldsmith and Kastera deemed the earnest money forfeited. The parties negotiated further and entered into a new deal for the conveyance of the land in question, that was signed in February of 2007, just prior to closing. The new deal had no conditions, no post-closing obligations, conveyed the land as is and where is, made no reference to the earlier payments made on the April contract, and contained mutual releases among all parties.
Doc. No. 353 at 28. Defendant thus argues that the $25,400,000 closing amount was $80,000 less than the Court's $25,480,000 value found in Phase I and, consequently, that specific "transfer" could not be avoidable as either an actual or a constructively fraudulent transfer. Id. at 27-29.
Defendant's characterizations of the PSA as "repudiated" and the earnest money *819as "forfeited" and the ultimate conveyance as a "new deal" are not supported by the record. The evidence establishes the PSA was serially amended and, as so amended, was ultimately closed. Contrary to Defendant's explication, the obligation to pay the earnest money was reaffirmed through the "second amendment" even though the timing of its payment was changed by reason of the $500,000 extension payment, and the closing date and amount were changed through the third amendment.
Defendant's taxonomic arguments are found unpersuasive. The evidence establishes that both the Earnest Money Transfer and the Closing Transfer were components of a single transaction in which DBSI-originated funds were used to purchase the Tanana Valley Property.
The earnest money requirement and the closing obligation both arose out of the same contract, the PSA, and both payments were required in order to obtain the Tanana Valley Property. Contrary to Defendant's contention that the agreement to pay $25.4 million was a "new deal" or a "new contract," the parties negotiated and executed a "Third Amendment to Real Estate Purchase and Sale Agreement" with direct internal reference to the original PSA of April 17, 2006 (therein defined as the "Agreement"), as amended previously by an addendum on April 17, 2006 and by the "Second Amendment" on September 13, 2006. Ex. 511 at 1 (emphasis added). In addition, Defendant's arguments about repudiation do not address the inclusion in the Third Amendment of paragraph 8, entitled "Continued Effectiveness of Terms of Agreement," which provides that "Except as provided in this Third Amendment, the terms and conditions of the Agreement [i.e. , the PSA] shall remain in full force and effect." Id. This Third Amendment to the PSA changed the closing date and the balance of the purchase price required of Plaintiff.
The closing statement corroborates the existence of a single transaction by providing Defendant a credit against the total purchase price for the earnest money that was paid prior to closing. It was at all times the same basic contract for the sale of the real estate, though serially amended and completed in two stages. While, as will be discussed, there were two transfers to Defendant at issue, they were not independent transactions as Defendant argues.
D. The transfers were made by participants in, and in furtherance of, a Ponzi scheme
As noted at the outset of this Decision, Defendant does not now dispute the existence of a massive Ponzi scheme by DBSI and numerous related and consolidated entities. Plaintiff established at trial, particularly through the testimony of Miller, Bringhurst and McKinlay and the exhibits related to their testimony, that DBSI et al , under the control of Swenson, his sons, Ellison and others, was engaged in an enormous Ponzi scheme for an extended period of time. That time period encompassed all the dates relevant to this litigation. The fact that a Ponzi scheme existed is incontrovertible on the evidence presented at trial.
1. Kastera
The evidence establishes that Kastera was not independent of DBSI's control in connection with any of the matters here litigated. Even though Reeve wanted Kastera to independently operate, he held only a minority ownership position in the entity.84 Swenson had a controlling two-thirds' interest in Kastera, and exercised that control, including at times dictating the *820work Kastera could perform, such as overruling Reeve's desire and recommendation that Kastera sell acquired properties for profit. Additionally, Kastera had no independent financial ability to acquire property such as the Tanana Valley Property, and had to rely on loans from DBSI or DBSI entities. Whether funds would be made available to Kastera for use in its building or development efforts depended on the outcome of the cash management meetings and Swenson's ultimate controlling decisions at such meetings as to where funds would go. Kastera was also reorganized into two divisions, a structure that Morris as its general counsel did not understand, but which Kastera accepted because Swenson had so decided. Additionally, the acquisition of the Tanana Valley Property was made at a time when additional TIC property was desperately needed by DBSI. DBSI dictated that the transaction would close with the Property being vested in DBSI-TV, not Kastera, and after it was transferred to DBSI-TV, it was quickly put to use as TIC inventory.
Though neither a debtor nor a consolidated nondebtor in the bankruptcy, the evidence establishes Kastera was part and parcel of the DBSI operation, and the DBSI Ponzi scheme. The acquisition of the Tanana Valley Property would not have occurred but for DBSI's desire that it occur, and its control of the process and financing of the transaction. Kastera, among others, was utilized by DBSI to perpetuate the Ponzi scheme and the Tanana Valley Property acquisition was in furtherance of that scheme.
2. DBSI 2006 Notes and DBSI 2006 LOF
DBSI 2006 Notes and DBSI 2006 LOF were jointly administered debtors under the confirmed plan. See Ex. 315 (confirmation order) Ex. B (copy of Second Amended Joint Chapter 11 Plan), p. 96 (defining DBSI 2006 Notes and DBSI 2006 LOF), p. 109 (defining Plan Debtors as including DBSI 2006 Notes and DBSI 2006 LOF), pp. 120-21 (summary of classification and treatment of claims against DBSI 2006 Notes), pp. 128-29 (same re: DBSI 2006 LOF) ).
The financing structure used in facilitating the payment of the earnest money and the closing of the PSA transaction was orchestrated within the DBSI control group. DBSI 2006 LOF funded the earnest money transfer, and DBSI 2006 Notes funded the closing.
3. DBSI Tanana Valley LLC
DBSI-TV was created to take title to the Property. It was an entity controlled by DBSI Housing Inc, Ex. 190, but it was not a DBSI Consolidated Debtor, a Consolidated Non-Debtor, or a Note/Fund Consolidated Debtor. See Ex. 315. After it took possession and title to the Property, the TIC process soon commenced with the first of the Cavanaugh PPMs issued 6 months later.85 Though this implementation of the TIC was subsequent in time to the actual transfers at issue, its occurrence and timing supports and validates the finding that the Property's acquisition and use was designed to further the Ponzi scheme.
E. Actual intent under § 548(a)(1)(A) and under § 544(b) and Idaho statutes
1. The Ponzi presumption
The district court in *821Zazzali v. Eide Bailly LLP , Case No. 12-CV-349-MJP, noted that "the existence of a Ponzi scheme is a matter of disputed fact for the jury; meanwhile the application of the Ponzi presumption is a matter of law that follows on the factual finding of a Ponzi scheme."86
A Ponzi scheme is made up of a series of fraudulent transfers. "The fraud consists of funneling proceeds received from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating an illusion that a legitimate profit-making business opportunity exists and inducing further investment." Donell v. Kowell , 533 F.3d 762, 767 n.2 (9th Cir. 2008) (quoting Wyle v. C.H. Rider & Family (In re United Energy Corp.) , 944 F.2d 589, 590 n.1 (9th Cir. 1991) ); Danning v. Bozek (In re Bullion Reserve of N. Am.) , 836 F.2d 1214, 1219 n.8 (9th Cir. 1988).87
Since the evidence established the existence of a Ponzi scheme, the application of the presumption, as the district court above noted, is a matter of law.
As held in Hayes v. Palm Seedlings Partners-A (In re Agric. Research and Tech. Group, Inc.) , 916 F.2d 528, 535 (9th Cir. 1990) (" Agritech "), "the mere existence of a Ponzi scheme" is sufficient to establish the actual intent to hinder, delay or defraud creditors under a state's fraudulent transfer statute. See also AFI Holding , 525 F.3d at 704 (same; citing Agritech ). See also Plotkin v. Pomona Valley Imports (In re Cohen) , 199 B.R. 709, 717 (9th Cir. BAP 1996) (proof of a Ponzi scheme is sufficient to establish the operator's actual intent to hinder, delay, or defraud creditors for purposes of analyzing fraudulent transfers under both the Bankruptcy Code and the Uniform Fraudulent Transfers Act).88
In a DBSI-related adversary proceeding, the Delaware Bankruptcy Court explained:
This Court has previously recognized and applied the [Ponzi] presumption in these DBSI cases. See , e.g. , Zazzali v. 1031 Exch. Grp. (In re DBSI Inc.) , [478] B.R. [192], Adv. No. 10-54648(PJW), 2012 WL 3306995 (Bankr. D. Del. Aug. 14, 2012) ; Zazzali v. Swenson (In re DBSI Inc.) , Adv. No. 10-54649(PJW), 2011 WL 1810632, at *4 (Bankr. D. Del. May 5, 2011).
Yet the presumption does not relieve Trustee of the burden to show that the Transfers at issue were made "in furtherance of" the Ponzi scheme. See , e.g. , *822Bear, Sterns [Stearns ] Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.) , 397 B.R. 1, 11 (S.D.N.Y. 2007) (noting that the court must determine "whether the transfers at issue were related to a Ponzi scheme" before it can apply the Ponzi presumption); In re Pearlman , 440 B.R. 569, 575 (Bankr. M.D. Fla. 2010) ("To rely on the Ponzi scheme presumption, the trustee must allege the debtors' loan repayments were somehow in furtherance of either the EISA Program or the TCTS Stock Program Ponzi schemes.") This is because even where a plaintiff has alleged the existence of a broad, fraudulent scheme, "the [c]ourt must focus precisely on the specific transaction or transfer sought to be avoided in order to determine whether that transaction falls within the statutory parameters of [an actually fraudulent transfer]." Bayou Superfund, LLC v. WAM Long/Short Fund II, LP (In re Bayou Grp., LLC) , 362 B.R. 624, 638 (Bankr. S.D.N.Y. 2007). See also Manhattan Inv. Fund , 397 B.R. at 11 (noting that "[c]ertain transfers may be so unrelated to a Ponzi scheme that the presumption should not apply").
Zazzali v. AFA Fin'l Grp., LLC, 2012 WL 4903593, *7 (Bankr. D. Del. Aug. 28, 2012).
2. The involvement of DBSI entities
Defendant emphasizes that Kastera was neither a DBSI consolidated debtor nor a consolidated non-debtor. While that is true, it disregards the weight and import of the evidence. Kastera was controlled by Doug Swenson. Kastera's vision of developing the Tanana Valley Property was subordinated to the need of DBSI to use the Property for TIC investment. And, indeed, the Property was used in the Cavanaugh TIC solicitations within months of closing.
Kastera had no source of financing for this transaction other than DBSI. Reeve acknowledged Kastera could not use its banking sources for a loan of the magnitude needed to acquire the Tanana Valley Property. DBSI created DBSI-TV to take title to the Property and was its sole owner. The closing financing was arranged through DBSI 2006 Notes. Defendant's argument that "Kastera was a separate entity and not in any way connected to the Ponzi schemes"89 is belied by the evidence. So, too, is his assertion that "[t]he transaction itself clearly was not in furtherance of any Ponzi scheme."90
Plaintiff established that the DBSI group of entities was insolvent, and engaged in a Ponzi scheme at the time of the subject transfers to Defendant on the earnest money note and the closing of the sale. These transfers were orchestrated by DBSI to further its Ponzi scheme. DBSI 2006 Notes, DBSI 2006 LOF, Kastera and DBSI-TV were all participants.
Kastera was the contract purchaser of the Tanana Valley Property under the PSA and all the amendments to that PSA. Defendant's closing brief asserts that "[t]he money [paid to Defendant] came from Kastera, not an entity of the bankruptcy estate."91 This is not fully accurate. While the PSA was Kastera's contract initially, and after several amendments that PSA finally closed, there are other relevant factors established by the evidence.
(a) The payment of the Earnest Money was made by and with funds transferred from DBSI 2006 LOF, to DBSI Housing, to Kastera, and then to Defendant.
(b) The payment required at closing was made by and with funds transferred from DBSI 2006 Notes, to *823DRR, to Title One Corp., and then to Defendant.
(c) Kastera was not independent, but instead was dominated and controlled by its 2/3 majority owner, Doug Swenson, in furtherance of DBSI's objectives and designs.
(d) DBSI created DBSI-TV to, and it did, take title to the Property at closing.
(e) The TIC solicitations for the Tanana Valley Property via the Cavanaugh PPMs commenced within months of closing.
Based on these facts, the transfers at issue were made in furtherance of the Ponzi scheme. Under the case law and the application of the presumption, the Court concludes the transfers were done with actual intent to defraud. Under § 548(a)(1)(A) and § 544(b) incorporating Idaho statutory law, they are avoidable as actually fraudulent transfers.
F. Liability for voidable transfers
Section 550 provides:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from-
(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
"The purpose of § 550(a) is 'to restore the [bankruptcy] estate to the financial condition it would have enjoyed if the transfer had not occurred.' " USAA Fed. Sav. Bank v. Thacker (In re Taylor) , 599 F.3d 880, 890 (9th Cir. 2010) (quoting Aalfs v. Wirum (In re Straightline Invs., Inc.) , 525 F.3d 870, 883 (9th Cir. 2008) (internal citations omitted) ).
In pretrial litigation, the parties addressed issues regarding potential recovery. See Zazzali v. Goldsmith , 2013 WL 1498365 (Bankr. D. Idaho Apr. 13, 2013). For context, the Court there stated:
The parties address not only elements of the causes of action, but also the potential statutory rights of Trustee to recovery against initial and subsequent transferees. In the Ninth Circuit, "a transferee is one, who at a minimum, has dominion over the money or other asset, the right to put the money to one's own purposes." Abele v. Modern Fin. Plans Servs., Inc. (In re Cohen) , 300 F.3d 1097, 1102 (9th Cir. 2002) (citations omitted). The "dominion test" focuses on "whether an entity had legal authority over the money and the right to use the money however it wished." Universal Serv. Admin. Co. v. Post-Confirmation Comm. (In re Incomnet, Inc.) , 463 F.3d 1064, 1070 (9th Cir. 2006). This right is measured at the time the transfer is made, not at the time the trustee seeks to avoid the transfer. See id.
At this stage, Trustee has sufficiently alleged facts supporting maintenance of this action without joining [DBSI-TV]. First, Trustee adequately alleged Kastera/[DBSI-TV] was a conduit for the [DBSI 2006] LOF funds in the Initial Transfer, and [DBSI-TV] and the escrow a conduit for the [DBSI 2006 Notes] funds paid Goldsmith in the Closing Transfer. Second, even if Goldsmith's argument about Kastera/[DBSI-TV] being more than a mere conduit is ultimately provable, this does not mean Kastera/[DBSI-TV] need be joined before Trustee seeks relief from Goldsmith as a subsequent transferee: "[A] trustee is not required to avoid the initial transfer from the initial transferee before *824seeking recovery from subsequent transferees under § 550(a)(2)." Woods & Erickson, LLP v. Leonard (In re AVI, Inc.) , 389 B.R. 721, 735 (9th Cir. BAP 2008).
Id. at *7.92
In addressing § 550 rights of recovery of avoided transfers, the Ninth Circuit emphasized:
[The] distinction between initial and subsequent transferees is "critical." Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.) , 127 F.3d 1195, 1197 (9th Cir. 1997). Trustees have an absolute right of recovery against the "initial transferee" and any "entity for whose benefit such transfer was made." Danning v. Miller (In re Bullion Reserve of N. Am.) , 922 F.2d 544, 547 (9th Cir. 1991).
Henry v. Off'l Comm. of Unsecured Creditors of Walldesign, Inc. (In re Walldesign, Inc.) , 872 F.3d 954, 962 (9th Cir. 2017). In defining "initial transferee" for purposes of § 550(a), the Ninth Circuit in Walldesign reaffirmed its use of the "dominion test." Id. at 962-63. It stated:
Under the dominion test, "a transferee is one who ... has dominion over the money or other asset,"-in other words, one with "the right to put the money to one's own purposes." In re Mortg. Store , 773 F.3d at 995 (quoting In re Incomnet , 463 F.3d at 1070 ). The "key[s]" to this test are " 'whether the recipient of funds has legal title to them' and whether the recipient has 'the ability to use [the funds] as he sees fit.' " Id. (quoting In re Incomnet , 463 F.3d at 1071 ). We further explained that, "an individual will have dominion over a transfer if, for example, he is 'free to invest the whole [amount] in lottery tickets or uranium stocks.' " Id. (quoting Bonded Fin. Servs. [v. Eur. Am. Bank ], 838 F.2d [890,] 894 [ (7th Cir. 1988) ] ). "The first party to establish dominion over the funds after they leave the transferor is the initial transferee; other transferees are subsequent transferees." Id. (citations omitted).
Id. at 963.
The "conduit" argument as signaled in the parties' pretrial litigation involved Plaintiff's contention that the earnest money transfer went from DBSI 2006 LOF to Kastera to Defendant, and that Kastera was a "mere conduit." 2013 WL 1498365 at *6. As to the closing transfer, Plaintiff contends DBSI 2006 Notes transferred the closing funds to DRR which, in turn, transferred them on behalf of DBSI-TV to TitleOne Corp as closing agent, who then paid them to or for the benefit of Defendant. Id.93
The decision in Schoenmann v. BCCI Constr. Co. (In re Northpoint Communications Group, Inc.) , 2007 WL 7541001 (9th Cir. BAP Nov. 7, 2007), provided a primer on the subject:
The general rule is that the party who receives a transfer of property directly from the debtor is the initial transferee. [In re ] Incomnet , 299 B.R. [574] at 578 [ (9th Cir. BAP 2003) ]. This applies to one-step transaction cases. See *825Incomnet , 299 B.R. at 580-81 (transfer was one-step transaction in which party determined to be "transferee" did not collect funds as agent for third party).
However, in cases in which a two-step transaction exists (A transfers property to B as agent for C), the "conduit" rule, which is an equitable exception to the general rule, has emerged. Under this line of cases, courts have developed two standards to determine whether a party is an "initial transferee" or a "mere conduit": the "dominion test" and the "control test."
Although courts have at times confused the terms, the Ninth Circuit and this Panel have consistently applied the dominion test where appropriate, and have declined to adopt the control test.
Id. at *3 (citations omitted).
1. The earnest money transfer component
The Court concludes that in regard to the earnest money transfer-where funds went from DBSI 2006 LOF to Kastera and then to Defendant-Kastera had dominion over those funds and was thus the initial transferee. It is true that DBSI 2006 LOF provided the funds to Kastera for the purpose of paying Defendant the balance of the earnest money consistent with the amended PSA. However, the funds were deposited in Kastera's account. Thus Kastera had legal title to the earnest money funds. Indeed, while $3,000,000 was transferred into Kastera's account from DBSI 2006 LOF, Kastera only transferred $2,980,258.54 to Defendant and retained the balance. Once the $3,000,000 was in its account, Kastera had the ability to use the funds for a purpose other than the satisfaction of the promissory note and purchase of the Property (e.g ., buying lottery tickets or uranium stocks), even if such conduct would be, on this record, extremely unlikely. Though Kastera was clearly controlled by DBSI and Swenson, the Ninth Circuit has rejected the control test, and the Court is compelled to conclude that Kastera had dominion over the earnest money funds. It was thus the initial transferee. Defendant was a subsequent ("immediate") transferee of this initial transferee. See § 550(a)(2).
2. The closing transfer component
In regard to the closing transfer, the funds originated with DBSI 2006 Notes. Those funds went through DRR as a wiring intermediary, then through Title One as closing agent, and ultimately most of those funds were distributed to Defendant or to others for his benefit. The Court finds and concludes that both DRR and Title One were conduits, lacking dominion over these transferred funds.
Kastera was not involved in this chain of transfer. By closing, Kastera's interests under the PSA had been assigned to DBSI-TV. And it was DBSI-TV that signed the statement of settlement approving the allocation of the closing funds. See Ex. 155. The evidence established that DBSI 2006 Notes directed payment of the funds to the title company on DBSI-TV's behalf based on the loan, promissory note and mortgage involving the Property. It is also clear that DBSI-TV closed the transaction and approved the closing agent's distribution of the funds, including $25,400,000 to or for the benefit of Defendant and $953,510.58 to DBSI 2006 LOF. The relevant question is whether DBSI-TV is an initial transferee.94
*826In Mano-Y & M, Ltd., v. Field (In re Mortgage Store, Inc.) , 773 F.3d 990 (9th Cir. 2014), the Ninth Circuit addressed whether a former principal of a debtor, who still maintained control of the debtor, would be an initial transferee when he controlled and instructed a closing agent in the distribution of funds coming from the debtor for his benefit. In applying a pure dominion analysis, the Circuit concluded that the party controlling the escrow agent was not the initial transferee as it lacked legal title to the funds at issue and the ability to use those funds as it saw fit. The equitable interest of such a party in the debtor-originated funds in the hands of an agent was "too constrained to satisfy the dominion test." Id. at 997. In other words, an agent's receipt and distribution of funds on behalf of a party is not sufficient by itself to give that party dominion over the funds. The Circuit concluded those that received the funds at closing were the first to hold dominion over the funds and were thus the initial transferees. In so holding, the Circuit expressly abrogated McCarty v. Richard James Enters. (In re Presidential) , 180 B.R. 233 (9th Cir. BAP 1995), in which the Bankruptcy Appellate Panel was faced with a similar escrow situation and found the party controlling the distribution of the funds through an escrow agent to be the initial transferee despite not having direct control over the money. The Circuit concluded that "had the BAP in Presidential applied the pure dominion test ... it would have been compelled to deem [one of the parties receiving funds at closing, there a realtor with a commission due under the contract] the initial transferee."95
Here, the Court concludes DBSI-TV lacked dominion over the closing funds. It never received or held legal title to the funds used to purchase the Property from Defendant, and it did not have the ability to freely appropriate those funds as they were committed to the closing agent to complete the amended PSA. At that closing, Defendant received a portion of these funds directly and a portion were paid to others on Defendant's behalf. Based on Ninth Circuit precedent, the Court concludes Defendant was the first to exercise dominion over those funds and was thus the initial transferee in the closing transfer component. See § 550(a)(1).
G. Limitation on a trustee's rights of recovery
Section 548(c) provides:
Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has 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.
Id. (emphasis added). As stated in Cohen :
There remains the question of the effect of the avoidance of the [ ] transfers that occurred ... before bankruptcy, which are avoidable under Bankruptcy Code § 548 as actually fraudulent transfers made in furtherance of a Ponzi scheme.
*827The liabilities of transferees of avoided transfers are specified at Bankruptcy Code § 550. Although the general rule is that transferees are liable either to return the property or pay its value, there are several safe harbors.
In addition, the Bankruptcy Code insulates the transferees of an avoided transfer who take for value and in good faith by providing that such a transferee has a lien, or may retain the interest transferred, to the extent the transferee gave "value to the debtor" in exchange for the transfer. 11 U.S.C. § 548(c).
199 B.R. at 719.
Under this provision, there are two requisites: value given by the transferee, and the good faith of the transferee.
As to subsequent transferees under § 550(a)(2), § 550(b) provides the following protections from recovery:
(b) The trustee may not recover under section (a)(2) of this section from-
(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or
(2) any immediate or mediate good faith transferee of such transferee.
Thus, if a subsequent transferee takes for value and in good faith and without knowledge of the voidability of the transfer (or under § 550(b)(2) takes in good faith from a § 550(b)(1) subsequent transferee who took for value and in good faith without knowledge) then that subsequent transferee is protected from judgment.
1. Good faith
a. Standards
Good faith, an "essential concept" of § 548(c), "is a notoriously hard-to-define concept in commercial law." 5 Collier on Bankruptcy ¶ 548.09[2][b], p. 548-102.2 (Richard Levin & Henry J. Sommer, eds., 16th ed). In Agritech , the Court indicated that the issue of good faith involved what the transferee "knew or should have known" in an objective rather than subjective sense, and concluded that, if the circumstances would have put a reasonable person on inquiry of the debtor's fraud and a diligent inquiry would have discovered the same, good faith is lacking. 916 F.2d at 535-36. See also Heller Ehrman, LLP v. Jones Day (In re Heller Ehrman LLP) , 2013 WL 951706, *15 (Bankr. N.D. Cal. Mar. 11, 2013), disapproved on other grounds , 527 B.R. 24 (N.D. Cal. 2014) (addressing § 550(b)(1) and citing Agritech ).96
The court in Leonard v. Coolidge (In re Nat'l Audit Def. Network) , 367 B.R. 207 (Bankr. D. Nev. 2007), agreed. It, like Agritech , quoted Shauer v. Alterton , 151 U.S. 607, 621, 14 S.Ct. 442, 38 L.Ed. 286 (1894), regarding a lack of good faith:
[W]hile the plaintiff was not bound to act upon mere suspicion as to the intent with which [the transferor] made the sale in question, if he had knowledge or actual notice of circumstances sufficient to put him, as a prudent man, upon inquiry as to whether [the transferor] intended to delay or defraud his creditors, and he omitted to make such inquiry with reasonable diligence, he should have been deemed to have notice of such fact, and therefore such notice as would invalidate the sale to him, if such sale was in fact made with the intent upon the part of the [transferor] to delay or defraud other creditors.
367 B.R. at 223-24.
In the corollary area of good faith and knowledge as elements under § 550(b), this Court stated in Hopkins v. D.L. Evans Bank (In re Fox Bean Co., Inc.) , 287 B.R. 270 (Bankr. D. Idaho 2002), *828that "[I]f a transferee has knowledge of facts that would indicate a particular transfer may be subject to avoidance by a bankruptcy trustee, and if further inquiry would reveal that the transfer is in fact recoverable, the transferee cannot 'sit on his hands, thereby preventing a finding that he has knowledge.' " Id. at 283 (citing Genova v. Gottlieb (In re Orange County Sanitation, Inc.) , 221 B.R. 323, 328-29 (Bankr. S.D.N.Y. 1997) (internal citation omitted) ).
b. Application
It is beyond argument that Defendant knew that Kastera was owned and managed by Doug Swenson and Reeve; that Swenson "had some money;" that Swenson's willingness to sign as a guarantor of payment of the earnest money was material; that Kastera would get the resources necessary for it to perform and consummate the transaction through DBSI; and that such funding was dependent on the successful issuance of a bond. Defendant also knew, by the time of closing, that Kastera's interests in the PSA had been assigned to a DBSI entity, DBSI-TV, and that DBSI-TV was acquiring a loan from DBSI 2006 Notes in order to finance and close the transaction.
However, the evidence did not establish that Defendant knew, at the time of the transaction, that DBSI and the DBSI-related entities were involved in a massive Ponzi scheme dependent on continually acquiring property in order to add TIC inventory and soliciting new investors in order to pay old investors.
Plaintiff contends there were sufficient red flags to alert Defendant and put him "on inquiry notice." Plaintiff argues that, using the appropriate objective standard, Defendant was required to exercise further caution and diligence. See , e.g. , Doc. No. 308 at 36. Plaintiff emphasizes, for example, the inability of Kastera to timely satisfy the earnest money payment. But Plaintiff downplays the fact that an extension was granted in return for a $500,000 payment, that the extension was short, and that the earnest money obligation was later satisfied as agreed. Plaintiff similarly notes the closing date was extended because "the bond was out" but does not acknowledge that use of a "bond" or other financing mechanism could be viewed simply as a necessary means for a large and sophisticated enterprise to generate a substantial amount required for closing. Doc. No. 308 at 36.97
As Collier notes: "the presence of any circumstance placing the transferee on inquiry as to the financial condition of the transferor may be a contributing factor in depriving the former of any claim to good faith unless investigation actually disclosed no reason to suspect financial embarrassment." Collier, ¶ 548.09[2] at p. 548-102.3 (citations omitted). The Court has itemized and described in this Decision the facts known to Defendant at the time of the transfers. They do not establish a lack of good faith, nor do they support the idea that additional inquiry by Defendant and/or his counsel was required in order to establish good faith.
*829The existence of the Ponzi scheme, and the role the acquisition of the Tanana Valley Property had in its perpetuation, are clear in retrospect. As noted at the outset of this Decision, Defendant now acknowledges it. But that is not the critical date under § 548(c) or § 550(b) for evaluating Defendant's knowledge and good faith.
The Court concludes the weight of the credible evidence establishes Defendant acted in good faith. Thus Defendant is entitled to the protection of § 548(c) as the initial transferee to the extent he gave value to the debtor at closing. And Defendant is entitled to the protection of § 550(b)(1) as a subsequent transferee if value was provided in the earnest money transfer.
2. Value
a. Standards
Under § 548(c), a transferee may retain any interest transferred "to the extent that such transferee ... gave value to the debtor in exchange for such transfer[.]" Value means, inter alia, "property." Section § 548(d)(2)(A). And value is determined as of the time the transfer occurred. Gladstone v. Schaefer (In re UC Lofts on 4th, LLC) , 2015 WL 5209252, *16-17 (9th Cir. BAP Sep. 4, 2015) (citing BFP Resolution Trust Corp. , 511 U.S. 531, 546, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) ).
However, unlike § 548(c) which protects the good faith initial transferee to the extent value is given to the debtor, a subsequent good faith transferee utilizing the § 550(b)(1) defense must merely provide value to be fully protected from recovery. See Collier, ¶ 550.03[1] at 550-25 ("The 'value' required to be paid by the secondary transferee is merely consideration sufficient to support a simple contract .... The term 'value' in this subsection is different from and does not mean value to the debtor"); see also Bonded Fin. Servs. , 838 F.2d at 897 ; In re Johnson , 357 B.R. 136, 141-42 (Bankr. N.D. Cal. 2006).
Here, Defendant was both a subsequent transferee, receiving the earnest money funds from an initial transferee (Kastera), and an initial transferee, receiving the closing funds from DBSI 2006 Notes. Thus there is some merit to Defendant's contentions that these transfers should be analyzed separately. But there are limits to that proposition, because these transfers here formed a single transaction resulting in the sale and conveyance of the Property.
As the Ninth Circuit has recognized, "Bankruptcy courts are courts of equity. As such, they possess the power to delve behind the form of transactions and relationships to determine the substance." Wyle v. C.H. Rider & Family (In re United Energy Corp.) , 944 F.2d 589, 596 (9th Cir. 1991) (citing Global W. Dev. Corp. v. Northern Orange County Credit Serv., Inc. (In re Global W. Dev. Corp.) , 759 F.2d 724, 727 (9th Cir. 1985) (other citations omitted) ). Relying on this holding in United Energy , the court in Uecker v. Ng (In re Mortgage Fund '8 LLC) , 2013 WL 4475487 (Bankr. N.D. Cal. Aug. 14, 2013), stated: "To that end, a segmented transaction may be viewed as one deal and the parties' labels may not be controlling as to the rights of the parties." Id. at *5 (citing Pajaro Dunes Rental Agency, Inc. v. Spitters (In re Pajaro Dunes Rental Agency, Inc.) , 174 B.R. 557, 584 (Bankr. N.D. Cal. 1994) ).98 As stated by the court in Argyle Online, LLC v. Nielson (In re GGW Brands, LLC) , 504 B.R. 577, 593 n.26 (Bankr. C.D. Cal. 2013), "[W]here a transfer is only a step in a general plan, the plan must be viewed as a whole...." Id.
*830(citing Orr v. Kinderhill Corp. , 991 F.2d 31, 35 (2d Cir. 1993) (citation and internal quotations omitted) ). "[A] court should consider the overall financial consequences these transactions have on the creditors." Id. (citing Mervyn's LLC v. Lubert-Adler Group IV, LLC (In re Mervyn's Holdings, LLC) , 426 B.R. 488, 497 (Bankr. D. Del. 2010) ).
b. Application
i. Earnest money
In the earnest money transfer, in exchange for the funds received by Defendant, Kastera was able to move forward under the PSA to obtain the Property. In addition, the earnest money funds satisfied Kastera's promissory note obligation.99 This constitutes value to support a simple contract. Under these facts, Defendant provided such value in good faith in exchange for the earnest money transfer and without knowledge of the avoidability of the transfer. As a "transfer" avoidable under § 544(b) and Idaho law, and recoverable from Defendant-the subsequent transferee-under § 550(a)(2), Defendant is entitled to the defense under § 550(b)(1).
ii. Closing
As Defendant was the initial transferee in the closing transfer under § 550(a)(1), Trustee may recover the value of the debtor's property transferred to him under § 548. However, § 548(c) provides Defendant protection "to the extent [he] gave value to the debtor." This analysis is distinguishable from the earlier dominion test. Value includes any benefit, direct or indirect, and a debtor may receive value without holding legal title. Here, Defendant provided and conveyed the Property at closing. While legal title to the Property was transferred to DBSI-TV, a non-debtor entity, DBSI-TV was wholly owned and controlled by DBSI, and the evidence establishes that the debtor received value. DBSI 2006 Notes received a secured interest in the Property at the time of closing and DBSI ultimately utilized the Property in its Ponzi scheme selling TIC interests in the Property to TIC investors. Thus the Court finds Defendant provided value to the debtor as required by § 548(c).
Defendant has argued that, in regard to the closing transfer, he received $25,400,000 which was less than the $25,480,000 value of the Property established in Phase I and provided at closing. The proposition, however, is myopic in its focus solely on the 2007 payment. The 2006 earnest money payment is not irrelevant.
First, the earnest money payment is part and parcel of the PSA by which Defendant sold the Property. The Court has already discounted the argument that the PSA was "breached" and, instead, has recognized that the PSA was serially amended and remained in full force and effect as amended.
Second, the case law allows the Court to evaluate the reality of the entire transaction, even though there were two separate in time payments constituting the total consideration paid for the Property. Here, the two transfers formed a single and unitary transaction.
The Court's conclusion above that there can be no § 550 recovery for the 2006 earnest money transfer is not something that can be viewed in total isolation. Nor can the receipt and retention of nearly $3,000,000 be deemed irrelevant to the closing. The closing could not and would not have occurred without the credit of *831that initial earnest money payment. This amount was in satisfaction of an initial payment required under the PSA as a condition of Defendant going forward with the transaction. And if Kastera (or, as here, DBSI-TV as assignee of Kastera's rights) proceeded to close the sale under the PSA, the $3 million was by the PSA's terms treated as a credit toward the total price of $28,400,000.100
Fundamentally, the rejection of Plaintiff's avoidance action as to the earnest money payment means, looking at that transfer in isolation, Defendant can retain those funds. But the PSA remained in existence. It was a contract between the parties. If Kastera (or its assignee) failed to close, it would forfeit that earnest money so paid.101 Conversely, if Defendant failed to perform his obligations under the contract and transfer the Property at closing, Kastera (or its assignee) was entitled, among other things, to refund of the earnest money payment.102 In short, Defendant may keep the $3,000,000 but, ultimately, he had to, and did, apply it toward the total amount paid for the sale of the Property at the time of closing.103
Using the precise figures, $2,980,258.54 (an earnest money payment originating with DBSI 2006 LOF) and $25,400,000 (closing funds obtained from DBSI 2006 Notes) were paid to Defendant in return for transfer of the Property. In exchange for this $28,380,258.54, Defendant provided value at closing to the debtor of $25,480,000 (the value of the Property). Pursuant to § 548(c), Defendant may retain the funds he received from the debtor to the extent of the value he provided in good faith. Thus, only $2,900,258.54 of the $28,380,258.54 remains voidable under § 548(a)(1) after application of § 548(c). Plaintiff is found to be entitled to a judgment under § 548 and § 550(a)(1) against Defendant, as the initial transferee of the closing transfer, in the amount of $2,900,258.54.
CONCLUSION
On the whole of the evidence, the Court concludes the transfers to Defendant were made with actual fraudulent intent and are avoidable. However Defendant acted in good faith and without knowledge of the Ponzi activities of DBSI, and he is entitled to the defenses provided under § 548(c) and § 550(b)(1) to the extent he provided appropriate value. Given the structure of the transfers and transaction, this results in a recovery of $2,900,258.54 from Defendant as the initial transferee of the closing transfer.
Plaintiff shall prepare and submit a proposed form of judgment.
The operative complaint is the First Amended Complaint ("FAC"), Doc. No. 1-17.
Unless otherwise indicated, all statutory references are to the Bankruptcy Code, Title 11 U.S. Code §§ 101 -1532.
The FAC and Defendant's Answer were filed in 2012, prior to the amendment of Rules 7008 and 7012(b). Both parties have consented to this Court's entering final orders and judgments subject only to appeal. See Doc. No. 28; see also Zazzali v. Goldsmith (In re DBSI, Inc.) , 2013 WL 1498365, *1-2 (Bankr. D. Idaho Apr. 11, 2013)
Over the course of Phase I and Phase II of the trial, 301 exhibits were admitted and 22 people testified. The Court has considered all the evidence presented, and the contentions of the parties, even if not specifically discussed in this Decision. As to all witness testimony (other than that admitted through deposition de bene esse ), the Court has evaluated the credibility of the witness. It has also determined the weight to be given each witness's testimony.
See generally Ex. 315 (confirmation order). The "DBSI Consolidated Debtors" were collectively DBSI, Inc.; DBSI Asset Management LLC; DBSI Development Services LLC; DBSI Discovery Real Estate Services LLC; DBSI Land Development LLC; DBSI Properties Inc.; DBSI Realty Inc.; DBSI Securities Corporation; DBSI/Western Technologies, LLC; DCJ, Inc.; FOR 1031 LLC; Spectrus Real Estate Inc.; and the "Consolidated Non-Debtors" included DBSI Redemption Reserve Fund, an Idaho general partnership; DBSI Investments Limited Partnership; Stellar Technologies, LLC; and all the "Non-Debtor Affiliates" described on Schedule 1 to the Disclosure Statement. The "Note/Fund Consolidated Debtors" included "Plan Debtors" such as DBSI 2006 Notes and DBSI 2006 LOF. Id. at 60-61, 95-96, 98, 101, 108-109. (The Court in this Decision refers to exhibit pagination rather than the original document's pagination).
The "tenant-in-common" interest has been referred to as "TIC." The term was used by counsel and witnesses throughout this trial as a noun, adjective and verb.
Defendant however resisted Plaintiff's attempts to establish through pretrial motion the existence of a Ponzi scheme and, based thereon, the application of the "Ponzi presumption" (which is discussed further below). While Defendant now acknowledges these Ponzi aspects and scheme, after a substantial evidentiary presentation by Plaintiff, he still raises several defenses to the FAC, including his asserted lack of knowledge of the Ponzi scheme at the time of the subject transaction.
The details of, and the specific entities involved in, the transaction will be addressed later in this Decision.
See , e.g. , Doc. Nos. 157-58, 171-74.
The PSA was executed by Doug Swenson as manager of Kastera.
Exhibit 204 is Defendant's August 14, 2006 memorandum to file regarding his August 8 meeting with Reeve and Kastera's attorney Tom Morris, and his August 9 meeting with Reeve. This memo is discussed later in greater detail.
This amendment added a small strip of land as well, and addressed other matters.
This letter referenced $3,500,000 as earnest money paid and proposed $20,500,000 of "new money." Id.
The parties have generally and fairly consistently discussed the transaction with reference to these amounts. That made it easier to follow the sense and thrust of their arguments. However, the precise amounts of the payments as the transaction occurred were somewhat different. Additional details regarding the transaction and amounts will be discussed later in this Decision.
This would appear to indicate that the difference between price paid ($28,800,000) and value of the Property ($25,480,000) is $3,320,000. However Plaintiff contends that even if Defendant is entitled to a good faith defense, he is still liable for $2,920,000. See , e.g. , Doc. No. 308 (Plaintiff's trial brief) at 1, 22, 24. This will also be addressed further.
Matthew McKinlay (discussed below) testified that a portion of the TIC investments would be designated as "accountable reserves" for these purposes and was typically 5% of the investment. Gary Bringhurst (also discussed below) indicated that such reserves were amounts "up to" 10% of the purchase price paid by TIC investors. Both said that, under the TIC agreements, the accountable reserves were to be used only for tenant and capital improvements, leasing commissions, and the like.
McKinlay is employed pursuant to a consulting agreement with the Plaintiff, and he is compensated as a 1099 contractor, including compensation for time spent testifying.
See Ex. 1256 (chart of DBSI Group's business structure, including "TIC Businesses").
Ex. 1042 is a chart, created by McKinlay, of the acquisition and disposition of accountable reserves during 2006. It reflects $42.9 million of accountable reserves raised, but only $4.1 million used as required (e.g. , leasing commissions, capital expenditures, tenant improvements). The remaining $38.8 million was spent on general DBSI operations including payroll, overhead, and payments to TIC investors. Ex. 1043 is a similar chart for 2007. That year, $62.3 million of accountable reserves was raised, with $7.3 million spent as required and $55 million spent on general DBSI operations.
Ex. 1197 reflects that as of September 2008, a total of $89.7 million of accountable reserves had been raised, $16.1 million used as required, and $73.6 million spent otherwise, leaving nothing for investors.
The private placement memorandum ("PPM") for DBSI 2006 Notes in October 2006 offered $50 million of 8.41% secured notes due December 2014, and indicated the proceeds from sale of the notes would provide funds to DBSI and subsidiary entities controlled by DBSI to acquire, develop and/or finance real estate prior to their sale, resale, third-party financing or syndication. Ex. 180 at 1. The PPM for DBSI 2006 LOF in April 2006 offered investors the opportunity to purchase up to $25 million worth of units (membership interests) in that company which was formed to acquire and develop undeveloped land. It indicated the investment objectives of DBSI 2006 LOF were to "preserve and protect" the members' capital, provide cash distributions to members from the sale of projects, and provide return of members' capital upon termination and wind-up of the company in four years. Ex. 179 at 1.
Bringhurst stated that David Swenson dealt with the note and bond side of the DBSI business and Jeremy Swenson the real estate side.
Kastera was created in mid-2005, just after DDRS was formed, primarily to purchase land with development potential. McKinlay testified that DBSI used the majority of the money raised by DBSI 2006 Notes and DBSI 2005 Notes for Kastera projects.
See , e.g. , Exs. 392, 393. The Delaware court found that both the examiner's report and due diligence by the chapter 11 trustee and creditors committee "revealed that cash arising from both [TIC and Note/Bond/Fund] investments was extensively commingled among the Plan Debtors and Non-Debtor Affiliates, and properties were routinely bounced back and forth between TIC Investment and Note/Bond/Fund Investment structures, often in conjunction with gross manipulations of value by DBSI management[.]" Ex. 315 at 18.
DBSI invested heavily in numerous technology companies. Bringhurst testified that these companies never made a profit or generated cash that could be used in other DBSI endeavors. However, Doug Swenson decided how to use funds and continued to invest in such companies notwithstanding the feelings of Bringhurst and others that this jeopardized the whole DBSI operation. By mid-2008, over $235 million had been invested in the tech companies. Ex. 381 at 2 (investment notes in non-real estate entities). See also Ex. 1236 (summary of negative net worth of technology companies, 2003-2007).
The Delaware court's confirmation decision found that Stellar "holds ownership interests in and was a conduit for providing capital and financing to certain technology related entities" but it "had no revenue-generating business operations, and no assets other than interests in" the technology entities. Further "[a]ll of Stellar's equity interests [in those companies] were pledged to secure inter-entity loans. The pledgees, Stellar's creditors, were all affiliated entities, however, and the money those affiliates loaned to Stellar all originated from commingled pools of funds received from DBSI investors. Neither DBSI Investments nor Stellar ever had the means to repay these 'loans'[ ] .... With respect to commingling of funds between the Consolidated Non-Debtors and DBSI, DBSI-related entities made loans totaling $208,333,387 to the Technology Companies[ ]." The Court further observed that the funds needed for such investments "were always transferred from whatever DBSI-related account had sufficient funds[ ]" and that "[i]n large part, the funds came from Accountable Reserves." Ex. 315 at 23.
As addressed by McKinlay in his testimony, Ex. 1256 shows that note and bond offerings were completed through DBSI 2005 Notes, DBSI 2006 Notes and DBSI 2006 LOF.
Bringhurst testified that not all individual properties in the portfolio were cash flowing negatively, though the portfolio as a whole was.
The report noted that a "significant amount [of that loss] is attributable to DBSI's policy to charge the properties 6% Management Fees. The internal portion of that management fee (at least 3% of gross income) accounts for nearly $5MM." Id. at 3.
The 2007 loss of $38 million was $6.5 million over that year's budgeted operating loss of $31.5 million. Id. McKinlay testified as to several Master Lease Cash Flow Summaries, Exs. 1055-1059. These showed cash flow losses in 2004 (of $4.8 million), in 2005 (of $9.1 million versus a forecasted gain of $8.3 million), in 2006 (of $24.8 million versus a forecasted loss of $19.1 million), and in 2007 (of $43.7 million versus a forecasted loss of $32.3 million). Id. In September 2008, DBSI stopped making TIC payments to investors. Ex. 1060 at 12.
DBSI was particularly concerned about Marvel because he had created a blog where TIC investors compared reports regarding their properties. DBSI discussed internally the investor concern and Marvel's blog, given their potential impact on continued TIC sales.
This copy of the DDRS letter is unsigned, and shows Doug Swenson as being copied. However, Bringhurst testified that it was Swenson's response to Marvel's letter.
United States v. Swenson, et al. , Case No. 13-cr-00091-BLW (the "Idaho Criminal Case").
The Court incorporates the same by reference without setting it out in full in this Decision.
Miller has significant training and experience as a Certified Public Accountant, a Certified Fraud Examiner, a Certified Insolvency and Restructuring Advisor, and has conducted numerous insolvency and related analyses. Miller's qualifications as an expert were not challenged at trial by Defendant. However, Defendant did file a pre-Phase II motion in limine as to the relevancy of Miller's testimony and the reliability of his methodology. Doc. No. 273. That motion was denied, as Defendant's arguments could be addressed on cross-examination. See Doc. No. 292. In part, the Court's ruling, id. at 7-8, considered and followed the approach of the District Court for the District of Idaho in Zazzali v. Eide Bailly LLP , Case No. 12-cv-349-MJP at Doc. No. 283-5, which rejected a similar motion in limine directed at Miller and stated that "an expert may opine on either the existence of a Ponzi scheme or the characteristics the DBSI Companies shared with a Ponzi scheme with regard to avoidance counts."
Miller noted that, in identifying the DBSI Group, he relied significantly on hundreds of tax returns of DBSI entities. Those returns included balance sheets and financial information, and his reliance thereon was based on the fact that these returns were filed under penalty of perjury and thus had undergone the most scrutiny. See Ex. 360 (DBSI Group tax return index). He also noted that DBSI self-referred to the "DBSI Group of Companies" in PPM and financial statements.
He testified that an entity-by-entity insolvency analysis could be performed but, given how the DBSI businesses operated, it would essentially be meaningless.
Miller also found that the DBSI Group was equitably insolvent, in that it could not pay debt as it came due without the infusion and use of new investor money and the misuse of accountable reserves.
See , e.g. , Ex. 378 at 1 (showing cash flow losses of $4.7 million in 2004 rose steadily to $160 million in 2008).
Miller determined the TIC master lease liabilities to the investors was $785 million in 2004. He found that the income from the TIC properties was not sufficient to fund the required payments. This resulted in constant pursuit of new TIC properties and TIC investors. Those liabilities rose to $1.86 billion by October 2008. Ex. 351.
They include a dependence on infusion of new outside funds; prior investor money not used for its stated purpose; new investor money used to pay old investors; a lack of business profits sufficient to pay as promised; commingling of finances and funds; lack of corporate formalities; misstated financials; material misstatements to investors; and lack of audited or complete financials.
Miller's conclusions are consistent with those of the Delaware court in confirming the DBSI liquidation plan. See Ex. 315 at 16.
See also Ex. 1008 (transcript of sentencing hearing).
Reeve had worked for Western Electronics and thereafter with DBSI starting in 2002. Reeve and Doug Swenson formed FOR 1031, and Reeve became FOR 1031's president and continued in that role until the spring of 2005 when, as noted earlier, DDRS was formed as a "joint venture" between DBSI Securities and FOR 1031.
This approach bothered Reeve because he thought his anticipated interest in Kastera would be based on "sweat equity." He felt, however, that he did not have much choice but to accept this proposal.
Swenson instructed FOR 1031 to pay $6,000,000 to Kastera on his behalf and to treat that as a distribution to him. Swenson separately obtained a promissory note from Reeve for the $2,000,000 loan, and Reeve's minority ownership interest in Kastera was pledged as collateral for his new note obligation to Swenson. Ex. 189.
However, McKinlay testified Kastera's payroll was at times funded by other DBSI entities.
While the parties agree Kastera was not a joint debtor, consolidated debtor, nor consolidated non-debtor, under the confirmed plan the chapter 11 trustee was authorized to, immediately prior to the effective date of the plan, assume the operating agreement of Kastera, remove all its managers and officers, and cause its dissolution. Ex. 315, Ex. B at 182-83. This authority presumably stems from Swenson's March 1, 2007 assignment to DBSI of his interest in Kastera. Ex. 184.
McKinlay also testified that, in addition to the funds Kastera received from DBSI 2006 Notes and DBSI 2005 Notes, there were "regular" cash advances from FOR 1031 to Kastera in the October 2006-February 2007 time frame.
When asked whether third-party lenders could have financed the Tanana Valley transaction in 2007, Reeve answered that Kastera had a relationship with Zions Bank but not for transactions of that size.
Even though Kastera was controlled by Swenson and most of its debt was to DBSI entities, it was not one of the entities filing bankruptcy. McKinlay observed, however, that it was Doug Swenson who ultimately determined which of the entities would file as debtors.
As yet another example of Swenson's control, Reeve noted that Kastera's 2005 and 2006 home building was profitable, but that Swenson would create "warranty reserves" in order to reduce the reportable income from those projects.
Wade Thomas, hired as a "compliance officer" at DBSI, served on a "loan committee" for DBSI 2006 Notes which, as noted, provided most of Kastera's financing. He indicated, however, that the loan committee was effectively a "rubber stamp" for Swenson's decisions.
While stating that Kastera was "autonomous," Morris also explained that it used DBSI funding to acquire properties. In fact, one condition of DBSI funding was that loans would only be made to a DBSI entity, and Kastera therefore formed one for use in processing the loans. Exhibit 360, the listing of DBSI Group tax returns created by Miller, does reflect a "DBSI Kastera Homes LLC" entity. Id. at 7, 10.
There was a "restructuring" of Kastera in March 2007 into a home building component and a "development" component. This occurred, according to Morris, "because Doug Swenson wanted to do it" but he testified that he did not necessarily understand what Swenson intended. It appears that the "Kastera Development" entity facilitated acquiring and using property in the TIC program while leaving Kastera Home in the building business. Morris noted that Swenson sent out a "notice" about this reorganization during the time that TIC-ing Kastera's properties was first being mentioned.
McKinlay testified that Kastera could not have internally funded this earnest money obligation.
This agreement provided that "The Extension Payment shall be applied first to interest accrued from April 17, 2006 through September 11, 2006, with the balance applied to principal on the Earnest Money Note." Id. The $500,000 was paid by a Kastera check. Ex. 507.
Exhibit 509 reflects the calculations on the Earnest Money Note given the extension granted and the $500,000 payment. Interest on the note from April 17, 2006, to September 11, 2006, was $68,465.75. The obligation on September 11, 2006, was thus $3,468,465.75 and the $500,000 extension payment reduced the note balance to $2,968,465.75 as of September 11. Interest on that adjusted amount from September 11 to October 10, 2006, was $11,792.54, resulting in a balance due as of October 10, 2006, of $2,980,258.29. The payment actually made was $2,980,258.54. Id. The reason for the $0.25 difference is not clear.
DBSI 2006 LOF also received in October 2006 from Kastera an "option" to purchase 25 acres of the Property. Ex. 107. This was in consideration of DBSI 2006 LOF providing the $3,000,000 to Kastera to satisfy the earnest money note. See Exs. 112, 113. If the option were not timely exercised by February 28, 2007, Kastera was obligated to return the money advanced by DBSI 2006 LOF plus interest. Ex. 107 at 2. Morris indicated that this option was the "brainchild" of Doug Swenson to justify Kastera borrowing from DBSI 2006 LOF the $3,000,000 needed for the earnest money obligation.
The DBSI-TV operating agreement, Ex. 190, reflects it was formed "[t]o acquire, own, operate, and sell the real estate project known as Tanana Valley[.]" Id. at 4. The sole member of DBSI-TV was DBSI Housing. Id. at 8. And while DBSI-TV was a DBSI controlled entity, it was not a DBSI Consolidated Debtor, a Consolidated Non-Debtor, or a Note/Fund Consolidated Debtor. See Ex. 315.
See Ex. 144 (appraisal by Timothy Williams). This appraisal was never admitted into evidence nor was its valuation substantiated. Indeed, the Court found the value of the Property in Phase I to be $25,480,000 as of closing.
According to McKinlay, DRR was an "internal bank" which had wiring capabilities (unlike some of the other DBSI entities), and was used by DBSI to facilitate money transfers.
Recall, the loan DBSI-TV obtained from DBSI 2006 Notes was $26,350,000. The distributions at closing to Defendant totaled $25,400,000. The difference, when factoring credits for prorated property taxes and irrigation fees in addition to buyer's closing costs, was $953,510.58. As the process moved toward closing, Morris suggested that this part of the money borrowed by DBSI-TV from DBSI 2006 Notes be used "to reimburse a portion of the $3,500,000 of earnest money paid - the $500,000 paid by Kastera, and $453,510 of the $3,000,000 paid by DBSI." Ex. 1267 at 234; see also Ex. 934. DBSI's counsel, Ellison, replied that Swenson believed that this $953,510 should be used to repay part of the DBSI 2006 LOF loan, not Kastera, and that if Kastera needed funds, it should arrange a separate loan. Ex. 934. The closing followed Swenson's instruction. See Ex. 154 (DBSI internal "file balance sheet"), Ex. 155 (purchaser's closing statement), reflecting payment to DBSI 2006 LOF of $953,510.58 out of the $26,350,000 borrowed from DBSI 2006 Notes.
In its prior decision, Zazzali v. Goldsmith (In re DBSI Inc.) , 2013 WL 1498365 (Apr. 11, 2013), this Court noted how Plaintiff characterized the avoidable recoveries. Plaintiff claimed the $3,000,000 funded by DBSI 2006 LOF for use in satisfying the earnest money obligation is avoidable. See id. at *6 and at n. 14 (noting that while the FAC appears to seek the entire $3.4 million, Plaintiff's counsel at oral argument clarified that it seeks to recover only the $3 million transferred by DBSI 2006 LOF).
This was followed, in chronological order, by three other PPMs: Ex. 403 (Cavanaugh IV dated October 17, 2007), Ex. 401 (Cavanaugh II dated Oct. 31, 2007), and Ex. 402 (Cavanaugh III dated February 12, 2008).
Reeve testified that Kastera built 25-30 houses in 2005 with about $50,000 profit per house, and doubled that performance in 2006. However, there were not enough lots to buy, so he said Kastera got into the development business to acquire the necessary ground.
The memo refers to him as "Morrison."
The memo states:
We further talked about Var's spot re; the SCC [sic ] restriction could go to a audit stage and not be good, basically shut stuff down completely.
NASD agencies
Review of proposed subscriptions - no more subscriptions - no private placement
Reg D offerings
goes to a due diligence period.
See Ex. 204.
See Ex. 960; Ex. 1267 at 3.
See Exs. 105 (note extension) and 106 (second amendment to PSA).
Ex. 507 ($500,000 check from Kastera).
McColl also indicated that in his experience home building and development companies were often "land rich and cash poor" and that this was a factor in considering Kastera's inability to fully fund the earnest money by its original due date.
Ex. 918.
Id.
See , e.g. , Ex. 138.
Ex. 140 (the third amendment to the PSA).
Defendant also testified that he learned of the new buyer entity that morning via an email.
The precise total is $28,380,258.54.
The precise difference is $2,900,258.54.
Zazzali v. United States (In re DBSI, Inc.) , 869 F.3d 1004 (9th Cir. 2017), states: "Section 544(b)(1), in relevant part, provides that a 'trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim ....' By its terms, Section 544(b)(1) requires the existence of an actual creditor who could avoid the transfer. 5 Collier on Bankruptcy ¶ 544.01. In other words, the effect of this section is 'to clothe the trustee with no new or additional right in the premises over that possessed by a creditor, but simply puts him in the shoes of the latter.' Id. ¶ 550.06[3][.]" Id. at 1009 (emphasis and some citations omitted). This requirement is amply met here given evidence establishing the existence of numerous unsecured creditors of DBSI, DBSI 2006 Notes, and DBSI 2006 LOF as of the petition date.
This Court also recently analyzed the application of "applicable law" under § 544(b). See Hillen v. City of Many Trees, LLC (In re CVAH, Inc.) , 570 B.R. 816 (Bankr. D. Idaho 2017).
The two year period runs from November 10, 2006, to the petition date of November 10, 2008.
Section 548(a)(1)(B) permits avoidance of a transfer, made or incurred within 2 years prior to the petition date, that is "constructively fraudulent" on the basis that the transfer was made in exchange for less than reasonably equivalent value, and made when the transferor was insolvent; engaged in a business for which it had unreasonably small capital; or intended to incur debts beyond its ability to pay. Section 544(b)'s incorporation of state law includes similar provisions for avoidance of constructively fraudulent transfers, and Idaho Code § 55-913(1)(b) provides a four-year look back period. Count 2 (as to the Closing Transfer), and Counts 4 and 5 (as to the Earnest Money Transfer) plead such causes of action. Like the actual fraud counts, these constructive fraud claims seek to impose liability on Defendant under § 550 and to preserve the avoided transfer under § 551. The Court concludes, for the reasons that follow, that this litigation can be completely addressed under the "actual fraud" theory, and there is no need to address in detail the constructive fraud allegations. The Court also determines that it is unnecessary to reach the alternative theory of "unjust enrichment" in Count 7.
The amount was, as noted, $2,980,258.54. Defendant's arguments, like Plaintiff's, tend to round that amount to $3,000,000.
Indeed, even that interest was based on a "loan" from Swenson to Reeve, secured by Reeve's minority ownership in Kastera, that he felt he had no alternative but to accept.
Ex. 400. This PPM dated September 26, 2007 indicated that DBSI Cavanaugh LLC, a newly formed company, wholly-owned and managed by DBSI Housing Inc., was formed to acquire and sell TIC interests in a leasehold interest the company acquired in 8.02 acres of the overall property. DBSI-TV is identified as the "ground lessor" of that parcel.
Quoted in Zazzali v. Goldsmith , 2018 WL 626167, *3 (Bankr. D. Idaho Jan. 30, 2018).
A Ponzi scheme includes arrangements where later funds are used to pay off previous investors, even if not insolvent from its inception. In Auza v. United Development, Inc. (In re United Devel., Inc.) , 2007 WL 7541011 (9th Cir. BAP Aug. 7, 2007), the debtor ("UDI") was in the business of land development and financed its operations primarily through syndication fees from limited partnerships established when real estate in Mesa, Arizona was purchased. When the market had a downturn, the limited partnerships were not able to adequately fund their operations, including loan payments to the plaintiffs. UDI borrowed funds from existing and new investors in order to repay previous loans, and the cycle of borrowing from one set of investors to pay previous investors caused debtor's liabilities to become unsustainable. Auza, the defendant in a fraudulent transfer action, argued that UDI was not a Ponzi scheme because it was not insolvent from its inception. The BAP disagreed, and affirmed the bankruptcy court's conclusion "that UDI was both a Ponzi scheme and insolvent at all times material to this dispute." Id. at *4-5 (citing Jobin v. McKay (In re M & L Bus. Mach. Co.) , 155 B.R. 531, 535 n.7 (Bankr. D. Colo. 1993) ).
Several of these authorities and others were noted in the Court's earlier decision. See 2018 WL 626167, *3 n.3.
Doc. No. 353 at 21.
Id.
Id.
In a footnote, the Court observed that the fact the "closing transfer" went through a title company was of no moment because, when an escrow company is used as an intermediary between two contracting parties, it is treated as the agent of both parties subject to the terms of that escrow agreement. Id. at *7 n.19. "Generally, the escrow agent merely acts as 'the conduit used in the transaction for convenience and safety,' and is disregarded." Id. (citing Foreman v. Todd , 83 Idaho 482, 364 P.2d 365, 367 (1961) ).
As discussed earlier, a portion of the funds transferred at closing, which originated from DBSI 2006 Notes, did not go to Defendant or to his benefit, but were paid back to DBSI 2006 LOF to partially satisfy its advancing the amounts needed to fund the earnest money obligation.
Like Kastera, DBSI-TV was part of the Ponzi scheme; it was controlled by DBSI and Swenson. It was not, however, a debtor or consolidated non-debtor. See supra note 59 and related discussion at page 44.
Both Presidential and The Mortgage Store analyzed whether the principal (or former principal) of the debtor, as the party directing the agent, would be deemed to have dominion over funds in escrow and thus be the initial transferee. Here, DBSI-TV was controlled by DBSI; it was not the principal of DBSI. But, like the principals in those cases, DBSI-TV is a non-debtor entity directing a closing agent. The status of the controlling party (i.e. , principal or non-principal) should not alter the analysis assuming the lack of legal title and access to the funds and the inability to use the funds as it sees fit are the same.
See also Collier, supra at ¶ 548.09[2][b], p. 458-102.2-102.3 (discussing Agritech ).
Plaintiff also argues that the "risks to FOR 1031's TIC syndication model" is a factor related to objectively reasonable notice or inquiry. Id. This appears to be a reference to the parties' discussions as shown in Defendant's memo, Ex. 204. See supra note 67. The Court finds the evidence of what exact information was provided to Defendant, and specifically information of the "risks" to FOR 1031's TIC solicitations, does not adequately support Plaintiff's "inquiry" contentions. The manner in which the information was delivered and explained would be critical to finding Defendant was aware of the TIC processes to a degree that he was placed on notice of potential Ponzi aspects or similar grounds for inquiry. The testimony regarding this meeting does not meet that burden.
In Pajaro Dunes , $1 million was transferred in six installments, and treated as one transfer.
And, incidentally, it satisfied the guarantees of Swenson and Reeve, though that provided no direct value to Kastera.
Ex. 101 at 1, ¶ 1.3; Ex. 140 at 1, ¶ 3.
Ex. 101 at 5, ¶ 3.4.
Ex. 101 at 1, ¶ 1.3 (establishing purchase price payments consisting of earnest money note payment and balance payment) and at 5, ¶ 3.2 (noting that should Defendant fail to consummate the sale, Kastera would be "entitled to pursue any lawful right or remedy to which Buyer may be entitled, including, without limitation, the immediate refund to Buyer of all Earnest Money paid.").
Assume, for example, that the earnest money had been paid over 4 years prior to the date of the filing of the bankruptcy petition and no possibility existed for § 544(b)'s application. When the parties' PSA closed within 2 years of the petition date, Defendant conveyed real property worth $25,480,000 for a payment of $28,400,000 (consisting of a prior payment of $3,000,000 and a final payment of $25,400,000). The failure of Plaintiff's § 544(b) cause here yields the same result; Defendant kept the $3,000,000 and, ultimately, applied it toward the total value paid for the sale of the Property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501787/ | Hon. David T. Thuma, United States Bankruptcy Judge
Before the Court is Plaintiff's claim for damages because Defendant gave her herpes, and for a declaration that the debt is nondischargeable under § 523(a)(2)(A) and (a)(6). Defendant counters that he lacked the requisite state of mind for any debt to be nondischargeable. After conducting a trial on the merits and hearing argument, the Court finds that Defendant is liable to Plaintiff for fraud and civil battery and that the debt is nondischargeable under § 523(a)(6).
I. FACTS
The Court finds:1
*837Plaintiff is a 40-year old registered nurse. Originally from South Dakota, she moved to New Mexico in 2009 and lived here until 2016. Plaintiff had a job as a surgical nurse at Presbyterian Hospital in Albuquerque. She is well educated, intelligent, and of good moral character. Physical health and well-being have always been very important to her. She has never been married. The Court finds that Plaintiff was a credible and truthful witness.
Defendant is a 44-year old software analyst, employed by Northrop Grumman. He is educated, intelligent, and articulate. He has been married twice and has children from both marriages. For the most part, his trial testimony was credible. In certain areas, however, the Court finds that his testimony was not credible. In addition, as set forth below, the Court finds that Defendant lied to Plaintiff at crucial times.
Plaintiff met Defendant online using a phone application called "Tinder" in October or November 2015. They began communicating by Tinder and Facebook. At some point Plaintiff decided to trust Defendant enough to give him her cell number.
Plaintiff and Defendant had their first date in December 2015, when Defendant invited Plaintiff to dinner at a local restaurant. Over the holidays, the parties kept in frequent contact. While Plaintiff was out of town, Defendant expressed that he "[couldn't] wait to have [Plaintiff] home."
Plaintiff was very cautious dating people she met through dating applications. Defendant was the only person who "passed every test." On December 31, 2015, Plaintiff went to Defendant's house for dinner. That evening, Defendant, in a seeming act of openness, told her that his ex-wife had obtained two restraining orders against him, prompted by threatening text messages he had recently sent. Plaintiff took this disclosure as a measure of Defendant's honesty. After spending a few hours together drinking wine and talking, the parties had their first sexual encounter. Beforehand, Plaintiff asked the Defendant, "Do you have anything I need to worry about?" Defendant understood this question (correctly) as asking whether he had any sexually transmittable diseases. He said he did not, and reassured Plaintiff by reminding her that he had been married for ten years. Plaintiff recalls that Defendant said, "oh gosh no," or something similar, in response to her question.
In fact, Defendant had genital herpes,2 an incurable, sexually transmitted disease. Defendant contracted herpes in about March 2004, while he was single. At that time, Defendant suspected that he contracted the disease. He suffered an outbreak in 2014, went to the doctor, and received a positive diagnosis on January 8, 2014. The written lab report confirming the diagnosis is part of the trial evidence.
Thus, Defendant lied when he answered, "oh gosh no." Defendant knew herpes was easily transmitted by unprotected sexual intercourse. Defendant lied because he knew if he told the truth, Plaintiff would not have sex with him.
Plaintiff believed Defendant's "oh gosh no" answer. Her belief was reasonable, given Defendant's candor about the restraining orders and all their prior communications and activities. Based on her reasonable assessment that Defendant told her the truth, Plaintiff agreed to have unprotected sex.
Over the next several weeks, the parties spent more time together. Defendant watched football games at Plaintiff's house, and during the week they saw each other. Defendant introduced Plaintiff to his daughter, who lived with him part of the *838time. They went on several hikes together. When they were alone, Plaintiff and Defendant had unprotected sex several more times.
Defendant testified that during the times he was with Plaintiff, he was almost always intoxicated, allegedly because he was so upset about his recent divorce and other matters. Defendant also testified that Plaintiff was often intoxicated when they were together. Plaintiff disputed Defendant's version of their time together. She admitted to some beer and wine drinking but described it as moderate. She also testified that they spent a substantial amount of time together without any alcohol consumption. The Court finds that Plaintiff's version of event is credible, and that Defendant's testimony of constant inebriation is not credible.
In February 2016, while Plaintiff was in Denver for a concert, she began to feel very ill. She experienced flu-like symptoms and developed bloody genital lesions. Urination was painful. She went to the doctor in Albuquerque as soon as she got back to town and tested positive for herpes.3 Plaintiff was distraught. She told Defendant about her diagnosis. Defendant responded with shock, concern, and apparent disbelief. Then, instead of confessing, Defendant told Plaintiff that he must have contracted herpes from his ex-wife. Again, this statement was false and Defendant knew it.
Plaintiff continued seeing Defendant, thinking they had a common bond of a medical affliction that was not of their doing. However, after a dinner at a local restaurant a month or two after her diagnosis, Plaintiff reproached Defendant's ex-wife for giving them both herpes. In response, Defendant admitted that he, not his ex-wife, was to blame. He also admitted that he knew about his condition before they slept together for the first time. Plaintiff immediately terminated the relationship.
Defendant was Plaintiff's only sex partner from October 2015 until the time of her diagnosis. The Court finds that there is no doubt that Plaintiff contracted herpes from Defendant.
After her diagnosis, Plaintiff suffered serious pain and distress from herpes outbreaks. Outbreaks can be lessened with treatment by Valacyclovir, an oral medication. The treatment cost is $150 per month. Plaintiff will have to take the medication for the rest of her life.
Herpes outbreaks can be triggered by stress. After her diagnosis, Plaintiff was offered a higher paying but more stressful job as an operating room manager. She ultimately decided not to take the job, and in fact to relocate to California, in part because of her fear that the stress attendant to being an operating room manager would trigger herpes outbreaks.4
Plaintiff was and continues to be distraught about contracting herpes. In addition to the physical pain and suffering, she sees herself as a pariah, permanently unable to date, marry, or have children. Plaintiff has paid for psychological counsel to help her deal with the situation. To date, the counseling costs have totaled $9,672 ($1,000 for on-line counseling and $8,672 for eight months of in-person counseling). She currently is paying $135 a week for counseling and estimated that it will need to continue for a year.
Plaintiff filed a state court action against Defendant in July 2016. On July 12, 2017, before the action could be tried, Defendant filed this bankruptcy case. Plaintiff brought this adversary proceeding on October 6, 2017.
*839II. DISCUSSION
A. Plaintiff's Claims.
Plaintiff alleges that Defendant committed six torts: negligence; fraud; negligent misrepresentation; negligent infliction of emotional distress; intentional infliction of emotional distress; and civil battery. The Court will address each claim.
1. Negligence. Under New Mexico law, a negligence claim "requires the existence of a duty from a defendant to a plaintiff, breach of that duty, which is typically based upon a standard of reasonable care, and the breach being a proximate cause and cause in fact of the plaintiff's damages." In re Otero County Hospital Assoc., Inc. , 2016 WL 7985365 at *12 (Bkrtcy.D.N.M.) (citing Herrera v. Quality Pontiac , 134 N.M. 43, 47-48, 73 P.3d 181 (S. Ct. 2003) ). See also Zamora v. St. Vincent Hosp. , 335 P.3d 1243, 1249 (S. Ct. 2014) (same). An intentional act may not be the basis for a negligence claim:
"The term 'negligence' is ordinarily used to express ... civil liability for an injury to a person...that is not the result of premeditation or formed intention. Intent and negligence are mutually exclusive; one cannot intend to injure someone by negligent conduct....The distinguishing factor between intentional tortious conduct and negligent conduct is that the intentional actor has the desire to bring about the consequences that follow or the substantial certainty that they will occur[.]
57A Am. Jur. 2d Negligence § 30. See also Waters v. Blackshear , 412 Mass. 589, 591, 591 N.E.2d 184 (1992) ("We start with the established principle that intentional conduct cannot be negligent conduct and that negligent conduct cannot be intentional conduct."); State v. Asfoor , 75 Wis.2d 411, 429, 249 N.W.2d 529 (1977) ("intent and negligence are mutually exclusive and one cannot intend to injure someone by negligent conduct."); 57A Am. Jur. 2d Negligence § 218 ("Negligence and intentional misconduct are contradictory terms - they differ in kind rather than degree.").
As explained below, Defendant's conduct was intentional. Thus, Plaintiff's negligence claim fails.
2. Fraud.5 In New Mexico, a common law fraud claim has five elements:
An actionable fraud is a misrepresentation of a fact, known to be untrue by the maker, and made with an intent to deceive and to induce the other party to act upon it with the other party relying upon it to his injury or detriment.
Unser v. Unser , 86 N.M. 648, 653-54, 526 P.2d 790 (S. Ct. 1974). See also , Williams v. Stewart , 137 N.M. 420, 429, 112 P.3d 281 (Ct. App. 2005) (citing Unser ).The elements must be proven by clear and convincing evidence. Tomlinson v. Burkett, 2018 WL 3868704, at *6 (Ct. App.) (unpublished).
Here, Defendant intentionally misrepresented his physical condition. When Plaintiff asked if there was "anything [she] needed to worry about," Defendant said "oh gosh no." Nothing could have been further from the truth, as Defendant knew full well.
Defendant lied to Plaintiff to induce her to have sex with him. Defendant knew that Plaintiff would not agree to have sex if she *840knew the truth. Defendant's conduct, knowledge, and intent clearly constitute the requisite misrepresentation of a fact with intent to deceive and induce Plaintiff to act.
Plaintiff relied on the Defendant's statement. She did so in part because of a false sense of trust engendered by Defendant's openness about the recent restraining orders. Given Defendant's apparent candor about his legal trouble and the months of previous communication, Plaintiff thought she could trust Defendant not to lie about his health. Her reliance was reasonable. Sadly, it also was misplaced; she now has an incurable STD.
The Court finds that all the elements of fraud were proven by clear and convincing evidence.
3. Negligent Misrepresentation. Negligent misrepresentation is a separate action from fraud or deceit. Maxey v. Quintana , 84 N.M. 38, 42, 499 P.2d 356 (Ct. App. 1972). "To state a negligent misrepresentation claim, Plaintiff must show that 'the offending party must have breached a duty of disclosure owed to the injured party, the injured party must have had a right to rely on the misinformation, and it must have sustained damages.' " Schwartz v. State Farm Mut. Auto. Ins. Co. , 2018 WL 4148434, at *4 (D.N.M.) (citing Ruiz v. Garcia , 115 N.M. 269, 274-75, 850 P.2d 972 (S. Ct. 1993). An intentional fraud cannot be a negligent misrepresentation. See Ledbetter v. Webb , 103 N.M. 597, 603, 711 P.2d 874 (S. Ct. 1985) ("where plaintiffs' conduct is found to be intentionally fraudulent or misleading ... it is error to conclude that the same conduct also amounts to negligent misrepresentation."). Elsewhere the Ledbetter court stated that "Negligent misrepresentation is not, of course, a "lesser included" cause of action with a claim for deceit or fraud." Id. at 602, 711 P.2d 874. See also City of Raton v. Arkansas River Power Authority , 600 F.Supp.2d 1130, 1149 (D.N.M 2008) (an action for negligent misrepresentation differs from the tort of deceit because the former is based on negligence while latter involves the intent to mislead).
Because Defendant committed an intentional fraud, Plaintiff's claim for negligent misrepresentation fails.
4. Negligent Infliction of Emotional Distress ("NIEF"). "NIED is an extremely narrow tort that compensates a bystander who has suffered severe emotional shock as a result of witnessing a sudden, traumatic event that causes serious injury or death to a family member." Baldonado v. El Paso Nat. Gas Co. , 143 N.M. 297, 304-05, 176 P.3d 286 (Ct. App. 2006), aff'd , 143 N.M. 288, 176 P.3d 277 (2008). NIED is "a tort against the integrity of the family unit." Ramirez v. Armstrong, 100 N.M. 538, 541, 673 P.2d 822 (S. Ct. 1983), overruled on other grounds , Folz v. State, 110 N.M. 457, 460, 797 P.2d 246 (S. Ct. 1990). A defendant cannot be liable for the tort unless the witness-plaintiff has a close marital or family relationship with the victim. Id. NIED has no application to this case.
5. Intentional Infliction of Emotional Distress ("IIED"). The tort of intentional infliction of emotional distress has the following elements:
(1) the conduct in question was extreme and outrageous; (2) the conduct of the defendant was intentional or in reckless disregard of the plaintiff; (3) the plaintiff's mental distress was extreme and severe; and (4) there is a causal connection between the defendant's conduct and the claimant's mental distress.
Baldonado v. El Paso Nat. Gas Co. , 143 N.M. at 297, 176 P.3d 286. These elements are based on the Restatement (Second) of Torts § 46 (1965).
*841Trujillo v. N. Rio Arriba Elec. Co-op, Inc. , 131 N.M. 607, 616, 41 P.3d 333 (S. Ct. 2001) ("[O]ur courts have adopted the approach used in the Restatement (Second) of Torts § 46 (1965).").
The Restatement requires conduct that is "so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community." Section 46, cmt. d; see also UJI 13-1628 NMRA 2001 ("Extreme and outrageous conduct is that which goes beyond bounds of common decency and is atrocious and intolerable to the ordinary person."). "The 'outrageous conduct' requirement is a high standard that our courts have consistently regarded as a significant limitation on recovery." Schueller v. Schultz , 2016 WL 2853876, at *2 (N.M. App.) (unpublished).
Conduct that satisfies the "extreme and outrageous" requirement is rare. The Court concludes that Defendant's conduct does not satisfy New Mexico's high requirements for the intentional infliction of emotional distress. The IIED claim therefore fails.
6. Civil Battery. In New Mexico, "the elements of civil and criminal assault and battery are essentially identical." New Mexico v. Ortega , 113 N.M. 437, 440, 827 P.2d 152 (Ct. App. 1992) ; Pena v. Greffet , 108 F.Supp.3d 1030, 1048 (D.N.M. 2015). A tortfeasor is liable for battery if: "(a) he acts intending to cause a harmful or offensive contact with the person of the other or a third person, or an imminent apprehension of such a contact, and (b) an offensive contact with the person of the other directly or indirectly results." Greffet , 108 F.Supp.3d at 1048 ; Ortega , 113 N.M. at 440, 827 P.2d 152. See also N.M. Stat. Ann. § 30-3-4 ("Battery is the unlawful, intentional touching or application of force to the person of another, when done in a rude, insolent or angry manner.").
The "intent to cause a harmful or offensive contact" element is ambiguous. The Restatement Second of Torts defines intent to mean either an intent to touch or an intent to cause harm or offense. Greffet , 108 F.Supp.3d at 1048. Under either definition, an unconsented touching is sufficient. Id. ("It is clear, however, that an intent to touch in a way that the defendant understands is not consented to is sufficient, as is an actual intent to harm.").
"[O]ne who effectively consents to conduct of another intended to invade his interests cannot recover in an action of tort for the conduct or for harm resulting from it." Restatement (Second) of Torts § 892A (1979). Consent is ineffective to bar a claim of battery, however, if it is induced by misrepresentation or mistaken belief. See Dan B. Dobbs, Paul T. Hayden and Ellen M. Bublick, The Law of Torts , § 111 (2d ed.), Mistake or Misrepresentation Negating Consent. "[I]f the defendant knows of the plaintiff's mistake or has induced it by a misrepresentation, he becomes liable for a battery." Id.
Here, Defendant lied to Plaintiff about having herpes to induce Plaintiff to have sex. Plaintiff's consent, which was based on the lie, was ineffective.
Given the lack of valid consent to the touching, Defendant had the requisite intent to batter under either theory of battery intent outlined above. When Plaintiff had unprotected sex under the mistaken belief that Defendant was disease-free, an offensive contact occurred. Plaintiff satisfied the elements for a claim of civil battery.6
*842B. Damages
Having found Defendant liable to Plaintiff for fraud and civil battery, the Court will assess damages.
1. Compensatory Damages. Plaintiff is entitled to her medical costs, including past and projected future costs. Such costs include doctor visits, medication, and psychological counseling. These costs are summarized as follows:
Doctor visit: $ 600 Valacyclovir for 40 years (40 years × 12 months per year × $150 per month), discounted to present value at 5%: $31,900 Initial therapy: $ 9,672 Additional therapy for one year @ $135 a week: $ 7,020 __________ Total: $49,192 ___________
The Court awards medical compensatory damages of $49,192.
Plaintiff is also entitled to damages for her pain and suffering. "It is not disputed that under New Mexico law damages can be recovered for mental pain and suffering as a consequence of physical injuries." Rutledge v. Johnson , 81 N.M. 217, 465 P.2d 274 (S. Ct. 1970). Damages for pain and suffering are part of compensatory damages. Alber v. Nolle , 98 N.M. 100, 106, 645 P.2d 456 (Ct. App. 1982) ; see also NMRA, Civ. UJI 13-1807 (damages are recoverable for "[t]he pain and suffering experienced [and reasonably certain to be experienced in the future] as a result of the injury."). There is no fixed standard for determining pain and suffering damages. In re Otero Cty. Hosp. Ass'n, Inc. , 2018 WL 893789, at *23 (Bankr. D.N.M.). The Court must exercise its judgment to determine the appropriate award. Id. Based on the evidence, the Court finds that the Plaintiff is entitled to $147,576 for pain and suffering (three times her medical expenses).
2. Punitive Damages. Based on record, and discussed further below, the Court finds Defendant's actions were willful and malicious. The Court believes that an award of punitive damages is appropriate. See Applied Capital, Inc. v. Gibson , 558 F.Supp.2d 1189, 1211 (D.N.M. 2007) ("To be liable for punitive damages, a wrongdoer must have some culpable mental state, and the wrongdoer's conduct must rise to a willful, wanton, malicious, reckless, oppressive, or fraudulent level.") (citing Eckhardt v. Charter Hospital of Albuquerque, Inc. , 124 N.M. 549, 562, 953 P.2d 722 (Ct. App. 1997). The Court finds that a punitive damage award of $50,000 is appropriate.
3. Total Damages. Together, compensatory and punitive damages total $246,768.
C. Nondischargeability.
Plaintiff established claims for fraud and civil battery, with total damages of $246,768. The next question is whether the debt is dischargeable in this chapter 7 case. The Court concludes that debt is dischargeable under § 523(a)(2)(A) but is nondischargeable under § 523(a)(6).
*8431. § 523(a)(2)(A). Section 523(a)(2)(A) excepts from discharge any debts "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 ...." In In re Rountree , 330 B.R. 166, 171 (E.D. Va. 2004), aff'd , 478 F.3d 215 (4th Cir. 2007), the court stated:
The determination of whether a debt is excepted from discharge under this category depends upon whether money, property or services, or an extension, renewal or refinancing of credit has been obtained, the character of the property, services or extension, renewal or refinancing of credit, and the character of the false pretenses or representation or actual fraud.
... For a debt to fall within this exception, money, property or services, or an extension, renewal or refinancing of credit must actually have been obtained by the false pretenses or representations or by means of actual fraud. The purposes of the provision are to prevent a debtor from retaining the benefits of property obtained by fraudulent means and to ensure that the relief intended for honest debtors does not go to dishonest debtors. Before the exception applies, the debtor's fraud must result in a loss of property to the creditor.
330 B.R. at 171 (citing Collier on Bankruptcy ¶ 523.08[1][a], [b], [d] (15th ed.) ).
Thus, even though Defendant defrauded Plaintiff, he did so to obtain sex rather than money, property, services, or credit. The fraud claim therefore falls outside the bounds of § 523(a)(2)(A).
2. § 523(a)(6). Section 523(a)(6) excepts from discharge any debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." To prevail under § 523(a)(6) a creditor must prove: (1) either he or his property sustained an injury; (2) the injury was caused by the debtor; (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). See also Panalis v. Moore (In re Moore) , 357 F.3d 1125, 1129 (10th Cir. 2004) (debtor's actions that caused the injury must be both willful and malicious). 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 nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury."). The required intent includes the belief that the injury is "substantially certain to result." Via Christi Reg'l Med. Ctr. v. Englehart (In re Englehart) , 2000 WL 1275614, at *3 (10th Cir. 2000) (quoting Geiger v. Kawaauhau , 113 F.3d 848, 852 (8th Cir. 1997), affirmed, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 ).
The Tenth Circuit follows a subjective standard in determining whether a defendant injured a plaintiff willfully. Englehart , 2000 WL 1275614, at *3 (the " '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."). See also In re Cain , 2014 WL 5852152, at *3 (D. Colo.) (quoting Englehart ); Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley) , 235 B.R. 651, 657 (10th Cir. BAP 1999) (intent means that the actor desires to cause consequences of his act or believes the consequences are substantially certain to result from it).
For a debtor's actions to be malicious, it must be intentional, wrongful, and done without justification or excuse. Deerman , 482 B.R. at 369 (citing *844Bombardier Capital, Inc. v. Tinkler , 311 B.R. 869, 880 (Bankr. D. Colo. 2004) ).7 See also Saturn Systems, Inc. v. Militare (In re Militare) , 2011 WL 4625024, *3 (Bankr. D. Colo.) (a "wrongful act, done intentionally, without just cause or excuse"); Tso v. Nevarez (In re Nevarez) , 415 B.R. 540, 544 (Bankr. D.N.M. 2009) (without justification or excuse); America First Credit Union v. Gagle (In re Gagle) , 230 B.R. 174, 181 (Bankr. D. Utah 1999) (without justification or excuse).
a. Battery. The Court finds that Defendant injured Plaintiff willfully. Defendant did not intend to give Plaintiff herpes. He knew, however, that herpes was readily transmitted by unprotected sex. Despite this knowledge, Defendant chose to put Plaintiff squarely in harm's way. The almost immediate result was that Plaintiff contracted herpes. The Court finds that Defendant knew Plaintiff's injury was substantially certain to occur. His conduct therefore was willful.
The Court also finds that Defendant injured Plaintiff maliciously. Defendant's actions were wrongful and had no justification or excuse. The Court can think of no situation in which one partner can rightfully, justifiably, or excusably lie to another about not having an incurable STD. Defendant's actions were contemptible and malicious.
Defendant battered Plaintiff willfully and maliciously. The resulting damages are nondischargeable under § 523(a)(6).
b. Fraud. There is no binding precedent whether Plaintiff's fraud claim is nondischargeable under § 523(a)(6). Some courts have held that fraud claims can never come within § 523(a)(6). For example, in In re Jahelka , 442 B.R. 663 (Bankr. N.D. Ill. 2010), the court found that "Sections 523(a)(2) and (a)(6) are mutually exclusive. Debts resulting from fraud are therefore nondischargeable under section 523(a)(2) or not at all." Id. at 671-72. See also S & T Bank v. Howard (In re Howard) , 2009 WL 4544392, at *6 (Bankr. S.D.N.Y.) ; Starkey v. Krueger (In re Krueger) , 2000 WL 33792711, at *8 (Bankr. D.N.D.) ; McCrary v. Barrack (In re Barrack) , 201 B.R. 985, 989-93 (Bankr. S.D. Cal. 1996), rev'd on other grounds, 217 B.R. 598 (9th Cir. BAP 1998) ; Old Kent Bank-Chicago v. Price (In re Price) , 123 B.R. 42, 45 (Bankr. N.D. Ill. 1991).
On the other hand, language from two Supreme Court cases suggest that fraud claims may sometimes fall within § 523(a)(6). In Husky Intern. Electronics, Inc. v. Ritz , --- U.S. ----, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016), the Supreme Court stated:
Just as a fiduciary who engages in a fraudulent conveyance may find his debt exempted from discharge under either § 523(a)(2)(A) or § 523(a)(4), so too would a fiduciary who engages in one of the fraudulent misrepresentations that form the core of Ritz' preferred interpretation of § 523(a)(2)(A). The same is true for § 523(a)(6). The debtors who commit fraudulent conveyances and the debtors who make false representations under § 523(a)(2)(A) could likewise also inflict "willful and malicious injury" under § 523(a)(6). There is, in short, overlap, but that overlap appears inevitable.
Id. at 1588. (emphasis in original). The Supreme Court continued:
[O]ur interpretation of "actual fraud" in § 523(a)(2)(A) also preserves meaningful distinctions between that provision and §§ 523(a)(4), (a)(6).... § 523(a)(6) covers debts "for willful and malicious injury," whether or not that injury is the result of fraud, whereas § 523(a)(2)(A)
*845covers only fraudulent acts. Nothing in our interpretation alters that distinction either.
Id. (citing Kawaauhau v. Geiger , 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) ).
Further, in Grogan v. Garner , 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) the Supreme Court said:
Arguably, fraud judgments in cases in which the defendant did not obtain money, property, or services from the plaintiffs and those judgments that include punitive damages awards are more appropriately governed by § 523(a)(6). See 11 U.S.C. § 523(a)(6) (excepting from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity") ....
498 U.S. at 282, n. 2, 111 S.Ct. 654 (citations omitted).
The Court concludes that claims for money, property, services, or extension of credit obtained by fraud are governed by § 523(a)(2)(A), while claims for injury to persons or property caused by fraud are governed by § 523(a)(6). Compare In re Rountree , 330 B.R. at 171 ( § 523(a)(2)(A) only applies to claims for money, property, etc. obtained by fraud, not to personal injury tort claims). Therefore, if Defendant's fraudulent conduct constituted willful and malicious injury to Plaintiff, the resulting damages would be nondischargeable under § 523(a)(6).
For the same reasons outlined in the battery nondischargeability analysis, the Court finds that Defendant, by his fraud, injured Plaintiff willfully and maliciously. The damages caused to Plaintiff by Defendant's fraud are nondischargeable under § 523(a)(6).
III. CONCLUSION
Defendant is liable to Plaintiff for damages caused by Defendant's fraud and civil battery. The Court awards total damages of $246,768. This debt is nondischargeable under § 523(a)(6). The Court will enter a separate judgment.
In making its findings, the Court took judicial notice of the docket in Defendants' main bankruptcy case and in this adversary proceeding. See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp. , 605 F.2d 1169, 1172 (10th Cir. 1979) (holding that a court may sua sponte take judicial notice of its docket); LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.) , 196 F.3d 1, 8 (1st Cir. 1999) (same).
The official name is herpes simplex virus type II or HSV-II.
The cost of the doctor visit was $600.
Plaintiff did not ask for compensatory damages for turning down the higher paying job.
Plaintiff includes a claim for "intentional misrepresentation" with her negligent misrepresentation claim. The Court concludes that there is no difference between a fraud claim and an intentional misrepresentation claim. See Uniform Jury Instruction 13-1633 (NMRA 2001) (elements of a fraudulent misrepresentation claim); Unser v. Unser , 86 N.M. 648, 653-54, 526 P.2d 790 (S. Ct. 1974) (elements of common law fraud); The Court will treat the claims as one for common law fraud.
For cases holding that a plaintiff can sue for battery when she consented to sexual relations in the mistaken belief that the defendant is free of infection, see Kathleen K. v. Robert B. , 150 Cal. App. 3d 992, 997, 198 Cal.Rptr. 273 (1984) (defendant said he was disease-free, when he had herpes); Hogan v. Tavzel , 660 So.2d 350 (Fla. App. 1995) (genital warts not revealed); Crowell v. Crowell , 180 N.C. 516, 105 S.E. 206 (1920) (it was a battery for husband to have sex with his wife without telling her that he had a "foul and loathsome disease"); Johnson v. Jones , 269 Or. App. 12, 344 P.3d 89 (2015) (2015) (failure to disclose herpes before sexual intercourse is grounds for civil battery). See also Barbara A. v. John G. , 145 Cal. App. 3d 369, 193 Cal.Rptr. 422 (1983) (grounds for battery when man tells falsely a woman that he can't get anyone pregnant).
Tinkler got the "wrongful act, done intentionally, without just cause or excuse" language from Tinker v. Colwell, 193 U.S. 473, 486, 24 S.Ct. 505, 48 L.Ed. 754 (1904). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501788/ | KEVIN R. ANDERSON, U.S. Bankruptcy Judge
The parties have a long, acrimonious history involving litigation in the Illinois federal court. In that forum, Plaintiffs obtained a significant judgment against the Debtors and engaged in extensive efforts to collect the judgment. These actions ultimately resulted in the Debtors filing for bankruptcy relief under Chapter 7. However, Plaintiffs have continued to pursue the Debtors by filing a complaint under 11 U.S.C. § 727 seeking to deny the Debtors their discharge. In their answer to the complaint, the Debtors asserted Counterclaims against Plaintiffs for civil conspiracy, conversion, property damage, and malicious prosecution arising out of the Illinois litigation. Plaintiffs have moved to dismiss the Counterclaims. For the reasons set forth herein, the Court grants the Plaintiffs' motion to dismiss the Debtors' Counterclaims.
I. FACTS
1. On or about December 16, 2016, the United States District Court for the Northern District of Illinois (the "Illinois Federal Court") entered a judgment (the "Judgment") in favor of Arma Yates1 and against the Debtors in the principal amount of $37,618,296.81 (the "Illinois Federal Action").2 The Judgment has not been modified by appeal or otherwise.3
2. After obtaining the Judgment, Arma Yates initiated collection actions in the Illinois Federal Court that required the Debtors to disclose and turnover non-exempt assets.
3. The Debtors filed a Chapter 7 case in this District on August 17, 2017 (Case No. 17-27193), which was one day before a show-cause hearing scheduled before the Illinois Federal Court. The Debtors' bankruptcy case was dismissed on September 20, 2017, based on their failure to pay the court filing fee.4
4. After the dismissal of the Debtors' first bankruptcy case, the Illinois Federal Court rescheduled the show-cause hearing for September 28, 2017.5
*8495. September 27, 2017, the Debtors filed a second Chapter 7 case, and George Hoffman was appointed as the Chapter 7 trustee.6
6. On March 22, 2018, Arma Yates filed a proof of claim for $46,975,528.54 based on the Judgment (the "Claim").7
7. On May 3, 2018, Arma Yates filed the above-captioned adversary proceeding under 11 U.S.C. § 727 based on allegations that the Debtors fraudulently transferred and concealed assets prior to their bankruptcy filing in an attempt to avoid paying the Judgment ("the Complaint").8
8. On June 14, 2018, the Debtors answered the Complaint and asserted counterclaims against Arma Yates (the "Counterclaims").9
9. The Counterclaims asserts four causes of action:
a. Civil conspiracy involving fraudulent and wrongful conduct by Arma Yates and others in obtaining and collecting the Judgment before the Illinois Federal Court.
b. Wrongful seizure of the Debtors' assets by Arma Yates in connection with its actions to collect on the Judgment.
c. Damages to property returned to the Debtors after its seizure by Arma Yates in connection with its actions to collect on the Judgment.
d. Malicious prosecution by Arma Yates in the Illinois Federal Action.
10. Arma Yates filed this motion to dismiss the Debtors' Counterclaims.10
11. To date, the Chapter 7 trustee has not abandoned the Counterclaims under 11 U.S.C. § 554.
II. RULING
1. The Debtors' Counterclaims Must be Dismissed Because the Court Lacks Jurisdiction to Hear Them.
The Debtors' Counterclaims assert causes of action for civil conspiracy, conversion, property damage, and malicious prosecution. These are common law tort claims11 that involve private rights.12 When a debtor asserts a private right in the bankruptcy court, such as a common law tort claim, it raises jurisdictional issues.
In Stern v. Marshall ,13 the Supreme Court held that the bankruptcy court lacks constitutional authority to enter a final order on a debtor's common law tort counterclaim. In Stern , Anna Nicole Smith had married Howard Marshall, who passed away shortly thereafter. Smith was *850not named in the will, and she alleged in the press that Marshall's son had fraudulently induced his father to exclude her from the will. Smith later filed for bankruptcy. In the bankruptcy case, Marshall's son filed a claim and a complaint against Smith for defamation. Smith counterclaimed for tortious interference with the will. The bankruptcy court ultimately dismissed the defamation claim and awarded Smith $425 million in damages on her counterclaim. Not surprisingly, the bankruptcy court assumed it had jurisdiction because 28 U.S.C. § 157(b)(2)(C) specifically defines a core bankruptcy proceeding as including "counterclaims by the estate against persons filing claims against the estate."
On ultimate appeal, the Supreme Court ruled that while the bankruptcy court had statutory authority under 28 U.S.C. § 157(b)(2)(C) to rule on the counterclaim, it lacked constitutional authority to do so under Article III. Specifically, the Court held that 28 U.S.C. § 157(b) violated Article III by allowing an Article I court (such as a bankruptcy court) to enter final judgment on a private right, common law counterclaim (such as tortious interference) that did not require the concurrent resolution of the creditor's proof of claim.14
This case bears the same jurisdictional infirmity. The Debtors' Counterclaims are private right tort claims that arise out of the alleged pre-petition conduct of Arma Yates in obtaining and collecting the Judgment. The Judgment is the basis for the Arma Yates's Claim against the Debtors' bankruptcy estate. However, because the Claim is based on a final judgment, issue and claim preclusion prevent a challenge to its allowance. Therefore, a decision on the Counterclaims does not require a concurrent resolution as to the allowance of the Arma Yates's Claim.
Consequently, this Article I Court does not have jurisdiction to hear the Debtors' private right, common law tort claims that "are not necessarily resolvable in the claims allowance process."15 While the Supreme Court subsequently determined that parties can consent to the bankruptcy court entering a final judgment on private right, common law tort claims,16 Arma Yates has not so consented. For these reasons, the Court must dismiss the Debtors' Counterclaims for lack of jurisdiction.
2. The Debtors' Counterclaims Must be Dismissed Because the Debtors do not Have Standing.
Even if the Court had jurisdiction to rule on the Counterclaims, the Debtors do not have standing to pursue them. Under 11 U.S.C. § 541, all of the Debtors' non-exempt assets as of the petition date of September 27, 2017, became property of the bankruptcy estate and subject to the control of the Chapter 7 trustee. This included all causes of action.17 The alleged facts giving rise to the Debtors' Counterclaims occurred prior to the bankruptcy filing. At oral argument, Debtors' counsel noted that the damage to the Debtors' Cabin Property could have occurred post-petition between the seizure of the Cabin Property in June of 2017 and its *851return to the Debtors in December of 2017. However, the entry of the Judgment and the seizure of the property in execution of the Judgment occurred pre-petition, and the Court will treat the causes of action in the Counterclaims as arising pre-petition.
As such, the Chapter 7 trustee is the only party with standing to pursue the Counterclaims.18 Therefore, unless and until the Trustee abandons the causes of action in the Counterclaims, the Debtors lack standing to prosecute them.
3. The Debtors' Counterclaims Must be Dismissed Because They are Barred by the Doctrines of Collateral Estoppel and Res Judicata
Even if the Court had jurisdiction and the Debtors had standing, the Counterclaims must still be dismissed under the doctrines of collateral estoppel and res judicata. The Court has reviewed the allegations in support of the Debtors' Counterclaims. They all directly arise from the actions of Arma Yates in obtaining and collecting on the Judgment in the Illinois Federal Court. The Counterclaims assert that Arma Yates made false statements in the Illinois Federal Action, that Arma Yates engaged in malicious prosecution in the Illinois Federal Action, and that Arma Yates engaged in wrongful and fraudulent conduct in collecting on the Judgment. For example, the Counterclaims allege:
The Counter Defendants joined together to jointly engage in a civil conspiracy to obtain a false and bad faith judgment against the [Debtors] ....19
The Counter Defendants joined together, with their lawyers in Utah, Texas and Illinois, in a civil conspiracy the purpose of which was and is (a) to obtain a wrongful and fraudulent judgment against the [Debtors] for allegedly due rents, (b) to preserve said wrongful Judgment, (c) to wrongfully and illegally seize assets from the [Debtors] to pay toward the wrongful judgment ....20
To the extent the Counterclaims raise issues that were previously decided by the Illinois Federal Court, they are barred by collateral estoppel. Federal law applies when considering the collateral estoppel effect of a prior, federal court judgment.21 In the Tenth Circuit, collateral estoppel "bars a party from relitigating an issue once it has suffered an adverse determination on the issue, even if the issue arises when the party is pursuing or defending against a different claim."22 Collateral estoppel applies when the following four elements are met:
(1) the issue previously decided is identical with the one presented in the action in question, (2) the prior action has been finally adjudicated on the merits, (3) the party against whom the doctrine is invoked was a party, or in privity with a party, to the prior adjudication, and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action.23
*852In this case, the parties are identical, the Debtors actively participated in the litigation and had a full opportunity to advance their defenses, and the litigation resulted in a final judgment on the merits. Further, the Debtors' Counterclaims arise from the same set of transactional facts regarding the Judgment and its collection. While the Court is not aware of every defense or argument the Debtors made in the Illinois Federal Action, cannot be disputed that they had the opportunity to raise the same claims asserted in the Counterclaims. For these reasons, the Debtors' Counterclaims are barred by collateral estoppel.
Even if the Debtors did not raise these issues in the Illinois Federal Action, res judicata bars the Debtors from asserting any causes of action that could have been asserted in the Illinois Federal Action:
Under res judicata, or claim preclusion, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in the prior action. Res judicata is intended to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, prevent inconsistent decisions, and encourage reliance on adjudication. A claim is barred by res judicata if three elements exist: (1) a final judgment on the merits in the prior suit; (2) the prior suit involved identical claims as the claims in the present suit; and (3) the prior suit involved the same parties or their privies.24
The Illinois Federal Action involved the same parties and resulted in a final judgment. The Debtors' Counterclaims arise from the same transactional facts that were before the Illinois Federal Court. If the Debtors believed Arma Yates engaged in wrongful and fraudulent conduct in obtaining and collecting the Judgment, the Debtors could and should have raised those issues with the Illinois Federal Court.
For these reasons, the Court concludes that both issue and claim preclusion bar the Debtors from raising their pre-petition Counterclaims; therefore, the Court will dismiss the Counterclaims.
4. As Matter of Comity and Judicial Economy, the Court Declines to Consider the Debtors' Counterclaims.
Finally, the Debtors' Counterclaims are more appropriately brought before the Illinois Federal Court as the court having original jurisdiction over the parties and their disputes. As noted by the Tenth Circuit, "the first federal district court which obtains jurisdiction of parties and issues should have priority and the second court should decline consideration of the action until the proceedings before the first court are terminated."25 The reasons underlying the first-filed rule are "to avoid the waste of duplication, to avoid rulings which may trench upon the authority of sister courts, and to avoid piecemeal resolution of issues that call for a uniform result."26
The Illinois Federal Court has a long history with the parties, giving it first-hand knowledge of their claims, defenses, and conduct regarding the Judgment.
*853Therefore, as a matter of comity and judicial economy, this Court will not consider the Debtors' Counterclaims.
III. CONCLUSION
Because the Debtors' Counterclaims assert private right, common law tort claims of civil conspiracy, conversion, property damage, and malicious prosecution, the Bankruptcy Court lacks constitutional authority to enter a final order or judgment. Consequently, the Bankruptcy Court must dismiss the Debtors' Counterclaims.
Even if the Bankruptcy Court had jurisdiction, the Counterclaims would still be dismissed because (1) the Debtors lack standing to pursue them; (2) they are barred by the doctrines of collateral estoppel and res judicata; and/or (3) under the first to file rule, the Counterclaims should be decided by the Illinois Federal Court. The Court will enter an Order consistent with the rulings set forth in this Memorandum Decision.
Plaintiffs Arma Yates, LLC; Florence Heights Associates, LLC; Hutchinson Kansas, LLC; Kansas Five Property, L.L.C.; Minnesota Associates, LLC; Ogden Associates, LLC; Peabody Associates Two, LLC; Sedgwick Properties, LLC; and Wellington Subleasehold, LLC are collectively referred to as "Arma Yates."
Docket No. 11, Exhibit 1 to Plaintiffs' Motion to Dismiss Debtors' Counterclaims. All subsequent references to the docket are in Case No. 18-2059 unless otherwise specified.
Docket No. 7, p. 11.
Case No. 17-27193, Docket No. 14.
Arma Yates, LLC v. Arma Care Center, LLC , No. 15 C 7171, 2018 WL 2193141 at *1 (D. N.D. Ill. May 14, 2018) ("The evidentiary hearing was subsequently postponed several times, first by Robertson's request for a continuance (R. 157) and then by Robertson and his wife's two successive bankruptcy filings (R. 159; R. 163).").
Case No. 17-28451.
Proof of Claim No. 11, Case No. 17-28451.
Docket No. 1.
Docket No. 5.
Docket No. 7.
Newby v. Enron Corp. (In re Enron Corp. Secs.) , 623 F.Supp.2d 798, 808 (S.D. Tex. 2009) (common law civil conspiracy); KMK Factoring, L.L.C. v. McKnew (In re McKnew) , 270 B.R. 593 (Bankr. E.D. Va. 2001) (common law conversion and property damage); Venuto v. Carella, Byrne, Bain, Gilfillan, Cecchi & Stewart, P.C. , 11 F.3d 385, 391 (3d Cir. 1993) (common law malicious prosecution).
See Loveridge v. Hall (In re Renewable Energy Dev. Corp.) , 792 F.3d 1274, 1279 (10th Cir. 2015) (explaining that "private rights" involve claims implicating an individual's rights to life, liberty and property that trigger Article III protections).
Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
Id.
In re Renewable Energy Dev. Corp. , 792 F.3d at 1281.
Wellness Int'l Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (ruling that "Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.").
Willess v. United States , 560 Fed. App'x. 762, 764 (10th Cir. 2014) ("[T]he relevant date for determining if a legal claim becomes property of the bankruptcy estate is the date of the claim's accrual, not the date the claim is brought.").
Id. ("Upon filing for bankruptcy, the trustee of the bankruptcy estate became the real party in interest and only he retained standing to bring [the debtor's] personal injury claim.")
Docket No. 5, ¶ 26.
Docket No. 5, ¶ 32.
Murdock v. Ute Indian Tribe of Uintah & Ouray Reservation , 975 F.2d 683, 687 (10th Cir. 1992) (citing, inter alia , Restatement (Second) of Judgments § 87, at 314 (1982) ).
Park Lake Res. Ltd. Liab. Co. v. U.S. Dep't of Agric. , 378 F.3d 1132, 1136 (10th Cir. 2004).
Burrell v. Armijo , 456 F.3d 1159, 1172 (10th Cir. 2006).
Satsky v. Paramount Commc'ns, Inc. , 7 F.3d 1464, 1467 (10th Cir. 1993) (citations and internal quotation marks omitted).
O'Hare Int'l Bank v. Lambert , 459 F.2d 328, 331 (10th Cir. 1972) (citation omitted).
Buzas Baseball, Inc. v. Bd. of Regents of Univ. Sys. of Ga., No. 98-4098, 1999 WL 682883, at *2 (10th Cir. Sept. 2, 1999) (citation omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501789/ | JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGE
This matter having come before the Court on the Motion For Summary Judgment, *855pursuant to FRBP 7056 and FRCP 56, and Narrative Summary of Undisputed Facts and Brief (doc. 11, 12) filed by Mark S. Zimlich, Bankruptcy Administrator for the Southern District of Alabama, and notice having been given, and a hearing held on September 18, 2018, and W. Alexander Gray Jr. having appeared for the U.S. Bankruptcy Administrator, and the Debtor, pro se , having not appeared, nor filing any objection or response to the Motion for Summary Judgment, and the Court having reviewed the Motion, Narrative Summary and Brief, Affidavit of Lynn Andrews and exhibits thereto, and other matters of record, and having made findings of fact and conclusions of law as set forth herein, the Court holds that the Motion for Summary Judgment (doc. 11) is due to be and is hereby GRANTED, and grants judgment, as set forth herein, denying Debtor a discharge in this case pursuant to 11 U.S.C. § 727(a)(6) and 727(d)(2-3).
JURISDICTION
This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157, and the order of reference of the District Court dated August 25, 2015. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J), and the Court has authority to enter a final order.
I. FINDINGS OF FACT
A. Debtor's Bankruptcy Case, Conversion, Conversion Schedules, and 341 Meeting
1. The Defendant Raymond Laforce, is an individual over the age of 19 years, who resides in this District.
2. This case was originally filed as a Chapter 11 case on September 11, 2014, and was converted to a Chapter 7 case on January 26, 2017. Conversion schedules were due to be filed within 14 days of the order of conversion. The conversion schedules are "new schedules of assets and liabilities [and a] statement of financial affairs." (doc. 489)("doc." references are to the main case; "AP doc." refers to this adversary proceeding). The practice is this District is for the conversion schedules to "update" the original schedules and show the debtor's assets, liabilities and other financial information as of the conversion date. (Affidavit of Lynn Andrews, ¶ 2 (hereinafter referred to as "Andrews Aff.").
3. On February 15, 2017, a notice went to creditors setting the 341 meeting of creditors on March 13, 2017, and setting the time to file complaints against discharge on May 12, 2017.
4. The Debtor failed to file conversion schedules within the time ordered. Partial schedules, only A, B, and D were filed (on the incorrect forms) on April 24, 2017. A more complete set of conversion schedules were filed on July 20, 21, 2017 (again on incorrect forms)(doc. 658-670). Amended conversion schedules, on the correct forms, were again filed on August 21, 2017 (doc. 691-92). An amended schedule A/B was filed on September 18, 2017 (doc. 701). The last set of conversion schedules was filed on November 22, 2017 (doc. 738). Although the last set of conversion schedules contain the electronic signature of the Debtor, counsel for the Debtor at the time, Willis Garrett, represented to the BA and the Trustee that he had been unable to get the Debtor to review and sign the conversion schedules, and, in fact, the Debtor has not signed the last set of conversion schedules filed with the Court. (Andrews Aff. ¶ 4).
5. During this same period the 341 meeting of creditors was reset eleven (11) times, with the last setting *856being January 29, 2017 (docs. 543, 567, 593, 627, 640, 693, 704, 711, 727, 746, 756). The Debtor first appeared for a scheduled 341 meeting on July 24, 2017. After this meeting, the 341 was adjourned, and the Debtor was expressly told to attend the next scheduled 341 meeting. The Debtor was not present at the August 31, 2017 date, a continuance was requested and granted for the September 18, 2017 date, and the Debtor attended on the October 16, 2017 date. Again, on that date, further amendments were requested, and the Debtor was expressly told to attend the next scheduled 341 meeting for further examination on the requested amended conversion schedules. Debtor failed to appear for the next four (4) scheduled 341 meetings. Counsel for Debtor attended on those dates. Based on this, the Trustee and BA concluded the 341 meeting of creditors on January 31, 2018 (doc. 775). Debtor's Counsel subsequently filed a motion to withdraw (doc. 770), which was granted on February 6, 2018 (doc. 789).
6. During this time period, a Motion to Compel filing of the conversion schedules and attendance at the 341 meeting was filed, and granted (docs. 544, 595), followed by a Motion for Sanctions when the conversion schedules were not filed and the debtor did not attend the scheduled 341 meeting (doc. 624). The Motion for Sanctions was withdrawn by the BA on February 6, 2018 (doc.790), due to the apparent futility of pursuing sanctions against the Debtor.
B. Debtor's Receipt of Monies From R & D Investments, LLC
7. In December 2016, while his chapter 11 case was still proceeding, the Debtor received a check dated December 20, 2016, payable to "Raymond Laforce," in the amount of $254,690.79 (Andrews Aff. ¶ 7; Ex. 1). The payor was R & D Oilfield Services, LLC, an entity in which R & D Investments, LLC, was a member, and the latter an entity in which Debtor was a member. It appears the Debtor cashed this check on December 21, 2017 and received the proceeds therefrom in cash. (Affidavit of Lynn H. Andrews, Ex. 2). On or about January 19, 2017, Debtor apparently used a portion of this cash to purchase a cashier's check from Wells Fargo Bank, in the amount of $154,683.29 (Andrews Aff. ¶ 7; Ex. 3).
8. A motion to convert Debtor's chapter 11 to a chapter 7 proceeding was filed by Wells Fargo Bank on January 11, 2017 (doc. 471). On the same day, the Debtor filed a motion to dismiss his chapter 11 case (doc. 473). The Court granted Wells Fargo's motion to convert by Order dated January 26, 2017, and Lynn H. Andrews was appointed as Trustee (doc. 489).
9. On February 19, 2017, the Debtor was arrested in Maitland, Florida, and was found in possession of cash in the amount of $99,280.01. The Trustee has subsequently recovered the cash proceeds of $99,280.01. (Andrews Aff. ¶ 9)
10. The Trustee filed a Motion for Turnover with respect to the R & D monies on March 16, 2017 (doc. 547). That motion is still pending, and Debtor has not turned over the balance of the R & D monies to the Trustee. (Andrews Aff. ¶ 10).
11. When the Debtor did attend his 341 meeting on July 24, 2017, the *857Debtor provided contradictory information to that contained in the schedules, and was unable to verify information regarding his assets and liabilities. The Debtor also purported to invoke the 5th amendment privilege against self-incrimination regarding, specifically, the R & D monies. (Andrews Aff. ¶ 11). On the initial conversion schedules filed (doc. 669), these monies were not listed as an asset on Schedule B, either as cash or money in a deposit account. The monies were not shown on the Statement of Financial Affairs, where income for the current year and the prior two years before that is required to be shown (doc. 670)(the Statement of Financial Affairs showed income for 2012-2014, which was the original amount on the 2014 chapter 11 filing; this is one of the items for which an amendment was demanded, as will be discussed below). Debtor was instructed to file amended conversion schedules containing complete and accurate information concerning his assets and liabilities, and to appear again for further examination on August 21, 2107. After two more adjournments, the Debtor reappeared for the adjourned 341 meeting on October 16, 2017. Although amended schedules A & B had been filed (doc. 701, 706), the Debtor indicated he had not reviewed the amended schedules, and he appeared to state that said schedules, and previously filed schedules and Statement of Financial Affairs, were incomplete and/or inaccurate. (Andrews Aff. ¶ 11). Debtor was instructed to file a complete and signed set of conversion schedules and related documents, with a deadline of November 6, 2017. Although these amended schedules were filed on November 22, 2017, as previously set forth they were not signed by the Debtor, and Debtor never attended the subsequent four (4) adjourned 341's for examination on these amended conversion schedules (Andrews Aff. ¶ 11).
12. On the final set of amended conversion schedules, filed on November 22, 2017 (doc. 738, Andrews Aff. Ex. 4) the Debtor did not list any cash, or monies in a deposit account (doc. 738, Sch. B, ## 16, 17), did not list any income received, from any source, during 2017 (SFA ## 4, 5), and did not list any gifts, thefts of money (although some items of personal property were listed) or other transfers, prior to the conversion date of January 26, 2018 (SFA ## 13, 15, 18). Although the Debtor had purported to invoke the 5th Amendment privilege against self-incrimination when questioned about the receipt, and disbursement/location of the R & D monies, the 5th amendment privilege was not invoked in writing in response to any question in the schedules and Statement of Financial Affairs.
C. Debtor Has Also Failed to List, Account For, or Turnover Other Personal Property
13. Debtor has failed to account for numerous items of personal property, including a 2011 Lexus, a 2002 GMC truck, and a 2012 Suzuki motorcycle, a 2009 Skeeter boat and motor, and watches and jewelry, and several firearms. The Trustee determined that Debtor owned a 2011 Lexus, but this vehicle was not listed in the conversion schedules and Debtor has not accounted *858for the disposition of the car. While a 2002 GMC truck is listed on the conversion schedules, Debtor has not accounted for its location or turned it over to the Trustee. Several guns were listed, and Debtor testified about a Rolex watch he owned, but not have been recovered or turned over. (Andrews Aff. ¶ 15). At his 341 meetings, Debtor has offered vague allegations of theft of some of these items, or indicated they have been lost or otherwise sold, without providing any details either in his testimony or his conversion schedules, and has failed to provide any documentation regarding these items. The Statement of Financial Affairs listed a theft of two pistols and a Rolex watch, but did not provide details, nor did the Debtor provide any in his testimony at the 341 meetings. (Andrews Aff. ¶ 15). The Trustee has filed a second Motion for Turnover with respect to this property, on October 2, 2017 (doc. 707).
II. CONCLUSIONS OF LAW
A. Summary and Standard of Review
The BA seeks a denial of a discharge to the Debtor based on his acts and omissions subsequent to the conversion of his chapter 11 case, including: 1) his failure to comply with the Code requirements for providing complete and accurate conversion schedules and attending his 341 meetings; 2) failing to comply with a Court order compelling the Debtor to perform these requirements; and 3) failing to turnover property that comprises property of his bankruptcy estate. Debtor has failed to do in this case.
"Summary judgment is appropriate if the evidence before the court shows 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. In making this determination, the court must view all evidence and make all reasonable inferences in favor of the party opposing summary judgment. The mere existence of some factual dispute will not defeat summary judgment unless that factual dispute is material to an issue affecting the outcome of the case. The relevant rules of substantive law dictate the materiality of a disputed fact. A genuine issue of material fact does not exist unless there is sufficient evidence favoring the nonmoving party for a reasonable jury to return a verdict in its favor." See, e.g., Chapman v. AI Transport, et al. , 229 F.3d 1012, 1023 (11th Cir. 2000). In this case, and for the purposes of this motion, the Court finds that there are no disputed issues of material fact, and the BA is entitled to judgment as a matter of law.
B. The Post-Conversion Grounds for Denial of Debtor's Discharge.
Although the time to file a complaint objecting to discharge expired on May 12, 2017, the BA filed, pursuant to Bankruptcy Rule 4004(b)(2), a motion to extend the time to file such complaint. This motion was granted on August 31, 2017, and the BA was granted additional time, to October 27, 2017, to file a complaint objecting to Debtor's discharge. (Doc. 695).
This Complaint to Deny Discharge was filed because Debtor failed to comply with the Code requirements regarding his conversion schedules and 341 attendance, and failed to comply with a Court order compelling him to do so. In addition, Debtor has failed to account for property of the estate, including several items of personal property, and most significantly, approximately $154,000.00 that Debtor received immediately before the conversion of this chapter 11 case. Although Debtor had numerous opportunities over a period of almost a year to comply with these requirements, and turnover property of the estate, he has failed to do so. As a consequence, *859Debtor should not receive a discharge in this case.
For events occurring during an ongoing bankruptcy case (as opposed to pre-petition events), the Code provides a mechanism to seek denial of a discharge after the standard time for filing a nondischargeability complaint has run. Bankruptcy Rule 4004(b)(2) allows such a complaint to be filed after the initial deadline for filing has run "...if...based on facts that, if learned after discharge would provide a basis for revocation under § 727(d)...." Bankr R. 4004(d)(2).
Section 727(d), in turn, states that among the grounds for seeking denial of a discharge:
...(2) the debtor acquired property that is property of the estate...and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver and surrender such property to the trustee ;
(3) the debtor committed an act specified in subsection (a)(6) [of § 727 ]
11 U.S.C. § 727(d) (emphasis added). Section 727(a)(6), in turn, provides that the debtor may be denied a discharge if "the debtor has refused, in the case- (A) to obey any lawful order of the court, other than an order to respond to a material question or to testify."
In this case, the Debtor's failures to provide complete, signed conversion schedules and to attend his 341 meetings, after being ordered to do so by the Court, constitute grounds for denial of discharge under § 727(a)(6). Further, Debtor's failure to report the acquisition of the R & D monies in his conversion schedules, and to deliver those monies, as well as other items of personal property, are grounds for denial of discharge under § 727(d)(2).
C. The R & D Monies
As previously set forth, on December 21, 2016, while Debtor was still a debtor-in-possession under his chapter 11 case, he received a check in the amount of $254,690.79 from an LLC in which he had a membership interest (hereinafter the "R & D monies"). His chapter 11 was converted a month later on January 26, 2017.
Any monies received by the Debtor during his chapter 11 case are, upon conversion of the case to chapter 7, property of Debtor's chapter 7 case. See 11 U.S.C. § 541(a)(6) ("proceeds, product, offspring, rents, or profits of or from property of the estate"); 11 U.S.C. § 1115(a)(1) (in an individual chapter 11, estate includes property acquired after commencement of case, but before conversion); In re Freeman , 527 B.R. 780, 794 (Bankr. N.D. Ga. 2015) ("...this court holds that property acquired by the estate under section 1115 and section 541(a)(7) remains estate property upon conversion of a case from chapter 11 to chapter 7...").
A month after the conversion of his case, the Debtor was arrested in Florida, and at that time had in his possession $99,280.01 in cash. The Trustee subsequently discovered the Debtor had obtained, on January 19, 2017, a cashier's check for $154,683.29, which the Trustee contends is the balance of the R & D monies received by the Debtor in December (there is a difference of $727). The Debtor is also involved in a related corporate bankruptcy case, In re Raymond & Associates , LLC, 15-01883, which has been converted from chapter 11 to a chapter 7 case, and there is a pending adversary proceeding involving the trustees in the Debtor's individual case and the corporate case as to claims regarding which estate all or part of the R & D monies belongs to. At this time, this Court makes no findings herein as to the respective rights of the trustees to the R & D monies.
Nevertheless, the R & D monies undisputedly received by the Debtor *860should have been accounted for in the conversion schedules, which reflect a conversion date of January 26, 2017. The requirement of conversion schedules, in this District, is to provide updated information on the Debtor's assets, liabilities, and other information as of the conversion date. (Andrews Aff. ¶ 2). The conversion schedules were supposed to be filed by February 9, 2017; the first set, which were incomplete and on improper forms, were not filed until April 24, 2017; a more complete set of conversion schedules were filed on July 20, 2017. Because Debtor testified in August (the first time he attended a 341 meeting) that he had not reviewed these initial sets of conversion schedules, he was ordered to prepare, sign and file complete conversion schedules. Debtor's counsel attempted to prepare such amended conversion schedules, but the last two versions were still incomplete and unsigned due to Debtor's failure to cooperate with his counsel in filing the conversion schedules. The last two versions were filed in September and November 2017, respectively.
In none of these conversion schedules did Debtor indicate that he had received the R & D monies, that he had spent or otherwise disposed of the monies in any fashion, whether by transfer, gift, or even theft, and, after almost a year, he has failed to turnover any of the remaining monies to the Trustee. Specifically, Debtor did not list (as of the conversion date, January 26, 2017) any cash or deposits, even though he had obtained the $154,683.29 cashier's check on January 19, 2017. (Andrews Aff. Ex. 4, Sch. B ## 16,17). The Debtor received the $254,690.79 of R & D monies in late December 2016, and should have listed such as income for 2016 as required by the Statement of Financial Affairs # 4,# 5. Instead, the only income shown for 2016 was $120,000.00, which, as represented by Debtor's counsel, was income received by Debtor from his business, Raymond & Associates, which is also in bankruptcy (Debtor received $10,000 per month from the business during its chapter 11 case). If the Debtor gifted any of the R & D monies to another, that should have been listed on question # 13 of the Statement of Financial Affairs, but nothing is shown; and if any of the monies were stolen, that should have been listed on Statement of Financial Affairs # 15. Despite being afforded numerous opportunities over the course of a year to do so, Debtor never accounted for all or any portion of the R & D monies in his conversion schedules. When asked at his 341 meetings about the R & D monies, debtor invoked his 5th Amendment right against self-incrimination, and refused to answer questions about the receipt, location, or disposition of the R & D monies.
D. The Fifth Amendment Issue
Under the Fifth Amendment to the United States Constitution, "No person ... shall be compelled in any criminal case to be a witness against himself." U.S. Const.Amend. V. That privilege can be asserted in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory. In re Connelly , 59 B.R. 421, 430 (Bankr. N.D. Ill. 1986). However, "a debtor may not turn the shield of the Fifth Amendment into a sword to cut his way to a discharge while carrying his property with him. His case will be dismissed, rather than permit that." Connelly , 59 B.R. at 448. Under the Bankruptcy Code, Section 727(a)(6)(B) provides 5th Amendment protection to a debtor who properly invokes such protection, unless the debtor has been granted immunity. If the Debtor has been granted immunity, then he may not assert his constitutional right to silence and doing so can be grounds for denial of a discharge. 11 U.S.C. § 727(a)(6)(B) ; Connelly, 59 B.R. at 429 n.11. "[F]ull disclosure of all relevant information has always been an important *861policy of the bankruptcy laws." Connelly , 59 B.R. at 430 (citing A. Kurland, Debtors' Prism: Immunity for Bankrupts under the Bankruptcy Reform Act of 1978, 55 Am.Bankr.L.J. 177, 179 (Part I Spring 1981) ). Therefore, when a debtor does assert his constitutional right to "refuse to testify for fear of self-incrimination, the bankruptcy court's ability to effect a thorough and equitable adjudication is jeopardized." Id. As such, blanket assertions of the 5th Amendment are insufficient for a debtor to remain silent. Such blanket assertions can delay or even entirely prevent the administration of a debtor's estate. For application of the 5th to be proper in this context, each assertion of it must be accompanied by a demonstration of real and appreciable danger of self-incrimination. "Generally, ...reasonable cause to apprehend danger of self-incrimination from direct answers to the specific questions posed" must be demonstrated, and such lack of [ ] specificity [ ] renders debtor's blanket assertion deficient. Connelly, at 434 (citing Hoffman v. United States, 341 U.S. 479, 486, 71 S.Ct. 814, 95 L.Ed. 1118 (1951). Moreover, "[i]t is well established that 'disclosure of a fact waives the privilege as to details.' " Connelly at 435 (citing In re Corrugated Container Antitrust Litigation, 661 F.2d 1145 (7th Cir.1981)aff'd 459 U.S. 248, 103 S.Ct. 608, 74 L.Ed.2d 430 (1983).
Because the Debtor was obligated to initially and specifically assert the 5th in response to the written questions set forth in the schedules and Statement of Financial Affairs, which he did not do, he waived his right to assert the 5th regarding those same questions during his 341 meeting.
The Connelly Court also discussed the issue of whether the 5th amendment protected a debtor from turning over property of the estate, and concluded it did not:
Three bankruptcy courts have addressed the question of whether the debtor may be privileged under the Fifth Amendment from turning over tangible property to the estate. All held that he is not....[A]n order to turnover property of the estate does not violate a debtor's Fifth Amendment rights, and therefore, immunity is not an issue.
59 B.R. at 443 ; citing and quoting In re Crabtree , 39 B.R. 726 (Bankr. E.D. Tenn. 1984) ; In re Devereaux , 48 B.R. 644 (Bankr. S.D. Cal. 1985) ; In re Krisle , 54 B.R. 330 (Bankr. D. S.D. 1985). Accordingly, the Debtor is obligated to turnover all property of the estate, specifically any remaining R & D monies in his possession, which he has failed to do.
E. Conclusion
Debtor has an individual chapter 11 case and a business chapter 11, Raymond & Associates LLC, both of which were converted to chapter 7 cases in late 2016. Debtor had from February of 2017 to January of 2018, to prepare, sign, and file accurate and complete conversion schedules and to appear at a 341 meeting of creditors for examination. Though Debtor appeared at two of his eleven scheduled 341 meetings, he failed to appear at the last four scheduled meetings, causing the BA file a motion to compel these actions, which this Court granted. During the pendency of his chapter 11 case, and after it was converted to chapter 7, Debtor has knowingly and fraudulently failed to report the acquisition of the R & D monies in the various amended schedules and Statement of Financial Affairs filed in the chapter 7 case and has failed to deliver or surrender said property to the Trustee. Debtor's conduct during this case is ample grounds to grant the BA the relief he has requested in his Motion for Summary Judgment and to deny Debtor his chapter 7 discharge. Therefore, because Debtor failed to comply with the Bankruptcy Code and has failed to comply with an express order of *862the Court, this Court hereby finds that the BA's Motion for Summary Judgment is due to be and hereby is GRANTED. Debtor SHALL be DENIED a discharge under 11 U.S.C. § 727(a)(6)(A).
III. JUDGMENT
Based upon the Findings of Fact and Conclusions of Law set forth herein, the Court hereby enters judgment in favor of the Bankruptcy Administrator on his Complaint, and ORDERS and DECREES that the Debtor Raymond Laforce is DENIED a discharge in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501792/ | (3) made while the debtor was insolvent;
(4) made--
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b).
11 There is no dispute that the Superior Court Judgment was entered within ninety (90) days of the Petition Date, or that the Debtor was insolvent at that time. As to whether the attachment and/or perfection of the Liens will allow any of the Creditors to receive more that it would have had the purported transfer not been made, the IRS denies that is the case as to it because the Tax Lien was filed against both the Debtor and Sandra Johnson. See Memorandum in Support of the United States' Motion for Partial Summary Judgment (Docket No. 88). More generally, it can only be the case as to one of the Creditors, since each of them holds a claim sufficient to absorb all of the Net Sale Proceeds if it is found to hold the first priority interest in them. The primary dispute, then, is whether the entry of the Superior Court Judgment constituted a "transfer" at the time that it was entered.
12 The Trustee states that the nature of property interests is generally determined by state law, but only when there is no controlling federal law. Barnhill,supra , 503 U.S. at 398, 112 S.Ct. 1386. See also Tower Credit, Inc. v. Schott (Matter of Jackson) , 850 F.3d 816 (5th Cir. 2017). As the Trustee acknowledges, Jackson , supra , disagrees with the holding of the Eleventh Circuit in Askin Marine Co. v. Conner (In re Conner) , 733 F.2d 1560 (11th Cir. 1984) regarding the time a transfer occurred under Section 547(e)(1)(B), but the court in Jackson notes that Conner predates Barnhill and did not consider Section 547(e)(3). Accord In re Freedom Grp., Inc. , 50 F.3d 408, 412 (7th Cir. 1995).
13 The Trustee relies on United States v. Security Trust & Sav. Bank , 340 U.S. 47, 50, 71 S.Ct. 111, 95 L.Ed. 53 (1950), in which the U.S. Supreme Court stated that, in examining California statutory law, a creditor may attach property of a defendant as security for the satisfaction of a potential judgment, but such lien is considered contingent or inchoate, similar to a lis pendens notice indicating the creditor holds a right to perfect its lien against the property. Such lien does not grant the creditor the right to proceed against the subject property unless and until the lien is perfected by the entry and recording of a judgment. In response to the Trustee's assertion that the Liens were inchoate when the IRS filed its Tax Lien, Synovus contends that in recording its judgment lien, it identified the Debtor (and itself as lienor), the property subject to the Lien, and the amount of the Lien such that nothing further was required for its perfection. See generally United States v. City of New Britain , 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). Upon review of the Synovus Lien as attached to its Proof of Claim filed on April 28, 2016 (No. 3), as well as the Stephens Lien (see Claim No. 4, filed on May 16, 2016), and the applicable federal law, these Liens were choate and have priority over the Tax Lien. Because the Debtor retained his interest in the Property under state law (as set forth below), the Debtor owned rights to the property when the Synovus Lien and the Stephens Lien were recorded.
14 The IRS did not assert a counterclaim with its answer to the Complaint. In its motion, the IRS seeks that summary judgment be granted to it as to Counts I and II of the Complaint because the Tax Lien is not subject to avoidance as a preferential transfer. It does not seek summary judgment on the issue of its priority vis a vis the other Liens or Creditors. The IRS filed a Statement of Material Facts as to Which There Is No Genuine Issue To Be Tried (Docket No. 88). In their responses, (see Docket Nos. 95, 100, and 101), the other parties hereto generally agree there is no dispute of material fact. Synovus does object to any characterization of the Superior Court Judgment's legal effect as recognizing that a transfer, in fact, occurred. The IRS has not responded to the other summary judgment motions. Under Local Rule BLR 7007-1(c), a failure to respond indicates that the motion is unopposed. It is not disputed that the IRS filed its Notice of Federal Tax Lien on October 2, 2012, which post-dates both the Transfer and the filing of the Liens. Further, the IRS filed a Proof of Claim asserting only an unsecured claim in the amount of $4,544,390.40. See Claim No. 1, filed April 4, 2016. That Proof of Claim was never amended to assert a secured claim in this case. Claims Docket, passim .
15 See In re Burkett , 295 B.R. 776, 779, 783 (Bankr. W.D. Pa. 2003) (concluding that ab initio means "never occurred" in construing an order revoking satisfaction of mortgage). Because property rights in bankruptcy cases are generally determined by state law, Synovus contends that this Court is bound by the holding in the Superior Court Judgment that the Transfer was void from its inception, and not merely voidable. Further, although federal law governs the priority of federal tax liens (In re McTyre Grading & Pipe, Inc. , 193 B.R. 983, 986 (Bankr. N.D. Ga. 1996) ), such liens are subordinate to prior-filed liens of judgment creditors. See In re Craft-Latimer , No. 15-51383-BEM, 2015 WL 5042108, at *2 (Bankr. N.D. Ga. Aug. 10, 2015) ; see also 26 U.S.C. §§ 6321 & 6323. As noted above (note 13, supra ), the Court accepts Synovus' argument disputing the Trustee's assertion that the Synovus Lien was inchoate when the IRS filed its Tax Lien.
16 According to Stephens, because the Debtor conveyed away his interest in the Property before any liens attached, no other creditor holds a valid lien against such an interest of the Debtor, and Stephens' claim takes priority.
17 This statute provides that -
(a) An insolvent person may not make a valid gift to the injury of his existing creditors.
O.C.G.A. § 44-5-88(a). Synovus contests the attempt by the Trustee or Stephens to collapse this independent provision for relief into the remedial scheme set forth under the U.F.T.A. Because an illegal gift is void, a creditor with a judgment does not need to use the remedies of the U.F.T.A. including any requirement that it first obtain an attachment. See O.C.G.A. § 18-2-77(a)(2) ; but see O.C.G.A. § 18-2-77(b). Further, Synovus notes that additional relief as referenced in Section 18-2-77(a)(3)(C) permits use of Section 44-5-88(a).
18 Synovus also argues, among other things, that (1) the Superior Court Judgment is final and binding, (2) Stephens is estopped from denying that the Transfer was voided as to all creditors since the parties herein all relied on that finding in supporting the Trustee's sale of the Property, (3) Stephens' asserted status as a "diligent creditor" does not allow him to displace a senior lienholder (citing, among others, Lamchick, Glucksman & Johnston, P.A. v. City Nat'l Bank of Fla. , 659 So.2d 1118 (Fla.Dist.Ct.App. 1995) ), (4) Stephens' argument that any levy on the Property by other creditors would be subject to his interests based on the Superior Court Judgment is without support (see O.C.G.A. §§ 9-12-80 et seq. , and § 9-13-60(c) (proceeds of sale applied first to liens superior to claims of plaintiff in execution) ) and is moot as the Debtor's interest became property of the estate under 11 U.S.C. § 541(a)(1), and (5) Stephens is not entitled to compensation for his attorney's fees based on the "common fund" doctrine. Synovus also disputes the Trustee's claim to a surcharge under 11 U.S.C. § 506(c) and, based on the seniority of the Synovus Lien over the Tax Lien, maintains any claim for subordination under 11 U.S.C. § 724(b) is moot. Finally, because there was no transfer, Synovus argues the Trustee's argument that, hypothetically, the Trustee could have sued under the U.F.T.A. and used the statute of limitations of the Fair Debt Collection Practices Act is not relevant.
19 Stephens urges that the Superior Court Judgment did not act to re-convey a property interest to the Debtor based on an avoidance of the Transfer under the U.F.T.A. According to Stephens, it is his status as a creditor that is determinative in his U.F.T.A. action, not his rights as a judgment lien holder.
20 Stephens adds that the Trustee has no stake in the ultimate distribution of the Net Sale Proceeds because there are no unsecured creditors of this estate. With respect to the IRS, Stephens avers in his uncontested Statement of Material Facts that the income taxes covered by the Tax Lien were for tax year 2010 and were not yet due and payable when the Deed was recorded. Docket No. 89, para. 7. Stephens further points out that the IRS did not file a timely response to the original complaint herein and is in default. In addition, as mentioned above, the Proof of Claim filed by the IRS (Claim No. 1) was filed as a general unsecured claim, which operates as an estoppel regarding its assertion of a secured interest in the Net Sale Proceeds. Finally, Stephens states that the IRS is not a good faith transferee for value under O.C.G.A. § 18-2-78(b) since the Tax Lien was involuntary. Thus, the argument that the Tax Lien attached to the Property when title was in the name of Sandra Johnson does not protect the Tax Lien against Stephens' right to recovery. To date, the IRS has not responded to Stephens' Motion or any of his statements of fact or legal arguments. See Local Rule BLR 7056-1(a)(2)(facts not controverted deemed admitted).
21 The cited portion of these Comments state as follows:
"Avoidance" is a term of art in this Act, for it does not mean that the transfer or obligation is simply rendered void. It has long been established that a transfer avoided by a creditor under this Act or its predecessors is nevertheless valid as between the debtor and the transferee. For example, in the case of a transfer of property worth $100 by Debtor to Transferee, held voidable in a suit by Creditor-1 who is owed $80 by Debtor, "avoidance" of the transfer leaves the $20 surplus with Transferee. Debtor is not entitled to recover the surplus. Nor is Debtor's Creditor-2 entitled to pursue the surplus by reason of Creditor-1's action (though Creditor-2 may be entitled to bring its own avoidance action to pursue the surplus). The foregoing principle is embedded in the language of subsection (a)(1), which prescribes "avoidance" only "to the extent necessary to satisfy the creditor's claim." Section 9(a) of the Uniform Fraudulent Conveyance Act was similarly limited.
Official Comments, Uniform Voidable Transactions Act (as amended in 2014), Section 7, Remedies of Creditor, ¶ 7, p. 38 (citations omitted)(available at http://www.uniformlaws.org/shared/docs/Fraudulent% 20Transfer/2014_AUVTA_Final% 20Act_Amended_2016mar8.pdf). Stephens states that these comments are instructive because this provision as adopted in Georgia in 2015 was not materially altered from the U.F.T.A., which controls herein.
22 This statute provides that -
(a) In an action for relief against a transfer or obligation under this article, a creditor, subject to the limitation in Code Section 18-2-78, may obtain:
(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim ; ....
O.C.G.A. § 18-2-77(a)(1) (emphasis supplied). Stephens also points out that the applicable statute of limitations had run against Synovus and that Synovus never joined the Superior Court Action. See O.C.G.A. § 18-2-79.
23 Once the party moving for summary judgment has identified materials demonstrating the absence of a genuine issue of material fact, the non-moving party cannot rest on mere denials or conclusory allegations, but must go beyond the pleadings and designate, through proper evidence such as by affidavits on personal knowledge or otherwise, specific facts showing the existence of a genuine issue for trial. See Fed. R. Civ. P. 56(e) ; see also Matsushita Elec. Ind. Co. v. Zenith Radio Corp. , 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Johnson v. Fleet Finance, Inc. , 4 F.3d 946, 948-49 (11th Cir. 1993) ; Fitzpatrick v. City of Atlanta , 2 F.3d 1112 (11th Cir. 1993).
24 See Docket Nos. 61 (para. 3), 67 (para. 3), 79, and 93.
25 The issue for decision might alternatively be stated as follows: in the absence of the Transfer, Synovus would have obtained and retained the first priority lien on the interest in the Property originally held by the Debtor by virtue of its first-in-time judgment. Does the fact that the Debtor made a patently fraudulent transfer of his interest in the Property to his wife just before Synovus obtained and recorded its judgment somehow change that result in circumstances where the Transfer was subsequently declared to be void ab initio by a court with jurisdiction over both the transferor and the transferee, albeit at the request of a different creditor of the Debtor? This Court, for the reasons set forth herein, holds that it does not.
26 Each of the Creditors' respective claims are larger than the amount of the Net Sale Proceeds, such that the claim that is ultimately determined to have priority will exhaust the full amount of the Net Sale Proceeds, subject to any expense recovery that is permitted to come ahead of the relevant claim.
27 Asserting the broad definition of "property" or "rights to property" under 26 U.S.C. § 6321, the IRS argues this provision includes a taxpayer's interest in a property owned with a spouse as a tenancy by the entirety. As correctly noted by the Creditors in their briefs, however, Georgia does not recognize such an estate between spouses, who co-own property as tenants in common. See e.g. Heid v. Astrue , 2012 WL 5874318, *4 (S.D. Ga. Oct. 26), report adopted, 2012 WL 5874338 (S.D. Ga. Nov. 20, 2012), citing O.C.G.A. §§ 44-6-120, -121.
28 The Court has previously found that the Liens were choate and enforceable (see note 13, supra ). Further, the IRS has not contested Stephen's statement that the income taxes covered by the Tax Lien were for tax year 2010 and were not yet due and payable when the Deed was recorded. Docket No. 89, para. 7. The IRS did not file a timely response to the original complaint herein. In addition, the proof of claim filed by the IRS (Claim No. 1) was filed as a general unsecured claim and operates as an estoppel to any assertion of a secured interest in the Net Sale Proceeds. Finally, it appears that the IRS is not a good faith transferee for value under O.C.G.A. § 18-2-78(b) since the Tax Lien is an involuntary lien. In view of all of the foregoing and the above, although the motion of the IRS is meritorious to the extent that the Tax Lien is not avoidable as a preference, it does not result in the IRS taking priority over Synovus or Stephens.
29 As noted above, the Trustee alternatively argues that any interest re-conveyed to the Debtor was subject to the Tax Lien that attached to the entire interest in the Property when it was titled in the name of Sandra Johnson. Given the ruling here that the one-half (½) interest at issue here was not re-conveyed to the Debtor by the Superior Court Judgment, and thus the Tax Lien had already attached to that interest, this argument does not support a re-positioning of the IRS Lien ahead of the other, earlier filed Liens.
30 Even if no transfer occurred until the Debtor acquired an interest in the Property, the Trustee has offered no controlling, countervailing federal law on the effect of a state court ruling under state law that a transfer is null and void, or otherwise suggesting that this Court should not give the words used by the Superior Court their ordinary meaning. The Trustee's related assertions that he could have sought to avoid the Transfer himself do not seem relevant to his preference claim, particularly since he has thus far chosen not to do so.
31 Stephens appears to agree with the Trustee's analysis to the extent that under the U.F.T.A., the Transfer was not invalidated in toto , as if it never happened. Acknowledging there is no direct Georgia case authority on point, Stephens adds, however, that the Transfer was voidable only insofar as a remedy was created in favor of Stephens' based on the meritorious assertion of his right to recovery in bringing the avoidance suit. Comment 7, as cited by both the Trustee and Stephens in their briefs, states that "[i]t has long been established that a transfer avoided by a creditor under this Act or its predecessors is nevertheless valid as between the debtor and the transferee " (emphasis supplied)(see note 21, supra ). This statement follows its description of "avoidance" as not being the same as "simply rendered void" and tends to support Stephens' reading of O.C.G.A. § 18-2-77(a)(1) that the beneficiaries of an avoidance are limited. (See note 22, supra ). However, this argument about what might happen under the U.F.T.A. (ignoring O.C.G.A. § 44-5-88 ) is no longer relevant in light of what actually did happen in the Superior Court Judgment (i.e. the Transfer was voided ab initio ). Further, even if such a result were not permitted under the U.F.T.A., the Superior Court Judgment also relied on O.C.G.A. § 44-5-88.
32 Without citing any supporting authority, the Trustee, relying on Comment 7 (see note 21, supra ) and the assertion that 11 U.S.C. § 547(e)(3) is controlling federal law (see Barnhill,supra ), seems to deny that the Superior Court could provide retroactive nullification as a remedy. However, that is precisely what it did, and in the posture of this case, it is not an effect that can be undone here.
33 The Trustee cites In re Westpark One, LLC , 2015 WL 5199368 (Bankr. D.Ariz. Sept. 4, 2015) for the proposition that a judgment creditor that records its judgment after a transfer of property by a judgment debtor acquires no lien even if the transfer is subsequently set aside as fraudulent. However, that decision holds that under Arizona's version of the U.F.T.A. and Arizona law, fraudulent transfers are voidable, not void ab initio , as the Transfer was found to be here. Cf. O.C.G.A. § 18-2-77.
34 In Georgia, "[f]raudulent conveyances are voidable in respect of creditors [and] [t]itle remains in the debtor subject to subsequent judgments in favor of his creditors." United States v. Reid , 127 F.Supp.2d 1361, 1380 (S.D.Ga. 2000), citing Coleman v. Law , 170 Ga. 906, 910, 154 S.E. 445 (1930). Georgia law also provides that when a judgment lien becomes effective, it binds all of the judgment debtor's property then owned or after-acquired. See O.C.G.A. § 9-12-80 ; see also In re Lively , 74 B.R. 238 (S.D. Ga. 1987), aff'd sub nom. without opinion, Walker v. Claussen Concrete Co. , 851 F.2d 363 (11th Cir. 1988) (holding that a judicial lien attached to property acquired by a bankruptcy trustee who prosecuted a fraudulent conveyance action); Cohutta Mills, Inc. v. Hawthorne Indus., 179 Ga.App. 815, 348 S.E.2d 91 (1986) (lien enforceable against property recovered by trustee). In Coleman,supra , 154 S.E. at 448, the Georgia Supreme Court began its analysis with this principle of law (i.e. the binding effect of judgments) stating that as to void conveyances, the property is subject to subsequent judgments. One oft-cited treatise notes Coleman as contrary authority to the rule that a judgment is not a lien on land fraudulently conveyed prior to the judgment. See 1 G. Glenn, Fraudulent Conveyances and Preferences, § 121, at 234-35 (Rev. ed. 1940). Cases cited by Glenn (p. 234, n. 51) in favor of this rule are the same cases cited in Westpark,supra , 2015 WL 5199368 at *4 (see note 33, supra ). Similarly, the court in In re Silver , 302 B.R. 720, 724 (Bankr. D. N.Mex. 2003), aff'd in part, rev'd in part , 303 B.R. 849 (10th Cir. BAP 2004), sought to distinguish Lively,supra , on grounds that, unlike Georgia law, New Mexico law only makes such transfers voidable.
35 The Georgia Supreme Court's statement in Coleman , supra , about the binding effect of judgments on property conveyed prior to rendition of a judgment was made in connection with a conveyance made with an actual intention to delay, hinder, or defraud creditors - transfers that are "void." The court in Reid , supra , thereafter applied that statement of Georgia law to transfers both actually and constructively fraudulent, and held such fraudulently transferred property "[s]ubject to any valid liens or other encumbrances" of the transferor. 127 F.Supp.2d at 1380. Compare O.C.G.A. § 18-2-22(2) & (3) (repealed)(cited in Reid , supra ) ; Civil Code 1910, § 3224(2)(cited in Coleman , supra ) ; and O.C.G.A. § 18-2-74(a)(1), § 18-2-75(a).
36 See also Reilly v. Sabin , 81 F.2d 259 (D.C.Cir. 1935) (finding that trustee under former Bankruptcy Act not entitled to enjoin holders of judgment liens from proceeding with action to set aside allegedly fraudulent transfer brought within four (4) months of bankruptcy since judgments at issue, even though entered subsequent to transfer, were obtained outside such period). Compare In re Amtron , 192 B.R. 130, 132 (Bankr. D.S.C. 1995) (federal tax lien attached to fraudulently conveyed patents). The court in Amtron cited Lively,supra , as analogous support of its analysis under South Carolina law that such conveyances are set aside as void.
37 Although Stephens maintains this provision does not override the more specific remedial provisions of the U.F.T.A., he cites no case authority to support the notion that its inclusion by the Superior Court in its Judgment is not significant or cannot be relied upon.
38 The Superior Court Judgment appeared to contemplate further proceedings that might provide a basis for awarding additional relief, which supports the interpretation of the Superior Court Judgment adopted here that such relief was not intended to be restricted to Stephens. In fact, Stephens was seeking such additional relief when the Debtor filed this bankruptcy case and all such efforts were stayed. See Plaintiff's Omnibus Motion in Respect of Levy and Partition Proceedings and Memorandum in Support Thereof, at Exhibit "L" (citing, among others, O.C.G.A. § 18-2-77(b) ). More specifically, Stephens had filed a motion seeking levy and sale against the Debtor's interest in the Property as transferred or, alternatively, an equitable partition of the Property by sale. That motion was pending on the Petition Date and likely precipitated the filing of this bankruptcy case. The relief sought therein has effectively been subsequently obtained in this Court, rendering those requests moot.
39 Stephens states that his agreement to the sale, which in his view only conveyed the Debtor's possessory right as a tenant at sufferance and the fee simple interest owned by Sandra Johnson, did not mean he acquiesced in the wording of the Superior Court Judgment. Thus, in Stephen's view, the Net Sale Proceeds remain subject to Stephens' rights as the avoiding creditor under the Superior Court Judgment, which, in his view, had not been finally determined. As discussed herein, however, the broader scope of the Superior Court Judgment has been adequately established.
40 Whether or not the Superior Court Judgment would have been deemed to have achieved sufficient finality for purposes of appeal under state law, and whether or not it is subject to collateral review, given the parties' reliance on its ruling in this bankruptcy case with respect to the sale of the Property and as a basis for their arguments in the Adversary Proceeding, the Court believes it is proper to give the Judgment its intended effect. Further, as a matter of comity, this Court believes it would be inappropriate to allow a collateral challenge here to the order of a state court with competent jurisdiction entered on matters presented to and necessarily adjudicated by that court.
41 Although judicial assessment that a transfer is void is generally necessary, a secured creditor does not receive new rights as a result of such ruling-its existing interest is simply recognized.
42 The Trustee's argument under Gordon v. Harrison (In re Alpha Protective Serv., Inc.) , 531 B.R. 889 (Bankr. M.D. Ga. 2015), that he could have avoided the Transfer using 11 U.S.C. § 544(b), is not relevant as the Transfer has already been avoided. Instead, the Court must address the effect of that avoidance. Moreover, there is contrary authority in this district. See MC Asset Recovery, LLC v. Southern Company , 2008 WL 8832805, 2017 Bankr. LEXIS 123608 (N.D. Ga. July 7, 2008) (relying upon provision in the adopting act of no intent to modify the provisions of Title 11); see also MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.) , 675 F.3d 530 (5th Cir. 2012).
43 See Counterclaim and Cross-Claims (para. 5)(Docket No. 10), and Counterclaims (para. 8) and Cross-Claims (para. 2)(Docket No. 67).
44 The Trustee contends that, because the IRS is a creditor in this case, he can avoid a transfer within ten (10) years prior to the Petition Date. See In re Kipnis , 555 B.R. 877 (Bankr. S.D. Fla. 2016). Likewise, the Trustee insists that he would have been able to avoid the Transfer by stepping into the shoes of the IRS and using the six-year reachback period under the Fair Debt Collection Procedures Act in accordance with 11 U.S.C. § 544(b). See Alpha Protective Serv.,supra , 531 B.R. 889. This may be so, but Stephens having already done so, such efforts do not seem necessary in this case. Further, had it been the Trustee that had undone the Transfer, it is clear, in light of his other requests in this case, that he would be seeking his costs for having done so out of the Net Sale Proceeds.
45 The case of Key West Rest. & Lounge, Inc. v. Connecticut Indem. Co. (In re Key West Rest. & Lounge, Inc.) , 54 B.R. 978, 985 (Bankr. N.D. Ill. 1985), cited by Synovus, is distinguishable because here the benefit provided to Synovus is not incidental and Synovus was similarly situated with the other Creditors as to the Transfer.
46 There is no basis to grant Stephens' fees based on a "percentage of the fund" analysis ahead of Synovus.
47 The costs were incurred with regard to the sale of the entire Property, while the Net Sale Proceeds represent only one-half of the net proceeds of sale.
48 The Trustee states that, contrary to Synovus' insistence, he is not in the Complaint seeking a fifty percent (50%) surcharge, but instead, is seeking to surcharge the Debtor's interest in the Property for reasonable fees and expenses consistent with 11 U.S.C. § 506(c).
-------- | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501793/ | John T. Laney, III, United States Bankruptcy Judge
The above styled case came before the Court on cross-motions for summary judgment. (Pl.'s Mot. for Summ. J., A.P. No. 10; Def.'s Mot. for Summ. J., A.P. No. 9). In this case, the Chapter 7 Trustee, Walter Kelley, asserts an action under 11 U.S.C. § 547 to avoid a transfer made from the Debtors to the Defendant, First Community Bank ("First Community"). First Community's primary defense is that the alleged transfer occurred outside of the ninety (90) day look-back period of 11 U.S.C. § 547(b)(4). The parties choose to address this dispositive issue with motions for summary judgment before conducting discovery. (See Sched. Order, A.P. No. 8).
Specifically, the parties seek summary judgment on whether First Community's acquisition of a judgment lien on the Debtors' real property occurred within 11 U.S.C. § 547(b)(4)'s look-back period. The Court can answer this question by addressing a question of Georgia law: whether an unrecorded judgment issued by a Georgia court transfers a lien on the judgment debtor's real property.
The parties briefed the issue and made oral arguments at a hearing on the motions. The Court took this matter under advisement. Having carefully considered the arguments and reviewed the applicable law, the Court determines that under Georgia law the entry of a judgment does not transfer a lien on a judgment debtors' real estate; rather, a judgment lien encumbering real property is only created upon recording the judgment in the applicable county's real estate records. Accordingly, the Trustee is entitled to summary judgment on whether the transfer occurred within 11 U.S.C. § 547(b)(4)'s look-back period.
I. SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056, states a court may grant summary judgment *918"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." Where "there are no disputed facts and the only issue is the application of law to the undisputed facts, a court may decide at the Rule 56 stage that one side or the other is entitled to judgment." Harris v. Liberty Cmty. Mgmt. , 702 F.3d 1298, 1303 (11th Cir. 2012) (citing Celotex Corp. v. Catrett , 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ).
This is the circumstance here. The parties have stipulated all of the facts relevant to the issue before the Court. (See Joint Stipulation of Fact, A.P. No. 6 [herein "Joint Stipulation"] ). The application of the law to those stipulated facts is the only remaining dispute between the parties. Therefore, this issue is well suited for disposition by summary judgment.
II. STIPULATED FACTS
The Debtors filed a Chapter 11 petition on March 21, 2017. (Pet., Bankr. Doc. No. 1). This Court entered an order converting the case to a Chapter 7 proceeding on March 7, 2018. (Order Granting Mot. to Convert Case, Bankr. Doc. No. 125). Prior to filing this case, the Debtors owned real estate in two Georgia counties, Worth and Tift.
On December 7, 2016, the Superior Court of Tift County entered a Consent Order and Final Judgment in favor of First Community Bank against the Debtors. (Joint Stipulation, ¶ 1). The Judgment was entered one-hundred four (104) days before the petition date.
On December 22, 2016, the Clerk of the Superior Court of Tift County recorded a Writ of Fieri Facias (" the Fi. Fa.") in Tift County's General Execution Docket. (Joint Stipulation, ¶ 4). This Fi. Fa. was recorded fifteen (15) days after the entry of the judgment and eighty-nine (89) days before the petition date.
On January 3, 2017, the Clerk of the Superior Court of Tift County re-recorded the Fi. Fa. to correct the spelling of the Debtors' last name. (Joint Stipulation, ¶ 7). The Fi. Fa. was recorded twenty-seven (27) days after the entry of the judgment and seventy-seven (77) days before the petition date.
On January 25, 2017, the Clerk of the Superior Court of Worth County recorded the Fi. Fa. in its General Execution Docket. (Joint Stipulation, ¶ 11). The Fi. Fa. was recorded four-nine (49) days after the entry of the judgment and fifty-five (55) days before the petition date.
III. CONCLUSIONS OF LAW
The timing of the judgment's entry and its recording is important in an avoidance action because "[w]hen a transfer is 'made' for § 547(b)(4)(A) purposes depends on when it is perfected." Gordon v. Novastar Mortg., Inc. (In re Hedrick) , 524 F.3d 1175, 1180 (11th Cir. 2008). Generally, a transfer occurs "at the time such transfer takes effect between the transferor and the transferee." 11 U.S.C. § 547(e)(2)(A). If the transfer is not perfected within thirty (30) days of taking effect, however, the Code considers the point of perfection as the time the transfer takes place. Id. § 547(e)(2)(B). For transfers pertaining to real property, 11 U.S.C. § 547 defines perfection as the point at which a bona fide purchaser could not take an interest in the property that is superior to the transferee's interest. Id. § 547(e)(1)(A). Under Georgia law, a bona fide purchaser cannot take an interest superior to a prior recorded security interest. See Williams v. Smith , 128 Ga. 306, 314, 57 S.E. 801 (1907).
Having framed the basic workings of 11 U.S.C. § 547 and the stipulated facts, the Court can address the issue in this case. Ultimately, resolution depends on when *919the judicial lien encumbering the Debtors' real property "took effect" between First Community and the Debtors under Georgia law.1 Regarding the real estate in Tift County, if the judicial lien "took effect" when the Tift County Superior Court entered the judgment then, because the judgment was recorded within 30 days, the date of the transfer for the purposes of the preference action is December 7, 2016. This would place the transfer outside the ninety (90) day look-back period and the First Community would be entitled to summary judgment on the claim. If, however, the entry of the judgment did not create a judicial lien encumbering the Debtors' real property, but rather the recording of the Fi. Fa. created the lien, the transfer occurred within the applicable look-back period and the Trustee is entitled to summary judgment on the issue. First Community concedes that even under its interpretation of the law the attachment of the judicial lien on the real property in Worth County, Georgia occurred within the applicable look-back period.2
The interest in property conveyed by a Georgia court's entry of judgment is a matter governed by Georgia law and primarily involves two Georgia statutes. O.C.G.A. § 9-12-80 states: "[a]ll judgments obtained in superior courts... shall bind all the property of the defendant in judgment, both real and personal, from the date of such judgment except as provided in this Code." O.C.G.A. § 9-12-86(b) states: "No judgment... shall in any way affect or become a lien upon the title to real property until the judgment, decree, or writ of fieri facias is recorded in the office of the clerk of the superior court of the county in which the real property is located." At first glance, interpreting these two statutes creates some friction. On one hand, O.C.G.A. § 9-12-80 clearly states that the entry of a judgment "binds" the judgment debtor's real property; but on the other, O.C.G.A. § 9-12-86(b) states the judgment does not "in any way affect or become a lien" on real property without recording.
Although case law interpreting these statutes does little to address this ambiguity, two Georgia appellate decisions provide some direction. In Morris-Weathers the Georgia Supreme Court was tasked with determining the priority between three competing judgment creditors, each of which obtained its judgment in the same term of court. National Bank of Ga. v. Morris-Weathers Co., 248 Ga. 798, 286 S.E.2d 17 (1982). One of the judgment creditors recorded its judgment before the other creditors and argued it accordingly had superior priority in the judgment debtor's real estate.
The Morris-Weathers Court found only one case that marginally supported this argument, In re Tinsley . In that case, the District Court of the Middle District of Georgia held an unrecorded judgment did not attach to real property even after the *920judgment debtor appealed the entry of the judgment. In re Tinsley , 421 F.Supp. 1007, 1011 (M.D. Ga. 1976) aff'd 554 F.2d 1064 (5th Cir. 1977). In coming to this conclusion, the Tinsley Court determined O.C.G.A. § 9-12-873 and § 9-12-80 conflicted with § 9-12-86(b).4 Because O.C.G.A. § 9-12-86(b) was more recently passed, the Tinsley Court held the statute repealed the others and controlled the issue. Id., 421 F.Supp. at 1011. The Morris-Weathers Court, however, found no contradiction between the statutes. Instead the court held that "for priority purposes, the judgment [upon recording] relates back to the date of its rendition and shall be considered of equal date with other perfected liens arising from judgments on verdicts rendered at the same term of court." Morris-Weathers , 248 Ga. at 800, 286 S.E.2d 17.
First Community seemingly argues Morris-Weathers overruled Tinsley and that the Trustee's reliance on Tinsley is misplaced. This Court, however, does not read Morris-Weathers in such a manner. The Morris-Weathers Court only disagrees with the Tinsley Court concerning whether O.C.G.A. § 9-12-86(b) conflicted with § 9-12-80 and § 9-12-87. See Morris-Weathers , 248 Ga. at 800, 286 S.E.2d 17 ("We do not agree that the effect of [ O.C.G.A. § 9-12-86 ] is to repeal either [ § 9-12-87 ] or [ § 9-12-80 ]. While it is true [ O.C.G.A. § 9-12-86 ] provides that all laws or parts of laws in conflict are repealed, ...we find no conflict which requires a repeal.") (internal citation omitted). It does not follow that Morris-Weathers rejected or overruled the holding in Tinsley . In fact, the issues in the two cases were so dissimilar that-even had the court expressly rejected the holding in Tinsley -it would have arguably been dictum. Morris-Weathers only concludes that courts must give effect to each statute.
The Morris-Weathers decision also provides other relevant reasoning to the issue before this Court. In finding O.C.G.A. § 12-9-86 did not conflict other law, the Morris-Wathers Court concluded that the statute's purpose was to protect third-party purchasers without notice of the judgment lien. Specifically, the Court stated: "[t]he purpose of the statute is to protect third persons acting in good faith and with notice by requiring that any judgment, decree or order must be recorded before it will in any way affect or become a lien on title to real property." Id. The Georgia Court of Appeals in Watkins v. Citizens & Southern Nat'l Bank cited this language while determining whether a judgment creditor, which had not recorded an expired judgment could revive the judgment under O.C.G.A. § 9-12-61. 163 Ga. App. 468, 294 S.E.2d 703 (1982). The Watkins Court concluded a judgment creditor could revive an unrecorded judgment, reasoning:
[the e]ntry of a judgment or any writ of fieri facias issued pursuant to any such judgment upon the general execution docket or other applicable records is simply the process of perfecting a lien *921against the real property of the defendant. The fact that appellee did not record its original judgment on the general execution docket 'does not mean that the judgment does not exist.'
Id. at 468, 294 S.E.2d 703 (quoting Morris-Weathers , 248 Ga. at 800, 286 S.E.2d 17 ) (citations omitted).
Citing this language, First Community contends the Morris-Weathers and Watkins Courts reasoned O.C.G.A. § 9-12-86 should only apply to third parties; that is, the statute only requires recordation to enforce a lien against a third-party. First Community is not alone in making this interpretation of those cases. The Bankruptcy Court in the Northern District of Georgia in In re Andrews likewise read those cases to hold O.C.G.A. § 9-12-86(b)"protects only third persons acting in good faith and without notice." Andrews v. Adcock (In re Andrews) , 500 B.R. 214, 220 (Bankr. N.D. Ga. 2013) (citing Morris-Weathers , 248 Ga. at 799, 286 S.E.2d 17 ) (emphasis added). The In re Andrews Court accordingly concluded that, because the statute only protects third parties, "the absence of recordation does not eliminate the existence or effect of an unrecorded judgment against the interest of a judgment debtor, as opposed to the interest of third parties, in the property." In re Andrews , 500 B.R. at 220.
Again, this Court reads Morris-Weathers and Watkins differently. Undoubtedly, these cases state the purpose of O.C.G.A. § 9-12-86(b) is to protect third parties. That does not mean, however, that the statute's effect only extends to third parties. Indeed, the statute explicitly states the judgment "shall [not] in any way affect or become a lien upon the title to real property." O.C.G.A. § 9-12-86(b) (emphasis added). While the statute's purpose was relevant to the issues before the Morris-Weathers and Watkins courts, the holding in those cases did not modify O.C.G.A. § 9-12-86(b)'s clearly stated effect-that a judgment does not "in any way" become a lien on real estate until it is recorded. In fact, a close reading of Morris-Weathers reveals the Georgia Supreme Court understood O.C.G.A. § 9-12-86(b) to require recording a judgment to create a lien on real estate. After recognizing that a judgment exists regardless of recording, the Court discussed the point at which the judgment attaches to real property; the Court stated: "The period between the taking of the judgment and its recording is merely a period of dormancy. When the judgment is recorded as provided for in the code, the dormancy ends and the judgment becomes effective as a lien on real estate ." Morris-Weathers , 248 Ga. at 799, 286 S.E.2d 17 (emphasis added). The court in these sentences was not discussing the point at which a judgment lien is perfected against third parties. It was explaining how "recording as provided for in the code" makes the judgment "effective as a lien on real estate." Nothing in the opinion indicated that during the period of "dormancy"-that is, the period between the judgment's entry and its recording-the judgment creditor holds a lien encumbering the judgment debtor's real estate.
The Court's interpretation of O.C.G.A. § 9-12-86(b) does not, as First Community argues it would, make O.C.G.A. § 9-12-80 superfluous. First, although O.C.G.A. § 9-12-80 states a judgment "binds all the property of the defendant in judgment, both real and personal," this provision only applies "except as otherwise provided in this Code." The statute expressly acknowledges its limitations and O.C.G.A. § 9-12-86(b) provides an exception to that general rule. See Pettigrew v. Hoey Constr. Co. (In re NotJust Another CarWash) , 2007 WL 7138341 note 4, 2007 Bankr. LEXIS 979 note 4 (Bankr. N.D. Ga. Feb. 16, 2007)
*922(finding O.C.G.A. § 9-12-86(b) provides an exception authorized by the clause "except as otherwise provided" in O.C.G.A. § 9-12-80 ). Secondly, this interpretation still gives meaningful effect to O.C.G.A. § 9-12-80. The statute recognizes that Georgia law provides creditors holding an unrecorded judgment unique rights in the debtor's real property, though those rights are short of being a lien. For example, O.C.G.A. § 9-12-82 provides a thirty (30) day grace-period during which a judgment creditor may record its judgment and be protected against the intervening interest of a bona fide purchaser. Additionally, O.C.G.A. § 9-12-88 prevents a judgment debtor from alienating property after an appeal of the judgment is filed. These are rights Georgia law gives to a judgment creditor concerning the judgment debtor's real property that are unavailable to a non-judgment creditor. Recognizing these rights while requiring proper recording to create a judicial lien on real estate gives effect to O.C.G.A. § 9-12-80. Further, recognizing these rights may shed some light on why the Georgia code uses the phrase "binds all the property" in O.C.G.A. § 9-12-80, though uses the phrase "become a lien" in § 9-12-86(b) and the phrase "create a lien" in other statutes.5
Frist Community also argues, citing O.C.G.A. § 9-12-85, that "the perfection statute"-presumably § 9-12-86(b) -should not be interpreted to affect the entry of the judgment between the Debtors and First Community. O.C.G.A. § 9-12-85 states: "Nothing in Code Sections 9-12-81 and 9-12-82 shall be construed to affect the validity or force of any deed, mortgage, judgment, or other lien of any kind as between the parties thereto." As previously discussed, O.C.G.A. § 9-12-81 and O.C.G.A. § 9-12-82 pertain to the rights of judgment creditors against bona fide purchasers. Those statutes are not applicable here; thus, O.C.G.A. § 9-12-85 does not support the proposition for which First Community cites it. Moreover, the Court's conclusion here does not in any way affect the entry of the judgment. The judgment exists regardless of recording and is a final adjudication of the dispute between the parties. That does not mean, however, that the judgment becomes a lien on real property prior to being recorded.
To be clear, the Court is not holding that a judgment fails to create an enforceable obligation between the judgment debtor and creditor. Such a ruling would certainly contravene settled Georgia law. The Court only holds that the entry of the judgment-without subsequent recordation-does not create a judicial lien on the judgment debtor's real property. Certainly, Georgia law gives judgment creditors specific rights to the judgment debtor's real property. The most important of those rights is the ability to record the judgment to create a judicial lien on the debtor's real property. These rights, however, do not create a lien on real property. Under Georgia law, only recording a judgment creates a judicial lien on real property.
IV. CONCLUSION
The Trustee seeks to avoid the transfer of a judicial lien on real property between the Debtors and First Community. He seeks summary judgment on the issue of whether that transfer took place within the look-back period provided by 11 U.S.C. § 547(b)(4)(A). Under Georgia law, a judicial lien on real property is created when the judgment is recorded in the applicable real estate records. Prior to recording, the entry of a judgment "in no way affect[s] or become[s] a lien on title to *923real property." O.C.G.A. 9-12-86(b). The parties have stipulated that the judgment was recorded within the look-back period. Therefore, the Court concludes the Trustee is entitled to summary judgment on this issue.
Though 11 U.S.C. § 547 provides when a transfer occurs for the purpose of an avoidance action, its references to when the transfer "takes effect between the transferor and the transferee" and to when a transfer is perfected is a matter of state law. See Butner v. U.S. , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ("Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.")
First Community argues this is so because, although the entry of the judgment transferred a judicial lien, the transfer was not perfected by recording within thirty (30) days; thus, 11 U.S.C. § 547(e)(2)(B) -not 11 U.S.C. § 547(e)(2)(A) -governs the date of the transfer.
O.C.G.A. § 9-12-87 provides:
(a) All judgments signed on verdicts rendered at the same term of court shall be considered, held, and taken to be of equal date.
(b) In the case of judgments signed on verdicts rendered at the same term of the court, no execution shall be entitled to any preference by reason of being first placed in the hands of the levying officer.
The Morris-Weathers and Tinsley decisions cite the statutes as previously codified in the 1933 code. The statutes, as currently codified, remain substantively the same as the earlier codifications. For clarity, this opinion will cite the statute as currently codified, even where the cases cite the 1933 Code.
E.g. , O.C.G.A. §§ 9-12-81(b), 82. 84(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501794/ | FINDINGS OF FACT
The stipulated facts are as follows, in paragraphs 1 through 60. As they are stipulated facts and not my findings, I replicate them essentially verbatim.
1. Chinmay and Nilu, along with their business partner Edward Furtado ("Furtado"), founded Advanced Process Technologies in or around March 1998.
2. Chinmay, Nilu, and Furtado also formed Integrated Pharmaceuticals, Inc. ("Integrated") in or around 2000, and Integrated acquired Advanced Process Technologies in 2000.
3. Integrated is a corporation organized under the laws of the State of Idaho, with a Massachusetts office located at 310 Authority Drive, Fitchburg, Worcester County, MA 01420. Integrated was a publicly traded company that was in the business of developing, manufacturing, marketing and distributing dietary supplements and nutritional substances.
4. Chinmay was the President and CEO of Integrated until he gave notice of his departure on July 19, 2007.
5. Nilu was the Vice President of Research and Development of Integrated until Integrated ceased operations on August 31, 2008.
6. The Chatterjees were both employees, directors, and investors of Integrated.
7. David Smith ("Smith") joined Integrated's board of directors ("the Board") in February 2004, after he personally invested $1,250,000 in Integrated. Smith later increased his investment to a total of $2,400,000. Smith had met with Chinmay just once prior to his initial investment. He chose to invest in Integrated based largely on his belief that Chinmay had the intelligence and drive to lead Integrated to success.
8. Sally Johnson-Chin ("Johnson-Chin") joined the Board in 2002 and invested *21$275,000 of her personal funds in Integrated.
9. Integrated raised approximately $6 million in investments by the end of 2004 and $9.7 million in investments over its lifespan.
10. The Chatterjees developed and intended to market a highly purified, water-soluble calcium powder (a calcium gluconate) to nutritionally fortify food and beverage products.
11. By early 2005, the Board had planned to sell the calcium powder in packets that could be added to food and beverage products without altering the taste.
12. Chinmay, Nilu, and Furtado held various patent rights related to the process of refining calcium gluconates and other gluconates in an entity called the NEC Partnership, including a patent for the water-soluble calcium powder. These patent rights were licensed to Integrated under a license Agreement (the "License Agreement"). The License Agreement defines two kinds of intellectual property subject to the license: "Licensor [NEC] hereby grants to Licensee [Integrated], subject to all the terms and conditions of this License Agreement, a right and license to make, have made, use, lease, promote, market, distribute, and sell the Licensed Products and Licensed Processes in the Field throughout the Territory. The right and license granted hereunder shall be exclusive as to any Patent Rights, and non-exclusive as to any Technical Information."
13. The NEC Partnership expressly retained the right to use any of the "Technical Information" relating to the patent process. It also required Integrated to pay a 3% royalty or $25,000 per quarter to NEC, whichever was greater. The quarterly minimum was only in effect if Integrated's sales were $5 million or greater.
14. By early 2005, the Board had planned to sell the calcium powder in packets that could be added to food and beverage products without altering the taste.
15. Chinmay proposed to the Board that Naples Marketing Systems, Inc. ("Naples") be Integrated's distributor and marketing agent, identifying Naples' contact with Demoulas Market Basket and indicating that Naples had come up with a name for the calcium powder ("Cal-Sap").2 [sic]3
16. Unbeknownst to the Board, Naples had already applied for the registered trademark for Cal-Sap in February 2005, before Chinmay had even introduced or suggested Naples to the Board.
17. Naples was founded as a Massachusetts limited liability company on July 13, 2004. Naples was created by Chinmay and one Constantine Miserlis ("Miserlis") to sell the same highly purified, water-soluble calcium powder that the Chatterjees had created and that Integrated was producing and poised to begin selling.
18. Naples was owned "at the time" by Miserlis.4 Miserlis had no previous marketing experience. Miserlis was an Integrated *22investor and also a long-time friend and colleague of Chinmay. Chinmay met Miserlis in 1992 while they both worked at Badger Engineers. Miserlis is a retired engineer and, by 2004, was in his mid-seventies.
19. Miserlis was also a paid consultant of Integrated, where he worked on such projects as improving Integrated's cooling tower design and bringing Integrated's wastewater treatment plant into compliance with city regulations.
20. Naples purchased the calcium powder from Integrated and packaged and distributed it as a supplement to be added to water or other drinks in the retail market. This was the exact same plan and delivery method that Integrated planned to use.
21. Smith had a private meeting with Chinmay about Naples in which he asked about Naples' experience marketing and selling products.5 Chinmay responded that Naples was a new company that had no other customers besides Integrated, but that it had a business connection to the supermarket chain Market Basket. Smith also asked Chinmay directly who the principal of Naples was, and Chinmay responded that he did not know.
22. Johnson-Chin discovered that invoices from Integrated to Naples were being sent to Miserlis at his home in Arlington, Massachusetts.
23. The Board held an emergency meeting on September 5, 2005, in order to confront Chinmay about the apparent conflict of interest with Naples and Miserlis. Chinmay apologized to the Board for not disclosing from the outset that Miserlis was running Naples.
24. Smith also questioned why Integrated had made a recent payment of approximately $200,000 to Naples for marketing services, and the $5,000 per month that was being paid to Miserlis for consulting. Chinmay said that he had transferred money from Integrated to Naples to help get them started.
25. Naples was the only company that Integrated ever paid to market and distribute Cal-Sap. Naples purchased from Integrated approximately $100,000 in calcium powder and other unrelated bulk products. Naples has never paid Integrated for an order of the calcium powder that is memorialized in an invoice sent on July 10, 2007.
26. Members of the Board expressed serious concerns to Chinmay about Naples' ability to market the calcium powder in light of the fact that it was a new company, and was being run by a seventy-five year old retired engineer. The Board was also displeased with the name of the product, and the packaging. None of the packaging had Integrated's name on it, and as such, did not develop a brand identification for the company. Chinmay insisted that Naples was the right company to market the calcium powder.
27. The members of the Board believed that the calcium powder and brand name Cal-Sap were Integrated's products. They succumbed to Chinmay's insistence that Integrated work with Naples.
28. Smith had a private conversation with Chinmay during which Smith recommended retaining the marketing company Kelton Research to assist with creating a brand and marketing strategy for the calcium powder. Chinmay responded that he did not want to hire Kelton Research, and wanted to continue to market through Naples.
*2329. Integrated's SEC year-end report for 2006 advertised a relationship with Naples:
We have developed a patent-pending calcium supplement that can be sold in packets like those use for artificial sweeteners ... We have signed a License Agreement with Naples Marketing Systems, LLC for the distribution of this product. Naples is selling the packets under the brand name "CAL-SAP", and currently supplies the product to a chain of about 59 grocery stores in New England, and is in discussion with other substantial distribution channels. The product is also available at Naples's website www.calsap.com.
30. In early 2006, Chinmay informed the Board that he and Miserlis were to meet with Market Basket. The purpose of the meeting was to persuade Market Basket to carry the product Cal-Sap. Smith informed Chinmay that he would like to attend the Market Basket meeting, but Chinmay insisted that Smith not attend-stating that this was the preference of the Market Basket representative.
31. The Board members believed that Chinmay was attending the Market Basket meeting as a representative of Integrated and had no reason to doubt this basic assumption. Chinmay reported to the Board that the meeting with Market Basket was a success and that the retailer had agreed to carry Cal-Sap in some of its stores. However, when Market Basket sent an invoice to Chinmay, it was addressed to him at Naples Marketing Systems, LLC. Cal-Sap did not sell particularly well in Market Basket, and a second order for the product was never placed.
32. In 2006, Johnson-Chin and Chinmay attended a meeting in New Jersey with a large distributor named Golick Martins, Inc., which had the ability to place Cal-Sap in numerous retail stores. At this meeting, Chinmay introduced himself as the CEO of Integrated, and the name Naples was never mentioned. Golick Martins expressed a high level of interest in carrying Cal-Sap; however, Mr. Chatterjee did not submit the documentation that Golick Martins requested. Also, Nilu failed to recertify the substance, and the deal consequently fell through.
33. As a product for Integrated to sell, Cal-Sap ultimately failed.
34. Integrated spent $211,680 in marketing in the year 2005, essentially all paid to Naples. In addition, Integrated spent $556,600 in the year 2005 on consulting fees, which was twice as much as the amount spent on research and development and quality assurance ($276,341). It was also in the year 2005 that Integrated was paying Miserlis over $5,000 per month for consulting work.
35. Integrated failed to recertify its stock of calcium powder (a requirement for selling the substance). Nilu was responsible for recertification of inventory but never accomplished this task.
36. In 2006, the Board decided to begin working on a bottled water project. Integrated's intention was to sell the exact same calcium powder, along with a few other ingredients, in a pre-packaged bottle of water. They created the brand-name HealthyCal+ for the new bottled water product.
37. Integrated retained Kelton Research to assess the potential of the bottled water product. The results of the research were extremely positive and suggested that the product could be a huge success.
38. Integrated was never able to manufacture a final bottled water product that was ready to be sold in stores. The development of the product was delayed significantly due to several factors: contamination *24of samples that went out for testing, the failure to recertify the ingredient, and a lack of movement, loyalty, and efforts on the part of the Chatterjees to get the project to the marketplace.
39. Board members had wanted to terminate Chinmay in 2005, but the Board decided that it needed him to remain at Integrated for his technical knowledge and in order to continue producing the calcium product.
40. Integrated was unable to generate revenue from the calcium powder, either through sales of Cal-Sap or HealthyCal+, and eventually ran out of money.
41. The technical knowledge licensed to Integrated on a non-exclusive basis is the property of the Chatterjees and their business partner, not Integrated, and therefore cannot constitute a trade secret of Integrated. Further, once NEC gained patent protection for the substance and process, it ceased to be a trade secret if it ever was one.
42. Board members Johnson-Chin and Smith asked Chinmay and Nilu for access to the proprietary information used to make the calcium powder but were never provided that information.
43. After Integrated shut down operations in August 2008, the Board employed the services of an information technology specialist to search for the proprietary information used to make the calcium powder, but he was unable to locate it.
44. There is no evidence that Chinmay, Nilu, Naples, or Acotrix has used any such information to produce the same powder since the Chatterjees' departure from Integrated.
45. On July 17, 2007, Mr. Chatterjee resigned as CEO of Integrated.
46. Mr. Chatterjee formed Acotrix, Inc. in August 2007, after his departure from Integrated. In September 2007, Acotrix purchased Naples from Miserlis. Chinmay purchased 100% of Naples from Miserlis for only 14.28% of Acotrix, Inc. The only asset that Acotrix had after the purchase and sale was Naples.
47. Chinmay became president of Naples in November 2007.
48. Chinmay created a business presentation for Naples in late 2008 or early 2009 titled "Product & Marketing Plan." The Naples "Product and Marketing Plan" touts a product called "Totally Calcium," which is the same calcium powder product that was previously sold as Cal-Sap.
49. The "Product and Marketing Plan" states that "Naples manufactures and packages unique Calcium Supplement Powder using its proprietary composition and packaging technology."
50. Naples used subcontractors to manufacture Totally Calcium, one of which was Integrated; the other was a French manufacturer called Jung Bauzler.
51. After Chinmay left Integrated In July 2007, Naples never purchased the calcium powder from Integrated again.
52. After Chinmay's resignation, Nilu continued to work as an employee for Integrated until the company closed its doors and laid off all of its employees on August 22, 2008.
53. Quickbooks documents were found on Nilu's Integrated computer after Integrated shut down operations, and these documents showed that she was assisting with the accounting for Naples and Acotrix, Inc. while she was an officer of Integrated.
54. Emails on an external hard drive assigned to Nilu by Integrated show that she was coordinating shipments of Cal-Sap from the packaging company in India, Omni Pharma Consulting, to the Naples *25address in Burlington, Massachusetts while she was an officer of Integrated. It was at this time during August 2008 that Integrated and its officers actually knew that both Chinmay and Nilu were working for Naples and breaching their fiduciary duties to Integrated.
55. Nilu continued nominally as a director of Integrated through her resignation on or around December 8, 2008, but she did not participate in any meetings of the Board or take further actions in her role as a director following the closing of the facility in August 2008.
56. Mrs. Chatterjee was not apprised of the decision to shut the plant prior to being laid off, and she was excluded from Board discussions and key information during the last year of her employment.
57. Acotrix is a corporate entity organized under the laws of the state of Wyoming. Acotrix was not created until after Chinmay left Integrated. Acotrix has never manufactured, distributed, or attempted to distribute any calcium products.
58. At the time of their resignations from Integrated, it is unclear whether or not Chinmay and Nilu had accrued unused vacation time because the existence of an actual vacation policy was not proven at trial. Although there was some loose arrangement for officers to take vacation days, the recording, accrual, and eligibility of such time was not shown to be an actual policy, but rather an ad hoc, informal practice utilizing basically the "honor system." Integrated refused to pay Chinmay and Nilu any alleged unused vacation time after their resignations because it deemed them to have been disloyal and to have breached their fiduciary duties to Integrated. However, no actual vacation policy existed at Integrated.
59. Nilu's salary was $65,615 in 2005, $36,000 in 2006, $36,000 in 2007, and $36,000 in 2008. During the period 2005 through 2008, Nilu did not provide any value to Integrated.
60. Chinmay's salary during these years was $71,446, $41,461 and $53,308 for the years 2005, 2006, and 2007 respectively, which totals $166,215. During the period 2005 through 2007, Chinmay did not provide any value to Integrated.
The following (in paragraphs 61 through 74) constitute the Superior Court's relevant rulings of law. I include them among the facts for two reasons. First, they include further Superior Court findings of fact which, as such, are among the facts to which the parties have stipulated for purposes of this adversary proceeding. Second, the rulings show how the actions of the Chatterjees, as set forth in the stipulated facts, resulted in the judgment debts at issue here. I reproduce these Superior Court rulings of law essentially verbatim.
61. Under Massachusetts law, officers and directors owe a fiduciary duty to protect the interests of the corporation they serve. Cecconi v. Cecco, Inc. , 739 F.Supp. 41, 45 (D. Mass. 1990). Senior executives are considered to be corporate fiduciaries and owe their company a duty of loyalty. Chelsea Industries v. Gaffney , 389 Mass. 1, 11-12, 449 N.E.2d 320 (1983). Corporate fiduciaries are required to be loyal to the corporation and to refrain from promoting their own interests in a manner injurious to the corporation. Seder v. Gibbs , 333 Mass. 445, 453, 131 N.E.2d 376 (1956). Johnson v. Witkowski , 30 Mass.App.Ct. 697, 705, 573 N.E.2d 513 (1991).
62. Chinmay, as an officer and director, employee, investor, and second largest shareholder of integrated, owed the company a fiduciary duty and duty of loyalty.
63. Chinmay breached his fiduciary duty of loyalty by collaborating with Miserlis *26to establish Naples for the purpose of profiting from and capturing the brand name value to Integrated's new product calcium powder. Chinmay had a personal financial interest in Naples at all relevant times. This is demonstrated by the fact that Chinmay was able to purchase Naples for no value in return from Miserlis within a month of departing Integrated, and Chinmay's admitted transfers of money from Integrated to Naples to help get Naples started. Chinmay essentially failed to give his undivided attention, work, and brain power to Integrated, which ultimately resulted in the failure of Integrated to bring a product of its own to market.
64. Chinmay was untruthful when he told the Board that he attended the Market Basket as the CEO of Integrated. He attended the meeting alone, and went as a representative of Naples.
65. Chinmay refused to retain other marketing and distribution companies for Cal-Sap because he was personally interested in the success of Naples.
66. Under the doctrine of equitable forfeiture, recognized in Massachusetts, an employee violating a fiduciary duty to an employer can be required to forfeit compensation owed by or already received from the employer. Boston Children's Heart Foundation, Inc. v. Nadal-Ginard , 73 F.3d 429, 435 (1st Cir. 1996). However, this remedy, also available [sic] even absent a showing of actual injury to the employer. The doctrine has been limited in Massachusetts cases only to that portion of compensation which exceeded the worth of the employee's services. Here, Chinmay and Nilu conferred no benefit upon Integrated. As their loyalties were completely divided, that disconnect caused Integrated's plan to market and sell Cal-Sap or any other product to fail. Integrated has incurred damages by paying Chinmay a salary while he was advancing Naples' interest to Integrated's detriment during the years 2005, 2006, and 2007. Chinmay's salary during these years was $71,446, $41,461 and $53,308 for the years 2005, 2006, and 2007 respectively, which totals $166,215. This entire amount shall be repaid to Integrated as an equitable forfeiture.
67. Integrated incurred damages in the amount of approximately $200,000 due to a transfer of money to Naples in the middle of 2005 for "marketing" services.
68. Integrated also incurred damage resulting from Chinmay's refusal to retain experienced marketing and distributing companies for the product Cal-Sap because he had a self-interest in funneling this business exclusively to Naples.
69. Nilu, as an officer, director, employee, and investor of Integrated, owed the company a fiduciary duty and duty of loyalty.
70. Nilu breached her fiduciary duty to Integrated by working on behalf of Naples while she was an officer of Integrated. Nilu coordinated shipments of Cal-Sap to Naples from its packaging contractor in India while she was an officer of Integrated. Nilu also performed accounting work on her Integrated-assigned computer for Naples and Acotrix while she was an officer of Integrated.
71. Nilu stopped performing her required functions at Integrated, including ensuring the recertification of the calcium powder.
72. Integrated has incurred damages by paying Nilu a salary while she was advancing Naples' interest to Integrated's detriment during the years 2005 - 2008. Nilu's salary was $65,615 in 2005, $36,000 in 2006, $36,000 in 2007, and $36,000 in 2008. As the second highest ranking officer at Integrated, Nilu breached her fiduciary *27duty to Integrated in 2005 when she allowed Integrated to transfer $200,000 to Naples. Nilu also failed to recertify the calcium powder for Integrated in 2006. The Naples accounting ledger shows that her entries began there in August 2007. The full amount of her salary shall be repaid to Integrated as an equitable forfeiture.
73. Integrated incurred damages as a result of Nilu's falling to fulfill her obligations as a high ranking officer at Integrated during the time she had begun to perform work for Naples. In particular, Nilu failed to recertify Integrated's calcium powder, which delayed the introduction of the bottled water product.
74. Integrated failed to produce sufficient evidence on the issue of lost profits for the Court to determine an amount of money that the company would have made but for the Chatterjees' breach of fiduciary duties.
75. On the basis of the above findings of fact and rulings of law, the Superior Court directed: (i) "judgment shall enter in favor of the plaintiff Integrated and against the defendant Chinmay Chatterjee as to Count I (Breach of Fiduciary Duty) for a total of $266,215 (Two Hundred Sixty Six Thousand Two Hundred Fifteen Dollars) plus interest and costs. The plaintiff Integrated failed to prove all other Counts against defendant [Chinmay]"; and (ii) "Judgment shall enter in favor of the plaintiff Integrated and against Nilu Chatterjee as to Count V (Breach of Fiduciary Duty) for a total of $273,615 (Two Hundred Seventy Three Thousand Six Hundred Fifteen Dollars) plus interest and costs. The plaintiff Integrated failed to prove all other Counts against defendant [Nilu]."
76. On July 3, 2015, the Superior Court entered judgment against Chinmay and Nilu as so directed.
77. Chinmay and Nilu appealed from the judgment to the Massachusetts Appeals Court. The Appeals Court determined (in relevant part) (i) that it was not error for the Superior Court to have determined that the breach of fiduciary duty counts against each of the Chatterjees were not time barred and (ii) that the damages awarded against Chinmay and Nilu were supported by the record. Regarding the damages, the Appeals Court stated:
Nor was there error in the ultimate damage award against the Chatterjees. The judge found that both Chatterjees breached their fiduciary duties to Integrated starting in 2005, and that neither conferred any benefit on Integrated from 2005 through 2008 because their loyalties were divided. The judge found that Integrated paid salaries to Chinmay totaling $166,215 from 2005 through 2007, and to Nilu totaling $173,615 from 2005 through 2008, and properly could order the Chatterjees to forfeit these amounts. See Chelsea Indus., Inc. v. Gaffney , 389 Mass. 1, 12-13 [449 N.E.2d 320] (1983). The judge further found that Nilu breached her fiduciary duty to Integrated when she allowed the company to transfer $200,000 to Naples in 2005, a transfer the judge found to have been made at Chinmay's direction. The judge assigned one-half of that amount to each of the Chatterjees because Naples did not provide the marketing services for which it was paid, see One to One Interactive, LLC v. Landrith , 76 Mass. App. Ct. 142, 148 [920 N.E.2d 303] (2010), (noting that "damages recoverable for breach of fiduciary duty is the loss of those advantages but for the defendants' breach or interference that [the plaintiff] would have been able to attain or enjoy"), and awarded Integrated damages against Chinmay in the *28amount of $266,215 plus interest and costs, and against Nilu in the amount of $273,615 plus interest and costs. The damages are supported by the record.
78. The Appeals Court accordingly affirmed the judgment as against both Chinmay and Nilu.
JURISDICTION
The matter before the court is a proceeding under 11 U.S.C. § 523(a) to determine the dischargeability of certain judgment debt. It arises under the Bankruptcy Code and in a bankruptcy case and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b). By standing order of reference, the District Court has referred the matter to the bankruptcy court pursuant to 28 U.S.C. § 157(a). It is a core proceeding within the meaning of 28 U.S.C. § 157(b)(1) and (b)(2)(1) (core proceedings include determinations of the dischargeability of particular debts). The bankruptcy court accordingly has authority to enter final judgment on the complaint.
DISCUSSION
The complaint states three counts against each defendant, one under each of three subsections of § 523(a), and each count seeks to except from discharge both components of each defendant's judgment debt: forfeited salary, and liability for the $200,000 transfer to Naples. For each of the three subsections at issue, (a)(2)(A), (a)(4), and (a)(6), the burden of proof is on the plaintiff creditor, and the standard is a preponderance of the evidence. Palmacci v. Umpierrez , 121 F.3d 781, 786 (1st Cir. 1997) (the claimant bears the burden of proving that its claim falls within an enumerated exception from discharge); Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991) (the standard of proof for discharge exceptions is a preponderance of the evidence).
Counts I and II: False Pretenses, False Representations, or Actual Fraud under § 523(a)(2)(A)
In Count I (against Chinmay) and Count II (against Nilu), Integrated seeks a determination that both components of the defendants' judgment debts are excepted from discharge by § 523(a)(2)(A). Section 523(a)(2)(A) states:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by-
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
11 U.S.C. § 523(a)(2)(A). Counts I and II, being based on allegations of false pretenses, false representations, and fraud, sound in fraud and, as such, needed to be pled with particularity. Fed. R. Civ. P. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake."), made applicable by Fed. R. Bankr. P. 7009. It was incumbent on Integrated to specify the particular representations or acts that constitute each instance of false pretense, false representation, or fraud that forms the basis of these counts. In its complaint, Integrated failed to do so. Rather, in Counts I and II, Integrated simply referred generally to "the actions described hereinabove," without specifying which of the multitude of actions described above constitute the instances of false pretense, false representation, or fraud on which these counts are predicated. Nor was this deficiency rectified at anytime *29before trial. In view of this deficiency in pleading, the defendant Debtors were not afforded a fair opportunity to defend as to these instances of alleged fraud at trial. Accordingly, "false pretenses, false representations and actual fraud" under § 523(a)(2)(A) is deemed effectively forfeited as a basis for a determination of nondischargeability.
Counts III and IV: Fraud or Defalcation while Acting in a Fiduciary Capacity
In Count III (against Chinmay) and Count IV (against Nilu) Integrated seeks a determination that both components of the defendants' judgment debts are excepted from discharge by § 523(a)(4) as debts for fraud or defalcation while acting in a fiduciary capacity.6
I begin with the allegations of defalcation while acting in a fiduciary capacity. In relevant part, § 523(a)(4) excepts from discharge any debt for "defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). It requires proof of two things: that the debtor have acted as the fiduciary in a fiduciary relationship; and that his or her conduct in that capacity, the conduct that gave rise to the debt or liability in question, have constituted a defalcation. In re Ackerman , 587 B.R. 750, 785 (Bankr. D. Mass. 2018) and cases cited.
The first matter to determine is whether the defendants were, in the conduct that gave rise to the judgment debt at issue, acting in a fiduciary capacity, as the fiduciary in a fiduciary relationship. On Integrated's motion for summary judgment, the Court ruled for purposes of this adversary proceeding that the Superior Court's judgment established, by issue preclusion, (i) that under Massachusetts law, each defendant was, by virtue of his or her position as an officer or director of Integrated, a fiduciary of Integrated, which is a corporation, and (ii) that each defendant committed the acts on which the judgment against him or her was predicated as a fiduciary of Integrated. Also on summary judgment, the Court further ruled (iii) that the fiduciary relationship of an officer or director of a corporation to that corporation under Massachusetts law makes him or her a fiduciary for purposes of § 523(a)(4),7 and (iv) on the basis of the Superior Court's findings and rulings, it *30follows as a matter of federal law that the actions of the defendants on which the state court judgment was predicated were actions undertaken by each defendant in "a fiduciary capacity" within the meaning of § 523(a)(4). The requirements of fiduciary capacity are thus established against both defendants and as to both parts of the judgment against each.
The second matter to determine is whether the conduct of each defendant that gave rise to the debt or liability in question constituted a "defalcation" within the meaning of § 523(a)(4). Defalcation in § 523(a)(4) requires a breach of fiduciary duty. Rutanen v. Baylis (In re Baylis) , 313 F.3d 9,17-18 (1st Cir. 2002) ; In re Ackerman , 587 B.R. at 786. In Baylis , the First Circuit explained that "a defalcation may be presumed from a breach of the duty of loyalty, the duty not to act in the fiduciary's own interest when that interest comes or may come into conflict with the beneficiaries' interest." In re Baylis , 313 F.3d at 20. In ruling on the motion for summary judgment, the Court found for purposes of this adversary proceeding that the Superior Court judgment established preclusively that each of the acts on which the judgment was predicated constituted a breach by the defendant in question of a fiduciary duty, specifically of the duty of loyalty that the defendant owed to Integrated. The judgment, against both defendants and in each part, was based entirely on findings of breach of fiduciary duty.
However, in order to constitute a defalcation within the meaning of § 523(a)(4), a breach of fiduciary duty must involve something more. A breach of fiduciary duty will constitute a defalcation within the meaning of § 523(a)(4) only when it satisfies certain requirements regarding intent, scienter, risk, or degree of fault. As the Court recently explained:
Notwithstanding defalcation's broad dictionary meaning, not every default, however innocent, will suffice. A defalcation must involve either (i) moral turpitude, bad faith, or other immoral conduct, or (ii) in lieu of these, an intentional wrong, which includes 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, such as where 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. Bullock v. BankChampaign, N.A. , 569 U.S. 267, 273-74, 133 S.Ct. 1754, 1759-60, 185 L.Ed.2d 922 (2013). That risk "must be of such a nature and degree that, considering the nature and purpose of the actor's conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation." Id. at 1760. In all of these possible ways that Bullard [sic , should be Bullock ] may be satisfied-conduct involving "moral turpitude" or "bad faith," "other immoral conduct," an "intentional wrong" involving conduct "that the fiduciary knows is improper," and conscious disregard or willful blindness to a substantial and unjustifiable risk that the conduct will turn out to violate a fiduciary duty-there is a requirement of scienter in the sense of appreciation by the fiduciary of the wrongfulness or his or her conduct, "a culpable state of mind." The Supreme Court was clear on the point: "We hold that [defalcation] includes a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase. We describe that state of mind as one involving knowledge of, or gross *31recklessness in respect to, the improper nature of the relevant fiduciary behavior." Id. at 1757.
In re Ackerman , 587 B.R. at 786.
At the summary judgment stage, I determined that the Superior Court judgment had not preclusively established what Bullock requires. The Court must therefore now determine whether the stipulated facts support findings, as to each defendant and each component of the judgment debt, that Bullock is satisfied. The necessary state of mind, rarely provable by direct evidence, may be determined from the totality of the circumstances, including inferences from circumstantial facts. Palmacci v. Umpierrez, 121 F.3d 781, 790 (1st Cir. 1997), citing Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 764 (1st Cir. 1994) ("circumstantial evidence may be sufficiently potent to establish fraudulent intent beyond hope of contradiction"); Putnam Resources v. Pateman, 958 F.2d 448, 459 (1st Cir. 1992) ("It is black letter law that fraud may be established by inference from circumstantial facts.").
I find that, as to each defendant and both components of each's judgment debt, Bullock is satisfied. The Chatterjees conduct was objectively wrongful. They were channelling business, opportunities, profits, payments, and their own labors and efforts away from Integrated to Naples, a competing enterprise, all the while drawing a salary from Integrated. This was theft, plain and simple. It was not accidental but knowing and intentional-at all times the Chatterjees fully appreciated their obligations to Integrated, that their efforts on behalf of Naples were inappropriate. They were educated business people, not unable to see their conduct for what it was. The defendants' culpable states of mind are further betrayed by their efforts to keep their conflicts of interest hidden from Integrated's Board and by the fact that neither was forthcoming with the Board about his or her work for and investment in Naples. Accordingly, the Court may and does infer from the stipulated facts that the Chatterjees appreciated the wrongfulness of the conduct on which their judgment debts are predicated.
I conclude that the judgment debts of the Chatterjees to the Integrated are, in their entirety, debts for defalcation while acting in a fiduciary capacity.
Under § 523(a)(4), Integrated also seeks a determination that the same judgment debts are excepted from discharge as debts for fraud while acting in a fiduciary capacity. Insofar as Count III and IV are based on allegations of fraud while acting in a fiduciary capacity, they, too, sound in fraud and, for that reason, needed to be pled with particularity. Fed. R. Civ. P. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake."), made applicable by Fed. R. Bankr. P. 7009. It was incumbent on Integrated to specify the particular representations or acts that constitute each instance of the fraud that forms the basis of these counts. In its complaint, Integrated failed to do so. Rather, in Counts III and IV, Integrated simply referred wholesale to "the actions described hereinabove," without specifying which of the multitude of actions described above constitute the instance or instances of fraud on which these counts are predicated. Nor was this deficiency rectified at anytime before trial. In view of this deficiency in pleading, the defendants were not afforded a fair opportunity to defend as to these instances of alleged fraud at trial. Accordingly, "fraud while acting in a fiduciary capacity" is deemed effectively forfeited as a basis for a determination of nondischargeability.
*32Counts V and VI: Willful and Malicious Injury, § 523(a)(6)
In Count V (against Chinmay) and Count VI (against Nilu) Integrated seeks a determination that both components of the defendants' judgment debts are excepted from discharge by § 523(a)(6) as debts for willful and malicious injury to Integrated. Subsection 523(a)(6) excepts from discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). It requires injury to another "entity," a defined term that includes corporation, see 11 U.S.C. § 101(15) and (41) (in Title 11, " 'entity' includes ... person" and " 'person' includes ... corporation"), or to the property of another entity. In addition, the injury needs to have been both willful and malicious. "Willfulness" requires a showing of intent to injure or at least of intent to do an act which the debtor is substantially certain will lead to the injury in question. Kawaauhau v. Geiger , 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). "Debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6)." Id. , 523 U.S. at 64, 118 S.Ct. at 978. "Malicious" requires the injury to have been "wrongful," "without just cause or excuse," and "committed in conscious disregard of one's duties." Printy v. Dean Witter Reynolds, Inc. , 110 F.3d 853, 859 (1st Cir. 1997). Malice thus has both objective and subjective elements: the injury must have been objectively wrongful or lacking in just cause or excuse; and the debtor must have inflicted the injury in "conscious disregard" of his or her duties, meaning that the debtor has to have been aware that the act was wrongful or lacking in just cause or excuse. Whittaker v. Whittaker (In re Whittaker) , 564 B.R. 115, 148-49 (Bankr. D. Mass. 2017), and cases cited.
I find that the injuries for which the judgment was awarded are injuries to an entity within the meaning of this section. Integrated, a corporation, is as such an entity. The forfeited salary portion of each Debtor's judgment debt arose from that fact that each of the Chatterjees received a salary for ostensibly serving Integrated when, in fact, during the years in question, each was serving the interests of Naples and provided service of no value at all to Integrated. The second part of each Debtor's judgment debt, for each's one-half share of the responsibility for a $200,000 transfer to Naples, was for the injury suffered by Integrated by virtue of that transfer. The parties stipulated (at Facts ¶ 67) that Integrated was damaged by this transfer.
Regarding the injury for which the forfeited salary was awarded as damages, I find as to both Chinmay and Nilu that the injury was both willful and malicious. It was willful on the part of each defendant because the injury was inflicted with intent to draw the salary and with knowledge and substantial certainty that, by drawing a salary from Integrated under the pretense of working as officers of Integrated but in fact working for its competitor, Naples, and providing service of no value to Integrated, they were injuring Integrated. The same injury was also malicious because, as I found above, the defendants' conduct was wrongful and committed in conscious disregard of their respective duties to Integrated, and each defendant fully appreciated the wrongfulness of his or her conduct. Accordingly, the damages against each defendant for forfeited salary, plus all interest and a proportionate share of the costs, is excepted from discharge by § 523(a)(6).
Regarding the injury for which the balance of the judgment was awarded, the damage to Integrated from a $200,000 transfer from Integrated to Naples, I find that Integrated has failed to establish by a *33preponderance of the evidence, as to either defendant, that the injury was willful or malicious. The stipulated facts do not supply sufficient detail about the transfer in issue-its purpose, the role of each defendant in arranging it, the knowledge and intent of each defendant about the transfer, what it was given for, what (if anything) Integrated received in exchange for it-to permit this Court to make findings that the injury was willful or malicious. Consequently, each defendant's judgment debt for this transfer, though excepted from discharge under § 523(a)(4) as a debt for defalcation while acting in a fiduciary capacity, is not also excepted from discharge by § 523(a)(6).
CONCLUSION
For the reasons set forth above, judgment shall enter declaring the state court judgment obligations of the Chatterjees to Integrated, including all interest and costs, to be excepted from discharge.
The stipulated facts do not indicate when Chinmay made this proposal to the Board. I surmise from other stipulated facts that he made this proposal sometime after February 2005.
The grammatical trouble in this stipulated fact-which the parties apparently did not see fit to edit or correct-makes the meaning of the latter part of the sentence (from and after "identifying") unclear. I understand the latter part of the sentence to mean that, in support of the proposal to the Board that is the subject of this sentence, Chinmay indicated to the Board that Naples had contact with Demoulas Market Basket and had come up with the name Cap-Sap for the calcium powder.
The stipulated facts say "at the time," but the time to which this phrase refers is unclear.
The stipulated facts do not indicate when this meeting occurred.
In the complaint, Integrated seeks to except from discharge the forfeited wages component of the damages solely for fraud while acting in a fiduciary capacity, not also for defalcation while acting in a fiduciary capacity. However, at least as early as the motion for summary judgment, Integrated made clear that it was seeking to except the entire judgment debt on two alternative bases in § 523(a)(4) : fraud while acting in a fiduciary capacity, and, in the alternative, defalcation while acting in a fiduciary capacity. At the trial, Integrated reiterated that defalcation was one of the bases on which it was proceeding, and the Debtors voiced no objection to this. I therefore understand the matter to have been submitted for adjudication, as to the entirety of the judgment debt, on both of these alternative grounds for exception from discharge.
See Bakis v. Snyder (In Re Snyder), 101 B.R. 822, 835 (Bankr. D. Mass. 1989), aff'd in relevant part and rev'd in part on other grounds sub nom. Snyder v. Bornstein, 923 F.2d 840 (1st Cir.1990), cert. denied, 500 U.S. 923, 111 S.Ct. 2030, 114 L.Ed.2d 115 (1991) (the fiduciary duties of corporate directors under Massachusetts law satisfy the requirements of section 523(a)(4) of the Bankruptcy Code ); M-R Sullivan Manufacturing Company v. Sullivan (In re Sullivan), 217 B.R. 670, 676 (Bankr. D. Mass. 1998) and cases cited (the fiduciary duties of corporate officers and directors under Arizona law satisfy the element of fiduciary relationship required to be proven under § 523(a)(4) ); Reiss v. McQuillin (In re McQuillin), 509 B.R. 773, 788 (Bankr. D. Mass. 2014) (fiduciary relationship of officers and directors to their corporation exists in Massachusetts). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501796/ | MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE:
The Chapter 11 Trustee has moved for Summary Judgment on some, but not all, of its claims against Defendant Alphonse "Buddy" Fletcher [ECF No. 207]. In support of her Summary Judgment Motion, the Trustee filed a memorandum of law [ECF No. 210] and the declarations of Geoffrey Varga (the "Varga Dec'l.") [ECF No. 208] and Gerard DiConza (the "DiConza Dec'l.") [ECF No. 211]. In accordance with Local Bankruptcy Rule 7056-1(b), the Trustee's motion is supported by a statement of undisputed material facts, dated July 8, 2016 ("Trustee's Stmt. of Facts") [ECF No. 209]. Fletcher has not filed an opposition to the motion. The Trustee filed a reply memorandum of law in further support of the Summary Judgment Motion (the "Reply Brief") [ECF No. 213] to address the applicable legal standard in light of the absence of any opposition to the Motion. On September 20, 2018, the Court heard argument on the Summary Judgment Motion (the "Summary Judgment Hearing"). Fletcher did not appear at the Summary Judgment Hearing.
The Trustee seeks judgment as a matter of law on three claims for breach of fiduciary duty and two claims for fraudulent transfer, as well as summary judgment dismissing all of Fletcher's counterclaims. For the reasons stated below, the Trustee is entitled to judgment on her fiduciary breach and fraudulent transfer claims, as well as against Fletcher's counterclaims.
BACKGROUND
Procedural Background
Soundview Elite and its affiliated entities (collectively, the "Soundview Funds"), *115open-ended investment companies registered in the Cayman Islands, filed for chapter 11 bankruptcy on September 24, 2013. In early 2014, this Court approved the appointment of Corinne Ball to serve as Chapter 11 Trustee for the jointly administered cases [Case No. 13-13098 ("Main Case"), ECF No. 160]. Later that year, a number of related investment funds incorporated in the British Virgin Islands (the "BVI Funds") were placed into liquidation and assigned joint liquidators, who filed cases in this Court under chapter 15 of the Bankruptcy Code [Case No. 15-12273]. Pursuant to a Cross-Border Insolvency Protocol [Main Case, ECF No. 502], Ms. Ball is authorized to prosecute claims on behalf of both the Soundview Funds and the BVI Funds (together, the "Richcourt Funds" or the "Funds").
On September 23, 2015, the Trustee filed her Complaint [ECF No. 1] commencing this Adversary Proceeding against several insiders of the Funds, including Alphonse Fletcher, Jr. Thereafter, the Trustee filed an Amended Complaint [ECF. No. 52]. The Amended Complaint asserted twenty-one causes of action, including claims for breaches of fiduciary duty, turnover, fraudulent transfers and disallowance of claims.
The Trustee now moves, pursuant to Federal Rules of Bankruptcy Procedure Rule 7056 and Federal Rules of Civil Procedure Rule 56, for summary judgment on five of those causes of action against Defendant Fletcher, three based on breaches of fiduciary duty (counts nos. 3, 5 and 8) and two for fraudulent transfers (counts nos. 15 and 18). See Amended Complaint ¶¶ 326-358; 374-405; 421-438; 498-507; 522-530.
The breach of fiduciary duty claims are based on Fletcher's failure to timely and properly disclose to investors of the Funds his acquisition of the Richcourt Funds (count no. 3), on three instances of defalcation by Fletcher following his acquisition of the Richcourt Funds (count no. 5), and based on the so-called "New Year's Eve Transaction" and Related Agreements (count no. 8). The two fraudulent transfer claims each seek to avoid the same two transfers made to Fletcher, based on alternative theories, either under Section 548(a)(1)(B) of the Bankruptcy Code, which is applicable to transfers made at a time when a debtor is insolvent and within two years of bankruptcy filing (count no. 18), or alternatively pursuant to Section 544 of the Bankruptcy Code, which allows the Trustee to bring fraudulent transfer claims on behalf of the estate under state law, here pursuant to Sections 273, 274, 275, 278, and 279 of the New York Debtor and Creditor Law (count no. 15).
Factual Background
The relevant facts, as set forth in the Statement of Undisputed Facts are not disputed and therefore deemed true, to the extent that they are supported by competent evidence. See Fed. R. Civ. P. 56(e).
The Richcourt Acquisition
Prior to their bankruptcy, the Richcourt Funds carried on business as open-ended investment companies with each fund registered as a mutual fund in the Cayman Islands or British Virgin Islands. See DeConza Dec'l at Exh. 9 (Soundview July 2009 Investment Brochure). At their peak in June 2008, the Richcourt Funds had approximately $1.55 billion under management. DeConza Dec'l, Exh. 13 at 14:13-16; 15:14-23 (Fletcher Deposition from November 5, 2013). At that time, the Citco Group and its affiliates ("Citco") owned, managed and controlled the Richcourt Funds through Richcourt Holding Inc. ("RHI"). See DeConza Dec'l, Exh. 6 at ¶ 96 (Direct Testimony/Affidavit of Fletcher on *116Motions to Dismiss, Convert, or Appoint a Trustee).1
In June 2008, persons affiliated with Citco asked Alphonse Fletcher, Jr. if he would be interested in bidding for the purchase of the management shares in the Richcourt Funds. DeConza Dec'l, Exh. 6 at ¶ 96 (Fletcher's Direct Testimony/Affidavit). At the time, Fletcher, through his wholly-owned Fletcher Asset Management Inc. ("FAM"), managed a number of other investment funds, including: (a) Fletcher Income Arbitrage Fund, Ltd. ("Arbitrage"); (b) FIA Leveraged Fund Ltd. ("Leveraged"); (c) Fletcher Fixed Income Alpha Fund, Ltd. ("Alpha"); (d) Fletcher International Inc. ("FII"); and (e) Fletcher International, Ltd. (Bermuda) ("FILB") (collectively, the "Fletcher Funds"). Stmt. of Facts at ¶ 5-6; Deconza Dec'l, Exh. 5 at 13-14 (FILB Trustee's Report and Disclosure Statement).
Fletcher was interested in the offer for several reasons, including the potential to earn significant management fees of at least $5 million per year over the next five years. Deconza Dec'l, Exh. 6 at ¶ 96). On June 20, 2008, Citco sold 85% of RHI to Fletcher,2 (see DeConza Dec'l at Exh. 10) (Share Purchase Agreement), giving Fletcher ownership of 85% of the management shares in the Richcourt Funds (the "Richcourt Acquisition"). Fletcher was appointed director and chairman of RHI. See DeConza Dec'l at Exh. 8 (Fletcher's Consent to Act as Director); DeConza Dec'l, Exh. 9 at 22 (Soundview July 2009 Investment Brochure).
Fletcher quickly installed a team of directors who were aligned with him. As of July 2009, RHI's directors were Fletcher, Ermanno Unternaehrer, Denis Kiely, Stewart Turner and Fletcher's brother, Todd Fletcher. Kiely and Turner previously had been employees of FAM. See DeConza Dec'l at Exh. 12 (Resolutions of Board of Directors). Kiely has described himself as Mr. Fletcher's "right-hand man." See DeConza Dec'l, Exh. 5 at 44 (citing Kiely SEC Dep. 409:6-7, Apr. 17, 2012).
Fletcher was personally responsible for managing the business affairs of the Richcourt Funds, including supervising the activities of the administrators and subadministrators and maintaining corporate records (see DeConza Dec'l, Exh. 11 at 19 (Declaration of Fletcher Pursuant to Local Rule 1007-2) ), and was also a member of the Richcourt Funds' investment management team. See DeConza Dec'l, Exh. 22, Ladner Tr. at 132:22-133:8 (Ladner Deposition). On September 4, 2012, Fletcher was appointed director of each of the individual Richcourt Funds. See DeConza Dec'l at Exh. 4 (Fletcher's Proof of Claim Against the Soundview Funds' Estates).
Failure to Disclose the Richcourt Acquisition
Although Fletcher acquired the management shares of the Richcourt Funds from Citco in June 2008, he did not notify the Richcourt Fund investors for a number of months. See DeConza Dec'l, Exh. 13, Fletcher Tr. at 36:4-13 (Fletcher Deposition).
*117Soon after the Richcourt Acquisition, Lehman Brothers collapsed, and in September 2008 RHI's access to credit expired. Stmt. of Facts at ¶ 35-36; DeConza Dec'l, Exh. 5 at 77. In November 2008, Fletcher began investing assets of the Richcourt Funds into Arbitrage, one of the Fletcher Funds. Stmt. of Facts at ¶ 38; DeConza Dec'l, Exh. 5 at 223. Between November 2008 and March 2010, Fletcher removed $61.7 million of cash from the Richcourt Funds and invested it into various Fletcher funds. Stmt. of Facts at ¶ 39; DeConza Dec'l, Exh. 5 at 223.
In a letter to investors dated December 30, 2008, the Richcourt Acquisition was described as an equity investment by FAM instead of a change in control. DeConza Dec'l at Exh. 15 (December 2008 Letter). The letter notified investors that they would be barred from cashing out their investments because the Board of Directors had decided, in light of the recent financial crisis, that they would not honor requests to redeem investments that were dated less than one month earlier. Id.
In January 2009, the directors of the Richcourt Funds again wrote to investors to inform them that redemptions might soon resume. See DeConza Dec'l at Exh. 16 (January 2009 Letter). The January 2009 letter contained a "Q and A" section that discussed the Richcourt Acquisition. Id. This section contained false information regarding the management of the Funds. For example, it read:
Q: Has management of the Richcourt Group changed?
A: No, all executives of the Richcourt Group have been retained, certain former Richcourt Group executives have rejoined the firm, and Citco executive Ermanno Untemaehrer continues on Richcourt's board.
Id. at 4. Contrary to these claims, the management structure of the Richcourt Funds had changed significantly following the Richcourt Acquisition. Kiely and Turner had become directors of the Funds, and ultimate decision-making authority had been transferred to Fletcher by way of his position as Director and Chairman of RHI. See DeConza Dec'l at Exhs. 8 and 9.
The December 2008 and January 2009 Letters also misrepresented the expiration of the Funds' lines of credit. In explaining the decision to suspend redemption requests, the December 2008 Letters referred only to the "expiration of a credit facility" (DeConza Dec'l at Exh. 15) and the January 2009 Letters mentioned "uncertainty regarding the fund credit line (DeConza Dec'l at Exh. 16). This language belied the undeniable fact that the Funds' lines of credit had expired months earlier and was not renewed. Stmt. of Facts at ¶ 35-36; DeConza Dec'l, Exh. 5 at 77.
New Year's Eve Transaction
Three of the Fletcher Funds, Arbitrage, Alpha and Leveraged, were placed into liquidation proceedings in 2012 in the Cayman Islands. Stmt. of Facts at ¶ 58; DeConza Dec'l, Exh. 5 at 107-08. In June 2012, another Fletcher Fund, FILB, filed for chapter 11 bankruptcy in this Court. Stmt. of Facts at ¶ 62; DeConza Dec'l, Exh. 5 at 108, see Case No. 12-12796 (MKV) (June 29, 2012). The Court appointed a Chapter 11 Trustee in the FILB case, who demanded that Fletcher unwind an April 22, 2012 transfer of $2.2 million in cash from FILB to FII, a non-debtor Fletcher Fund. Stmt. of Facts at ¶ 64; DeConza Dec'l, Exh. 5 at 122-23.
On December 31, 2012, while negotiations were ongoing between Fletcher and the FILB Trustee, Fletcher executed documents that in effect transferred $4 million from Soundview Elite to FII in exchange for an equity interest in FILB (which, as noted, had filed for chapter 11).
*118See DeConza Dec'l at Exh. 18 (December 31 Sales Agreement); Exh. 23 Saunders Tr. 36:3-22; 74:6-75:12; 83:22-84:6 (Floyd Saunders Deposition). At that time, Fletcher was a board member of both FII and Soundview Elite, as well as SCM and FAM, the investment advisors and managers of Soundview Elite and FII, respectively. See DeConza Dec'l, Exh. 23, Saunders Tr. at 83:25-84:18; 84:19- 85:4. Fletcher signed the sales agreement for both sides of the transaction, as director of both FII and Soundview Elite. DeConza Dec'l at Exh. 18. Gerti Muho, a co-defendant in this adversary proceeding, also signed the sales agreement as the second director of Soundview Elite. Id.
RF Services, a Fletcher affiliate, determined the price that Soundview Elite would pay for the equity stake in FILB, a bankrupt investment vehicle. See DeConza Dec'l. Exh. 13, Fletcher Tr. at 75:14-75:17; 85:5-85:8. Fletcher did not seek an independent appraisal. Id. Fletcher and RF Services had had conversations with the FILB Trustee, who had given no indication that FILB's equity holders would receive any distribution in the bankruptcy. Id. at 76:19-77:3; 76:14-18. Despite this and in the face of outstanding unpaid redemption requests from Soundview's investors (see id. at 77:4-11), Fletcher caused Soundview Elite to pay $4 million to FII for an equity stake in FILB. DeConza Dec'l. Exh. 19 at 4 (FILB Administrative Expense Claim).
FII used the money transferred from Soundview Elite to repay the FILB Trustee the $2.2 million and also to pay legal fees, including Fletcher's personal legal fees. See DeConza Dec'l, Exh. 13, Fletcher Tr. at 80:4-82:21. FII additionally used a portion of the $4 million to pay directors fees to Fletcher and other members of his team. See id. at 82:23-83:8.
Bankruptcy
On September 24, 2013, each of the Soundview Funds commenced a voluntary chapter 11 in this Court. Fletcher filed a proof of claim in the bankruptcy for payment of post-petition director's fees in the amount of $10,070.65, which the Trustee later moved to subordinate. See Main Case, ECF No. 1033. On May 20, 2016, this Court entered an order [Main Case, ECF No. 1099] granting the Trustee's motion to subordinate Fletcher's claim and other insider claims.
The Trustee brought twenty-eight adversary proceedings in the bankruptcy, many of which were consensually resolved, with settlements approved by the Court pursuant to Bankruptcy Rule 9019. In this adversary proceeding, the Citco defendants and certain related individual defendants (the "Citco Defendants") moved to dismiss the Complaint for lack of personal jurisdiction and failure to state a claim [ECF Nos. 57-59, 61]. After extensive briefing and several days of oral argument, the Trustee settled with all Citco Defendants while the motions to dismiss were pending. The Court approved the settlements [ECF No. 161] and dismissed all claims against the Citco Defendants [ECF No. 164].
On August 31, 2017, this Court confirmed the Chapter 11 Trustee's plan ("the Plan") [ECF No. 1509]. The Plan provided for Fletcher's claim as follows: "Class 5 (Insider Claims) ... will not receive or retain any property on account of their Claims or Interests and such Holders are deemed to have rejected the Plan pursuant to section 1126(g)." Plan at § 5.2(e).
DISCUSSION
I. Jurisdiction
As an initial matter, in his Answer to the Trustee's Complaint in this *119case (the "Answer") [ECF No. 18], Fletcher expressly denies all allegation in the Complaint (other than two specific allegations) and denies all conclusions, including the Trustee's assertion that this Court has jurisdiction over this matter and her consent to entry of final judgment by this Court. See Complaint [ECF No. 1] at ¶ 91. He also demands a jury trial. Answer at 8. Against this backdrop and under governing law, and notwithstanding Fletcher's default on this Motion and his proof of claim filed against the Debtor, the Court rejects the Trustee's contention that Fletcher has implicitly consented to this Court's authority to enter final judgment in this case.3
In Stern v. Marshall , the Supreme Court held that Bankruptcy Courts lack the constitutional authority to enter final judgments in adversarial proceedings, even in "core" proceedings under § 157(b)(2)(C), if those claims implicate private, state-law rights. 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). See In re Ne. Indus. Dev. Corp. , 511 B.R. 51, 53 (S.D.N.Y. 2014) ; In re Lyondell Chemical Co. , 467 B.R. 712, 719 (S.D.N.Y. 2012) ("Under Stern, it is not the core/non-core distinction but Article III that determines the bankruptcy court's adjudicative authority."); Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP , 462 B.R. 457, 464 (S.D.N.Y. 2011).
Stern identified three circumstances where a bankruptcy court undoubtedly does have the constitutional authority to enter final judgments in an adversary proceeding: (1) the claim at issue falls within the public rights exception ( Stern , 564 U.S. at 504, 131 S.Ct. 2594 ); (2) the state law claim would necessarily be resolved in ruling on a creditor's proof of claim ( id. at 499, 131 S.Ct. 2594 ); or (3) the parties unanimously consent to final adjudication by a non-Article III tribunal. Id. at 481-82, 131 S.Ct. 2594. See also Wellness Int'l Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).
Although the facts of Stern involved a counterclaim asserted by the bankruptcy debtor, the same jurisdictional framework applies to affirmative claims initiated by the debtor or trustee. See Executive Benefits Insurance Agency v. Arkison , 573 U.S. 25, 134 S.Ct. 2165, 2172, 189 L.Ed.2d 83 (2014) (acknowledging that "neither party contests th[e] conclusion" that the fraudulent conveyance claims in the case were Stern claims, in that they are "core" under § 157(b), but nonetheless implicate private rights); see also In re Lyondell Chem. Co. , 467 B.R. 712, 720 (S.D.N.Y. 2012) ; In re Lehman Bros. Holdings Inc. , 480 B.R. 179, 190 (S.D.N.Y. 2012) ;
*120Adelphia Recovery Tr. v. FLP Grp., Inc. , 2012 WL 264180, at *4 (S.D.N.Y. Jan. 30, 2012) ; Dev. Specialists , 462 B.R. at 469.
It has not been argued that the Trustee's claims in this case fall within the public rights exception4 and the Court concludes that the claims do not satisfy either of the other two Stern exceptions. The claims asserted, for fiduciary breach and fraudulent transfer, are clearly Stern claims, at the same time "relating to" the bankruptcy but also implicating private rights. See In re Oldco M Corp. , 484 B.R. 598, 607 n.5 (Bankr. S.D.N.Y. 2012) (noting the distinction between Trustee's fraudulent conveyance actions, like the causes of action asserted here, which are "quintessentially common-law suits that more nearly resemble state-law contract claims by a bankrupt corporation to augment the bankruptcy estate" and preferential transfer actions, which involve the public rights of "creditors' claims to a pro rata share of the bankruptcy res ."). As such, absent consent by Fletcher, the Court lacks jurisdiction to enter a final judgment on the Trustee's claims, unless the claims would be necessarily resolved in ruling on Fletcher's proof of claim. Stern , 564 U.S. at 499, 131 S.Ct. 2594.
The Trustee argues that this Court has jurisdiction to enter final judgments on her claims, either because Fletcher implicitly consented to final judgment by failing to file a response to the Motion for Summary Judgment or, alternatively, because the Trustee's claims necessarily would be resolved in the process of allowing or disallowing Fletcher's proof of claim. The Trustee is incorrect.
A. Implied Consent by Failing to Respond to Motion for Summary Judgment
The Trustee argues that Fletcher impliedly consented to entry of a final judgment by this Court by failing to object to the Trustee's Motion for Summary Judgment. The Court disagrees.
The Trustee relies on In re Oldco M Corp. for the proposition that " Stern does not limit the bankruptcy court's authority to enter a default judgment when the defendant has failed to respond to the summons and complaint." 484 B.R. at 601. This argument conflates the legal effects of failing to respond to a complaint and failing to respond to a motion for summary judgment.
In Oldco , the defendants, despite having received notice on four separate occasions, failed altogether to respond to the Trustee's summons and complaint. Id. This is markedly different from the procedural history here. In this adversary proceeding, Fletcher did not default, but rather responded to the Complaint with an Answer,5 denying almost all factual allegations and disputing this Court's jurisdiction *121over him, and thereafter failed to respond to the Motion for Summary Judgment. The Committee Notes for Rule 56 of the Federal Rules of Civil Procedure clearly state that "summary judgment cannot be granted by default even if there is a complete failure to respond to the motion."
Not only did Fletcher respond to the initial complaint with his Answer, he explicitly contested the Bankruptcy Court's jurisdiction over him. Answer at Seventh Defense ¶ 13 ("The Bankruptcy Court does not have jurisdiction over Defendant Fletcher in this matter."). Moreover, in his Answer, Fletcher explicitly demanded a jury trial under Federal Rules of Civil Procedure Rule 38(a). See Dev. Specialists , 462 B.R. at 469-70 ("[W]here a jury right is asserted, any consent to final adjudication in Bankruptcy Court must be express.") (cited by In re Oldco , 484 B.R. at 607 ); see also 28 U.S.C. § 157(e) ("If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial ... with the express consent of all the parties.").
As the Supreme Court held in Wellness International , a litigant's consent to the bankruptcy court's jurisdiction to finally adjudicate claims "-whether express or implied-must be knowing and voluntary." 135 S.Ct. at 1937. The court in Oldco , the sole case relied on by the Trustee to support the adjudicative authority of this Court, cautioned that "implied consent should not be lightly inferred; indeed, 'a waiver of important rights should only be found where it is fully knowing.' " 484 B.R. at 609 (quoting Messer v. Bentley Manhattan Inc. (In re Madison Bentley Assocs., LLC ), 474 B.R. 430, 437 (S.D.N.Y.2012). In re Lyondell , 467 B.R. at 722 (defendants' active participation in bankruptcy proceedings without objection for over a year, including the bankruptcy court's order confirming the plan and allowing the court to "hear and determine" claims, did not amount to the defendants' implied consent to the court's ability to enter final judgment on the plaintiff's fraudulent transfer claims). On the facts and procedural history before it, this Court cannot infer Fletcher's consent to entry of a final judgment.
B. Filing of a Proof of Claim
A bankruptcy court does, of course, have jurisdiction to issue final judgments on claims that "stem[ ] from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern , 564 U.S. at 499, 131 S.Ct. 2594. See Langenkamp v. Culp , 498 U.S. 42, 44, 111 S.Ct. 330, 331, 112 L.Ed.2d 343 (1990) ("[B]y filing a claim against a bankruptcy estate the creditor triggers the process of 'allowance and disallowance of claims,' thereby subjecting himself to the bankruptcy court's equitable power."); In re Arbco Capital Mgmt., LLP , 479 B.R. 254, 262-63 (S.D.N.Y. 2012) ("A creditor may subject itself to the binding authority of the bankruptcy court by filing a proof of claim against the bankrupt estate.").
Clearly, though, not all core proceedings under Section 157(b) revolve around the allowance or disallowance of a claim against the estate. Some actions are "brought solely to augment the bankruptcy estate." In re Lyondell , 467 B.R. at 720. Stern turned on precisely that issue. "Counterclaims by the estate against persons filing claims against the estate" are core proceedings under Section 157(b)(2)(C). Despite this, a bankruptcy court does not have final adjudicative authority over every possible claim between the debtor and a creditor. Because a creditor must file a proof of claim to recover against the estate, the act of filing a proof *122alone "cannot be considered consent to bankruptcy court's decision of matters unrelated to that claim or the bankruptcy." In re Oldco , 484 B.R. at 607.
The question under Stern , then, is whether each factual and legal element of the claims asserted by the Trustee "would necessarily be resolved in the claims allowance process" in connection with Fletcher's proof of claim. Stern , 564 U.S. at 487, 131 S.Ct. 2594. For the reasons discussed below, the Court answers this question in the negative and concludes that it does not have authority to issue a final judgment on the claims against Fletcher in this adversary proceeding. This decision should therefore serve as proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1). See Exec. Benefits , 134 S.Ct. at 2172 (2014).
Fletcher's Claim Against the Estate
Fletcher submitted a proof of claim in the Soundview bankruptcy, 13-13098, for an administrative claim in the amount of $10,070.65 (Claim No. 8-1). DeConza Dec'l at Exh. 14. The basis for the claim is listed as a "claim arising from post-petition directors' fees." Id. Prior to filing the claim and before Plaintiff was installed as Chapter 11 Trustee, Fletcher and other insiders, as managers of the debtor-in-possession, moved the Court for authority to pay Fletcher's and other insiders' directors fees as post-petition administrative expenses [Main Case, ECF No. 192]. At a hearing dated March 19, 2014, the Court denied the applications without prejudice [Main Case, ECF No. 242 at 31:7-12]. Fletcher subsequently filed proof of claim 8-1.
Later in the bankruptcy, after the Trustee began investigating the mismanagement of the Debtor by the Insiders and after this adversary proceeding was initiated, the Trustee filed a Notice of Objection to Insider Claims and Subordination of Such Claims [Main Case, ECF No. 851]. Fletcher and others failed to oppose the Notice, and the Trustee then moved to subordinate the Insider Claims [Main Case, ECF No. 1033]. This Court entered an order subordinating the Insider Claims, including the claim filed by Fletcher seeking director's fees [Main Case, ECF No. 1099]. On August 31, 2017, the Debtor's Plan of Reorganization [Main Case, ECF No. 1509] was confirmed pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code, and provided for Fletcher's claim as follows: "Class 5 (Insider Claims) ... will not receive or retain any property on account of their Claims or Interests and such Holders are deemed to have rejected the Plan pursuant to section 1126(g)." See Plan at § 5.2(e).
Fletcher's claim has effectively been disallowed. Thus, the Trustee's claims in this adversary proceeding were not necessarily resolved in the claims allowance process with regards to Fletcher's claim, and his filing of the claim does not constitute consent to the Court's authority to fully adjudicate the Trustee's adversary proceeding.
The Trustee's Claims in this Adversary Proceeding
Under Bankruptcy Rule 3006(b), a party can include an objection to a proof of claim in an adversary proceeding. Nonetheless, an objection to a claim against the Debtor's estate and an adversary proceeding are procedurally different. See Cruisephone, Inc. v. Cruise Ships Catering and Servs. N.V. (In re Cruisephone, Inc.) , 278 B.R. 325, 330 (Bankr. E.D.N.Y. 2002) ("A proof of claim filed by a creditor is conceptually analogous to a civil complaint, an objection to the claim is akin to an answer or defense and an adversary proceeding initiated against the creditor that filed the proof of clam is like a counterclaim.").
*123The Trustee's claims in this adversary proceeding do not reference Fletcher's proof of claim or claims against the estate at all. The causes of action are not framed as defenses to Fletcher's proof of claim, but rather as affirmative actions seeking to increase the res of the estate. Of course, " Stern does not require courts to ignore a debtor's defenses to a proof of claim." In re Penson Worldwide , 587 B.R. 6, 18 (Bankr. D. Del. 2018). But even if the claims asserted in the Amended Complaint could reasonably be read as an objection to Fletcher's (or any other insider's) claims against the estate, these defenses must actually be plead. Cf. id. (bankruptcy court could enter final judgment where "the basis of Plaintiff's defense to the proof of claim and its affirmative claims is the same ... [and] each count has the same factual predicate").
Moreover, the Trustee filed a specific Objection to Fletcher's and other Insiders' proofs of claims, which ultimately succeeded in subordinating the claims without the need for a hearing or any fact-finding by the Court because no opposition to the motion was filed. See Notice of Objection ("If no opposition against the subordination of these Insider Claims is filed with this Court ... all the insider Claims listed on Exhibit A shall be subordinated as set forth in the Addendum."). Pursuant to the Debtor's Plan, which has been confirmed, Fletcher received no distribution by reason of his claim. See Plan [ECF No. 1369] at § 5.2(e). In practice, then, the claims allowance process demonstrably did not "necessarily ... resolve" the Trustee's claims.6 It is an unnecessary exercise for the Court to conjecture which defenses the Trustee might have argued in objecting to Fletcher's proof of claim, and further, the degree to which they would have overlapped with the Trustee's affirmative causes of action in this adversary proceedings. Cf Frazin v. Haynes & Boone, L.L.P. (In re Frazin ), 732 F.3d 313 (5th Cir. 2013) ("Because the sole purpose of Frazin's breach of fiduciary duty action was to defeat the Attorneys' fee applications in bankruptcy court, the bankruptcy court necessarily had to resolve every aspect of his breach of fiduciary duty claim to rule on the Attorneys' fee applications.").
Here, the Trustee's common law claims against Fletcher and her objection to Fletcher's proof of claim proceeded on parallel tracks, and the common law claims do not allege to be defenses against Fletcher's proof of claim for administrative fees.
A court can undoubtedly enter final judgments on common law claims after making the post hoc determination that the factual and legal findings necessary to rule on the objections to a creditor's proof of claims were also sufficient to satisfy the elements of the state-law claims against the creditors.7 But, as in this case, where *124the claims were subordinated without any fact finding, the Court cannot find that these claims were unavoidably resolved in the claims allowance process.8 See In re Penson Worldwide , 587 B.R. at 21 n.70 ("In Stern, the Supreme Court had the benefit of hindsight in determining what was and was not necessarily resolved in the claims resolution process. It is harder to make the determination at the outset of the litigation.").
The same analysis applies to Trustee's claims for fraudulent transfer. Fraudulent transfer claims are private rights claims "simply intended to increase payouts to creditors under the confirmed plan." Kirschner v. Agoglia , 476 B.R. 75, 81 (S.D.N.Y. 2012) ; see also FDIC v. Hirsch (In re Colonial Realty Co.) , 980 F.2d 125, 131 (2d Cir.1992) (res sought by an avoidance action is not "property of the estate" until the debtor succeeds in compelling the property's return).
The fraudulent transfer claims do not appear to be objections to Fletcher's proof of claim and therefore do not implicate the claims allowance process. Further, as outlined *125above, Fletcher's claim was objected to and resolved independent of this adversary proceeding. In short, by filing a proof of claim, Fletcher did not consent to this Court's final adjudication of every fraudulent conveyance claim; rather, at most, Fletcher consented to adjudication of those actions that are intertwined with the process of allowing or disallowing his proof of claim. See Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , 490 B.R. 46, 55 (S.D.N.Y. 2013) ("Thus, under Katchen , whenever the Bankruptcy Court must resolve a § 502(d) claim brought by the Trustee, it may also finally decide avoidance actions to the extent that those actions raise the same issues as the § 502(d) claim and thus would 'necessarily' be resolved by it.").
II. Summary Judgment Standard
Bankruptcy Rule 7056 controls the procedure for adversary proceedings in bankruptcy, making Rule 56 of the Federal Rule of Civil Procedure applicable to this motion. It is well settled that on a motion for summary judgment, the moving party bears the initial burden of showing that the undisputed facts entitle it to judgment as a matter of law. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) ; see also Estate of Gustafson ex rel. Reginella v. Target Corp. , 819 F.3d 673, 675 (2d Cir. 2016) ; Ferrostaal, Inc. v. Union Pacific R.R. Co. , 109 F.Supp.2d 146, 148 (S.D.N.Y. 2000). In deciding a summary judgment motion, the court must resolve all ambiguities and draw all reasonable inferences against the moving party. See Matsushita , 475 U.S. at 587, 106 S.Ct. 1348 (1986).
Once the moving party has carried its burden of showing that no material fact is in dispute and that it is entitled to judgment as a matter of law, the party opposing the motion "may not rest upon the mere allegations or denials in his pleadings, but ... must set forth specific facts showing there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Rule 56(e) of the Federal Rules of Civil Procedure applies, where, as is the case here, the party against whom judgment is sought fails to respond to a summary judgment motion:
Failing to Properly Support or Address a Fact . If a party fails to properly support an assertion of fact or fails to properly address another party's assertion of fact as required by Rule 56(c)the court may :
(1) give an opportunity to properly support or address the fact;
(2) consider the fact undisputed for purposes of the motion ;
(3) grant summary judgment if the motion and supporting materials - including the facts considered undisputed - show that the movant is entitled to it ; or
(4) issue any other appropriate order.
Fed. R. Civ. P. 56(e) (2010) (emphasis added); see also Vt. Teddy Bear Co. v. 1-800 Beargram Co. , 373 F.3d 241, 244, 246 (2d Cir. 2004) (noting that the non-movant's failure "allow[s] the district court to accept the movant's factual assertions as true," provided that the court is "satisfied that the citation to evidence in the record supports the assertion").
This Court's Local Rule 7056-1, which mirrors the District Court's Local Rule 56.1, requires a party moving for summary judgment to include a "separate, short, and concise statement, in numbered paragraphs, of the material facts as to which the moving party contends there is no genuine issue to be tried," Rule 7056-1(b), that "each statement ... be followed by *126citation to evidence which would be admissible," Rule 7056-1(d), and that "each numbered paragraph in the statement of material facts required to be served by the moving party shall be deemed admitted for purposes of the motion unless specifically controverted by a correspondingly numbered paragraph in the statement required to be served by the opposing party." Rule 7056-1(c). The Trustee has filed a Statement of Undisputed Facts in support of her Summary Judgment Motion [ECF No. 209].
Fletcher failed to respond to the Trustee's Summary Judgment Motion and failed to address the Trustee's Statement of Undisputed Facts. The assertions contained in the Trustee's Statement are uncontroverted and thereby "deemed admitted" for the purposes of ruling on this Summary Judgment Motion. The Court is also satisfied that the underlying evidence supporting the Statements would be admissible at trial. See Giannullo v. City of New York , 322 F.3d 139, 140 (2d Cir. 2003) ("Local Rule 56.1 statement is not itself a vehicle for making factual assertions that are otherwise unsupported in the record.") (quoting Holtz v. Rockefeller & Co. , 258 F.3d 62, 74 (2d Cir. 2001) ).
III. The Trustee's Claims
The Trustee moves for summary judgment on claims numbers three, five and eight in the Amended Complaint, which are claims for breach of fiduciary duty under New York common law, and claims numbers fifteen and eighteen, which are claims for fraudulent transfers under the Bankruptcy Code and New York Debtor and Creditor Law.
A. Fiduciary Breach Claims
Under New York law, to recover for a breach of fiduciary duty, the plaintiff must prove (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct. See Pokoik v. Pokoik , 115 A.D.3d 428, 982 N.Y.S.2d 67 (1st Dep't 2014) ; Ozelkan v. Tyree Bros. Envtl. Servs. , 29 A.D.3d 877, 879, 815 N.Y.S.2d 265, 267 (2nd Dep't 2006) ; In re Perry H. Koplik & Sons, Inc. , 499 B.R. 276, 289 (S.D.N.Y. 2013), aff'd , 567 F. App'x 43 (2d Cir. 2014). Based on the undisputed facts, all three elements are satisfied here.
1. Existence of Fiduciary Relationship
It is undisputed that upon consummation of the Richcourt Acquisition, Fletcher became a director of RHI, the holding company for SCM and RCM, which in turn managed the Richcourt Funds. Fletcher installed his FAM colleagues, Turner and Kiely, as directors of each Richcourt Fund. See DeConza Dec'l at Exh. 12 (Resolutions of Board of Directors)
As a director, Fletcher unquestionably owed fiduciary obligations to the Funds. See Alpert v. 28 Williams Street Corp. , 63 N.Y.2d 557, 568, 483 N.Y.S.2d 667, 473 N.E.2d 19 (N.Y. 1984). He controlled the management of the Funds, and the Funds and their stakeholders were dependent on him to protect their interests. See In re Refco Inc. Sec. Litig. , 826 F.Supp.2d 478, 502-03 (S.D.N.Y. 2011) ("Broadly stated, a fiduciary relationship is one founded upon trust or confidence reposed by one person in the integrity and fidelity of another.") (quoting Penato v. George , 52 A.D.2d 939, 383 N.Y.S.2d 900, 904-05 (2d Dep't 1976) ); see also EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19, 832 N.E.2d 26, 31, 799 N.Y.S.2d 170 (N.Y. 2005) (a fiduciary relationship "exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation")
*127(quoting Restatement (Second) of Torts § 874, Comment a ).
Investment advisers, fund managers and others in control of investment funds also owe fiduciary duties to the funds, much as general partners owe fiduciary duties to limited partners. See I.B. Trading, Inc. v. Tripoint Glob. Equities, LLC , 280 F.Supp.3d 524, 542 (S.D.N.Y. 2017) ("Investment advisors owe a fiduciary duty to the clients they advise") (quoting Rasmussen v. A.C.T. Envtl. Servs. Inc. , 292 A.D.2d 710, 712, 739 N.Y.S.2d 220, 222 (3rd Dep't 2002) ); Bullmore v. Banc of America Securities LLC , 485 F.Supp.2d 464, 468-69 (S.D.N.Y. 2007) ; Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp. , 351 F.Supp.2d 79, 102 (S.D.N.Y.2004) (collecting cases). This is especially so where, as here, Fletcher had broad discretion to manage the other directors of the Funds. See Stmt. of Facts at ¶ 25-31.
This Court finds that Fletcher owed fiduciary duties to the Funds at all times relevant to the actions and events of which the Trustee complains.
2. Breaches of Fiduciary Duty
The fiduciary duties owed by investment advisers and fund managers include the duty of loyalty and the duty of care. See Norlin Corp. v. Rooney, Pace Inc. , 744 F.2d 255, 264 (2d Cir. 1984) (traditional fiduciary duty consists of the duties of care and loyalty); Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Sec. Corp. , 2002 WL 362794, at *8-9 (S.D.N.Y. Mar. 6, 2002) (investment advisers owe "duties of care, disclosure and loyalty" to their clients); Jordan (Bermuda) Inv. Co. v. Hunter Green Invs., Ltd. , 2003 WL 21263544, at *4 (S.D.N.Y.) (fund administrator had "a fiduciary duty to all Fund shareholders to implement all trades on behalf of those shareholders and to report the status of each shareholder's account accurately").
As a fiduciary, a fund manager must place the fund's interests before its own while exercising due care in the decision-making process. See Anwar v. Fairfield Greenwich Ltd. , 728 F.Supp.2d 372, 441-42 (S.D.N.Y. 2010) (refusing to dismiss claim based on failure of service provider "to take whatever action necessary" to protect assets invested with Madoff); Paige Capital Mgmt., LLC v. Lerner Master Fund, LLC , 2011 WL 3505355, at *30-31, 2011 Del. Ch. LEXIS 116, at *110 (Del. Ch. Aug. 8, 2011) (a general partner, as manager of a hedge fund, owes fiduciary duties to limited partners as investors and must act with a good faith belief that it is advancing the best interests of the fund and its investors).
The Trustee asserts breach of fiduciary duty claims based on three specific alleged breaches by Fletcher: (1) Fletcher's failure to disclose the Richcourt Acquisition (see Amended Complaint at ¶ 326-358); (2) the first three post-acquisition defalcations by Fletcher (see id. at ¶ 374-405); and (3) the New Year's Eve transaction and related agreements (see id. at ¶ 421-438). In her Motion for Summary Judgment, the Trustee addresses the second and third causes of action together.
a. Failure to Disclose Richcourt Acquisition and Subsequent Misrepresentations
It is axiomatic that a fund manager must always fully disclose material information to investors. See Dubbs v. Stribling & Assoc. , 96 N.Y.2d 337, 341, 728 N.Y.S.2d 413, 752 N.E.2d 850 (N.Y. 2001) (fiduciaries have a duty to "disclose any information that could reasonably bear on plaintiffs' consideration" of a transaction); Alpert , 63 N.Y.2d at 569, 483 N.Y.S.2d at 674, 473 N.E.2d 19 (holding that fiduciaries *128owe a duty of candor); Globe Woolen Co. v. Utica Gas & Electric Co. , 224 N.Y. 483, 490, 121 N.E. 378, 380 (N.Y. 1918) (Cardozo, J.) ("There must be candor and equity in the transaction."); see also Wendt v. Fischer , 243 N.Y. 439, 443, 154 N.E. 303 (N.Y. 1926) (especially where there is conflict of interest, "disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its stark significance").
Withholding material information from investors or others may be as wrongful as affirmatively misrepresenting such information. See Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 179, 919 N.Y.S.2d 465, 944 N.E.2d 1104, 1108 (N.Y. 2011) (fiduciaries cannot omit material information). Subsequently learning that earlier communications were false and failing to correct them also may be a breach of the duty of loyalty because of a lack of candor. In re Beacon Assocs. Litig. , 745 F.Supp.2d 386, 410 (S.D.N.Y. 2010) (recognizing "a continuing duty to update or correct past statements when they became known to be misleading").
The Court finds that Fletcher breached his fiduciary duty to the Funds by failing to disclose the Richcourt Acquisition and thereafter misrepresenting details regarding the Acquisition. The first notice of Fletcher's taking control not was provided until December 2008, over five months after the Acquisition, and both that notice and the January 2009 letter contained misleading information regarding the management structure of the Funds. The Trustee pleads the plausible interpretation of the Letters' misrepresentation, that Fletcher aimed to delay investors from questioning the management structure and financial condition of the Funds, so that he could maintain control and discretion over the Funds' assets. See Szulik v. Tagliaferri , 966 F.Supp.2d 339, 364 (S.D.N.Y. 2013) ("[N]ondisclosure benefitted defendants because it permitted the continuation of undisclosed payments.").
Fletcher's failure to provide the Richcourt Funds and their investors with all relevant and truthful information about the highly material Richcourt Acquisition deprived them of the opportunity to divest from the Funds in response to the change in management structure and decision-making authority. See Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V. , 17 N.Y.3d 269, 279, 952 N.E.2d 995, 1002, 929 N.Y.S.2d 3, 10 (1st Dep't 2011) ("In certain circumstances, a fiduciary's disclosure obligations might effectively operate like a written representation that no material facts are undisclosed."). Citco had managed the Funds since their inception and Fletcher was an unknown entity. The Court concludes based on these undisputed facts that in disseminating the misrepresentations in the December 2008 and January 2009 Letters, Fletcher failed to act in the Funds' interests, and thereby breached his duties of loyalty and candor owed to the investors.
b. The New Year's Eve Transaction and other Post-Acquisition Defalcations
It is similarly beyond dispute that a fund manager must avoid conflicts of interests. See Pokoik , 115 A.D.3d at 429, 982 N.Y.S.2d at 70 ("This is a sensitive and inflexible rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty.") (quoting Birnbaum v. Birnbaum , 73 N.Y.2d 461, 466, 541 N.Y.S.2d 746, 539 N.E.2d 574 (N.Y. 1989) ).
Generally, a conflict exists where a manager is on "both sides" of a *129proposed transaction. See In re Perry H. Koplik & Sons, Inc. , 476 B.R. 746, 808-09 (Bankr. S.D.N.Y. 2012). A director is also considered "self-interested" in a transaction where he or she "will receive a direct financial benefit from the transaction which is different from the benefit to shareholders generally." Alphonse Hotel Corp. v. Tran , 828 F.3d 146, 152 (2d Cir. 2016). Once a prima facie showing is made that directors have a self-interest in a particular corporate transaction, the burden shifts to them to demonstrate that the transaction is fair and serves the best interests of the corporation and its shareholders. See Norlin Corp. , 744 F.2d at 264 (citing N.Y. Bus. Corp. Law § 713 (McKinney) ). "It is black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply." In re Croton River Club. Inc. , 52 F.3d 41, 44 (2d Cir.1995) (applying New York law).
The Court concludes based on the undisputed factual record that Fletcher was on both sides of the New Year's Eve Transaction, in breach of his duty of loyalty. Fletcher controlled and was a director for FII (the entity that received $4 million from Soundview Elite), while at the same time he controlled and was a director for Soundview Elite (the entity that transferred $4 million to FII and received worthless securities). See DeConza Dec'l, Exh. 13 Fletcher Tr. at 83:25-85:4.
Where a fiduciary is self-interested, the Court must engage in "a two-pronged inquiry into the fair process and the fair price of the transaction." Pereira v. Cogan , 294 B.R. 449, 526 (S.D.N.Y.2003), vacated and remanded on other grounds , 413 F.3d 330 (2d Cir. 2005). See also In re Perry H. Koplik , 476 B.R. at 803 ("Where officers or directors of a corporation considering a transaction are not disinterested and have a personal stake in the outcome ... they must show the entire fairness of the transaction, or that it is intrinsically fair.") (quotations omitted); Alpert , 63 N.Y.2d at 570-71, 483 N.Y.S.2d 667, 473 N.E.2d at 670 (N.Y. 1984) ("[W]hen there is an inherent conflict of interest, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the merger.").
The Court finds that the transaction was both procedurally and substantively deficient. Fletcher has not provided any evidence or argument to satisfy his burden of proving the entire fairness of the New Year's Eve Transaction. The transaction was procedurally unfair to the Funds because Fletcher blatantly failed to "ma[k]e the necessary investigation and undert[ake] due deliberation with respect to the decision." In re Perry H. Koplik , 476 B.R. at 803. When conflict exists, it is incumbent on managers to pursue approval from disinterested directors in order to determine whether a conflicted transaction is proper. See In re Kenneth Cole Prods., Inc. , 27 N.Y.3d 268, 274, 52 N.E.3d 214, 218 (N.Y. 2016). The undisputed facts in this case demonstrate that Fletcher caused Soundview Elite to pay for an equity interest in the bankrupt FII based on a valuation provided by Fletcher and his affiliate RF Services, and that Fletcher did not receive an independent appraisal of the FILB equity stake in connection with this transaction. Stmt. of Facts at ¶ 74-78. See Tucker Anthony Realty Corp. v. Schlesinger , 888 F.2d 969, 974 (2d Cir. 1989) ("There has been no evidence of 'arm's length negotiations,' competitive bidding, or review and approval by the limited partner.").
Substantively, the terms of the transaction cannot be defended. See In re Croton River Club , 52 F.3d at 44. Soundview received no value in return for the $4 million it paid to FII in connection with the transaction.
*130The equity stake in FILB that Soundview purchased under Fletcher's direction was essentially worthless. See Varga Dec'l. at ¶ 18. At the time, FILB was in bankruptcy, and there was no indication that its assets would be sufficient to pay off its liabilities, let alone allow for payments to equity holders (who take last, only after all creditors are paid, see 11 U.S.C. § 726 ). See DeConza Dec'l., Exh. 13 (Fletcher Tr.) at 77:4-75:11. The FILB shares were ultimately extinguished following the FILB chapter 11 plan confirmation. Varga Dec'l. at ¶ 18. Thus, the undisputed facts clearly establish that the $4 million transfer brought in no consideration for Soundview, and that Fletcher's decision to execute the transaction cannot be defended on its merits.
On these facts, the Court concludes that the New Year's Eve Transaction was patently deficient and unfair, and constituted a breach of Fletcher's duty of loyalty. See In re Perry H. Koplik , 476 B.R. at 803 ("Self-dealing transactions ... constitute paradigmatic examples of breaches of the duty of loyalty.").
c. Other Post-Acquisition Defalcations
According to the undisputed facts, starting in November 2008, after acquiring the Richcourt Funds and seeing the line of credit to his other funds disappear, and continuing until March 2010, Fletcher also caused the Richcourt Funds to transfer a total of $61.7 million in cash into various Fletcher Funds. See Stmt. of Facts at ¶ 39; DeConza Dec'l, Exh. 5 at 223. These "investments" similarly provided little or no benefit to the Richcourt Funds.
The Court concludes that these transfers also constituted self-dealing in breach of Fletcher's duty of loyalty. The Court finds that Fletcher represented both sides of each transaction, and further that the investments provided little or no benefit to the Richcourt Funds. Fletcher made transactions using the Richcourt Funds' assets for personal gain, to sustain his Fletcher Funds and earn significant management fees. Fletcher persistently exploited his fiduciary responsibilities by using Fund assets for his own self-interest. He is therefore liable for the resulting damage to the investors.
3. Damages
As with any other action sounding in tort, a claim for breach of fiduciary duty requires a showing of harm flowing from the breach. However, courts have accepted a lower standard for proving causation in the case of fiduciary breach actions. Milbank, Tweed, Hadley & McCloy v. Boon , 13 F.3d 537, 543 (2d Cir. 1994) ("[B]reaches of a fiduciary relationship in any context comprise a special breed of cases that often loosen normally stringent requirements of causation and damages."). The Trustee therefore does not bear the burden of showing strict "but for" causation or proximate cause in her claims for fiduciary breach, according to what is known as the "prophylactic rule." Id.
The relaxed standards of the "prophylactic rule" reflect the correspondingly strict duties of fiduciaries, and courts are inclined to treat breaches harshly in order to disincentive them. See Gibbs v. Breed, Abbott & Morgan , 271 A.D.2d 180, 189, 710 N.Y.S.2d 578, 584 (1st Dep't 2000) ("[T]he purpose of this type of action is not merely to compensate the plaintiff for wrongs committed ... [but also] to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit"). Once the act of fiduciary breach is established, "uncertainties in fixing damages will be resolved against the wrongdoer." Donovan v. Bierwirth , 754 F.2d 1049, 1056 (2d Cir. 1985). See also *131Bank of Am. Corp. v. Braga Lemgruber , 2007 WL 4548298, at *8 (S.D.N.Y. July 10, 2007) ("[A]ny doubt or ambiguity with respect to Plaintiffs' damages should be resolved against the [ ] Defendants."). In order to recover, plaintiffs must, at a minimum, establish that the breach was a "substantial factor" in causing an identifiable loss. See Gibbs , 271 A.D.2d at 189, 710 N.Y.S.2d at 584.
In cases involving breaches of fiduciary duty in managing investment funds, damages are established and losses are measured by calculating "the difference between the plan's actual performance and how the plan would have performed if the funds had been invested like other funds being invested during the same period in proper transactions." Trustees of Upstate New York Engineers Pension Fund v. Ivy Asset Mgmt. , 843 F.3d 561, 567 (2d Cir. 2016) (citing Donovan , 754 F.2d at 1056 ) (quotations omitted). See also Scalp & Blade, Inc. v. Advest, Inc. , 309 A.D.2d 219, 229, 765 N.Y.S.2d 92, 99-100 (4th Dep't 2003) ("Many federal decisions ... support the award of lost appreciation (or excess depreciation) damages for the mismanagement of an investment portfolio, provided that there has been a breach of trust extending beyond mere negligence and committed for the personal gain of the fiduciary."); In re State St. Bank & Tr. Co. Fixed Income Funds Inv. Litig. , 842 F.Supp.2d 614, 659 (S.D.N.Y. 2012) ("This calculation provides a reasonable approximation of the position [the Plans] would have occupied but for the breach of trust."); Restatement (Second) of Trusts § 205(c) (1959). This method is intentionally harsh to breaching defendants. See Donovan , 754 F.2d at 1056 ("Where several alternative investment strategies were equally plausible, the court should presume that the funds would have been used in the most profitable of these.").
In this case, the Trustee does not seek separate awards of damages stemming from each act of fiduciary breach by Fletcher, or restitution for specific funds that were defalcated. Rather, the Trustee's theory of damages, supported by the declaration of its expert, Mr. Varga, is based on the aggregate losses suffered by the Richcourt Fund as a result of Fletcher's continued mismanagement of the Funds from the date of the Richcourt Acquisition in 2008 through the date of filing of bankruptcy in 2013.
First, by failing to inform investors of the change in the Fund's management following the Acquisition, Fletcher prevented investors from considering the option of withdrawing their investments, which they had knowingly entrusted to only Citco. Next, and most significantly, the Trustee alleges Fletcher should have liquidated the funds shortly after the Acquisition, when the Funds' line of credit was terminated without replacement while the Fund was facing significant redemption requests from investors. See Stmt. of Facts at ¶ 35-36; DeConza Dec'l, Exh. 5 at 77. Without outside lines of credit, the Funds would be forced to pay down expired lines of credit by using assets that otherwise would be used to redeem clients. Stmt. of Facts at ¶ 37; Varga Dec'l at ¶ 7. The Trustee's theory of damages, supported by the Varga affidavit, is that a prudent manager, facing mounting redemption requests from investors in late 2008 and early 2009 and insufficient credit to satisfy the redemptions, would have sought to liquidate the Funds to avoid further losses. Instead, in an effort to maintain the Funds and preserve his management fees Fletcher created a special purpose vehicle that effectively forced investors to accept periodic payments instead of the entire redemption request. See Stmt. of Facts at ¶ 52-57; Varga Dec'l at ¶ 8-9. These actions only built higher the house of cards, *132and were clearly undertaken for Fletcher's short-term benefit, in violation of his duty of loyalty to the Fund's investors. See In re MF Glob. Holdings Ltd. Inv. Litig. , 998 F.Supp.2d 157, 183 (S.D.N.Y. 2014) ("These defendants knew of the liquidity crisis and its increasing impact on the firm's excess share of customer accounts. Even in light of that knowledge, they continued to transfer money [ ] to [defendant's] other operations as part of [their] 'shell game.' ").
The record is clear that over the same period, Fletcher misrepresented his role in the management of the Funds in his December 2008 and January 2009 letters, further depriving investors of material information and withholding any reason to investigate further. Instead of winding down the Funds, Fletcher continued to operate and (mis)manage them for years, siphoning millions in cash from the Funds for investment in his other Fletcher Funds (Stmt. of Facts at ¶ 39) and plainly misappropriating large sums of money in pursuit of self-interest (see, e.g. , the New Year's Eve Transaction, Stmt. of Facts at ¶ 58-83). These actions were not the result of mere "error of investment judgment," In re Bank of New York , 35 N.Y.2d 512, 519, 364 N.Y.S.2d 164, 323 N.E.2d 700, 704 (N.Y. 1974), but rather calculated and self-interested decisions by Fletcher to sustain control of the Funds for his own pecuniary benefit. In light the glaring conflicts of interest inherent in any transaction between the Fletcher-managed Richcourt Funds and the Fletcher-managed Fletcher Funds, conclusions about Fletcher's role in causing the Fund's injuries should be construed liberally against him. See Estate of Re v. Kornstein Veisz & Wexler , 958 F.Supp. 907, 927-28 (S.D.N.Y. 1997) ("Viewed through the lens of a potential conflict of interest, defendants' otherwise defensible tactical decisions take on a more troubling gloss, and suggest at the least the possibility that defendants' divided loyalties substantially contributed to [plaintiff's alleged harm].").
The Court finds that the chain of breaches described above were a "substantial factor" in the eventual losses to investors. A prudent manager acting in accordance with his or her duties of loyalty and care would have taken steps to liquidate the funds in late 2008 to avoid further losses. See In re Baker's Estate , 249 A.D. 265, 268, 292 N.Y.S. 122, 128 (4th Dep't 1936). Pursuant to the "prophylactic rule," the Court finds Fletcher responsible and liable for the entirety of damages that flowed from his intentional failure to act prudently and loyally with regards to the Funds. See Malmsteen v. Berdon, LLP , 369 F. App'x 248, 251 (2d Cir. 2010) ("Because '[a]n action for breach of fiduciary duty is a prophylactic rule intended to remove all incentive to breach-not simply to compensate for damages in the event of breach,' there need not be "but-for" causation between the breach and the asserted damages.") (quoting ABKCO Music, Inc. v. Harrisongs Music, Ltd. , 722 F.2d 988, 995-96 (2d Cir.1983) ).
The Trustee relies on the declaration of Geoffrey Varga (the "Varga Dec'l."), the financial consultant of the Chapter 11 Trustee, for the computation of damages. Varga states that as a result of the various breaches and misrepresentations and defalcations, the Funds suffered losses of approximately $78 million. Varga Dec'l. at ¶ 19. Varga computed the alleged damages by first estimating the returns from a hypothetical liquidation of the Funds' portfolios during late 2008 until early 2009 (when Fletcher should have taken affirmative steps to wind down the funds), and comparing that number to the actual amounts investors recovered in the five-year period leading up to the bankruptcy/
*133liquidation of the Funds in mid-2013. Id. Varga takes into account the global market decline during the financial crisis in late fall 2008, estimating a 15% expected drop in total asset value during that period, and further assumes that the Funds' portfolio would only have been able to realize 90% of its market value if liquidated in late 2008 or early 2009. Id. Varga concludes that the portfolios could have provided a total of $681 million for investors, if liquidated prudently. Varga reviewed bank statements during the relevant time period and found that investors in fact received a total of $603 million in the years leading up to the 2013 bankruptcy filing, leaving a deficit of $78 million, which he attributes to Fletcher's fiduciary breaches. Id.
The Court finds Varga's methodology sufficient to establish the amount of damages flowing from Fletcher's breaches of duty. See, e.g. , Matter of Janes , 90 N.Y.2d 41, 55, 681 N.E.2d 332, 339, 659 N.Y.S.2d 165, 172 (N.Y. 1997) ("In imposing liability upon a fiduciary on the basis of the capital lost, the court should determine the value of the stock on the date it should have been sold, and subtract from that figure the proceeds from the sale of the stock or, if the stock is still retained by the estate, the value of the stock at the time of the accounting."). In New York State, to recover damages in a fiduciary action, one must prove with "reasonable certainty, though not mathematical precision, the amount of loss." Am. Fed. Grp., Ltd. v. Rothenberg , 136 F.3d 897, 908 (2d Cir. 1998). Varga's methods are facially reasonable and, additionally, his decades of experience in the field of insolvency accounting would surely qualify him as an expert at trial.9 See Varga Dec'l. at ¶ 3.
Many decisions in this circuit have relied on similar methodologies that estimate hypothetical values in order to calculate damages in fiduciary actions. See, e.g. , S & K Sales Co. v. Nike, Inc. , 816 F.2d 843, 852-854 (2d Cir. 1987) ; Enright v. New York City Dist. Council of Carpenters Welfare Fund , 2013 WL 3481358, at *18 (S.D.N.Y. July 10, 2013) ; In re Perry H. Koplik. , 476 B.R. at 791-92 ; accord Wolf v. Rand , 258 A.D.2d 401, 402, 685 N.Y.S.2d 708, 710 (1st Dep't 1999) ; see also In re Signature Apparel Grp. LLC , 577 B.R. 54, 109 (Bankr. S.D.N.Y. 2017) ("[D]amages resulting from a breach of fiduciary duty are liberally calculated. As long as there is a basis for an estimate damages, and the plaintiff has suffered harm, 'mathematical certainty is not required.' ") (regarding Delaware law).
The Court accepts Varga's calculation of losses, especially in light of the fact that his methods are reasonable and are not controverted by any opposing or alternative calculations submitted by Fletcher. See Venizelos v. Oceania Mar. Agency, Inc. , 268 A.D.2d 291, 292, 702 N.Y.S.2d 17, 18 (N.Y. 2000) ("Since a breach of fiduciary duty was proved, the [trial] court may be accorded significant leeway in ascertaining a fair approximation of the loss ... so long as the court's methodology and findings are supported by inferences within the range of permissibility."); see also Donovan , 754 F.2d at 1056 ; Herman v. Feinsmith , 39 A.D.3d 327, 328, 834 N.Y.S.2d 140, 141 (1st Dep't 2007) ; Oshrin v. Hirsch , 6 A.D.3d 352, 354, 776 N.Y.S.2d 545, 546 (1st Dep't 2004).
*134B. Claims for Fraudulent Transfers
The Trustee also seeks summary judgment against Fletcher for his receipt of constructive fraudulent transfers in 2013 in the aggregate amount of $91,667 ($31,667 received on January 1, 2013 and $60,000 on April 8, 2013). She argues two overlapping causes of action to avoid these transfers, alternatively under Section 548(a)(1)(B) or under Section 544 of the Bankruptcy Code. Both theories rely on Section 550(a) for statutory support giving the trustee the ability to initiate proceedings to recover property from a transfer that is avoided under Section 548 or 544.
Section 548(a)(1)(B) permits a trustee to avoid transactions made within two years of the bankruptcy filing if the debtor failed to receive reasonably equivalent consideration in exchange for the transfer, provided certain conditions are present.10 Among those conditions are that the debtor was insolvent on the date of the transfer or became insolvent as a result of the transfer, 11 U.S.C. § 548(a)(1)(B)(ii)(I), or that the transfer was made specifically to an insider under an employment agreement and not in the ordinary course of business. 548(a)(1)(B)(ii)(IV). Section 544 of the Bankruptcy Code, the Trustee's alternative authority, permits a trustee to bring fraudulent transfer claims on behalf an estate when such claims could be brought under state law by an entity that was a creditor at the time of the transfer. The Trustee relies on Sections 273, 274, 275, 278, and 279 of the New York Debtor and Creditor Law for the underlying state law causes of action for fraudulent conveyances.
In order to recover under Section 548(a)(1)(B)(ii)(I), a plaintiff must show that: (1) the transfer occurred within two years of the date of filing a petition, (2) the debtor received less than a reasonably equivalent value in exchange for the transfer, and (3) the debtor was insolvent at the date of the transfer or became insolvent as a result of the transfer. 11 U.S.C. § 548(a)(1)(B)(ii)(I).
As evidentiary support of the transfers, the Trustee cites to Exhibit 2 to the Amended Complaint, a spreadsheet showing outgoing transfers from Soundview Elite from 2011 until its filing for bankruptcy. See ECF No. 52, Exh. 2 at 39. The exhibit evidences transfers to Fletcher in the alleged amounts and during the stated timeframes. The Trustee also relies on the declaration of the Trustee's expert, Mr. Varga, in support of the fraudulent conveyance claims. Varga's conclusions, based on firsthand "review and analysis of Soundview Elite's books and records," (Varga Dec'l. at ¶ 9), are not contradicted by any opposing evidence.
*135The Court finds that the Trustee has met her burden under Section 548(a)(1)(B) to prove the two fraudulent transfers. First, the transfers undoubtedly occurred within two years of the Soundview bankruptcy filing. Both transfers took place in early 2013 (see ECF No. 52, Exh. 2 at 39; Varga Dec'l. at ¶ 22) and Soundview filed a bankruptcy petition later that same year, on August 31, 2013. Main Case, ECF No. 1. Second, according Varga's expert testimony, "Soundview Elite did not receive fair (or any) consideration for these transfers." Varga Dec'l. at ¶ 23. Third, Varga concluded, based on Soundview's books and records and taking into account the significant number of outstanding redemption requests, that Soundview was insolvent at the time Fletcher received the transfers. Id.
The Court concludes that the Trustee is entitled to summary judgment on her claims for fraudulent transfers under Section 548(a)(1)(B) of the Bankruptcy Code.11 However, by the Trustee's own admission (see Reply Brief at 7), the damages stemming from the fraudulent transfer claims are subsumed within the $78 million dollars in damages stemming from the fiduciary breach claims. Because the Court finds Fletcher liable for the entirety of Debtor's decline in value during the period between the Richcourt Acquisition and the filing date, Debtor's damages from the fraudulent transfers are included in that calculation. The Trustee does not seek, and cannot recover, duplicative damages. See id.
C. Interest
The Trustee requests that the Court award pre-judgment interest at a rate of nine percent per annum based on New York CPLR §§ 5001(b) and 5004, with interest accruing from the time that Fletcher prudently should have begun to liquidate the funds in January 2009, after the market had begun to stabilize following the collapse of Lehman Brothers in late 2008. See Varga Dec'l. at ¶ 20; Reply Brief at 7 n.3. CPLR 5001(b) provides that "[i]nterest shall be computed from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred."
The Court concludes that the Trustee is entitled to interest at the New York statutory rate. The Trustee's damages award for fiduciary breach are based on state common law claims, and as such, New York state interest laws should apply. See Strobl v. New York Mercantile Exch. , 590 F.Supp. 875, 881 (S.D.N.Y. 1984), aff'd , 768 F.2d 22 (2d Cir. 1985).12 Under New York law, pre-judgment interest is awarded as a matter of right pursuant to CPLR 5001(a) for causes of action sounding in law or tort. See, e.g. , Huang v. Sy , 62 A.D.3d 660, 661-62, 878 N.Y.S.2d 398, 400 (2nd Dep't 2009) ("the Supreme Court *136properly awarded pre-verdict interest as a matter of right pursuant to CPLR 5001(a)... [on claims to] recover damages for fraud and breach of fiduciary duty"). In contrast, it is within the Court's discretion to award pre-judgment interest on equitable claims. Woerz v. Schumacher , 161 N.Y. 530, 537-38, 56 N.E. 72 (N.Y. 1900) ("[U]pon demands bearing interest at law, the court of equity is bound to allow it; but where the demand does not bear interest at law, it will or will not be allowed according to the equity of the case, in the discretion of the court.").
Even if the Trustee's claims and remedies for fiduciary breach sounded in equity (i.e. , if her theory of damages relied on claims for disgorgement or unjust enrichment), this Court would still be inclined to award prejudgment interest. Interest is not considered a penalty and is not designed to punish the liable party, but rather to compensate the plaintiff for the loss of funds ultimately owed during a certain period of time. See J. D'Addario & Co., Inc. v. Embassy Industries, Inc. , 20 N.Y.3d 113, 957 N.Y.S.2d 275, 980 N.E.2d 940 (N.Y. 2012). Here, where the Trustee's damages stemmed from fiduciary breaches that deprived them of proper use of funds to which they were entitled, retroactive compensation for their dispossession of these funds in the form of interest is appropriate. See Sexter v. Kimmelman, Sexter, Warmflash & Leitner , 43 A.D.3d 790, 795, 844 N.Y.S.2d 183, 188 (1st Dep't 2007) (holding that pre-judgment interest is "virtually mandated," even in actions that are equitable in nature, "where fiduciaries failed to properly account for many years, during which time the fiduciary enjoyed the benefit of the injured [party's] money") (quotations omitted); Eighteen Holding Corp. v. Drizin , 268 A.D.2d 371, 372, 701 N.Y.S.2d 427 (1st Dep't 2000) ("[E]ven if plaintiff's action had been equitable, the ... award of prejudgment interest would nonetheless have been proper in light of the circumstance that defendants wrongly withheld plaintiff's money.").
The Court therefore concludes that the Trustee is entitled to judgment in the amount of $78 million on her breach of fiduciary duty claims, plus pre-judgment interest at a rate of nin percent per annum,13 together with costs and post-judgment interest. (See Varga Dec'l. ¶¶ 19-20).
IV. Fletcher's Counterclaims
In his Answer, Fletcher asserts a number of counterclaims. They include:
(1) Seeking a full review by a Fee Examiner of expenses and fees paid by the Trustee (which Fletcher asserts are excessive and cannot be justified) and disgorgement of any excessive fees;
(2) Relief for "undisclosed conflicts of interest" between the Trustee and her Professionals;
(3) Relief for (i) the Trustee's redaction of employee information; (ii) the Trustee's failure to identify a corporation that directly or indirectly owns 10% or more of the equity interests of one or more of the Funds; and (iii) that certain professional fee invoices were redacted;
(4) Relief regarding blocked access to bank accounts, which is allegedly preventing from retaining counsel;
(5) Relief related to the actions of Deborah Midanek (a non-party to this *137action) that allegedly caused damage to the Funds;
(6) Request for payment of Fletcher's administrative claim in the underlying Soundview bankruptcy case.
Answer at ¶ 23-28.
The Trustee responded to these counterclaims in her Answer to Counterclaims [ECF No. 44]. The Court concludes that the Trustee is entitled to summary judgment dismissing all of Fletcher's counterclaims. Each of the counterclaims is subject to dismissal either because it fails to state a claim upon which relief can be granted because it is asserted against parties not involved in this adversary proceeding, or because the issue raised had previously been litigated and decided in earlier bankruptcy proceedings and is therefore barred by the law of the case doctrine. Although a court has the discretion to revisit its own prior decision, a court "should [be] loathe to do so in the absence of extraordinary circumstances such as where the initial decision was clearly erroneous and would work a manifest injustice." Christianson v. Colt Indus. Operating Corp. , 486 U.S. 800, 817, 108 S.Ct. 2166, 2178, 100 L.Ed.2d 811 (1988) (quotations and citations omitted). Fletcher's counterclaims offer no new evidence or arguments that would persuade the Court to reconsider its prior rulings from earlier bankruptcy proceedings.
Counterclaim No. 1 Seeking review of excessive fees paid by the Trustee to various professionals
Fletcher asserts that the fees paid to the Trustee's Professionals and the Fund Liquidators cannot be justified. Answer at ¶ 23. As examples, he points to the fees of $1.9 million for the Trustee's various investigations into the Debtor and $3.4 million paid to the Liquidators as unreasonable. Id. at ¶ 31-32.
This Court previously considered objections regarding Trustee expenses, including an objection by co-defendant and insider George Ladner [Main Case, ECF Nos. 387 and 392], and ultimately overruled the objections in granting the Trustee's Motion for an Order Establishing Procedures for Monthly Compensation and Reimbursement of Expenses of Professionals [Main Case, ECF No. 405]. As such, Fletcher's first counterclaim is barred by law of the case and is not subject to re-litigation. See McGee v. Dunn , 940 F.Supp.2d 93, 100 (S.D.N.Y. 2013) ("The objective of the law of the case doctrine includes promoting efficiency and avoiding endless litigation by allowing each stage of the litigation to build on the last and not afford an opportunity to reargue every previous ruling."). Moreover, in connection with the confirmation of the Plan, the Court previously approved the Chapter 11 Trustee's professionals' fees on a final basis [Main Case, ECF Nos. 1556-58 and 1569]. Notice of the application for fees was given [Main Case, ECF No. 1533] and Fletcher did not object. These rulings "either expressly resolved [the] issue or necessarily resolved it by implication," Aramony v. United Way of Am. , 254 F.3d 403, 410 (2d Cir. 2001), and Fletcher has offered no new evidence or arguments to convince the Court to reconsider its prior decisions. Accordingly, Counterclaim One is barred by the law of the case doctrine and should be dismissed.
Counterclaim No. 2 Asking the Court to investigate alleged conflicts of interest involving the Trustee and her Professionals
Fletcher seeks to have the Trustee removed or investigated due to purported conflicts of interest. In his second counterclaim ("Counterclaim Two"), Fletcher asserts that the Trustee's professionals failed to disclose conflicts of interest in direct *138violation of Bankruptcy Rule 2014 and 11 U.S.C. § 327. Answer at ¶ 33.
This claim is similarly barred by prior rulings by this Court. Fletcher failed to object to the Trustee's Application to Employ Counsel [Main Case, ECF No. 176] and a Financial Consultant [Main Case, ECF No. 205]. On March 13 and 20, 2014, the Court entered Orders Authorizing Trustee to Retain Counsel and Financial Consultant [Main Case, ECF Nos. 220 and 233]. The Court's orders approved the employment of the Trustee's Professionals, and Fletcher has offered no "cogent" or "compelling" reasons in his Answer to convince the Court to reconsider its prior approval. Ali v. Mukasey , 529 F.3d 478, 490 (2d Cir. 2008).
Further, Gerti Muho, a Fletcher associate and a co-defendant in the Trustee's adversary proceeding, previously moved to have the the Trustee removed as Chapter 11 Trustee of the Debtor [Main Case, ECF No. 291], and Fletcher previously argued the alleged conflicts reiterated in his Answer in a statement filed with the Court in support of the Muho motion [Main Case, ECF No. 302]. This Court denied the motion to remove the Chapter 11 Trustee [Main Case, ECF No. 306]. Counterclaim Two is therefore barred by law of the case, and the Court sees no reason to reconsider its prior orders. See In re Bennett Funding Grp., Inc. , 367 B.R. 302, 325 (Bankr. N.D.N.Y. 2007) (Court would not consider defendant's counterclaim against the chapter 11 trustee alleging conflicts of interest by the trustee, where the court had previously entered an order denying the removal of the trustee).
Counterclaim No. 3 Seeking disclosure of the identity of corporations that directly or indirectly own 10% or more of the equity interests of one or more of the Funds
On October 2, 2014, the Trustee filed an ex parte motion to authorize the Trustee to redact certain information about investors, pursuant to Cayman Island law [Main Case, ECF No. 368]. George Ladner, a colleague of Fletcher's and co-defendant in this case, objected to the Trustee's motion [Main Case, ECF No. 370] under the same legal theory that Fletcher asserts in his counterclaim. At a hearing on November 6, 2013 [Main Case, ECF No. 403 at 7-9], this Court ruled on Ladner's objection and granted the Trustee's motion. Fletcher acknowledges in his Answer that the Court previously granted the Trustee's motion. Answer at ¶ 25. The Court in its discretion will "avoid time-consuming relitigation of issues already decided." Liani v. Baker , 2010 WL 2653392, at *11 (E.D.N.Y. June 28, 2010). Counterclaim Three should be dismissed.
Counterclaim No. 4 Seeking removal of restriction on Fletcher's access to Soundview banking accounts to allow him to retain counsel
Fletcher claims that "[t]his Court has systematically blocked the Fletcher ... Defendant[ ] from retaining counsel," Answer at ¶ 37, by blocking his access to funds held in a Delaware Bank, in excess of the Court's jurisdictional authority. Id. at ¶ 12
This claim fails to state a claim upon which relief can be granted because, inter alia , it is asserted against the wrong parties. Fed. R. Civ. P. 12(b)(6) ; see Mercator Corp. v. Windhorst , 159 F.Supp.3d 463, 471 (S.D.N.Y. 2016) (dismissing claim raised against improper party for failure to state a claim). The Court is not a party to the adversary proceeding, and the counterclaim does not raise any claims against the Trustee or Plaintiff. Counterclaim Four is an inappropriate mechanism to address Fletcher's requested relief. Moreover, the Court's prior rulings blocking access to Soundview's assets were entirely justified and it will not be revisited. See, e.g. , Decision *139on Motions for Summary Judgment and Asset Freezing Preliminary Injunction [Adv. Proc. No. 14-019323, ECF No. 88]. Counterclaim Four should be dismissed.
Counterclaim No. 5 Requesting that non-party Midanek disclose fees and expenses paid to herself and others during the liquidation of the Funds and return those amounts to the Debtor
Prior to filing, from March 26 through June 19, 2013, Solon Group, Inc. ("Solon"), a U.S. entity, served as a the only non-management director of the Richcourt Funds. See DeConza Dec'l, Exh. 21 (May 28, 2013 Letter from Midanek to Cayman Islands Monetary Authority). On May 28, 2013, Deborah Midanek, the president of Solon, wrote to the Cayman Islands Monetary authority to express her concerns over the management of the Funds. Id. at 7. Midanek, acting as sole independent director of each of the Funds, also adopted written resolutions removing Fletcher as Director of the Funds, and caused the Funds to file winding-up petitions in Cayman Court. Answer ¶ 19-20.
Fletcher asserts that Midanek did not have the authority to remove him and others as directors, and that she paid herself and others with assets from the Funds for activities that were adverse to the Funds. Id. at 22. This includes her role in filing the winding up petitions with the Cayman Courts, which ultimately led to the Funds' U.S. bankruptcy. Id.
This adversary proceeding is an inappropriate means to address Fletcher's requested relief. Fundamentally, this counterclaim does not raise any claims against the Trustee. See Fed. R. Civ. P. 12(b)(6) ; Mercator , 159 F.Supp.3d at 471. Midanek was not named as a defendant in Fletcher's counterclaims, and she received no notice regarding Fletcher's purported claims relating to her. See Riverside Capital Advisors, Inc. v. First Secured Capital Corp. , 28 A.D.3d 457, 460, 814 N.Y.S.2d 646, 649 (2nd Dep't 2006) ("The nonparty entities demonstrated that they were not named as defendants in this action, had not been served with process notifying them of claims against them, and had not been afforded the opportunity to institute a defense. A court has no power to grant relief against an entity not named as a party and not properly summoned before the court."). Accordingly, Counterclaim Five should be dismissed.
Counterclaim No. 6 Seeking payment of Fletcher's administrative claim for post-petition services in the Main Case
As discussed above, Fletcher filed a proof of claim [Main Case, Claim No. 8-1] in the amount of $10,070.65 in the main case, seeking from the Debtor unpaid Director's Fees as post-petition Administrative Expenses. Prior to filing the proof of claim, Fletcher, along with other Insiders, had moved for an order allowing the payment of his and various other director and officer fees as administrative expense claims [Main Case, ECF No. 192]. This Court denied the request without prejudice at a hearing dated March 19, 2014 [Main Case, ECF No. 242 at 31:7-12]. In his Answer, Fletcher submits that "the Court's actions were punitive by refusing to pay for four months of administrative fees." The Court should not entertain these assertions, which are nothing more than an untimely attempt to reargue prior rulings by the Court. See McGee , 940 F.Supp.2d at 100 ("Without good reason a court will generally adhere to its own earlier decision on a given issue in the same litigation.") (quotations and citations omitted). As such, Counterclaim Six should be dismissed.
In addition to the foregoing, the Fletcher's Counterclaims should also be *140dismissed for failure to prosecute. See Fed. R. Civ. P. 41(b) ("If the plaintiff fails to prosecute or to comply with these rules or a court order, a defendant may move to dismiss the action or any claim against it."). A Court has the authority to dismiss sua sponte for lack of prosecution as part of its "inherent power" to manage their own affairs and control the docket. See Link v. Wabash R. Co. , 370 U.S. 626, 630, 82 S.Ct. 1386, 1389, 8 L.Ed.2d 734 (1962) ; see also 11 U.S.C. § 105 ; U.S. ex rel. Drake v. Norden Sys., Inc. , 375 F.3d 248, 250-51 (2d Cir. 2004) ("[I]nvoluntary dismissal is an important tool for preventing undue delays and avoiding docket congestion."); In re Kanaley , 241 B.R. 795, 800 (Bankr. S.D.N.Y. 1999).
Since filing his answer on December 15, 2015, nearly three years ago, Fletcher has not engaged with this case in any meaningful respect. He has not sought discovery on his claims, has not moved to dismiss the claims against him as other co-defendants have, and, as discussed above, did not file any opposition to the Trustee's Motion for Summary Judgment or the supporting Statement of Undisputed Facts. Moreover, as discussed above, it is clear that his counterclaims lack any merit. While dismissal with prejudice is "the harshest of sanctions" and pro se complaints should only be dismissed for failure to prosecute "when the circumstances are sufficiently extreme," Baptiste v. Sommers , 768 F.3d 212, 216 (2d Cir. 2014), the procedural history here is sufficiently clear to support a finding that Fletcher has failed to pursue his counterclaims. See, e.g. , Chira v. Lockheed Aircraft Corp. , 634 F.2d 664, 666 (2d Cir. 1980) (dismissal proper when plaintiff failed to take any action to move his case to trial during six month period); Ambrose v. Mestre , 2014 WL 2708021, at *3 (S.D.N.Y. June 16, 2014) ("Since the filing of his complaint [two years prior], Ambrose has failed to interact even once with the Court or with opposing counsel."); Malone v. HSBC Mortg. Corp. USA , 2012 WL 406903, *3 (S.D.N.Y. 2012) (ten months); Isiofia v. District Director of Citizenship and Immigration Service , 2008 WL 2986273 (S.D.N.Y. 2008) (pro se plaintiff held to have abandoned claim after eighteen months of inactivity following filing of complaint); Ahmed v. I.N.S. , 911 F.Supp. 132, 134 (S.D.N.Y. 1996) (thirty-five months of inactivity).
Fletcher has done nothing to pursue his counterclaims in nearly three years since filing his Answer on December 15, 2015. Whereas Fletcher has clearly withdrawn himself from the litigation proceedings, the Trustee is not required to prove prejudice. See Wubayeh v. City of New York , 320 F. App'x 60, 62 (2d Cir. 2009) ("Prejudice resulting from unreasonable delay can be presumed as a matter of law.") (quotations and citations omitted); see also Rudder v. Jimenez , 2014 WL 1349047, *5 (S.D.N.Y. 2014) ("Courts have held that a continued delay in litigation caused by a dilatory plaintiff is in itself prejudicial to defendants."). While Fletcher has not received express notice that his failure to comply would result in dismissal, he has effectively disassociated himself from the proceedings; notably, he failed to respond to the Trustee's Summary Judgment Motion, which has resulted in significant judgment against him. There is simply no indication that Fletcher intends to pursue his counterclaims, and any further delay would be without purpose. His counterclaims should be dismissed with prejudice, both for failure to prosecute and on the grounds that they are without merit.
CONCLUSION
In light of the foregoing, the Motion for Summary Judgment should be granted, *141and Defendant Fletcher's counterclaims should be dismissed with prejudice. The Trustee is entitled to recover damages in the amount of $78 million, plus pre-judgment interest and $350 in filing fee costs. As discussed above, this Court does not have authority to enter a final order or judgment in this case absent the consent of both parties, which has not been given. Therefore, this Decision shall be treated as proposed findings of fact and conclusions of law, subject to the objection procedure set forth in Federal Rules of Bankruptcy Procedure Rule 9033, and a final judgment must be entered by the District Court.
RHI was the parent company of Soundview Capital Management ("SCM") and Richcourt Capital Management ("RCM") (Stmt. of Facts at ¶ 15), which, in turn, owned the voting shares and acted as investment managers to each of the Richcourt Funds pursuant to investment management agreements ("IMAs"). See DeConza Dec'l at Exh. 7 (Investment Management Agreement). Pursuant to the IMAs, SCM and RCM undertook to manage and monitor the Richcourt Funds. Id. at 3-4.
Fletcher created a holding company, Richcourt Acquisition Inc. ("RAI"), to facilitate the transaction. See DeConza Dec'l, Exh. 6 at ¶ 97.
While issues of jurisdiction and issues of final adjudicative power are "distinct," see Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP , 462 B.R. 457, 471 (S.D.N.Y. 2011), it is facially implausible that a party would implicitly consent to final judgment by a bankruptcy court while at the same time objecting to the threshold issue of whether the same court has personal jurisdiction over the party, especially in light of the Supreme Court's explicit instructions that a party's consent to final jurisdiction must be "knowing and voluntary." Wellness International Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 1937, 191 L.Ed.2d 911 (2015). In Wellness , the Supreme Court indicated that the "key inquiry [to consent] is whether the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try to the case before the non-Article III adjudicator." Id. at 1948. Based on Fletcher's blanket denial of the Trustee's allegations and his objection to personal jurisdiction, it would be incongruous to conclude that he nonetheless "voluntarily" consented to having the Trustee's claims tried in bankruptcy court.
Public rights claims are "derived from" or "closely intertwined" with a federal regulatory scheme and can therefore be fully adjudicated by an Article I bankruptcy court without intruding on the separation of powers set out by Article III. See Kirschner v. Agoglia , 476 B.R. 75, 80 (S.D.N.Y. 2012) (citing Stern , 564 U.S. at 487-496, 131 S.Ct. 2594. This is in contrast to "private rights" claims, which are "the 'stuff' of common law, over which only an Article III court can render final judgment."Id.
Although Fletcher did not file a subsequent Answer in response to the Amended Complaint, the Amended Complaint did not assert any additional claims against him, and further, the Trustee did not proceed against Fletcher in this action under any theories based on default. See Transcript from Hearing on Motion for Summary Judgment (the "Hearing Transcript") [ECF No. 215] at 5:1-5 ("[This is not] a simple default situation ... where a party fails to respond to a run-of-the-mill type motion. It is a summary judgment, and we do have to make our case based on the undisputed facts.").
That is not to say that the Trustee could not seek to disallow the claim entirely, even at this post-confirmation stage. While "no § 502(d) disallowance claim would lie against a defendant who filed a claim that has been finally disallowed," Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , 531 B.R. 439, 455 (Bankr. S.D.N.Y. 2015), a subordinated claim is not disallowed; rather it is relegated to the lowest priority. See In re Adelphia Commc'ns Corp. , 365 B.R. 24, 73 (Bankr. S.D.N.Y. 2007) ("[S]ubordination and disallowance ... [are] separate remedies ... Plainly disallowance is more draconian, and would be appropriate in just a few situations."). However, the Trustee has not sought to amend their complaint to incorporate this relief.
See, e.g. , 13 Holdings, LLC v. Gorilla Cos. (In re Gorilla Cos.) , 2014 WL 1246358 at *7 (D. Ariz. Mar. 26, 2014) ("[O]nce the Bankruptcy Court litigated the factual basis of whether Gorilla owed additional monies to 13 Holdings under the terms and provisions of the APA, it had also litigated the factual basis of whether 13 Holdings had been unjustly enriched at Gorilla's expense.").
Even if the Court were to construe the Trustee's claims for breach of fiduciary duty as objections or defenses to Fletcher's proof of claim, it is not clear that the Court's decision to disallow Fletcher's claim would have simultaneously and necessarily satisfied each and every element of the Trustee's claims. See In re Lehman Bros. Holdings , 480 B.R. at 190 ("[P]artial overlap of the action is insufficient; rather a plaintiff must demonstrate that each factual and legal element of its claim will be decided in the claims allowance process such that after the process, "nothing remains for adjudication in a plenary suit.") (quoting Katchen v. Landy , 382 U.S. 323, 334, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) ).
Fletcher's proof of claim is for post-petition administrative fees. The Trustee's claims for breach of fiduciary require findings of fact and legal conclusions regarding events that occurred five years prior to the Debtor's filing up until the date of filing. Fletcher's proof of claim seeks $10,000. The Trustee's claims seek damages of over seventy-five million dollars. The Trustee's claims also require numerous findings of fact and law-of the existence of a fiduciary relationship, that Fletcher breached his duties, and the extent of damages. There is no question that Fletcher's claim could be disallowed based on a more limited set of findings. Compare In re Soporex, Inc. , 463 B.R. 344, 363 (Bankr. N.D. Tex. 2011) ("Count 2 of the Complaint contains a claim against Sabolik for breach of the fiduciary duties of due care and loyalty, while Count 3, against Smith and Sabolik, alleges a claim for corporate waste. In deciding whether Smith and Sabolik are owed unpaid compensation and benefits by Inc. as asserted in their proofs of claim, this Court will not be called upon to decide the Trustee's state law claims against them as pled in Counts 2 and 3.") with In re Penson Worldwide , 587 B.R. at 10 ("The basis of Plaintiff's defense to the proof of claim and its affirmative claims is the same.").
In sum, assuming that the Trustee had postured the claims as objections to the proof of claim, the claims for breach of fiduciary duty would nonetheless require broader findings of fact and law than the claims allowance process would require. See In re Lehman Bros. Holdings , 480 B.R. at 190 ; see also Waldman v. Stone , 698 F.3d 910, 921 (6th Cir. 2012) ("Stone emphasizes that his affirmative claims turn on the same fraudulent conduct as his disallowance claim ... [based on the] same transaction or occurrence as a disallowance claim; "some overlap" between the claims is not enough ... Stone's affirmative claims required him to prove facts beyond those necessary to his disallowance claims"); In re Frazin , 732 F.3d at 323 (Plaintiff's claim was not completely resolved in the claims allowance process because "although the bankruptcy court necessarily had to resolve most, if not all, of Frazin's factual allegations ... the bankruptcy court was not required to resolve the legal effect flowing from those factual allegations"). Especially in light of the fact that the Trustee resolved Fletcher's proof of claim as an entirely separate matter as part of the Plan confirmation process, the Court concludes that it does not have adjudicative authority to enter final judgment on the Trustee's claims in this adversary proceeding.
Mr. Varga appeared at the hearing on the Trustee's Motion for Summary Judgment and was prepared to testify with regard to the subject matter of his declaration. No one appeared for Defendant Fletcher or expressed a desire to cross-examine Mr. Varga. The Court therefore accepted Counsel's proffer regarding Mr. Varga's testimony together with Mr. Varga's declaration in support of the Trustee's Motion for Summary Judgment.
The statute provides, in relevant part:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily ...
(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; [or]
(ii)(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B).
The Trustee does not make a separate argument in favor of a ruling under Section 544 or Section 548(a)(1)(B)(ii)(IV) in her Motion for Summary Judgment and the Court does not need to analyze those causes of action, since any relief requested pursuant to those additional claims would be duplicative of Fletcher's established liability under Section 548(a)(1)(B).
In contrast, the decision to grant or deny prejudgment interest on claims arising under federal law is within the sound discretion of the district court. Strobl , 590 F.Supp. at 881. The fraudulent transfer judgments, awarded pursuant to § 548 of the Bankruptcy Code, were awarded under federal law. See In re 1031 Tax Grp. , LLC, 439 B.R. 84 (Bankr. S.D.N.Y. 2010). However, as discussed above, this award is subsumed by the awards for the fiduciary breach claims and no independent damages should be awarded by reason of the fraudulent transfers.
Under New York law, prejudgment interest is calculated on a simple interest basis, without compounding interest. See Long Playing Sessions, Inc. v. Deluxe Labs., Inc. , 129 A.D.2d 539, 540, 514 N.Y.S.2d 737, 738 (1st Dep't 1987) ; Marfia v. T.C. Ziraat Bankasi , 147 F.3d 83, 90 (2d Cir.1998). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501797/ | HONORABLE ELIZABETH S. STONG, UNITED STATES BANKRUPTCY JUDGE
Introduction
Before the Court is the amended complaint of plaintiff Alliance Shippers, Inc. ("Alliance") and the counterclaim of Jerry Choez in this adversary proceeding. Alliance seeks a determination that the debt that Mr. Choez initially owed to Alliance's predecessor-in-interest, Felix Produce Corp. ("Felix Produce"), and now owes to Alliance, is nondischargeable under Bankruptcy Code Section 523(a)(4). Mr. Choez seeks a declaratory judgment that the default judgment entered on September 14, 2009, in Felix Produce Corp. v. New Lots Food Corp. and Jerry Choez , Docket No. 08-CV-5161, in the United States District Court for the Eastern District of New York, is void for lack of personal jurisdiction.
On January 26, 2018, the parties filed a Joint Pre-Trial Statement identifying two issues to be determined at trial - whether a trust was created under the Perishable Agricultural Commodities Act ("PACA"); and if so, whether Mr. Choez committed a fiduciary defalcation with respect to that trust.
The trial of this action took place on July 16 and 17, 2018, and the Court heard testimony from two witnesses, a senior Alliance executive and Mr. Choez. Post-trial briefing was completed on August 20, 2018, and the record is now closed.
Jurisdiction
Alliance's nondischargeability claim arises under Bankruptcy Code Section 523(a)(4) and is a core matter. 28 U.S.C. § 157(b)(2)(I). This Court may hear Mr. Choez's counterclaim because it is a "counterclaim[ ] by the estate against [a] person[ ] filing [a] claim[ ] against the estate." 28 U.S.C. § 157(b)(2)(C). As core matters, this Court has constitutional authority to enter a final judgment because the claims alleged in the amended complaint stem "from the bankruptcy itself." Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
In addition, to the extent that they are not core proceedings, this Court may adjudicate these claims pursuant to Judiciary Code Section 157(c)(2) because the parties have stated their consent to the entry of a final judgment here. See Wellness Int'l Network, Ltd. v. Sharif , --- U.S. ----, 135 S.Ct. 1932, 1940, 191 L.Ed.2d 911 (2015) (holding that in a non-core proceeding, a bankruptcy court may enter final orders "with the consent of all the parties to the proceeding"). For these reasons, this Court has jurisdiction to consider and enter judgment on these claims under Judiciary Code Section 1334(b) and the Standing Order of Reference dated August *14728, 1986, as amended by Order dated December 5, 2012, of the United States District Court for the Eastern District of New York.
Selected Procedural History
The following procedural and background information is drawn from the extensive record in this adversary proceeding, and familiarity with the record is assumed.
The Default Judgments
Two unrelated default judgments, one entered in federal district court in Brooklyn and the other entered in state court in New Jersey, form the background to this dischargeability action. In one, Felix Produce was the plaintiff, and in the other, Felix Produce was the defendant.
In 2008, Felix Produce commenced an action, captioned Felix Produce Corp. v. New Lots Food Corp d/b/a Bravos Supermarket, Krasdale Foods Inc., and Jerry Choez , Docket No. 08-CV-5161, in the United States District Court for the Eastern District of New York (the "District Court") against Mr. Choez and New Lots Food Corp. ("New Lots Food"), a business owned and operated by Mr. Choez, seeking payment under PACA for perishable agricultural commodities that Felix Produce sold to New Lots Food (the "District Court Action"). On September 16, 2009, the District Court entered a default judgment in favor of Felix Produce and against New Lots Food and Mr. Choez, jointly and severally, in the amount of $30,735.45 (the "District Court Judgment").
Separately, and several years after the District Court Action was concluded, Alliance brought an action in the Superior Court of New Jersey, Law Division, Middlesex County (the "New Jersey Superior Court"), against Felix Produce, among others, to collect on a debt owed to it. On October 11, 2013, the New Jersey Superior Court entered a default judgment in favor of Alliance and against Felix Produce, among others, in the amount of $23,330.
Alliance brought a second action in the New Jersey Superior Court against Mr. Choez and New Lots Food, to collect on the District Court Judgment. On October 20, 2015, the New Jersey Superior Court entered a default judgment in favor of Alliance and against Mr. Choez and New Lots Food, among others, in the amount of $25,723.
The Debtors' Bankruptcy Cases
On April 8, 2010, Mr. Choez and his wife, Rosalin Choez, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, Case No. 10-43026. On May 25, 2010, the Debtors' bankruptcy case was dismissed pursuant to Bankruptcy Code Section 521(i), effective as of that date, and on May 26, 2010, the Debtors' bankruptcy case was closed.
On July 22, 2010, the Debtors filed a second voluntary petition for relief under Chapter 7 of the Bankruptcy Code, Case No. 10-46896. On September 8, 2010, the Debtors' second bankruptcy case was likewise dismissed pursuant to Bankruptcy Code Section 521(i), effective as of September 7, 2010, and on September 20, 2010, the Debtors' second bankruptcy case was closed.
On November 30, 2015, the Debtors filed a third voluntary petition for relief under Chapter 7 of the Bankruptcy Code, Case No. 15-45404. The Debtors' third bankruptcy case followed a different path, and on December 28, 2015, the Chapter 7 Trustee, Robert J. Musso, filed a report of no distribution. And on February 24, 2016, the Debtors each received a discharge.
This Adversary Proceeding
As the record reflects, the parties have engaged in extensive motion practice in *148this action, including motions to dismiss, a motion for summary judgment, and a motion to reconsider.
On January 19, 2016, Alliance commenced this adversary proceeding by filing a complaint. On January 19, 2016, Mr. Choez filed a motion to dismiss. On February 11 and 29, 2016, the Court held hearings on the motion to dismiss, at which Mr. Choez and Alliance, each by counsel, appeared and were heard. By Memorandum Decision dated June 3, 2016, the Court granted Mr. Choez's motion to dismiss, and allowed leave to replead on grounds that "Alliance has shown that 'the prospect of a plausible claim is suggested' by the allegations of the Complaint." Alliance Shippers, Inc. v. Choez (In re Choez) , 2016 WL 3244861, at *11 (Bankr. E.D.N.Y. June 3, 2016).
On June 29, 2016, Alliance filed this amended complaint. Alliance alleges that Mr. Choez is or was a person in control of, and responsible for, the disposition of the assets of New Lots Food, including its PACA trust assets. Am. Compl. ¶ 6, ECF No. 15. Alliance also alleges that, following a default judgment in the District Court Action in favor of Felix Produce and against New Lots Food and Mr. Choez, jointly and severally, Mr. Choez and Felix Produce did not receive payment of the $30,735.45 judgment. Am. Compl. ¶¶ 7, 8. And Alliance alleges that it brought an action in the Superior Court of New Jersey, Docket No. MID-L-2024-12, against Krisp-Pak Sales Corp. ("Krisp-Pak") and was awarded a judgment of $369,700, which remains unsatisfied. Am. Compl. ¶ 9.
In addition, Alliance alleges that Krisp-Pak was in the business of selling, and Felix Produce was in the business of purchasing, wholesale quantities of perishable produce, that Felix Produce was licensed as a dealer under PACA, and that Krisp-Pak delivered $23,330 of produce to Felix Produce. Am. Compl. ¶ 10.
Alliance asserts that, as an execution judgment creditor of Krisp-Pak, it brought an action in the New Jersey State Court, Docket No. MID-L-2650-13, against Felix Produce and other produce wholesalers. Am. Compl. ¶ 11. Alliance states that on February 20, 2015, an amended judgment was entered against Felix Produce in the amount of $23,330 which, Alliance alleges, remains unsatisfied. Am. Compl. ¶ 12. Alliance alleges that on March 6, 2015, it obtained an order executing on the rights and credits due to Felix Produce from Mr. Choez, and permitting Alliance to liquidate those rights and credits against Mr. Choez. Am. Compl. ¶ 13.
On July 8, 2016, Mr. Choez moved to dismiss the amended complaint. On September 15, 2016, and November 22, 2016, the Court held hearings on the motion, at which Mr. Choez and Alliance, each by counsel, appeared and were heard. On December 28, 2016, the Court issued an oral decision and order denying Mr. Choez's motion to dismiss the amended complaint.
On January 17, 2017, Mr. Choez filed an answer and counterclaim. Answer and Countercl., ECF No. 32. In his counterclaim, Mr. Choez seeks a declaratory judgment stating that the District Court Judgment is void as a matter of law. Answer and Countercl. ¶ 19. Mr. Choez asserts that he was not served with the summons and complaint in that action, and as a result, that the District Court did not have personal jurisdiction over him. Answer and Countercl. ¶¶ 19, 22, 24. On February 6, 2017, Alliance filed an answer to the counterclaim. Countercl. Answer, ECF No. 33.
On May 10, 2017, Mr. Choez filed a motion for summary judgment. Mr. Choez argued that he is entitled to summary judgment on his counterclaim and on Alliance's Section 523(a)(4) claim. With respect *149to his counterclaim, Mr. Choez argued that the District Court Judgment is void as a matter of law on grounds that the District Court lacked personal jurisdiction over him and over New Lots Food.
With respect to Alliance's Section 523(a)(4) claim, Mr. Choez argued, among other things, that Alliance cannot prove the first element of its claim, that the debt resulted from a fiduciary defalcation under an express or technical trust. Specifically, Mr. Choez argued that Alliance did not produce a copy of Felix Produce's PACA license, and instead, relies only on the District Court Action for proof that a PACA trust existed. Mr. Choez argued, as noted above, that the District Court Judgment is void as a matter of law and even if it is not void, it should not have collateral estoppel effect here.
By Memorandum Decision and Order dated November 20, 2017, the Court denied Mr. Choez's motion for summary judgment on his counterclaim, because he did not show that there is no genuine dispute as to a material fact that the District Court Judgment is void for lack of personal jurisdiction. Choez v. Alliance Shippers, Inc. (In re Choez) , 2017 WL 5604109, at *12-13 (Bankr. E.D.N.Y. Nov. 20, 2017). The Court also denied Mr. Choez's motion for summary judgment on Alliance's nondischargeability claim, because similarly, he did not show that there is no genuine dispute as to a material fact as to any of the three elements of this claim. In re Choez , 2017 WL 5604109, at *19. And finally, the Court found that the District Court Judgment does not have collateral estoppel effect here, because it was entered on default. In re Choez , 2017 WL 5604109, at *16. That is, the Court concluded that "Alliance cannot establish at least one of the four criteria of federal collateral estoppel, that the question of the existence of a PACA trust was actually litigated and determined in the District Court Action." Id.
On January 25, 2018, Mr. Choez filed a letter requesting that the Court reconsider the summary judgment decision. On March 1, 2018, Mr. Choez filed a motion to reconsider the order denying the motion for summary judgment and a memorandum of law and affidavit in support on grounds, among others, that newly discovered evidence showed that Felix Produce did not have a PACA license at the time of the relevant transactions.
And by order dated May 3, 2018, the Court denied the motion to reconsider on grounds, among others, that Mr. Choez did not establish that the "newly discovered evidence" was not available upon the exercise of reasonable diligence at the time that the summary judgment motion was made.
The Trial
On July 16 and 17, 2018, the Court held a trial on the amended complaint and the counterclaim. At trial, Alliance offered the testimony of Edward Wright and Mr. Choez, and introduced and admitted into evidence Plaintiff's Exhibits A, A1, A2, A3, A4, A6, and B. Mr. Choez offered his own testimony and introduced and admitted into evidence Defendant's Exhibits A, B, and C.
At trial, Alliance also offered Plaintiff's Exhibits C, D, D1, D2, D3, D4, and D5, which are pleadings and other documents from the record of the District Court Action. Mr. Choez objected to these exhibits, on grounds that Alliance did not establish a proper foundation for their admission, and alternatively, that they were impermissible hearsay and not appropriate subjects for judicial notice of the truth of the matters asserted therein.
On July 17, 2018, Mr. Choez filed a letter setting forth his objections to these *150exhibits. On July 18, 2018, this Court directed Mr. Choez to file a brief in support of his objections and scheduled a hearing for August 13, 2018. On July 25, 2018, Mr. Choez filed a brief in support of his objections, and on August 3, 2018, Alliance filed a response.
On August 13, 2018, the Court held a hearing on Mr. Choez's objections, at which Alliance and Mr. Choez, each by counsel, appeared and were heard. By order dated August 17, 2018, the Court held that the Exhibits would be admitted to establish the fact of the District Court Action and related findings, but not for the truth of the matters asserted therein.
On August 20, 2018, Alliance and Mr. Choez filed post-trial briefs, and the record is now closed.
The Witnesses
Edward Wright
Alliance's first witness was Edward Wright. Mr. Wright is Vice President of the refrigerated division of Alliance and his duties primarily include the movement and delivery of produce. Trial Tr. July 16, 2018 ("July 16 Trial Tr."), 16:6-11, 17:2-4, ECF No. 90. He has worked for the company for eighteen years. July 16 Trial Tr. 15:14-17.
Mr. Wright testified that Krisp-Pak was a former customer of Alliance, and that Alliance handled produce shipments from the West Coast to Krisp-Pak's produce market in Hunts Point, New York. July 16 Trial Tr. 17:22-25, 18:1-8. In particular, he stated:
Q (Mr. Horowitz): Okay. Now what type of services did Alliance render for Krisp-Pak?
A (Mr. Wright): We handled produce shipments from the West Coast, the stated [sic] that I mentioned earlier, and we shipped them into the Hunts Point produce market where Krisp-Pak had a - they called them sheds where they do their business at.
July 16 Trial Tr. 18:3-8.
Mr. Wright also testified that when Krisp-Pak went out of business, it "owed Alliance approximately $370,000." July 16 Trial Tr. 18:12-21. He testified that Alliance eventually recovered a judgment against Krisp-Pak. July 16 Trial Tr. 21:23-25, 22:1-12. See Pl's Exh. A and Pl's Exh. A1. And Mr. Wright testified that when Krisp-Pak did not pay its debt to Alliance, he directed Alliance's counsel to seek out vendors who owed money to Krisp-Pak, and Felix Produce was one of those vendors. July 16 Trial Tr. 31:4-25, 32:1-7.
Mr. Wright testified that he then directed Alliance's counsel to attempt to collect from Felix Produce through court proceedings. July 16 Trial Tr. 32:8-15. The proceedings led to a court order directing Felix Produce to pay Alliance. July 16 Trial Tr. 33:4-25, 34:1-25. See Pl's Exh. A2. Mr. Wright testified that Felix Produce did not pay Alliance, and that he further instructed counsel to pursue payment from Felix Produce. This led to a judgment against Felix Produce in favor of Alliance. July 16 Trial Tr. 35:6-19, 36:5-12. See Pl's Exh. A4.
Mr. Wright testified that when Felix Produce did not satisfy its debt, he directed Alliance's counsel to identify any entities or persons that owed money to Felix Produce. This led to the identification of New Lots Food and Mr. Choez, and eventually, to a court order directing Mr. Choez to pay Alliance. July 16 Trial Tr. 37:3-25, 38:1-10. See Pl's Exh. A5.
Mr. Wright testified that when Mr. Choez did not pay Alliance, he directed Alliance's counsel to bring a lawsuit against Mr. Choez and New Lots Food. July 16 Trial Tr. 38:11-20. See Pl's Exh. A6. Mr. Wright testified that as a result of *151that lawsuit, Alliance obtained a judgment against Mr. Choez in the amount of $25,723. That judgment has not been paid. July 16 Trial Tr. 42:6-22. See Pl's Exh. B.
Mr. Wright testified that when he learned that Mr. Choez had filed for bankruptcy, he directed Alliance's counsel to determine what caused the debt that Mr. Choez owed to Felix Produce. July 16 Trial Tr. 42:23-25, 43:1-5. The result of this investigation was the recovery of statements and invoices showing that Mr. Choez owed Felix Produce money for purchases of produce. July 16 Trial Tr. 43:6-14. See Pl's Exh. C and Pl's Exh. D. Mr. Wright stated:
Q (Mr. Horowitz): Did I supply you with any documents other than statements?
A (Mr. Wright): You provided us with the statements and also the actual billings from Mr. Felix to Mr. Choez.
July 16 Trial Tr. 44:21-24.
Mr. Wright also testified that Alliance had a judgment against Mr. Choez in the amount of $30,549, see Pl's Exh. D3, and a judgment against Mr. Choez as well, under the PACA laws and regulations, see Pl's Exh. D5. July 16 Trial Tr. 55:25-56:6. And he testified that Exhibits C, D, D1, D2, D3, D4, and D5 were obtained by Alliance's counsel as a result of Alliance's lawsuit against Mr. Choez. July 16 Trial Tr. 58:20-23.
Based on the entire record, this Court finds that Mr. Wright was a credible witness, and that his testimony was consistent with, and supported by, several of the exhibits admitted into evidence.
Jerry Choez
Alliance's second witness was the defendant Jerry Choez. Mr. Choez testified that he is a co-debtor in this bankruptcy case, and that this is his third bankruptcy filing. July 16 Trial Tr. 65:24-25, 66:1-11. He testified that in the last twenty or so years, he has "been involved in" two businesses that dealt in produce. One of those businesses was New Lots Food, which Mr. Choez owned and operated under the trade name Bravo Supermarket. July 16 Trial Tr. 66:14-25, 67:1-25. He also testified that he alone managed the financial affairs of New Lots Food, and that he alone was responsible for purchasing the produce sold at the supermarket. July 16 Trial Tr. 68:1-21. And Mr. Choez testified that he determined which produce sellers were paid and how they were paid in the ordinary course of business. July 16 Trial Tr. 69:9-25, 70:1.
Mr. Choez testified that sometimes vendors were paid by company check, and other times vendors were paid in cash. He testified that if he paid a vendor in cash, he would usually have the vendor sign off on the invoice to acknowledge payment. July 16 Trial Tr. 70:2-13. Mr. Choez testified that sometimes Felix Ceballos, the owner of Felix Produce, would sign his name on the invoices provided to New Lots Food, indicating that Felix Produce was paid on delivery. July 16 Trial Tr. 71:9-14. And he testified that he did not have copies of signed invoices from Mr. Ceballos accounting for the approximately $30,000 debt owed to Felix Produce, because Mr. Ceballos was paid cash on delivery. July 16 Trial Tr. 72:1-14.
Mr. Choez also testified that he could not be sure whether the notation "paid" written on copies of certain invoices was written by him or by Mr. Ceballos. July 16 Trial Tr. 76:6-24. When pressed to indicate whether he could find Mr. Ceballos's signature on any of the invoices offered in evidence, Mr. Choez testified that he could not definitively say whether Mr. Ceballos signed those invoices. July 16 Trial Tr. 77:13-25, 78:1-25, 79:1-25, 80:1-4. He testified that the name "Manny" was written at the bottom of one of the invoices, and that *152he was not sure for whom Manny worked. Mr. Choez also acknowledged that the word "paid" was not written on that invoice, or on a separate invoice that bore a signature at the bottom. July 16 Trial Tr. 80:5-8. And he testified that he could locate only two invoices among those offered in evidence that bore the initials of Mr. Ceballos. July 16 Trial Tr. 81:17-20.
Mr. Choez testified that he believed that Mr. Ceballos did not have a PACA license because he did not state on his invoices that he was a PACA licensee. July 16 Trial Tr. 81:21-25. Mr. Choez also testified that he stated during his deposition that he did not know whether Mr. Ceballos had a PACA license, and was not concerned with whether he had a license or not. July 16 Trial Tr. 82:1-17.
Mr. Choez testified that he "didn't have a problem with [Mr. Ceballos]" during the time they did business together and is "at a loss" to understand why Mr. Ceballos brought an action against him. July 16 Trial Tr. 82:18-24. He further testified that he did not reach out to Mr. Ceballos when he learned of the lawsuit, because he learned about it several years after it was brought and because he was never advised to contact Mr. Ceballos. July 16 Trial Tr. 83:7-25, 84:1-25. Mr. Choez testified that he did not have contact information for Mr. Ceballos, did not ask other vendors for Mr. Ceballos' information, and does not currently know where Mr. Ceballos is located or how to contact him. July 16 Trial Tr. 85:1-25, 86:1-13. Mr. Choez also testified that he used the proceeds from the business's produce sales to pay other business expenses, including rent and wages, because he had already paid the vendors cash on delivery for their produce. July 16 Trial Tr. 86:14-25, 87:1-25, 88:1-15.
Mr. Choez testified that the Bravo Supermarket business failed in October 2008 because the business could not pay its expenses as they became due. July 16 Trial Tr. 88:18-25, 89:1-11. He testified that he vacated the premises on the same day that the supermarket failed, and left behind his business equipment and records. July 16 Trial Tr. 91:2-15. And Mr. Choez testified that these were later taken over by Krasdale Foods Inc. ("Krasdale"), a secured creditor of the Bravo Supermarket business. Id. That loan, he testified, was secured by, among other things, the business's equipment, files, and inventory. Trial Tr. July 17, 2018 ("July 17 Trial Tr.") 15:16-23, ECF No. 88. Mr. Choez also testified that invoices and statements similar to the invoices and statements contained in Plaintiff's Exhibit C were included among the business records that he left behind. July 16 Trial Tr. 92:5-12.
When asked if he had been given copies of Plaintiff's Exhibit C - invoices for purchases from Felix Produce with PACA language at the bottom - Mr. Choez testified that he did not receive invoices in that format from Mr. Ceballos. He stated that the invoices included in Plaintiff's Exhibit C did not contain his name or the business name. July 16 Trial Tr. 92:16-25, 93:1-19. And he testified that he did not know if the charges shown on the invoices included in Plaintiff's Exhibit C bearing PACA language matched the amounts noted on the statements listing the produce that was purchased. July 16 Trial Tr. 93:24-25, 94:1-14.
Mr. Choez also testified that the invoices included in Exhibit C that were not marked "paid" and did not have Mr. Ceballos' signature on them, that he did not receive those invoices from Mr. Ceballos, and that some of those invoices did not contain his name or his business' name or address. July 16 Trial Tr. 95:17-25, 96:1-25, 97:1-24. And Mr. Choez testified that he believed that the invoices included in Plaintiff's Exhibit C came from his own *153business records located in a filing cabinet in the Bravo Supermarket premises, and were provided to Mr. Choez's counsel by Krasdale. July 16 Trial Tr. 98:10-25, 99:1-19.
Alliance continued its examination of Mr. Choez on the second day of trial. Mr. Choez testified that Krasdale made a loan to New Lots Food, which was secured by Bravo Supermarket's equipment, files, and inventory. July 17 Trial Tr. 15:16-23. He testified that when New Lots Food defaulted on the Krasdale loan, Krasdale "took over," and he surrendered the Bravo Supermarket business premises and all of its records to Krasdale. July 17 Trial Tr. 15:24-16:4. He also testified that he does not know what happened to the premises or business records, including any invoices from Felix Produce, after he left. July 17 Trial Tr. 16:3-25-17:25. And Mr. Choez testified that he and New Lots Food did not do business with Alliance. July 17 Trial Tr. 18:15-25.
Mr. Choez testified that he first learned of Mr. Ceballos's lawsuit against him when Alliance brought an action against him to collect that debt. July 17 Trial Tr. 18:20-25, 19:1-15. He testified that this was the first time that he learned of the claim that he and Krasdale owed Mr. Ceballos approximately $30,000. July 17 Trial Tr. 19:16-25, 20:1-2. Mr. Choez also testified that he was not aware that Krasdale settled with Mr. Ceballos. July 17 Trial Tr. 20:19-21:1.
Mr. Choez testified that Krasdale did not ask him to assist in defending the lawsuit brought by Mr. Ceballos, and that he assumed that was because Krasdale could defend itself using the business records that Krasdale now had in its possession. July 17 Trial Tr. 21:2-25, 22:1-6. Mr. Choez also testified that he did not know whether he was required to indemnify Krasdale for any claims that it paid on his behalf. July 17 Trial Tr. 22:7-25, 23:1-14.
Mr. Choez testified that he was not a PACA licensee at the time he owned and operated the Bravo Supermarket and New Lots Food. July 17 Trial Tr. 24:5-19. He also testified that he understood that he could be personally liable for amounts owed to produce suppliers if he took the produce without paying for it, sold the produce, and then did not repay the suppliers of the produce from the proceeds. July 17 Trial Tr. 25:23-25, 26:1-9.
Mr. Choez was then examined by his attorney, Mr. Beard. Mr. Choez testified that at the time he did business with Mr. Ceballos, he did not know that Mr. Ceballos was acting on behalf of Felix Produce. He stated that he first learned of Felix Produce when he received a copy of the New Jersey Superior Court Judgment. July 17 Trial Tr. 26:23-25, 27:1-14. Mr. Choez testified that he directed Coran Ober, the law firm that employs Mr. Beard, to investigate further into Felix Produce and the surrounding lawsuits. He testified that as a result of this investigation, he learned that Felix Produce was a New York corporation. July 17 Trial Tr. 27:15-25, 28:1-25, 29:1-25, 30:1-14. See Def's Exh. A.
Mr. Choez testified that Felix Produce was incorporated on November 20, 2008, and dissolved on April 25, 2012. July 17 Trial Tr. 31:4-5, 31:16-25, 32:1-11. See Def's Exhs. A, B. Mr. Choez testified that during this bankruptcy proceeding, he directed his counsel to investigate whether Felix Produce was the holder of a PACA license, and this led to the production of an application, license, and renewal for PACA license issued by the United States Department of Agriculture to Felix Produce. July 17 Trial Tr. 33:12-25, 34:1-10. See Def's Exh. C. Mr. Choez testified that Felix Produce first obtained its PACA license on December 10, 2008. July 17 Trial Tr. 39:24-25, 40:1-2. See Def's Exh. C.
*154On further examination by Alliance, Mr. Choez testified that at the time he did business with Mr. Ceballos, he was more concerned with the quality and price of the produce than with the business forms. July 17 Trial Tr. 40:7-21.
Based on the entire record, this Court finds Mr. Choez to be a credible witness, and that his testimony was consistent with, and supported by, several of the exhibits admitted into evidence.
The Applicable Legal Standards
The Elements of a Claim Under Bankruptcy Code Section 523(a)(4)
Bankruptcy Code Section 523(a)(4) provides that 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." 11 U.S.C. § 523(a)(4). This " 'dischargeability provision has for more than a century been construed narrowly and strictly by the Supreme Court.' " Owens v. Owens (In re Owens) , 2005 WL 387258, at *4 (S.D.N.Y. Feb. 17, 2005) (quoting Schwalbe v. Gans (In re Gans ), 75 B.R. 474, 488 (Bankr. S.D.N.Y. 1987) ), aff'd , 155 F. App'x 42 (2d Cir. 2005).
To prevail on a Section 523(a)(4) claim, a plaintiff must establish three elements:
First, the debt must result from a fiduciary's defalcation under an "express or technical trust" involving the entrusting of money or other property to a fiduciary for the benefit of another. Second, the debtor must have acted in a fiduciary capacity with respect to the trust. Third, the transaction in question must be a "defalcation" within the meaning of bankruptcy law.
Chao v. Duncan (In re Duncan) , 331 B.R. 70, 77 (Bankr. E.D.N.Y. 2005) (internal citations omitted). The Second Circuit has held that "[a] creditor seeking to establish nondischargeability under § 523(a) must do so by the preponderance of the evidence." Ball v. AO Smith Corp. , 451 F.3d 66, 69 (2d Cir. 2006) (citing Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ).
The First Element - the Existence of an Express or Technical Trust. Under the first element of Section 523(a)(4), " '[a] technical trust is one imposed by statutory or common law and will exist where the statute (1) defines the trust res, (2) identifies the trustee's fiduciary duties, and (3) imposes a trust prior to and without reference to the wrong that created the debt.' " E. Armata, Inc. v. Parra (In re Parra ), 412 B.R. 99, 104 (Bankr. E.D.N.Y. 2009) (quoting A.J. Rinella & Co. v. Bartlett (In re Bartlett ), 397 B.R. 610, 619 (Bankr. D. Mass. 2008) ).
"PACA trusts satisfy the requirements for a technical trust." In re Parra , 412 B.R. at 105. And pursuant to PACA, a trust is created when a sale of perishable agricultural commodities occurs, until the seller is paid:
Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.
7 U.S.C. § 499e(c)(2). Under the statute, PACA trust rights can be preserved by *155one of two methods, the notice method and the invoice method.
The Notice Method. Produce sellers preserve their PACA trust rights by giving "written notice of intent to preserve the benefits of the trust" to the merchant within thirty days after expiration of the parties' payment terms. 7 U.S.C. § 499e(c)(3). "The written notice to the commission merchant, dealer, or broker shall set forth information in sufficient detail to identify the transaction subject to the trust." Id. This written notice may be separate from the invoice that a seller may provide at the time of the transaction. Id. In addition to the written notice of intent to preserve the benefits of the trust, this written notice must include, among other information, the names and addresses of the seller and the buyer, the transaction date, the commodity that is the subject of the transaction, the invoice price and payment terms, and the amount past due and unpaid.
The requirements for the "notice of intent to preserve trust benefits" are identified with particularity in the Code of Federal Regulations, as follows:
(1) Notice of intent to preserve benefits under the trust must be in writing, must include the statement that it is a notice of intent to preserve trust benefits and must include information which establishes for each shipment:
(i) The names and addresses of the trust beneficiary, seller-supplier, commission merchant, or agent and the debtor, as applicable,
(ii) The date of the transaction, commodity, invoice price, and terms of payment (if appropriate),
(iii) The date of receipt of notice that a payment instrument has been dishonored (if appropriate), and
(iv) The amount past due and unpaid; except that if a supplier, seller or agent engages a commission merchant or growers' agent to sell or market their produce, the supplier, seller or agent that has not received a final accounting from the commission merchant or growers' agent shall only be required to provide information in sufficient detail to identify the transaction subject to the trust.
7 C.F.R. § 46.46(f)(1).
One bankruptcy court has observed that, in the context of the Notice Method, "courts are split on whether compliance with the notice requirements of PACA must be strict or merely substantial." In re Superior Tomato-Avocado, Ltd. , 481 B.R. 866, 870 (Bankr. W.D. Tex. 2012). That court held:
[T]he notice requirements need only be substantially complied with, in order to effectuate Congressional intent and harmonize the interplay of PACA and the Bankruptcy Court. Even though A & A was not a licensee, it substantially followed a set [of] guidelines set forth by the PACA, providing Superior general notice that A & A may bring a PACA trust claim. The clear statement regarding intent, coupled with attaching the specific invoices with respect to which it claimed a trust, is sufficient to meet the requirements set out in section 499e(c)(3).
In re Superior Tomato-Avocado, Ltd. , 481 B.R. at 873. And it concluded that "[t]he weight of authority as well as the current trend in the case law both tip in favor of substantial compliance." In re Superior Tomato-Avocado, Ltd. , 481 B.R. at 870.
Courts in this District have likewise held that under PACA, and in particular its implementing regulations, perfect compliance *156is not the test, and substantial compliance with the regulatory notice requirements is enough. For example, one court found that the identification of a business as "S & S" rather than "Sweet & Savory," and listing the incorrect address, did not invalidate the plaintiff's attempt to preserve a PACA trust. Food Authority, Inc. v. Sweet & Savory Fine Foods, Inc. , 2011 WL 477714, at *3 (E.D.N.Y. Feb. 4, 2011).
The Invoice Method. Alternatively, a licensed PACA produce seller may preserve its PACA trust rights by including language required by PACA on its invoice to notify the buyer that the produce is sold subject to the PACA trust. 7 U.S.C. § 499e(c)(4). Notably, this path is available only to a produce seller that is a holder of a PACA license. As the PACA statute states:
In addition to the method of preserving the benefits of the trust specified in paragraph (3), a licensee may use ordinary and usual billing or invoice statements to provide notice of the licensee's intent to preserve the trust. The bill or invoice statement must include the information required by the last sentence of paragraph (3) and contain on the face of the statement the following: "The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 ( 7 U.S.C. 499e(c) ). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received."
7 U.S.C. § 499e(c)(4).
As one court has explained:
Proper notice under the invoice method consists of three independent requirements. See [A & J Produce Corp. v. ] Chang , 385 F.Supp.2d [354] at 361 [ (S.D.N.Y. 2005) ]. First, the bills or invoices must be "ordinary and usual," meaning they are "communications customarily used between parties to a transaction in perishable agricultural commodities in whatever form, documentary or electronic, for billing or invoicing purposes." 7 U.S.C. § 499e(c)(4) ; 7 C.F.R. § 46.46(5). Second, the payment period must appear on the bill or invoice if it differs from the default payment period established by the regulations. 7 U.S.C. § 499e(c)(4). Finally, the bill or invoice must give notice on its face that the perishable agricultural commodities are covered by the PACA's statutory trust requirement, and do so using the precise language provided in the Act. See 7 U.S.C. § 499e(c)(4).
New Son Yeng Produce N.Y. LLC v. New A & N Food Mkt., Inc. , 2014 WL 3725874, at *5 (E.D.N.Y. July 25, 2014).
The Second Element - Acting in a Fiduciary Capacity with Respect to the Trust. Under the second element of a Section 523(a)(4) claim, the term "fiduciary capacity" is narrowly construed, to encompass only those relationships arising out of express or technical trusts, or statutorily imposed trusts. 4 Collier on Bankruptcy ¶ 523.10[1][d] (Richard Levin, Alan N. Resnick & Henry J. Sommer eds., 16th ed.). It does not extend to constructive, implied, or resulting trusts. Id.
The Third Element - Committing a Fiduciary Defalcation with Respect to the Trust. As to the third element of Section 523(a)(4), the Supreme Court has interpreted "defalcation" to require "a culpable state of mind requirement akin to that which accompanies application of the other terms in the same statutory phrase" such as fraud, embezzlement, and larceny.
*157Bullock v. BankChampaign, N.A. , 569 U.S. 267, 269, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013). This is a high standard, and for this element to be established, the Supreme Court has specified that the fiduciary must have acted with actual knowledge, with "willful[ ] blind[ness]," or with "bad faith, moral turpitude, or other immoral conduct." Bullock , 569 U.S. at 273-74, 133 S.Ct. 1754. The Supreme Court rejected the notion that a lower threshold for "defalcation" should apply, noting that such a definition would capture " 'even innocent acts of failure to fully account for money received in trust,' " and would not be appropriate here. Bullock , 569 U.S. at 271, 133 S.Ct. 1754 (quoting Sherman v. SEC (In re Sherman) , 658 F.3d 1009, 1017 (9th Cir. 2011) ).
To similar effect, the Second Circuit has held that "defalcation under [ Bankruptcy Code Section] 523(a)(4) requires a showing of conscious misbehavior or extreme recklessness - a showing akin to the showing required for scienter in the securities law context." Denton v. Hyman (In re Hyman) , 502 F.3d 61, 68 (2d Cir. 2007). Accord Rahman v. Seung Min Park (In re Seung Min Park) , 2011 WL 1344495, at *4 (Bankr. E.D.N.Y. Apr. 8, 2011) (same).
Relief from Judgment
Under Federal Rule of Civil Procedure 60(b)(4), made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 9024, "[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding" if "the judgment is void." Fed. R. Civ. P. 60(b)(4).
As the Second Circuit has noted, "[s]ince [Rule] 60(b) allows extraordinary judicial relief, it is invoked only upon a showing of exceptional circumstances." Nemaizer v. Baker , 793 F.2d 58, 61 (2d Cir. 1986). Rule 60(b) is strictly applied, following the tenet that "[a] court's final judgment should not 'be lightly reopened.' " Herschaft v. N.Y.C. Campaign Fin. Bd. , 139 F.Supp.2d 282, 286 (E.D.N.Y. 2001) (quoting Nemaizer , 793 F.2d at 61 ). Rule 60(b) does not designate a forum "for presenting a motion for relief from judgment, [but] the motion is generally brought in the district court rendering judgment." Covington Indus., Inc. v. Resintex A.G. , 629 F.2d 730, 733 (2d Cir. 1980) (citing 7 James Wm. Moore et al., Moore's Federal Practice ¶ 60.28(1) (2d ed. 1979) ).
In limited circumstances, a district court may entertain a collateral attack on another district court's judgment. "Although the case law is somewhat meager, precedent exists supporting the proposition that Rule 60(b)(4) may be invoked in the registration court to obtain relief from a foreign default judgment attacked as void for lack of personal jurisdiction over the parties against whom it was rendered." Covington Indus. , 629 F.2d at 734 (describing a district court in the Southern District of New York voiding a judgment of a district court in the Central District of California).
The concept of a void judgment is narrowly construed. A judgment is void, and subject to relief under Rule 60(b)(4), "only in the rare instance where a judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard." United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 271, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). For example, a judgment may be void if the rendering court lacked the power to exercise personal jurisdiction over the defendant. See 12 *158James Wm. Moore et al., Moore's Federal Practice ¶ 60.44 (3d ed. 2017).
A judgment may also be void if the rendering court had the power to exercise personal jurisdiction over the defendant, but the defendant was not properly served. Id. A certificate or affidavit of service is evidence that a defendant was properly served. "[A] properly filed affidavit of service by a plaintiff is prima facie evidence that service was properly effected." Ahluwalia v. St. George's Univ., LLC , 63 F.Supp.3d 251, 260 (E.D.N.Y. 2014).
A defendant can "rebut[ ] the presumption of proper service" with a "sworn denial of receipt of service." Old Republic Ins. Co. v. Pacific Fin. Servs. of Am., Inc. , 301 F.3d 54, 57 (2d Cir. 2002). The defendant himself must swear to " 'specific facts to rebut the statements in the process server's affidavits.' " Old Republic Ins. Co. , 301 F.3d at 58 (quoting Simonds v. Grobman , 277 A.D.2d 369, 716 N.Y.S.2d 692, 693 (2d Dep't 2000) ).
Discussion
Alliance's Section 523(a)(4) Claim
Bankruptcy Code Section 523(a)(4) provides that a debt is nondischargeable if it is the result of the debtor's fraud or defalcation while acting in a fiduciary capacity. Accordingly, to prevail after trial on this claim, Alliance must establish three elements. First, Alliance must show that the debt at issue arose in connection with an express or technical trust involving the entrusting of money or other property to a fiduciary for the benefit of another, here a PACA trust. Second, Alliance must show that Mr. Choez acted in a fiduciary capacity with respect to that trust. And third, Alliance must show that the circumstances at issue amounted to a "defalcation" within the meaning of bankruptcy law.
Alliance also seeks an award of counsel fees and costs of suit.
Whether Alliance Has Shown that the Debt at Issue Arose in Connection with an Express or Technical Trust
The first element of Alliance's Section 523(a)(4) claim is that the debt at issue arose in connection with an "express or technical trust," here, a PACA trust, involving the entrusting of money or other property to a fiduciary for the benefit of another. In re Duncan , 331 B.R. at 77. That is, Alliance must show, by a preponderance of the evidence, that a PACA trust existed and was preserved at the time of the transactions at issue.
As described above, there are two ways to preserve a PACA trust: by giving written notice of intent to preserve trust benefits, or the Notice Method, and for a PACA licensee only, the Invoice Method. Alliance must show that one of these paths was followed in order to prevail on this claim.
The Notice Method. As described above, the Code of Federal Regulations provides that the written notice of intent to preserve trust benefits must meet the following requirements, and contain the following information:
(1) Notice of intent to preserve benefits under the trust must be in writing, must include the statement that it is a notice of intent to preserve trust benefits and must include information which establishes for each shipment:
(i) The names and addresses of the trust beneficiary, seller-supplier, commission merchant, or agent and the debtor, as applicable,
(ii) The date of the transaction, commodity, invoice price, and terms of payment (if appropriate), *159(iii) The date of receipt of notice that a payment instrument has been dishonored (if appropriate), and
(iv) The amount past due and unpaid; except that if a supplier, seller or agent engages a commission merchant or growers' agent to sell or market their produce, the supplier, seller or agent that has not received a final accounting from the commission merchant or growers' agent shall only be required to provide information in sufficient detail to identify the transaction subject to the trust.
7 C.F.R. § 46.46(f)(1). This Court agrees with the weight of authority that substantial compliance with each of the requirements of the Notice Method is sufficient to preserve a PACA trust. That is, while each and all of the notice requirements must be satisfied in substance, a modest variation in the required information, such as using an initial for a portion of a party's name, will not annul a notice that otherwise meets the requirements of the statute.
Alliance argues, in substance, that Felix Produce preserved a PACA trust by delivering invoices and statements to Mr. Choez that contained the necessary statutory language as required by PACA. Pl's Post Trial Br. at 5.
First, Alliance argues that the evidence shows that the debt owed by Mr. Choez and New Lots Food to Felix Produce, an account debtor of Krisp-Pak, was assumed by Alliance in satisfaction of a debt that Krisp-Pak owed to Alliance.
As described above, Alliance's Vice President Mr. Wright testified that Krisp-Pak, a former customer of Alliance, went out of business and "owed Alliance approximately $370,000." July 16 Trial Tr. 18:12-21. Alliance eventually recovered a judgment against Krisp-Pak. July 16 Trial Tr. 21:23-25, 22:1-12. See Pl's Exh. A and Pl's Exh. A1. And when that judgment was not paid, Alliance sought to collect from vendors who owed money to Krisp-Pak, and Felix Produce was one of those vendors. July 16 Trial Tr. 31:4-25, 32:1-7.
Alliance succeeded in obtaining a court order directing Felix Produce to pay Alliance. July 16 Trial Tr. 33:4-25, 34:1-25. See Pl's Exh. A2. This led to a judgment against Felix Produce in favor of Alliance. July 16 Trial Tr. 35:6-19, 36:4-15. See Pl's Exh. A4. But again, that judgment was not paid, and Alliance sought to collect from entities or persons who owed money to Felix Produce, and that led to the identification of New Lots Food and Mr. Choez.
And again, Alliance succeeded in obtaining a court order directing Mr. Choez to pay Alliance. July 16 Trial Tr. 37:3-25, 38:1-20. See Pl's Exh. A5. Alliance brought an action against Mr. Choez and New Lots Food. July 16 Trial Tr. 38:16-20. See Pl's Exh. A6. As a result of that lawsuit, Alliance obtained a judgment against Mr. Choez in the amount of $25,723, which remains unpaid. July 16 Trial Tr. 42:6-22. See Pl's Exh. B.
Second, Alliance argues that the evidence establishes the existence of a PACA trust between Felix Produce and New Lots Food.
Alliance argues that the evidence shows that Felix Produce complied with the requirements of PACA to preserve a PACA trust. Specifically, Alliance points to evidence in the form of invoices and statements that contain the following language:
"The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust, authorized by Section 5(c) of the Perishable Agricultural Commodities Act. 1930 (7 U.S.C. 499(e)(c) ). The seller of these commodities retains a trust claim over these commodities, *160all inventories of food or other products derived from these commodities and any receivables or proceeds from the sale of these commodities until full payment is received. In the event of the enforcement of our trust claim, we will seek to recover reasonable attorney's fees and the costs of recovery."
Pl's Exhs. C, D, and D1. Notably, this is the language set forth in PACA for purposes of preserving a PACA trust by the Invoice Method, and that method is available only to a produce seller that is a holder of a PACA license.
Alliance also argues that Mr. Choez did not come forward with evidence disputing the validity or accuracy of the invoices and statements. Alliance notes that Mr. Choez did not introduce evidence of payment, such as paid receipts signed by Felix Produce, or invoices or statements containing different PACA language or no PACA language at all. As Mr. Choez testified:
Q (Mr. Horowitz): Do you have any actual invoices from Felix which makes up the $30,000 claim that he signed his name or New Lots - or excuse me, his company's name that you paid him?
A (Mr. Choez): No, he didn't have to.
July 16 Trial Tr. 72:1-4.
And Alliance points to testimony that Mr. Choez was not sure as to whether the notation "paid" on invoices was written by him or Mr. Ceballos. July 16 Trial Tr. 76:6-24. In particular, Alliance argues that Mr. Choez was not able to state definitively whether he could find Mr. Ceballos's signature on any of the invoices in front of him, except for two invoices. July 16 Trial Tr. 77:13-81:20.
In conclusion, Alliance argues that Felix Produce's statements with respect to its intent, including as set forth in its invoices, show that Felix Produce substantially complied with PACA's notice requirements, and therefore, preserved a PACA trust.
Mr. Choez responds first by noting that Alliance failed to plead in its amended complaint that a PACA trust was preserved using the Notice Method. He argues that even if Alliance had alleged that a PACA trust was preserved by this method, Alliance has not shown that the requirements to preserve a PACA trust were met. And Mr. Choez argues that the Second Circuit requires strict compliance, not substantial compliance, with the Notice Method to preserve a PACA trust.
Mr. Choez also argues that Alliance did not introduce testimony or other evidence to show that written notice of intent to preserve trust benefits was given to Mr. Choez by Felix Produce, as required by the Notice Method of preserving a PACA trust. Rather, Mr. Choez testified that he did not receive invoices bearing PACA language from Mr. Ceballos, and also testified that the specific invoices he was shown did not contain his name or the name of his business. July 16 Trial Tr. 92:19-25, 93:1-19. For these reasons, Mr. Choez argues that Alliance failed to prove the existence of a PACA trust by the Notice Method.
Here, the record shows that Alliance has met its burden to establish that the debt owed by Mr. Choez and New Lots Food to Felix Produce, an account debtor of Krisp-Pak, was assumed by Alliance in satisfaction of a debt that Krisp-Pak owed to Alliance.
But the record also shows that Alliance has not met its burden to establish that a PACA trust was preserved in favor of Felix Produce pursuant to the Notice Method. To be sure, the record contains some evidence that Felix Produce intended to preserve a PACA trust. This evidence includes invoices that bear the particular language set forth in PACA for use by PACA license holders to preserve their *161trust rights by the Invoice Method. But that language is only one portion of the notice procedure that is required under the Notice Method, and here, Alliance has not met its burden to establish that Felix Produce substantially complied with each of the requirements of the Notice Method to preserve a PACA trust.
Specifically, Alliance did not provide invoices or documents sent by Felix Produce to New Lots Food containing a "statement that it is a notice of intent to preserve trust benefits." 7 C.F.R. 46.46(f)(1). And Alliance did not provide testimony at trial by Mr. Ceballos, or any other employee of Felix Produce, that Mr. Ceballos communicated his intent to preserve a PACA trust to Mr. Choez. In addition, Alliance did not provide written notices or documents that set forth, among other necessary information, the address of the seller, the name and address of the buyer, a clearly defined transaction date, the commodity that is the subject of the transaction, the invoice price and payment terms, and the amount past due and unpaid, as required by the statute to satisfy the Notice Method requirements. Instead, the PACA language found on the invoices is the language necessary to preserve a trust under the Invoice Method, and requires the PACA seller to have a PACA license.
This does not satisfy the requirement that a produce seller preserve its PACA trust rights by giving "written notice of intent to preserve the benefits of the trust" to the merchant within thirty days after expiration of the parties' payment terms. 7 U.S.C. § 499e(c)(3). Nor does it meet the requirement that "[t]he written notice to the commission merchant, dealer, or broker shall set forth information in sufficient detail to identify the transaction subject to the trust." 7 U.S.C. § 499e(c)(3). And it does not amount to substantial compliance with those requirements, either.
Indeed, if the use of the Invoice Method language on an invoice was sufficient to satisfy the requirements of the Notice Method, then it is difficult to see what purpose would be served by the two means to preserve the benefits of a PACA trust, or why it would be desirable for a produce seller to have a PACA license.
The Invoice Method. PACA provides that a licensed PACA produce seller may preserve its PACA trust rights by including specified language on its invoice to notify the buyer that the produce is sold subject to the protections of a PACA trust. 7 U.S.C. § 499e(c)(4). As noted above, the required language is as follows:
"The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 ( 7 U.S.C. 499e(c) ). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received."
7 U.S.C. § 499e(c)(4).
Significantly, and as also noted above, the Invoice Method of preserving PACA trust rights is available only to a produce seller that is a holder of a PACA license. 7 U.S.C. § 499e(c)(4).
In the amended complaint, Alliance alleges that a PACA trust was established and preserved pursuant to the Invoice Method. As the amended complaint states:
On each of the outstanding invoices sent by the Plaintiff's judgment debtor to New Lots, the Plaintiff's judgment debtor, as a PACA licensee, placed the exact language statutorily prescribed by PACA to be placed on all invoices by a licensee to notify the buyer that a seller/supplier *162of perishable agricultural commodities is preserving its rights as a beneficiary to the statutory trust pursuant to 7 U.S.C. Sec. 499e(c)(4), plus pre and post judgment interest and attorneys' fees.
Am. Compl. ¶ 17.
But at trial, Alliance did not argue or offer evidence to show that Felix Produce was a licensed PACA seller at the time it did business with New Lots Food. And Alliance acknowledges that "Felix did not become a PACA licensee until between its sales to the debtor and its District Court action against the debtor," that is, after the transactions at issue. Pl's Post Trial Br. at 12.
Mr. Choez argues that Alliance may not rely on the Invoice Method because the evidence shows that Felix Produce did not have a PACA license at the time that it did business with Mr. Choez. Specifically, he argues that the evidence shows that the transactions at issue took place between April 2008 and September 2008, and that Felix Produce did not obtain a PACA license until December 10, 2008. July 17 Trial Tr. 39:24-25, 40:1; Def's Exh. C.
Mr. Choez also notes that this evidence came to light while this adversary proceeding was pending. He points to his testimony showing that during the course of this action, he directed his counsel to investigate whether Felix Produce was the holder of a PACA license. This inquiry led to the production of an application, license, and renewal for a PACA license issued by the United States Department of Agriculture to Felix Produce. July 17 Trial Tr. 33:12-25, 34:1-10. See Def's Exh. C. And as those documents confirm, Felix Produce first obtained a PACA license on December 10, 2008. As Mr. Choez testified:
Q (Mr. Beard): Mr. Choez, when did Felix Produce Corp first obtain a [PACA] license?
A (Mr. Choez): [Exhibit C] says December 10th, 2008.
July 17 Trial Tr. 39:24-25, 40:1.
Here, the record shows that Alliance has not met its burden to establish that a PACA trust was preserved in favor of Felix Produce pursuant to the Invoice Method. Here again, and to be sure, the record contains evidence that Felix Produce complied with some of the requirements of the Invoice Method. Alliance has come forward with evidence that Felix Produce included the specific language required by PACA to preserve a PACA trust on its invoices. The invoices state:
"The perishable agricultural commodities listed on this invoice are sold subject to the statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act. 1930 (7 U.S.C. 499(e)(c) ). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received. In the event of the enforcement of our trust claim, we will seek to recover reasonable attorney's fees and the costs of recovery."
Pl's Exh. C.
But just as it is clear that the evidence establishes that the Invoice Method language was included on Felix Produce's invoices, it is also clear that the evidence demonstrates that Felix Produce did not have a PACA license at the time it did business with New Lots Food and Mr. Choez. See Def's Exh. C. As a consequence, Felix Produce was not able to use the Invoice Method to preserve its PACA trust rights, because PACA provides that "a licensee may use ordinary and usual billing or invoice statements to provide notice of the licensee's intent to preserve *163the trust" - and Felix Produce was not a PACA licensee. See 7 U.S.C. § 499e(c)(4) (emphasis added).
* * *
In sum, the record shows that Alliance has met its burden to establish that the debt owed by Mr. Choez and New Lots Food to Felix Produce was assumed by Alliance. But the record also shows that Alliance has not met its burden to establish that a PACA trust was preserved in favor of Felix Produce pursuant to the Notice Method because, among other reasons, Alliance has not met its burden to establish that Felix Produce substantially complied with each of the requirements of the Notice Method to preserve a PACA trust. And similarly, the record shows that Alliance has not met its burden to establish that a PACA trust was preserved in favor of Felix Produce pursuant to the Invoice Method because, among other reasons, Felix Produce did not have a PACA license at the time it did business with New Lots Food and Mr. Choez, and as a consequence, it could not rely on the Invoice Method to preserve its PACA trust rights.
For these reasons, and based on the entire record, Alliance has not proved, by a preponderance of the evidence, the first element of its Section 523(a)(4) claim, that the debt at issue arose in connection with an express or technical trust.
Whether Alliance Has Shown that Mr. Choez Acted in a Fiduciary Capacity with Respect to the Trust
The second element of Alliance's Section 523(a)(4) claim is that Mr. Choez "acted in a fiduciary capacity with respect to the trust." In re Duncan , 331 B.R. at 77 (citations omitted). That is, Alliance must show, by a preponderance of the evidence, that Mr. Choez acted in a fiduciary capacity with respect to a PACA trust.
For purposes of a nondischargeability claim under Section 523(a)(4), the term "fiduciary capacity" is narrowly construed to include only relationships arising out of express or technical trusts, or statutorily imposed trusts. It does not extend to constructive, implied, or resulting trusts. As noted above, a PACA trust is a "technical trust" for the purposes of Section 523(a)(4).
Alliance argues that Mr. Choez acted in a fiduciary relationship with respect to a PACA trust. Alliance argues that Mr. Choez acknowledged that he was the sole officer, owner, and shareholder of New Lots Food, that he possessed the sole authority to write checks on behalf of New Lots Food, and that he was responsible for distributing sales proceeds.
Here, the record shows that Mr. Choez was the sole officer of New Lots Food and was responsible for operating the Bravo Supermarket business. Mr. Choez testified that he owned New Lots Food:
Q (Mr. Horowitz): Okay. And then thereafter you decided to move back to New York and back maybe 10 years ago, thereabouts, you and you alone started a business or company rather called New Lots Food Corp; right?
A (Mr. Choez): Yes.
Q: Okay. And you attached the trade name to it as Bravo Supermarket?
A: Yes.
Q: Okay. And this business or this company and the business was solely owned by you?
A: Yes.
July 16 Trial Tr. 67:10-20.
Mr. Choez also testified that he was in charge of managing the financial affairs of New Lots Food:
Q (Mr. Horowitz): The business - we'll call it Bravo business or Bravo for -*164business for short, you were the only one who could sign checks?
A (Mr. Choez): Yes.
Q: Okay. And you were the only one who went to the bank to make deposits and withdrawals; right?
A: Yes.
July 16 Trial Tr. 68:1-9.
But here, and as described above, the record also shows that Alliance did not establish that a PACA trust was preserved with respect to the debt at issue. And the term "fiduciary capacity" is narrowly construed to include only relationships arising from express or technical trusts, or statutorily imposed trusts.
For these reasons, and based on the entire record, Alliance has not proved, by a preponderance of the evidence, the second element of its Section 523(a)(4) claim, that Mr. Choez was acting in a fiduciary capacity with respect to an express or technical trust.
Whether Alliance Has Shown that Mr. Choez Committed a Fiduciary Defalcation with Respect to the Trust
The third element of Alliance's Section 523(a)(4) claim is that Mr. Choez committed a fiduciary defalcation with respect to the debt at issue. See In re Duncan , 331 B.R. at 77. That is, Alliance must show, by a preponderance of the evidence, that Mr. Choez committed a defalcation as a fiduciary within the meaning of Section 523(a)(4).
As described above, not every loss compels the conclusion that a fiduciary defalcation has occurred. Rather, for conduct to amount to a fiduciary defalcation, the Supreme Court has specified that the fiduciary must have acted with actual knowledge, with "willful[ ] blind[ness]," or with "bad faith, moral turpitude, or other immoral conduct." Bullock , 569 U.S. at 267-68, 133 S.Ct. 1754. To similar effect, the Second Circuit has held that "defalcation under [ Bankruptcy Code Section] 523(a)(4) requires a showing of conscious misbehavior or extreme recklessness - a showing akin to the showing required for scienter in the securities law context." In re Hyman , 502 F.3d at 68 (citations omitted).
Alliance argues that Mr. Choez committed a defalcation with respect to a PACA trust. It points to Mr. Choez's testimony that he was the sole manager, decision-maker, and bookkeeper of New Lots Food. Alliance also argues that this Court should infer that Mr. Choez was familiar with the requirements of PACA based on his experience in the produce and supermarket industry and his response to Felix Produce's PACA trust claim. Pl's Post Trial Br. at 14-15. And Alliance argues that Mr. Choez violated his fiduciary obligations under PACA by knowingly paying business expenses from sales proceeds, rather than holding those funds in trust for Felix Produce.
Mr. Choez responds that Alliance has not shown that he committed a fiduciary defalcation under Section 523(a)(4). Rather, Mr. Choez states, his testimony demonstrates that Felix Produce was immediately paid cash upon delivery by New Lots Food. Mr. Choez also responds that he faced several obstacles following the opening of New Lots Food, including a delay in its receipt of a license to accept Women Infant and Children benefits, and that this led to lower revenues and eventually, to the default on the Krasdale loan and on payments to other creditors.
And Mr. Choez argues that as a result of the default on the Krasdale loan, he surrendered the Bravo Supermarket business premises and all of its records in October 2008. He responds that Alliance has not come forward with persuasive or credible evidence to show that he had the requisite intent to commit wrongdoing, or *165that he was extremely reckless in his behavior. And Mr. Choez points out that there was no alternate testimony provided at trial to discredit his testimony.
Here, the record includes conflicting evidence as to how Mr. Ceballos and Felix Produce were paid, and whether Mr. Choez knew that Felix Produce was attempting to preserve a PACA trust. For example, Mr. Choez testified that he paid Mr. Ceballos cash on delivery. Specifically, he stated:
Q (Mr. Horowitz): Do you have any actual invoices from Felix which makes up the $30,000 claim that he signed his name or New Lots - or, excuse me, his company's name that you paid him?
A (Mr. Choez): No, he didn't have to.
Q: He didn't have to, because you didn't require him to.
A: Because he wouldn't have left the produce if I wouldn't have paid him. It was a COD account.
July 16 Trial Tr. 72:1-7.
The record also includes evidence in the form of invoices and statements bearing PACA notice language that is consistent with Alliance's argument that Felix Produce was attempting to preserve a PACA trust. As noted above, that language is identical to the form of notice required to preserve a PACA trust under the Invoice Method.
And the record includes Mr. Choez's testimony that he was responsible for paying suppliers and other business expenses. This establishes that Mr. Choez was the individual responsible for the operations of Bravo Supermarket, and was aware that if he and Bravo did not pay its produce suppliers, that that could lead to personal liability for him. He testified:
Q (Mr. Horowitz): Okay, so you understood during the time that you operated Bravos that if you bought produce, and I'm going to use that example - that commodity because that's what's at issue in this case, that you bought produce and you didn't pay the supplier for it, but then you went out and resold the produce to your customers, if you didn't take the money from the customers and give it to the - or pay the produce supplier, that you would be personally liable. Could be personally liable, excuse me.
A (Mr. Choez): Did I have that understanding?
Q: Yes.
A: Yes.
July 17 Trial Tr. 25:23-25. 26:1-9.
The burden is on Alliance to prove by a preponderance of the evidence that Mr. Choez acted with actual knowledge, "willful[ ] blind[ness]," or "bad faith, moral turpitude, or other immoral conduct," and did so as a fiduciary of an express or technical trust, with respect to the debt at issue. Bullock , 569 U.S. at 267-68, 133 S.Ct. 1754. This element of intent is a significant component of liability under Section 523(a)(4), and as noted, the Second Circuit has explained that "defalcation under [ Bankruptcy Code Section] 523(a)(4) requires a showing of conscious misbehavior or extreme recklessness." Hyman , 502 F.3d at 68. And here, as it was in the motion for summary judgment, the record falls short. While Alliance has demonstrated that Mr. Choez was knowledgeable about the grocery business and the obligations that accompany the purchase of perishable agricultural commodities - here, produce - Alliance has not shown by a preponderance of the evidence that Mr. Choez acted with the kind of willful misconduct that is necessary to a fiduciary defalcation.
In addition, as the Court has already found, Alliance has not shown by a preponderance of the evidence that a PACA trust *166was in existence at the time Mr. Choez was doing business with Felix Produce, or that Mr. Choez was acting in a fiduciary capacity with respect to such a trust.
For these reasons, and based on the entire record, Alliance has not proved, by a preponderance of the evidence, the third element of its Section 523(a)(4) claim, that the debt at issue arose from misconduct by Mr. Choez that constituted a "defalcation" within the meaning of bankruptcy law.
Whether Alliance Has Shown that It Is Entitled To Recover Counsel Fees and Costs of Suit
Alliance seeks an award of counsel fees and costs of suit. Courts have found that where PACA trust rights have been preserved, these rights may extend to the recovery of contractual fees and costs. As one court stated, "[u]nder PACA, a party can recover costs other than amounts due for produce 'that are due contractually or otherwise "in connection with" the transaction that is the subject of the PACA trust claim." Spectrum Produce Distrib., Inc. v. Fresh Mktg., Inc. , 2012 WL 2369367, at *2 (D.N.J. June 20, 2012) (internal citations omitted). These costs and expenses "include attorney fees and interest that buyers and sellers have bargained for in their contracts." Id. (quotations and citations omitted).
Alliance points to language in the invoices and statements of Felix Produce that states: "In the event of the enforcement of our trust claims, we will seek to recover reasonable attorney's fees and the costs of recovery." Pl's Post Trial Br. at 15.
Here, the Court has found that Alliance has not proved, by a preponderance of the evidence, that a PACA trust existed, that Mr. Choez acted in a fiduciary capacity with respect to such a trust, or that the debt at issue arose out of a defalcation. For these same reasons, Alliance cannot recover its counsel fees and costs of suit because it did not prevail on its Section 523(a)(4) claim.
For these reasons, and based on the entire record, Alliance has not proved, by a preponderance of the evidence, that it is entitled to recover its counsel fees and costs of suit.
Mr. Choez's Counterclaim
A judgment is void "only in the rare instance where [it] is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard." United Student Aid Funds , 559 U.S. at 271, 130 S.Ct. 1367 (citations omitted). A judgment may also be void if the rendering court had the power to exercise personal jurisdiction over the defendant, but the defendant was not properly served. See 12 James Wm. Moore et al., Moore's Federal Practice ¶ 60.44 (3d ed. 2017).
Accordingly, to prevail on his counterclaim, Mr. Choez must show that this Court has the authority to void the District Court Judgment, and that grounds to void that judgment exist because he was not properly served in the District Court Action.
Whether Mr. Choez Has Shown that He Is Entitled to a Declaratory Judgment Voiding the District Court Action for Lack of Personal Jurisdiction
In his counterclaim, Mr. Choez alleges that he was not served with the summons and complaint in the District Court Action and, as a result, that the District Court did not have a basis to exercise personal jurisdiction over him.
Mr. Choez testified that he did not receive notice of the District Court Action. July 17 Trial Tr. 19:1-6, 19:10-15. He also testified that he left the Bravo Supermarket *167business premises in October 2008, and did not return. July 17 Trial Tr. 16:19-21.
Mr. Choez has sought this relief before. In this Court's decision on Mr. Choez's motion for summary judgment, the Court stated:
As a threshold matter, the Court must determine whether this is the proper forum to consider a claim that seeks to void the District Court Judgment. This Court has previously held that the rendering court is the proper forum to review whether a party has violated a court order. See Geltzer v. Brizinova (In re Brizinova ), 565 B.R. 488, 503 (Bankr. E.D.N.Y. 2017). As this Court has noted, such a "rule makes sense, for several reasons [including that it] promotes clarity and predictability." In re Brizinova , 565 B.R. at 503. For similar reasons, the District Court that entered the District Court Judgment, and not this Court, is the appropriate forum to consider Mr. Choez's challenge to that judgment.
In re Choez , 2017 WL 5604109, at *12.
For substantially the same reasons as stated in In re Choez , here, the Court concludes that the proper forum for the consideration of this claim is the District Court that entered the District Court Judgment, and not this Court.
For these reasons, and based on the entire record, Mr. Choez has not shown that he is entitled to a declaratory judgment voiding the District Court Action for lack of personal jurisdiction.
Conclusion
For the reasons stated herein, and based on the entire record, the Court finds that Alliance has not established any of the elements of its Bankruptcy Code Section 523(a)(4) claim, that a PACA trust existed and was preserved, that Mr. Choez acted in a fiduciary capacity with respect to that trust, or that Mr. Choez's actions amounted to a fiduciary defalcation with respect to that trust. And for these reasons, and based on the entire record, the Court finds that the debt owed by Mr. Choez to Alliance is dischargeable under Bankruptcy Code Section 523. For these same reasons, and based on the entire record, Alliance is not entitled to an award of its counsel fees and costs of suit.
Separately, for the reasons stated herein, and based on the entire record, the Court finds that Mr. Choez has not established that the District Court Judgment is void for lack of personal jurisdiction.
An order and judgment in accordance with this Memorandum Decision after Trial will be entered simultaneously herewith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501798/ | STUART M. BERNSTEIN, United States Bankruptcy Judge
Plaintiff Irving H. Picard (the "Trustee"), the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), filed his proposed Amended Complaint on August 30, 2017 ("PAC")1 (ECF Doc. # 100)2 seeking to recover avoidable transfers totaling approximately $156 million from subsequent transferees BNP Paribas S.A. ("BNP Bank"), BNP Paribas Arbitrage SNC ("BNP Arbitrage"), BNP Paribas Securities Services S.A. ("BNP Securities Services"), and BNP Paribas Bank & Trust (Cayman) Limited ("BNP Cayman," and collectively, the "Defendants"). The Defendants have moved to dismiss the PAC arguing that (i) it was improperly filed without leave of Court, (ii) the Court lacks personal jurisdiction over the Defendants, (iii) the PAC fails to state claims upon which relief can be granted, and (iv) certain claims are time-barred. For reasons outlined below, the motion to dismiss for lack of personal jurisdiction is denied, the filing of the PAC will be treated as a motion by the Trustee for leave to amend his existing complaint, and that motion is granted in part and denied in part.
BACKGROUND
Unless otherwise indicated, the background information is taken from the well-pleaded factual allegations of the PAC and other information the Court may consider in determining whether the pleading is legally sufficient.
A. The Ponzi Scheme3
At all relevant times, Bernard Madoff operated the investment advisory arm of *177BLMIS as a Ponzi scheme. (¶ 36.) Beginning in 1992, Madoff told investors that he employed the "split-strike conversion" strategy ("SSC Strategy"), under which BLMIS purported to purchase a basket of stocks intended to track the S & P 100 Index, and hedged the investment by purchasing put options and selling call options on the S & P 100 Index. (¶¶ 42-45.) In reality, BLMIS never purchased any securities on behalf of its investors and sent monthly statements to investors containing falsified trades typically showing fictitious gains. (¶¶ 40, 41.) All investor deposits were commingled in a JPMorgan Chase Bank account held by BLMIS, and the funds were used to satisfy withdrawals by other investors, benefit Madoff and his family personally, and prop up BLMIS' proprietary trading department. (¶ 40.)
The BLMIS Ponzi scheme collapsed when redemption requests overwhelmed the flow of new investments, (¶ 49), and Madoff was arrested by federal agents for criminal violations of federal securities laws on December 11, 2008 (the "Filing Date"). (¶ 18.) The Securities and Exchange Commission ("SEC") contemporaneously commenced an action in the United States District Court for the Southern District of New York, and that action was consolidated with an application by the Securities Investor Protection Corporation ("SIPC") asserting that BLMIS' customers needed the protections afforded by SIPA. (¶¶ 18, 19.) On December 15, 2008, the District Court granted SIPC's application, appointed the Trustee and his counsel, and removed the SIPA liquidation to this Court. (¶ 20.)
At a plea hearing on March 12, 2009, Madoff pleaded guilty to an eleven count criminal information and admitted that he "operated a Ponzi scheme through the investment advisory side of [BLMIS]." (¶¶ 23, 50.)
B. Defendants
BNP Bank is a corporation organized under the laws of France. (¶ 52.) It provides banking services in seventy-five countries and has maintained a presence in the United States since the late 1800s. (¶ 58.) Currently, BNP Bank has over 10,000 employees and more than 700 retail branches in the United States. (¶ 58.)
BNP Arbitrage and BNP Securities Services, both French entities, are wholly-owned subsidiaries of BNP Bank, (¶¶ 53, 55), and maintain offices in Paris, France and New York, New York. (¶¶ 53, 55, 59.) BNP Cayman is also a wholly owned subsidiary of BNP Bank that is located in and organized under the laws of the Cayman Islands. (¶ 54.)
C. BNP Bank's Introduction to Madoff and the Creation of a Feeder Fund
1. BNP Bank Made Loans to Madoff
BNP Bank's relationship with Madoff began around November 1988 when it provided a $15 million personal line of credit to Madoff, which increased to $40 million by May 1995, and to $75 million by October 1996. As collateral for the loan, Madoff pledged securities it held on behalf of BLMIS customers. (¶ 84.) BNP Bank conducted due diligence in connection with the extension of credit, which included reviewing BLMIS' Financial Operating and Combined Uniform Single ("FOCUS") Reports and audited financials and meeting with Madoff at BLMIS' office. (¶ 85.) Madoff used the loan proceeds to finance and grow the BLMIS Ponzi scheme. (¶ 88.)
*1782. BNP Bank Created and Serviced Oreades
In 1997, BNP Bank partnered with Access International Advisors ("Access") to create Oreades SICAV ("Oreades"), a Luxembourg-incorporated "feeder fund" that invested exclusively with BLMIS. (¶ 89.) BNP Bank, through its subsidiaries purported to provide services to Oreades while Access recruited investors. (¶ 90.)
In January and March 1998, a BNP Bank subsidiary opened two investment accounts at BLMIS for Oreades. (¶ 91.) Two BNP Bank subsidiaries served as administrators of Oreades: BNP Paribas Fund Administration S.A. from 1997 to 2002 and BNP Securities Services from 2002 to 2004. (¶ 92.) The administrators were responsible for processing subscriptions into and redemptions from Oreades and frequently corresponded with BLMIS employees to direct transfers in and out of Oreades' BLMIS accounts. (¶ 94.) The administrators received all of the BLMIS account statements and trade confirmations for Oreades, and were responsible for calculating the fund's monthly net asset value based on those numbers. (¶ 95.)
By 2003, BNP Bank's standard practice was to receive account statements and trade confirmations electronically. In May 2003, BNP Securities Services asked BLMIS to adhere to this policy, but BLMIS refused, and continued to send paper statements and confirmations through the mail. BNP Bank exempted BLMIS from this requirement to maintain the business relationship. (¶ 96.)
From the time of Oreades' formation, BNP Bank and Access hid the fact that BLMIS was serving as Oreades' custodian and investment advisor. (¶ 97.) Oreades represented that a BNP Bank subsidiary served as its official custodian (BGL BNP Paribas from 1997 to 2002 and BNP Securities Services from 2002 to 2004), but in reality, the BNP Bank subsidiary delegated all custodial authority to BLMIS through an undisclosed sub-custodian agreement. (¶¶ 98, 99.) Madoff demanded this arrangement as a precondition to investment, (¶ 99), but did not charge a fee for the custodial services performed by BLMIS. (¶ 100.) This allowed the BNP Bank subsidiaries to charge custodial fees to Oreades investors without performing corresponding services. (¶ 100.)
Similarly, Oreades represented to investors and to Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier ("CSSF"), that a BNP Bank affiliate, Inter Conseil, served as its investment advisor. (¶ 101.) However, Inter Conseil delegated its investment advisory duties to BLMIS in an undisclosed Sub-Advisory and Management Agreement. (¶ 102.) Madoff required the delegation and performed the services free of charge, (¶¶ 102, 105), and Inter Conseil received fees from Oreades investors despite the delegation of duties. (¶ 105.) In addition, BNP Bank's own compliance rules required a "strict separation" between a fund's investment adviser and custodian. (¶ 106; see also ¶¶ 99, 102.) The delegation of custodial and investment advisory duties to BLMIS violated this rule. (¶ 107.)
BNP Bank knew that the delegation to BLMIS of custodial and investment advisory duties violated Luxembourg law. First, only a Luxembourg-regulated entity could act as Oreades' custodian, but BLMIS was not regulated by the CSSF. (¶ 108.) Second, Luxembourg law required that Oreades' investment advisor and custodian be disclosed, but BNP Bank and its affiliates deliberately omitted mention of BLMIS in offering materials. (¶ 109; see also ¶¶ 261-62.) Third, Luxembourg law required the BNP Bank subsidiary purportedly acting as custodian to verify the *179actions of BLMIS as investment advisor, but the subsidiary lacked the ability to verify BLMIS trades. (¶ 110.) Because BLMIS' relationship with Oreades violated Luxembourg law, BNP Bank required that Inter Conseil's management arrangement with BLMIS "must remain 'private' that is, the CSSF ... must remain unaware of it." (¶ 111; see also ¶¶ 261-62.)4
3. BNP Bank Recognized BLMIS' Fraud Risk and Closed Oreades
On July 10, 2003, a senior executive at BNP Securities Services, Lionel Trouvain, reviewed a BNP Bank internal audit and compliance report on Oreades and became concerned "that the risk [to] BNP Paribas is very extensive." (¶ 113.) Trouvain noted that BLMIS' practice of sending account documents via mail was problematic:
[N]o reference is ever made to the method of sending the [trading] deals carried out by 'BLMIS'. As you undoubtedly know, the trades are sent by mail after 7 or 8 days and are then posted after the fact by our settlement department. Market practices are really different today and it would seem that B. Madoff does not ever want to improve its order transmission methods.
In practice [today], orders are sent by fax or via SWIFT by the managers on the day of the deal (along with the broker confirmation if the orders are not pre-matched). They are then coded by the depository bank and the operation is then carried out on the Settlement date (D+1;2;3) according to the markets. It would be appropriate to put this type of order transmission in place between us and B. Madoff because in current practice, we have no opportunity to consider the true validity of the orders .... This is a point that our risk and ethics departments found during their internal audit and I have to contribute a source of improvement.
(¶ 114 (emphasis and ellipsis in PAC); see also ¶¶ 246-49, 253.)
Trouvain also stated that BNP Bank would ultimately be held liable for misrepresenting and omitting the role of BLMIS as Oreades' custodian and investment advisor:
In my opinion, if there is a management problem with [BLMIS], the entire responsibility for management would lie ... in the last resort, with the promoter, namely BNP Paribas ... In the eyes of the CSSF, B. Madoff does not exist.
(¶ 116.) He also inquired about where BLMIS was holding U.S. Treasury Bills on Oreades' behalf. (¶ 117.)
In August 2003, Trouvain and other BNP Bank employees met with Access' management to determine whether it was possible to bring their relationship with BLMIS into compliance with BNP Bank's internal rules. According to the meeting minutes, BLMIS' hidden role as Oreades' custodian and investment advisor was an "unconscionable" violation of BNP Bank's rules and Luxembourg law. BNP Bank wanted "to be released from liability it ha[d] incurred as a 'sponsor' (initiator of the creation) manager, and custodian of the fund." (¶ 118; see also ¶¶ 241-45.)
Communicating through Access, BNP Bank asked Madoff to permit it to disclose BLMIS to the CSSF, but Madoff refused. Access told BNP Bank that Madoff's refusal was based in part on wanting to avoid U.S. regulatory scrutiny for BLMIS' failure to register as an investment advisor. (¶ 119.) One BNP Bank employee warned *180that "if the CSSF asks me about the precise role of Inter Conseil and of BNP in Oreades, I will have to tell the truth." (¶ 120.) Madoff similarly refused BNP Bank's request to permit BNP Securities Services or Access to track BLMIS trading activity in real time. (¶¶ 121, 252.)
By November 2003, BNP Bank was measuring its potential liability as Oreades' sponsor, administrator and custodian "in the event of a default on the part of Madoff." (¶ 122.) Ultimately, BNP Bank decided to shut down Oreades: BNP Securities Services closed the BLMIS accounts in March 2004, and Inter Conseil placed Oreades into liquidation in Luxembourg in May 2004. (¶¶ 123-25.)
D. Others at BNP Bank were Suspicious of Madoff
Paulo Gianferrara, who from 2000 to 2006 served as the Head of Hedge Funds for BNP Paribas Private Wealth in Paris and Geneva, refused to approve transactions involving BLMIS feeder funds for private banking clients. (¶ 128.) According to employees of Fairfield Greenwich Group - an entity that managed certain BLMIS feeder funds - Gianferrara "always had a problem with Madoff" and would "not even consider[ ]" investments in Fairfield's Madoff-related products. (¶ 129.)
Patrick Fauchier of Fauchier Partners - an entity that was involved in a joint venture with a BNP Bank affiliate - told Access in June 2008 that he was concerned that the SEC would not allow BLMIS to continue as a business and found it suspicious that Madoff did not charge customary investment management fees. (¶¶ 131, 133, 134; see also ¶¶ 258-60.) Fauchier also flagged BLMIS' FOCUS Reports in which BLMIS disclosed that it managed only twenty-three investment accounts; Fauchier knew that BLMIS was underreporting that figure. (¶ 135.) The Trustee alleges, upon information and belief, that Fauchier shared his concerns about Madoff to senior officers at BNP Bank. (¶ 136.)
E. BNP Bank Became a Global Leverage Provider to BLMIS Feeder Funds
Despite the circumstances surrounding the closing of Oreades, BNP Bank embarked on a strategy to become a global leverage provider to BLMIS feeder funds and their investors. (¶ 138.) In addition to generating fees for BNP Bank and its subsidiaries, pursuing this business would build BNP Bank's reputation as a leverage provider and allow it to compete with rival bank Société Générale ("SocGen"). It also presented opportunities to cross-sell BNP Bank services to institutional clients. (¶ 139.) Becoming a leverage provider allowed BNP Bank to profit from BLMIS' performance without the risk associated with serving in a fiduciary capacity (as it did with Oreades). (¶¶ 140, 148.)
1. Acquisition of ZCM
In the early 2000s, BNP Bank lacked the infrastructure and personnel necessary to offer credit facilities and structured products at the level of rival banks. (¶ 141.) In 2003, Zurich Financial offered to sell its leverage business unit, Zurich Capital Markets, Inc. ("ZCM"), consisting of sixty employees in New York and a portfolio linked to investment funds. (¶ 142.) In connection with a potential acquisition, BNP Bank conducted due diligence on ZCM's portfolio, including a multi-million dollar credit facility with Santa Barbara Holdings Ltd. ("Santa Barbara") - a fund that was invested solely in BLMIS feeder fund Harley International (Cayman) Limited ("Harley"). (¶ 143.) BNP Bank had a strict policy against transacting with single-manager funds, and Harley was a single-manager *181fund managed by BLMIS. (¶ 144.) BNP Bank nonetheless approved the acquisition of ZCM in July 2003. (¶ 145.)
The ZCM acquisition provided BNP Bank with the infrastructure and personnel necessary to create and market credit facilities and structured products to clients, including BLMIS feeder funds. (¶¶ 146-47.) These transactions were highly lucrative and, according to the Trustee, incentivized BNP Bank to turn a blind eye to Madoff's fraud. (¶ 150.)
SocGen had also considered acquiring ZCM but its diligence revealed obvious risks of fraud associated with Harley, including "impossibl[y]" consistent returns, BLMIS' failure to charge customary management or performance fees, and BLMIS acting as its own custodian. (¶¶ 153-59.) SocGen offered to purchase ZCM's assets excluding the Santa Barbara credit facility, but Zurich Financial refused. Thereafter, SocGen blacklisted BLMIS-related investments. (¶ 161.) According to the Trustee, BNP Bank chose to acquire ZCM despite knowing about SocGen's misgivings concerning Madoff. (¶ 162.)
2. The Defendants Deviated from Standard Diligence Practices to Avoid Confirming Madoff's Fraud
Following the ZCM acquisition, customer demand for leverage and credit on BLMIS-related transactions was high and BNP Bank management was eager to profit from the demand. (¶ 168.) This line of business was handled by the "Fund Derivatives Group" - consisting of employees of BNP Bank, BNP Arbitrage, and non-party BNP Paribas Securities Corp. ("BNP Securities Corp."), (¶ 66), - that created, marketed, and serviced credit facilities and derivative financial instruments such as swaps, notes, and other structured products. Such products offered customers "leverage," thereby creating an opportunity to earn multiples of the returns generated by the underlying referenced asset without large up-front outlays of capital. (¶ 64.) BNP Bank provided billions of dollars in capital to fund the credit facilities and structured products. (¶¶ 4, 67.) BNP Arbitrage created and managed the facilities and products, and BNP Securities Corp. marketed and monitored the facilities and products. (¶ 67.) In addition, BNP Securities Corp. served as the calculation agent, which included calculating the amount that BNP Bank should invest or redeem from a BLMIS feeder fund. (¶ 68.)
Typically, the Fund Derivatives Group's due diligence in connection with an ongoing or potential transaction entailed reviewing all relevant public documents including financial documents, offering memoranda, subscription agreements, account statements, trade confirmations and documents relating to the fund manager's investment strategy. (¶ 169.) When a transaction would result in significant exposure to BNP Bank, it was standard procedure for the due diligence team to conduct on-site visits and memorialize findings in a memorandum. (¶ 170.)
Notwithstanding the diligence procedures, the Fund Derivatives Group's due diligence team lacked authority to reject Madoff-related transactions, (¶¶ 165, 167), and such transactions were pre-approved by senior management at BNP Bank. (¶ 168.) Likewise, senior management instructed the due diligence team not to contact Madoff or anyone from BLMIS to arrange on-site diligence visits. (¶ 174.) The due diligence team did make one on-site visit to BLMIS in March 2008, but did not draft a memorandum to memorialize the visit. (¶ 175.)
The due diligence team also ranked fund managers in a periodic report called the "Heat Map" based on a risk score assigned by the team. For purposes of this report, *182Madoff-related transactions were grouped into a single "Madoff" category regardless of the BLMIS feeder fund involved, and Madoff was always listed at the top of the Heat Map. (¶¶ 171-73.)
Moreover, by taking on billions of Madoff-related deals, the Fund Derivatives Group disregarded BNP Bank's policy against taking on exposure from single-manager trades. (¶ 178.) According to the Trustee, BNP Bank deviated from its standard operating procedures because the Fund Derivatives Group would not have been profitable absent the Madoff-related transactions. (¶¶ 166, 179.)
3. BNP Bank Provides Leverage to BLMIS Feeder Funds
a. Santa Barbara
In February 2004, BNP Bank, through its Fund Derivatives Group, entered into another credit facility with Santa Barbara. (¶ 180.) Trouvain (who had previously raised concerns regarding Oreades) worked on this transaction. (¶ 182.) The credit facility called for BNP Bank to make senior secured loans to Santa Barbara for levered investments with Harley; Harley's BLMIS account served as collateral for the credit facility. In exchange, Santa Barbara paid BNP Bank above-market fees and interest, which, as of 2004, was 170 basis points above LIBOR. (¶ 183.) BNP Arbitrage served as calculation agent, (¶ 185), and BNP Securities Corp. served as collateral agent, (¶ 184), for the credit facility. Under the terms of the credit facility, BNP Bank, BNP Arbitrage and BNP Securities Corp. took control over Harley's BLMIS account so that Harley could not make redemptions absent BNP Bank's consent. (¶ 187.) These BNP entities communicated directly with BLMIS and received and reviewed Harley's BLMIS account statements and trade confirmations. (¶ 186.)
In 2007, BNP Bank entered into an option agreement with HSBC Bank USA, N.A. ("HSBC"), with Harley as the underlying reference fund. The option required HSBC to pay BNP Bank for losses sustained by Harley above a certain fixed percentage of the fund's net asset value. The notional amount of the trade was $70 million, and increased to $90 million in 2008. The Trustee alleges that BNP Bank entered into this transaction to protect itself in the event of BLMIS' failure. (¶ 190.) During negotiations over the option, the head of trading at the Fund Derivatives Group told an HSBC employee that he was unable to reconcile the trading statements BNP Bank had received from BLMIS. (¶ 191.)
Between 2003 and 2008, BNP Bank's relationship with Santa Barbara, Harley and Fix Asset Management (the investment manager of Santa Barbara and Harley) grew substantially, as did the size of the credit facility. By the Filing Date, BNP Arbitrage had received transfers of approximately $975 million of customer property from Harley's BLMIS account. (¶ 192.)
b. Legacy
In July 2004, BNP Bank entered into a $100 million credit facility with Legacy Capital Ltd. ("Legacy"), an investment company that invested exclusively with BLMIS. (¶ 193.) Under the facility, BNP Arbitrage and BNP Securities Corp. served as calculation agent and collateral agent, respectively, and both were authorized to act on BNP Bank's behalf. (¶ 195.) Legacy pledged all of its capital stock to BNP Securities Corp. and granted a security interest in Legacy's BLMIS account. (¶ 196.) In connection with the Legacy credit facility, BNP Bank, BNP Arbitrage, and/or BNP Securities Corp. communicated directly with BLMIS and received and reviewed Legacy's BLMIS account statements *183and trade confirmations. (¶ 197.) In September 2006, the credit facility was increased to a maximum of $120 million. (¶ 198.) BNP Bank, BNP Arbitrage and BNP Securities Corp. maintained the Legacy credit facility through the Filing Date and directed the withdrawal of approximately $175 million of customer property from BLMIS. (¶ 199.)
The PAC also described the circumstances leading to BNP Bank's extension of the Legacy credit facility. In June 1999, Meritage - a sub-fund of Renaissance Technologies Corp. ("Renaissance"), entered into a total return swap through which it received returns equal to those paid on an equivalent amount of the counterparty's own investment with BLMIS via Legacy's BLMIS account. (¶ 201.) In 2003, Renaissance identified red flags at BLMIS analogous to that identified by SocGen in connection with the ZCM acquisition (e.g. , returns not correlated to the S & P 100 Index, nearly impossible market timing, impossible options trading volume, failure to charge customary management fees, failure to use a well-known auditor). (¶¶ 200, 203-05.) As a result, Renaissance directed Meritage to begin unwinding its BLMIS investment, and Legacy began looking for an investor to replace Meritage. (¶ 206.) In 2004, Legacy approached BNP Bank about providing it with a line of credit to replace the Meritage investments. (¶ 207.) BNP Bank performed due diligence on Legacy's BLMIS account receiving information similar to that reviewed by Renaissance and thereafter decided to extend the $100 million credit facility to Legacy in July 2004. (¶¶ 208-09.)
c. Tremont
In August 2005, BNP Bank entered into a $100 million credit facility with Rye Select Broad Market Insurance Portfolio LDC ("Insurance Portfolio Fund"), a BLMIS feeder fund managed by Tremont Group Holdings, Inc. ("Tremont"). (¶ 212.) As collateral for the credit facility, Insurance Portfolio Fund pledged the assets held in its BLMIS account. (¶ 214.) BNP Bank authorized and directed BNP Securities Corp. to act as the collateral agent and calculation agent for the credit facility, and BNP Bank received and reviewed Insurance Portfolio Fund's BLMIS account statements and trade confirmations. (¶¶ 215-16.)
Prior to entering into a credit facility with BNP Bank, Tremont explored a similar facility with the investment bank Dresdner Kleinwort ("Dresdner"). Dresdner raised a variety of concerns about Madoff with Tremont including whether BLMIS segregated its investment accounts, whether an independent third party verified the assets held by BLMIS, how BLMIS was compensated for its role with respect to Tremont's investment, and Madoff's secrecy regarding BLMIS operations. In light of Dresdner's concerns, Tremont decided to pursue a credit facility with BNP Bank instead. (¶ 218.)
d. Option and Swap Agreements with BLMIS Feeder Funds
In December 2005, BNP Bank entered into an option agreement to provide leverage to Equity Trading Fund, Ltd., a fund that invested exclusively in BLMIS feeder fund Equity Trading Portfolio Limited ("Equity Trading"). (¶¶ 219-20.) The agreement contemplated another transaction (the "Equity Trading Option") wherein BNP Bank sold Equity Trading Fund, Ltd. a structured option to leverage Equity Trading's investments with BLMIS. (¶ 221.) As collateral for the Equity Trading Option, BNP Arbitrage and BNP Cayman acquired a direct ownership interest in Equity Trading. (¶ 222.) Pursuant to the Equity Trading Option, BNP Bank, BNP Arbitrage and BNP Cayman received and reviewed Equity Trading's BLMIS account *184statements and trade confirmations. (¶ 223.)
In October 2006, BNP Paribas Securities5 entered into an option agreement to provide leverage to Tremont (Bermuda) Ltd., a fund of funds managed by Tremont that invested with BLMIS. (¶ 224.) Under the agreement, BNP Bank sold Tremont (Bermuda) Ltd. a structured option (the "Tremont Option") to leverage Rye Select Broad Market Portfolio Limited ("Portfolio Limited Fund"), a Tremont-managed BLMIS feeder fund. (¶ 225.) In practical terms, the Tremont Option meant that BNP Bank would provide Tremont (Bermuda) Ltd. with increased returns on its BLMIS investments. (¶ 226.) In January 2007, BNP Bank entered into a swap agreement (the "Tremont Swap") to provide leverage to Tremont Enhanced Market Neutral Fund L.P., a Tremont-controlled fund that invested with BLMIS. (¶ 227.) The Tremont Swap called for a total return swap transaction linked to various Tremont-controlled reference funds, including Rye Select Broad Market Prime Fund L.P. ("Prime Fund"), Rye Select Broad Market Fund, L.P. ("Broad Market Fund"), and Rye Select Broad Market, L.P. ("XL LP") - all funds that invested directly or indirectly with BLMIS. (¶ 228.) Pursuant to the Tremont Option and Tremont Swap, BNP Bank and BNP Securities Corp. received and reviewed Tremont's BLMIS account statements and trade confirmations. (¶ 229.)
For some deals, BNP Bank affiliates helped to shield the involvement of Madoff/BLMIS in the transactions. In December 2007, BNP Bank was negotiating an option agreement administered by HSBC, which referenced a BLMIS feeder fund. HSBC told BNP Securities Corp. to delete any reference to Madoff or BLMIS in the option agreement and BNP Securities Corp. complied. (¶ 263.) Similarly, in September 2008, an Access employee asked a BNP Bank subsidiary - FundQuest - to remove BLMIS references in marketing materials for products invested in BLMIS feeder fund Luxalpha SICAV; FundQuest complied with Access' request. (¶¶ 264-65.)
4. BNP Bank Created Structured Products for Clients Referencing BLMIS Feeder Funds
In addition to providing leverage to BLMIS feeder funds, BNP Bank sold BLMIS-related financial products to its customers touting its "extensive experience" with Madoff. (¶ 232.) In 2006, BNP Bank began providing leverage to clients who invested in BLMIS feeder fund Ascot Partners, L.P. ("Ascot") in exchange for fees and interest payments. Through these leveraged transactions, BNP Cayman redeemed shares and ultimately received transfers of customer property from Ascot. (¶ 233.)
BNP Bank also marketed and sold structured products to clients that referenced other large BLMIS feeder funds. For example, BNP Bank sold three-year term notes that paid note purchasers a return based on the performance of Fairfield Sentry Limited ("Fairfield Sentry") - the largest BLMIS feeder fund. However, BNP Bank structured the notes so that it did not have to pay investors in the event Fairfield Sentry lost more than 30% of its value. (¶¶ 234-39.)
Last, BNP Bank sold shares in BLMIS feeder funds directly to its clients earning fees from both the clients and the funds. (¶ 240.)
F. Red Flags
The PAC also includes allegations that the Defendants were aware of various performance *185impossibilities at BLMIS learned while servicing Oreades and providing leverage to clients. (¶¶ 267-68.) These include that BLMIS achieved returns inconsistent with a fund employing the SSC Strategy (¶¶ 269-84), some of BLMIS' trades were made at prices outside the daily price range for the security (¶¶ 285-88), there were not enough options in the entire market to implement the SSC Strategy for the amount that BLMIS purported to have under management (¶¶ 289-95), BLMIS was misreporting the number of accounts and amount under management (¶¶ 296-303), BLMIS consistently purchased shares below the daily average price and sold shares above the daily average price (¶¶ 304-10), BLMIS reported options trading volumes beyond the entire options volume reported on the Chicago Board Options Exchange for certain days (¶¶ 311-16), BLMIS was secretive about identities of counterparties to its purported over-the-counter options trades, and the volume of such options was implausible (¶¶ 317-21), BLMIS sometimes made profitable trades that were purely speculative and not consistent with the SSC Strategy (¶¶ 322-27), BLMIS settled options trades as much as three days after execution instead of the one-day period customary in the industry (¶¶ 331-35), and certain BLMIS customer statements showed multiple dividends paid from a Fidelity money market fund within a given month even though the fund paid dividends only once per month. (¶¶ 336-39.)
G. The Transfers
The Trustee seeks to recover avoidable transfers from the Defendants as subsequent transferees under section 550(a)(2) of the Bankruptcy Code in the amount of approximately $156 million. (See ¶¶ 423-46.) The subsequent transfers came from two sources: (i) the BLMIS accounts held by four Tremont-managed funds: Prime Fund, Broad Market Fund, Insurance Portfolio Fund, and Portfolio Limited Fund (collectively, the "Tremont Funds") and (ii) the BLMIS account held by Ascot. (See PAC, Ex. B.)
1. Initial Transfers to the Tremont Funds
In a separate adversary proceeding styled Picard v. Tremont Group Holdings, Inc. , Adv. Proc. No. 10-05310 (SMB), the Trustee sought to avoid and recover approximately $2,140,297,364 in initial transfers ("Tremont Initial Transfers") from numerous parties including the Tremont Funds.6 (¶ 343.) On September 22, 2011, the Court approved a settlement under Federal Bankruptcy Rule 9019 that "ensure[d] judgments" against the defendants and "enable[d] the estate to immediately recover $1.025 billion ...." (Bench Memorandum and Order Granting Trustee's Motion for Entry of Order Approving Agreement , dated Sept. 22, 2011 ("Tremont Settlement Order"), at 2 (ECF Adv. Proc. No. 10-05310 Doc. # 38).)
2. Transfers from Ascot
The PAC sought to recover subsequent transfers totaling $57,190,550 from Ascot to the Defendants ("Ascot Subsequent Transfer Claims"), but these claims are now moot. The Trustee had commenced a separate adversary proceeding styled Picard v. Merkin , Adv. Proc. No. 09-01182 (SMB), seeking, inter alia , to avoid and recover $461 million transferred from BLMIS to Ascot within six years of the Filing Date. By order, dated December 10, *1862014 (ECF Adv. Proc. No. 09-01182 Doc. # 251), the Court dismissed the Trustee's avoidance claims against Ascot other than the intentional fraudulent transfer claims made within two years of the Filing Date pursuant to 11 U.S.C. § 548(a)(1)(A). The surviving claims totaled $280 million. See Picard v. Merkin (In re BLMIS ), 515 B.R. 117 (Bankr. S.D.N.Y. 2014).
After the Court took the instant matter under advisement, the remaining parties to the Picard v. Merkin adversary proceeding entered into a settlement pursuant to which Ascot and Gabriel Capital Corporation agreed to pay the Trustee $280 million in satisfaction of all claims. (See Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving Settlement Agreement Between the Trustee and Ascot Partners, L.P., Through Its Receiver, Ralph C. Dawson, Ascot Fund Limited, J. Ezra Merkin, and Gabriel Capital Corporation , dated June 13, 2018 (ECF Adv. Proc. No. 09-01182 Doc. # 450).) The settlement was approved by order dated July 3, 2018 (see ECF Adv. Proc. No. 09-01182 Doc. # 454).
In light of the settlement for the full amount of the Trustee's remaining initial transfer claims against Ascot, the Court issued an Order to Show Cause , dated Aug. 29, 2018 (ECF Doc. # 140) in this adversary proceeding requiring the Trustee to explain why his claims to recover subsequent transfers that were sent from Ascot to BNP Cayman should not be dismissed under the "single satisfaction" rule, 11 U.S.C. § 550(d).7 Thereafter, the Trustee and BNP Cayman stipulated to the dismissal of the Ascot Subsequent Transfer Claims, (see Stipulated Order to Dismiss Claims to Recover the Ascot Transfers from the Amended Complaint , signed Sept. 12, 2018 (ECF Doc. # 145) ), and the Court need not address those claims any further.
H. The Defendants Motion
The Defendants have moved to dismiss the PAC. (See Memorandum of Law in Support of the BNP Paribas Defendants' Motion to Dismiss , dated Oct. 25, 2017 ("BNP Brief ") (ECF Doc. # 107).) They argue that the Trustee improperly filed the PAC without their consent or leave of court, (BNP Brief at 12-13), the safe harbor codified in 11 U.S.C. § 546(e) barred the claims, (id. at 14-16), the Defendants took the subsequent transfers for value, in good faith and without knowledge of the voidability of the initial transfer as set forth in 11 U.S.C. § 550(b)(1), (id. at 16-34), certain of the claims are time-barred under 11 U.S.C. § 550(f), (id. at 34-35), and the Court lacks personal jurisdiction over the Defendants. (Id. at 35-38.)8
The Trustee filed his Memorandum of Law in Opposition to Defendants' Motion to Dismiss the Amended Complaint on December 20, 2017 ("Trustee Brief ") (ECF Doc. # 110) disagreeing with each point made in the BNP Brief . The Defendants filed their Reply Memorandum of Law in Support of the BNP Paribas Defendants' Motion to Dismiss on January 19, 2018 ("Defendants Reply ") (ECF Doc. # 116).
*187DISCUSSION
A. Personal Jurisdiction
As discussed later, the Court is treating the matter before it as a motion by the Trustee for leave to amend his existing complaint. Before addressing that motion, the Court will initially consider the Defendants' contention that the Court lacks personal jurisdiction over them. Although teed up as a motion to dismiss a proposed complaint which has not technically been filed, the Defendants' motion is directed at the allegations in the PAC, and the Court may consider the allegations in the proposed pleading in deciding whether the Court would lack personal jurisdiction over the Defendants should it grant leave to file the PAC. See, e.g. , Meeker v. Ellis , No. 4:08CV04219 (JLH), 2010 WL 749552, at *2 (E.D. Ark. Mar. 2, 2010) (considering jurisdictional allegations in a proposed amended complaint in denying a motion to dismiss under Rule 12(b)(2) ).
To survive a motion to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, the Trustee "must make a prima facie showing that jurisdiction exists." SPV Osus Ltd. v. UBS AG , 882 F.3d 333, 342 (2d Cir. 2018) (quoting Penguin Grp. (USA) Inc. v. Am. Buddha , 609 F.3d 30, 34-35 (2d Cir. 2010) ). A trial court has considerable procedural leeway when addressing a pretrial dismissal motion under Rule 12(b)(2). It may "determine the motion on the basis of affidavits alone; or it may permit discovery in aid of the motion; or it may conduct an evidentiary hearing on the merits of the motion." Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A. , 722 F.3d 81, 84 (2d Cir. 2013) (quoting Marine Midland Bank, N.A. v. Miller , 664 F.2d 899, 904 (2d Cir. 1981) ). Where a court chooses not to conduct an evidentiary hearing on personal jurisdiction, the plaintiff's prima facie "showing may be made through the plaintiff's 'own affidavits and supporting materials, containing an averment of facts that, if credited, would suffice to establish jurisdiction over the defendant.' " S. New Eng. Tel. Co. v. Global NAPs Inc. , 624 F.3d 123, 138 (2d Cir. 2010) (quoting Whitaker v. Am. Telecasting, Inc. , 261 F.3d 196, 208 (2d. Cir. 2001) ); accord In re Braskem S.A. Sec. Litig. , 246 F.Supp.3d 731, 751 (S.D.N.Y. 2017) (prima facie showing to defeat pre-discovery challenge to jurisdiction may be made through plaintiff's affidavits and other materials); Wego Chem. & Mineral Corp. v. Magnablend, Inc. , 945 F.Supp.2d 377, 381 (E.D.N.Y. 2013) (plaintiff may defeat a pre-discovery challenge to jurisdiction "by way of the complaint's allegations, affidavits, and other supporting evidence"). The pleadings and affidavits are to be construed "in the light most favorable to the plaintiffs, resolving all doubts in their favor." Chloé v. Queen Bee of Beverly Hills, LLC , 616 F.3d 158, 163 (2d Cir. 2010) (quoting Porina v. Marward Shipping Co. , 521 F.3d 122, 126 (2d Cir. 2008) ); accord Licci ex rel. Licci v. Lebanese Canadian Bank, SAL , 732 F.3d 161, 167 (2d Cir. 2013).
In order to exercise personal jurisdiction over a defendant, "due process requires a plaintiff to allege (1) that a defendant has certain minimum contacts with the relevant forum, and (2) that the exercise of jurisdiction is reasonable in the circumstances." SPV Osus , 882 F.3d at 343 (quoting O'Neill v. Asat Trust Reg. (In re Terrorist Attacks on Sept. 11, 2011 ), 714 F.3d 659, 673 (2d Cir. 2013) ). In determining reasonableness, a court considers (1) the burden that the exercise of personal jurisdiction will place on the defendant, (2) the interests of the forum state in adjudicating the dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the interstate judicial system's *188interest in obtaining the most efficient resolution of controversies, and (5) the shared interest of the several States in furthering substantive social policies. Asahi Metal Indus. Co., Ltd. v. Superior Court of Cal., Solano Cty. , 480 U.S. 102, 113, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987) ; World-Wide Volkswagen Corp. v. Woodson , 444 U.S. 286, 292, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980). The minimum contacts and the reasonableness requirements are related, and "a court must weigh the relative strengths and weaknesses of each requirement - that is, depending upon the strength of the defendant's contacts with the forum state, the reasonableness component of the constitutional test may have a greater or lesser effect on the outcome of the due process inquiry." Metro. Life Ins. Co. v. Robertson-Ceco Corp. , 84 F.3d 560, 568 (2d Cir.), cert. denied , 519 U.S. 1007, 117 S.Ct. 508, 136 L.Ed.2d 398 (1996) ; see also Burger King Corp. v. Rudzewicz , 471 U.S. 462, 477, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (the "reasonableness" considerations sometimes serve to establish jurisdiction "upon a lesser showing of minimum contact than would otherwise be required"). Nevertheless, it would be a "rare" case where the defendant's minimum contacts with the forum support the exercise of personal jurisdiction but it is unreasonable to force the defendant to defend the action in that forum. See Licci , 732 F.3d at 170 (discussing personal jurisdiction under New York's long-arm statute).
Here, the Trustee asserts that the Court has general jurisdiction over BNP Bank, BNP Arbitrage, and BNP Securities Services (Trustee Brief at 33-34), has specific jurisdiction over all the Defendants (id. at 28-33), and the exercise of personal jurisdiction is reasonable. (Id. at 34-35.)
1. General Jurisdiction
In Daimler AG v. Bauman , the Supreme Court described the "limited set of affiliations" that will subject a defendant to general jurisdiction in a forum:
For an individual, the paradigm forum for the exercise of general jurisdiction is the individual's domicile; for a corporation, it is an equivalent place, one in which the corporation is fairly regarded as at home. With respect to a corporation, the place of incorporation and principal place of business are paradigm bases for general jurisdiction. Those affiliations have the virtue of being unique-that is, each ordinarily indicates only one place-as well as easily ascertainable. These bases afford plaintiffs recourse to at least one clear and certain forum in which a corporate defendant may be sued on any and all claims.
571 U.S. 117, 137, 134 S.Ct. 746, 187 L.Ed.2d 624 (2014) (quotation marks, citations, and alterations omitted); accord id. at 138-39, 134 S.Ct. 746 (the inquiry is "whether [the] corporation's affiliations with the State are so 'continuous and systematic' as to render [it] essentially at home in the forum State") (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown , 564 U.S. 915, 919, 131 S.Ct. 2846, 180 L.Ed.2d 796 (2011) ). Except in an "exceptional" case, a corporate defendant may only be subject to general jurisdiction in its place of incorporation or principal place of business. Brown v. Lockheed Martin Corp. , 814 F.3d 619, 627 (2d Cir. 2016) ; accord Daimler , 571 U.S. at 139 n. 19, 134 S.Ct. 746. It is not enough that a foreign corporation conducts a portion of its business through a branch office located in the forum State. SPV Osus , 882 F.3d at 343 ; Gucci Am., Inc. v. Bank of China , 768 F.3d 122, 135 (2d Cir. 2014).
Although BNP Arbitrage and BNP Securities Services maintain offices in New York, (¶ 59), and BNP Bank has *189over 10,000 employees and more than 700 retail branches in the United States, (¶ 58), they were incorporated in France, (¶¶ 52, 53, 55), and presumably conduct business principally in France. The Trustee does not allege a principal place of business in the United States nor does he argue that this is an "exceptional" case in which the Court should exercise general jurisdiction over a foreign defendant. See Lockheed Martin , 814 F.3d at 628-30 (recognizing that Daimler had made stricter the general jurisdiction standard and ruling that Lockheed Martin was not subject to general jurisdiction in Connecticut despite having had a physical presence for over thirty years, employing between thirty and seventy workers, making $160 million in revenues, and paying Connecticut taxes). Therefore, the Court concludes that the Trustee has not made a prima facie showing that the Court can exercise general jurisdiction over these Defendants.9
2. Specific Jurisdiction
"The inquiry whether a forum State may assert specific jurisdiction over a nonresident defendant focuses on the relationship among the defendant, the forum, and the litigation." Walden v. Fiore , 571 U.S. 277, 283-84, 134 S.Ct. 1115, 188 L.Ed.2d 12 (2014) (quotation marks and citations omitted).10 In Walden , the Supreme Court set forth two related principles for specific jurisdiction. "First, the relationship must arise out of contacts that the 'defendant himself ' creates with the forum State." Id. at 284, 134 S.Ct. 1115 (quoting Burger King , 471 U.S. at 475, 105 S.Ct. 2174 ) (emphasis in original). "Second, our 'minimum contacts' analysis looks to the defendant's contacts with the forum State itself, not the defendant's contacts with persons who reside there." Id. at 285, 134 S.Ct. 1115 ; see also id. ("although physical presence in the forum is not a prerequisite to jurisdiction ... physical entry into the State - either by the defendant in person or through an agent, goods, mail, or some other means - is certainly a relevant contact"). The defendant's "suit-related conduct must create a substantial connection with the forum state," id. at 284, 134 S.Ct. 1115, and "general connections" will not suffice. Bristol-Myers Squibb Co. v. Superior Court of Cal., San Francisco Cty. , --- U.S. ----, 137 S.Ct. 1773, 1781, 198 L.Ed.2d 395 (2017).
*190The Second Circuit has established a sliding scale to determine whether a defendant's in-forum activities are sufficient for the exercise of specific jurisdiction:
Where the defendant has had only limited contacts with the state it may be appropriate to say that he will be subject to suit in that state only if the plaintiff's injury was proximately caused by those contacts. Where the defendant's contacts with the jurisdiction that relate to the cause of action are more substantial, however, it is not unreasonable to say that the defendant is subject to personal jurisdiction even though the acts within the state are not the proximate cause of the plaintiff's injury.
SPV Osus , 882 F.3d at 344 (quoting Chew v. Dietrich , 143 F.3d 24, 29 (2d Cir. 1998) ).
Here, the Trustee's claims are based on 11 U.S.C. § 550(a)(2), which allows him to recover avoidable transfers from subsequent transferees. Therefore, the jurisdictional analysis focuses on the Defendants' U.S. contacts related to the receipt of the fifty-nine subsequent transfers at issue. Each transfer is a separate claim, cf. Metzeler v. Bouchard Transp. Co., Inc. (In re Metzeler ), 66 B.R. 977, 984 (Bankr. S.D.N.Y. 1986) ("Courts have consistently treated preferential transactions as separate and distinct under Rule 15(c).... The same should be true of separate fraudulent transfers.") (citations omitted) ), and the Trustee "must establish the court's jurisdiction with respect to each claim asserted." Charles Schwab Corp. v. Bank of Am. Corp. , 883 F.3d 68, 83 (2d Cir. 2018) (quoting Sunward Elecs., Inc. v. McDonald , 362 F.3d 17, 24 (2d Cir. 2004) ); accord Daniel v. Tootsie Roll Indus., LLC , 17 Civ. 7541 (NRB), 2018 WL 3650015, at *8 (S.D.N.Y. Aug. 1, 2018).
Initially, the subsequent transfers fall into at least two groups. First, the PAC alleges that the leverage and structured products businesses generated by the Fund Derivatives Group accounted for virtually all of the subsequent transfers that are the subject of the Trustee's claims. (¶ 65 ("The fraudulent transfers of customer property received by Defendants were derived from products and investments made possible in large part by the Fund Derivatives Group in New York"), ¶ 408 ("As discussed above, the transfers from the Tremont Funds arise out of levered transactions-credit facilities, swaps, and option agreements with the Tremont Funds-that were created, marketed, operated, and supervised by members of BNP Paribas's Fund Derivatives Group in New York."); see also The Trustee's Proffered Allegations Pertaining to the Extraterritoriality Issue as to the BNP Paribas Defendants , dated June 26, 2015 ("Trustee's Proffer "), at ¶ 83 (ECF Doc. # 64).) Second, the PAC alleges that each of the Defendants were investors that maintained their own accounts with one or more of the Tremont Funds. (See ¶ 393.)
The Trustee has made a prima facie showing of personal jurisdiction with respect to the subsequent transfers at issue. Employees from BNP Bank and BNP Arbitrage comprised the Fund Derivatives Group, (¶ 66), which operated out of New York, (¶¶ 4, 8, 65, 408; Trustee's Proffer ¶¶ 12, 66), and those subsequent transfers arose, for the most part, from the Fund Derivatives Group's New York contacts. Although BNP Securities Services and BNP Cayman were not part of the Fund Derivatives Group, they provided services to that group through their participation in the Securities Services Group. (¶¶ 69-71.) Moreover, the PAC alleges that BNP Securities Services maintained an office in New York, and while the PAC does not allege that BNP Cayman had a New York office, it does allege that the "Defendants *191and [BNP Securities Corp.] also shared the same offices, employees, contact information, and bank accounts relating to BNP Paribas's Madoff business." (¶ 63.) BNP Securities Corp. is a Delaware corporation and a broker-dealer registered with the SEC, and maintains an office located at 787 Seventh Avenue, New York, New York. (Trustee's Proffer ¶ 10.) Furthermore, Bank Cayman represented in a subscription agreement signed in August 2005 with Fairfield Sentry, another BLMIS feeder fund, that its principal place of business was New York. (Declaration of Torello H. Calvani in Support of the Trustee's Opposition to Defendants' Motion to Dismiss Amended Complaint , dated Dec. 20, 2017 ("Calvani Declaration "), Ex. 1, Bates No. BNPSAD0000039 (ECF Doc. # 111).)11 Based on these allegations and additional information provided by the Trustee in opposition to this branch of the motion to dismiss, the Trustee has made a prima facie showing that the Defendants had sufficient minimum contacts with the United States, specifically New York, regarding the services rendered in connection with the Fund Derivatives Group, and any related transfers arose out of those contacts and were the proximate cause of the injuries the Trustee seeks to redress through the PAC.
The Trustee has also made a prima facie showing that the Court has personal jurisdiction over any fraudulent transfer claims resulting from redemptions by the Defendants from their accounts with the Tremont Funds. The Tremont Funds were managed from offices in New York, (¶¶ 386-92, 397-99, 405-06), and in their capacity as investors, the Defendants sent subscription agreements to New York, wired funds in U.S. dollars to New York, sent redemption requests to New York and received redemption payments from a Bank of New York account in New York. (¶¶ 393-95, 407; Trustee's Proffer ¶¶ 72-73, 80).) The redemption and any other payments the Defendants received as direct investors in the Tremont Funds arose from the aforementioned New York contacts and were the proximate cause of the injuries that the Trustee seeks to redress.
The Defendants' principal contrary authority, Hill v. HSBC Bank plc , 207 F.Supp.3d 333 (S.D.N.Y. 2016), is distinguishable. In Hill , former BLMIS customers sued multiple HSBC entities that served as custodians and administrators for BLMIS feeder funds alleging that the HSBC entities aided and abetted the BLMIS Ponzi scheme by facilitating investments into BLMIS feeder funds while ignoring red flags and suspicious conduct indicating fraud at BLMIS. Id. at 336-37. Most of the HSBC entities were foreign, and the plaintiffs alleged that these foreign defendants were subject to specific jurisdiction through their contacts with New York, including the transmission of instructions to BLMIS in New York, the receipt of BLMIS accounts statements and trade confirmations sent from New York, contracting with BLMIS to act as sub-administrator or sub-custodian, the facilitation of the transfer of funds from feeder funds to BLMIS in New York and the transmission of false information to customers around the world. Id. at 337-38.
The foreign defendants asserted that the District Court lacked personal jurisdiction over them under New York's long-arm statute, and the District Court agreed. It *192observed that "[n]one of the business activities allegedly conducted by the Foreign Defendants occurred in New York." Id. at 339. The plaintiffs did not allege that the contracts between the foreign defendants and Madoff were executed in New York. Instead, the complaint alleged that they "communicated with and transmitted information and funds to and from BLMIS in New York," activities which were "incidental" to fulfilling a foreign contract. Id. at 339-40. Furthermore, although the complaint alleged that HSBC Bank plc created and structured financial products and hired KPMG to conduct due diligence on BLMIS, these activities, even if directed at New York residents, were insufficient to establish a transaction of business under N.Y.C.P.L.R. § 302(a)(1) unless supplemented by business transactions occurring in New York. Id. at 340.
In contrast, the PAC alleges that the Fund Derivatives Group operated from New York, and the subsequent transfers were largely the result of those New York activities. (¶ 65.)12 In addition, BNP Securities Services maintained an office in New York, BNP Cayman operated out of the New York office with the same employees as BNP Securities Corp., and BNP Cayman represented that New York was its principal place of business. Both entities provided securities services to the Fund Derivatives Group, and although the PAC does not identify those services in granular detail, the PAC fairly implies that they were rendered in connection with the business of the Fund Derivatives Group, and the subsequent transfers they received in connection with those services arose from their New York contacts. Furthermore, Hill has no bearing on the issue of personal jurisdiction arising from the Defendants' redemptions as investors in the Tremont Funds which arose from their New York contacts with the Tremont Funds.
3. Reasonableness
To avoid jurisdiction on the basis that it would fail to comport with traditional notions of fair play and substantial justice, the defendant must present a "compelling case that the presence of some other considerations would render jurisdiction unreasonable." Burger King , 471 U.S. at 477, 105 S.Ct. 2174 ; accord Metro. Life Ins. , 84 F.3d at 575 ("dismissals resulting from the application of the reasonableness test should be few and far between"). The Defendants do not suggest that the exercise of personal jurisdiction would be unreasonable, and they are represented by capable New York counsel in this Court.
Accordingly, the Defendants' motion to dismiss for lack of personal jurisdiction is denied.
B. Failure to Seek Leave to Amend
The Defendants argue that the PAC was improperly filed without leave of Court or consent as required under Rule 15(a)(2) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rule 7015 of the Federal Rules of Bankruptcy Procedure. (Defendants Brief at 12-13.) The Trustee responds that the Court explicitly granted him leave in SIPC v. BLMIS (In re BLMIS ), No. 08-01789 (SMB), 2016 WL 6900689 (Bankr. S.D.N.Y. Nov. 22, 2016) (" Bankr. Ct. ET Decision "), consolidated appeal docketed , No. 17-2992 (2d Cir. Sept. 27, 2017). (Trustee Brief at 36-37.)
*193Some additional background is necessary to understand the Trustee's contention and the disposition of this issue. The District Court previously withdrew the reference pursuant to 28 U.S.C. § 157(d)13 on several occasions to consider common issues arising out of the over 1,000 avoidance actions commenced by the Trustee. Two decisions issued by District Judge Rakoff are relevant to the question presented. In SIPC v. BLMIS (In re BLMIS ), 513 B.R. 222 (S.D.N.Y. 2014) (" Dist. Ct. ET Decision "), the District Court ruled that 11 U.S.C. § 550(a)(2) does not apply extraterritorially, and bars the Trustee's claims "to the extent that they seek to recover purely foreign transfers." Id. at 232 ; see also id. at 232 n. 4. In SIPC v. BLMIS (In re BLMIS ), 516 B.R. 18 (S.D.N.Y. 2014) (" Good Faith Decision "), the District Court, addressing the question of the transferee's "good faith" under 11 U.S.C. §§ 548(c) and 550(b), ruled that good faith should be determined under a subjective standard, id. at 21-23, and placed the burden of pleading a lack of good faith on the Trustee. Id. at 23-24. Lack of good faith, in the context of these cases, refers to knowledge of Madoff's Ponzi scheme, i.e. , knowledge that BLMIS was not actually trading securities. See SIPC v. BLMIS (In re BLMIS ), No. 12 MC 115 (JSR), 2013 WL 1609154, at *4 (S.D.N.Y. Apr. 15, 2013). Both District Court decisions, however, stopped short of dismissing the Trustee's claims and returned the actions to the Bankruptcy Court for further proceedings consistent with the decisions. Good Faith Decision , 516 B.R. at 24 ; Dist. Ct. ET Decision , 513 B.R. at 232.
Upon return to this Court, and because of the adverse District Court rulings, the Trustee filed a Motion for Leave to Replead Pursuant to Fed. R. Civ. P. 15(a) and Court Order Authorizing Limited Discovery Pursuant to Fed. R. Civ. P. 26(d)(1)14 on August 28, 2014 (ECF Adv. Proc. No. 08-01789 Doc. # 7827) to amend his allegations in various avoidance actions, including this adversary proceeding, to show that (i) the subsequent transfers were domestic and not purely foreign (the "Extraterritoriality Issue"), and (ii) the defendants received the transfers under circumstances sufficient to establish subjective bad faith (the "Good Faith Issue"). After a conference with the parties on September 17, 2014, the Court entered an Order Concerning Further Proceedings on Extraterritoriality Motion and Trustee's Omnibus Motion for Leave to Replead and For Limited Discovery on December 10, 2014 ("Scheduling Order ") (ECF Adv. Proc. No. 08-01789 Doc. # 8800) under which the Court would first resolve the Extraterritoriality Issue before addressing the Good Faith Issue. (See id. , ¶ 14 ("Further proceedings on the Trustee's Motion insofar as it seeks ... leave to amend the complaints ... to add allegations relevant to the good faith issue ... shall be scheduled by the Court following the decision on the Extraterritoriality Motion.").)
This Court resolved the Extraterritoriality Issue in Bankr. Ct. ET Decision . As *194relevant to this adversary proceeding, the Court granted the Trustee's motion to amend his complaint based on proffered allegations that certain Tremont-managed feeder funds operated out of New York, used U.S. bank accounts to send redemptions, and the redeemers (i.e. the subsequent transferee defendants) received the transfers into U.S. bank accounts. Bankr. Ct. ET Decision , 2016 WL 6900689, at *29-30. The Trustee now relies on the Court's ruling in the Bankr. Ct. ET Decision to argue that he was also granted leave to amend his allegations as to the Defendants' lack of good faith. However, the portion of the Trustee's motion seeking to amend based on the Good Faith Issue was expressly deferred pursuant to the Scheduling Order . The parties did not address and the Court did not decide the issue in connection with the Bankr. Ct. ET Decision . Consequently, the Defendants are correct that the Trustee filed his PAC without leave of Court or consent in violation of Federal Civil Rule 15(a)(2).
Although the PAC is a nullity because it was filed without leave, Shanghai Weiyi Int'l Trade Co. Ltd. v. FOCUS 2000 Corp. , No. 15-CV-3533 (CM) (BCM), 2016 WL 5817009, at *3 (S.D.N.Y. Oct. 4, 2016) (report and recommendation); Higgins v. Monsanto Co. , 862 F.Supp. 751, 754 (N.D.N.Y. 1994), the Court will treat the pending motion, though made by the Defendants, as one for leave to file the PAC. As discussed immediately below, the same standard governs a motion for leave to amend and a motion to dismiss for failure to state a claim. Furthermore, no party will be prejudiced because they have extensively briefed and argued the common legal principle that governs both motions.
C. Leave to Amend
1. Standards Governing the Motion
Rule 15(a) of the Federal Rules of Civil Procedure governs motions for leave to amend pleadings. Generally, leave should be freely granted, but the court may deny the motion in instances of undue delay, bad faith, dilatory motive, undue prejudice to the opposing party or futility. Foman v. Davis , 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). The Defendants do not charge the Trustee with bad faith or an improper motive, assert that they were unduly prejudiced or that the Trustee unduly delayed. Instead, they argue that the PAC is futile. (See BNP Brief at 13-40.) "An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)." Lucente v. Int'l Bus. Machines Corp. , 310 F.3d 243, 258 (2d Cir. 2002).
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted); accord Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ; accord Twombly , 550 U.S. at 556, 127 S.Ct. 1955. Determining whether a complaint states a plausible claim is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. The court should assume the veracity of all "well-pleaded factual allegations," and determine whether, together, they plausibly give rise to an entitlement of relief. Id.
In deciding the motion, "courts must consider the complaint in its entirety, *195as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Moreover, a court may consider prior iterations of pleadings containing statements inconsistent with the latest version. See Negrete v. Citibank, N.A. , 237 F.Supp.3d 112, 129 (S.D.N.Y. 2017) ("A party cannot advance one version of the facts in its pleadings, conclude that its interests would be better served by a different version, and amend its pleadings to incorporate that version.") (quoting United States v. McKeon , 738 F.2d 26, 31 (2d Cir. 1984) ) (alterations omitted), appeal docketed , 17-2783 (2d Cir. Sept. 7, 2017).
The PAC incorporates by reference the Complaint in Picard v. Tremont Group Holdings, Inc. , dated Dec. 7, 2010 ("Tremont Complaint ") (ECF Adv. Proc. No. 10-05310 Doc. # 1), in which the Trustee sought to avoid the Tremont Initial Transfers, and the proffered Second Amended Complaint in Picard v. HSBC Bank PLC , dated June 26, 2015 (ECF Adv. Proc. No. 09-01364 Doc. # 399). (See ¶ 343.) The Defendants relied on the Trustee's Complaint , dated December 2, 2010 in Picard v. Oreades SICAV , Adv. Proc. No. 10-05120 (SMB) (the "Oreades Complaint ") (ECF Adv. Proc. No. 10-05120 Doc. # 1) and the Trustee's Proffer in support of their dismissal motion, and the Trustee agreed that the Court may consider both pleadings. (See Tr. at 32:13-33:23.)
2. Claims to Recover Subsequent Transfers
Section 550(a)(2) of the Bankruptcy Code allows the Trustee to recover an avoidable transfer from "any immediate or mediate transferee of" the initial transferee. To plead a subsequent transfer claim, the Trustee must plead that the initial transfer is avoidable, and the defendant is a subsequent transferee of that initial transferee, that is, "that the funds at issue originated with the debtor." Picard v. Legacy Capital Ltd. (In re BLMIS ), 548 B.R. 13, 36 (Bankr. S.D.N.Y. 2016) ; accord Silverman v. K.E.R.U. Realty Corp. (In re Allou Distribs., Inc. ), 379 B.R. 5, 30 (Bankr. E.D.N.Y. 2007). The plaintiff must allege the "necessary vital statistics-the who, when, and how much-" of the purported transfers to establish an entity as a subsequent transferee of the funds. Allou Distribs. , 379 B.R. at 32 ; accord Gowan v. Amaranth LLC (In re Dreier LLP ), 452 B.R. 451, 464 (Bankr. S.D.N.Y. 2011). However, the plaintiff's burden at the pleading stage "does not require dollar-for-dollar accounting" of the exact funds at issue. IBT Int'l, Inc. v. Northern (In re Int'l Admin. Servs., Inc. ), 408 F.3d 689, 708 (11th Cir. 2005) (citations omitted); accord Legacy Capital , 548 B.R. at 36. Federal Civil Rule 9(b) governs the portion of a claim to avoid an initial intentional fraudulent transfer, Sharp Int'l Corp. v. State St. Bank & Trust Co. , (In re Sharp Int'l Corp. ), 403 F.3d 43, 56 (2d Cir. 2005), and Rule 8(a) governs the portion of a claim to recover the subsequent transfer. Legacy Capital , 548 B.R. at 36 (citing cases).
The fraudulent transfer provisions provide an affirmative defense to a good faith purchaser for value. Thus, an initial transferee may defend against or limit his liability to the extent he "takes for value and in good faith." See 11 U.S.C. § 548(c). In a slight variation, Bankruptcy Code § 550(b)(1) limits the Trustee's recovery from a subsequent transferee to the extent the subsequent transferee "[took] for value, ... in good faith, and without *196knowledge of the voidability" of the initial transfer. Once a subsequent transferee meets the three elements of § 550(b)(1), a later subsequent transferee that acted in good faith (and regardless of value or knowledge of avoidability) is fully protected. See 11 U.S.C. § 550(b)(2) ; Coleman v. Home Sav. Assoc. (In re Coleman ), 21 B.R. 832, 836 (Bankr. S.D. Tex. 1982) ; accord 5 RICHARD LEVIN & HENRY J. SOMMER, COLLIER ON BANKRUPTCY ¶ 550.03[1] and [4] (16th ed. 2018).
Ordinarily, the transferee must raise the affirmative defense under both sections 548(c) and 550(b). See Good Faith Decision , 516 B.R. at 24. In addition, an objective, reasonable person test usually applies to determine a transferee's good faith. See Marshall v. Picard (In re BLMIS ), 740 F.3d 81, 90 n. 11 (2d Cir. 2014) ("The presence of 'good faith' depends upon, inter alia , '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.' ") (quoting Christian Bros. High School Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC ), 439 B.R. 284, 310 (S.D.N.Y. 2010) ). As discussed earlier, however, the District Court has placed the burden of pleading a lack of good faith on the Trustee. Good Faith Decision , 516 B.R. at 24 n. 4 ; see also BLMIS , 590 B.R. at 205-06 (discussing District Court BLMIS rulings). In addition, the District Court has ruled that a subjective test governs the good faith inquiry under sections 548(c) and 550(b), Good Faith Decision , 516 B.R. at 23 ; see also Picard v. Avellino , 469 B.R. 408, 412 (S.D.N.Y. 2012) (Lack of objective good faith is not enough "because the securities laws do not ordinarily impose any duty on investors to investigate their brokers, [and] those laws foreclose any interpretation of 'good faith' that creates liability for a negligent failure to so inquire."), and in Legacy Capital , this Court concluded that, given the District Court's treatment of the defenses set forth in sections 548(c) and 550(b)(1) of the Bankruptcy Code, the Trustee must also plead that the subsequent transferee lacked knowledge of the voidability of the initial transfer. Legacy Capital , 548 B.R. at 36.
In summary, the Trustee must plead that (1) the initial transfer is avoidable, and either (2) the subsequent transferee lacked good faith or (3) received the subsequent transfer with knowledge that the initial transfer was avoidable. But even if the subsequent transferee received the transfer in good faith and without knowledge of the avoidability of the initial transfer (and assuming a prior transferee did not take for value), the subsequent transferee must still take for value to prevail on its defense. The District Court has not placed the burden of pleading lack of value on the Trustee, and the transferee is in the better position to identify the value he gave for the subsequent transfer. See Legacy Capital , 548 B.R. at 37. Accordingly, the value component remains the transferee's burden to plead and prove.
a. Avoidability
The PAC did not allege specific facts in support of the avoidability of the Tremont Initial Transfers, but instead, incorporated the Tremont Complaint. The Defendants did not challenge the legal sufficiency of the Tremont Complaint in their initial moving papers. Rather, they asserted that their subsequent transfers were also protected by the safe harbor, 11 U.S.C. § 546(e).15 (See BNP Brief at 15 ("The *197only way the Trustee can escape the application of Section 546(e) here is by pleading with particularity and plausibility that the [Defendants] actually knew of the Madoff Ponzi scheme.") (emphasis in original).)
Their invocation of the safe harbor is only partially correct. By its terms, the safe harbor is a defense to the avoidance of the initial transfer. See 11 U.S.C. § 546(e) ("Notwithstanding [enumerated avoidance powers], the trustee may not avoid a transfer ....) (emphasis added). Hence, a subsequent transferee is protected indirectly to the extent that the initial transfer is not avoidable because of the safe harbor. See SIPC v. BLMIS (In re BLMIS ), 2013 WL 1609154, at *7 (a subsequent transferee may raise the § 546(e) defense even where the initial transferee fails to raise the defense or settles with the trustee). The Trustee does not, however, "avoid" the subsequent transfer; he recovers the value of the avoided initial transfer from the subsequent transferee under 11 U.S.C. § 550(a), and the safe harbor does not refer to the recovery claims under section 550. Moreover, even if the subsequent transferee was unaware of Madoff's Ponzi scheme, it must still prove that it gave value in order to prevail on its defense.
The Defendants did not challenge the legal sufficiency of the Tremont Complaint until their reply, and then only in a half-hearted and conclusory manner. (BNP Reply 4 ("Here, the Trustee incorporates by reference in the Amended Complaint the allegations against the Tremont funds as initial transferees, which plainly fall short of alleging the 'actual knowledge' necessary for the safe harbor not to apply).) This belated argument suffers from two problems. First, a court will not ordinarily consider arguments raised for the first time in the reply brief. McBride v. BIC Consumer Prods. Mfg. Co., Inc. , 583 F.3d 92, 96 (2d Cir. 2009). Second, the Defendants failed to explain why the Tremont Complaint was legally insufficient. The Tremont Complaint spans 135 pages and consists of 467 separately numbered paragraphs. The Defendants did not identify any defects beyond their conclusory statement, and the Court declines their implicit invitation to hunt for them.
Accordingly, the Trustee has adequately pled the avoidability of the Tremont Initial Transfers.
b. Knowledge and Good Faith
As stated, the Trustee must also plead that the Defendants took the subsequent transfers in good faith and without knowledge of the avoidability of the initial transfer. The two concepts represent separate elements under section 550(b), but they are related. To satisfy his burden of pleading a lack of good faith, the Trustee must allege that each Defendant willfully blinded itself to facts suggesting a high probability of fraud at BLMIS. Good Faith Decision , 516 B.R. at 22-23 ; Picard v. Merkin (In re BLMIS ), 563 B.R. 737, 752 (Bankr. S.D.N.Y. 2017). Willful blindness consists of two elements: "(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact." Global-Tech Appliances, Inc. v. SEB S.A. , 563 U.S. 754, 769, 131 S.Ct. 2060, 179 L.Ed.2d 1167 (2011). If a person who is not under an independent duty to investigate *198"nonetheless, intentionally chooses to blind himself to the 'red flags' that suggest a high probability of fraud, his 'willful blindness' to the truth is tantamount to a lack of good faith." Picard v. Katz , 462 B.R. 447, 455 (S.D.N.Y. 2011), abrogated on other grounds by SIPC v. BLMIS , (In re BLMIS ), 513 B.R. 437 (S.D.N.Y. 2014). "Thus, willful blindness connotes strong suspicion but some level of doubt or uncertainty of the existence of a fact and the deliberate failure to acquire actual knowledge of its existence." Merkin , 515 B.R. at 140 (emphasis in original).
To plead that a Defendant knew that it was receiving the proceeds of an avoidable transfer, the Trustee must plausibly allege that the Defendant "possess[ed] knowledge of facts that suggest a transfer may be fraudulent." Banner v. Kassow , 104 F.3d 352, 1996 WL 680760, at *3 (2d Cir. Nov. 22, 1996) (summary order) (quoting Brown v. Third Nat'l Bank (In re Sherman ), 67 F.3d 1348, 1355 (8th Cir. 1995) ). Section 550(b)(1) does not impose a duty to investigate or monitor the chain of transfers that preceded the subsequent transfer, but "[s]ome facts strongly suggest the presence of others; a recipient that closes its eyes to the remaining facts may not deny knowledge." Bonded Fin. Servs., Inc. v. European Am. Bank , 838 F.2d 890, 898 (7th Cir. 1988) (Easterbrook, J.). This standard "essentially defines willful blindness which, the District Court has held, is synonymous with lack of good faith." Legacy Capital , 548 B.R. at 38 ; see also id. at 38-39 (noting that some courts and commentators have suggested that the good faith and knowledge elements of 11 U.S.C. § 550(b)(1) are one and the same).
Here, too, the parties have not identified a distinction between the two elements of § 550(b)(1). Therefore, the Court will examine whether the Trustee adequately alleged that the Defendants willfully blinded themselves to Madoff's Ponzi scheme, i.e. , that BLMIS was not actually trading securities.
i. First Element: High Probability of Fraud
The Trustee contends that the Defendants were aware of the high probability that BLMIS was not actually trading securities based on so-called red flags, the closing of the Oreades fund because of concerns about Madoff, and information they learned and warnings they received from others. The Court addresses these "triggers" below, but in the end, they do not imply and the Trustee fails to plausibly plead that the Defendants subjectively believed there was a high probability that BLMIS was a Ponzi scheme.
Red Flags
The Trustee alleges that the Defendants became aware of the numerous red flags summarized earlier. (See generally ¶¶ 267-339.) The Court has previously rejected the Trustee's attempt to plead, in hindsight, a defendant's subjective knowledge by showing trading impossibilities in BLMIS account statements. See Legacy Capital , 548 B.R. at 33-34 ("Hindsight is infallible, but connecting the dots in real time may require clairvoyance. In many cases, it requires a regular comparison of information in BLMIS generated trade confirmations and monthly account reports with market information. Even if the comparison is made, many red flags are no more than pale pink especially when they crop up infrequently over a long period."). The Court also observed that the "red flag" theory of scienter has been rejected in Madoff-related securities fraud litigation by numerous courts in the Second Circuit. Id. (listing cases). Instead, the existence of the red flags supports the more compelling inference that Madoff fooled the Defendants as he did individual investors, financial *199institutions and the regulators. In re Beacon Assocs. Litig. , 745 F.Supp.2d 386, 402 (S.D.N.Y. 2010) ("The SEC and FINRA failed to catch Madoff's fraud."); SEC v. Cohmad Sec. Corp. , No. 09 Civ. 5680(LLS), 2010 WL 363844, at *2 (S.D.N.Y. Feb. 2, 2010) ("[T]he complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions, and regulators."). The Trustee pleads the same red flags in the PAC, (see, e.g. , ¶ 284 (returns of BLMIS feeder funds were too consistent), ¶ 286 (Defendants received trade confirmations for BLMIS feeder funds with prices above the daily high or below the daily low), ¶ 305 (BLMIS timed trades too consistently), ¶ 314 (BLMIS option volumes were too high), ¶ 322 (BLMIS made trades that were inconsistent with the SSC Strategy) ), and for the same reasons, the Trustee's "red flag" allegations do not support an inference that the Defendants subjectively believed there was a high probability that BLMIS was not actually trading securities.
Servicing and Shutting Down Oreades
The Trustee alleges that the way certain Defendants serviced and ultimately closed Oreades supports an inference that they knew that there was a high probability of fraud at BLMIS. Some of the Defendants' practices with respect to Oreades were undoubtedly questionable. They include representing that BNP Securities Services was Oreades' custodian and receiving fees while delegating those duties to BLMIS, (¶¶ 97-100), allowing BLMIS to act as Oreades' custodian and investment adviser in violation of BNP Bank's "strict separation" rule, (¶ 106), and Luxembourg law, and failing to disclose that BLMIS served as Oreades' investment advisor. (¶¶ 108-111.) Although these allegations raise questions about the propriety of certain of Defendants' actions in servicing Oreades, and imply that they were willing to overlook legal and regulatory violations to make more money, they do not support the inference that those Defendants believed there was a high probability that BLMIS was not actually trading securities on behalf of Oreades and its investors.
The Trustee's allegations relating to Oreades center on the aforementioned email authored by Trouvain, a senior officer at BNP Securities Services, who expressed concern about the antiquated methods of communication used by BLMIS for sending trade documentation. Truncating that email, the PAC attempts to imply that Trouvain thought BLMIS was not actually making the trades it was reporting:
It would be appropriate to put this type of order transmission in place between us and B. Madoff because in current practice, we have no opportunity to consider the true validity of the orders .... This is a point that our risk and ethics departments found during their internal audit and I have to contribute a source of improvement.
(¶ 114 (emphasis in original).) The Trustee argues that the emphasized portion of the email shows that Trouvain questioned whether BLMIS was actually engaged in trading securities. (Trustee Brief at 9.)
The omitted portion of the email indicated by the ellipsis appeared in the Trustee's 2010 Oreades Complaint and is supplied in italics below. It clearly shows that Trouvain did not question whether BLMIS was actually trading securities - he was satisfied that it was - and instead, pointed out that the lack of real-time trading information made it difficult for auditors to determine how to allocate the BLMIS trades among BLMIS' clients, which included Oreades:
It would be appropriate to put this type of order transmission in place between *200us and B. Madoff because in current practice, we have no opportunity to consider the true validity of the orders. As Broker/Dealer, B. Madoff was audited and it seems that everything is correctly posted but since there is no B. Madoff management company, it is surely very difficult for the auditors to verify that all the deals carried out on behalf of the clients of B. Madoff are correctly indexed to these same clients . This is a point that our risk and ethics departments found during their internal audit and I have to contribute a source of improvement.
(Oreades Complaint ¶ 56 (emphasis added and omitted from a separate portion).)
The Trustee also asks the Court to infer that BNP Bank and BNP Securities Services subjectively believed that BLMIS was not trading securities based on the circumstances surrounding the closing of Oreades. According to the Trustee's counsel, "[y]ou don't [shut down a successful feeder fund] because you have concerns that ... the bookkeeping isn't being adequately done." (Tr. at 39:1-3.) However, Trouvain's July 2003 email confirmed that Madoff "was audited and it seems that everything was correctly posted." In addition, BLMIS and its auditors confirmed to Trouvain one month later that all securities positions had been segregated. (¶ 59.)
The Defendants closed the Oreades fund nine months later in May 2004, and the PAC does not allege any information that came to the Defendants' attention during that period that turned them from believers to non-believers. The more plausible inference is that the Defendants shut down the Oreades fund because of the risks associated with using the unregistered BLMIS as a sub-custodian and investment advisor in violation of Luxembourg law, (¶¶ 116, 118, 122, 123), questions regarding the location of the U.S. Treasury securities held by BLMIS, (¶ 117), and Madoff's refusal to allow BNP Bank to confirm the trades in real time or disclose his role to the CSSF because BLMIS was not registered as an investment adviser in the United States and wanted to avoid regulatory scrutiny. (¶¶ 119, 121.)
Concerns of Third Parties Regarding BLMIS
The PAC alleges or implies that various third parties expressed concern to one or more of the Defendants about BLMIS or refused to do business with BLMIS or any fund that invested with BLMIS.
First, rival bank SocGen (like BNP Bank) considered purchasing ZCM but was unwilling to take on the credit facility to BLMIS feeder fund Santa Barbara because BLMIS' returns were impossibly consistent, BLMIS failed to charge customary investment management fees and BLMIS acted as its own custodian. (¶¶ 153-61.) The Trustee alleges that a former ZCM employee told BNP Bank executives about SocGen's concerns, (¶ 162), but these concerns involved three of the red flags that were generally known. In addition, a Tremont employee confirmed SocGen's reluctance to do Madoff-related financing to a member of BNP Bank's Fund Derivatives Group, (¶ 162), but the PAC does not indicate what he said or the reason for its reluctance.
Second, Mr. Fauchier, who was involved in a joint venture with a BNP Bank affiliate, became suspicious about Madoff because BLMIS did not charge investment management fees and underreported the number of managed accounts in its FOCUS Reports. Fauchier refused to invest with BLMIS or BLMIS feeder funds and questioned whether the SEC would allow BLMIS to continue as a business. (¶¶ 131-35.) The PAC then alleges "[u]pon information and belief, as a member of BNP Paribas's Asset Management Group, Fauchier *201Partners shared its knowledge that Madoff was illegitimate, as well as its prohibitions against investing with Madoff, with other senior officials at BNP Paribas." (¶ 136.) The PAC does not allege the basis for the Trustee's belief.16
Third, the PAC alleges that BNP Bank extended a $100 million credit facility to Legacy because Renaissance, upon identifying multiple red flags associated with BLMIS, decided to terminate its Legacy investment. (¶¶ 200, 203-05.) The PAC does not allege that the Defendants were privy to the diligence performed by Renaissance or the red flags it identified. In fact, the Trustee represented in connection with the motion to dismiss the Legacy complaint that the Renaissance Report was never shared with BNP Securities Corp., the only BNP defendant in that case. (Memorandum of Law in Opposition to Defendants' Motions to Dismiss the Amended Complaint , dated Aug. 27, 2015, at 32 ("Neither the Renaissance Proposal nor the Meritage Oversight Committee's subsequent findings were disclosed to BNP when Legacy sought to secure its funding.") (ECF Adv. Pro. No. 10-05286 Doc. # 122).)
Fourth, the PAC describes how Dresdner raised a variety of concerns about Madoff with Tremont, (¶ 218), but the Trustee does not allege that these concerns were communicated to the Defendants.
Fifth, the PAC alleges that the head of hedge funds at BNP Paribas Private Wealth, Mr. Gianferrara, would not approve Madoff-related investments for his private banking clients, (¶ 128), "always had a problem with Madoff," and "would 'not even consider[ ]' investments in FGG's Madoff-related funds." (¶ 129.) The PAC does not, however, identify the problems or imply that Mr. Gianferrara believed that BLMIS was not trading securities.
Sixth, the Trustee alleges that in December 2007, HSBC told non-party BNP Securities Corp. to delete any reference to Madoff and BLMIS in an option agreement, and BNP Securities Corp. complied, (¶ 263), and in September 2008, an Access representative told BNP Bank subsidiary FundQuest to remove any references to Madoff, and FundQuest "deleted all references to Madoff and deliberately destroyed FundQuest's old marketing materials." (¶ 264.) Access stressed that Madoff's role in Luxalpha, another foreign feeder fund, was "very sensitive," and wanted assurances, which FundQuest gave, that no one would be able to find any traces of Madoff in the files or on the internet. (¶ 265.) As in many of the prior instances just discussed, the PAC does not identify the concerns with disclosing Madoff's connection with the fund or option agreement at issue, whether the non-debtor affiliates communicated these concerns to the Defendants or, for that matter, whether the Defendants had any connection to the two transactions.
Third-party concerns that are actually communicated to a defendant may be relevant to the defendant's knowledge. See Merkin , 563 B.R. at 749. However, the "warnings" identified by the Trustee amount, in most cases, to pleading by innuendo.17 Typically, they refer to a third-party *202"concern," sometimes unidentified, with Madoff that may or may not have been conveyed to the Defendants and as to which the Trustee asks the Court to infer that the Defendants were aware of the concern. But even if these concerns raised a suspicion that Madoff might be engaged in fraudulent activities, they did not imply a subjective belief in the high probability that Madoff was operating a Ponzi scheme, or was not actually trading securities, or that the trades reported in the monthly customer statements were fictitious.
This brings me to the ultimate question - does the PAC allege a plausible claim, i.e. , does it make sense, that the Defendants would have done what the PAC says they did if they subjectively believed that there was a high probability that BLMIS was not trading securities, and the trades it was reporting to its customers, including the Defendants' transaction counterparties, were fictitious? For the reasons that follow, it does not.
The Implausibility of the Trustee's Theory of the Case
The crux of the Trustee's argument is that the Defendants engaged in the leverage business while entertaining a belief that there was a high probability that BLMIS was not actually trading securities, the reported BLMIS trades were fictitious and their collateral was therefore fictitious, and their obligors' sole assets, at least in the case of feeder funds fully invested with BLMIS, were non-existent. The reason: the Defendants wanted to earn fees, "to establish their reputation as a leverage provider in a highly-competitive market, to grow the brand of BNP Paribas's Fund Derivatives Group, to compete with its biggest rival, SocGen, and to cross-sell services to BNP Paribas's institutional clients." (¶ 139.) In other words, BNP Bank made billions of dollars of risky and possibly uncollectible loans to those investing with BLMIS or BLMIS feeder funds in order to make tens of millions of dollars in fees and build its profile.
In Buchwald Capital Advisors LLC v. JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc. ), 480 B.R. 480 (S.D.N.Y. 2012), aff'd , 541 F. App'x 55 (2d Cir. 2013), District Judge Sullivan characterized a near identical argument as "nonsensical" and "bordering on the absurd." Id. at 489. There, the defendant banks (the "Banks") made prepetition secured loans to two entities that operated a jewelry business (the "Debtors"). Id. at 483-84. The Debtors then allegedly transferred the loan proceeds to entities unaffiliated with the Debtors but affiliated with and owned and controlled by the Debtors' owners, the Fortgangs (the "Affiliates"). Id. at 484. Thus, at the end of the day, the Debtors were left with encumbered assets but no loan proceeds.
After the Debtors filed chapter 11 petitions, the unsecured creditors committee commenced an action to avoid the Banks' liens as fraudulent transfers. Id. at 485. The committee sought to collapse the first leg of the transaction (the Banks' loans to the Debtors) with the second leg (the Debtors' transfer of the loan proceeds to the Affiliates) under the collapsing principles discussed in HBE Leasing Corp. v. Frank , 48 F.3d 623 (2d Cir. 1995), contending that the Banks knew or should have known that the loans were part of a fraudulent scheme by which the Debtors would transfer the loan proceeds to the Affiliates.
*20318 According to the plaintiff, the Banks were aware of the Debtors' poor financial condition, the transfers to the Affiliates, the Affiliates' lack of any relationship to the Debtors and the poor loan documentation. Id. at 488-89. They nevertheless made loans to insolvent Debtors, knowing that the Debtors would thereafter transfer the loan proceeds to unaffiliated entities, to raise their profiles and earn commissions.
The District Court rejected the plaintiff's theory observing that it "requires an inference that is highly implausible, bordering on the absurd." Id. at 489.
In essence, [the plaintiff] alleges that the Banks took the massive risk of continuing their lending relationships with the [Debtors and Affiliates] on the speculative hope that there may be sufficient liquidity in the 'Fabrikant Empire' ... as a whole to enable the Banks to obtain repayment through personal guarantees and other pressure. Such an assertion would be nonsensical if the Banks were in fact aware that Debtors and the Affiliates had to use the same dollars to repay separate obligations. Put simply, drawing all inferences in favor of the [plaintiff], it is difficult to see what benefit the Banks could hope to obtain by lending ever-larger amounts of money to failing companies. The [complaint's] wholly conclusory allegations that the Banks were clouded in judgment due to lavish commissions is equally implausible, since the loss of principal would have far outweighed the commissions earned on the loans[.]
Id. (record citations and corresponding quotation marks omitted) (emphasis added).
The scheme on which the PAC is based is equally implausible. According to the PAC, BNP Bank provided Madoff with a personal line of credit of $75 million, secured by Madoff's pledge of the securities held on behalf of BLMIS customers. (¶ 84.) It extended credit to Santa Barbara in an undisclosed amount to invest in Harley, another BLMIS feeder fund, and collateralized the loan with Harley's BLMIS account. (¶ 183.) It loaned $120 million to Legacy, an entity that invested exclusively with BLMIS, and collateralized that loan with a pledge of Legacy's BLMIS account. (¶¶ 193-98.) It even made a direct loan to Tremont's Insurance Portfolio Fund in the sum of $100 million, and collateralized that loan with a pledge of the assets held in its BLMIS account. (¶¶ 212, 214.) The PAC refers with less detail to many similar transactions by which BNP Bank loaned money to a counterparty for the purpose of investing with BLMIS or a BLMIS feeder fund, and took a pledge of its borrower's account with BLMIS or the BLMIS feeder fund as collateral to secure repayment.
The Defendants' ability to collect on whatever leverage BNP Bank extended to direct investors in BLMIS or investors in BLMIS feeder funds ultimately depended on the value of the BLMIS investments. If BLMIS was a Ponzi scheme, the securities listed in the BLMIS customer statements were non-existent and BNP Bank's collateral was as worthless as its borrowers' investments in BLMIS or a BLMIS feeder fund. According to the PAC, BNP Bank nonetheless engaged in billions of dollars of risky transactions, including loans and extensions of credit that ultimately depended on the value of BLMIS accounts, to earn "tens of millions of dollars in fees and interest payments," (¶ 64), and raise BNP Bank's position as a world leader in *204the fast-moving derivatives market. (¶ 151.) This theory is as preposterous as the scheme alleged by the plaintiff in Fabrikant , and it is implausible to suggest that the Defendants would make loans or engage in the transactions described in the PAC if they subjectively believed that there was a high probability that BLMIS was not actually trading securities.19
Accordingly, the PAC fails to plausibly allege that the Defendants subjectively believed there was a high probability that BLMIS was not actually trading securities and was, in fact, a Ponzi scheme.
ii. Second Element: Turning a Blind Eye
Since the Court has concluded that the Trustee failed to plead that the Defendants were highly suspicious of BLMIS fraud, it need not address whether the Defendants took deliberate actions to avoid confirming that fraud. But assuming that the Trustee adequately pleaded the knowledge prong of the willful blindness test, he failed to plead that the Defendants turned a blind eye.
The Trustee's pleadings are replete with allegations that the Defendants performed due diligence when dealing with Madoff, BLMIS, BLMIS feeder funds or BLMIS-related securities. BNP Bank performed due diligence on Madoff and BLMIS as early as 1988 and into the mid-1990s when it extended a personal line of credit to Madoff and accepted BLMIS customer securities as collateral. (¶¶ 84-85.) BNP Bank also conducted due diligence of ZCM's portfolio, including the sizeable credit facility with BLMIS feeder fund Santa Barbara, in connection with the acquisition of ZCM in 2003. (¶¶ 143, 163.) After the acquisition, the Defendants continued to perform due diligence when transactions involved BLMIS, (¶ 83 (the Fund Derivatives Group and BNP Bank's "Group Risk Management" department conducted due diligence on transactions involving BLMIS feeder funds); ¶ 208 (BNP Bank conducted due diligence on Legacy's BLMIS account when entering into $100 million credit facility with Legacy); ¶ 230 (the head of the Fund Derivatives Group represented to BNP Bank's risk management department that it would conduct due diligence on BLMIS and BLMIS feeder funds) ), and made an on-site diligence visit to BLMIS in March 2008. (¶ 175.).
The Trustee's Proffer also includes several allegations relating to the Defendants' due diligence of BLMIS and Madoff. It alleges that the Defendants "conducted initial and ongoing due diligence on BLMIS and BLMIS feeder funds," (Trustee's Proffer ¶ 13), "[a]s the collateral agent, BNP Securities Corp. conducted due diligence, monitored the [Santa Barbara] facility, and provided operational support to BNP, and as the calculation agent BNP Securities Corp. calculated the facility's interest rates, fees, and loan-to-value ratio," (id. ¶ 61), BNP Securities Corp. "served as the calculation agent for the Tremont credit facility and ... as the collateral agent for the Tremont credit facility ... was responsible for conducting due diligence, monitoring the facility, and providing operational support to BNP," (id. ¶ 86), and requested that the Kingate Funds, large BLMIS
*205feeder funds, email all due diligence materials to BNP. (Id. ¶ 145.)
In addition, the Oreades Complaint detailed how Trouvain followed-up with BLMIS after he expressed concerns in July 2003. On August 7, 2003, Trouvain sent a fax attaching a letter written by his colleague to BLMIS requesting periodic verification of the assets in Oreades' BLMIS accounts:
The current operational flow provides a monthly statement of trading activity and positions sent via fax and post. This process has been reviewed by the Bank's internal and external auditors and is not considered to be compliant with our requirements under Luxembourg Law, as it does not constitute an independent verification.
We are therefore seeking from yourselves a method whereby a periodic independent verification of the Fund's assets and its two underlying accounts can be conducted and confirmed to Luxembourg in order to allow [BNP Securities Services] to discharge its fiduciary function. Were this verification to be proved by your auditors, Friehling and Horowitz, the information can be relied upon by both the Fund's auditors KPMG and our internal auditors.
(Oreades Complaint ¶ 57 (emphasis in original and emphasis omitted from other portions).)
Frank DiPascali of BLMIS responded to Trouvain on August 12, 2003. He assured Trouvain that as of June 2002 (when BNP Securities Services became Oreades' administrator and custodian), "all security positions ... have been segregated for the exclusive benefit of [BNP Securities Services]." (Id. ¶ 58.) BLMIS' auditor, Friehling & Horowitz ("F & H"), also wrote back to Trouvain on August 21, 2003 providing an independent verification of the assets in Oreades' BLMIS accounts:
As Independent Auditors for [BLMIS], we have verified and hereby confirm to you that on May 31, 2003 the security positions stated on Appendix 1 and Appendix 2 (please see attached) were held in segregated accounts for the exclusive benefit of [BNP Securities Services].
...
We further confirm that we are independent with respect to [BLMIS], [BNP Securities Services] and their affiliates under requirements of A.I.C.P.A.
(Id. ¶ 59.)20
Rather than turn a blind eye, the above correspondence and other allegations show that the Defendants engaged in ongoing due diligence and received repeated confirmations that the transactions were real. Furthermore, while the Trustee alleges that the Fund Derivatives Group made exceptions to its typical due diligence practices for BLMIS-related transactions, (¶¶ 165, 167, 168, 171-74, 178), these allegations do not undercut the affirmative allegations of due diligence. In short, and not surprisingly, the Defendants did not ignore their BLMIS exposure; the likelihood of repayment of the Defendants' loans and *206credit facilities depended on the value of their counterparties' BLMIS assets.
c. Value
Although the Trustee has failed to plead the Defendants' lack of good faith or knowledge that the initial transfers were avoidable, the Defendants must still demonstrate that they gave value for the subsequent transfers to prevail on their defense under section 550(b)(1).21 The "value" that a subsequent transferee must provide is "merely consideration sufficient to support a simple contract, analogous to the 'value' required under state law to achieve the status of a bona fide purchaser for value." Legacy Capital , 548 B.R. at 37 (citation omitted); accord Enron Corp. v. Ave. Special Situations Fund II, LP (In re Enron Corp. ), 333 B.R. 205, 236 (Bankr. S.D.N.Y. 2005). In addition, the "value" element under section 550(b)(1) looks to what the transferee gave up rather than what the transferor received. Bonded Fin. Servs. , 838 F.2d at 897 ; Genova v. Gottlieb (In re Orange Cty. Sanitation, Inc. ), 221 B.R. 323, 328 (Bankr. S.D.N.Y. 1997).
Even where the pleading burden rests with the defendant, the Court may dismiss for failure to state a claim when the defense is apparent on the face of the complaint. Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP , 322 F.3d 147, 158 (2d Cir. 2003) ; accord Pani v. Empire Blue Cross Blue Shield , 152 F.3d 67, 74 (2d Cir. 1998), cert. denied , 525 U.S. 1103, 119 S.Ct. 868, 142 L.Ed.2d 770 (1999). The Defendants assert, (BNP Brief at 33-34; BNP Reply at 15-16), that they provided value because they received subsequent transfers in exchange for the redemption of BLMIS feeder fund shares. See Redmond v. Brooke Holdings, Inc. (In re Brooke Corp. ), 515 B.R. 632, 642 (Bankr. D. Kan. 2014) (redemption of stock could provide value); CLC Creditors' Grantor Trust v. Howard Sav. Bank (In re Commercial Loan Corp. ), 396 B.R. 730, 744 (Bankr. N.D. Ill. 2008) ("stock was 'value' because it constituted consideration sufficient to support a simple contract"). The Trustee counters, (Trustee Brief at 27), that subsequent transfers were not for value because they were distributions made to the Defendants as holders of equity in the BLMIS feeder funds. See Boyer v. Crown Stock Distrib., Inc. , 587 F.3d 787, 796 (7th Cir. 2009) (agreeing with the bankruptcy court below that equity distributions to shareholders were not for value); Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Grp., Inc. ), 916 F.2d 528, 540 (9th Cir. 1990) (distributions to limited partners on account of equity interests were not for value).
The PAC identifies fifty-nine subsequent transfers to the Defendants. (PAC, Ex. E, F, H, I.) For the most part, the PAC alleges that the subsequent transfers related to leverage transactions in which the Defendants made loans, extended credit or provided structured products, or rendered support services in connection with the leverage business. However, the PAC also alleges that the Defendants were investors in the Tremont Funds in their own right, and the Trustee provided evidence in connection with the Defendants' jurisdictional objection that BNP Cayman requested redemptions from its own BLMIS account.
*207Each subsequent transfer must be judged separately to determine whether the Defendant gave value, and that determination cannot be made from the four corners of the PAC or the other pleadings that the Court has previously considered.
3. Statute of Limitations
Claims to recover subsequent transfers must be commenced no later than the earlier of one year after the initial transfer is avoided or the date that the case is closed or dismissed. 11 U.S.C. § 550(f). A settlement of an avoidance claim represents finality and triggers the one-year period set forth in § 550(f). SIPC v. BLMIS(In re BLMIS) , 501 B.R. 26, 32 (S.D.N.Y. 2013), denying motion to amend , No. 12 MC 115 (JSR), 2014 WL 465360 (S.D.N.Y. Jan. 14, 2014) ; Picard v. Bureau of Labor Ins.(In re BLMIS) , 480 B.R. 501, 522 (Bankr. S.D.N.Y. 2012). The Court approved the Trustee's settlement with the Tremont Funds on September 22, 2011, and the limitations period set forth in section 550(f) expired on September 22, 2012. An amendment filed after the applicable statute of limitations has run asserting additional claims that do not relate back to the date of an earlier timely pleading is futile. See Rodriguez v. City of N. Y. , 10-CIV-1849, 2011 WL 4344057, at *6 (S.D.N.Y. Sept. 7, 2011).
While the Trustee timely commenced this adversary proceeding to recover, inter alia , the value of certain Tremont Initial Transfers from the Defendants, the PAC was filed almost five years after the expiration of the statute of limitations. It added claims under § 550(a)(2) to recover the following forty-one additional subsequent transfers (collectively, the "New Subsequent Transfer Claims") that were not included in the original Complaint , dated May 4, 2012 ("Original Complaint ") (ECF Doc. # 1):
*208Transferor Transferee Date of Amount ($) PAC Transfer Ex. Insurance Portfolio Fund BNP Arbitrage 12/19/08 32,865 F Insurance Portfolio Fund BNP Bank 11/17/05 15,591 F Insurance Portfolio Fund BNP Bank 11/30/05 1,075,822 F Insurance Portfolio Fund BNP Bank 1/18/06 12,500 F Insurance Portfolio Fund BNP Bank 3/1/06 1,178,000 F Insurance Portfolio Fund BNP Bank 5/19/06 12,500 F Insurance Portfolio Fund BNP Bank 5/31/06 1,282,480 F Insurance Portfolio Fund BNP Bank 7/18/06 10,417 F Insurance Portfolio Fund BNP Bank 3/1/07 1,705,000 F Insurance Portfolio Fund BNP Bank 3/21/07 258 F Insurance Portfolio Fund BNP Bank 6/1/07 1,740,333 F Insurance Portfolio Fund BNP Bank 7/2/07 583,833 F Insurance Portfolio Fund BNP Bank 8/1/07 564,167 F Insurance Portfolio Fund BNP Bank 9/4/07 640,333 F Insurance Portfolio Fund BNP Bank 12/3/07 1,760,000 F Insurance Portfolio Fund BNP Bank 3/3/08 1,661,698 F Insurance Portfolio Fund BNP Bank 6/3/08 1,156,550 F Insurance Portfolio Fund BNP Bank 7/31/08 25,000,000 F
*209Insurance Portfolio Fund BNP Bank 7/31/08 654,111 F Insurance Portfolio Fund BNP Bank 10/1/08 574,792 F Portfolio Limited Fund BNP Cayman 8/4/05 400,000 H Portfolio Limited Fund BNP Cayman 11/1/05 400,000 H Portfolio Limited Fund BNP Cayman 12/1/05 1,250,000 H Portfolio Limited Fund BNP Cayman 4/3/06 750,000 H Portfolio Limited Fund BNP Cayman 12/28/06 2,300,000 H Portfolio Limited Fund BNP Cayman 12/28/06 1,000,000 H Portfolio Limited Fund BNP Cayman 6/13/07 108,420 H Portfolio Limited Fund BNP Securities 10/20/04 2,041,858 H Services Portfolio Limited Fund BNP Securities 12/22/04 2,118,243 H Services Portfolio Limited Fund BNP Securities 1/21/05 1,510,684 H Services Portfolio Limited Fund BNP Securities 7/21/05 2,528,454 H Services Portfolio Limited Fund BNP Securities 1/5/06 5,300,000 H Services Portfolio Limited Fund BNP Securities 1/5/06 900,000 H Services Portfolio Limited Fund BNP Securities 1/5/06 6,040,000 H Services Portfolio Limited Fund BNP Securities 1/24/06 17,137 H Services Portfolio Limited Fund BNP Securities 1/24/06 32,727 H Services Portfolio Limited Fund BNP Securities 1/24/06 42,346 H Services Portfolio Limited Fund BNP Securities 1/25/06 10,000 H Services Portfolio Limited Fund BNP Securities 5/2/06 1,520,000 H Services Transferor Transferee Date of Amount ($) PAC Transfer Ex. Portfolio Limited Fund BNP Securities 5/26/06 172,359 H Services Portfolio Limited Fund BNP Securities 12/1/06 7,385,000 H Services Total 75,488,478
*210The Defendants assert that the New Subsequent Transfer Claims are time-barred. (BNP Brief at 34-35.) The Trustee responds, (Trustee Brief at 37-39), that the New Subsequent Transfer Claims relate back to the filing of the Original Complaint pursuant to Rule 15(c)(1)(B) of the Federal Rules of Civil Procedure, which provides for relation back when "the amendment asserts a claim ... that arose out of the conduct, transaction or occurrence set out - or attempted to be set out - in the original pleading."
To relate back, the new claim must arise out of "a common 'core of operative facts' uniting the original and newly asserted claims." Mayle v. Felix , 545 U.S. 644, 659, 125 S.Ct. 2562, 162 L.Ed.2d 582 (2005). The "central inquiry is whether adequate notice of the matters raised in the amended pleading has been given to the opposing party within the statute of limitations by the general fact situation alleged in the original pleading." Slayton v. Am. Express Co. , 460 F.3d 215, 228 (2d Cir. 2006) ; accord Stevelman v. Alias Research Inc. , 174 F.3d 79, 86 (2d Cir. 1999). "This test does not require that the prior complaint put the defendants on notice of new or additional legal theories ... but it must inform the defendants of the facts that support those new claims." Official Comm. of Unsecured Creditors v. Pirelli Commc'ns Cables & Sys. USA LLC(In re 360networks (USA) Inc.) , 367 B.R. 428, 434 (Bankr. S.D.N.Y. 2007) (citation omitted).
In the context of avoidance actions, "each preferential and fraudulent transaction is treated separately and distinctly," Fabrikant , 480 B.R. at 492 ; accord Metzeler , 66 B.R. at 984, because the "[p]roof offered for one transaction does not govern as to another and, as such, relation back cannot be ordered between different transactions merely for being similar or arising from the same conduct." Fabrikant , 480 B.R. at 492 ; accord 360networks , 367 B.R. at 434 ("a preference action based on one transfer does not put defendant on notice of claims with respect to any other unidentified transfers"). Furthermore, the "mere allegation" that the previously identified transfers and the newly added transfers are "all ... fraudulent transfers does not make them part of the same conduct." Metzeler , 66 B.R. at 983 ; see also id. at 984 ("there is no indication that, merely because different transactions bear the same label, relation back is to be ordered on the ground that they arise from similar conduct").
The Trustee contends that the New Subsequent Transfer Claims relate back "because the Trustee's initial pleading (plus years of active litigation in this and related adversary proceedings) provided Defendants with notice that the Trustee intended to recover all fraudulent transfers of BLMIS customer property that Defendants received from BLMIS Feeder Funds." (Trustee Brief at 39.) This argument proves too much; it ignores the Rule's requirement that the new claims must "ar[ise] out of the conduct, transaction, or occurrence set out - or attempted to be set out - in the original pleading." FED. R. CIV. P. 15(c)(1)(B). The New Subsequent Transfer Claims arise from different facts and circumstances and depend on different proof. For example, the PAC seeks to recover twenty-one subsequent transfers totaling $39,661,250 made by the Insurance Portfolio Fund, (PAC, Ex. F), but the Original Complaint did not allege any transfers from the Insurance Portfolio Fund. Furthermore, each subsequent transfer, old or new, arose from either separate and distinct loans, credit facilities or derivative transactions with various counterparties while others appear to relate to either redemptions or equity distributions *211to the Defendants as direct investors in the Tremont Funds. The assertion that all the original subsequent transfer claims and the New Subsequent Transfer Claims arose from a "common core of operative facts" lacks merit.
The Trustees' authorities, Adelphia Recovery Trust v. Bank of Am., N.A. , 624 F.Supp.2d 292 (S.D.N.Y. 2009) (" Adelphia "), reconsideration granted in part , No. 05 Civ. 9050 (LMM), 2009 WL 1676077 (S.D.N.Y. June 16, 2009) and Picard v. Peter Madoff(In re BLMIS) , 468 B.R. 620 (Bankr. S.D.N.Y. 2012) (" Peter Madoff "), are distinguishable. Adelphia involved the prosecution of numerous claims arising from the Rigas family's borrowing billions of dollars prepetition for personal use using the debtor's assets as collateral (the "Co-Borrowing Facilities"). 624 F.Supp.2d at 297. The Adelphia Recovery Trust, established under the chapter 11 plan, brought intentional fraudulent transfer claims against Salomon Smith Barney ("SSB") for prepetition payments made on account of the Rigas family's margin loan debt. The Trust's amended complaint added $95 million in additional fraudulent transfers, and SSB moved to dismiss the new claims as time-barred. Id. at 333.
The Trust argued that the new transfers related back, and the Court agreed:
The newly alleged fraudulent transfers relate back to the Creditors Complaint and are not time barred. The new margin loan payments in the Amended Complaint arise out of the same Co-Borrowing Facility transactions as those pled in the Creditors Complaint. The newly alleged margin loan payments occurred during the same time period as those alleged in the Creditors Complaint.... SSB was placed on notice in the original complaint because the Creditors Complaint listed roughly 84 million dollars in loan payments to SSB. The Creditors Complaint also pled that [the Adelphia Recovery Trust] was seeking repayment of monies related to the margin loans broadly.
Id. at 333-34. The Adelphia Court distinguished Metzeler as a case "involv[ing] fraudulent transfers which arose out of different transactions." Adelphia , 624 F.Supp.2d at 334.
Similarly, in Peter Madoff , the Trustee sought leave to amend his complaint against Bernard Madoff's family members, inter alia , to add new initial fraudulent transfer claims against Bernard Madoff's brother Peter Madoff, and Bernard Madoff's sons or their estates (the "Family Defendants"). 468 B.R. at 623-24. Although the Family Defendants did not object to the assertion of the new claims, id. at 634, the Court nevertheless analyzed whether they related back, and concluded that they did. The original complaint alleged that BLMIS was operated as a "piggy bank" that allowed the Family Defendants to take huge sums of money for their personal use. Id. The proposed new claims relied on the same legal theories as the initial complaint which named the Family Defendants, and gave reasonable notice that the Trustee was still uncovering additional transfers that he would seek to recover. Id. at 633. The Court did not discuss Metzeler .
The subsequent transfers to the Defendants listed in the PAC, old and new, were not part of the common fraudulent scheme or pattern present in Adelphia and Peter Madoff . Each arose out of a separate leverage transaction or redemption, and the facts and circumstances surrounding the value given in exchange for the transfer will differ. Moreover, the Court has concluded that the PAC fails to plead the Defendants' bad faith. Thus, unlike the claims relating to transactions involving the Rigas or Peter Madoff's family, the *212Defendants were not at the center of a common scheme to strip assets from BLMIS, but instead, were looking to payments from third parties. Accordingly, the New Subsequent Transfer Claims are time barred, and it is futile to permit the Trustee to amend the Complaint to assert them.
CONCLUSION
For the reasons stated, the Defendants' motion to dismiss for lack of personal jurisdiction is denied. The Trustee's motion for leave to amend his pleading is denied to the extent of the assertion of the New Subsequent Transfer Claims and is otherwise granted except that the only issue regarding each surviving transfer is whether the Defendant subsequent transferee (or a predecessor subsequent transferee) gave value for the transfer. The Court has considered the parties' other arguments and concludes that they are without merit or rendered moot by the disposition of the motion. Settle Order.
References to paragraphs in the PAC will be denoted as "(¶ ___)."
"ECF Doc. # ___" refers to documents filed on the docket of this adversary proceeding. References to other dockets will include the case number.
Certain of the headings are derived from the PAC. They are descriptive only and do not necessarily imply the Court's views of the allegations.
The Trustee also alleges that BNP Bank and BNP Securities Services knew BLMIS was not registered as an investment advisor with the SEC in violation of U.S. securities laws. (¶ 112.)
The PAC does not specify which BNP entity it is referring to in ¶ 224.
According to the PAC (¶¶ 346, 351, 361, 371 and Ex. C), the Tremont Initial Transfers were made to Prime Fund ($945 million), Broad Market Fund ($252 million), Insurance Portfolio Fund ($90.65 million) and Portfolio Limited Fund ($609 million).
Section 550(d) of the Bankruptcy Code provides that "[t]he trustee is entitled to only a single satisfaction under subsection (a) of this section."
The Defendants also argued that they were not properly served, (see BNP Brief at 38-40), but withdrew that contention in advance of the hearing. (See Transcript of March 9, 2018 Hearing ("Tr. ") at 60:14-17 (ECF Doc. # 137).)
As discussed in the succeeding text, the Trustee has provided evidence that New York is BNP Cayman's principal place of business. This might support the conclusion that BNP Cayman is subject to the Court's general jurisdiction, but the Trustee has not made this argument.
Determining personal jurisdiction over a foreign defendant in a federal question case requires that the Court first look to the jurisdictional law of the forum state, Licci , 732 F.3d at 168 ; Best Van Lines, Inc. v. Walker , 490 F.3d 239, 242 (2d Cir. 2007), and the PAC alleges personal jurisdiction under New York's Civil Practice Law & Rules ("CPLR"). (¶ 56.) However, in bankruptcy cases, a court must consider the defendant's minimum contacts with the United States rather than the forum state. Owens-Illinois, Inc. v. Rapid Am. Corp. (In re Celotex Corp. ), 124 F.3d 619, 630 (4th Cir. 1997) ("[W]hen an action is in federal court on 'related to' jurisdiction ... we need only ask whether [defendant] has minimum contacts with the United States such that subjecting it to personal jurisdiction does not offend the Due Process Clause of the Fifth Amendment to the United States Constitution. Given that [defendant] is a Delaware corporation with its principal place of business in New York, we have no doubt that this is the case." (citations omitted) ); Hosking v. TPG Capital Mgmt., L.P. (In re Hellas Telecomm. (Lux.) II SCA ), 547 B.R. 80, 96-97 (Bankr. S.D.N.Y. 2016) (collecting cases). In this regard, the parties have not addressed personal jurisdiction under the CPLR in their briefs, and instead, have focused on the principles of general and specific jurisdiction discussed in the text.
BNP Cayman also represented in a subscription agreement with Ascot that it was organized under Delaware law, (Calvani Declaration , Ex. 3 at Bates Nos. NYGSAA0020973, NYGSAA0020989), and that it was not a foreign corporation or partnership for tax purposes. (Id. at Bates No. NYGSAA0020974.)
For the same reasons, the Defendants' reliance on To v. HSBC Holdings, PLC , No. 15CV3590-LTS-SN, 2017 WL 816136 (S.D.N.Y.), aff'd , 700 F. App'x 66 (2d Cir. 2017) - a case addressing substantially similar claims against foreign HSBC defendants - is also distinguishable.
Section 157(d) of Title 28 states
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.
The branch of the Trustee's motion seeking limited, expedited discovery under Rule 26(d)(1) was denied. See SIPC v. BLMIS (In re BLMIS ), 590 B.R. 200 (Bankr. S.D.N.Y. 2018).
Section 546(e) of the Bankruptcy Code provides in pertinent part:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by ... a ... stockbroker ..., or that is a transfer made by ... a ... stockbroker ... in connection with a securities contract, as defined in section 741(7) ..., that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.
The joint venture in which Fauchier participated involved a BNP Bank affiliate that is not a party. The PAC does not allege facts supporting the inference that the knowledge gathered by the employees and agents of this BNP affiliate was communicated to the Defendants or should be imputed to any of the Defendants.
In another example of this type of pleading, the PAC alleges that the head of trading for the Fund Derivatives Group told a former BNP Bank employee then working at HSBC that he was unable to reconcile the trading statements received from BLMIS. (¶ 191.) The PAC does not identify what the reconciliation problem was or its relevance to the Defendants' subjective belief in the high probability that BLMIS was not engaged in the actual trading of securities.
Following the confirmation of the chapter 11 plan, the GUC Trustee substituted for the committee as the plaintiff.
The PAC cites two instances in which BNP Bank hedged its positions against potential losses of BLMIS feeder funds. (¶¶ 190, 239.) However, the hedges represented a small fraction of the total exposure the Defendants faced with respect to BLMIS. If the Defendants were aware of a high probability that BLMIS was a Ponzi scheme and its collapse meant the collapse of the feeder funds, it would not have limited itself to two hedges. Furthermore, it is not uncommon to purchase hedges, such as credit default swaps, to guard against the default of one's obligor.
The PAC states that the Defendants knew that F & H was "unqualified and incapable" of auditing a firm the size of BLMIS, (¶ 257), based on its communications with F & H, (¶ 254), and because F & H did not appear on the American Institute of Certified Public Accountants' ("AICPA") peer review program list. (¶ 256.) However, the Trustee does not allege that any Defendant reviewed the AICPA list let alone noticed that F & H was absent from such list. Moreover, the Trustee does not provide any details about the communications between any Defendant and F & H that led the Defendants to question F & H's qualifications. To the contrary, Trouvain's August 7, 2003 correspondence with BLMIS specifically seeking verification from F & H supports the opposite inference.
In many cases, the Defendants were the first subsequent transferees. In other instances, they received the transfers following previous subsequent transfers from one Tremont Fund to another Tremont Fund. The PAC does not indicate whether in the latter situations, the Tremont Fund subsequent transferee gave value to the Tremont Fund subsequent transferor. I assume for the purposes of judging futility that no value was exchanged, and accordingly, the Defendants must demonstrate that they gave value. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501799/ | MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE
*216Rafael Lozada ("Lozada" or "Plaintiff") commenced this action, pursuant to 11 U.S.C. § 528(a)(8) and Federal Rule of Bankruptcy Procedure 7001(6), seeking a judgment declaring that it is an undue hardship for Mr. Lozada to repay the student loan debts he owes to Educational Credit Management Corporation ("Defendant" or "ECMC") and the debts are therefore dischargeable. While the Court is not unsympathetic to Mr. Lozada's situation, the law does not permit granting him the relief he seeks based on the factual record. Accordingly, for the reasons set forth below, the Court finds that Mr. Lozada's student loans are not dischargeable.
JURISDICTION AND VENUE
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York, dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Both parties have consented to the entry of a final order or judgment by this Court. Pre-Trial Order [ECF No. 26], Jurisdiction ¶ 1.
PROCEDURAL BACKGROUND
Mr. Lozada petitioned this Court for relief pursuant to chapter 7 of the Bankruptcy Code on June 20, 2017. Thereafter, he commenced this adversary proceeding seeking to discharge his student loan debt. Pursuant to the Court's individual practice rules, in advance of the trial, the Parties submitted a proposed Pre-Trial Order, which the Court entered on August 7, 2018. [ECF No. 26]. The Pre-Trial Order include, inter alia , the facts to which the parties stipulated.
Mr. Lozada stipulated pre-trial to facts that seriously called into question his ability to demonstrate undue hardship. Nevertheless, the Court accepted testimony and documentary evidence at trial to give Mr. Lozada the opportunity to supplement the seemingly conclusive stipulated facts. The Court conducted a trial on August 21, 2018, at which the Court received evidence and heard argument from the parties. Thereafter, the Parties submitted post-trial briefs. Def.'s Post-Trial Brief [ECF No. 30]; Pl.'s Post-Trial Brief [ECF No. 31].1
FACTUAL BACKGROUND
The relevant facts are, for the most part, stipulated and are not otherwise in significant dispute. As reflected in the Pre-Trial Order, dated August 7, 2018, the parties stipulated to the following facts:
1. Plaintiff is an individual residing at 25 Glenbeck Row, Stamford, Connecticut.
*2172. ECMC is a not-for-profit corporation duly organized under the laws of the State of Minnesota, with offices located at 111 South Washington Avenue, Suite 1400, Minneapolis, Minnesota 55401.
3. ECMC, a federal student loan guarantor in the Federal Family Education Loan Program ("FFELP"), holds an interest in one (1) unpaid student loan pertaining to Plaintiff (the "Educational Credit Management Corporation Loan")
4. The ECMC Loan is a federal consolidation loan under FFELP.
5. The loans underlying the ECMC Loan include, inter alia , loans obtained to finance Plaintiff's education at Brooklyn Law School and the education of an individual other than Plaintiff at St. John's University.
6. As of July 24, 2018, the outstanding balance of the ECMC Loan, including principal, interest, fees, and costs, was approximately $337,980.04. In addition, the ECMC Loan accrues interest at a rate of 8.25% per annum, or $71.63 per diem .
7. Plaintiff is 67 years old.
8. Plaintiff is married and has no dependents.
9. Plaintiff has retired from working.
10. Plaintiff lives with his wife, a retired school teacher.
11. Plaintiff's sole source of income is Social Security income.
12. Plaintiff's monthly social security benefits total approximately $1,219.00.
13. Plaintiff is able to drive an automobile.
14. Plaintiff holds a Bachelor of Arts degree from City College of New York and a Juris Doctorate from Brooklyn Law School.
15. Plaintiff entered law school at the age of 38.
16. Plaintiff has never passed any bar exam or been admitted to practice law.
17. After failing the New York bar exam on his first attempt, Plaintiff decided not to take another bar exam or pursue any type of career in the legal industry.
18. Plaintiff has held various positions in the social service and non-profit sectors, and has worked within the government in support of non-profit initiatives, often at a supervisory or director level.
19. Plaintiff has earned as much as $75,000.00 per year.
20. Plaintiff had an annual salary of $70,000.00 as recently as 2013.
21. Plaintiff has been unemployed since 2014.
22. Plaintiff has not attempted to find employment since January 2015.
23. Plaintiff is able to use a computer to perform tasks including conducting research on the internet, using e-mail, and creating documents.
24. Plaintiff has not considered seeking employment in a position that would not place a physical strain on him.
25. Plaintiff sought and was granted several deferments and forbearances from his obligation to pay his federal student loans (the "Deferments and Forbearances").
26. Between April 2005 and May 2017, Plaintiff had Deferments and Forbearances totaling 80 months.
*21827. Between July 2013 and May 2017, Plaintiff had Deferments and Forbearances for all but three (3) months.
28. Plaintiff consolidated his federal student loans into the ECMC Loan in March 2002.
29. Plaintiff pays his granddaughter a weekly allowance of $25-30.
30. Plaintiff's bank statements from his joint checking account with his wife reflect numerous payments to his adult children on a regular basis, although Plaintiff is unsure of the reason(s) for such payments.
31. Plaintiff's bank statements from his joint checking account with his wife reflect numerous, regular visits to restaurants.
32. Plaintiff and his wife regularly contribute at least ten percent (10%) of their total income toward charitable contributions and religious donations.
33. Plaintiff and his wife made charitable contributions and religious donations totaling $23,510 in 2016, $21,544 in 2015, $21,866 in 2014, $24,783 in 2013, and $12,678 in 2012.
34. Plaintiff refuses to reduce the amount of charitable contributions and religious donations he and his wife make every year, even if doing so would allow him to repay the ECMC Loan to some extent.
35. Plaintiff and his wife received the following federal income tax refunds: $4,609 for 2016; $5,037 for 2014; $3,852 for 2013; and $2,676 for 2012 (collectively, the "Tax Refunds").
36. No portion of the Tax Refunds were used to repay the ECMC Loan.
37. Plaintiff inherited approximately $30,000 from his mother in 2015 but did not use any of that money to repay the ECMC Loan.
38. Plaintiff and his wife receive total net income of no less than $5,942 per month.
39. Plaintiff is eligible to enter the William D. Ford Direct Loan Consolidation Program (the "Ford Program") in order to achieve greater flexibility in repaying his unpaid student loan pertaining to Educational Credit Management Corporation.
40. If Plaintiff entered into the Ford Program, his monthly payment under the Income Contingent Repayment Program option would be $826.15 for 300 months, based on his reported household adjusted gross income of $66,029 and a family size of 2, as reported in Plaintiff's 2016 federal income tax return.
41. If Plaintiff entered into the Ford Program, his monthly payment under the Standard Repayment Program option would be $2,617.00 per month for 300 months.
42. If Plaintiff entered into the Ford Program, his monthly payment under the Extended Repayment Program option would be $2,492.00 per month for 360 months.
43. If Plaintiff entered into the Ford Program, his monthly payment under the Graduated Repayment Program option would be $2,278.00 per month for the first 12 months, for 300 months.
Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 1-43.
*219EVIDENCE PRESENTED AT TRIAL
At trial, the Court heard the testimony of two witnesses and received 17 exhibits into evidence. Plaintiff testified at trial, but called no other fact witness and no expert witnesses. [Tr. 11:2-112:7].2 ECMC cross-examined Plaintiff on all relevant topics. After Plaintiff rested, Education Credit Management Corporation called Jesse Ogren ("Ogren"), a vocational expert, to offer an opinion on Mr. Lozada's employment prospects. [See Tr. 114:2-131:25].
While the Court found Mr. Lozada earnest and credible, his testimony did not, in any significant measure, supplement the facts to which he had stipulated pre-trial, which were seemingly fatal to his claim of undue hardship. Plaintiff testified at trial regarding his educational background and employment history [see Tr. 12:23-13:14], his student loan debt [see, e.g. , Tr. 16:10-19:4], his finances [see Tr. 46:1-48:18], and his medical condition [see Tr. 57:13-59:6].
Mr. Lozada earned a Bachelor of Arts degree from City College. Pre-Trial Order. [Tr. 13:14-14:8]; see also Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 14. While working full time, when he was thirty-eight years-old, Mr. Lozada enrolled at Brooklyn Law School. [Tr. 14:22-15:6]; see also Pre-Trial Order Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 38. He aspired to be a lawyer because, growing up, he encountered "a lot of injustices" and "saw a lot of people hurting because they either didn't understand the legal system or were unable to ... get a lawyer." [Tr. 14:10-21]. Mr. Lozada graduated from law school in 1989 [Tr. 17:12-14], but did not pass the bar exam on his first attempt. [Tr. 15:8-19]. He did not sit for the bar exam again, and as a result was not admitted to practice law. [Tr. 15:8-16:1]. Despite having a law degree, Mr. Lozado never sought employment in a law-related field or otherwise made professional use of his legal education.
Mr. Lozada has spent his career working in social services and in the not-for-profit sector. [See, e.g., Tr. 12:23-13:14]. Primarily, Mr. Lozada worked with the Central Board of Education to implement substance abuse prevention programs throughout the city. [Tr. 16:3-11]. He explained that he found it difficult to maintain steady employment because the funding for his employment projects would expire and not be renewed. [Tr. 18:21-23]. Mr. Lozada's most recent employment ended in December 2014 when, as a result of a change in leadership, Prison Ministries, the non-profit for which he worked, charted a "new direction" and determined that Mr. Lozada did not "fit into what they were looking for." [Tr. 36:4-16].
Plaintiff also testified, in contradiction to what he stipulated pre-trial, that he searched for employment during most of 2015. [Tr. 96:8-17]. Plaintiff claims that he submitted his resume to at least 100 online job listings throughout 2015 [Tr. 96:8-17], but was unsuccessful in finding employment. [Tr. 96:8-17]. Somewhere around 2015, Mr. Lozada and his wife used their "retirement fund of about $90,000" in an unsuccessful attempt to "start a daycare center." [Tr. 39:5-14]
So we started doing all the research and putting together a business plan and so forth and eventually we were able to submit an application to the city to start a daycare center and we took that money and put it into - into that business, trying to start that business. Daycare businesses in the city, as I came to know, a very complicated matter. And *220what happened was, we had to actually rent the place, have the place set up for them to look and see if it met the requirement before they could - they would issue a permit so we could start the business.
They told me originally it would take three months. It took over a year. In the span of that year, we were paying rent because we had to get the place in order for even them to consider giving us a permit .... And what happened in the span of that time is that all the seed money that we had set aside for that got all eaten up.
So, by the time they were ready to issue us a permit, we had no more money, so we couldn't proceed.... I mean, it was a nightmare dealing with that process. So, our expectation were if we get a business going, that will provide enough income not just to pay the student loan but for us to be able to live and, you know, have a future. And it just wasn't to be.
[Tr. 39:15-40:15].
Mr. Lozada testified that he is no longer seeking employment, [Tr. 83:7-8], and now considers himself retired. [Tr. 83:23-24]; see also Complaint [ECF No. 1], ¶¶ 15, 23 (retired as of 2014); Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 9. Mr. Lozada testified that despite working full time at the Board of Education while in law school, he could only afford tuition by taking out student loans. [Tr. 14:24-15:19]. When he graduated in 1989, Mr. Lozada owed about $40,000 in student loan debt. [Tr. 17:1-10]. Starting in 1990, Mr. Lozada paid $500 a month towards his student loan, and he continued to make payments "to about 1994." [Tr. 17:10-24]. Over the course of the next twenty years, Mr. Lozada consolidated his loans several times, took out and consolidated a Parent Plus loan for his son to attend St. John's University, and continued to pay the loan intermittently when he was employed. [See, e.g. , Tr. 17:10-35:18].
At trial, Mr. Lozada testified that he applied several times for an income-based repayment plan, but his loan servicer told him he did not qualify for such a plan "and they told [Mr. Lozada] they were giving [him] - they were rolling it over, just rolling it over [as forbearances and deferments.]" [See, e.g. , Tr. 91:1-91:24]. Mr. Lozada's loan servicer put the loans into forbearance for five years beginning in 1994. [Tr. 18:20-20:14]. Between April 2005 and May 2017, Mr. Lozada received either a deferment or a forbearance for his loans for a total of 80 months. Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 25-27. Mr. Lozada has not made a payment on the loan since 2015. [Tr. 35:6-18].
Mr. Lozada stipulated that he is eligible to enter the William D. Ford Direct Loan Consolidation Program and that under this program his monthly payment under the Income Contingent Repayment Program would be $826.15 for 300 months. [Tr. 108:14-21]; see also Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 39, 40.
Mr. Lozada's sole source of income is $1,296.00 in monthly benefits from Social Security. [Tr. 41:8-17]; [Rafael Lozada Social Security Benefit Statement, PX A].3 His wife contributes $4,685 a month to the household's income. [See PX C and D]. Plaintiff and his wife have a combined monthly income of no less than $5,942 per month. [Tr. 101:4-16]; see also Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 38.
Mr. Lozada's testimony demonstrated that he is a charitable man, who regularly *221tithes, apportioning at least 10% of his income to his church. [See, e.g. , Tr.47:23-48:9]. When he can give more, or when a community member is in need, he and his wife donate additional amounts. [Tr. 79:3-80:15]. In total, Mr. Lozada and his wife donated over $100,000 in the five years leading up to bankruptcy. [See Tr. 79:3-80:1]; Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 33.
Mr. Lozada testified that his monthly household expenses amount to $4,499. [Tr. 99:7-100:16]. Approximately $100 of this amount is attributable to out-of-pocket medical expenses. [Tr. 47:8-12]. As Mr. Lozada explained, he suffers pain daily from doing routine activities, has undergone cataract surgery, and takes various medications. [See Tr. 58:2-60:22]. Mr. Lozada alleges that his health issues are among the causes that prevent him from working. [Tr. 83:9-14]. He, did not, however, offer any admissible medical records or otherwise call any treating physicians or medical experts with respect to his condition, diagnosis, or his prognosis. [Tr. 60:13-61:5].
ECMC called Ogren, a certified educational rehab counselor and licensed professional counselor, who opined that he believes Plaintiff should be able to find employment. Ogren testified that he was able to find job listings for which Mr. Lozada is qualified and which he may be able to attain. [Tr. 123:6-19]. These jobs offered a salary of about $40,000. [Tr. 123:6-19]. On cross examination Ogren acknowledged that he has never worked with someone with Mr. Lozada's unique work background, and he could not recall if he has ever successfully placed a job seeker who is 65 or older. [Tr. 130:2-131:21].
DISCUSSION
"Congress intended that student loans be discharged in rare cases of exceptional circumstances." In re Jackson , No. 05-15085 (PCB), 2007 WL 2295585, at *4 (Bankr. S.D.N.Y. Aug. 9, 2007) ; see also In re O'Hearn , 339 F.3d 559, 564 (7th Cir. 2003). As ECMC argued at trial, "[i]f it were simply easy to walk away from these obligations, the program's integrity would fall apart and there would be no program." [Tr. 7:19-21]. The Second Circuit has explained that Congress enacted section 523(a)(8) in order to preserve the solvency of student loan programs "because there was evidence of an increasing abuse of the bankruptcy process that threatened the viability of educational loan programs ...." In re Renshaw , 222 F.3d 82, 87 (2d Cir. 2000).
The Bankruptcy Code reflects this policy :
"(a) A discharge under section 727, 1141, 1228(a)9, 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-...
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents , for-
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
11 U.S.C. § 523 (emphasis added).
A debtor who seeks to discharge student loan debt bears the burden of *222demonstrating undue hardship by a preponderance of the evidence. See Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (holding that "the standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard"). The statute itself provides little guidance on how to determine whether an undue burden exists. In Brunner v. New York State Higher Education Services Corporation , the Second Circuit articulated what has become the standard test for determining whether a debtor would face an undue hardship if his student loans were not discharged. 831 F.2d 395 (2d Cir. 1987). See In re Frushour , 433 F.3d 393, 400 (4th Cir. 2005) (listing the circuits that have adopted the Brunner test); 4 Collier on Bankruptcy ¶ 523.14 (16th 2018) (describing Brunner as the most widely used test).
Under the Brunner test, a debtor must make the following three-part showing:
(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Brunner , 831 F.2d at 396. The analysis at issue "requires courts to consider the unique or extraordinary circumstances of a particular situation on a fact-intensive, case-by-case approach." In re Jackson , No. 05-15085 (PCB), 2007 WL 2295585, at *4.
A. Minimal Standard of Living
Under the first prong of the Brunner test, Mr. Lozada must establish, based upon his current income and expenses, that he cannot both maintain a minimal standard of living and repay his student loans. Brunner , 831 F.2d at 396. The Second Circuit has made clear that this prong of the Brunner test is "the minimum necessary to establish 'undue hardship.' " Id.
This is a challenging standard for debtors to meet, since a debtor must "demonstrate more than tight finances, although a debtor is not required to live at or below the poverty line." See In re Elmore , 230 B.R. 22, 26 (Bankr. D. Conn. 1999). "A debtor must demonstrate financial circumstances that [go] beyond the 'garden-variety financial hardship' that most debtors experience." In re Jean-Baptiste , 584 B.R. 574, 587 (Bankr. E.D.N.Y. 2018). While it is not the Court's role to impose, ad hoc , a certain standard of living on the debtor, or to author his budget, the Court is required to "review the reasonableness of the Debtor's budget-particularly the allocation of projected expenses in relation to projected income as it determines his capabilities to pay the instant obligations without undue hardship." In re Pincus , 280 B.R. 303, 317 (Bankr. S.D.N.Y. 2002).
One unique consideration in evaluating Mr. Lozada's projected budget is the fact that Mr. Lozada and his wife regularly contribute 10% of their income to the Church. [Tr. 47:23-25]; Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 32-34. In addition, he and his wife give additional amounts to charity whenever there is a need or a request for help. [See, e.g. , Tr. 80:2-23]. In total, Mr. Lozada made donations of $12,678 in 2012, $24,783 in 2013, $21,866 in 2014, $21,544 in 2015, and $23,510 in 2016. Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 32-34. As a threshold matter, the Court must consider whether Plaintiff's tithing and charitable donations must be included, or excluded, for the purposes *223of assessing whether his expenses are reasonable for his circumstances. There is surprisingly little case law on point within this Circuit.
In 1998, Congress, through the enactment of the Religious Liberty and Charitable Donation Protection Act, 11 U.S.C. § 1325(b)(2)(A) ("RLCDPA"), "amended several sections of the Bankruptcy Code to exclude 'charitable contributions' totaling less than fifteen percent of the debtor's gross annual income from consideration by the bankruptcy courts for various purposes." In re Savage , 311 B.R. 835, 842 (1st Cir. BAP 2004). Congress did not, however, include section 523(a)(8) among those amended provisions. "As a result, there is a split of authority as to whether Congress intended religious and charitable donations to be permissible expenses in determining undue hardship under § 523(a)(8)." Id.4
In In re Lebovits , the court held that the RLCDPA nonetheless applied to the undue hardship analysis and concluded that the debtor's contribution in that case, which fell far below the fifteen percent threshold, was well within the permissible limits set by Congress, and therefore did not undercut the Court's finding that the debtor in that case satisfied the minimal standard of living prong under Brunner . 223 B.R. 265, 273 (Bankr. E.D.N.Y. 1998). But see In re Lynch , 299 B.R. 62, 74 (Bankr. S.D.N.Y. 2003) (holding a debtor's federal income tax debt nondischargeable where her tithing of $20,000-a-year was not required and therefore was not a necessary expense). ECMC argues that religious and charitable donations preclude debtors from satisfying Brunner's first prong and cite to In re Fulbright . 319 B.R. 650 (Bankr. D. Mont. 2005). There, the court held "that religious and significant charitable donations are per se not proper expenses in determining whether discharging student loan debt would result in undue hardship," Id. at 660, and held that that debtor failed to show he could not repay his loan while maintaining a minimal standard of living.
The Court agrees that, "any interpretation that expressly allows or disallows tithing should be rejected as both interpretations seem to amend [ section] 523(a)(8) when Congress did not." In re McCafferty , No. 14-04545-FPC7, 2015 WL 6445185, at *6 (Bankr. E.D. Wash. Oct. 23, 2015) (citing Pennsylvania Dep't of Pub. Welfare v. Davenport , 495 U.S. 552, 562, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990) ("We will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.") ). Since Congress has not provided explicit guidance on this issue, charitable giving, while commendable, cannot per se be exempted from contractual obligations.5 Instead, charitable giving *224expenses, such as Mr. Lozada's tithes, must be evaluated on a case-by-case basis, "considering factors such as the amount and the debtor's history in order to determine whether, for that particular debtor, tithing constitutes a reasonably necessary expenditure." In re McCafferty , 2015 WL 6445185, at *6. See also Educ. Credit Mgmt. Corp. v. Rhodes , 464 B.R. 918, 923 (W.D. Wash. 2012) (holding that the bankruptcy court "erred in failing to examine the appropriateness of [that debtor's] monthly contributions to [his religion]"); cf In re Cline , 248 B.R. 347, 351 (8th Cir. BAP 2000) (upholding the bankruptcy court's finding that a $25 monthly tithing was modest and reasonable under the circumstances). While the Court respects Mr. Lozada's commitment to charity, the reality is that when he elects to tithe rather than pay his nondischargeable debt, he is making donations using someone else's money. As such, the Court, in evaluating the first Brunner prong will consider Mr. Lozada's charitable donations totaling over $100,000 in the five years preceding his bankruptcy, see Joint Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 32, 33, in the context of his overall financial condition.
In addition to his charitable contributions, Mr. Lozada testified that he spends approximately $4,499 on monthly expenses. [Tr., 99:7-100:16]. Plaintiff approximated the breakdown of his expenses as following:
Rent $ 2500 Electric $ 130 Gas $ 40 Water $ 15 Cable $ 100 Cell phone $ 100 Food and Supplies $ 500 Clothing and Laundry $ 100 Personal care $ 100 Medical out of pocket $ 100 Transportation $ 200 Entertainment $ 100 Car Loan $ 314 Car Insurance $ 200
[Tr., 99:7-100-25].
As stipulated pre-trial, Mr. Lozada's monthly household income is not less than $5,942. Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 38. This amount is predominately attributable to Mr. Lozada's wife who earns $3,466 from her pension and another $1,219 from social security. [See Pl.'s Exs. C and D]. It is well established "that total household income, including that of a non-debtor spouse, live-in companion, life partner and contributing co-habitant, must be considered in conducting this minimal standard of living analysis, as well as its relevance in generally determining undue hardship under the Bankruptcy Code."
*225In re Davis , 373 B.R. 241, 248 (W.D.N.Y. 2007) (collecting cases); see also In re French , No. 04-03060, 2006 WL 2583646, at *4 (Bankr. S.D.N.Y. Aug. 31, 2006). Accordingly, crediting Mr. Lozada's $4,499 estimation at trial of his expenses, Mr. Lozada has at least $1,400 a month in surplus income that he can apply towards paying his student loans.
Moreover, the Court views some of Mr. Lozada's expenses as excessive in light of the sacrifice expected of an individual obligated to repay his student loan obligation. Specifically, Mr. Lozada's expenses with respect to rent, food, transportation, entertainment, and charitable donations are excessive under the circumstances. Earlier this year Mr. Lozada and his wife moved from an apartment in the Bronx to an apartment in Stamford, Connecticut. [Tr. 65:10-66:7]. Mr. Lozada's move significantly increased his expenses. While living in the Bronx he paid $867 a month for rent. [Tr. 66:22-24]. Now, however, he pays $2,500 a month for rent, [Tr. 99:8-11], tripling his rent obligations. The Court is sympathetic to the fact that, due to Mrs. Lozada's medical condition, Mr. Lozada and his wife had to relocate from the Bronx apartment to an apartment building with a reliable elevator. [See Tr. 67:1-12]. Nevertheless, to suggest that there were no suitable homes available at a lower rent strains credulity. Moreover, moving from the Bronx to Stamford, Connecticut, undoubtedly increased the need for Debtor to own (and use) a car, totaling $514 a month in expenses, in addition to the $200 he attributed to transportation during his testimony.
Mr. and Mrs. Lozada spend approximately $500 a month on food because they frequently dine out. [Tr. 76:22-77:7]. A debtor is not required to abstain entirely from dining out to satisfy the first prong of the Brunner test, but the Plaintiff's practice of frequently dining out is problematic. This is made clear by the fact that the government estimates that the average cost of food for a similarly situated family of two, in July 2018, was $366.10 under a Thrifty plan or $472.70 under a Low-cost plan. U.S. DEP'T OF AGRICULTURE. COST OF FOOD AT HOME AT FOUR LEVELS, U.S. AVERAGE, JULY 2018 available at https://www.cnpp.usda.gov/sites/default/files/CostofFoodJul2018.pdf.
The $500 a month Mr. Lozada allocates towards food must be considered with Mr. Lozada's other expenses. Mr. Lozada estimated at trial that he spends $100 a month on "entertainment," the same amount that he attributes to out of pocket medical expenses. As explained above, Mr. Lozada donates a significant amount to religious organizations and charities. Mr. Lozada gives his granddaughter a weekly allowance of between $25 and $30, Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 29, and he provides money to adult children even though they are not his dependents. Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 30. In 2016 he paid $1,100 a month to rent an apartment in Florida while he maintained a home in New York, [Tr. 71:9-19], he has taken multiple trips to Puerto Rico to visit his father, and in 2014 Mr. Lozada went on a family vacation to Virginia Beach. [Tr. 85:21-86:14].
In short, Mr. Lozada enjoys a sizable monthly surplus. His expenditures indicate that he lives a comfortable lifestyle and the record does not reveal any efforts to minimize discretionary expenses. Based on this record, it simply is not the case that Plaintiff has minimized his expenses as required in order to satisfy the first prong under Brunner .
B. Persistence of Current Financial Condition and Additional Circumstances
The second prong of Brunner requires that Plaintiff demonstrate that his *226current financial condition is likely to persist for a significant portion of the repayment period of the student loans. Brunner , 831 F.2d at 396. Under this prong, the Court must "make a predictive judgment as to the likelihood that a debtor's financial hardship will continue for a significant portion of the repayment period." In re Kenny , 313 B.R. 100, 107 (Bankr. N.D.N.Y. 2004).
There are two elements to this prong. The first element is whether the debtor's financial difficulties are "likely" to continue. Under this standard a debtor must establish by a preponderance of the evidence that his financial situation is not likely to improve. In re Crawley , 460 B.R. 421, 438 (Bankr. E.D. Pa. 2011). Implicit in this requirement is that the debtor demonstrate that he has made, or is currently making, diligent efforts to secure stable employment or demonstrate that he is unemployable. In re Jones , 392 B.R. 116, 128 (Bankr. E.D. Pa. 2008). The second element requires a showing that the financial difficulties are likely to persist for a significant portion of the repayment period. Id. To satisfy both elements a debtor must prove that there are "unique and exceptional circumstances, beyond [his] control ... that would prevent future employment and the ability to repay the debt." In re Benjumen , 408 B.R. 9, 16 (Bankr. E.D.N.Y. 2009). For example, courts frequently find that debtors have satisfied the second Brunner prong where the debtor establishes that he suffers from serious illnesses or disabilities. See, e.g. , In re Jackson , No. 05-15085 (PCB), 2007 WL 2295585, at *6 (Bankr. S.D.N.Y. Aug. 9, 2007).
Here, the Court substantially credits the Plaintiff's testimony about the effects that he suffers from a variety of conditions that negatively impact him. For instance, Mr. Lozada testified that he has diabetes, increased dry eyes, "herniated discs in [his] spine" for which he receives physical therapy, and has "tears in [his] rotator cuffs in both of [his] shoulders" for which he has completed physical therapy. [Tr., 58:1-61:4]. As a result, he cannot lift heavy objects. [Tr. 58:2-19]. The Court cannot however, based solely on Plaintiff's testimony, evaluate the extent to which the conditions about which Plaintiff complains negatively impact his ability to work. Moreover, the Court's own observations of the debtor and consideration of his education suggest he is capable of working in some capacity.
For the purposes of the Brunner analysis, it is critical that the debtor establish an unpromising prognosis (i.e., persistence). While a debtor is able to testify about his own limiting physical conditions, Mr. Lozada was not competent to testify as to his prognosis based on the conditions he described. In re Traversa , No. 06-31447 (LMW), 2010 WL 1541443, at *10 (Bankr. D. Conn. Apr. 15, 2010) (holding that the debtor failed to satisfy the second Brunner where that debtor failed to create a sufficient record to demonstrate that his medical condition negatively impacts his ability to earn a living because he did not introduce documentary or expert testimony with respect to his ailments); In re Congdon, 365 B.R. 433, 438-39 (Bkrtcy.D.Vt. 2007) ; Norasteh v. Boston University (In re Norasteh), 311 B.R. 671, 678 (Bankr.S.D.N.Y.2004) (Noting that "[a]t a minimum, ... a borrower seeking ... 'an undue hardship' discharge must provide corroborative evidence that he had an impairment that prevents him from earning enough to repay his student loans, and that the impairment is likely to persist well into the future," and concluding that Debtor failed to satisfy the second Brunner prong because he did not "submit medical reports identifying his symptoms, *227diagnosing his condition, or indicating its severity or probable duration"). "A judge can observe the witness and hear him describe his symptoms, but a judge cannot make a diagnosis or determine the severity of the impairment based on that alone." In re Norasteh , 311 B.R. 671, 678 (Bankr. S.D.N.Y. 2004).
In this case, given the absence of competent medical evidence, the Court cannot conclude that a 68-year-old who is highly educated, computer literate, and who routinely drives [Tr. 103:11-13] is incapable of working even in a sedentary capacity. Mr. Lozada acknowledged that he is capable of some employment, offering at trial that he likely could work "part-time [at] McDonalds." [Tr. 109:1-7]. And yet, Mr. Lozada confirmed that he is not currently seeking employment. [Tr. 83:7-8]. The Court concludes that Mr. Lozada has failed to carry his burden of proof with respect to the second prong of Brunner and therefore is not entitled to a discharge with respect to his student loan debt.
C. Good Faith Effort to Repay the Loans
The third prong of the Brunner test requires that the Plaintiff demonstrate that he made a good faith effort to repay his student loans. Brunner , 831 F.2d at 396. A finding of good faith "turns on several considerations, including the debtor's efforts to obtain employment, maximize his income, minimize his expenses, and participate in alternative repayment options." In re Norasteh , 311 B.R. 671 at 676.
As previously noted, Mr. Lozada failed the bar exam on his first attempt and decided not to take it again. [Tr. 15:8-16:1]. Even after obtaining a law degree, he did not seek out any law related employment, opting instead to work in the social services field. While his decision to work in social services is laudable and the Court commends him for his sense of duty to serve, Mr. Lozada benefitted from his student loans and he is obligated to repay his debt. The unfortunate truth is that in the face of significant debt, Mr. Lozada limited his income and his prospects for finding work. By his own admission he has not looked for work for more than three years and considers himself retired. Pre-Trial Order [ECF No. 26], Stip. Fact ¶¶ 9, 22. "In essence, the record reflects that the Plaintiff has not sought to maximize his income." In re Marlow , No. 11-34018, 2012 WL 4829424, at *13 (Bankr. E.D. Tenn. Oct. 10, 2012), aff'd, No. CIV.A. 3:13-24, 2013 WL 3515726 (E.D. Tenn. July 11, 2013), aff'd (Apr. 23, 2014). As discussed above, Mr. Lozada also has not made efforts to minimize his expenses
The evidence presented at trial does demonstrate that Mr. Lozada initially made good faith efforts to repay his debt. From 1990 to 1994 he paid $500 a month towards his loans. In 1994, however, the funding for his employment expired, and he was laid off. [Tr. 18:21-23]. Mr. Lozada approached the entity holding his loans, explained his situation, and asked for options. [Tr. 19:12-16]. As a result, Mr. Lozada's obtained a forbearance. [Tr. 19:12-23]. Mr. Lozada testified at trial that in 2003 he requested to enroll in an income-based repayment program, a program that could reduce significantly his monthly payments, Pre-Trial Order [ECF No. 26]. Stip. Fact ¶¶ 40-43, but his loan servicer rejected his application stating he did not qualify for it. [Tr. 91:9-14]. Instead, when Mr. Lozada could not find employment, the servicer, year after year, granted forbearances and deferments. [Tr. 91:13-24].
Mr. Lozada's initial payments on his loans are certainly indicative of good faith. See In re Wells , 380 B.R. 652, 662 (Bkrtcy.N.D.N.Y. 2007) ;
*228French v. NCO Financial Systems (In re French ), No. 04-40365, 2006 WL 2583646, at *7 (Bankr. S.D.N.Y. Aug. 31, 2006) ("a history of loan repayment can serve as evidence of good faith[,] [but it] is only one factor to be considered in the overall determination ...."). Additionally, Mr. Lozada's requests for income-based repayment plans and his obtainment of deferments and forbearances also provides some indication of good faith. See In re Pincus , 280 B.R. at 316-17 (finding that the debtor exhibited good faith when, inter alia , he requested forbearances on three separate occasions); In re Carlson-Callow , 2008 WL 2357012, at *8 (Bkrtcy.D.Idaho June 06, 2008) (finding good faith where, inter alia , the debtor obtained several deferments and forbearances).
The Court notes that ECMC and Mr. Lozada have stipulated that Mr. Lozada is eligible to enter the William D. Ford Direct Loan Consolidation Program. Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 39. If Mr. Lozada entered into the Ford Program, his monthly payment under the Income Contingent Repayment Program would be $826.15 for 300 months. Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 40. Given that Mr. Lozada enjoys a monthly surplus of at least $1,400, there is no question he could afford to pay $826.15 per month to pay his student loan obligation and continue to maintain a minimal standard of living.
ECMC argues that debtors who fail to avail themselves to income contingent repayment programs cannot establish good faith. A debtor's decision to forgo enrolling in an income-based repayment plan is not, in and of itself, fatal to a finding of good faith, but is one of many factors to be considered when evaluating the debtor's good faith.6 In re Benjumen , 408 B.R. 9, 24 (Bankr. E.D.N.Y. 2009) ; In re Johnson , 299 B.R. 676, 682 (Bankr. M.D. Ga. 2003) (holding that a debtor's good faith does not rest exclusively on his willingness to participate in the Income Contingent Repayment Program).
Based on his trial testimony, there is no question that Mr. Lozada feels the weight of his student loan obligation. He testified that his understanding is that he can either pay the amount the company is requesting, and if he does not "the recourse would be for them to, I guess, get a judgment against my Social Security check and take a certain percentage of that check." [Tr. 106:17-22]. Mr. Lozada provided sincere and emotional testimony at trial, explaining that he brought this case to go "through a process [for] some kind of solution" and that he did not "ever want to give the impression that [he] just [does not] care or ...." [Tr. 107:6-14].
However, the Court cannot ignore that Mr. Lozada has received annual tax refunds of $2,676, $3,852, $5,037, and $4,609 for the years 2012, 2013, 2014, and 2016 respectively, Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 35, but did not use any of these funds to pay down his student loan debt. Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 36. Similarly, Mr. Lozada did not use any of the $30,000 he inherited in *2292015 towards repaying his student loan debt. Pre-Trial Order [ECF No. 26], Stip. Fact ¶ 37. And as discussed above, Mr. Lozada has contributed more than $100,000 to charity in recent years while neglecting his loan obligations. If Mr. Lozada had used the money from his tax refunds, his inheritance, and his charitable contributions solely from the 5 years preceding his bankruptcy filing , he could have paid down close to half of his $309,694.24 student loan debt as of the date he filed for bankruptcy. See [ECF No. 1], Schedule E/F. This would have had a significant impact, particularly in light of the fact that the 8.25% annual interest on his loan compounds on a daily-basis. "Where a debtor has had the opportunity to repay an amount, but did not; where '[n]o factors beyond [the] [d]ebtor's reasonable control precluding repayment have been suggested,' and where the debtor simply ignores his obligation, such conduct does not satisfy the third prong of the Brunner test." In re Hixson , 450 B.R. 9, 22-23 (Bankr. S.D.N.Y. 2011) (quoting Lehman v. N.Y. Higher Educ. Servs. Corp. (In re Lehman), 226 B.R. 805, 809 (Bankr. D. Vt. 1998) ).
Although his payments and requests for alternative plans early on are indicative of good faith, they are not sufficient to support a finding of good faith effort to repay the loans when viewed against the backdrop of all the relevant circumstances. The factual record clearly demonstrates that Mr. Lozada did not make an effort to maximize his income to repay his student loan debt. Similarly, the record reflects that he did not minimize his expenses or use his excess income to repay his student loan debt. Mr. Lozada's failure to consider enrolling in an income-based repayment plan since his retirement, particularly when viewed in the context of his lack of effort to seek employment or to minimize his expenses, weighs heavily against a finding of good faith. Based on the totality of the facts before it, the Court concludes that Mr. Lozada has failed to meet the good faith requirement of Brunner .
In sum, Plaintiff has failed to carry his burden with respect to each prong of the Brunner test. Therefore, the Plaintiff's request for a discharge of the loan to Educational Credit Management Corporation must be denied under § 523(a)(8).
CONCLUSION
For the forgoing reasons, Plaintiff's debt to Educational Credit Management Corporation is not dischargeable. Educational Credit Management Corporation is directed to settle a judgment in accordance with this decision, on no less than 5 business days' notice to all parties in interest.
It is so ORDERED.
Although Plaintiff submitted his brief after the November 2 filing deadline, the Court has considered each party's post-trial submission.
"Tr. __:__" refers to the transcript of the August 21, 2018, trial, filed on the electronic docket of this adversary proceeding at ECF No. 29.
PX A refers to Plaintiff's Exhibit A. Other Plaintiff's Exhibits will be referred to throughout as PX followed by the exhibit letter. Defendant's Exhibits will be referred to throughout as DX followed by the exhibit letter.
Plaintiff's argument that section 707(b)(1) "even orders a court not to take into consideration whether a debtor makes charitable contributions" misstates the scope of that section, which deals with dismissal of a chapter 7 case for "cause."
The Court's analysis here is confined to how tithing factors into a determination of whether a plaintiff can maintain a minimal standard of living if required to repay his student loans under section 523(a)(8). The Court's analysis does not concern or impact in any respect Plaintiff's constitutional right to practice his religion. "Plaintiffs alone can decide whether they can or should make donations to their church, and the Court does not presume to interfere with that decision." In re Ritchie , 254 B.R. 913, 921 (Bankr. D. Idaho 2000). Mr. Lozada did not argue that section 523(a)(8) as applied to these facts is unconstitutional, and accordingly the Court is not deciding that issue. Nevertheless, the Court notes that at least one court has held that section 523(a)(8) as applied under similar facts is neutral, not intended to prohibit the practice of religion, and does not violate the debtor's First Amendment rights. In re Lynn , 168 B.R. 693, 700 (Bankr. D. Ariz. 1994) ; cf In re Rivera , 214 B.R. 101, 108 (Bankr. S.D.N.Y. 1997)
Some debtors demonstrate good faith even though they decide to refrain from an income-based repayment plan. As courts have recognized, "by enrolling in an alternative repayment plan, [debtors] would incur a potentially nondischargeable tax obligation pursuant to 11 U.S.C. § 523(a)(1), for the amounts forgiven under the repayment plan." In re Benjumen , 408 B.R. 9, 24 (Bankr. E.D.N.Y. 2009) (citing Allen v. Am. Educ. Servs. (In re Allen) , 324 B.R. 278, 281-282 (Bankr. W.D. Pa. 2005) ; Durrani v. Educ. Credit Mgmt. Corp. (In re Durrani), 311 B.R. 496, 508 (Bankr.N.D.Ill.2004) ). If courts accepted that debtors must enroll in income based repayment programs the result would be that debtors could simply be "trading one nondischargeable debt for another." In re Barrett , 487 F.3d 353, 364 (6th Cir. 2007). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501800/ | MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE
The Chapter 7 Trustee, Robert L. Geltzer (the "Trustee"), seeks to recover as constructive fraudulent transfers amounts paid by the Chapter 7 co-debtors, Luba Pincus and Bruce Sterman (the "Debtors"), to or for the benefit of their two daughters, defendants Alexandra Sterman and Samantha Sterman (the "Defendants"), allegedly for college tuition, books and supplies, and room and board while they were students at Oberlin College. The Trustee and the Defendants filed cross-motions *232for summary judgment (the "Trustee's Motion," ECF Doc. # 24; the "Defendants' Motion," ECF Doc. # 22 at 11). The Defendants' Motion is supported by the affidavits of debtor Luba Pincus (the "Pincus Affidavit," ECF Doc. # 22 at 1) and debtor Bruce Sterman (the "Sterman Affidavit," ECF Doc. # 22 at 5).
The parties also entered a stipulation of undisputed facts (the "Stipulated Facts," ECF Doc. # 21). The Stipulated Facts indicate that some of the transfers to or for the benefit of Samantha were made while she was a college student before she was 21 years old and some were made while she was a college student after she was 21 years old. The Stipulated Facts indicate that the transfers to or for the benefit of Alexandra were made after she was 21 years old and had already graduated from college . According to the Stipulated Facts, since Alexandra graduated college in 2009, she has been "financially independent." (Stipulated Facts ¶ 15.)
The parties limit their cross motions to a request that the Court rule whether the Debtors received "reasonably equivalent value" for the transfers for college tuition and expenses; if the Debtors received reasonably equivalent value, the transfers would not be avoidable as constructive fraudulent transfers even if the Debtors were insolvent at the time of the transfers. There are two questions presented: first, did the Debtors receive reasonably equivalent value for their daughters' college educations and related expenses because their daughters' education will enhance their self-sufficiency; and second, does it matter whether the daughters were younger or older than 21 when the transfers were made?
For the reasons explained below, the Court grants the Trustee's Motion in part and denies it in part with respect to the transfers to or for the benefit of Samantha. The Trustee's Motion is granted with respect to the transfers to or for the benefit of Alexandra, as she was older than 21 and no longer a student when the transfers were made.
I. BACKGROUND
The Debtors, Luba Pincus and Bruce Sterman, filed a joint chapter 7 petition on February 19, 2016 (the "Petition Date"). (The Stipulated Facts ¶ 2.) The Trustee filed an adversary proceeding to recover allegedly constructively fraudulent transfers made by the Debtors to or for the benefit of their daughters. (Id. ¶ 11-12.)1
Alexandra attended Oberlin College from 2005-2009; Samantha attended Oberlin College from 2009-2013. (Id. ¶ 15-19.) In the six years prior to the Petition Date, the Debtors made several transfers to or for the benefit of their daughters. The parties stipulate that the transfers were made in connection with the Defendants' "college educations at Oberlin College and related expenses, including school books and supplies, meals, campus housing/rent/utilities, transportation and birthday presents." (Id. ¶ 12.)
The Stipulated Facts state that Alexandra Sterman reached age 21 on January 12, 2008 and graduated from Oberlin College in 2009. (Stipulated Facts ¶¶ 13 & 14.) Exhibit A to the Complaint (ECF Doc.
*233# 1) indicates that transfers to or for the benefit of Alexandra, totaling $15,675.00, were made between August 13, 2010 and October 13, 2015. Paragraph 12 of the Stipulated Facts states that "[t]he schedules of transfers that are attached to the Complaint as Exhibits A and B accurately describe the transfers to and/or for the benefit of the Defendants that are the subject of the Complaint." Those two exhibits list transfers between 2010-2015. Both the Stipulated Facts and the Pincus Affidavit state that Alexandra attended college between 2005 and 2009, and graduated in 2009, so it is clear under the Stipulated Facts that the transfers to or for the benefit of Alexandra all were made after she was 21 years old and after she graduated from Oberlin. The Pincus Affidavit also makes clear that "[s]ince graduation [Alexandra] has been fully employed, self sufficient and tax paying adult." (Pincus Affidavit ¶ 9.)
The Trustee claims that the transfers are constructively fraudulent. The Trustee seeks to recover $15,675.00 from Alexandra for transfers "while she was of majority age." (Stipulated Facts ¶ 16.) The Trustee seeks to recover $9,952.00 from Samantha; $2,276.00 of those transfers were made "in respect of college tuition and living expenses ... while she was a minor, and $7,676.00 were made while she was of majority age."2 (Id. ¶ 18.)
For purposes of the summary judgment motions, "the parties have agreed not to put solvency at issue." (Trustee's Motion ¶ 12, ECF Doc. # 11.) Therefore, the sole question is whether the Debtors received reasonably equivalent value for the transfers to or for the benefit of their daughters.3
II. LEGAL STANDARD
A. Summary Judgment
Rule 56(a) of the Federal Rules of Civil Procedure, made applicable by Bankruptcy Rule 7056, states that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). To successfully assert that a fact is not in dispute or cannot be disputed, a movant must:
cit[e] to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or show[ ] that the material cited do not establish the absence or presence of a genuine dispute, or that an adverse party *234cannot produce admissible evidence to support the fact.
FED. R. CIV. P. § 56(c)(1).
"The party seeking summary judgment bears the burden of establishing that no genuine issue of material fact exists and that the undisputed facts establish [the movant's] right to judgment as a matter of law." In re Soliman , 515 B.R. 179, 185 (Bankr. S.D.N.Y. 2014), (citing Rodriguez v. City of New York , 72 F.3d 1051, 1060-61 (2d Cir. 1995) ).
B. Fraudulent Transfers
The Trustee claims that the transfers were constructively fraudulent pursuant to Bankruptcy Code § 544. Section 544 provides that the trustee may avoid a transfer of a debtor's property interest that is voidable under state law by a creditor holding an allowed unsecured claim. See 11 U.S.C. § 544(b)(1) ; see also Banner v. Lindsay (In re Lindsay) , Adv. 2010 WL 1780065, at *5 (Bankr. S.D.N.Y. 2010). The Trustee alleges that the transfers in question were fraudulent under the New York Debtor and Creditor Law ("NYDCL"). Under the NYDCL, a conveyance is fraudulent if it is incurred without "fair consideration." NYDCL §§ 273 and 275. "Fair consideration" is defined by the NYDCL as follows:
fair consideration is given for property, or obligation,
a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or
b. When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.
NYDCL § 272.
Ordinarily, the plaintiff bears the burden of proving a lack of fair consideration but where, as here, "the facts regarding the nature of the consideration are within the transferee's control, the burden of proving the fairness of consideration shifts to the transferee." Ackerman v. Ventimiglia (In re Ventimiglia) , 362 B.R. 71 (Bankr. E.D.N.Y. 2007).
The Trustee also argues that the conveyances were constructively fraudulent under Bankruptcy Code § 548. Under that provision, a trustee may avoid a transfer made by the debtor within two years of the filing of the petition if the debtor did not receive "reasonably equivalent value" in the exchange. 11 U.S.C. § 548(a)(1)(b). The Bankruptcy Code defines the term "value" as "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." 11 U.S.C.A. § 548(d)(2)(A). The Bankruptcy Code does not define the term "reasonably equivalent value." In re Gonzalez , 342 B.R. 165, 169 (Bankr. S.D.N.Y. 2006). Courts have found that the term does not require the exchange to be "mathematically equal" but "[p]urely emotional benefits, such as love and affection" will not suffice. Id. at 169, 173. Both direct and indirect benefits flowing to the debtor may be considered. In re Akanmu , 502 B.R. 124, 130-31 (Bankr. E.D.N.Y. 2013) (quoting Liquidation Trust v. Daimler AG (In re Old CarCo LLC) , No. 11 Civ. 5039(DLC), 2011 WL 5865193, at *7 (S.D.N.Y. Nov. 22, 2011) ). "Fair consideration" under the NYDCL and "reasonably equivalent value" under section 548(a)(1)(B)(i) have substantially the same meaning. Id. (citing *235Picard v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC) , 458 B.R. 87, 110 (Bankr.S.D.N.Y.2011) ).4
III. DISCUSSION
The conveyances in this case must be broken down into three categories: (A) transfers made for education-related expenses to or for the benefit of both daughters after they reached the age of majority so that they could attend Oberlin College,5 (B) transfers made for education-related expenses to or for the benefit of Samantha when she was a minor, and (C) transfers to Alexandra after she graduated from college. Summary judgment should be granted to the Trustee with respect to categories (A) and (C) and denied with respect to category (B). Summary judgment should be denied to Alexandra and Samantha with respect to category (A) and (C) and granted to Samantha with respect to category (B).6
A. The Education Related Transfers Made after the Defendants Reached the Age of Majority
There is a developing body of law regarding whether college tuition payments made by parents for the education of their children after they reach the age of majority are constructively fraudulent. The Trustee points to several decisions where courts held that pre-petition college tuition payments are avoidable because the debtor parents did not receive reasonably equivalent value in exchange for the tuition payments. See Boscarino v. Bd. of Trs. of Conn. State Univ. Sys. (In re Knight ), 2017 WL 4410455 (Bankr. D. Conn. 2017) ; Roach v. Skidmore Coll. (Matter of Dunston), 566 B.R. 624, 636-37 (Bankr. S.D. Ga. 2017) ; Gold v. Marquette Univ. (In re Leonard) , 454 B.R. 444 (Bankr. E.D. Mich. 2011) ; Lindsay , 2010 WL 1780065. The Defendants counter by pointing to case law holding that parents did receive reasonably equivalent value in exchange for college tuition payments. See Lewis v. Penn. St. Univ. (In re Lewis) , 574 B.R. 536, 541 (Bankr. E.D. Pa. 2017) ; DeGiacomo v. Sacred Heart Univ., Inc. (In re Palladino) , 556 B.R. 10, 16 (Bankr. D. Mass. 2016) ; Trizechahn Gateway, LLC v. Oberdick (In re Oberdick) , 490 B.R. 687, 712 (Bankr. W. D. Pa. 2013) ; Sikirica v. Cohen (In re Cohen) , 2012 WL 5360956, at *10 (Bankr. W. D. Pa. 2012).7
*236Whether insolvent parents receive reasonably equivalent value for college tuition payments made for the benefit of their adult children is a culturally and socially charged issue. With the greatest respect for the courts that have found reasonably equivalent value for such tuition payments, the Court is constrained by the language of the Bankruptcy Code and the NYDCL-those statutes define the terms "value" and "fair consideration" to require either the transfer of property or the satisfaction of an antecedent debt in return for an insolvent debtor's payments. 11 U.S.C.A. § 548(d)(2)(A) ; NYDCL § 272. The Debtors received neither in this case with respect to transfers made to or for the benefit of Alexandra and Samantha after they reached the age of majority-21 years old in New York State.8
Alexandra and Samantha argue that their parents received reasonably equivalent value because the transfers made after they were adults increased the likelihood that they would be self-sufficient. (Pincus Affidavit ¶ 23.) The Massachusetts bankruptcy court reached that conclusion in In re Palladino , 556 B.R. at 16. In that case, the debtors made pre-petition tuition payments so that their daughter could attend college. Id. at 12. The Trustee attempted to set aside the tuition payments on a theory of constructive fraud. Id. at 13. The court ruled against the trustee because it found that the parents received an economic benefit from the tuition payments. The court stated:
I find that the [debtors] paid [the college] because they believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency ... A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.
Id. at 16.
The court's conclusion is supported by studies on the value of a college education to a family. See Brief Amici Curiae of American Council on Education, and 19 Other Education Associations in Support of Sacred Heart University, Inc. and Affirmance, at 4-7, Degiacomo v. Sacred Heart University , No. 17-1334 (1st Cir. Jul. 27, 2017) (citing studies showing that a college degree improves an individual's chances of gaining employment, increases their average income, and decreases the chances that they will live with their parents).
The Court does not question whether the Debtors' decision to send money to or for the benefit of their adult daughters for their college education was economically prudent. But, unfortunately, the economic "benefit" identified by the Defendants does not constitute "value" under the NYDCL or the Bankruptcy Code.
*237In In re Lindsay , 2010 WL 1780065, Judge Morris ordered avoidance, as constructively fraudulent transfers, of college tuition payments made for the benefit of the debtors' son. It is unclear whether the tuition payments were made before or after the son turned 21. The opinion only refers to the "adult son" living with his parents. Id. at *1. The court rejected the defendants' argument that a legal obligation to pay the tuition existed.9 The defendants argued that they had a legal and moral obligation to pay for their child's education. Id. at *9. But the defendants did not point to any authority supporting these arguments. Id. ("The Court is not aware of any law requiring a parent to pay for a child's college education. Defendants do not offer any authority in support of their argument that a judgment debtor's 'moral obligation' to pay for a child's college education is a defense to [the NYDCL]."). To the extent that Lindsay is read to require avoidance for tuition and education-related expenses for adult children, this Court agrees with the decision. See also Knight , 2017 WL 4410455, at *5 ("While such support is unquestionably admirable ... it is undisputed that the Debtor had no legal obligation [to] pay for her adult son's college education.").10
The Defendants here also argue that the Debtors received "psychic and other intangible benefits" from the conveyances. (Defendants' Opposition Brief, at 12.) The Defendants explain:
The debtors benefited when they paid rent by knowing their daughters had a roof over their heads on campus. The debtors benefited when they paid utilities by knowing their daughters has [sic] heat and light to read their books on campus. The debtors benefited when they paid health insurance by knowing their daughters could receive medical care. The debtors benefitted when they paid for transportation to and from Oberlin by knowing their daughters were travelling safely to and from campus.
(Id. at 11.) The Defendants support this argument by citing to In re Gonzalez , 342 B.R. 165. In that case, the debtor had a son out of wedlock with a woman named Karen. Id. at 167. Although he had no legal obligation to do so, the debtor made regular monthly payments on a mortgage for the home where his son and Karen lived. Id. The debtor claimed "that he made the payments to support his son ... and because Karen was unable to keep current on the note and could not otherwise provide a proper home for [their son]." Id. The debtor spent "all of his weekends" at the home with Karen and his son. Id. at 167. The trustee argued that the mortgage payments made by the debtor were avoidable because they were constructively fraudulent. Id. at 168. The court ruled against the trustee. The Defendants correctly point out that the Gonzalez court's ruling was based in part because the debtor *238received "psychic" and "other intangible benefits" from the mortgage payments. Id. at 172. The Defendants ignore, however, that the court found that these benefits were "in addition to" the debtors' use of the property on a weekly basis. Id. Thus, Gonzalez does not stand for the proposition that "psychic" benefits alone constitute reasonably equivalent value, as the Defendants portend.
Accordingly, the Trustee's summary judgment motion with respect to the transfers made after Alexandra and Samantha reached the age of 21 is granted.
B. Education Related Conveyances before Samantha Reached the Age of Majority
The Stipulated Facts indicate that $2,276.00 of the transfers to or for the benefit of Samantha were made while she was a minor. (Stipulated Facts ¶ 18.) The Stipulated Facts also state that the transfers were made for her "college education[ ] at Oberlin College and related expenses, including school books and supplies, meals, campus housing/rent/utilities, transportation and birthday presents." (Id. ¶ 12.) While the case law does not require that parents pay for college tuition for a minor child at a private college to satisfy the parents' obligation to provide a minor child with education, the issue rather is whether the parents receive reasonably equivalent value when they do pay for such an education. On this issue, the Court agrees with Chief Judge Craig, writing in In re Akkanmu :
The Trustee argues that New York law does not require the Debtors to provide parochial or private school education, and that the Debtors could have satisfied their obligation at no cost by sending the children to public school. This argument misses the point. The fact that the Debtors chose to educate their children in parochial school rather than public school, arguably exceeding the "minimum standard of care," does not change the fact that, by doing so, they satisfied their legal obligation to educate their children, thereby receiving reasonably equivalent value and fair consideration. It is irrelevant to this determination whether the Debtors could have spent less on the children's education, or, for that matter, on their clothing, food, or shelter. To hold otherwise would permit a trustee to scrutinize debtors' expenditures for their children's benefit, and seek to recover from the vendor if, in the trustee's judgment, the expenditure was not reasonably necessary, or if the good or service could have been obtained at a lower price, or at no cost, elsewhere. For example, a trustee could seek to avoid a debtor's payments to a restaurant for a meal purchased for the debtor's child, or payments to a department store for clothing purchased for the child, on a theory that adequate food or clothing could have been obtained at lower cost. A trustee could sue the vendor to recover the cost of a computer or other electronic device purchased pre-petition by a debtor for his child, on the theory that the item was not reasonably necessary..... The absurdity of this scenario is obvious.
A trustee is not granted veto power over a debtor's personal decisions, at least with respect to pre-petition expenditures. "[A] trustee's powers are not limitless." In re Thompson , 253 B.R. 823, 825 (Bankr. N.D. Ohio 2000). "[T]he 'Bankruptcy Code confers absolutely no power upon the trustee to make decisions concerning how a debtor manages his everyday affairs such as where the debtor will live or work.' " French v. Miller (In re Miller) , 247 B.R. 704, 709 (Bankr. N.D. Ohio 2000) (determining whether a chapter 7 trustee may waive *239the attorney-client privilege of a debtor). This is equally applicable to a debtor's decisions concerning where and how to educate his children.
In re Akanmu , 502 B.R. at 132-33 ; Graves v. Graves , 177 Misc.2d 358, 675 N.Y.S.2d 843, 846-47 (Sup. Ct. 1998) (requiring father to pay for child's college education).
Therefore, barring facts showing egregious conduct by debtors (which has not been shown here with respect to these Debtors),11 the Court concludes that Samantha is entitled to summary judgment dismissing the portion of the Trustee's claim seeking to recover $2,276.00 of the transfers to or for the benefit of Samantha made while she was a minor; the Trustee's cross motion to recover this portion of the transfers is denied.
C. Transfers to Alexandra After She Graduated from College
The Court has already concluded in Section A above that the Debtors did not receive reasonably equivalent value in return for the transfers made to or for the benefit of Alexandra and Samantha after they were 21. The Stipulated Facts show that all the transfers to or for the benefit of Alexandra were after she graduated college, after she reached the age of 21, and after she was financially independent. Even if any argument could support paying college tuition and related expenses for an adult child while still in school, if the student started college while still a minor, no argument has been made that would immunize from avoidance transfers made after graduation once the adult child has become financially independent.
IV. CONCLUSION
For the reasons explained above, the Court concludes that transfers to or for the benefit of Alexandra and Samantha after they reached the age of 21 for college tuition and related expenses are avoidable as constructive fraudulent transfers if the Debtors were insolvent at the times the transfers were made. On the other hand, on the record before the Court, transfers to or for the benefit of Samantha while she was a minor for college tuition and related expenses were supported by reasonably equivalent value and, therefore, are not avoidable.
IT IS SO ORDERED.
The Complaint also seeks to recover conveyances made to Oberlin College, Oberlin Student Cooperative Association, Navient Corporation, and Nelnet, Inc. The Trustee entered into a stipulation dismissing the Complaint against Nelnet, Inc. on September 24, 2018 (ECF Doc. # 30), and has since reached settlement agreements with Oberlin College, Oberlin Student Cooperative Association, and Navient Corporation. (ECF Doc. # 31-33.) Accordingly, the only remaining defendants are Alexandra and Samantha Sterman.
Settled New York law recognizes parents' obligation to provide minor children with housing, food, education and healthcare. "[I]t is axiomatic that parents are obligated to provide for their children's necessities, such as food, clothing, shelter, medical care, and education." In re Michel , 572 B.R. 463, 475 (Bankr. E.D.N.Y. 2017) (quoting In re Akanmu , 502 B.R. 124, 132 (Bankr. E.D.N.Y. 2013). The age of majority in New York is 21 years old. Columbia Cty. Dep't of Soc. Servs. ex rel. William O v. Richard O , 262 A.D.2d 913, 914, 692 N.Y.S.2d 496, 498 (1999) ("As a general rule, parents are required to support a child until the child attains the age of 21 (see, Family Ct. Act § 413 [1 ][a] ).").
The Complaint also includes a claim for unjust enrichment. (Complaint ¶¶ 45-49.) The parties' summary judgment papers are silent on the unjust enrichment claim and only consider whether the conveyances were constructively fraudulent. Accordingly, the unjust enrichment claim is not presently before the Court.
Both section 548 of the Bankruptcy Code and the NYDCL require that the trustee establish that the Debtors were insolvent when the transfers were made. Whether the Debtors were insolvent at the times of the transfers remains unresolved.
All the challenged transfers to or for the benefit of Alexandra were made after reached the age of majority (21) and after she graduated from college in 2009, and while she was working and "financially independent." It is unclear how these transfers after Alexandra graduated were made so that Alexandra could attend Oberlin College from which she had already graduated. In any event, as explained below, the Court concludes that the Debtors did not receive reasonably equivalent value for transfers made to or for the benefit of Alexandra or Samantha after they reached the age of 21.
The Complaint also seeks to recover $700 in cash gifts to Alexandra and Samantha. The Stipulated Facts do not provide any details about those gifts. Nothing in this Opinion addresses the issues concerning the cash gifts.
The recent decision by the district court in Pergament v. Brooklyn Law School , 18-CV-2204 (ARR), 2018 WL 6182502 (E.D.N.Y. November 27, 2018), is inapposite. The court reversed the bankruptcy court's grant of summary judgment on constructive fraudulent transfer claims in favor of three universities that received tuition payments from a chapter 7 debtor for two of his children. The issue addressed by the district court was whether the colleges were initial transferees, or subsequent transferees that took the tuition payments in good faith. The issue whether the debtor received reasonably equivalent value for the tuition payments is not addressed.
State law determines the age of majority. It defines the age below which parents are required to provide financial support for their children. The State law requirement to provide financial support establishes the antecedent debt that is satisfied by the payment for tuition and related expenses. As already indicated, New York law sets the age of majority at 21. See supra n.3. In re Knight , 2017 WL 4410455, one of the best reasoned decisions concluding that tuition payments for adult children does not provide reasonably equivalent value arose from transfers for college tuition for a child over 18 years of age in Connecticut. Unlike New York which defines the age of majority as 21, Connecticut defines the age of majority as 18. See Spencer v. Spencer , 10 N.Y.3d 60, 63, 853 N.Y.S.2d 274, 882 N.E.2d 886 (2008).
In re Lindsay , No. 06-36352 (CGM), 2010 WL 1780065, at *9 (Bankr. S.D.N.Y. May 4, 2010) ("Defendants admit that they transferred proceeds of certain assets sales to a university for their son's education. The Court notes at the outset that Defendants produce no evidence of their alleged legal obligation to pay their son's tuition, such as a promissory note in favor of the university or a lender. The Court is not aware of any law requiring a parent to pay for a child's college education.").
To the extent that Lindsay is read to require avoidance for tuition and education-related expenses for adult children, I agree with the decision. As explained in the next section of this Opinion, however, I reach a different result for transfers for tuition and education-related expenses for minor children, which I conclude may be supported by reasonably equivalent value.
One could postulate egregious facts-such as a distressed debtor making a lump sum transfer of several years of tuition payments and expected related expenses before filing a bankruptcy case-that could lead a court to conclude that the transfer is avoidable as an actual or constructive fraudulent transfer. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501801/ | OPINION AND FINDINGS OF FACT AND CONCLUSIONS OF LAW
KEVIN GROSS, U.S.B.J.
I. INTRODUCTION 1
This Opinion follows the trial in the adversary proceeding on March 19-23, 2018, and May 1-2, 2018. The parties are plaintiff Alan Halperin, as Trustee of the GFES Liquidation Trust ("Trustee" or "Plaintiff"), and defendants Michel B. Moreno ("Moreno"), MOR MGH Holdings, LLC ("MGH Holdings"), Frac Rentals, LLC
*247("Frac Rentals"), Aerodynamic, LLC ("Aerodynamic"), Casafin II, LLC ("Casafin"), and Turbine Generation Services, LLC ("TGS" and together with Moreno, MGH Holdings, Frac Rentals, Aerodynamic, and Casafin, "Defendants"). At trial, the Court heard live testimony from Moreno, Ted McIntyre ("McIntyre"), former officer and director Enrique Fontova ("Fontova"), former director Charles Kilgore ("Kilgore"), and the experts presented by both parties, Christopher J. Kearns ("Kearns") (for the Trustee) and Rodney W. Sowards ("Sowards") (for Defendants). The Court also considered extensive stipulated facts, and reviewed prior deposition testimony from both live witnesses and witnesses who were outside the district and had not volunteered to testify at trial.2
The Trustee filed this adversary proceeding on April 6, 2015, following confirmation of the plan of liquidation of debtors Green Field Energy Services, Inc., et al. (the "Debtor" or "Green Field"). Before its bankruptcy in 2013 and ultimate liquidation in 2014, Debtor was an oil services business. It differentiated itself by using frac pressure pumps powered by aero-derivative turbine engines. The use of this technology allowed Green Field to operate and compete on a smaller footprint with more fuel flexibility, including natural gas or field gas, as opposed to diesel fuel traditionally used by competitors.
Within months of closing on a high-yield bond offering in 2011, and in the midst of Green Field's ramp up, the demand for frac services declined, causing liquidity problems and creating the need for Debtor to find alternative sources of capital. Moreno's search for capital led him to General Electric Company and its affiliate GE Oil & Gas, LLC ("GEOG" and, collectively with General Electric Company, "GE"), which expressed interest in an even newer start-up joint venture under which Moreno or Green Field would produce turbine-powered power generator units (instead of turbine-powered frac pumps) to be leased to the same producers targeted by Debtor for its traditional oil services.
The Trustee's Complaint3 originally pleaded 35 counts in four broad categories: (1) Counts 1-10 related to the transfer of the so-called power generation business ("PowerGen" or "power generation") opportunity; (2) Counts 11-14 related to the two share purchase agreements; (3) Counts 15-26 related to various alleged preferential and/or fraudulent transfers; and (4) Counts 27-35 sought disallowance and/or subordination of various administrative claims and proofs of claim filed by Moreno and/or entities he controls.
The Trustee has settled and dismissed Causes of Action ("Count") 9, and 10, against all Director Defendants. The Trustee also settled Counts 11 and 33 as against one of Debtor's former shareholders-Moody, Moreno and Rucks, LLC ("MMR"), which was dismissed from this proceeding. The Trustee also voluntarily withdrew Counts 4, 5, 13, 15, 16, 17, 18, 20, 22, 25, and 26.
On January 24, 2018, the Court entered a Memorandum Opinion and Order on the *248parties' cross motions for partial summary judgment (D.I 463, 464) (the "SJ Opinion"), resolving Counts 19, 23, 24, 30, 31, 34, and 35. As a result of the Court's partial ruling in the SJ Opinion, the Trustee voluntarily withdrew Count 21.
By two subsequent orders on both parties' motions to reconsider and to amend (Memorandum Order Denying Motion to Reconsider, D.I. 473; Memorandum Order re Motion to Amend, D.I. 476), the Court clarified its SJ Opinion concerning the share purchase agreement theories under Counts 11 and 12, and the Court narrowed issues for trial on Moreno's alleged "transfer beneficiary" liability which the Trustee asserts under 11 U.S.C. § 550(a)(1) in Counts 19, 23 and 24.
Accordingly, the issues presented for trial included:
1) Counts 1, 2, 3, 6 and 7 - fraudulent transfer, breach of fiduciary duty and corporate waste claims against Moreno and TGS related to the alleged transfer or waiver of the power generation business;4
2) Counts 11, 12 and 14 - breach of contract, breach of fiduciary duty and tortious interference claims against MGH Holdings and Moreno related to the alleged breaches of the two SPA contracts between Debtor and MGH Holdings; and
3) Counts 19, 23 and 24 - Moreno's personal liability for any avoidable transfers under the "transfer beneficiary" theory of 11 U.S.C. § 550(a)(1).
II. BASIS FOR JURISDICTION
The Trustee and Defendants have agreed that counts 1, 2, 19, 23 and 24 are statutorily "core" claims within the meaning of 28 U.S.C. § 157(b)(2). They have also agreed that counts 3, 6, 7 and 14 are "non-core" claims. See D.I. 288. The Trustee and Defendants dispute whether Counts 11 and 12 are core claims. MGH Holdings has not filed a claim in Green Field's bankruptcy case. Therefore, the Court finds that the Trustee's claims against MGH Holdings for pre-petition breaches of two pre-petition contracts are not "core" claims under 28 U.S.C. § 157(b)(2).
The Trustee consents to the Court's entry of final orders or judgments in connection with this adversary proceeding. The Trustee also asserts that the Court has statutory and constitutional authority to enter final orders or judgments with respect to the core claims at issue in this case. 28 U.S. C. § 157(b)(2) ; In re Millennium Lab Holdings II, LLC , 575 B.R. 252, 261-62 (Bankr. D. Del. 2017) (holding that Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), does not prevent a bankruptcy judge from entering final orders in statutorily core proceedings).
Defendants do not consent to the Court's entry of final orders or judgments *249with respect to the non-core claims in this adversary proceeding. Defendants have not consented to the Court's constitutional authority to enter final judgment in this matter. They have expressly reserved such rights since Defendants' initial filings in this proceeding. The Court will enter judgment on the core claims and will issue proposed findings of fact and conclusions of law for the non-core claims.
The Court finds that it has both statutory and constitutional authority to enter final orders or judgments with respect to the statutorily core claims at issue in this case. 28 U.S.C. § 157(b)(2) ; Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc. ), 466 B.R. 626, 644 (Bankr. D. Del. 2012) (adopting the "narrow interpretation" of Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), holding that Stern "only removed a non-Article III court's authority to finally adjudicate one type of core matter, a debtor's state law counterclaim asserted under § 157(b)(2)(C)"). With respect to the non-core claims, these Findings of Fact and Conclusions of Law will constitute proposed findings of fact and conclusions of law under 28 U.S.C. § 157(c)(1) and Federal Rule of Bankruptcy Procedure 9033(a).
III. FINDINGS OF FACT
A. Background
Moreno served as Chief Executive Officer for Dynamic Industries for approximately 10 years, until 2007, when he sold his majority interest to a third-party investor. Trial Tr. 489-92. When he first acquired Dynamic Industries, it performed offshore welding and maintenance on offshore rigs. Id. The business evolved into a full-service fabrication, integration and maintenance business that built, installed and commissioned large-scaled floating production storage and off-loading units all over the world. Id. Thereafter, Moreno transitioned out of his management of Dynamic and formed MMR with two business partners and invested in various businesses in the energy industry. Stipulation No. 11.5 One such investment was Hub City Industries, L.L.C ("Hub City").
B. Formation of Green Field
1. Hub City to Green Field
Hub City was a traditional oil and gas well-related service company that was originally formed in 1969. Stipulation Nos. 28-31. Such traditional services included cementing, coiled tubing, pressure pumping, acidizing, nitrogen and other pumping services. Stipulation No. 30. Prior to Moreno's involvement with Hub City, the company had begun working with inventor McIntyre on a new technology that would utilize used turbine engines to power various pumping technologies. Trial Tr. 1517:16 - 1519:24. In December 2010, Hub City began offering hydraulic fracturing services to its customer base. Stipulation No. 31.
Moreno first began investing in Hub City with two of his partners through MMR in 2005 or 2006, when McIntyre first began developing his turbine-powered frac pump. Trial Tr. 1517:16 - 1519:24. At the time, Moreno was still working with Dynamic Industries and had no direct involvement in Hub City's operations or management. Trial Tr. 507-08. Also during this period, McIntyre, an expert in unconventional applications for aero derivative turbine engines, was working with Hub *250City on an application of the aero derivative turbines to power Hub City's newer pressure pumping operations. Trial Tr. at 503-05. McIntyre later obtained a trademark on his pressure pumping technology under the mark "Frac Stack Pack."6 He also sought but was denied a patent on the use of turbine engines to power and control frac pumps. Trial Tr. 1552:6-11.
A recapitalization and buyout of Hub City's members began in May 2011 and in September 2011, Hub City changed its name to Green Field Energy Services, LLC. Stip. Facts ¶ 32. Upon conversion to a Delaware corporation in October 2011, the LLC changed its name to Green Field Energy Services, Inc. Stip. Facts ¶ 36. The recapitalization and buyout resulted in MOR MGH Holdings, LLC ("MOR MGH") owning 88.9% of Green Field's common stock and MMR, an entity owned 33.3% by Moreno, owning 11.1% of Green Field's common stock. Stip. Facts ¶¶ 32- 33; PX 142 at p. 5.
Moreno became the Chairman of the Board of Directors of Green Field and Chief Executive Officer in October 2011 and remained Chairman and CEO until Green Field's liquidation. Stip. Facts ¶ 37. Fontova became the President of Green Field and a director in October 2011 and remained in those positions until approximately October 2013. Stip. Facts ¶ 39. Earl Blackwell ("Blackwell") was Chief Financial Officer of Green Field from 2009 until Green Field's liquidation. Stip. Facts ¶ 40. Kilgore and Mark Knight ("Knight") also became directors of Green Field in October 2011 and remained directors until October 2013. Stip. Facts ¶¶ 41, 42.
2. Partnership with McIntyre and TPT
McIntyre is the President and Chief Operating Officer of Marine Turbine Technologies, LLC ("Marine Turbine"), as well as the manager of TPT. Trial Tr. 1497:3-24. TPT is a 50-50 joint venture between Green Field and McIntyre, which McIntyre holds through another entity, MTT Properties, LLC ("MTT Properties"). Trial Tr. 1498:2-10. Marine Turbine was incorporated in 1990 and is owned solely by McIntyre through MTT Properties. Trial Tr. 1497:19 - 1498:10.
As it relates to Green Field and the frac pump business, McIntyre's work began as early as 2004 when a company contacted Marine Turbine about producing a frac pump with a turbine engine on top. Trial Tr. 1500:2-12; McIntyre Depo. Tr. 9:9 - 10:5. This led to McIntyre starting to develop his frac pump in 2006 and 2007 within a new entity called Turbine Stimulation Technologies ("TST"), which, at the time, was jointly owned by McIntyre and the previous owners of Hub City. Trial Tr. 1507:22 - 1508:21; McIntyre Depo. Tr. 9:9 - 11:4.
McIntyre simultaneously entered into a Capital Contribution/Assignment Agreement, dated September 22, 2011, pursuant to which MTT Properties assigned to TPT its right, title, and interest in and to the "Invention." PX 102. An Amended and Restated Assignment Agreement executed less than a month later on October 17, 2011, modified the assignment to make it more inclusive and expansive by adding MTT Manufacturing, LLC, another entity owned by McIntyre. JX 7. The Amended and Restated Assignment Agreement assigned to MTT Properties all rights, title and interest in and to the Invention as well *251as an additional assignment of all rights, title and interest in and to any Intellectual Property relating to the Frac Stack Pack Technology. JX 7; Trial Tr. 1555:18- 1556:18.
When Moreno took over Hub City (now Green Field) in 2011, there were discussions about Green Field simply purchasing McIntyre's entire Marine Turbine business. Trial Tr. 1510:11 - 1512:22. However, Moreno and McIntyre could not agree on a value for McIntyre's unrelated intellectual property portfolio, which included firefighting, boats, motor vehicles and power generation. Id. Thus, as a compromise, they formed TPT as a joint venture. Trial Tr. 1510:11 - 1512:22, 127:14 - 128:11, 511-13. TPT was thus formed in September of 2011, with McIntyre being appointed as the manager. JX 6. In exchange for Green Field's agreement to fund TPT's overhead and expenses (JX 6, Trial Tr. 1523:11-20), McIntyre agreed to contribute his Frac Stack Pack technology and assign all interests in the Frac Stack Pack technology to TPT. JX 7, JX 8; Trial Tr. 1510:11 - 1512:22, 127:14 - 128:11. The contribution and assignment agreements to TPT in September of 2011 are specific. They are limited to McIntyre's Frac Stack Pack pressure pumping invention. There is no mention in those documents of power generation or any other technology developed by McIntyre or his company, Marine Turbine.
Contemporaneously with the formation of TPT, and McIntyre's assignment of the Frac Stack Pack technology into TPT, TPT granted Green Field a 5-year license to use the Frack Stack Pack pressure pumping technology. PX 103, Trial Tr. 511-13. At the end of the 5-year license term, McIntyre would have been allowed to sell his pressure pumping technology in the open market. Id.
In addition to holding the intellectual property, TPT was the entity that manufactured and built the frac pumps for Green Field. McIntyre testified at trial that TPT exclusively built frac pumps for Green Field and that Green Field received an exclusive and perpetual license to the fracking technology. Trial Tr. 1509:23-1510:10, 1511:6-21. Pursuant to the TPT Operating Agreement, TPT was the sole manufacturer of Green Field's turbine powered fracking pumps and Green Field was TPT's sole customer, sole source of revenue and sole source of funding for TPT's operations. Stip. Facts ¶¶ 54-56; JX 6; McIntyre Dep. 56:14-18. Moreno acknowledged that "Green Field was funding TPT. TPT had no way to fund itself. Green Field was responsible for every employee at TPT. Their rent, their overhead, everything." Trial Tr. 906:23-907:2.
Green Field also provided employees to assist TPT, including Green Field project managers, such as David Kinnaird, who created "schedules, procurement, to help the supply chain, because the way that arrangement worked was Green Field was actually paying all the expenses associated with the building out of the equipment." Trial Tr. 1294:12-24, 1566:1-20; PX 243. As Fontova testified, Green Field "would procure the equipment, and then it would be assembled at TPT, primarily with TPT employees, but we had Green Field, some technicians, some schedulers and some project managers helping." Trial Tr. 1295:4-10.
Moreno repeatedly testified at trial that he treated TPT and Green Field as one company. Trial Tr. 123:14-25; 125:11-126:9; 184:13-185:5. Indeed, because of Green Field's control over TPT, Green Field was considered the primary beneficiary of the TPT venture, and TPT met the definition of a "variable interest entity," such that Green Field consolidated TPT's operating *252results with Green Field's in its financial statements. PX 226 at p. 57 (MORE_00036699); PX 142 at p. 65 (GFES014956).
3. The Green Field Start-Up
When Moreno began Green Field, the company was doing very little pressure pumping. Trial Tr. 1290-91. The initial plan in 2011 was to maintain these profitable "legacy services" and build a fleet to expand the company's pressure pumping horse power capabilities. Id. At the time of Moreno's takeover in 2011, Hub City had about a 24,000 horsepower pumping capacity-i.e., less than the capacity of one full frac spread. Trial Tr. 1293.
A full frac spread includes more than just pressure pumps. Trial Tr. 1291:20 - 1293:13, 1520:3-17. A complete frac spread includes trailers, man camps, water trucks, wireline, blenders, data vans, Sandkings and other equipment. Id. Depending on the formation where the fracking is being done, a spread may require approximately 35,000 horsepower as well, which could require anywhere from 20 to 30 pumps. Id.
The business plan was to build six to seven frac spreads over time. Trial Tr. 537-38; 1292-94. At the time, the rough cost to build each spread was between $35 and $50 million. Trial Tr. 1292-95, 1520:14-17. To raise this capital, Moreno and his management team searched for an "anchor" customer. Trial Tr. 533-37. After five years of serving Green Field's equipment in the field, the company's goal was to begin selling the equipment directly to other servicing companies. Trial Tr. 537-38. However, to finance its early start-up operations during the period from May 2011 through September 2011, Green Field borrowed $53 million under a bridge loan (the "Bridge Loan") from Jefferies & Company. Stipulation No. 60. Green Field intended the Bridge Loan to finance working capital needs, fund the manufacture of the first operational fleet of Frac Stack Pack pressure pumps, sustain Green Field to an eventual note issuance, and to refinance its obligations under a then-existing credit agreement with JP Morgan. Id.
Within months of entering into the market, Green Field entered into a "Contract for High Pressure Fracturing Services" (the "Shell Contract") with SWEPI, LP, the successor to Shell Western Exploration and Production, Inc. (collectively with its affiliates and subsidiaries, "Shell"). Stipulation No. 61. At all relevant times, Shell remained Green Field's most significant customer, representing up to 79% of all its revenues. Id. The Shell Contract committed $600 million in future revenue to Green Field, which became part of Green Field's business plan. Trial Tr. 542-43. In the Shell Contract, Green Field agreed to furnish certain fracking spreads at Shell drilling sites and service such sites at a discounted rate. In return, Shell agreed to provide up to an aggregate amount of $100 million in senior secured term loans (the "Prepayment Funding"). Stipulation No. 62.
On November 15, 2011, Green Field engaged in a bond issuance (the "Bond Issuance") and raised an additional $250 million through high interest secured notes from public markets. Stipulation No. 63. The Bond Issuance was memorialized on November 15, 2011, by an indenture (the "Indenture") between Green Field and Wilmington Trust, National Association, as trustee and collateral agent (the "Indenture Trustee"). Id.
The funds from the Bond Issuance were used primarily to repay both the Bridge Loan with Jeffries and the initial $42.5 million of Prepayment Funding due under the Shell Contract. The remainder amount was made available for the manufacturing of McIntyre's Frac Stack Pack pressure *253pumps and general operating cash needs. Stipulation No. 64. In other words, the $250 million proceeds from the Bond Issuance was not enough to fully fund Green Field's business plan.7
Shortly after the Bond Issuance, the oil and gas industry experienced a significant decline in natural gas prices, which in turn impacted the fracking industry. Stip. Facts ¶ 65. The decline in the oil and gas industry negatively impacted Green Field's operating results in 2012. Thus, Green Field sought additional financing from Shell in April 2012. Id. Green Field and Shell agreed to revise the structure of the Shell Contract, replacing the interest free Prepayment Funding with a $30 million revolving senior credit facility for up to an aggregate amount of $100 million (the "Shell Senior Credit Facility"). Id. Due to a limitation on debt set forth in Section 4.08 of the Indenture, the Shell Senior Credit Facility was limited to additional debt of no more than $30 million. Id.
In May 2012, Green Field fully drew the $30 million from the Shell Senior Credit Facility, but this proved still insufficient to satisfy their cash requirements. Stip. Facts ¶ 66. Shell therefore agreed to amend the Shell Senior Credit Facility and agreed to provide the remaining $70 million in funding (the "Shell Amended Senior Credit Facility"). Id. The Shell Contract, as amended, provided that the $100 million Shell loaned to Green Field was to be paid back according to a payment schedule requiring monthly $2 million payments until November 2013 (at which point they increased to $4 million and then $7.5 million in May 2014). JX 5 at MORE_00571025-26. Green Field defaulted on those payments in June, July, and August 2013 and reported those defaults in its quarterly report for the period ended June 30, 2013. PX 174 at pp. 8, 30; Stip. Facts ¶¶ 79, 83.
In order to obtain the additional borrowing under the Shell Amended Senior Credit Facility, Moreno approached the bondholders with a consent solicitation (the "Consent Solicitation") that proposed to modify Section 4.08 of the to permit a "one-time incurrence of up to $95.0 million in senior term loans secured by a first priority security interest in all of the company's motor vehicles and equipment under a credit agreement with one of [Green Field's] key customers, [Shell]...." Stip. Facts ¶ 67. As consideration for the bondholder consent, on October 24, 2012, MOR MGH and MMR (the Green Field shareholders) agreed to provide additional equity investments into Green Field under a share purchase agreement (the "2012 SPA"). Stip. Facts ¶ 68.
Section 2.01(a) of the 2012 SPA established that MOR MGH and MMR would purchase $10 million of Green Field preferred stock at execution, and up to an additional $15 million on a quarterly basis. Stip. Facts ¶ 69. The formula in the 2012 SPA required the quarterly increments to bridge the gap between actual cash on hand at quarter's end and $10 million (e.g., if cash on hand at quarter's end equaled $9 million, the required purchase by MOR MGH and MMR would be $1 million). Id.
*254C. Moreno and the Various "Moreno Entities"
Before further discussing Moreno's search for new capital to help Green Field during the 2012 downturn, the Court must address the various entities either owned and/or controlled by Moreno. The Trustee alleges that Moreno and a "web of affiliated companies under his control ... engaged in a concerted campaign" to strip Green Field of valuable assets. Second Amended Complaint ¶ 1. Moreno acted as manager for several entities that played various roles in Green Field's business, but the evidence does not support the Trustee's allegations of a "concerted campaign" against Green Field or its creditors. On the whole, the Court finds that the following entities were formed, or otherwise managed by Moreno, and often supported by Moreno voluntarily pledging his personal assets.
1. The Grantor Retained Annuity Trusts and Related Holding Companies
Moreno began forming grantor retained annuity trusts ("GRATs") in 2009, as part of an estate planning measure following the 2008 financial crisis. Trial Tr. 494. Moreno and his wife each is a settlor of his or her respective GRAT, neither one is a beneficiary of the GRATs, and neither one is trustee of the GRATs. Trial Tr. 496-99. Each GRAT is "seeded" with assets, whether it is cash or stock in a privately held company. Id. The assets are valued by a third-party at the time of contribution. Id. The primary purpose for the GRAT structure is to leave the beneficiary with the anticipated increased value of the contributed assets, but without the tax burden on the growth. Trial Tr. 498. In general, the trusts take on the obligation to repay the settlors their seed capital through annuity payments over a defined period of time, 10-15 years typically. Id. Sometimes the trusts lack the liquidity to make the required annuity payments. Id. Moreno testified that the annuity repayment is flexible-the payments may be deferred if the trusts are short on cash; the trusts may also give loans to the settlors (as they did in some instances) against future annuity payments, if cash is available. Id. While Moreno is a manager for some of the GRATs, he testified that he was not involved in the day-to-day finances of the GRATs, instead relying upon his family office accounting staff to ensure regulatory and accounting compliance. Trial Tr. 829:12-23.
In 2011, Moreno and his wife formed two new GRATs called the MBM 2011 MGH Grantor Retained Annuity Trust and the TCM 2011 MGH Grantor Retained Annuity Trust (collectively the "MGH GRATs"). Stipulation No. 9. As with the other GRATs, their daughter was (and still is) the sole beneficiary of the MGH GRATs. Trial Tr. 496.
The sole asset of the MGH GRAT was an equal share of a newly formed company called MGH Holdings. Stipulation No. 9; PX 96, PX 97. MGH Holdings was established as a special purpose limited liability company registered in the state of Delaware. Stipulation No. 6. Its sole asset was stock in Green Field. As of October 17, 2011, MGH Holdings owned 88.9% of Green Field's common stock. Stipulation No. 7. At all relevant times, Moreno was a manager of MGH Holdings. Stipulation No. 8.
Also in 2011, Moreno and his wife established two other GRATS called the MBM 2011 DOH Grantor Retained Annuity Trust and the TCM 2011 DOH Grantor Retained Annuity Trust (collectively the "DOH GRATs"). PX 98, PX 99. The terms of the DOH GRATs are substantially the *255same as those of the MGH GRATs. Trial Tr. 68.
The schedule of annuity payments listed in the DOH GRAT agreements were tied to the value of Dynamic Offshore Holdings. Trial Tr. 495; PX 98, 99. That entity is not related to Dynamic Industries. Trial Tr. 495. After selling his interest in Dynamic Industries, Moreno started an offshore exploration business called Dynamic Offshore Holdings, but that entity had no affiliation to Dynamic Industries or its construction and fabrications businesses. Id.
The sole asset of each DOH GRAT was an equal share of an entity called MOR DOH Holdings, LLC ("DOH Holdings"). Trial Tr. 68. DOH Holdings eventually came to own three different entities that did business with Green Field-Frac Rentals, Shale Support Services and TGS. This structure is relevant to the "ultimate beneficiary" analysis discussed below.
Moreno's family office maintained separate records for the GRATs and their assets. In this regard, Moreno's accounting staff never treated obligations of MGH Holdings as an obligation of DOH Holdings, or vice-versa. Trial Tr. 92:13-21. Before forming TGS in May of 2013, from time to time, Moreno borrowed against his future annuity payments due from the DOH GRATs. PX 158; Trial Tr. 76:3-80:1; Trial Tr. CONFIDENTIAL Mar. 20, 2018 at 1-2:22. Such borrowing transactions were memorialized by notes issued in favor of DOH Holdings. Id. In May, 2013, at the request of GE, DOH Holdings transferred its interests in those notes and other non-TGS entities to a separate entity called MOR 2013 Holdings, LLC. Id. This transaction left DOH Holdings owning nothing but TGS. Id.
2. Moody Moreno and Rucks, LLC
MMR is one of the two primary owners of Green Field. Its membership interests are owned by TMC Investment, L.L.C. (33.3% equity interest), Elle Investments, L.L.C. (33.3% equity interest), and Rucks Family Limited Partnership (33.3% equity interest). Stipulation No. 11. At all relevant times, MMR owned 11.1% of the Green Field common stock. Stipulation No. 10. While the Trustee initially asserted claims against MMR under the 2012 SPA, those claims were settled well before trial for $100,000. Stipulation No. 12.
3. Turbine Powered Technology, LLC
TPT is a Louisiana limited liability company established on September 22, 2011 by its members, Green Field and MTT Properties, LLC ("MTT Properties"). Stipulation No. 24. Green Field and MTT Properties each owned 50% of TPT. Stipulation No. 26. TPT is not a named defendant in this action. Stipulation No. 27.
As discussed above, TPT was formed to hold McIntyre's Frac Stack Pack intellectual property so that it could be licensed to Green Field for use in its pressure pumping and other traditional well services. Trial Tr. 127:14-128:11. Initially, Moreno considered acquiring McIntyre's entire business and intellectual property portfolio, but the parties could not agree on a valuation for McIntyre's other intellectual property-i.e., the inventions beyond the Frac Stack Pack technology. Id. Thus, the parties reached a compromise to "co-own the manufacturing component of the startup" through TPT. Id.
4. The Preference Defendants
In its SJ Opinion on the parties cross motions for partial summary judgment, the Court discussed Aerodynamic, Casafin and Frac Rentals (collectively, the "Preference Defendants"). See Memo Op., D.I. 463 at 14-17. The issues surrounding the Preference Defendants were largely undisputed, *256and the Court has resolved most of them through summary judgment.
Aerodynamic and Casafin were special purpose entities established or otherwise utilized to assist Green Field in its aggressive plan to scale up the company's operations to remote areas where there was little or no infrastructure or large commercial airports. See Memo Op., D.I. 463 at 14-17, Trial Tr. 549-50, Blackwell Depo. at 156:12 - 157:22, 159:2-24.
Frac Rentals was established to rent additional equipment to Green Field because the company was unable to raise additional capital or borrow additional funds under the existing Indenture. Trial Tr. 552, Blackwell Depo. 142:13-20. Debtor's CFO testified that it was fairly commonplace in the industry to rent peripheral equipment with short-term utility. Blackwell Depo. 168:6-9. In Green Field's business judgment, ownership and maintenance of such peripheral equipment was "a capital investment, and it [was] really better to let somebody else provide that capital and just pay a day rate on using the equipment." Blackwell Depo. at 168:13-18.
Frac Rentals was established and funded by its owners-initially 80% owned by DOH Holdings, and 20% by a third-party investor Michael J. Smith-with Moreno acting as manager for the entity. Memo Op., D.I. 463 at 16; Blackwell Depo. 143:22-144:3, 170:9-13.
While Michel Moreno served as the Manager for the entity, it was operated by his brother, Jesus Moreno and a group of experienced operators of fracking related equipment. Id. In the Court's SJ Order (D.I. 464), the Court entered summary judgment on the following counts, in the following amounts:
• Count 19 - Frac Rentals: $69,137.97;
• Count 23 - Aerodynamic: $110,000.00; and
• Count 24 - Casafin: $466,414.94.
However, it was undisputed that all three Preference Defendants are no longer in business, have sold or otherwise disposed of their respective assets, and cannot satisfy a judgment. At trial, Moreno's stated that he received no salaries or distributions from any of the Preference Defendants, Trial Tr. 552-553. Also all money that Green Field paid to the Preference Defendants was generally used to satisfy the Preference Defendants' own expenses and obligations, such as fuel, maintenance, pilot fees, and the like. Trial Tr. 551-53.
5. Turbine Generation Services, LLC
The last entity alleged to fall within a "web of affiliated companies" is TGS. The undisputed evidence demonstrates that TGS was formed as a subsidiary of DOH Holdings in March of 2013. Moreno testified that he created TGS as a place-holder for a potential joint venture with GE, "not knowing where it was going to land" given his ongoing and fluid negotiations with GE. Trial Tr. 293-295, 312:6-14; JX 27, PX 136, PX 152. Moreno further testified, without being controverted by other witnesses or evidence introduced by the Trustee, that the formation of TGS was GE's mandate. GE was concerned about Green Field's finances. JX 30, Trial Tr. 291-93. Moreno testified that he did not have control over the process when it came to negotiations with GE over the direction of its power generation investment. Trial Tr. 588:4-7, 697:24-368:7, 782:3-19. Thus, at GE's insistence, Moreno formed TGS outside of Green Field. PX 157, Trial Tr. 785-87.8
*257Moreno's credible testimony on this point was entirely consistent with all other evidence showing Moreno's ongoing discussions with GE over this period of time, as well as Moreno's disclosures to bondholders, as discussed in detail below. The Court finds that, consistent with the other entities set up by Moreno to support Green Field's operations, Moreno established TGS for legitimate business reasons aimed to support Green Field, not to harm Green Field or create an unfair opportunity for Moreno.
D. The Decline of the Fracking Market and Transition to Power Generation
1. PowerGen
By the fall of 2012, Green Field was suffering significant losses and began looking for opportunities, investments or lines of business, to help prop it up. Trial Tr. 1416:22- 1417:15. As Moreno testified, one of the characteristics of drilling for oil is that the oil fields are sometimes in remote locations that do not have accessible power or a power grid. Trial Tr. 171:17-25; 191:10-15. For companies to drill in these remote locations, they must either connect to the power grid or bring in portable power. Trial Tr. 172:1-9. Because connecting to the power grid could be extremely expensive, portable power is used by the industry to a substantial degree. Trial Tr. 172:7-13.
As of November 2012, Moreno believed there was a market for power generation and that Green Field could participate in that market. Trial Tr. 188:15-189:4. McIntyre testified at trial that the power generation idea arose because Moreno realized that lack of electricity was a barrier for fracking companies. Trial Tr. 1530:11- 1531:12. Specifically, Moreno's understanding of the power generation market arose from discussions with potential Green Field fracking customers, including SandRidge Exploration and Production, LLC ("SandRidge"). Trial Tr. 558:6-8; PX 121 at p. 24. On a call with Green Field bondholders on November 21, 2012, Moreno touted to bondholders the exciting business opportunity provided to Green Field by the PowerGen business. He explained that there was a "big need for power" at well sites in North America and that operators had "to use portable power, 1-meg machine, 350kw machines and they go through the traditional suppliers, like Aggreko and Caterpillar. They're mostly diesel-driven units of portable power so there's a tremendous demand for power." PX 121 at p. 24. Moreno described the "significant" demand in the market, stating that "the demand for power is very nearly similar to what it was for fracing a year and a half ago" and emphasized that the demand was coming from existing customers. PX 121 p. 24. Moreno also told bondholders that given the tight margin profiles for fracking at the time, the power generation business could be "a great hedge and balance for us." PX 121 at p. 25. Moreno explained that PowerGen had a "dramatically better" margin profile. PX 121 at p. 25.
On the call with Green Field bondholders on November 21, 2012, Moreno also touted to bondholders the commitments it already had for PowerGen, including from Apache and Sandridge. PX 121 pp. 3, 20; Trial Tr. 158:6-17, 178:13-179:4, 182:11-183:6. At the time of the November 21, 2012 bondholder call, TPT was actively building a prototype power generation unit *258for SandRidge, which was completed in December 2012 and paid for by Green Field. Trial Tr. 178:2-8, 213:13-24, 222:20-223:8, 1452:24-1453:11, 1531:16- 1532:11; PX 243. At trial, Moreno testified that SandRidge became a customer of Green Field for purposes of a power generation pilot program. Trial Tr. 219:24-221:20. He testified that if the pilot program with SandRidge was successful "it could morph into them starting to buy equipment from Green Field" rather than others. Trial Tr. 219:24-221:20.
Furthermore, Moreno's trial testimony and the November 21, 2012 bondholder call make clear that Green Field was taking the same dual fuel system, developed for Green Field's fracking operations, and applying it to PowerGen units. Trial Tr. 158:18-159:6; PX 121 at pp. 24-25. The turbine engine, adapted to accommodate multiple fuel sources, and thus able to run on both diesel and natural gas, including natural gas from the well-site, as used in Green Field's fracking operations, was technology translatable directly from fracking to power generation. PX 121 at pp. 24-25; Trial Tr. 198:22-202:4. Moreno explained to the bondholders in November 2012 the simplicity of transitioning Green Field's technology to power generation. PX 121 at pp. 24-25; see also PX 121 p. 20 ("[I]t's the turbine and the ability to use multiple fuel sources that makes this really work.").
2. 2012 SPA Obligations
Pursuant to the 2012 SPA, on October 24, 2012, the day of its execution, MOR MGH and MMR were required to purchase $10 million of Green Field's preferred stock, and they did in fact make that purchase. D.I. 219, at ¶ 56. The obligations to make additional purchases of preferred stock arose thereafter on a quarterly basis as determined by the formula that required purchase in an amount "equal to the amount by which $10,000,000.00 exceeds the Cash or, if applicable, cash equivalents of the company ... as of the last Business Day of such fiscal quarter." PX 119. On February 13, 2013, while Green Field's was transitioning into the power generation market and negotiating with GE, the payment for the fourth quarter of 2012 became due. PX 132; Trial Tr. 381:3-382:20. Blackwell sent a notice to Moreno, Moody, and Rucks that the payment for the fourth quarter of 2012 was due. PX 132; Trial Tr. 381:3-382:20. These payments were, in fact, made by MOR MGH and MMR. Trial Tr. 381:17-382:23; D.I. 219 at ¶ 58; Blackwell Dep. 31:13-32:18.
On May 2, 2013, Blackwell again sent notice to Messrs. Moreno, Moody, and Rucks in connection with the payment due following the close of Q1 2013. PX 147. MOR MGH was responsible for $3,968,606 and MMR was responsible for $496,020. Stip. Facts ¶ 71. Payment was requested on or before May 15, 2013. PX 147. As explained below, on May 13, 2013, Moreno orchestrated Green Field's waiver of the PowerGen Business in favor of himself personally and Moreno caused TGS to enter into the $25M loan with GE. On May 15, 2013, two days after the Waiver, Moreno caused MOR MGH and MMR to breach their obligations under the 2012 SPA for the first quarter of 2013. Stip. Facts ¶¶ 71, 72. Moreno caused MOR MGH's breach despite the fact that Moreno was the CEO of Green Field, had a fiduciary obligation to Green Field, and MOR MGH's only asset was its stock ownership in Green Field. Trial Tr. 847:9-21.
On August 19, 2013, pursuant to the 2012 SPA, MOR MGH was responsible for funding $1,993,317 to Green Field and MMR was responsible for funding $249,138 to Green Field for the second *259quarter of 2013. Stip. Facts ¶ 73. Again, neither MOR MGH nor MMR made those payments. Stip. Facts ¶ 74.
During the bankruptcy proceedings, Moreno's financial consultant, Mesirow Financial, prepared a document summarizing the transactions between Moreno and other entities he controlled and Green Field. Trial Tr. Conf. 3/20 at 5:16-6:8; JX 3. The chart lists approximately $48 million in turbine sales ($23M) and deposits ($25M) that involved both TGS and Green Field. JX 3; DX 221; Trial Tr. 844:11-846:10. Putting aside Moreno's characterization of those transactions as purported contributions to Green Field,9 of the $85M borrowed, $37M was either used by Moreno for his personal interest (i.e. $10M to purchase his Dallas house) or was otherwise unaccounted for. Trial Tr. 844:20-846:10; JX 3; DX 221. Accordingly, Moreno had additional funds on hand that would have allowed him to permit MOR MGH to satisfy its obligations under the 2012 SPA or the 2013 SPA (discussed and defined below). Moreno conceded at trial that "[i]t would have been beneficial for Green Field to have every dollar it could find." Trial Tr. 469:17-19. He also acknowledged that the absence of cash "is absolutely the kiss of death" to a company. Trial Tr. 478:12-17. Despite these acknowledgments, he chose to cause MOR MGH to fail to provide necessary cash to Green Field, even though he had funds on hand.
For the payments due for each of the first two quarters of 2013 under the 2012 SPA, Blackwell, at the direction of Moreno, informed Moreno's fellow members in MMR, Moody and Rucks, that Moreno was intending to make the payments, even though Moreno ultimately did not make them. Blackwell Dep. 42:11-44:16, 55:7-12; PX 148. Moreno was aware that if he did not cause MOR MGH to make the payments, and he did not contribute his one-third share of MMR's obligations, then his partners in MMR would likewise not arrange for the remaining two-thirds of MMR's obligations to be fulfilled. Trial Tr. 388:2-392:14; PX 148; PX 149. Blackwell, who was responsible for sending the notices to the Green Field shareholders and was responsible for the company's finances, testified that Rucks and Moody informed him that they would not pay their funding obligations unless Moreno paid his. Blackwell Dep. 55:13-17.
In total, MOR MGH's breaches of the 2012 SPA totaled $5,961,923. MMR's breaches totaled $645,158. Both are exclusive of pre-judgment interest.
3. Goldman Sachs Loans and the 2013 SPA
Moreno personally borrowed funds from Goldman Sachs in May and July of 2013, totaling $40 million. Trial Tr. 396:19-397:9. The first tranche for $25 million was dated May 15, 2013, i.e. two days after the Waiver Date. PX 156. The specified purpose of *260the personal loan was to make an "equity investment in Green Field which shall be used as working capital to fulfill equipment orders and to make and [sp] equity investment in Turbine Generation Services, L.L.C." PX 156 at GS0002950. The second tranche for $15 million was dated July 5, 2013. Trial Tr. 417:5-20; PX 166. Moreno put none of this money into Green Field.
On June 28, 2013, Green Field and MOR MGH executed a new share purchase agreement (the "2013 SPA," together with the 2012 SPA, the "SPAs"). Stip. Facts ¶ 75; PX 162. The 2013 SPA was a condition of Goldman Sachs loaning the second tranche of $15 million to Moreno personally and it required Moreno to purchase additional preferred stock in Green Field and then pledge that stock to Goldman Sachs as security for the personal loan. Trial Tr. 397:20-398:3; PX 160. Goldman Sachs required that Moreno provide a written certification once the stock had been purchased. Trial Tr. 400:12-402:19; PX 165.
MOR MGH did not buy the $10 million of Green Field preferred stock as required by the 2013 SPA. Stip. Facts ¶ 78. Despite not purchasing the required preferred stock under the 2013 SPA, Moreno provided a written certification to Goldman Sachs that the stock had in fact been purchased. Trial Tr. 403:11-404:20; PX 165. The certification detailed the specific accounts into which the money was allegedly deposited. PX 165. Moreno signed the certification on behalf of both Green Field and MOR MGH. Trial Tr. 404:17-20. The certification was false. Instead of funding his 2013 SPA obligation, Moreno admitted at trial that he used the $10 million to purchase his residential home in Dallas. Trial Tr. 411:24-420:12; PX 168. The Court observes that Moreno initially denied that he used the proceeds to purchase a home. Trial Tr. 411:18-23. However, when confronted with a document from his estate planning professionals (PX 168), he then admitted it. Trial Tr. 411:24-420:12; PX 168. Moreno also testified that the loan documents allowed him to use the loan proceeds to purchase personal real estate. Trial Tr. 416:4-417:2. The loan agreement, however, expressly precluded such use. Trial Tr. 417:5-418:21; PX 166 at GS0003763 ("The Borrowers will not, directly or indirectly, use any part of such proceeds for the purpose of (a) purchasing, improving, or otherwise investing in residential real estate, whether a primary residence of the Borrowers or otherwise."). The Court finds that Moreno knowingly and intentionally lied to Goldman Sachs and intentionally diverted $10M earmarked for Green Field to his own personal use.
Moreno testified that the payment was not accounted for properly and that he sent the money from MOR DOH who sent it to TGS who sent it to Green Field. Trial Tr. 403:11-405:23. However, the capital contribution chart shows the payments from TGS to Green Field and none of those monies are the $10 million owed under the 2013 SPA; those monies were deposits for TPT or turbine engine purchases. In October 2013, when Moreno's (and Green Field's) attorney Slavich inquired as to whether Moreno had caused Green Field to receive the $10 million due under the 2013 SPA, Moreno told Slavich that MOR DOH, not Green Field, received the money. PX 183. Blackwell also testified that Green Field never received the $10 million due under the 2013 SPA.10 Trial Tr.
*261408:4-410:18; Blackwell Dep. at 68:3-15, 74:5-75:15; PX 187.
4. Deterioration of Green Field and SPA Defaults
Green Field failed to make its $2 million monthly payments to Shell under the Shell Contract, as amended, for each of June, July, and August 2013, a default totaling $6 million. Stip. Facts ¶ 79. Moreno testified that had the SPAs been fulfilled, Green Field would have been able to make the required interest payments under the Shell Contract. Trial Tr. 469:20-470:3. Green Field's failure to satisfy the requirements of the 2012 SPA forced Moreno to notify the Indenture Trustee of the defaults and publicly acknowledge the same in the Q2 2013 Quarterly Report. Stip. Facts ¶ 83. Moreno signed the letter to Wilmington Trust, the Indenture Trustee, notifying it that the 2012 SPA had been breached. Trial Tr. 431:21-433:16; PX 171. That letter also stated that "the Company has failed to sell shares of preferred stock or make arrangements for another form of capital contribution ." PX 171 (emphasis added). Moreno also signed the Quarterly Report, dated August 20, 2013, which stated that "[t]he Company's shareholders did not purchase, and the company did not issue, preferred stock to its shareholders when payment for such shares of preferred stock was due on May 15, 2013 and August 13, 2013, nor did the company make arrangements for another form of capital contribution." 435:17-437:8; PX 174 at p. 8. Moreno also notified Green Field's accountants, Ernst & Young, of the defaults on August 19, 2013. PX 173; Blackwell Dep. 51:25-52:19.
These public notifications triggered a cross-default under the Shell Amended Senior Credit Facility. Stip. Facts ¶ 83. Green Field's Corporate Family Rating, Probability of Default Rating and Senior Secured Notes Due 2016 rating were all downgraded. Id. Moody's Investor Services categorized the downgrades as follows: Corporate Family Rating, downgraded to Ca from Caa2; Probability of Default Rating, downgraded to Ca-PD/LD from Caa2-PD; and Senior Secured Notes Due 2016, downgraded to C (LGD 5 / 72%) from Caa2 (LGD 4 / 60%).Id. Shell issued a notice of default to Green Field on October 8, 2013. Stip. Facts ¶ 84. On September 6, 2013, Moreno admitted to the bondholders that he failed to make the equity commitments under the 2012 SPA because he was spending his personal capital on PowerGen, which at that point was owned entirely by TGS and outside of Green Field. Trial Tr. 440:1-441:14; PX 177 at p. 5. Moreno acknowledged his responsibility for the SPA obligations and promised to cure the defaults that quarter. Trial Tr. 445:10-446:7; PX 177 at p. 5 ("I do plan on (inaudible) that default this quarter ... certainly I'll be in a position to cure this default in this quarter.").
As a result of the defaults under the SPAs, GE terminated its negotiations with Green Field (as discussed below). On September 13, 2013, Edoardo Padeletti ("Padeletti") responded to an internal GE email chain circulating a news article announcing Green Field's defaults and said: "We are working internally and with Moreno lawyers to understand properly the potential implications and (in a worst case scenario) how this could impact our JV." JX 50. Then, one week later, on September 20, 2013, GE circulated an email directing GE employees to "stop any work that is proceeding with regards to Project Cayenne." PX 215. Padeletti confirmed in his deposition that the Shell defaults contributed to GE's failure to consummate the joint venture for the PowerGen business. Padeletti Dep. 109:23-110:6, 118:8-23.
*262Green Field filed a voluntary petition for Chapter 11 bankruptcy relief on October 27, 2013. Stip. Facts ¶ 4.
E. GE Negotiations
In the fall of 2012, while Moreno was discussing the power generation business with the Green Field bondholders and TPT was building the prototype unit, Moreno was looking to generate capital for Green Field and had discussions with several capital sources, ultimately beginning negotiations with GE. Trial Tr. 212:20-213:12.
In October 2012, Green Field entered into a nondisclosure agreement with GE Energy Financial Services for the exchange of proprietary information, including both the fracking and power generation technology. PX 120; Trial Tr. 251:22-253:18. Green Field then entered into a second nondisclosure agreement with the Aero Energy and Oil & Gas businesses of GE in December 2012 which also involved the fracking and power generation technology. PX 127.
Moreno testified that from the outset of his discussions with GE he sought a $100 million investment from GE for Green Field's fracking business, and when GE showed interest in power generation, he sought $200, with $100 million to go to fracking and $100 million for power generation. Trial Tr. 257:3-259:5. Moreno testified that he originally sought to have the power generation investment go directly into Green Field. Trial Tr. 259:6-10. Fontova testified that manufacturing of the PowerGen units would be done by TPT (the manufacturing business), and that the intent was to run the leasing business through Green Field. Trial Tr. 1452:9-20.
By March and April 2013, Green Field and Moreno were negotiating a joint venture for the leasing of PowerGen units. Moreno testified that the opportunity got passed around to various divisions of GE and GE repeatedly went back and forth about investing in power generation and fracking versus power generation only and whether the investment would be made directly into Green Field. Trial Tr. 684:6-685:9; 685:19-686:19. GE was concerned about Green Field's pre-existing senior debt as well as exposure to the environmental concerns with fracking. Trial Tr. 259:11-260:17.11
F. GE Was Interested in the Multi-Fuel Technology
GE indicated that it was interested in Green Field's power generation units because of the advantages of Green Field's multi-fuel technology originally developed for Green Field's fracking equipment and now deployed with its power generation units. On January 7, 2013, Green Field issued a press release announcing that it had signed a "global supplier agreement with GE Oil & Gas to deliver low-cost, cleaner burning power generation solutions to the oil and gas industry." PX 129; Trial Tr. 214:24-215:9. The press release also stated that Green Field would provide "its proprietary technology, including its bi-fuel capability developed for use on its Turbine Frac Pumps." PX 129. The press release stated that Green Field had "secured commitments with two customers to conduct pilot programs to test power generation of oil and gas equipment utilizing natural gas produced on site in the field." PX 129. These two commitments were for SandRidge and Apache. PX 129.
*263In an executive summary circulated to GE from Green Field on March 20, 2013, Green Field described the power generation concept and specifically noted Green Field's "proprietary fuel control technology." JX 28 at GFES042781-82. The executive summary also provided that "[i]n addition to the advantages of less capital cost, greater ease in transport and fewer emissions, Green Field's turbine driven Power Generation units are capable of running on 'Field Gas'. This ability to run on Field Gas provides a significant savings to the end user in operating cost." JX 28 at GFES042785.
Moreno testified that he agreed with the statements written in the executive summary at the time. Trial Tr. 269:10-11; 269:20-21. Moreno also testified that GE was interested in the dual fuel technology that was developed for Green Field's hydraulic fracturing operations and paid for by Green Field. Trial Tr. 271:10-20. McIntyre similarly testified at trial that GE expressed interest in putting together a power generation rental fleet "[b]ecause no one at the time offered generators that could be dispatched into remote areas that could run on well gas, everything was diesel driven, liquid fuel." Trial Tr. 1536:13-22. Hosford testified at his deposition that one of the benefits of the Green Field engines was that "you could burn different fuels and you can switch fuels on the fly." Hosford Dep. 76:1-9.
As Moreno stated on a conference call with Green Field bondholders on April 19, 2013, GE and Green Field were working toward a joint venture and GE was interested in Green Field's dual fuel technology as it applied to power generation, which Moreno described as "fairly unique and even-and folks can't duplicate very quickly without our support." PX 143 at p. 7; Trial Tr. 264:18-265:22.
G. The PowerGen Opportunity
On May 13, 2013, the shareholders and board of directors of Green Field executed the Consent Solicitation. Stipulation No. 91, JX 61. That same day, GE advanced $25 million to TGS in exchange for the Senior Secured Note (the "GEOG Note") executed by TGS as borrower, and Moreno, as guarantor, in favor of GEOG, as lender. Stipulation No. 93, JX 49. The GEOG Note contained two critical attachments, which are discussed below. First, Annex A to the GEOG Note is a list of engines and equipment to be purchased from Green Field. Second, Annex B is a Term Sheet titled Project Cayenne, Summary of Principal Terms (the "Term Sheet"). JX 49.
The Trustee alleges that this date of May 13, 2013, was critical. Central to the fraudulent transfer, breach of fiduciary duty and corporate waste theories asserted in the Second Amended Complaint is the allegation that the so-called PowerGen business idea belonged to Green Field and was transferred to TGS as a result of the Consent Solicitation on May 13, 2013. To understand the merits of this highly critical issue, the Court must first consider the circumstances surrounding how the PowerGen business idea came to be, and what really happened on May 13, 2013.
1. Early Contact with Private Equity Groups and Bondholders
The reduction in fracking demand in addition to increased operating costs in 2012 challenged Green Field's early business plan to expand its frac spread fleet at the pace originally designed. While the company was performing according to plan from an operational perspective, the reduced margins and demand put a strain on the company's liquidity, preventing Green Field from continuing its planned capital expenditure outlays. JX 15, Trial Tr. 588.
*264During a bondholder call on November 21, 2012, Moreno advised bondholders that he and Green Field were doing two things to improve liquidity-raise more equity where ever possible, and reduce capital expenditures until Green Field had more customers in place. Id. As Moreno testified at trial, Green Field suddenly had "a huge hole in [its] business plan." Trial Tr. 589-90. Because Moreno still believed in the company and its technology, he was motivated to go back into the marketplace and find more money to survive the economic downturn. Id.
Moreno started meeting with prospective investors in the fall of 2012 to help fill Green Field's capital needs. Trial Tr. 562-65. He started with his contacts at Jeffries-the firm that helped underwrite the Bond Issuance-in hopes that his contacts could connect him to private equity groups interested in investing in Green Field. Id. These contacts led to meetings with Goldman Sachs Private Equity, Cerberus Capital, Emigrant Bank, Solace Capital, BP Capital and at least a dozen other potential investors. Id. , Trial Tr. 1355:13 - 1356:9. Many of these firms were already existing bondholders. Trial Tr. 562-65, 567-70, 912-915, 943-945, PX 143, DX 47 at pg. 4. In all, Moreno testified that he met with "dozens of private equity sources," none of whom was interested in funding Green Field. Trial Tr. 567:9-12. The few investors that expressed interest in investing were only interested in investing alongside a larger strategic investor, like GE. Trial Tr. 1355:13 - 1356:9.
While Moreno's capital search began as an effort to find investments for Green Field's pressure pumping operations, he remained open to the possibility of expanding into a new power generation business-as long as the new venture helped Green Field's core business plan. Trial Tr. 567-68, 560-62. On this point, Moreno testified that a power generator business would constitute a whole new business line for Green Field, and that he did not want to start a new business line or business venture while he already had his hands full with the Green Field start-up. Trial Tr. 560-62, 578:1-22. Moreno began warming to the idea of starting a power generator business after he sold an interest in one of his unrelated businesses to the founder of SandRidge in 2012, during which transaction the principal of SandRidge indicated willingness for SandRidge to participate in a pilot program for turbine powered generators. Trial. Tr. 557- 58.
At the time, Moreno knew that Green Field lacked the intellectual property rights and know-how to develop power generators from its turbine stock. Trial Tr. 559-6. Moreno testified that there was no effective way to negotiate a deal involving power generators without giving McIntyre some economic benefit. Trial Tr. 205:15-206:15, 227:11-228:4. However, Moreno believed that McIntyre would be willing to contribute his know-how to a future venture, and Moreno further viewed a potential power generator business as "a catalyst to help [Moreno] raise money for Green Field." Trial Tr. 523, 559-60. Moreno testified that he stopped meeting with potential investors in Green Field only after he received a communication from GE that Jeff Immelt, then CEO of GE, had approved a substantial investment into a future joint venture with Green Field. JX 25, DX 109, 260, Trial Tr. 574-75, 681.
2. Negotiations with GE 12
Moreno was ultimately unsuccessful in attracting new investments in Green Field.
*265Trial Tr. 1355:13 - 1356:9, 1358:1-22. However, one of the many private equity groups that Moreno contacted during this process-Cerberus Capital-led him down a different path. Through the course of meeting with potential investors, Moreno met Bob Nardelli ("Nardelli"), who was then serving on the investment committee for Cerberus Capital. Trial Tr. 564-66. Moreno testified that his initial meetings with Cerberus Capital were intended to raise $100 million of new capital for Green Field, which Moreno hoped to use to complete Green Field's business plan of building additional frac spreads. Trial Tr. 568:6-24. Although Cerberus Capital was not interested in investing in Green Field, Nardelli connected Moreno with Nardelli's former colleagues at GE. Trial Tr. 566:7-13, 569:20-570:11.
Moreno's initial discussions with GE began in September 2012, initially with an effort to get GE to infuse capital on Green Field's balance sheet through its fracking business. Trial Tr. 250:6-18. Over time, however, those discussions changed. Moreno testified that he did not initially pitch the idea of a power generator business. Trial Tr. 257:17-258:17. In October 2012, the parties executed a non-disclosure agreement containing a very broad definition of "well services." PX 120. While the Trustee highlighted the inclusion of "power generation" in the definition of "well services," Moreno testified that, at the time, Green Field was not in the business of power generation or many other enumerated items in the definition of well services. Tr. 252-53. Moreno testified that the early discussions with GE centered on GE's interest in extending the life of GE's retired turbine engines for uses like frac pumps or power generators, as McIntyre had done with the retired Honeywell engines deployed in Green Field's operations. DX 264, 266, Trial Tr. 255:8-256:24, Tr. 260:22-262:22, 937:24-938:11. As late as March 30, 2013-several months into the negotiations-representatives of GE acknowledged that GE's primary interests involved: (a) getting working knowledge of the above ground oilfield services business; (b) developing a power offering that is cost competitive in the power-to-lift space; and (c) creating optionality for GE in buying out any partnership with Moreno or Green Field. DX 264. For GE, a partnership with Green Field and McIntyre offered the opportunity for GE to expedite the process of putting its used turbine engines back into the market for secondary uses. DX 264, DX 266, Trial Tr. 265:23-266:15, Trial Tr. 937:24-938:11.
On December 21, 2012, Green Field signed a Memorandum of Understanding with GE under which the parties contemplated a supply agreement. Green Field would start using GE components to build future products. DX 181, Trial Tr. 606-09. After that date, discussions with GE evolved. Trial Tr. 621-26.
On January 7, 2013, Green Field announced a pilot program with SandRidge, an oilfield operator, where SandRidge would start using turbine power generator units to be built by Green Field. PX 129, Trial Tr. 219-20. Moreno testified that, before that announcement, SandRidge had *266never ordered any services from Green Field. Trial Tr. 219:9-220:24. Moreno, Fontova, and McIntyre also testified throughout trial that Green Field had no manufacturing capacity on its own-TPT, led by McIntyre, did all manufacturing for Green Field. Trial Tr. 1346:15-24, 1353:16-22, 1511:6 - 1512:9.
On February 1, 2013, Moreno exchanged e-mails with Lee Cooper at GE discussing deal points for "a GE financing plan for Greenfield," which included a $100 million equipment financing line backed by customer orders and guaranteed by Moreno. DX 183, Trial Tr. 611- 24. Under this proposal, Green Field would commit to ordering GE parts, and GE would consider converting its debt to equity in the future. Id.
Ten days later, on February 11, 2013, GE directed Moreno to meet with Josh Loftus as "the right guy to speak with" about a "line of credit for both frac packages and power packages." DX 258, Trial Tr. 661-65. The e-mail asked for a face-to-face meeting with Moreno to discuss partnership options as well. Id. On February 16, 2015-i.e., the day after Moreno met with GE representatives-GE circulated an internal e-mail recapping the meeting with Moreno. (DX 257, Trial Tr. 632-39). According to GE's internal e-mail, the PowerGen leasing concept would be "a substantial third arm of Green Field (along with the Manufacturing arm and existing Ops arm)." Id. Moreno testified that the "Manufacturing arm" meant TPT, and the "Ops arm" meant Green Field. Id. He came away from the meeting with GE with an impression that GE would invest in Green Field and allow Green Field to control the PowerGen leasing company. Id.
One week later, on February 23, 2013, GE sent Moreno a list of terms based on their meeting from February 15, 2013. DX 258, Trial Tr. 665-68. Moreno responded to the e-mail by thanking the GE representative and indicating that the details could be worked out that same week. Id. The reason for the urgency was that Moreno understood that GE's investment committee meeting would be convening on March 8, 2013, and that this prospective investment would be presented to GE's CEO, Jeff Immelt, for his approval. Trial Tr. 665-66. Moreno's meetings with various GE representatives, including Mike Hosford, a representative of GEOG, and Lee Cooper, a member of GE's investment committee, had left Moreno with the impression that Jeff Immelt was likely to approve an investment of $100 million into Green Field. Id.
In anticipation of the March 8 presentation to Jeff Immelt, Moreno formed TGS on March 7, 2013. PX 136. The initial member of TGS was DOH Holdings. PX 136, Trial Tr. 293-95. Moreno testified that he placed it under DOH Holdings "as a placeholder, not knowing where it was going to land." Trial Tr. 312:6-14.
Immelt ultimately did approve a $100 million investment through a joint venture with Green Field "on the spot" during the March 8 review. DX 109, Trial Tr. 674-79. Immelt instructed GE to "get [Moreno] $25M by end of the week to help both sides of the business." DX 197, Hosford Depo Tr. 95:1-25, 97:23 - 98:15.13 Having been informed of Immelt's approval, Moreno immediately stopped discussions with private equity investors in reliance on Immelt's approval and instructions. Id. On March 13, 2013, Mike Hosford at GEOG sent Moreno and others in Green Field's *267management an invitation to a conference call on March 15, 2013, to discuss "what [Green Field] will bring to the NewCo and also what GE is thinking." DX 260, Trial Tr. 679-81. Moreno insisted at that meeting and following that meeting that whatever funds GE was willing to invest in the joint venture had to be used to complete Green Field's overall business plan. Id. On March 17, 2013, following Moreno's calls and communications with GE representatives, Moreno changed the name of TGS to Green Field Power Generation Services, LLC. JX 27.14
During the course of negotiations with GE, Moreno had a dinner meeting with Immelt on March 25, 2013. Trail Tr. 689-98. In preparing Immelt for the dinner meeting, a GE representative told Immelt about Green Field's pressure pumping business and Moreno's newest exploration of the power generation business through a potential joint venture with GE. JX 30. According to this e-mail, and as confirmed by Moreno at trial, Moreno was seeking a total of $200 million from GE-$100 million each for Green Field's business plan and for the new PowerGen start-up. JX 30, Trial Tr. 689-98. At the time, GE was receptive to both.
However, on March 26, 2013, two weeks after Immelt's initial approval of the investment, GE sent around an internal e-mail demonstrating their own struggle to execute on Immelt's initial demands. DX 262, Trial Tr. 698-701. Moreno had the impression from the amount of time GE was investing in him, a relatively small entrepreneur, that it demonstrated GE's commitment to him and the potential partnership. Trial Tr. 698-701.
Three days later, consistent with GE's prior briefing to Immelt, Moreno continued to request that GE invest $100 million directly into Green Field, separate and apart from the $100 million already authorized for the PowerGen business venture. DX 264, Trial Tr. 701-14. GE's internal e-mails summarized Moreno's request and indicated a willingness to provide the additional funding, if for no other reason than to prevent Moreno from seeking the additional funding from private equity investors. Id. Of course, as Moreno testified, he stopped meeting with private equity groups in early March when GE advised him that Immelt had approved the investment. Trial Tr. 719-20. GE's internal e-mails indicate that, even within GE, certain representatives were growing concerned about misleading Moreno "regarding the size of our investment." DX 264, Trial Tr. 719-20.
On April 3, 2013, Moreno flew to Schenectady, New York to meet with Colleen Calhoun, one of his primary points of contact at GE, and others to discuss deal points for the joint venture. Trial Tr. 720-21. The next day, on April 4, 2013, Calhoun sent Moreno a detailed e-mail with the deal points discussed in Schenectady. JX 31, Trial Tr. 313-23, 727:7-14. Those deal points included a total $200 million capital infusion into Green Field, but required that the PowerGen entity be held outside of Green Field. Id. Moreno testified that the $200 million investment would have solved Green Field's liquidity problems, but GE changed its mind within weeks of Calhoun's e-mail. Trial Tr. 723-27.
Later the same day, on April 4, 2013, Calhoun e-mailed Beth Comstock at GE to report that she had "an outline of a deal," with $50 million going "out the door" first, followed by three additional installments of *268$50 million each "based on milestones." DX 265, Trial Tr. 740. She advised her colleagues at GE that the GE team would be meeting in Houston to "get aligned" and that the next few days would be critical. Id.
The next day, on April 5, 2013, Calhoun raised an issue with Moreno concerning the ownership of the PowerGen intellectual property. JX 32, Trial Tr. 728-31. Specifically, GE recognized that McIntyre controlled the intellectual property surrounding the PowerGen business, and Moreno discussed with Calhoun how to treat McIntyre in a manner that would entice him to cooperate with GE and Green Field on their potential joint venture. JX 32, Trial Tr. 732:15-733:9.
Ted is the sole owners of MTT .... and so, you know, [PowerGen] is Ted's baby. And I'm trying to use the potential opportunity to benefit Green Field and the joint-owned company TPT that Ted and I had, or Green Field and Ted had... I needed Ted to be a partner. I couldn't force it. You know, I couldn't just mandate it.
Trial Tr. 732:15-733:9.
In the midst of this uncertainty over how Green Field could contribute McIntyre's intellectual property into the potential joint venture, Moreno flew to Houston on April 8 and 9, 2013, to meet again with GE's executive team. DX 266, Trial Tr. 745-49. On April 10, 2013, Calhoun e-mailed her superiors at GE with the "big points" discussed during the meetings with Moreno. Id. The outline of the deal continued to contemplate a $200 million investment, but Calhoun's internal e-mail recognized the uncertainty for the form of investment, the approval process and timeline for investments, and the business unit at GE that would own the investment. Id. Throughout these meetings, Moreno continued to insist that the money invested by GE needed to be used to pay for Green Field's pressure pumping equipment expansion. Id.
One week later, the uncertainty over which GE unit would own the venture bubbled to the surface. DX 268. On April 17, 2013, John Flannery-now the CEO of GE, but then the Senior Vice President of Corporate Business Development-e-mailed Calhoun to warn her that he was "not having much luck yet finding a 'sponsor' " for the power generation joint venture business. Id. Flannery indicated that GE "really need[ed] someone to show more interest" than Flannery was seeing at the time "to warrant taking any financial risk on this." DX 268. Moreno was unaware of this struggle within GE. Trial Tr. 751:9 - 752:16, 753:8 - 754:4.
That same day, on April 17, 2013, Calhoun sent additional e-mails internally to her colleagues at GE, recognizing that "we've done a 180 degree turn in the last 5 days," and that she did not know how to interact with Moreno given GE's sudden change in position. DX 268, Trial Tr. 754-55. She suggested that "[a]t the very least[,] we need to get him the $25MM loan and help him unwind what we've been discussing." Id. Another five days later, on April 22, 2013, internal e-mails within GE show that Calhoun was still trying to find a business unit to take ownership of the PowerGen business venture. DX 270, Trial Tr. 760.
Then, on April 23, 2013, Calhoun provided an update to her GE colleagues, recognizing that GE was still only "50/50 on doing the deal." DX 111, Trial Tr. 755-60. The update recognized that John Flannery was convening a meeting of potential business unit sponsors on April 24, 2013, and that there remained a chance that GE would not approve the contemplated $200 million investment. Id. Calhoun lobbied her colleagues to remain supportive of a *269smaller $25 million loan if the larger investment did not get approved, explaining that "we've put Mike in a tough spot financially as he has waited for GE." Id.
Flannery held his meeting on April 24, 2013, and contemporaneous e-mails characterized those meetings as being "like an episode of 24." Id. Apparently, a faction within GE had agreed to invest in PowerGen, but conditioned on the money not being used toward Green Field's existing business. DX 271, Trial Tr. 764-65. While, GE was internally opposed to its money being used toward Green Field's pressure pumping business, Moreno was apparently unaware of this internal debate and continued to assume that the joint venture would support Green Field's business. Id.
One week later, on May 1, 2013, showing his frustration with the lack of movement by GE, Mike Hosford at GEOG sent an e-mail to Lee Cooper and Beth Comstock at GE to detail his perspective of the six-month history between Moreno and GE. DX 197, Trial Tr. 769-77, Hosford Depo Tr. 94:2-16. The e-mail details how GE continued to change its position with Moreno, and had moved from what was supposed to be a partnership relationship into "more of a transaction feel only." Id.
Hosford contemporaneously sent a copy of his e-mail to Moreno to show Moreno that there were some factions within GE still fighting for him. Id. While Comstock and Cooper defended GE by suggesting that Hosford was unaware of the lack of support in some key areas, Comstock acknowledged to Cooper that GE's behavior over the past six months was "embarrassing" and that she was "not sure [Hosford] is wrong" in his characterization. Id. Hosford concluded his e-mail by suggesting that GE should advance $25 million to Moreno immediately, with some going to the PowerGen joint venture and some going to Green Field to "allow him to complete at least frac spread 5." Id.
3. The GE Term Sheet and Related Transactions
As GE continued to struggle internally, Green Field was under time pressure. By May 17, 2013, Green Field needed to make a $17 million semi-annual interest payment under the Bond Indenture. Trial Tr. 799:7-12. As of May 2, 2013-i.e., weeks before the semi-annual bond interest payment was due-Green Field did not have the liquidity to honor the semi-annual interest payment. PX 147, Trial Tr. 386:15 - 387:18. Under the circumstances, GE represented Green Field's best chance for avoiding an immediate default under the Indenture. Trial Tr. 1358:1-22.
Moreno fought hard to get cash from GE to help Green Field. While his discussions with GE had led him to believe that GE would fund its investment through Green Field by March or April of 2013, GE was slow to move on Immelt's orders to get Moreno money. Instead, Moreno was able to procure a short-term $25 million loan under the GEOG Note, which Moreno personally guaranteed. JX 49, Tr. 804-08. On May 13, 2013, Moreno and TGS executed a senior secured loan with GE for $25 million, which included the Project Cayenne Term Sheet as an attachment to the note. JX 49.
Moreno continued fighting to get concessions from GE in the Term Sheet annexed to the GEOG Note. First, Moreno negotiated to ensure that TPT would be the contract manufacturer for TGS. JX 49, Tr. 804-08. The term ultimately led to the execution, on June 21, 2013, of the Agreement for the Manufacture and Sale of Turbine Powered Generators (the "Tri-Party Agreement"), which was executed by Green Field, TPT and TGS. Stipulation No. 94.
*270Moreno also negotiated for the inclusion of a provision in the Term Sheet to ensure that TPT earned a 25% mark-up on all equipment manufactured for TGS. JX 49, Tr. 804-08. Requiring TGS to order units from TPT benefited Green Field in two critical ways: (1) it gave half of the profit directly to Green Field, through its 50% ownership of TPT; and (2) it allowed TPT to operate profitably so that Green Field would not have to fund its operations and overhead costs, saving Green Field substantial costs. Id. Moreno also fought to ensure that Green Field bondholders could exercise options to buy into the joint venture. Id.
While GE wavered on whether to allow an investment in Green Field directly, the Term Sheet contemplated the use of GE's initial $50 million investment to: (a) buy Green Field's unused engine inventory; and (b) build additional power pumping equipment to be leased to Green Field. JX 49, Trial Tr. 939-42.
Upon executing the GEOG Note, GE funded the $25 million loan to TGS. JX 49. Moreno characterized this transaction as "an elegant solution that GE signed off that said, yes, we understand that the timing of building this inventory at TGS is maybe a little sooner than necessary, but we see the value of going ahead and allowing you to buy the inventory, which would indirectly create some liquidity for Green Field." JX 3, Trial Tr., Mar. 20, 2018 at 9:17 - 11:13, 15:10 - 16:3. According to Moreno, Green Field could not have sold the turbine engines to just anyone for these values. Trial Tr., Mar. 20, 2018 at 11:4-20. GE provided a crucial joint venture partner to be a customer for TPT's manufacturing end-user product, which did not exist before GE advanced money to TGS. Id.
On May 14, 2013, TGS used nearly $20 million of those loan proceeds to purchase unused turbine inventory from Green Field. JX 3. Green Field had purchased those turbines from Honeywell at approximately $135,000.00 each. Trial Tr. 1582-83. There was no application or use for the turbines at the time, because Green Field lacked the liquidity to continue its capex expansion on its frac spread fleet. Id. Yet, despite the lack of a market or use for Green Field turbine inventory, Moreno negotiated with GE to purchase the engines from Green Field at approximately $500,000.00 per unit, totaling nearly $20 million, and constituting an almost 300% mark-up. Id.
While the Trustee's expert considered this transaction "fair value" because neither GE nor Powermeister, LP (discussed below) "cried foul," Trial Tr. 1086, 1758, 1085, the Court is not persuaded by that evaluation. Powermeister is the investment arm of Mt. Vernon, a bondholder with an existing investment in Green Field. A substantial mark-up that benefitted Green Field would give Powermeister no reason to "cry foul." Further, the circumstances leading up to GE's willingness to provide a $25 million short-term loan demonstrates that the use of these funds was anything but "fair value." This was an accommodation by GE, because GE had placed Moreno in a difficult position. DX 111, Trial Tr. 755-60. The Court agrees with Soward, Defendants' expert, that this transaction meets the definition of "extraordinary consideration," at least as it relates to the turbines. Trial Tr. 1764.
Further, the cash received from the inventory sales gave Green Field the liquidity it needed to satisfy its interest payment obligations due under the Indenture. Trial Tr. 1385. The loan proceeds from the GEOG Note also allowed TGS to reimburse Green Field over $1 million for the time Green Field's employees spent trying to develop the PowerGen business within *271Green Field before it became clear to Green Field that GE would not invest directly in Green Field. JX 1; Padaletti Depo. Tr. 97:13 - 98:6. The Court finds that this payment provided additional consideration to Green Field, which would not have been possible but for Moreno's continuous negotiations with GE and extensive efforts to find capital to save Green Field.
H. Transparency with Bondholders and Board Members
Through the Second Amended Complaint and at trial, the Trustee questioned Moreno's openness and truthfulness. Based on the extensive record presented by Defendants, the Court finds that although there were areas of testimony that were not open and truthful, Moreno was credible concerning his communications with bondholders and Green Field's Board members.
1. The Board of Directors
The Court considers the circumstances surrounding the execution of the Consent Solicitation. Specifically, the Trustee alleges that Green Field's board of directors failed to inform themselves. Second Amended Complaint ¶ 31. Having considered the evidence presented at trial, including the extensive e-mails, notes, deposition testimony and live testimony, the Court agrees that the other members of the board were informed of Green Field's business and the circumstances necessary to make decisions, they acted prudently and independently.
Green Field's board was initially comprised of four individuals: Moreno, Fontova, Kilgore and Goodson. Stipulation Nos. 37, 39, 41, 42, 43 & 44. The board later added Mark Knight. Stipulation No. 42. Collectively, the board was an engaged group of successful businessmen, each with his own experience, opinions and ego. Trial Tr. 1593:6-12.
While Fontova had worked at Dynamic Industries prior to joining Moreno at Green Field, he had decades of experience in senior management of large, public companies in the energy industry such as Shell and its affiliates. Trial Tr. 1278:2-1279:22. Fontova worked for other businesses not controlled by Moreno both before and after joining Green Field. Id. During his time working at Dynamic Industries and Green Field, Fontova felt free to disagree with Moreno and never felt as though he might be fired for disagreeing with Moreno. Trial Tr. 1284:18-1285:6.
Kilgore was appointed based on his past experience serving on the board of Dynamic Industries for 10 years, during which period the company saw a large expansion in its business and the ultimate successful sale of ownership to a private investment group. Trial Tr. 526-27, 1589:15-23. Moreno came to know Kilgore in the time before Moreno acquired Dynamic Industries and asked Kilgore to join the board of Dynamic Industries based on Kilgore's experience in the offshore market. Trial Tr. 1589:7-14. Kilgore is independently successful having founded and operated his supply boat business that delivers equipment to oil rigs and platforms in the Gulf of Mexico. Trial Tr. 1586:7-1587:17. Kilgore did not rely on Moreno for employment, nor did he rely on any of Moreno's businesses to support his own businesses. Trial Tr. 1589:24 - 1590:4. Kilgore was never paid to serve on the board of Dynamic or Green Field; he served voluntarily but took the appointments seriously. Trial Tr. 1591:1-14.
Goodson was the CEO of PetroQuest Energy, a publicly held oil and gas company focused on exploration and production. Trial Tr. 1591:17-19, 525. Moreno had known Goodson for 15-20 years prior to his *272joining the Green Field board. Trial Tr. 525. Goodson resigned from the Green Field board in May of 2012 to avoid any potential conflicts when his company began considering Green Field as a vendor for PetroQuest. Stipulation No. 44, Trial Tr. 525. Mark Knight was added to the board when Goodson resigned. Trial Tr. 528-29. Knight had a good reputation in the community and industry, and he was the CEO of his family company, Knight Oil Tools, which was one of the largest private companies in the industry. Trial Tr. 528-29, 1592:12-1593:5, 1591:20-22, 1592:4-11. He was also well-regarded for his involvement in the Lafayette, Louisiana community, which involved service on many boards and philanthropic endeavors. Trial Tr. 1592:12-1593:5. As with Kilgore, Knight was not compensated for his service Green Field's board. Trial Tr. 528. Rather, the board members were added to help Green Field grow as a young start-up. Id.
Once formed, the board met regularly to discuss Green Field matters. Fontova Depo. Tr. 15:1-13. While minutes were prepared to memorialize discussions, the meetings generally covered a broader array of topics than the agenda and minutes reflected. Fontova Depo. Tr. 15:1-13, Trial Tr. 1364:11-1366:3. The initial board meeting, in 2011, was held in person, but subsequent meetings were convened by phone, typically once per quarter. Trial Tr. 1593:13-1594:4. The meetings generally required a degree of formality, as all board members would receive an agenda in advance of the call, along with associated materials (e-mailed or shipped packages). Trial Tr. 1594:5-1595:1.
The Court finds that the board was apprised of the developments and the value of any potential PowerGen business opportunity. Both Kilgore and Fontova testified that they were well-aware of the many twists and turns that negotiations with GE had taken, and Fontova knew first-hand that GE would not allow a joint venture to be held within Green Field. Trial Tr. 1326:5219, 1598:4-1601:17. Kilgore was kept apprised of the developments through regular phone calls and meetings with Moreno and, on occasion, Fontova. Trial Tr. 532, 1596:1-25. Knight was told about Moreno's ongoing discussions with GE and had warned the other board members that GE was very difficult to work with and was not to be trusted. Trial Tr. 1599:14-1601:17, Knight Depo. Tr. 47:12-48:15, 49:1-50:6, Trial Tr. 1363:16-1364:8.
The board also understood that Green Field lacked the financial wherewithal to start a new line of business, particularly if GE was unwilling to invest in Green Field directly. JX 74, Trial Tr. 1616:6-1619:6. Thus, during the April 2013 board meeting and in prior meetings, the board discussed Green Field's need for new capital and GE emerging as Green Field's most likely (if not only) source. JX 74, Trial Tr. 1616:6-1619:6, 1489:19-1491:19. Because Moreno's discussions with GE remained fluid, no formal resolution was presented to the board and the board members did not believe any action was required because Green Field was not being asked to give anything away. Trial Tr. 1603:4-1605:25, 1607. However, the board members agreed that they would sign a consent if such a consent became necessary. Trial Tr. 1603:4-1605:25.
By May 13, 2013, GE was ready to advance money through a $25 million short-term convertible loan to TGS. As Moreno had negotiated with GE, the funds would be used to purchase Green Field's inventory, and Green Field would use those proceeds to make the semi- annual interest payment under the Indenture and resolve its short-term liquidity problems. Trial Tr. CONFIDENTIAL Mar. 20, 2018 at 11:4-20, Trial Tr. 1606:12 - 1608:12.
*273Further, under the Term Sheet, TPT would execute a manufacturing agreement with TGS to begin building power generator units for TGS to lease to new customers. JX 49, Trial Tr. 1606:12 - 1608:12.
To assist in the transaction and satisfy a condition being imposed by GE's Padoletti, Green Field's corporate counsel at Latham & Watkins prepared the Consent Solicitation and circulated it through the company's CFO, Blackwell, who normally circulated materials to board members. Trial Tr. 1604:18-1605:25. The board members did not hold another meeting to deliberate execution of the Consent Solicitation. Id. Moreno executed it on behalf of himself and as manager for the two shareholders. Id. Fontova and Kilgore executed the Consent Solicitation without meeting, and Knight was not in his office on May 13, 2013, but executed the Consent Solicitation remotely. Trial Tr. Knight Depo. Tr. 51:18-53:14.
As such, the board signed the Consent Solicitation without meeting together and without receiving a fairness opinion. Despite this, the board members have all stated that the Consent Solicitation was a good move for Green Field. Short notice for the Consent Solicitation and the absence of a formal meeting or fairness opinion to deliberate the Consent Solicitation's terms casts some doubt on whether the board was adequately informed. The Court finds, however, that the record demonstrates that the Board was kept informed of Moreno's ongoing GE negotiations, had access to and considered adequate and accurate information in deciding whether to execute the Consent Solicitation and fully understood what Green Field would receive in exchange for its execution of the Consent Solicitation.
2. Bondholder Communications
Under the Indenture, Green Field began holding quarterly bondholder conference calls in 2012 to discuss the company's quarterly financials and operations. Stipulation Nos. 88, 89. Those calls were held on June 5, 2012, August 22, 2012, November 21, 2012, April 19, 2013, May 22, 2013 and September 6, 2013. Stipulation No. 89. Each of those conference calls was transcribed. Stipulation No. 90, PX 111, PX 197, PX 217, PX 121, PX 143, PX 157, PX 177.
During these conference calls, Moreno typically gave a high-level update on business development, then the company's CFO, Blackwell, would give an update on the financial performance, followed by Fontova's update on the company's operations. PX 111, PX 197, PX 217, PX 121, PX 143, PX 157, PX 177; Trial Tr. 1298:21-1299:24. The call transcriptions clearly show that Fontova advised bondholders as to how the market reduction in 2012 impacted the company's margins and resulting ability to continue its planned operational expansion. PX 121, PX 143, Trial Tr. 1300, 1303:6-22, 1306-08.
Importantly, in all of Fontova's operational updates to bondholders, he never once mentioned PowerGen or attempted to give bondholders an update on Green Field's PowerGen business. Trial Tr. 1308:18-1309:5, 1314:24-1315:1. He explained that this was because Green Field never operated a PowerGen unit and, thus, there was never any update to give bondholders. Id. Of the hundreds of employees at Green Field, not a single employee was ever engaged in the PowerGen business; Green Field's operational efforts during this period were limited to "touching base with some of our customers to try and engage them and get feedback on their receptiveness about potentially PowerGen." Trial Tr. 1317:19-1318:4.
In addition to quarterly conference calls with all of Green Field's officers, Moreno *274also made it a point to keep in touch with the bondholders. Before the April 2013 conference call, Moreno invited many of the bondholders to visit Green Field and TPT's respective facilities in Louisiana to see and hear first-hand how Green Field's operations were developing-an offer that 80% of the bondholders accepted. Trial Tr. 315:21-317:5. In addition to this invitation, Moreno kept his more active bondholders apprised individually between quarterly calls. Trial Tr. 627:23 - 628:6.
Moreno made frequent calls to Green Field's larger bondholders, including one in particular-Wayne Teetsel of Stonehill Capital ("Teetsel"), which held at least $30 million of the total $250 million bonds issued. Teetsel Depo. Tr. 205:13-25. The Teetsel calls were to him alone and not to all bondholders. The calls are important because Teetsel took contemporaneous handwritten notes of his conversations with Moreno, an undertaking that sheds light on the extent to which Moreno sought transparency with his investors. Teetsel Depo. Tr. 26:10-15, 43:11-14, 46:10-12, 126:2-13, 133:3-18, 174:15-22, 178:9-18. Based on the following history of bondholder communications, the Court finds that Moreno did not intend to mislead or defraud Green Field or its creditors.
As early as November 7, 2012, Moreno informed Teetsel that GE was interested in making an equity investment into Green Field so that Green Field could form a new leasing company to build and lease power generation units. DX 42, Trial Tr. 579-83. On November 15, 2012, Moreno updated Teetsel that GE was contemplating a contribution of its Compressed Natural Gas technology into the joint venture, and that Green Field would agree to convert its "manufacturing capacity" from construction of frac pump equipment to power generation equipment. DX 44, Trial Tr. 583-86. At the time, in mid-November 2012, GE was contemplating a $25 million cash and $50 million in-kind contribution into the joint venture. Id. The Court finds that this representation was accurate at the time.
One week later, on November 21, 2012, Green Field held its quarterly bondholder call. JX 15. According to Teetsel's contemporaneous handwritten call notes, Teetsel understood that Green Field's performance had been poor due, in part, to increased guar prices and lower energy prices. JX 15. Moreno advised bondholders that he was doing two things to increase liquidity. JX 15, Trial Tr. 588, Teetsel Depo. Tr. 134:4 - 135:17. First, he attempting an equity raise. Id. Second, he was pulling back capex spending until there were more customer contracts in place. Id. Operationally, Moreno advised bondholders that the company was performing as planned. Id. However, although Moreno had already told Teetsel and others about a potential GE investment in a new PowerGen leasing business venture, Teetsel knew that no such business existed. Teetsel Depo. Tr. 136:13-20.
Eight days after the bondholder conference call, on November 29, 2012, Moreno called Teetsel directly to provide an update on his capital raise efforts. DX 26, Trial Tr. 592-600. Moreno told Teetsel about the potential SandRidge pilot program and provided rough estimates of the capital costs and likely revenues realized from a potential leasing venture. Id. At the time, while Teetsel understood why Green Field was exploring the potential new PowerGen business venture, he believed that Green Field lacked the liquidity to expand into this new line of business. Teetsel Depo. Tr. 143:8-144:13. Teetsel knew that Moreno was only considering the PowerGen idea as a means to save Green Field. Id.
*275On December 20, 2012, Moreno provided Teetsel with another update describing the imminent execution of a memorandum of understanding and supply agreement between Green Field and GE. DX 178, DX 181, Trial Tr. 603-09. Under this arrangement, Green Field and TPT would begin commercializing GE products for use in their existing pressure pumping business. Id. While discussions were progressing on the supply agreement terms, Moreno believed discussions with GE would progress more quickly if GE simply provided a line of credit to Green Field in exchange for Green Field's commitment to purchase GE products. DX 179, Trial Tr. 603-06. These discussions failed, however, because GE was only willing to extend $10 million of credit to Green Field and only with a standby letter of credit and personal guaranty from Moreno. Id. Thus, Moreno continued negotiations with GE as a joint venture and equity partner. Id.
One month later, on January 18, 2013, Moreno provided Teetsel with another update that GE had committed to infusing Green Field with $15 million, which would be used to fund TPT's efforts to commercialize McIntyre's dual fuel technology on GE's equipment. DX 30, Trial Tr. 608-11. Importantly, also during this conversation, Moreno advised Teetsel that he was expecting a $200 million term sheet from GE any day. Id.
As the negotiations with GE began to shift, Moreno kept Teetsel and the bondholder group apprised of those shifts. The first example of this appears in Teetsel's notes from a call on February 6, 2013. JX 22. In the days before Moreno's call with Teetsel, Moreno had been in discussions with GE about the form of the joint venture or equity investment. Trial Tr. 611-24. According to e-mails between Moreno and individuals at GE, and GE internal communications responding to Moreno's communications, GE had not yet decided how to partner with Moreno and Green Field. DX 183, Trial Tr. 611-24. By the time Moreno provided his update to Teetsel on February 6, 2013, Moreno advised Teetsel that any money coming from GE would come "with strings." JX 22, Trial Tr. 626-29. Specifically, the $100 million contemplated as of early February 2013 might have to go into a special purpose entity outside of Green Field, and that Green Field's only interest in the PowerGen business might be as the contract manufacturer. Id. Moreno told bondholders that this structure would still provide Green Field with much needed liquidity. Id.
Over the course of the next two weeks, Moreno was deeply engaged in discussions with GE over the form of GE's potential investment. On February 28, 2013, Moreno provided Teetsel with an update about the private equity firms with whom Moreno had met. DX 49. Moreno met with private equity firms until GE confirmed that Immelt had approved GE's investment into Green Field on March 8, 2013. Trial Tr. 668-74. On February 15, 2013, Moreno met with GE in Irving, Texas. DX 257, DX 258, Trial Tr. 661-65. On February 28, 2013, once Moreno was comfortable that GE would approve an investment with Green Field, Moreno provided Teetsel the full update. JX 49, Trial Tr. 668-74. At the time, Moreno anticipated that GE would invest $100 million by the end of March 2013. Id.
On March 12, 2013, days after Immelt approved an immediate investment of at least $25 million, Moreno provided Teetsel with an update. JX 25, Trial Tr. 681. According to Teetsel's notes, "GE [was] working on getting Mike $25 [million] in the interim to kick-start the construction of power gen units ... $25 [million] would come into Green Field as a deposit on the 1st $100 [million] order." JX 25.
*276Nine days later, on March 21, 2013, Moreno provided Teetsel with another update. JX 25. According to Teetsel's notes, Immelt wanted the investment funded by the end of April. Id. Teetsel's notes also indicate that GE was willing to fund 100% of the capital for the joint venture, but "the JV must be an unrestricted subsidiary [of Green Field and] will require bondholder approval." Id. As Moreno warned Teetsel in February, GE's money comes "with strings." JX 22, Trial Tr. 262-26, 682-86. More specifically, in order for Green Field to benefit from GE's investments, the bondholders were going to have to consent to the creation of a new subsidiary of Green Field that was "unrestricted" - meaning that the new venture would not be subject to the $250 million bondholder debt. Id. While Green Field never formally solicited bondholder consent on this issue, the Court finds that such efforts would have proven futile for at least a couple of reasons. First, the bondholders had made clear to Moreno that they would only consent to a structure where the joint venture was a restricted subsidiary of Green Field. Teetsel Depo. Tr. 198:23 - 199:3. Additionally, GE could not get comfortable that its potential investment in a subsidiary of Green Field-restricted or unrestricted-would be sufficiently protected from Green Field's bondholders. Trial Tr. 588:4-7, 637:24 - 638:7, 782:3 - 19.
On March 25, 2013, i.e., the same day that Moreno dined with Immelt to discuss the future partnership-Teetsel's notes reflect that GE "seems to be" willing to invest in the power generation business "as a division of Green Field" and fund CapEx needs for both the PowerGen start-up and Green Field's existing pressure pumping business through "an upsized investment in the Power Gen JV." JX 29. Moreno advised Teetsel again that GE had committed to advance $25 million immediately, with the remainder of the investment to come by the end of April. JX 29, JX 30, Trial Tr. 686-89. Moreno's update to his largest bondholder remained true to GE's position at the time.
Moreno's next critical update to Teetsel was on April 5, 2013. JX 33. As discussed above, Moreno had made significant progress with GE prior to this date-e.g., Moreno flew to Schenectady, New York on April 3 to meet with Calhoun and her team, Calhoun e-mailed an outline of the deal points to Moreno, then raised the issue over who owned the PowerGen intellectual property, and started to convene "critical" meetings in Houston, Texas to "get aligned" on the various moving parts. JX 32, DX 265, Trial Tr. 728-31, 740. According to Teetsel's April 5 notes, GE was willing to contribute up to $200 million to the joint venture, and the joint venture would provide Green Field with $400 million of consistent revenue over the next three years, with 25% margins. JX 33, Trial Tr. 736-40. Moreno was still committed to using those revenues from the PowerGen joint venture to complete Green Field's frac spread construction. Id. Once again, Teetsel's notes, based on Moreno's disclosures to him, remain consistent with the transaction that GE was contemplating at the time. JX 32, DX 265, Trial Tr. 728-31, 740.
Five days later, on April 10, 2013, Moreno provided Teetsel with another update. DX 45. Teetsel's notes provide that Green Field had lined up two new customers for its frac services. DX 45, Trial Tr. 742-43. This demonstrates that Green Field had not pivoted from its core fracking business, even in the midst of Moreno's negotiations with GE. Id.
On April 18, 2013, Moreno updated Teetsel again. DX 45. According to Teetsel's notes, GE was still contemplating a $200 million investment, of which $25 million *277would be made by the end of the month, and $100 million would be used to fund the construction of two frac spreads for Green Field. DX 45, Trial Tr. 744-46. Teetsel also noted Moreno's ongoing negotiations with GE to ensure that bondholders would receive warrants for non-voting shares in the joint venture with GE. Id. As discussed above, this term made it into the ultimate Term Sheet annexed to the GEOG Note. JX 49.
On May 14, 2013, Moreno provided another update to Teetsel. DX 35. According to Teetsel's notes from this call, Moreno advised Teetsel that he closed on the initial GE loan on the previous day, and that Moreno would be closing on a personal loan with Goldman Sachs the next day. DX 35, Trial Tr. 778-81. Moreno told Teetsel that the two loans would provide Green Field with up to $50 million in liquidity. Id. In other words, even though the PowerGen leasing company was being held outside of Green Field, Moreno assured Teetsel that he was able to help Green Field by keeping it outside. Id.
As discussed above, Green Field actually benefited from the GE loan. As soon as GE funded the loan, Moreno caused the vast majority of the funds to be transferred to Green Field to purchase Green Field's stale turbine inventory, at a substantial mark-up. JX 3; Trial Tr. 829:12- 23, 830:3 - 832:8. This transaction allowed Green Field to make its semi-annual interest payment to the Indenture Trustee-something that, but for Moreno's willingness to personally guarantee loans for non-debtor entities, Green Field would not otherwise have been able to do.
While Teetsel was the only bondholder to keep contemporaneous handwritten notes memorializing his phone conversations with Moreno, there is evidence that Teetsel was not the only bondholder with whom Moreno communicated during this period. Moreno testified that he communicated with many of his bondholders, and there is evidence to corroborate this testimony. Trial Tr. 782:10-19. For example, Jacob Rothman, a representative of another bondholder called Beach Point Capital, testified that Moreno had been updating him on his efforts to raise capital for Green Field, and that Rothman believed that Moreno might actually be able to raise the equity needed to keep Green Field in business. Rothman Depo. Tr. 80:19-81:21. Another bondholder, Mount Vernon Investments, actively negotiated with Moreno and ultimately made a qualified investment in TGS (through its affiliate Powermeister), knowing that the PowerGen leasing business would be held outside of Green Field and believing that a well-capitalized PowerGen business would benefit Green Field and, by extension, its bondholders. DX 137, DX 140, DX 141; Merrick Depo. Tr. 15:20-16:20, 86:9-87:16, 87:22-88:10. Moreno testified that he also worked closely with another bondholder, BP Capital, who considered but decided not to make a similar loan or qualified investment. Trial Tr. 564:6-565:16.
Considering the weight of evidence, the Court finds that Moreno was open and transparent with Green Field's creditors, and that the Trustee has not presented sufficient evidence-direct or circumstantial-to demonstrate that Moreno intended to defraud or otherwise harm Green Field or its creditors. On the contrary, the evidence suggests, and the Court finds, that Moreno was dealing with a very fluid situation during the course of his negotiations with GE, and as time ran out on Green Field's liquidity, Moreno did his best to keep Green Field's creditors apprised of how GE's ever-changing investment might impact Green Field and its ongoing business.
*2783. Ownership of the PowerGen Idea
The Trustee sought to paint PowerGen as a natural extension of Green Field's Frac Stack Pack license. The Court is not so persuaded, and McIntyre, the inventor and expert in the field of aero-derivative turbine applications, himself disagreed with this proposition. McIntyre Depo. Tr. 32:23 - 34:15. As discussed above, the Frac Stack Pack invention was one of many applications of aero-derivative turbines that McIntyre developed and deployed. McIntyre had also developed fire suppression systems for the oil and gas industry as well as engines for boats and motor vehicles-none of which the Trustee contends to be a natural extension of the Frac Stack Pack technology.
As Moreno's search for capital led him into discussions with GE over a PowerGen business, Moreno involved McIntyre from the beginning. McIntyre Depo. Tr. 39:1-40:18, 49:22-51:17. Before that time, TPT was not engaged in manufacturing power generators-it only built TFPs for Green Field's pressure pumping business. McIntyre Depo. Tr. 61:12-64:1. Only after Moreno convinced his counterparts at SandRidge to run a pilot program for power generator units in January 2013 (PX 129; Trial Tr. 219:9-220:24) and after GE's engineers spent enough time with McIntyre's staff working on design specifications for the power generation units, did McIntyre use Marine Turbine assets and trade credit to build power generator units in February 2013. Trial Tr. 1530:11-1533:22; McIntyre Depo. 64:19-66:15. Construction was at TPT's facility, which McIntyre owned and which he had also used for Marine Turbine's business. Trial Tr. 1516:14-22.
While McIntyre's staff built TPUs for the SandRidge pilot in early 2013, neither Green Field nor TPT supplied any technology or know-how toward the construction. Trial Tr. 1533:10-1534:15. McIntyre only considered allowing his PowerGen opportunity to be manufactured through TPT instead of Marine Turbine because Moreno convinced him that "it was the right thing" to do, and because Moreno could bring an industry titan, like GE, to the table as a potential customer. Trial Tr. 1537:7-1538:23, 1541:25-1542:12.
I. Valuing the PowerGen Startup
1. The Parties' Expert Witnesses
In an effort to prove (and disprove) damages, the Trustee and Defendants each presented an expert witness to opine on the value of the PowerGen startup as of the time of the alleged transfer. The Trustee contends, and his expert Kearns, assumed that the date of the transfer and, thus, the critical date for valuation was May 13, 2013, the date Green Field's board of directors executed the consent, waiving the opportunity to participate in the leasing side of the PowerGen business and permitting Moreno to continue negotiations with GE through TGS. Trial Tr. 997:15-18. Defendants dispute that anything was actually transferred on that date or as a result of the Consent Solicitation, but their expert Sowards also provided his analysis of the potential value of the PowerGen startup as of May 13, 2013.
Both Kearns and Sowards were qualified as expert witnesses for purpose of evaluating the value of the PowerGen startup. Trial Tr. 1252:13-1254:25, 1674:15-1675:3, 1794:4-17, 1841:16-23.
2. Methodology and Areas of Disputes
Kearns testified that he used a "Venture Capital Approach" which involved five steps. Trial Tr. 1031. Because PowerGen did not have any operating history and, thus, no ability to consider past performance, step one was to determine the development stage of the company. Trial Tr.
*2791031. Step two was to "evaluate potential range of outcomes ... and those outcomes can include a single, to a home run, to a strikeout." Trial Tr. 1051. Step three was to "probability weight" those potential outcomes. Step four was to determine the value of the enterprise. Trial Tr. 1051. Lastly, step five was to take the value and allocate it among the participants in the venture. Trial Tr. 1032.
Kearns did not create, conduct or rely upon his own financial projections or market analysis as a basis for determining the value of PowerGen common equity. Trial Tr. 1108. Rather, he relied entirely upon GE's financial projections and market studies (discussed infra ). Trial Tr. 1108. Fur t h e r, beyond relying on the documents produced in this case, Kearns acknowledged that he lacked direct personal knowledge to verify the assumptions for any of the financial projections. Trial Tr. 1164.
Kearns identified AICPA guidelines on the valuation of equity securities for privately held companies to describe the methodology he relied upon. PX 213. The methodology he used is known as the "Probability Weighted Equity Return Model" ("PWERM") methodology. Kearns directed the Court to Chapter 6 of the AICPA guidelines which describes "probability weighting analysis." Kearns noted that "in this case you have a range of potential outcomes, going from, as you will see, management's view to zero. And how from a valuation perspective those outcomes have to be weighted from a probability perspective to come to a value conclusion." (PX 213; Trial Tr. 1033-34). In general, Sowards, Defendants' expert, did not disagree with the general methodology described by Kearns and as outlined in the AICPA guidelines. Sowards did, however, have significant disagreement concerning the correct application of the methodology, as well as whether Kearns relied upon the appropriate data when applying the PWERM methodology. Trial Tr. 1742:21-1744:13, 1745:18-1746:2.
As a threshold matter, Sowards testified that there were actually a fair number of points on which he agreed with Kearns's methodology. Trial Tr. 1684:16-1685:24. Specifically, Sowards and Kearns agreed that, without seed capital of $100 million, there was no PowerGen business or opportunity to value. Trial Tr. 1685:1-6. Sowards also agreed that GE's financial model was useful to try to ascribe value to common equity for the PowerGen startup opportunity given its lack of operating history. Trial Tr. 1685:7-11. Sowards and Kearns also agreed on the discount rates applied for the premium and the delay period. Trial Tr. 1685:11-14. Lastly, they agreed that an EBITDA multiple of six to eight was reasonable for determining an enterprise value. Trial Tr. 1685:15-19.
The differences in the experts' valuation opinions centered around four principal "critiques," as presented by Sowards. First, Sowards testified that Scenario 4-not Scenario 3-is the appropriate "GE Model" that could be used as a "base case" for determining a value. DX 311, Slides 1-6; Trial Tr. 1687:10 - 1688:13, 1689:17 - 1730:5. Second, Sowards testified that the value ascribed to Green Field under the Tri-Party Agreement, which would not have existed but for Moreno's work to negotiate the Term Sheet with GE, should be taken into account. DX 311, Slides 7-9; Trial Tr. 1731:8 - 1742:20. Third, Sowards opined that Kearns' analysis failed to account for the risk that the $100 million capital infusion, which was necessary for the PowerGen startup, would not be obtained. DX 311, Slides 10-11; Trial Tr. 1742:21 - 1757:8. Finally, Sowards testified that Kearns' analysis failed to take into account the profit Green Field obtained *280from TGS by selling its unused turbines. DX 311, Slides 12-13; Trial Tr. 1757:9-1765:17. While Kearns attributes $26.9 million in value to the PowerGen opportunity, Sowards explained that, if these four adjustments are taken into account, the value of PowerGen is less than $0. DX 311, Slides 14-15; Trial Tr. 1775:12-1787:3. Sowards further explained that if Kearns had used Scenario 4, instead of Scenario 3, and made none of the other three adjustments he describes, the valuation of the PowerGen opportunity using Kearns' methodology would be $6.8 million. Id. The effect of each of the adjustments described by Sowards on the value of the PowerGen common equity is demonstrated in DX 311. Each of the four points are addressed below.
3. Selection of a "Base Case" for Valuation-Use of Scenario 3 or Scenario 4
A significant amount of trial time was spent discussing the various "scenarios" of the "GE Sensitivity," which were GE's PowerGen financial models. Trial Tr. 971-1254 [Kearns]; Trial Tr. 1661-1842 [Sowards]; JX 39 [GE Sensitivity]. The GE Sensitivity was considered by GE Corporate in May, 2013 with regard to the PowerGen opportunity, and it consists of four "scenarios," containing different assumptions and inputs. By "sensitivity," the Court understood that GE made assumptions based on its own observations as well as those provided by Green Field's management, and made various different adjustments for utilization of power generation units, speed of deployment of the units, capital costs and the like. Trial Tr. 1052-53. On or about May 2, 2013, management for Green Field sent individuals at GE a detailed Microsoft Excel file with what purports to be management's financial projections, assuming $100 million equity from GE and "maximum production of units with available cash received from GE plus cash generated from operations." JX 36. GE then prepared its own model, which sensitized management's projections and considered GE's own different assumptions. JX 39, JX 40. The same models were forwarded to GEOG's representative, Padaletti, on May 15, 2013. JX 59. For purposes of the GE sensitivity analysis, Green Field's projections are in Scenarios 1 and 2, and GE's sensitized projections are in Scenarios 3 and 4. JX 39, JX 40.
Kearns did not conduct an independent financial analysis or projection of the PowerGen startup, but, instead, relied on the GE Sensitivity. Trial Tr. 1108. The first critique offered by Sowards was over Kearns's selection of Scenario 3 as the "base case" for determining value. DX 311, Slides 1-6. Kearns concluded that the Green Field management's projections, which were contained in Scenarios 1 and 2, were unreliable, and, thus, chose not to use the Green Field projections in his valuation analysis. Trial Tr. 988:7-14. Sowards agreed with Kearns that Green Field management projections were unreliable as a base case and should not be used in an analysis of the value of common equity of the PowerGen Opportunity. Trial Tr. 1730:12 - 1731:7.
Kearns and Sowards disagreed as to whether Scenario 3 or Scenario 4 provides the more reliable base case for valuation of the common stock of a PowerGen joint venture. For his base case, Kearns relied upon Scenario 3, describing it as the "GE PowerGen Sensitivity" in his trial testimony. Trial Tr. 1149-50; Kearns demonstrative Slides 24 and 25. Sowards contended that Scenario 3 is not GE's model because it does not contain all of the key assumptions made by GE during its analysis of the financial projections and that Scenario 4, which does contain all of GE's key assumptions, is therefore the most reliable *281base case and should have been used for the financial analysis/determination of valuation and damages, if any. As described below, the Court agrees with Sowards' contention that Scenario 4 is the most reliable base case and should have been used for the financial analysis/determination of valuation and damages, if any.
In a document titled "Project Cayenne Financial Model Overview" (the "GE Model Overview"), dated May 21, 2013, GE described and compared the "Green Field Model" and the "GE Model." JX 40. This GE Model Overview is informative, as it describes the differences in the Scenarios in the GE Sensitivity. Kearns relied on the GE Model Overview in conducting his analysis. Trial Tr. 1147. He cited the same document as the basis for stating that the EBITDA he relied upon (which came from Scenario 3) was forecasted following GE's adjustments of "several key assumptions." Kearns acknowledged that on Slide 6 of the GE Model Overview, GE listed its "key assumptions" as compared against Green Field's model. Trial Tr. 1150. Kearns opined that GE "sensitized several key assumptions" and that following those adjustments, the GE PowerGen Sensitivity forecasted revenues of $87.3 million for 2015 and EBITDA of $48.3 million. Trial Tr. 1147:25-1149:24. These amounts come from Scenario 3. Trial Tr. 1163:1-18. Kearns also testified that the $48.3 million of EBITDA used in his analysis resulted from a GE analysis which contained GE's key assumptions. Trial Tr. 1147:25 - 1149:24.
Scenarios 1 and 2 of the GE Sensitivity Analysis, which are the Green Field management's models, projected the total number of power generation units to be manufactured and deployed as 265 units. JX 36; DX 311, slide 4; Trial Tr. 1156. In the GE Model Overview, GE described Green Field management's assumptions regarding the number of units to be manufactured and deployed (265 units) as follows: "Unit deployments based on capacity of TPT, not a bottom's up commercial schedule - only 40 MW under contract to date." JX 40, p. 2. On the same slide of the GE Model Overview, GE described Green Field management's model as "High Growth, high margin, high CAPEX model." JX 40, p. 2. Slide 6 of the GE Model Overview, which contains a bold heading of "GE MODEL," explains the following differences between the GE model and the Green Field management model scenarios:
• Similar construct with a few key differences
• Doubled Variable Cost assumptions to 10/12/6% of sales
• Increased fixed monthly cost to 500k and 6%
• Reduced Utilization to 65%
• Increased equipment costs to $630k for 1 MW unit
• Slower ramp in unit sales after 40 MW has been commercialized
• Balance Sheet capitalized with $100M from Day 1
JX 40, p. 6. Scenario 3 does not contain all of GE's key assumptions, as indicated on Slide 6 of the GE Model Overview. JX 40. Only Scenario 4 lines up with GE's own description of the "GE Model." Specifically, Scenario 3 contains a projected total number of units to be manufactured and deployed that remains at 265 units-the same as Green Field management projections in Scenarios 1 and 2. JX 36, DX 311 slide 4; Trial Tr. 1055, 1158-59, 1165. Scenario 4, which includes GE's assumption of the manufacture and leasing of 191 units, is significantly different. Only Scenario 4 contains the "slower ramp in unit sales" and increased equipment cost. JX 36, DX 311 slide 4. Scenario 4 also slows the rate of deployment of the units. JX 40 p. 7. These are key assumptions by GE that *282were known or knowable as of May 13, 2013. Trial Tr. 1774:11-1775:11. Accordingly, Scenario 4 utilizes the same assumptions as those listed in the GE Model Overview and self-described by GE as the "GE Model." JX 40, Slides 6-7. As such, the Court finds that Scenario 4 is the more reliable and appropriate base case for an analysis of the value of PowerGen common equity.
As Sowards explained, the projected financial results using Scenario 3 as the base case for the valuation analysis rather than Scenario 4 are significantly different. JX 40, Slide 6-7; Trial Tr. 1723:4 - 1724:22, 1701:12-25, 1707:3-1708:2, 1713:2-1716:20. Scenario 3 generates EBITDA of $48.3 million in 2015 while Scenario 4 generates EBITDA of $29.9 million in 2015. JX 39, DX 311, Slide 6; Trial Tr. 1692:17-1697:13. Kearns agreed that if he had used Scenario 4 his valuation of the common equity would have been "lower." Trial Tr. 1171.
Kearns claimed that he used GE's projections of revenue and EBITDA. Trial Tr. 1148-49. However, his analysis was based upon projected EBITDA from Scenario 3 which contained management's original assumption of 265 units to be manufactured based solely upon manufacturing capacity rather than the market driven assumption used by GE in Scenario 4, which, again, assumes 191 units to be manufactured. Id. Kearns testified that he used Scenario 3 as the basis for his valuation, and that he "considered" but did not use Scenario 4 because it was a "downside" or "stress case" that was not informative for valuation purposes. Trial Tr. 1052, 1056, 1102. Sowards testified, and this Court agrees, that the selective use of GE's key assumptions for a base case diminishes the usefulness and reliability of Kearns' valuation opinions. Trial Tr. 1724:7-22. Kearns admitted that his report(s) did not disclose the existence of Scenario 4 and that he should have at least noted it in a footnote. Trial Tr. 1165:7-17. There was no testimony or evidence indicating that, as suggested by Kearns, GE considered Scenario 4 to be a downside case or that they considered it of no value in a valuation analysis. Trial Tr. 1171:19-1172:7. On the contrary, the evidence indicates that Scenario 4 is GE's more complete financial sensitivity analysis. In addition to the references in the GE Model Overview (JX40), indicating that the GE Scenario 4 contained all the key assumptions and was the "GE model," Kearns admitted that the Project Cayenne Overview (JX40) supports GE's use of the lower number of projected units. Tr. 1187. Other evidence also supports the conclusion that GE was concerned that the potential market for PowerGen units might be smaller than GE originally thought, a concern that supports financial projections forecasting production of fewer units and supports a conclusion that Scenario 4 was both the "GE model" and a more appropriate base case.15
Kearns also refers to the "September reforecast," which is an incomplete draft forecast prepared by GEOG in September 2013. PX 212. The earlier model, prepared by GE in May 2013, was prepared by a *283different GE group and then presented to management at GEOG for completion. Padaletti Depo. Tr. 157:22-162:6. GEOG began to prepare its own financial model for the PowerGen opportunity, but never completed its modeling before deciding to withdraw from negotiations all together. Id. For this reason, the so-called September reforecast is not a reliable indication of value or what was known or knowable in May 2013. Trial Tr. 1770:3-1775:11. However, the Court notes that the figures in the subsequent GEOG draft model in September 2012 projected the same number of units (191) that were contained within Scenario 4 of the May 2013 model. PX212, Tr. 1055, 1060. The use by GE of a lower projected number of units supports Sowards' assertion that GE assumed a smaller number of PowerGen units would be manufactured and leased in the oil and gas market and this is a more reliable assumption.
Also supporting this conclusion is an email dated April 23, 2013, from a GE officer, Robert Duffey, to John Flannery and Duncan O'Brien. DX 288. In this e-mail, Duffey gave his comments after reviewing a draft business plan for the anticipated joint venture. Among other comments, he notes that he saw there are a lot of uncertainties in the business plan that he saw that the assumptions on market share might not be achievable by a business with no personnel today, that the oil and gas industry's slow adoption of new technologies, and that other competitors such as Caterpillar were also "doing pilots today as well." Id. Duffey also notes that the business plan "assumes that the infrastructure is in place to remotely produce and deliver the gas needed for fuel in the field." Trial Tr. 1189-91. The absence of infrastructure to deliver "field gas" to the PowerGen turbine units would again deprive the turbine PowerGen leasing operation its most significant claimed competitive advantage-the ability to operate on field gas available at the well site-and could also have caused GE to be more conservative in estimating the number of units which could be manufactured and leased. DX 288.
Kearns also testified that PowerGen was in the early part of the growth-stage opportunity; that PowerGen had no track record of profits. Trial Tr. 1123:3 - 1131:25. All of the factors cited point to the use of Scenario 4 as a more reliable basis for valuing the common equity in PowerGen. Kearns relied on the assumption by Green Field management, GE and its outside consultants with respect to the market and costs and did not independently verify any of their assumptions. Trial Tr. 1142. Separate and apart from the documents, he could not give opinions as to the number of PowerGen units that could be built or leased. Trial Tr. 1144. Moreover, Kearns specifically identified the GE Model Overview as a document that would support GE's use of a lower projected number of units. Tr. 1187.
The testimony of Kearns raises another issue regarding Kearns' opinions on valuation and damages. As noted, he dismissed Scenario 4 as a stress case, a downside case and as not instructive as to common equity valuation. He did so in spite of his testimony that the "second step" of his valuation methodology was to "evaluate a potential range of outcomes...and the outcome can include a single to a homerun, to a strikeout," Trial Tr. 1031; and his testimony that you have a range of potential outcomes "from management's view to zero, Trial Tr. 1040, that from a valuation perspective must be weighted from a probability perspective to come to a value conclusion. Even if the Court could conclude that Scenario 3 was a more reliable base case than Scenario 4, Kearns testified that he "probably weighted" Scenario 3 only *284against the management Scenarios 1 and 2 and against the GE September forecast draft. Trial Tr. 1077-78. None of Scenarios 1 or 2 or the September reforecast take into account the probability of a strike out.
The Court believes that Kearns' methodology was generally reliable; however, his reliance on Scenario 3 and the exclusion of Scenario 4 from his analysis reduces the usefulness of his valuation analysis and opinions. Kearns chose to rely entirely on the analysis conducted by GE and its consultants and testified that he had no independent knowledge or experience to give opinions regarding the number of PowerGen units that could or would be manufactured and leased for use in the oil and gas industry. Trial Tr. 1108, 1142-45. Thus, there is no basis to support the selection of an EBITDA from a scenario that does not contain all of the information identified as key assumptions, which are contained in another scenario. The evidence shows that in spring 2013, GE was expressing concerns about the market for turbine powered generation in the oil and gas industry. Scenario 4 recognized that concern, while Scenario 3 did not. Moreover, Kearns admitted that the assumptions in the GE Model Overview, which included GE's lower utilization rates and slower deployment of units, were present only in Scenario 4 of GE's analysis. Based on all of the evidence the Court concludes that Scenario 4 provides a more reliable basis for evaluation of the common equity attributed to the PowerGen opportunity and that Scenario 3 does not reflect all of the conditions that were known or knowable in May 2013.
The more reliable base case for valuing the common stock in the PowerGen opportunity is Scenario 4. Under Scenario 4, GE projected 2015 EBITDA of $29.9 million. Accepting and applying Kearns' methodology to EBITDA of $29.9 million results in a total common equity value of $39.6 million. Dem Ex. D311, slide 6. Further applying Kearns' methodology to then find the Green Field interest in PowerGen (49.9%), and deducting the net TGS deposit (which Kearns testified is "undisputed mitigation") results in a damage amount of $6.8 million before making any of the additional three adjustments suggested by Sowards. Applying the adjustments recommended by Sowards to the calculations using Scenario 4, as discussed below, further reduces damages significantly-to a figure below zero. DX 311, slide 6 and 14; Trial Tr. 1775:12 - 1788:6.
4. The Tri-Party Agreement and Value to Green Field
The second critique offered by Sowards was Kearns's failure to include the value added by the Tri-Party Agreement as mitigation. JX 42, DX 311, slides 7-9; Trial Tr. 1731:11-1742:20. As discussed above, the Tri-Party Agreement was an agreement between TPT and TGS under which TGS agreed to order its TPUs from TPT at a 25% profit margin. JX 42. This was one of the terms negotiated by Moreno for the benefit of Green Field that was included in the GE Term Sheet. JX 49. Before the execution of the Tri-Party Agreement, Green Field was responsible for paying all of TPT's overhead and expenses. In other words, TPT was a cost center to Green Field. Following the execution of the Tri-Party Agreement, TGS would be paying all of TPT's expenses, plus a 25% profit margin on all units produced. This converted TPT from a cost center into a profit center for Green Field. Trial Tr. 1732:7-1733:20.
Green Field stood to benefit from its 50% ownership of TPT and the 25% profit built into the Tri-Party Agreement. Trial Tr. 1733:24 - 1742:20. As TPT built power generation units, it would be paid a 25% profit on each unit, and Green Field would own 50% of that. Specifically, depending *285on the Scenario adopted and the number of units produced over the operative period, by Sowards' calculation, Green Field stood to benefit from the Tri-Party Agreement between $6.5 million (for Scenario 4) and $9.1 million (for Scenario 3). JX 42, DX 51, DX 311, Slide 9; Trial Tr. 1733:23-1742:20. Kearns offered no explanation for why this profit that Green Field would receive under the Tri-Party Agreement (and the change from TPT as a cost center to TPT as a profit center) was not valuable to Green Field and should not be taken into account. The Court thus agrees with Sowards that the profit attributable to Green Field's ownership of TPT should be factored into any damage model as mitigation. Accordingly, the Court accepts Sowards' critique on this point and will reduce any damages accordingly. Applying the projected profit under the Tri-Party Agreement as mitigation of damages to the potential value of Green Field's common equity in PowerGen under Scenario 4 reduces the alleged damages from $6.8 million to $300,000. See DX 311.
5. The Trustee's Valuation and the Risk of No Funding
The third critique offered by Sowards was that Kearns failed to account for the risk that no funding for the PowerGen opportunity would be obtained. DX 311, Slide 10; Trial Tr. 1742:21-1757:8. On this issue, Kearns agreed that PowerGen needed initial funding of $100 million. Kearns' entire valuation and damages scenario assumed access to $100 million in capital, and Kearns acknowledged that, without capital, there would be no opportunity to value. Trial Tr. 1205, 1208, 1210. Kearns also agreed that there was a risk that PowerGen would never be funded. Trial Tr. 1134-35. He also agreed that if there was a 50% chance that the opportunity could not be financed, a valuation of the opportunity should take that risk into account. Trial Tr. 1135.
When directly asked if he took into account that PowerGen could never obtain the necessary seed funding, Kearns explained: ".... I testified that I took into account there was a possibility that PowerGen ultimately could yield little or no value." Trial Tr. 1209. However, that failed to address the question. Instead, Kearns testified that the risk was "baked into" the 35% discount rate already applied for the execution risk of the business. Trial Tr. 1209:3-12. Sowards also explained that the 35% execution risk applied by Kearns did not include the risk of "no funding." Trial Tr. 1743:6 - 1744:13. On the contrary, the "execution risk" assumed that there would be funding, even if the funding was delayed for a period. Trial Tr. 1744:19 - 1746:2. But Kearns's analysis did not properly consider the risk that no investor(s) would come forward with the $100 million seed capital necessary to give the business the opportunity to develop, or not.
Sowards' opinion that there was a risk that funding would not be obtained is supported by the evidence. According to an April 23, 2012, e-mail from Colleen Calhoun, she had advised Moreno that GE was about "50/50" on consummating its investments with Green Field and/or TGS. DX 111; Calhoun Depo. Tr. 126:13-127:15, 128:8-129:16, 130:9-132:9. Within the same e-mail, Calhoun suggested that, even if GE decided not to invest in a joint venture, GE should consider making a $25 million short-term loan to Moreno given the amount of time that had passed since GE initially advised Moreno that GE's CEO had approved the investment. Id. Even after May 13, 2013, when GEOG advanced the initial $25 million as contemplated in Calhoun's April 2012 e-mail, GEOG's corporate representative, Padaletti, testified that GEOG was not yet committed to a *286long-term deal. Trial Tr. 1756; Padaletti Depo. Tr. 105:1-7, 107:18 - 108:4.
Kearns acknowledged that when TGS executed the GEOG Note in May 13, 2013, it remained unknown if GE would convert the loan to equity and fund the remaining amounts contemplated under the Term Sheet. Trial Tr. 1208. The Court finds that the 35% execution risk does not account for the actual risk of no funding, as of May 13, 2013, that is, that GE or any other investor might not have invested in the PowerGen opportunity. Accordingly, the Court will reduce the valuation and damage model by 50% to account for this risk. See DX 311.
6. The Trustee Fails to Account for Profit
Sowards' final critique was that Kearns failed to account for the "extraordinary consideration" provided to Green Field from the sale of turbines to TGS using the proceeds of the loan from GEOG to TGS. DX 311, Slides 12-13; Trial Tr. 1757:9-1765:17. According to Green Field's account records, the turbine inventory had a book value of approximately $8,727,082.54. DX 227, Trial Tr. 1759:24-1763:2. Moreno caused TGS to pay Green Field $23,091,345.00 for these same turbines, demonstrating a profit of $14,363,262.46. Id. The profit is extraordinary based on the book value, alone. But the Court heard testimony from Moreno, Kilgore and McIntyre that these turbines had no readily available market and no real use other than as proposed by Green Field or TGS. Trial Tr. CONFIDENTIAL Mar. 20, 2018 at 11:4-20; Trial Tr. 1582:5-1583:7, 1597:16-1598: 10, 1603:4-19, 1626:2-8. Sowards disagreed with Kearns' proposition that the $23 million paid for Green Field's turbines was an even exchange of value for value. Given the significant increase in cash price over the book values, as well as the uncontroverted testimony regarding the absence of an available market for the turbines, the Court agrees that the sale of turbines to TGS was more than an even exchange of value for value.
The Court also agrees that the increased sale price on the inventory was not the only benefit to Green Field. The sales provided much-needed liquidity for Green Field that allowed Green Field to make payments on its senior secured notes and maintain a level of liquidity through the end of the month. Accordingly, the profit of $14,363,262.46 to Green Field on the sale of the turbines to TGS must be taken into account as mitigation of damages.
7. Conclusions as to Value
For the reasons discussed above, the Court finds that the PowerGen business had little or no value as of May 13, 2013, and Green Field received much more than it gave up as the result of the May 13 Consent Solicitation. While the financial models demonstrated that the potential PowerGen leasing business may have had value in the future, GE's own models indicated that the business was worth no more than $6.8 million. DX 311, Slide 14. However, this assumes that an investor was actually willing to invest $100 million of seed capital to help the business get off the ground. As of May 13, 2013, there was a 50% chance that no such investor would surface. The value, therefore, needs to be reduced by 50%. Further, the $14.4 million of "extraordinary consideration" from the sale of Green Field's stale turbine inventory provided Green Field with needed liquidity and is a mitigation of damages. Finally, Green Field stood to benefit by up to $6.5 million in future profits under the terms of the Tri-Party Agreement. Thus, the Court finds that, even if there had been a transfer of the PowerGen business, or even if Moreno had breached his fiduciary duties to Green Field by causing the opportunity to be transferred to TGS, *287Green Field benefited from the transaction. In other words, the Trustee has failed to carry his burden of proving damages as a result of the Consent Solicitation, dated May 13, 2013, and subsequent transactions.
CONCLUSIONS OF LAW
I. FIDUCIARY DUTY
A. Ultimate Beneficiary
In the SJ Opinion and order (Memo Op., D.I. 463, 464), the Court granted partial summary judgment on three of the Trustee's preference counts against Aerodynamic, Casafin and Frac Rentals. Specifically, the Court held that, of the $3.7 million alleged preferential transfers made to Aerodynamic, Casafin, Frac Rentals and TGS, only the following amounts (totaling $645,552.91) could be recovered by the Trustee as preferential transfers:
Count 19 (Frac Rentals Transfers): $69,137.97; Count 23 (Aerodynamic Transfers): $110,000.00; and Count 24 (Casafin Transfers): $466,414.94.16
[Editor's Note: The preceding image contains the reference for footnote16 ].
The Court subsequently clarified in its Memorandum Order Regarding Defendants' Motion to Amend Opinion and Order Regarding Cross-Motions for Partial Summary Judgment (Memorandum Order re Motion to Amend, D.I. 476) (the "Clarifying Opinion"), that the Trustee had not demonstrated, as a matter of law, that Moreno was the "ultimate beneficiary" of the foregoing transfers such that the Trustee could recover the foregoing amounts from Moreno under 11 U.S.C. § 550(a). Thus, at trial, it was the Trustee's burden to prove the elements of section 550(a).
Because the only property transferred to Aerodynamic, Casafin and Frac Rentals was cash from Green Field, the Court held that the Trustee need not quantify the value of the transfers. Clarifying Opinion at 5-6. The issues for trial were, thus, whether: (1) Moreno received an actual benefit from the transfers; and (2) Moreno had access to the property transferred. Id.
Under Section 550(a)(1) of the Code, a party may recover an avoidable transfer from "the initial transferee of such transfer or the entity for whose benefit such transfer was made." The Trustee alleges that Moreno, through his ownership of and activity in Aerodynamic, Casafin and Frac Rentals, is a party for whose benefit the avoidable transfers were made, making him an ultimate beneficiary.
In McCook Metals , Chief Judge Eugene R. Wedoff outlined a three-part test to determine whether or not a party could be considered an ultimate beneficiary of a transfer. See Baldi v. Lynch (In re McCook Metals, LLC) , 319 B.R. 570, 590-594 (Bankr. N.D. Ill. 2005) ; see also Bonded Financial Services, Inc. v. European American Bank , 838 F.2d 890 (7th Cir. 1988). To recover a transfer under Section 550(a)(1) from an ultimate beneficiary, a party must show: "(1) it must actually have *288been received by the beneficiary; (2) it must be quantifiable; and (3) it must be accessible to the beneficiary." Id. at 590.
In addressing the first element, the McCook Metals court stated that "an actual benefit rather than a merely intended one must be received in order for the beneficiary to be liable under § 550(a)(1)." Id. The McCook Metals court's reading of the Code is consistent with at least one other court's findings. Id. at 591 (citing Bonded Financial , 838 F.2d at 895 ). The Trustee relies principally on Official Comm. of Unsecured Creditors of Buckhead Am. Corp. v. Reliance Capital Grp. (In re Buckhead Am. Corp. ), 178 B.R. 956 (D. Del. 1994), in support of his position that Moreno's ownership and control of Aerodynamic, Casafin and Frac Rentals is sufficient to make him the ultimate beneficiary for any transfers to those entities. In the Court's Clarifying Opinion, however, the Court explained why the Trustee's reliance on Buckhead was misplaced, and why a fact issue remained regarding whether Moreno actually benefitted from these three entities.
At trial, the Trustee relied on the same evidence that he did on summary judgment. Specifically, the Trustee argued that Moreno's position as manager for the three transferees, as well as his direct or indirect ownership of the entities, meant that he stood to benefit from any transfers to those entities. But the Trustee's evidence is insufficient. At trial, Moreno presented uncontroverted evidence that Aerodynamic, Casafin and Frac Rentals were all special purpose entities established to provide aircraft support and specialized equipment for Green Field. All equipment owned by those entities were financed through third-parties because Green Field lacked the credit to obtain the equipment for itself. Green Field's disinterested CFO, Blackwell, monitored the invoices of these entities to make sure the rates charged were within market, and the payments that Green Field made to the transferees ultimately paid for third-party expenses, such as financing costs, pilot fees, maintenance and fuel. The special purpose entities generated no profit, and there is no evidence that Moreno drew any form of a salary, dividend or distribution from any of them. On the record presented at trial, the Court concludes that the Trustee has not met this first element of demonstrating that Moreno received an actual benefit from the Aerodynamic Transfers, Frac Rental Transfers or Casafin transfers. As such, the Trustee may not recover any of these amounts from Moreno under 11 U.S.C. § 550(a).
For the same reasons, and to complete the analysis, the Trustee has not demonstrated that Moreno had access to the transfers. As discussed in the Clarifying Opinion, "[c]ontrol of an entity is not enough to show access to the benefit. The party must show that there was actual access... Percentage interests and annual payments are not enough to show, as a legal conclusion, that Moreno had access to the transfers." Clarifying Opinion at 6 (citing McCooks , 319 B.R. at 592 ). As with the first element, the Trustee relied solely on the same record presented on summary judgment-i.e. , that Moreno was the 50% owner of Aerodynamic and Casafin, and was entitled to annuity payments from one of the DOH GRATs.17 Even though Moreno was the manager for all three transferees, there was no evidence that he was employed by any of the entities, and Moreno *289testified credibly that he relied on his family office to manage the cash of these entities. The Court has no evidence that Moreno ever directed his family office to make payments from these three transferees. Thus, the Trustee has failed to demonstrate how Moreno had access to the funds transferred from Green Field. Because the Trustee has not carried his burden on the first and third elements of the McCooks standard for establishing Moreno as an ultimate beneficiary under 11 U.S.C. § 550(a), the Court concludes that the Trustee may not recover any portions of the Aerodynamic Transfers, Frac Rental Transfers or Casafin Transfers from Moreno.
B. Claims Related to the PowerGen Business
The Trustee asserts three basic theories against Moreno based on the PowerGen transfer. First, the Trustee alleges that the transfer was fraudulent and that the value of the business may be recovered from Moreno personally. Second, the Trustee alleges that Moreno may be held liable for the transfer because Moreno breached his fiduciary duties in authorizing the transfer to occur, harming Green Field by depriving it of the value of the business. Third, the Trustee alleges that Moreno may be held liable for corporate waste. These theories are addressed in order below.
1. Fraudulent Transfer Theory
The Trustee first seeks a determination that the PowerGen Transfer was a fraudulent transfer, and asks the Court to award judgment against Moreno for the value of the PowerGen business. Under this theory, the Court must first decide the threshold question whether the Trustee has demonstrated a transfer of an interest in Debtor's property in a manner that may be avoidable-i.e. , constructive or actual fraud-under section 548 of the Bankruptcy Code or applicable state law. As a predicate to avoiding any transfer, the Trustee must first prove that Debtor held an interest in the property transferred. Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corp. Retirement Plan No. 003 (In re Fruehauf Trailer Corp. ), 444 F.3d 203, 211 (3d Cir. 2006) (quoting Mellon Bank, N.A. v. Metro Communications, Inc. , 945 F.2d 635, 645 (3d Cir. 1991) ) (citing 11 U.S.C. § 548(a)(1) ; BFP v. Resolution Trust Corp. , 511 U.S. 531, 535, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) ). As the party "bringing the fraudulent conveyance action," the Trustee "bears the burden of proving each of these elements [of fraudulent transfer] by a preponderance of the evidence." In re Fruehauf Trailer Corp. , 444 F.3d at 211 (citing Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L. (In re R.M.L. ), 92 F.3d 139, 144 (3d Cir. 1996) ).
Even if the Trustee carries his burden on this threshold question, the Court must decide a second threshold question-whether Moreno is an "ultimate beneficiary" of the so- called PowerGen transfer-before assessing damages. That is, because the transfer went to TGS, not Moreno, the Trustee must also prove that Moreno was the "ultimate beneficiary" of the transfer under section 550(a)(1) of the Bankruptcy Code.
(a) PowerGen Was Not Property of Debtor.
"The Bankruptcy Code defines property interests broadly, encompassing 'all legal or equitable interests of the debtor in property.' " In re Fruehauf Trailer Corp. , 444 F.3d at 211 (quoting 11 U.S.C. § 541(a)(1) ). The Third Circuit interprets "property of the debtor" broadly to include anything of "value." See id. (quoting *290Segal v. Rochelle , 382 U.S. 375, 379, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966) ); cf. In re R.M.L. , 92 F.3d at 148 ("We also agree that the mere 'opportunity' to receive an economic benefit in the future constitutes 'value' under the Code."). Nevertheless, at trial it was the Trustee's burden to prove that Green Field held a property interest in the so-called PowerGen business or opportunity. The Trustee did not carry his burden for the following reasons.
First, the Trustee could never fully articulate what Debtor owned or transferred under the broad definition of PowerGen. Throughout trial, it remained unclear whether the Trustee was seeking to avoid the transfer of a business, an opportunity, the equipment related to the potential business opportunity or some combination of the foregoing. That issue remained unclear at trial. While the Trustee presented evidence that Green Field and its executives were aware of the potential value in the manufacturing and leasing of turbine power generator units, the mere awareness of such an opportunity does not render that opportunity an "asset" of Debtor under the Uniform Fraudulent Transfer Act. See W. Oil & Gas J.V. v. Griffiths , 2002 WL 32319043, *3 (N.D. Tex. Oct. 2002) (granting summary judgment for the defendant under the Texas Uniform Fraudulent Transfer Act, because the plaintiff could not prove that the defendant held a property interest in an opportunity, even though the defendant knew of the opportunity and advised others of the potential value of the opportunity).
While bankruptcy courts construe "property of the debtor" broadly, the Delaware Supreme Court has held that a company's "precarious financial position" and restrictions imposed under loan covenants can prevent a company from claiming a right to a corporate opportunity. See Broz v. Cellular Info. Sys. , 673 A.2d 148, 155 (Del. 1996). Further, "for an opportunity to be deemed to belong to the fiduciary's corporation, the corporation must have an interest or expectancy in that opportunity." Id. at 156. A company's "articulated business plan" and recent divestment practices can demonstrate whether the opportunity belonged to the company. Id. (concluding that the company did not have an interest in the opportunity because the articulated business plan did not contemplate new acquisitions, and the company had been divesting similar assets).
Based on the extensive record described above, the Court is unable to conclude that Debtor had an interest or expectancy in the potential PowerGen business opportunity. There is no question that Green Field never actually operated a PowerGen business. Further, there is no dispute that Green Field lacked the capital necessary to begin a new PowerGen start-up business on its own. Indeed, the only reason Moreno was exploring the possibility of a separate PowerGen start-up was to fill a gap in capital to support Green Field's existing pressure pumping based business plan-to build out six or seven frac spreads and diversify Green Field's well services customer base. Green Field needed an investor like GE to provide the capital necessary to start any new business, and the most likely source of capital for such a business venture proved to be GE. While GE considered allowing Green Field to own the leasing venture, it ultimately concluded that the leasing company had to be held outside of Green Field. Nevertheless, Moreno negotiated with GE to ensure that TPT would be the leasing company's initial contract manufacturer, and that TPT would earn a 25% mark-up on all units produced. Under the circumstances, given GE's unfettered leverage over Moreno and Green Field, the Court concludes that *291Green Field never truly had an opportunity to establish a PowerGen leasing company. At the same time, however, by allowing Moreno and TPT to work directly with GE outside of Green Field, the board of directors for Green Field made sure that Green Field would still benefit from up to $400 million of revenue over the three-year manufacturing period. Based on this record, the Court concludes that Green Field never held an interest in the PowerGen leasing business opportunity and, consequently, the Trustee has failed to establish that anything of value was transferred to TGS.
This is also true from a technological perspective. The overwhelming evidence demonstrated to the Court that Green Field never owned an interest in McIntyre's intellectual property. This point was made clear from the very formation of TPT, which was a compromise between Green Field and McIntyre. Under the compromise, TPT would hold only McIntyre's Frac Stack Pack intellectual property, while McIntyre would retain all rights to his other intellectual property. Both Moreno and McIntyre testified that they could not agree on a value for McIntyre's other intellectual property. Thus, TPT was limited to the Frac Stack Pack technology.
Moreno testified credibly that if he had tried to start a PowerGen business without McIntyre's consent, McIntyre would have had a valid claim against Green Field for stealing McIntyre's intellectual property. While Moreno went into deep discussions with GE before anyone at GE raised this issue with Moreno, it was always apparent from TPT's records that not even TPT owned the right and know-how to manufacture McIntyre's power generator units. TPT and Green Field could only acquire those rights and information if McIntyre was willing to contribute his PowerGen intellectual property and know-how into TPT. Ultimately, once GE demonstrated its willingness to advance money into TGS, Moreno convinced McIntyre to contribute his PowerGen intellectual property into TPT, but that did not occur until June, 2013- more than one month after the alleged PowerGen transfer occurred.
Thus, based on the record presented, the Court finds and concludes that the Trustee has failed to demonstrate the existence of a property interest of Green Field in the PowerGen technology or business. At all relevant times, the technology belonged to McIntyre, and Green Field never had an interest in the PowerGen leasing business opportunity.
(b) Any Transfers to TGS Were Not Actually or Constructively Fraudulent
Even if the Trustee could establish that Green Field held an interest in the so-called PowerGen business or opportunity, the transfer is not avoidable because there is insufficient evidence of actual or constructive fraud. To avoid a transfer as constructively fraudulent, a plaintiff must demonstrate: (i) a transfer within the applicable time period; (ii) the debtor's insolvency; and (iii) a lack of reasonably equivalent value (or fair consideration). See Charys Liq. Trust v. McMahan Sec. Co. L.P. (In re Charys Holding Co.) , 443 B.R. 628, 636 (Bankr. D. Del. 2010). Here, Debtor's insolvency is not in dispute. (Stipulation No. 92). Thus, the relevant issues for trial were: (a) whether and when the alleged transfer occurred, if ever; and (b) whether Green Field received reasonably equivalent value or fair consideration in exchange for any transfer.
The Trustee was required to prove that Green Field received less than reasonably equivalent value (or fair consideration) in exchange for the alleged transfer.
*292Mellon Bank, N.A. v. Metro Communications, Inc. , 945 F.2d 635, 646 (3d Cir. 1991) ; 11 U.S.C. § 548(a)(2)(A). In determining whether a debtor received reasonably equivalent value, the Third Circuit applies a two-step analysis: (a) first, whether the debtor received any value from the transaction in question; and (b) whether that value was reasonably equivalent to the value transferred, considering a totality of circumstances. See Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L. (In re R.M.L.) , 92 F.3d 139, 152 (3d Cir. 1996). The Trustee contends that the transfer occurred on May 13, 2013, the day that Green Field's shareholders and board of directors executed the Consent Solicitation agreeing to waive any potential PowerGen opportunity to allow Moreno, TGS and TPT to engage GE for the potential venture. Without reaching any conclusions over what was transferred on that date, the critical issue for the Court to decide is whether Debtor received reasonably equivalent value in exchange for what it gave up on May 13, 2013. On this issue, the Court concludes that the Trustee failed to carry his burden.
As a direct result of the consent executed on May 13, 2013, GE advanced $25 million to TGS. While Moreno personally guaranteed this obligation, Green Field was not required to sign the note or guaranty the obligation. Thus, Green Field took on no new debt on May 13, 2013. Instead, Moreno caused over $19 million of the GEOG Note proceeds to be used for inventory purchases at prices that Green Field could not have obtained in a true arm's length third-party sale. This inventory sale gave Green Field immediate liquidity in an amount that allowed the company to pay its semi-annual interest payment to bondholders and avoid payment defaults to its other creditors.
Meanwhile, the Project Cayenne Term Sheet attached to the TGS note provided for TPT to become TGS's contract manufacturer. Ultimately, as a result of the deal negotiated by Moreno, TPT entered into the Tri-Party Agreement under which Debtor was effectively relieved of its ongoing obligations to pay TPT's overhead costs, and as the result of which Green Field became entitled to half of the profits generated by TPT. In other words, in exchange for a consent that gave up nothing on behalf of Green Field, Green Field received an immediate influx of over $20 million in cash and an agreement to earn up to $400 million in future revenues. On balance, the Court concludes that Green Field did receive reasonably equivalent value than it gave up on May 13, 2013. As such, the Court concludes that the so-called PowerGen transfer of May 13, 2013, is not avoidable as a constructive fraudulent transfer.
Nor can the Trustee avoid the PowerGen transfer as an actual fraudulent transfer. The proof required to show actual fraud is higher than that required to establish constructive fraud. To avoid a transaction under section 548(a)(1)(A) of the Bankruptcy Code, the Trustee must show that the transaction was made "with actual intent to hinder, delay or defraud" creditors. Official Comm. of Unsecured Creditors of Fedders N. Am., Inc. v. Goldman Sachs Credit Partners L.P. (In re Fedders N. Am., Inc.) , 405 B.R. 527, 545 (Bankr. D. Del. 2009). Because direct evidence of an actual fraudulent transfer is often unavailable, courts generally rely on circumstantial evidence, or "badges of fraud," to infer the debtor's fraudulent intent. See id. (citing In re Hechinger Inv. Co. of Del. , 327 B.R. 537, 550-51 (D. Del. 2005) ; Dobin v. Hill (In re Hill) , 342 B.R. 183, 198 (Bankr. D. N.J. 2006) ).
The "badges of fraud" considered by courts include, but are not limited to: (1) the relationship between the debtor *293and the transferee; (2) consideration for the conveyance; (3) insolvency or indebtedness of the debtors; (4) how much of the debtor's estate was transferred; (5) reservation of benefits, control or dominion by the debtor over the property transferred; and (6) secrecy or concealment of the transaction. See id.
The complete statutory list of factors to consider under DUFTA are as follows:
(1) The transfer or obligation was to an insider;
(2) The debtor retained possession or control of the property transferred after the transfer;
(3) The transfer or obligation was disclosed or concealed;
(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) The transfer was of substantially all the debtor's assets;
(6) The debtor absconded;
(7) The debtor removed or concealed assets;
(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Uniform Fraudulent Transfer Act, Del. C. § 1304(b).
In the Second Amended Complaint, the Trustee alleged only a handful of the foregoing factors-i.e. , that the PowerGen Transfer was made to or for the benefit of an insider; that Debtor received no value or less than reasonably equivalent value for the transfer; that Debtor was insolvent at the time of the transfer; and that the PowerGen business was valuable. No single factor is determinative, and the Court must consider the totality of circumstances. At summary judgment, the Trustee had asserted only a few badges, and, at trial, failed to prove anything beyond what Defendants stipulated before trial. Specifically, Defendants did not dispute that Green Field was insolvent and that the Consent Solicitation authorized Moreno to continue negotiations with TGS-an entity controlled by an insider of Green Field. At trial, the Trustee did not prove that anything had been concealed, and for the reasons discussed above, the Trustee did not carry his burden in proving that Green Field received less than reasonably equivalent value for what it gave up or transferred. Under the circumstances, the Court concludes that the Trustee has not carried his burden in proving that there has been a constructive or actual fraudulent transfer. See In re Fedders N. Am., Inc. , 405 B.R. at 545.
(c) Moreno Was Not the "Ultimate Beneficiary" of PowerGen.
Even if the Trustee had demonstrated Green Field's interest in PowerGen, the Trustee cannot recover the value from Moreno, because the Trustee has failed to prove that Moreno was the beneficiary of any transfer to TGS. As discussed above, Moreno is the manager of TGS, but holds no ownership interest in the entity. He is the settlor of a GRAT that owns approximately 45% of DOH Holdings, the parent of TGS. He testified credibly and without being controverted that he received no distributions, dividends *294or salaries from TGS. Further, Moreno personally guaranteed the $25 million note to GE, and pledged his personal wealth to Goldman Sachs and Powermeister in order to borrow funds. Under the circumstances, the Trustee has not demonstrated that Moreno received any actual benefit from any transfer to TGS. Accordingly, Moreno cannot be held liable under section 550(a) for any avoidable transfer made to TGS.
2. Breach of Fiduciary Duty
The Delaware Supreme Court has held that directors and officers of a Delaware corporation owe the corporation and its shareholders a "triad" of duties. See Malone v. Brincat , 722 A.2d 5, 10 (Del. 1998) ; In re Fedders N. Am., Inc. , 405 B.R. at 539. "This triad is composed of the duty of care, the duty of loyalty, and the duty to act in good faith." In re Fedders N. Am., Inc. , 405 B.R. at 539 (citing Malone , 722 A.2d at 10 ).
A plaintiff cannot prove a breach of the duty of care without a showing of gross negligence. See id. (citing Cargill, Inc. v. JWH Special Circumstance LLC , 959 A.2d 1096, 1113 (Del. Ch. 2008) ). Presentation to a board may not be required "where the opportunity is one that the corporation is incapable of exercising." See Broz v. Cellular Info. Sys. , 673 A.2d 148, 157-158 (Del. 1996) ; see also Wolfensohn v. Madison Fund, Inc. , 253 A.2d 72, 76 (1969).
In the present case, Moreno's duty of care is not in question. Rather, the Trustee asserts two claims for breach of loyalty and good faith (Counts 3 and 13) based on: (a) the alleged fraudulent transfer of the PowerGen business to TGS; and (b) Moreno's alleged conduct in preventing MGH Holdings from purchasing stock under the SPAs. As a threshold matter, these are alternative legal theories to the Trustee's fraudulent transfer theories (Counts 1 and 2) and the Trustee's tortious interference theory (Count 14). The Court addresses the merits of each claim below.
Through Count 3, the Trustee asserts a claim directly against Moreno for conspiracy or aiding and abetting an alleged fraudulent transfer to TGS, which the Court has already addressed. "The authorities are ... clear that there is no such thing as liability for aiding and abetting a fraudulent conveyance or conspiracy to commit a fraudulent transfer as a matter of federal law under the Code." In re Fedders N. Am., Inc. , 405 B.R. at 549 (citations omitted). Even if the Trustee could have established that Green Field (through Moreno) defrauded its creditors by transferring a PowerGen business to TGS, the Trustee would still have been required to prove how Moreno benefited from the transfer under the "ultimate beneficiary" standards of section 550(a). See generally In re McCook Metals LLC , 319 B.R. 570, 591 (Bankr. N.D. Ill. 2005). For the reasons already discussed above, the Trustee failed to prove that the Consent Solicitation of May 13, 2013, constituted an actual or constructive fraudulent transfer. Further, the Trustee failed to demonstrate how Moreno, as the manager of TGS, received an actual benefit from the alleged transfer.
Nevertheless, in the interest of completeness and the record, the Court addresses the merits of the fiduciary duty claims. "A claim for breach of the duty of loyalty requires a showing that a fiduciary was on both sides of a transaction and that the transaction was not entirely fair to the company." See In re Fedders N. Am., Inc. , 405 B.R. at 540. "Delaware has three tiers of review for evaluating director decision-making: the business judgment rule, enhanced scrutiny, and entire fairness. The business judgment rule is the default standard *295of review." Reis v. Hazelett Strip-Casting Corp. , 28 A.3d 442, 457 (Del. Ch. 2011).
The Court concludes that the Trustee has not carried his burden in showing that Moreno was truly on both sides of the PowerGen transaction. While it is undisputed that Moreno was an officer and director of Green Field and was technically the manager of TGS, the overwhelming evidence presented at trial showed that Moreno was not negotiating with himself to transfer PowerGen to TGS. Rather, he was negotiating with GE extensively over the course of several months in an effort to entice GE to invest directly into Green Field, consistent with his fiduciary duties to Green Field. When GE finally decided that it would not invest in Green Field directly, Moreno found a way to bring liquidity to Green Field, monetize illiquid assets, and convert TPT from a cost-center into a profit-center for Green Field. The undisputed evidence demonstrated to the Court that Moreno negotiated these points, not with himself, but with GE over the course of several months. Accordingly, the Court concludes that Moreno was not really on both sides of the transaction that led to the PowerGen business being started up within TGS. Moreno negotiated with GE and acted in the best interests of Green Field in doing so. It follows then that the ordinary business judgment standard applies to Moreno's actions as an officer and director of Green Field.
(a) Moreno's Actions Were Consistent with His Fiduciary Duties.
The business judgment rule presumes that "in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company." Reis , 28 A.3d at 457 (quoting Aronson v. Lewis , 473 A.2d 805, 812 (Del. 1984) ). The duty to act in good faith "is a subsidiary element of the duty of loyalty." In re Fedders N. Am., Inc. , 405 B.R. at 540 (citing Stone v. Ritter , 911 A.2d 362, 370 (Del. 2006) ).
The Delaware Supreme Court has identified three examples of conduct that may establish a failure to act in good faith. First, it has held that such a failure may be shown where a director "intentionally acts with a purpose other than that of advancing the best interests of the corporation." [ ] Second, it has held that a failure may be proven where a director "acts with the intent to violate applicable positive law." [ ] Third, it has held that a failure may be shown where the director "intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties." [ ] The court noted, however, that this list of examples is not necessarily exclusive. More specifically, it said there "may be other examples of bad faith yet to be proven or alleged, but these three are the most salient." [ ]
Id. (quoting In re Walt Disney Co. Derivative Litigation , 906 A.2d 27, 67 (Del. 2006) ).
Based on the evidence presented, the Court concludes that Moreno's actions as CEO and chairman of the board of Green Field were made in the best interests of Green Field, consistent with reasonable business judgment. In the present case, there was a legitimate reason to execute the Consent Solicitation on May 13, 2013-GE emerged as the only source of capital sufficient to give Green Field the liquidity it needed to make interest payments under the Indenture and bring Green Field's business plan back on track, and GE was insisting on the execution of the Consent Solicitation before it would advance any funds. Moreno and other *296members of the board relied on advice of Green Field's corporate counsel, Latham & Watkins, to execute whatever documents were necessary to bring immediate liquidity into the company. By executing the Consent Solicitation, Moreno and the remaining board members did not believe they were giving up anything of value, because the PowerGen opportunity was unavailable without GE's seed capital, and GE was unwilling to invest in Green Field directly. On the other hand, Moreno and the other board members understood that, by executing the Consent Solicitation, GE would advance $25 million to TGS, which TGS then made available to Green Field to pay interest on its senior secured notes. Additionally, once the PowerGen leasing business was properly capitalized, TPT would start to earn 25% profits on each unit it manufactured and sold to TGS, allowing Green Field to realize positive cash flow from its 50% interest in the manufacturing subsidiary. The Court therefore finds that Moreno was motivated by his belief that his negotiations with GE would save Green Field, and the trial evidence corroborates Moreno's position. Under the circumstances, the Court concludes that Moreno did not breach his fiduciary duties to Green Field, as such actions were protected by the business judgment rule.
The Court further concludes that, while inapplicable to the facts presented, Moreno's actions would have satisfied Delaware's heightened fiduciary duty standards. The Court provides the following analysis, for the sake of completeness, but concludes that neither heightened standard applies to the facts of this case.
(b) Moreno's Actions Satisfy the Enhanced Scrutiny Test.
Enhanced scrutiny is Delaware's intermediate standard of review. Framed generally, it requires that the defendant fiduciaries "bear the burden of persuasion to show that their motivations were proper and not selfish" and that "their actions were reasonable in relation to their legitimate objective." Mercier v. Inter-Tel (Del.), Inc. , 929 A.2d 786, 810 (Del. Ch. 2007).
Enhanced scrutiny applies when the realities of the decision-making context can subtly undermine the decisions of even independent and disinterested directors. The Unocal case involves resistance to a hostile takeover, where there is an "omnipresent specter" that target directors may be influenced by and act to further their own interests or those of incumbent management, "rather than those of the corporation and its shareholders." Unocal Corp. v. Mesa Petroleum Co. , 493 A.2d 946, 954-55 (Del. 1985). Tailored for this context, enhanced scrutiny requires that directors who take defensive action against a hostile takeover show (i) that "they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed," and (ii) that the response selected was "reasonable in relation to the threat posed." Reis , 28 A.3d at 457 (quoting Unocal , 493 A.2d at 954-55 ).
In the present case, Moreno had reasonable grounds for believing that Debtor was facing a liquidity crisis. The undisputed evidence demonstrated that a slowdown in the fracking market left a hole in Green Field's operating cash flow, preventing it from completing its business plan to build out six or more frac spreads and expand its hydraulic fracturing customer base to be less reliant on Shell. Moreno spent most of the second half of 2012 and the entire first quarter of 2013 trying to raise new capital to get Green Field's business plan back on track.
While Kearns, the Trustee's expert, testified that he believed that Green Field could have found a willing investor had it *297maintained its PowerGen rights in bankruptcy, the overwhelming and uncontroverted evidence directly contradicts Kearns's uninformed beliefs. Not only did Green Field lack a contractual right to McIntyre's PowerGen intellectual property as of May 13, 2013, but Moreno and Green Field's management had been trying for months to raise the capital needed to start up the business with Green Field to no avail. Moreno's efforts included meetings with dozens of potential investors, existing bondholders and strategic investors like GE. After months of searching, the best Moreno could do was sign personal guarantees to borrow from GE (through TGS), Goldman Sachs (through the DOH GRATs) and Powermeister (through DOH Holdings). None of those lenders were willing to lend to or invest in Green Field directly. Only by taking those actions was Moreno able to insert approximately $50 million for the benefit of Green Field. Further, while McIntyre was aware of these negotiations, the earliest documentation of his purported contribution of PowerGen intellectual property into TPT came in June 2013, over a month after the execution of the Consent Solicitation. The Court does not accept the Trustee's suggestion that Green Field had other reasonable alternatives.
(c) Moreno's Dealings with Green Field Satisfy "Entire Fairness" Test.
While the Trustee failed to prove that Moreno was on both sides of the transaction, the Court will consider whether the transaction satisfies the "entire fairness" standard, in the interest of completeness. Miller v. McCown De Leeuw & Co., Inc. (In re The Brown Schools ), 386 B.R. 37, 47 (Bankr. D. Del. 2008). The "entire fairness" standard requires proof of both: (i) fair dealing and (ii) fair price, examined together as a whole. Official Unsecured Creditors' Comm. of Broadstripe, LLC v. Highland Capital Mgmt., L.P. (In re Broadstripe, LLC ), 444 B.R. 51, 106 (Bankr. D. Del. 2010).
(i) "Fair dealing" involves elements such as (a) when the transaction was timed, (b) how it was initiated, (c) how it was structured, (d) how it was negotiated, (e) how it was disclosed to the directors, and (f) how the approvals of the directors and the stockholders were obtained.
(ii) "Fair price" includes such considerations as "economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock."
Id. (citing Weinberger v. UOP , 457 A.2d 701, 710-11 (Del. 1983) )
In the present case, the evidence presented by Moreno was sufficient to satisfy Moreno's burden under the "entire fairness" standard. Specifically, Moreno established that he dealt with Green Field in a fair manner. Negotiations with GE were initiated at least six months before the Green Field liquidity crises came to a head, and Moreno fought hard to get a transaction with GE to close in March, 2013, with two months to spare before interest payments came due. During this process, it appeared at various points in time as though GE was willing to invest directly in GE, but GE frequently changed its mind and ultimately withdrew from negotiations without consummating anything more than the GEOG Note with the Term Sheet attached. Moreno's efforts to raise capital were disclosed to bondholders and the board of directors as early as November, 2012, and Moreno continuously kept bondholders and outside directors apprised of his discussions with GE, both on quarterly *298conference calls as well as through frequent phone calls to Teetsel and Kilgore.
The Court is persuaded that the board approved the transaction in a reasonable manner and on an informed, real-time basis. As Kilgore testified, the board had followed Moreno's negotiations with GE since November of 2012 and deliberated the need for a formal consent in April, 2013. At the time, the board decided that no formal consent was necessary because the company was not giving anything up. When Green Field's corporate counsel (Latham & Watkins) advised the board that the Consent Solicitation would satisfy GE's lending conditions requiring Green Field to give any corporate assets away, the company's CFO, Blackwell, circulated the Consent Solicitation to each director. Each director executed the Consent Solicitation on the spot, having deliberated the matter in previous conference calls and fully understanding that Green Field was not giving anything up by "waiving" PowerGen. During their live testimony, Kilgore and Fontova both explained that Green Field was receiving far more from Moreno's negotiations with GE than Green Field was giving up-specifically, Green Field would receive most of the $25 million that GE was loaning to TGS and Moreno and a future source of revenue through its manufacturing subsidiary. Although a meeting of the Board, with discussion and exchanging thoughts and concerns was the preferable procedure, the Court concludes that Moreno dealt fairly in obtaining approval of the Consent Solicitation.
The Court also concludes that Green Field received a "fair price" in exchange for waiving the PowerGen opportunity. As the board members testified, Green Field was not giving anything up, except the potential opportunity to participate in the leasing side of a PowerGen business, even though the record demonstrated that there was no funding available to Green Field to participate in that side of the business. Even if the Court accepts Kearns's $26.9 million assessment of the value for the leasing side of the PowerGen business, the Court agrees with Sowards that Green Field received far more in excess of this amount in exchange for its "waiver" of the opportunity. Specifically, but for the Consent Solicitation from the board, GE would not have advanced the first $25 million and negotiations would likely have ceased. With the Consent Solicitation, GE advanced funds to TGS, knowing that TGS would use the funds to "purchase" inventory from Green Field at a substantial mark-up-so substantial that it allowed Green Field to make its $17 million semi-annual interest payment to bondholders. In addition to the inventory sales, Green Field was reimbursed over $1 million for its executives' time trying to develop the business within Green Field, and TPT began producing PowerGen units to sell to TGS at a 25% profit margin, half of which would supplement Green Field's cash flow. Under the circumstances, the Court concludes that Green Field received a "fair price" in exchange for the board's Consent Solicitation to allow Moreno and TPT to work with GE and TGS directly on the PowerGen business. As such, Moreno's actions would not constitute a breach of his fiduciary duties, even under the heightened "entire fairness" standard.
3. Corporate Waste
Delaware law recognizes a claim for corporate waste where the plaintiff establishes "particularized facts showing that the corporation, in essence, gave away assets for no consideration." See Resnik v. Woertz , 774 F.Supp.2d 614, 635 (D. Del. 2011) (quoting Green v. Phillips , C.A. No. 14436, 1996 WL 342093, at *5 (Del. Ch. June 19, 1996) ). "Waste has been described *299as 'an exchange of corporate assets for consideration so disproportionally small as to lie beyond the range at which any reasonable person might be willing to trade. Most often the claim is associated with a transfer of corporate assets that serves no corporate purpose.' " In re USDigital, Inc. , 443 B.R. 22, 47-48 (Bankr. D. Del. 2011) (quoting Weiss v. Swanson , 948 A.2d 433, 450 (Del.Ch. Mar. 7, 2008) ).
"The test for corporate waste is an 'extreme test, very rarely satisfied by shareholder plaintiff.' " Id. In USDigital , the Bankruptcy Court explained that a transaction could be considered corporate waste if the company decided to spin off a new venture that it had invested operating funds to develop without making arrangements for reimbursement. See id. at 48. In this case, however, Green Field made arrangements for TGS to reimburse Green Field over $1 million for executives' time and expenses incurred between November 2012 and June 2013. (JX 1, Stipulation No. 95). Further, both Fontova (an inside director) and Kilgore (an outside director) explained their understanding of what Green Field stood to gain by consenting to Moreno's continued negotiations with GE through the external entity TGS. Green Field stood to gain immediate liquidity from the sale of its stale and illiquid inventory, plus Green Field stood to receive future revenues from TPT which, under the terms of the Tri-Party Agreement, would no longer weigh down Green Field's balance sheet as a cost center. Even if the Court accepted Kearns's value for the PowerGen business, without discount, the Trustee has failed to prove that the Consent Solicitation gave away an asset for little or no consideration. The Consent Solicitation opened a door of liquidity for Green Field that was previously closed.
II. BREACHES OF THE SHARE PURCHASE AGREEMENTS
A. Liability of MOR MGH
The Trustee seeks damages for MOR MGH's breaches of the 2012 and 2013 SPAs, respectively. Under applicable New York law,18 "an action for breach of contract requires proof of (1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages." In re Delta Mills, Inc. , 404 B.R. 95, 105 (Bankr. D. Del. 2009) (quoting First Investors Corp. v. Liberty Mut. Ins. Co. , 152 F.3d 162, 168 (2d Cir. 1998) ). In its SJ Opinion, the Court determined that the first two elements were uncontested and that "the 2012 SPA was breached and that MOR MGH and MMR did not make their required purchases for each of the first two quarters of 2013." D.I. 463 at pp. 36-37, 39. The Court also found that "MOR MGH never made the $10,000,000 purchase under the 2013 SPA, as required." Id. at p. 39. Both in the SJ Opinion and its Reconsideration Order, the Court denied awarding judgment to the Trustee at that time on the basis that "[w]hether Green Field was or was not in the 'same economic position' that it would have been without the breach of contract is an issue that remains for trial." D.I. 473 at p. 4. With the trial record before it, the Court now finds that Green Field was damaged by MOR MGH's breaches of the SPAs.
As the Court previously articulated in its SJ Opinion, "[u]nder New York law, the normal measure of damages for breach of contract is expectation damages - - the amount necessary to put the *300aggrieved party in as good a position as it would have been had the contract been fully performed." McKinley Allsopp, Inc. v. Jetborne Int'l., Inc. , No. 89 Civ. 1489 (PNL), 1990 WL 138959, at *8 (S.D.N.Y. Sept. 19, 1990) ; see also Topps Co., Inc. v. Cadbury Stani S.A.I.C. , 380 F.Supp.2d 250, 261 (S.D.N.Y. 2005) ("Damages for a breach of contract are normally limited to the amount necessary to put the plaintiff in the same economic position plaintiff would have occupied had the breaching party performed the contract."). At summary judgment, the Trustee asked the Court to follow those cases holding that "under New York law, where the breach of contract was a failure to pay money, the plaintiff is entitled to recover the unpaid amount due under the contract plus interest." House of Diamonds v. Borgioni, LLC , 737 F.Supp.2d 162, 172 (S.D.N.Y. 2010) (citing Scavenger, Inc. v. GT Interactive Software Corp. , 289 A.D.2d 58, 58-59, 734 N.Y.S.2d 141 (N.Y. App. Div. 2001) ). The Court declined to do so out of concern that damages beyond failure to receive the amounts due under the contract needed to be established. Two cases aid in providing context. See Stokoe v. E-Lionheart, LLC , 129 A.D.3d 703, 704, 11 N.Y.S.3d 199 (N.Y. App. Div. 2015) ("Thus, contrary to the conclusion of the Supreme Court, the plaintiffs are entitled to recover, as damages, the amounts due under the promissory notes and guarantees. The plaintiffs established, prima facie, the amounts that were due under the promissory notes and guarantees."); cf. Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y. , 10 N.Y.3d 187, 193, 856 N.Y.S.2d 505, 886 N.E.2d 127 (2008) ("With agreements to pay money ... the sole purpose of the contract is to pay for something given in exchange. In such cases, what the payee plans to do with the money is external and irrelevant to the contract itself."). The Court now holds that the Trustee has met his burden of proof of damages by establishing non-payment of the amounts owed under the 2012 and 2013 SPAs.
The Court holds that Green Field would have been in a better economic position had MOR MGH complied with its SPA obligations. First, Moreno testified at trial that "[i]t would have been beneficial for Green Field to have every dollar it could find." Trial Tr. 469:17-19. He also testified that the absence of cash "is absolutely the kiss of death" to a company. Trial Tr. 478:12-17. Moreno also acknowledged that had the SPAs been fulfilled, Green Field would have been able to make the required interest payments under the Shell Contract. Trial Tr. 469:20-470:3. Green Field then would have avoided its cross-defaults under the Shell Contract and the Bond Indenture. See Stip. Facts ¶ 83. Accordingly, the Court holds that Green Field would have been in a better economic position had MOR MGH and MMR complied with the SPAs than it was as a result of the breach.
Furthermore, MOR MGH, through Moreno, had access to additional funds to make the payments, without impacting the ability of TGS to satisfy its obligations to TPT in connection with the manufacture of the PowerGen units. The evidence at trial established that Moreno or his entity MOR DOH, which owned TGS, borrowed at least $85 million from GE, Goldman Sachs and Powermeister between May and August 2013. Trial Tr. 843:7-844:19. Putting aside Moreno's characterization of certain transactions as "capital contributions," the evidence establishes that approximately $48 million of transactions between TGS and Green Field occurred during this time period in the form of turbine sales ($23M) and deposits ($25M). JX 3; DX 221; Trial Tr. 844:11-846:10. From the remaining $37 million of available funds, Moreno admitted-only after being confronted with a *301document from his estate planning professionals-that $10 million was improperly siphoned off to purchase his Dallas home. Trial Tr. 411:18-420:12, 844:11-19. The additional $27 million was completely unaccounted for. Trial Tr. 844:20-846:10; JX 3; DX 221. That $37 million was thus available to satisfy the $17 million in SPA obligations, without impacting in any way TGS' obligations to TPT. Further, Moreno could have borrowed additional money on behalf of MOR MGH in order to fulfill its obligations under the SPAs. Moreno acknowledged that whatever money either TGS or MOR MGH had in its possession was derived from money borrowed by Moreno. Trial Tr. 846:23-847:8. Indeed, all of the money that Defendants allege TGS paid to Green Field to satisfy the SPA obligations was either from Moreno's personal funds or money that he borrowed. Trial Tr. 817:14-24, 846:23-847:8.19
At summary judgment, Moreno argued that he satisfied MOR MGH's obligations under the SPAs by contributing $66 million in funds to Green Field from other entities. At trial, Moreno again testified about these payments. Trial Tr. Conf. 3/20 at 5:16-6:8. The Court, in its earlier SJ Opinion, already rejected Moreno's argument that these payments constitute substitute performance for MOR MGH's breaches of the SPAs. D.I. 463 at pp. 38-39. Moreno now argues that those payments demonstrate his good faith effort to benefit Green Field.
Moreno also testified at trial that there was a material adverse change that relieved him of his obligations under the 2012 SPA. Trial Tr. 470:11-16. In none of his contemporaneous public disclosures disclosing the defaults did Moreno assert any potential material adverse change. PX 171; PX 174 at p. 8. Additionally, he promised to cure the defaults, demonstrating that he still believed he had an obligation that he needed to fulfill. Trial Tr. 445:10-446:7; PX 177 at p. 5. The Court has already determined that the SPAs were breached. D.I. 463 at p. 39. The Court finds that Moreno's argument is without merit.
Accordingly, the Trustee has proven that Green Field suffered damages in the amount of $15,961,923 due to MOR MGH's failure to honor its obligations under the 2012 and 2013 SPAs. The Trustee prevails on damages, plus applicable prejudgment interest. The New York legal interest rate is 9% per annum, N.Y. C.P.L.R. § 5004, and is calculated on a simple interest basis. Marfia v. T.C. Ziraat Bankasi , 147 F.3d 83, 90 (2d Cir. 1998). New York law provides that prejudgment interest must be computed
from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred. Where such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date.
N.Y. C.P.L.R. § 5001(b) (McKinney's 2016). The Trustee is therefore entitled to prejudgment interest of 9% from May 15, 2013 to present with respect to the first quarter 2013 required but unperformed purchase of $3,968,606; from August 19, 2013 to present with respect to second *302quarter 2013 required but unperformed purchase of $1,993,317; and from June 28, 2013 to present with respect to the required but unperformed $10 million purchase under the 2013 SPA. Pre-judgment interest in the amount of $7,208,235.50 has accrued through June 29, 2018, the date of the Trustee's filing. Prejudgment interest continues to accrue at the rate of $3,935.82 per day, until the date of judgment.
B. Moreno's Tortious Interference
The Trustee seeks damages against Moreno personally for his tortious interference with the obligations of MOR MGH and MMR under the SPAs. Under New York law, "[t]he elements of a tortious interference with contract claim are well established-the existence of a valid contract, the tortfeasor's knowledge of the contract and intentional interference with it, the resulting breach and damages." Hoag v. Chancellor, Inc. , 246 A.D.2d 224, 677 N.Y.S.2d 531, 533 (1998). In the Court's SJ Opinion, the Court determined that the 2012 and 2013 SPAs were valid contracts, that Moreno had knowledge of those contracts, and that the contracts had been breached due to MOR MGH and MMR's nonpayments. D.I. 463 at pp. 36-39, 42. As described above, the Court finds that Green Field was damaged as a result of the breaches. Thus, the Court must decide whether Moreno interfered with MOR MGH and MMR's obligations under the SPAs and whether he acted with the requisite level of intent.
The Court finds that Moreno intentionally interfered with the obligations of MOR MGH under the SPAs. Moreno was the manager of MOR MGH. Stip. Facts ¶ 8; Trial Tr. 62:2-12; PX 92 at § 3.2. MOR MGH, in turn, was owned by two grantor retained annuity trusts, collectively referred to as the MGH GRATs. Stip. Facts ¶ 9. Moreno was responsible for managing the assets and investments of the MGH GRATs. Trial Tr. 67:17-20, 75:13-76:2. Accordingly, Moreno exercised full control over MOR MGH and controlled whether or not it made payments in compliance with its obligations under the SPAs.
The Court also finds that Moreno interfered with MMR's obligations under the 2012 SPA. Moreno was aware that if he did not cause MOR MGH to make its payment and Moreno did not contribute his one-third share of MMR's obligations, then his partners in MMR would likewise not follow through with payment. Trial Tr. 388:2-392:14; PX 148; PX 149. Blackwell, who was responsible for sending the notices to the shareholders and was responsible for Green Field's finances, testified that Rucks and Moody were not going to make their funding calls unless Moreno made his. Blackwell Dep. 55:13-17. Even though Moreno directed Blackwell to represent to Moody and Rucks that Moreno was intending to make the payments, Moreno had no intention to perform, did not perform and, as a result, caused Moody and Rucks to breach the 2012 SPA. Blackwell Dep. 42:11-44:16; 55:7-12; PX 148. Moreno was thus responsible for interfering with MMR's obligations.
The Court also finds that Moreno acted with the requisite level of intent when he interfered with the obligations of MOR MGH and MMR under the SPAs. The traditional articulation of intentional interference is that the interfering party must be a stranger to the contract; a corporate representative acting in his corporate capacity is not typically deemed a "stranger."20
*303Rockland Exposition, Inc. v. Alliance of Auto. Serv. Providers of N.J. , 894 F.Supp.2d 288, 336-37 (S.D.N.Y. 2012). However, where the corporate officer is acting with malice, that is, for his personal gain, rather than the corporate interests, liability from interference will be found. Id. at 338 ; Hoag , 677 N.Y.S.2d at 533-34 ; Petkanas v. Kooyman , 303 A.D.2d 303, 759 N.Y.S.2d 1, 2 (2003). "New York courts have construed personal gain to mean that the challenged acts were undertaken with malice and were calculated to impair the plaintiff's business for the personal profit of the individual defendant." Rockland , 894 F.Supp.2d at 338 (internal quotation marks and citations omitted). In proving "malice," courts have held that merely showing that the defendant acted with the intent to procure personal gain is sufficient. See, e.g., Albert v. Loksen , 239 F.3d 256, 272-76 (2d Cir. 2001) (denying summary judgment to defendant because evidence that supervisor interfered with employee's employment contract in order to prevent employee from reporting his misconduct would be sufficient to prove malice); see Zuckerwise v. Sorceron Inc. , 289 A.D.2d 114, 735 N.Y.S.2d 100, 102 (2001) ; Hoag , 677 N.Y.S.2d at 533-34. Indeed, "the malicious motive is inferred from the acts taken with knowledge of the contract." Connell v. Weiss , No. 84 Civ. 2660, 1985 WL 428, at *2 (S.D.N.Y. Mar. 19, 1985) (citing Campbell v. Gates , 236 N.Y. 457, 460, 141 N.E. 914 (1923) ).
The Court finds that Moreno acted with malicious intent in causing the breaches of the SPAs. MOR MGH's only asset was its ownership of the common shares of Green Field. Trial Tr. 847:9-21. By causing MOR MGH to breach its obligations under the 2012 and 2013 SPAs, Moreno deprived Green Field of $17 million of capital which Green Field needed in order to satisfy obligations to Shell and to continue its business. Trial Tr. 469:20-470:3.
Further, the timing of the breaches of the 2012 SPA speaks to Moreno's intent. While Moreno caused MOR MGH to satisfy the initial $10 million payment obligation and the payment obligation for the fourth quarter of 2012 required under the 2012 SPA, that performance occurred before the transfer of the PowerGen opportunity. Trial Tr. 381:17-382:23; D.I. 219 at ¶ 58; Blackwell Dep. 31:13-32:18. The first breach of the 2012 SPA occurred on May 15, 2013, just two days after Green Field waived the PowerGen opportunity in favor of Moreno personally. See Stip. Facts ¶ 71; JX 61. In other words, Moreno made the decision to stop complying with the obligations of the 2012 SPA as soon as he knew that he would no longer be pursuing the PowerGen business opportunity in Green Field. He was thus willing to let Green Field suffer and, as he put it, give it the "kiss of death" by denying it needed funds and instead putting the money towards a business that he now personally owned outside of Green Field. Trial Tr. 478:12-17. Indeed, Moreno admitted to Green Field bondholders on a quarterly conference call that the very reason for his default was because he was devoting his personal capital to PowerGen, which he had intentionally sequestered outside of Green Field. Trial Tr. 440:1-441:14; PX 177 at p. 5.
Moreno also knew that MOR MGH breaching the SPAs would cause Green Field to fail to make its interest payments to Shell, which would cause a cross-default under the Bond Indenture, which would then send Green Field into a downward spiral towards bankruptcy. Green Field's failure to satisfy the requirements of the 2012 SPA forced Moreno to notify the Indenture Trustee of the defaults and publicly acknowledge the same in the second *304quarter 2013 Quarterly Report. Stip. Facts ¶ 83. These public notifications triggered a cross-default under the Shell Amended Senior Credit Facility. Id. As a result, Green Field's Corporate Family Rating, Probability of Default Rating and Senior Secured Notes Due 2016 rating were all downgraded. Id. Shell then issued a notice of default to Green Field on October 8, 2013. Stip. Facts ¶ 84. Moreno testified that had the SPAs been fulfilled, Green Field would have been able to make the required interest payments under the Shell contract. Trial Tr. 469:20-470:3. Moreno also knew that causing harm to Green Field was not in MOR MGH's best interest because MOR MGH owned no assets other than Green Field stock. Trial Tr. 847:9-21. Accordingly, Moreno knew that by causing the breaches of the SPAs, Green Field would default on the Shell Contract and cross-default on the Bond Indenture, which would have negative implications for the company which, in turn, would harm MOR MGH.
Moreno falsely testified that "Green Field received every dollar that TGS ended up getting." Trial Tr. 424:9-10. However, no monies went into Green Field other than in fair market value transactions (i.e., turbine sales) (Trial Tr. 1085:20-1086:23, 1091:7-1092:3, 1820:11-19, 1824:20-1825:1) or as deposits required to be held in trust. Trial Tr. 466:2-6, 837:12-840:24; Trial Tr. Conf. 3/20 at 16:4-8. Moreno acknowledged that these payments were distinct and unrelated to the SPAs. Trial Tr. 468:9-469:12, 846:11-22. Moreover, even under Moreno's accounting, there was at least $35 million on hand that he borrowed either personally or through TGS, which either went to Moreno personally or was unaccounted for. Trial Tr. 844:20-846:10; JX 3; DX 221.
The most egregious evidence of Moreno's malicious intent was his diversion of $10 million from the second tranche of the Goldman Sachs loan. Moreno secured the loan by promising Goldman Sachs that he would cause MOR MGH to use $10 million of the funds to purchase additional preferred stock in Green Field which he would then pledge to Goldman Sachs. Trial Tr. 397:20-398:3; PX 160. Goldman Sachs required Moreno to certify in writing that the purchase did in fact occur. Trial Tr. 400:12-402:19; PX 165. Moreno, in turn, provided Goldman Sachs with the written certification, which he signed on behalf of both MOR MGH and Green Field. Trial Tr. 403:11-404:20; PX 165. The certificate, as previously stated, was untrue. Instead, Moreno took that same $10 million and used it to purchase his Dallas home. Trial Tr. 411:18-420:12; PX 168. Moreno testified that he was allowed under the loan agreement to use the funds for personal real estate purposes. Trial Tr. 416:4-417:2. But his testimony is flatly contradicted by the terms of the loan agreement itself. PX 166 at GS0003763; Trial Tr. 417:5-418:21. Moreno's lies at trial only underscore his malicious intent and desire to avoid liability. There can be no question that spending available funds on one's personal residence in direct violation of the terms of the loan agreement, rather than fulfilling obligations to the company, constitutes placing one's personal interests ahead of the company's.
Moreno testified that the payment was not accounted for properly and that he sent the money to MOR DOH which sent it to TGS which sent it to Green Field. Trial Tr. 403:11-405:23. The Court rejected this argument at summary judgment. D.I. 463 at pp. 38-39. In any event, the capital contribution chart shows the payments from TGS to Green Field, and none of those monies are the $10 million owed under the 2013 SPA; rather, those monies were deposits held for TPT or turbine engine purchases. JX 3. Additionally, in October 2013, Moreno told his (and Green *305Field's) attorney, Slavich, that MOR DOH, not Green Field, received the money. PX 183. Blackwell, who Fontova agreed would know most about the financial affairs of Green Field, also testified that Green Field never received the $10 million due under the 2013 SPA. Trial Tr. 408:4-410:18; Blackwell Dep. at 68:3-15, 74:5-75:15, 209:23-210:3; Fontova Dep. 120:9-17; PX 187.
Accordingly, the Trustee has proven that Green Field is entitled to damages from Moreno in the amount of the $16,607,081,21 plus applicable prejudgment interest at 9%, due to Moreno's tortious interference. N.Y. C.P.L.R. § 5001(a) ("Interest shall be recovered upon a sum awarded ... because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property ...."); N. Main St. Bagel Corp. Duncan , 37 A.D.3d 785, 831 N.Y.S.2d 239, 242-43 (2007). The only difference in damages under this count is that Moreno is also liable for the additional amounts not funded by MMR, plus pre-judgment interest thereon, net of the amounts acquired in settlement. This amount equals an additional $645,158, before the accrual of prejudgment interest. As of June 29, 2018, prejudgment interest has accrued in the amount of $7,546,111.12, and continues to accrue at a rate of $4,119.55 per day.
C. The Trustee is Entitled to a Constructive Trust on Moreno's Dallas Home
Alternatively, the Court finds that these facts justify the remedy of a constructive trust against Moreno's Dallas home.22 Under Delaware law, "a constructive trust is an equitable remedy of great flexibility and generality. A constructive trust is proper when a defendant's fraudulent, unfair or unconscionable conduct causes him to be unjustly enriched at the expense of another to whom he owed some duty." Ruggerio v. Estate of Poppiti , No. CIV.A. 18961-NC, 2005 WL 517967, at *3 (Del. Ch. Feb. 23, 2005) ; In re Opus E. , 528 B.R. at 106 ("The imposition of a constructive trust is also appropriate where a defendant has been unjustly enriched."). Thus, courts analyze the same elements for a constructive trust as they do for an unjust enrichment claim. "To prevail on a claim for unjust enrichment or imposition of a constructive trust[,] the Trustee must allege sufficient facts to plausibly show that (i) there was an enrichment; (ii) an impoverishment; (iii) a relation between the enrichment and the impoverishment;
*306(iv) the absence of justification; and (v) the absence of a remedy provided by law." In re Direct Response Media, Inc. , 466 B.R. 626, 661 (Bankr. D. Del. 2012).
Courts have found that a successful tortious interference claim can give rise to a constructive trust. See GHK Assocs. v. Mayer Grp., Inc. , 224 Cal.App.3d 856, 274 Cal.Rptr. 168, 182 (1990) ("A breach of contract or intentional interference with [a] contract can make the offending party a constructive trustee."); Scymanski v. Dufault , 80 Wash.2d 77, 491 P.2d 1050, 1057 (1971) ("We have here a defendant who has intentionally interfered with another's business relationship and as a result of such interference has acquired the property that was the subject of that relationship. A constructive trust ... is the appropriate remedy.").
Courts have also imposed a constructive trust on a home when it is clear that the proceeds that were wrongfully taken from the plaintiff were used to purchase that home. See In re Lee , 574 B.R. 286, 294 (Bankr. M.D. Fla. 2017) ("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."); Zobrist v. Bennison , 268 Ga. 245, 486 S.E.2d 815, 817 (1997) ("In its grant of partial summary judgment to Bennison, the trial court concluded that the money used to pay down Zobrist's mortgage actually belonged to Bennison's children. That conclusion, applied to the principle stated above, authorized the imposition of the trust."); Benson v. Richardson , 537 N.W.2d 748, 760 (Iowa 1995) ("A party in whose favor a constructive trust has been established may trace the property to where it is held and reach whatever has been obtained through the use of it.").23
As explained above, $10 million of the funds Moreno borrowed from Goldman Sachs, which were to be used to purchase stock in Green Field, was instead used to purchase his Dallas home, in violation of the express terms of the loan agreement. Trial Tr. 411:18-420:12; PX 168. Moreno then lied to Goldman Sachs about the stock purchase. Trial Tr. 403:11- 404:20; PX 165. Moreno signed the Goldman Sachs certification on behalf of both MOR MGH and Green Field, thus concealing the fraud from Green Field. PX 165. This is the type of fraudulent, unfair and unconscionable conduct that justifies imposition of a constructive trust. Moreno was enriched by using $10 million to buy a home, and Green Field was impoverished because it was deprived of $10 million of funding. The impoverishment is directly related to the enrichment, and there is no justification for Moreno's actions. Further, there is no adequate remedy at law to be able to recover the $10 million spent on the home. Accordingly, the Court finds that all of the elements of a constructive trust are satisfied.
III. THE PROOFS OF CLAIM OF AERODYNAMIC, CASAFIN, AND FRAC RENTALS
There is an inconsistency in the Court's SJ Opinion that it shall now correct.
*307Despite having awarded judgment to the Trustee on the three preferences claims (Aerodynamic, Casafin and Frac Rentals), the Court declined to disallow the corresponding proofs of claim filed by those defendants under Section 502(d). In the SJ Opinion, the Court stated:
The Trustee argues against Moreno's preference claims pertaining to TGS, Aerodynamic, Casafin and Frac Rentals. Under Section 502(d), summary judgment for the Trustee can only be granted if the Trustee is successful in his motion to deny those specific preference claims. As discussed above, the Court did not grant the Trustee summary judgment on his preference claim, and thus summary judgment on count 29 is denied.
DI. 463 at pp. 45-46. However, it was the Trustee, not Moreno, who brought the preference claims, and the Court did, in fact, award judgment to the Trustee on his preference claims against Aerodynamic, Casafin and Frac Rentals. D.I. 463 at p. 46. As a result, the Trustee argued against the proofs of claim by Aerodynamic, Casafin and Frac Rentals against Debtor. Because the Trustee was successful on his preference claims, pursuant to Section 502(d) of the Bankruptcy Code, all proofs of claim against Debtor by Aerodynamic, Casafin and Frac Rentals must be disallowed until such time that those entities return the preferential transfers to the estate. 11 U.S.C. § 502(d) (emphasis added) ("[T]he court shall disallow any claim of any entity ... that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable ...."); see, e.g., In re Pardee , 218 B.R. 916, 930 (9th Cir. BAP 1998) ("Every claim of an entity that is a transferee of an avoidable transfer, such as a preference, or that holds property that should be turned over to the trustee is automatically disallowed until the property is turned over or the liability is paid in full."). At trial, Moreno testified that Aerodynamic, Casafin and Frac Rentals have not paid the judgments against them. Trial Tr. Conf. 3/19 at 5:16-23; Trial Tr. 89:15-90:4, 91:7-14. The Court thus finds in favor of the Trustee on Count 29.
IV. CONCLUSION
The Court has found in favor of Moreno and Defendants and against the Trustee on the Trustee's claims arising from the waiver of the PowerGen business for constructive fraudulent transfer, actual fraudulent transfers, breach of fiduciary duty and corporate waste. The Court has also found in TGS's favor on the claim against TGS for aiding and abetting Moreno's breach of fiduciary duty. The Court therefore finds that there are no damages for each of these causes of action.
The Court has found in favor of the Trustee on his claims relating to the two SPAs. The Court has found that MOR MGH breached the 2012 SPA and 2013 SPA, damaging Green Field in the amount of $15,961,923 plus interest, for 2012 and 2013 respectively. Additionally, the Court has found that Moreno intentionally and tortuously interfered with the obligations of MOR MGH and MMR under the SPAs, damaging Green Field in the amount of $16,607,081. The damages for tortious interference are duplicative of the damages for breach of contract, but include an additional $645,158, before the accrual of prejudgment interest. Accordingly, the Court finds that the Trustee is entitled to recover $16,607,081, plus prejudgment interest from Moreno personally. The Court alternatively finds that because Moreno tortiously interfered with the 2013 SPA and used $10 million to purchase his personal *308residence in Dallas, the Trustee is entitled to a constructive trust over that property in the amount of $10 million.
Further, the Court has found that the Trustee can recover the judgments previously awarded to him for his preferential transfer claims against Aerodynamic, Casafin and Frac Rentals against Moreno personally as the entity for whose benefit the transfers have been made. Accordingly, the Court finds that the Trustee may recover a total of $645,552.91 from Moreno for those claims, plus applicable prejudgment interest. The Court also finds that the proofs of claim filed by Aerodynamic, Casafin and Frac Rentals against Debtor are disallowed until Moreno pays those judgments to Debtor pursuant to 11 U.S.C. § 502(d) of the Bankruptcy Code.
The Trustee, through his attorneys, is directed to confer with Defendants' attorneys on an appropriate form of Order consistent with this Opinion and Findings of Fact and Conclusions of Law to be submitted to the Court. If the parties cannot agree they may submit alternative forms of Order.
ORDER
The Court conducted trial in the captioned matter on March 19-23, 2018 and May 1-2, 2018. For the reasons contained in the Court's Opinion and Findings of Fact and Conclusions of Law, dated September 12, 2018 [D.I. 535], IT IS HEREBY ORDERED that:
1. The Court enters judgment on behalf of the Defendants and against the Plaintiff on the Plaintiff's claims for constructive fraudulent transfer and actual fraudulent transfer against defendants Michel B. Moreno ("Moreno") and Turbine Generation Services, LLC ("TGS") (Counts 1 and 2).1
2. The Court recommends to the District Court for the District of Delaware (the "District Court") that it enter judgment in favor of the Defendants and against the Plaintiff on the Plaintiff's claims for breach of fiduciary duty against Moreno, aiding and abetting breach of fiduciary duty against TGS, and corporate waste against Moreno (Counts 3, 6, and 7).
3. The Court recommends to the District Court that it enter judgment in favor of the Plaintiff and against defendant MOR MGH Holdings, LLC ("MOR MGH") on the Plaintiff's breach of contract claims (Counts 11 and 12) in the amount of $15,961,923, plus prejudgment interest at the applicable New York simple interest rate of 9%, which as of June 29, 2018, has accrued in the amount of $7,208,235.50, and shall continue to accrue at a rate of $3,935.82 per day until a judgment is entered.
4. The Court recommends to the District Court that it enter judgment in favor of the Plaintiff and against Moreno on the Plaintiff's tortious interference with contract claim (Count 14) in the amount of $16,607,081, plus prejudgment interest at the applicable New York simple interest rate of 9%, which as of June 29, 2018, has accrued in the amount of $7,546,111.12, and shall continue to accrue at a rate of $4,119.55 per day until a judgment is entered. Additionally, the Court recommends that the District Court enter a judgment entitling the Plaintiff to a constructive trust over Moreno's Dallas residence in the *309amount of $10 million in order to recover his damages on this count.
5. In the Court's Order Regarding Cross-Motions for Partial Summary Judgment , dated January 24, 2018 [D.I. 464], it granted summary judgment in favor of the Plaintiff on his preferential transfer claims in the amount of $69,137.97 against defendant Frac Rentals, LLC (Count 19), $110,000 against defendant Aerodynamic, LLC (Count 23), and $466,414.94 against defendant Casafin II, LLC (Count 24). The Court finds in favor of defendant Moreno and against the Plaintiff on these claims to the extent the Plaintiff sought to recover the preferential transfers against defendant Moreno, individually, as the person for whose benefit such preferential transfers were made pursuant to Section 550(a)(1) of the Bankruptcy Code. Accordingly, the Court now enters final judgment in favor of the Plaintiff and against Frac Rentals, LLC, Aerodynamic, LLC, and Casafin II, LLC, in the amounts of $69,137.97, $110,000, and $466,414.94, respectively.
6. The Court enters judgment in favor of the Plaintiff and against defendants Aerodynamic, LLC, Casafin II, LLC, and Frac Rentals, LLC on the Plaintiff's disallowance claim pursuant to Section 502(d) of the Bankruptcy Code (Count 29) and orders that the proofs of claim filed by Aerodynamic, LLC Casafin II, LLC and Frac Rentals, LLC are disallowed until such time that they pay the preferential transfer judgments against them to the Debtors.
This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Rule 52 of the Federal Rules of Civil Procedure, which is incorporated into Rule 7052 of the Bankruptcy Rules of Procedure. Fed. R. Civ. P. 52(a) (3) ; Fed. R. Bankr. P. 7052.
The Court recognizes that Defendants preserved an objection to the Court's consideration of deposition testimony from live witnesses who had chosen to testify in the Court, although outside the subpoena range of the Court. The Court overrules the objection on the ground that Debtor and Defendants have made use of the depositions.
For purposes of this Memorandum Opinion, the Court considers the Second Amended Complaint and Objection to Claims Pursuant to Bankruptcy Code Sections 502 and 503 and Federal Rule of Bankruptcy Procedures 3007 (the "Second Amended Complaint" or "Complaint"). D.I. 209.
Debtor's manufacturing subsidiary, Turbine Power Technologies, LLC ("TPT"), used technology-developed, owned and adapted by Ted McIntyre - to manufacture turbine powered fracturing pumps ("TFPs"), which Debtor used pursuant to an exclusive license agreement between TPT and Debtor. PowerGen refers to a prospective business of manufacturing and/or leasing turbine power generator units ("TPUs") powered by aero derivative turbine engines. It is undisputed that the technology used to develop, adapt and manufacture the TPUs was also owned by Ted McIntyre. However, unlike the TFPs, Green Field was never granted an exclusive license agreement to use the TPUs technology. Therefore, one of the central issues for trial was whether Green Field, directly or through its interest in TPT, had an interest in the technology necessary to manufacture and/or lease TPUs.
As used herein, "Stipulation No." means the undisputed facts which the Trustee and Defendants submitted through the Joint Statement of Admitted Facts, attached as Exhibit A to the Proposed Final Joint Pretrial Order. D.I. 501.
"Fracking" refers to the process of hydraulic fracturing which is a well stimulation technique in which rock is fractured by pressurized liquid in order to increase the rate at which fluids such as petroleum, water or natural gas can be recovered from subterranean natural resources.
The success of Green Field's early business plan-i.e., to build over half a dozen frac spreads-relied largely on the company's ability to generate sufficient cash flow to fund both ordinary operations and new capital expenditures. Trial Tr. 537-38; 540-41; 1293-94. By the end of 2012, the fracking market had slowed, and Green Field's margins had evaporated. Trial Tr. at 1300, 1303:6-22, 1306-08; PX 121, PX 143. To fill the void left by these evaporating margins, Moreno and Green Field began to search for additional capital from lending sources, bondholders or new investors. Trial Tr. 530-38. Id. Eventually, this effort led Moreno to GE.
During a bondholder call on May 22, 2013, Moreno told bondholders that "As it sits today, power generation is outside of Green Field because it was a mandate from GE, obviously, to keep it off of the exposure of the bonds and so right now it is set up as a separate business. My hope is that we can tie the two together, and I'm working hard to make certain that happens." PX 157, Trial Tr. 786:15-23. At trial Moreno confirmed that this transcript from May 2013 was accurate.
The turbine sales were in connection with the $25M advance from GE to TGS and were fair market value transactions that converted hard assets into cash. Trial Tr. 1085:20-1086:23, 1091:7-1092:3, 1820:11-19, 1824:20-1825:1. The deposits were delivered under the Tri-Party Agreement and were paid by TGS to Green Field in Green Field's role as contract manager, to be held by Green Field in trust for the purposes of paying TPT once TPT manufactured and invoiced the power generation units. Trial Tr. 837:12-840:24; Confi Trial Tr. 16:4-8; Trial Tr. 466:2-6. Moreno agreed that the deposit amounts paid under the Tri-Party Agreement were unrelated to the obligations of MOR MGH under the two share purchase agreements. Trial Tr. 468:9-469:12. Moreno also testified that he understood the obligations of MOR MGH to be distinct from the obligations of TGS. Trial Tr. 846:11-22. The Court rejects Moreno's assertion that these transactions were intended to benefit Green Field. Trial Tr. Conf. 3/20 at 5:16-6:8; JX 3.
The Court finds Blackwell's testimony credible. Blackwell stated that he would know more about Green Field's financial affairs than anyone else. Blackwell Dep. at 209:23-210:3. Fontova agreed that Blackwell would know more about the financials of the company than he would. Fontova Dep. 120:9-17.
GE employees confirmed that the bond debt was a concern of GE's. Calhoun Dep. 171:22-173:3; Hosford Dep. 133:1-5, 133:9-20, 135:25-136:17; Padeletti Dep. 198:18-199:13.
The facts discussed in this subsection summarizes the extensive record presented at trial, which included live testimony from Michel Moreno and Rick Fontova and corroborating documents, including dozens of e-mails from GE (both internal and external), contemporaneous handwritten notes of Wayne Teetsel, spreadsheets and related documents. The Court also considered the deposition testimony of current and former GE employees such as Colleen Calhoun, Edoardo Padaletti, Michael Hosford and Sanjay Bishnoi, as well as Green Field officers and directors (Fontova, Blackwell and Kilgore). Finally, the Court considered deposition testimony of Wayne Teetsel, who represented Green Field's largest bondholder and took contemporaneous handwritten notes of his frequent phone calls with Moreno.
Moreno had been clear with GE that he was looking for a total $200 million investment-$100 million for Green Field and $100 million toward the new potential PowerGen joint venture. (DX 197).
Moreno changed the name back to Services, LLC, on May 9, 2013, days before GE advanced $25 million to TGS. PX 152. GE's position regarding Green Field's ownership had changed during the intervening period.
In December 2012, GE retained Boston Consulting Group to evaluate the size of the market for PowerGen. PX 205, Trial Tr. 1022. Kearns admitted that the BCG report "is not quite so optimistic in terms of the size of the market." Id. Moreover, in an email dated May 2, 2013, Sanjay Bishnoi of GE Capital advised Colleen Calhoun of GE that contrary to GE expectations the PowerGen turbines will ultimately have a higher cost due to lower fuel efficiency (thus depriving gas turbine PowerGen units a claimed significant competitive advantage over existing technology). PX 205. Importantly, Bishnoi also points out that the Boston Consulting Group report "suggests the market is smaller than what our work would suggest." DX 290, Trial Tr. 1198.
In the same opinion and order, the Court denied summary judgment on Count 21 against TGS (which claim the Trustee subsequently withdrew) and ruled that Defendants were entitled to summary judgment on the remaining amounts of the Frac Rentals Transfers ($524,828.21), Aerodynamic Transfers ($165,000.00); and Casafin Transfers ($151,983.00). Accordingly the Trustee cannot recover those amounts from Defendants.
The DOH GRATs owned 50% of DOH Holdings, which in turn owned 80% of Frac Rentals.
The Court previously decided in its SJ Opinion that New York law applies to the Trustee's contract-related claims, including breach of contract and tortious interference. D.I. 463 at pp. 36, 41.
Moreno had previously borrowed money based on the strength of his personal financial statement, which listed his total assets at $252 million. Trial Tr. 3/22 Conf. 6:11-8:15. He also acknowledged that TGS had no creditworthiness of its own, and thus relied entirely on Moreno's personal finances to borrow money on behalf of TGS. Trial Tr. 3/22 Conf. 15:24-16:3.
The Court observes that Moreno testified at trial that he referred interchangeably to the SPA obligations as his own and that of MOR MGH. Trial Tr. 385:22-386:10; see also PX 217 at p. 9; PX 143 at p. 6; PX 177 at p. 5.
MOR MGH and MMR collectively failed to purchase $6,707,081 of Green Field preferred shares under the 2012 SPA for the first and second quarters of 2013. MOR MGH failed to make the $10 million purchase under the 2013 SPA. Thus, in total, MOR MGH and MMR failed to make $16,707,081 in purchases of Green Field preferred shares. The amount owed by MMR ($745,158) was resolved by a settlement agreement in the amount of $100,000. Thus, the Court has reduced the total amount of damages owed by $100,000, leaving damages of $16,607,081.
Courts have held that because constructive trusts are remedies rather than causes of action, they need not be plead in the complaint. Heston v. Miller , No. CIV.A.5820, 1979 WL 174446, at *2 (Del. Ch. Oct. 11, 1979) ("The allegations of the complaint also support a claim of constructive fraud and for the imposition of a constructive trust, although the prayer for relief does not set forth such a demand."); Bemis v. Estate of Bemis , 114 Nev. 1021, 967 P.2d 437, 442 (1998) ("[T]he remedy of constructive trust may be available notwithstanding a failure to plead fraud in the complaint[.]"); see also Kahan v. Rosenstiel , 424 F.2d 161, 174 (3d Cir. 1970) ("Plaintiff's complaint does not specifically ask for equitable relief; it contains only the general request for 'further relief as may be just.' Nonetheless, under Rule 54(c) of the Federal Rules of Civil Procedure, a court may have awarded any relief appropriate under the circumstances.").
The Court notes that the Texas homestead exemption does not preclude the imposition of a constructive trust on Moreno's home in Dallas. See McMerty v. Herzog , 661 F.2d 1184, 1186 (8th Cir. 1981) ("In this case, the wrongfully diverted funds can be traced to Lake Crystal. Because Lake Crystal is the product of the diverted property, the homestead exemption does not apply.").
For the reasons set forth in the Opinion, counts 1, 2, 19,23, 24, and 29 are statutorily "core" claims for which the Court may enter final orders or judgments pursuant to 28 U.S.C. § 157(b)(2). Counts 3, 6, 7, 11, 12, and 14 are non-core claims for which the Court may enter proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1) and Federal Rule of Bankruptcy Procedure 9033(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501802/ | Paul M. Black, UNITED STATES BANKRUPTCY JUDGE
This matter comes before the Court on confirmation of the Fourth Amended Chapter 12 Plan (the "Fourth Amended Plan") (ECF No. 172) filed by the Debtor, Dale E. Akers (the "Debtor"), and the objections thereto filed by Farm Credit of the Virginias, A.C.A. ("Farm Credit") (ECF Nos. 40, 55, 86, 158, 177), Skyline National Bank ("Skyline") (ECF Nos. 41, 54, 178), and the Chapter 12 Trustee (the "Trustee") (ECF No. 38). The Court held a hearing on these matters on October 17, 2018, and has reviewed supplemental memoranda filed by the Debtor (ECF No. 199), the Trustee (ECF No. 198), and Farm Credit (ECF No. 202).1
FINDINGS OF FACT
At issue in this case are two farming operations in which the Debtor actively participates: a produce farm operated by the Debtor, and a general partnership through which the Debtor and his son Ryan Akers raise, buy and sell cattle. The Debtor has financed his farming operations in part through loans from Farm Service Agency ("FSA"), Skyline, and Farm Credit. Those creditors have filed secured claims in this case in the amounts of $97,572.61, $27,872.33, and $227,658.36, respectively. (Ct.'s Claims Reg., Proofs of Claim 2, 3, 5, 6, 7.) Although the record does not provide an exhaustive background of facts leading to the Debtor's bankruptcy filing, prior testimony from the Section 341 meetings indicates that his financial difficulties stem, in part, from the payment of a son's substantial medical bills. (Supp. to Trustee's Report, ECF No. 38-1, at 1.) The Debtor ultimately sought the protection of the Bankruptcy Code and filed his Chapter 12 petition in this Court on May 3, 2017.
The Debtor filed his first Chapter 12 Plan on July 31, 2017 (ECF No. 24), to which Farm Credit, Skyline, and the Trustee all objected. (ECF Nos. 38, 40, 41.) Each objected on multiple grounds, including that the Debtor's financial records and projections did not support the plan's feasibility. In fact, by the September 20, 2017 hearing on plan confirmation, the Debtor still had not filed any monthly operating reports. By Order dated September 28, 2017, the Court denied confirmation of the plan and provided fourteen days to file an amended plan, provide tax returns to the objecting creditors, and file monthly operating reports. (ECF No. 46.) Since September *3652017, the Debtor has filed five subsequent plans, none of which have yet been confirmed. He filed his Fifth Amended Plan shortly after the confirmation hearing on the Fourth Amended Plan at issue here.
The Debtor has had numerous difficulties in putting forth a confirmable plan, most of his own making. A description of the Debtor's prior confirmation hearings is necessary to set the background for evaluation of the Debtor's current plan.
I. The May 16, 2018 Confirmation Hearing
On May 16, 2018, the Court held a hearing on the Debtor's Second Amended Chapter 12 Plan.2 A new objection to the Plan was filed by Farm Credit, and both Skyline's and the Chapter 12 Trustee's objections were carried over from the prior plan. The objections focused primarily on feasibility. At the hearing it became readily apparent that the Debtor believed he owed approximately $40,000.00 in delinquent real estate taxes to Carroll County, Virginia. The Debtor knew long before the confirmation hearing that he owed the taxes, and indicated his counsel knew it as well. However, Carroll County was neither disclosed as a creditor nor listed on the mailing matrix as a creditor in the case. Carroll County filed no proof of claim in the case, and the Debtor's Chapter 12 plan made no provision for payment of the tax claim. Despite having no opportunity to be heard, when it became apparent the Chapter 12 Trustee and the Court were concerned about the lack of disclosure and the failure to address the delinquent real estate taxes, Debtor's counsel indicated the Debtor would simply agree to add language to the confirmation Order requiring the Debtor to pay Carroll County in full within three years of confirmation. The Court was not persuaded that the Debtor could make the plan payments as proposed in the plan, much less the plan payments plus the additional sum necessary to make the tax payments to Carroll County. In no event was the Court going to allow the Debtor to attempt to bind Carroll County to the terms of a plan about which it had no notice or opportunity to be heard.
Part of what concerned the Court is that the Debtor has a cattle business with his son, Ryan. Ryan pays all the bills in the cattle operation, and gives half the profit to the Debtor. However, the Debtor was projecting $5,430.00 per month in revenue for January 2018 through May 2018 from cattle sales as part of his budget in support of confirmation. (ECF No. 123, Ex. 3). However, the Debtor's monthly operating reports for January and February, the only ones filed prior to May 2018, showed no income of any type for those months. (ECF No. 123, Ex. 2). The Debtor later testified that he has been paid about $14,000 year to date in cattle sales through March and April, 2018. The actual number was $17,874.49 in monthly operating reports filed after the hearing. (ECF Nos. 135, 136). When asked by the Court how many cattle the Debtor owned with his son, the Debtor did not know but estimated the number at about 100. Again, a post-hearing exhibit reflected the actual number to be 76 head of cattle. (ECF No. 137). The Debtor had also borrowed and paid back money from his son post-petition to fund farm operations, and the Debtor testified that he was putting money into his son's checking account-and in *366at least one instance having a check written to Farm Credit off that account-to pay operations of the Debtor's farm. Given the Court's lack of confidence in the Debtor's financial reporting, the lack of knowledge of the Debtor as to the cattle operation, the blurred lines between the finances of the Debtor's son and those of his own, and the omission of the Carroll County tax debt from the schedules and the Chapter 12 plan, the Court denied confirmation and gave the Debtor thirty days to file a modified plan to come forth with better documented financial projections, with amended schedules to address the Carroll County tax debt. Given the Debtor's borrowings from his son, the Debtor was also ordered not to incur any additional debt without prior Court approval.3
II. The July 25, 2018 Confirmation Hearing
A Third Amended Plan was filed June 15, 2018 and set for hearing on July 25, 2018. Farm Credit again objected to the Plan, and both Skyline's and the Chapter 12 Trustee's prior objections were carried over as well. The Debtor and his counsel met after the May 16, 2018 confirmation hearing and prepared new projections. Unfortunately, the projections filed with the Court in preparation for the July 25, 2018 confirmation hearing were the wrong set of projections. This became apparent when the Debtor was on the stand and revealed to counsel and the Court that the projections he was asked to testify about were not the correct ones. In particular, the projected expenses for fertilizer, lime, seeds and plants were all wrong by a wide margin. The Debtor projected $48,000 in such expenses through July 2018, and through the hearing date, the Debtor had incurred nothing on those items. In addition, the projected expenses for January through June 2018 in other areas did not match the Debtor's actual expenses for those months as reflected in monthly operating reports filed with the Court. The Debtor's actual expenses were in some instances substantially less than his projections, which would in theory work to his benefit in determining net income if his revenue numbers were accurate. However, given the Court's prior, express admonition that the Debtor needed to come with credible figures to support confirmation, the Debtor's inability to come up with even a "ballpark" accurate expense and revenue projection left the Court with little confidence in the credibility of estimates as to either revenues or expenses going forward.4 That the Debtor and his counsel only learned that the wrong projections *367were filed with the Court once the Debtor was on the stand did not help the situation, leaving the Court also to have serious concerns whether appropriate preparations were made for the confirmation hearing. In addition, the Debtor was also uncertain at the confirmation hearing how much he owed in past due real estate taxes, which gave the Court further concern about his ability to curtail those arrearages under the terms of his Third Amended Plan. Confirmation of the Third Amended Plan was denied.
The Court put the Debtor on terms, giving him one last chance to come up with a confirmable plan. In addition, the Debtor had to make timely payments to the Chapter 12 Trustee and to Skyline Bank in the interim, which he did.5 He was also required to timely file his July, August and September Monthly Operating Reports in advance of the next confirmation hearing, which were filed by the deadlines set by the Court. The Debtor was further ordered to revise his 2018 projections to reflect actual income and expenses. A Fourth Amended Plan was filed on August 14, 2018, and set for hearing on October 17, 2018. The Chapter 12 Trustee's objections were again carried over, Farm Credit again objected to the plan due to lack of feasibility and Skyline filed a limited objection to the plan.
III. The October 17, 2018 Confirmation Hearing
The Debtor filed revised projections for 2018 using actual numbers off his Monthly Operating Reports filed with the Court. However, it became apparent from even a cursory review of the arithmetic, his August operating report was off. The expenses on his operating report for August 2018 were shown to be $20,166.12, but totaling all the expenses in the expense field yielded only $13,964.90. Despite totaling $20,166.12 in one place on the operating report, the Debtor used expenses totaling $14,572.72 on the same page of the August report, and he reflected $15,517.90 for August on the 2018 expense projection filed in support of his confirmation argument.6 (Compare ECF No. 176 with ECF No. 184-2). The Debtor gave the Court little reason to have confidence in his ability to accurately track or reflect his actual income and expenses, especially because the Debtor testified he knew in advance of the hearing that the numbers did not add up before the issue was raised in open court. This was reminiscent of the prior confirmation hearing where the Debtor had two sets of projections, but the wrong set was filed in support of confirmation and not pointed out until he was on the witness stand.
The Debtor's projections for revenue off produce sales at the July confirmation hearing were $53,000 for August and $53,000 for September 2018. The Debtor's actual numbers were $40,077.04 in August and $38,106.84 in September. (Compare ECF No. 152-3 with ECF No. 184-2). Granted, the Debtor had to deal with Hurricanes Florence and Michael, which affected some of his crops and the North and South Carolina markets for those crops. As the Debtor testified, "it is hard to sell a *368pumpkin to someone who doesn't have a house." Nevertheless, his sales numbers were off substantially from the projections previously advanced.7
The issue that arose at the October confirmation hearing that was more problematic than the recordkeeping and sales figures was a question raised by the Court-how much was Farm Credit to be paid under the plan? It was not clear to the Court based on the terms of the plan, and once the question was asked, it became apparent that no one was in agreement with that fundamental issue despite this being the Debtor's Fourth Amended Plan and third contested confirmation hearing. Part of the issue was that Farm Credit was granted relief from stay to foreclose collateral pledged by a third party, which would leave a deficiency claim in an undetermined amount that had to be paid as an unsecured claim of the Debtor. The Chapter 12 Trustee pointed out that even if pre-confirmation payments were added to calculations under the plan, funding of the plan was insufficient to satisfy the terms of the plan-which reflected on page two that given the net equity in the Debtor's real estate, funding is "believed to be sufficient to pay all unsecured creditors in full." (ECF No. 172, at 2).8 The Chapter 12 Trustee assumed under the plan all the Farm Credit debt was being consolidated into a single note, and no separate claims were to be paid out of the unsecured creditor pool. Such was not the case. It was apparent that Farm Credit's foreclosure was conducted in August, but the Debtor did not inquire from Farm Credit what its collateral sold for between the time of the foreclosure sale and mid-October confirmation hearing, much less attempt to plan for the potential unsecured claim in the newly filed plan.
The Court took confirmation under advisement, directed Farm Credit to file an amended claim reflecting its deficiency, and ordered the parties to file briefs in support of their submissions in support or opposition to the Debtor's Fourth Amended Plan.9 All parties did so, and the Debtor additionally filed a Fifth Amended Plan, which is now set for hearing on January 23, 2019. There will be no hearing on that plan.
CONCLUSIONS OF LAW
This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the referral made to this Court by Order from the District Court on December 6, 1994, and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that this matter is a "core" bankruptcy proceeding within the meaning of 28 U.S.C. §§ 157(b)(2)(A), (L), and (O).
I. Confirmation of the Debtor's Fourth Amended Plan
The Bankruptcy Code provides Chapter 12 debtors with an enumerated list of requirements *369for plan confirmation. 11 U.S.C. § 1225(a). Relevant to this case, Section 1225(a) states:
Except as provided in subsection (b), the court shall confirm a plan if-
...
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;
(5) with respect to each allowed secured claim provided for by the plan-
(A) the holder of such claim has accepted the plan;
(B) (i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed by the trustee or the debtor under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder;
(6) the debtor will be able to make all payments under the plan and to comply with the plan ....
Id.
The Debtor bears the burden to prove by a preponderance of the evidence that the Court should confirm a proposed plan. In re Pressley , 502 B.R. 196, 202 (Bankr. D.S.C. 2013). Thus, "if any creditor calls into question any element required for confirmation, it is the debtor's burden to prove compliance therewith." In re Keith's Tree Farms , 519 B.R. 628, 636 (Bankr. W.D. Va. 2014). "If the debtor fails to establish any one of the six elements in § 1225, then the court must deny confirmation of the plan." In re Rice , 357 B.R. 514, 518 (8th Cir. BAP 2006).
In their briefs, the Trustee and Farm Credit raise several issues with the Debtor's Fourth Amended Plan.10 Farm Credit argues that the Fourth Amended Plan is not feasible and will not provide for payment on its secured claims as required by 11 U.S.C. §§ 1222 and 1225(a)(5). The Trustee further notes that the plan is underfunded, such that unsecured creditors will not receive the dividend the plan proposes. On the other hand, the Trustee appears to support confirmation of the Debtor's Fifth Amended Plan. Similarly, rather than arguing for confirmation of the Fourth Amended Plan, the Debtor focuses on confirmation of the Fifth Amended Plan, filed November 27, 2018. (ECF No. 199.)
A. The Fourth Amended Plan is Not Feasible
When the Debtor first filed a plan in this case, the Trustee, Farm Credit, and Skyline all cast doubt on the Debtor's ability to propose a feasible plan. (See Supp. to Trustee's Report, ECF No. 38-1, at 2 (observing that the Debtor's original schedules and 2016 tax return "fail to demonstrate the financial projections for the farming operation"); Obj. of Skyline, ECF No. 41, at 1 (objecting based on the Debtor's inability to produce financial records); Farm Credit's Memo. in Support of Obj., ECF No. 202, at 9-13.) Although Skyline and the Trustee have not expressly renewed their objections based on feasibility, *370the Court nonetheless has the same concern over whether the Debtor can meet this requirement.11
Section 1225(a)(6) requires Chapter 12 debtors to "be able to make all payments under the plan and to comply with the plan." 11 U.S.C. § 1225(a)(6). Although courts have recognized that feasibility is a difficult requirement to prove in Chapter 12, "[i]t is not necessary for debtors to 'guarantee the ultimate success of their plan, but only to provide a reasonable assurance that the plan can be effectuated.' " In re Wise , No. 12-07535-dd, 2013 WL 2421984, at *3 (Bankr. D.S.C. May 31, 2013) (alterations in original) (quoting In re Howard , 212 B.R. 864, 879 (Bankr. E.D. Tenn. 1997) ). Nonetheless, "[t]he Court must be persuaded that it is probable , not merely possible or hopeful, that the Debtors can actually pay the restructured debt and perform all obligations of the plan." In re Rape , 104 B.R. 741, 749 (W.D.N.C. 1989) (quoting In re Kloberdanz , 83 B.R. 767, 773 (Bankr. D. Colo. 1988) ).
On feasibility, courts within the Fourth Circuit have generally considered "whether the debtor will be able to comply with the terms of the plan based on the debtor's historical performance and current condition of the debtor's business." In re Keith's Tree Farms , 519 B.R. at 637. "This determination is made in light of projections of income and expenses .... The evidence ... comes in part from Debtor's records in the form of tax returns, and is supplemented by Schedules I and J and by projections based on changes or additions to the historical operation." In re Wise , 2013 WL 2421984, at *3.
Here, the Fourth Amended Plan proposes annual payments totaling $29,500 per year to the Trustee, approximately $14,207.81 to Farm Credit, $2,887.92 to Skyline, and $8,234.15 to FSA. (ECF No. 172, at 2-4.) Additionally, the Debtor proposes to pay part of the Carroll County Treasurer's secured claim of $36,086.32 by December 2021, with the balance to be paid by 2024, and pay an additional $3,000 each year toward his remaining Carroll County delinquent tax liability. Adding the annual payments above, the Debtor is obligated to minimum annual payments of almost $58,000.00.12 Seven years after confirmation, the Fourth Amended Plan also provides for balloon payments to Farm Credit, FSA, and Skyline, paying the remainder of those claims in full.
In support of his ability to comply with these plan payments, the Debtor has submitted several cash flow projections and monthly revenue and expense reports since filing bankruptcy. Over time, the Debtor has amended his projections to reflect actual expenses and revenue, decreasing expenses to about 67.5%13 of the original projection, and ultimately receiving less revenue than expected. To illustrate this, the Court finds it helpful to compare the projections submitted for the May 2018 *371confirmation hearing (ECF No. 123-3) and the latest projections filed October 10, 2018 (ECF No. 184-2). The May projections estimate total expenses of $218,297 and total revenue of $228,010.
The Debtor has now provided actual revenue and expenses for 2018 through the month of October. Based on these amendments, the Debtor has substantially decreased the costs of his farming operation. The total expenses for 2018, using actual expenses from January through October and projections for November and December, and not including plan payments, are expected to be only $125,819.60.
The most significant changes from the Debtor's revenue projections were from produce. Although the Debtor originally projected $190,000 in produce revenue (ECF No. 123-3), this amount ultimately decreased to $133,714.91, as the Debtor actually received $3,830 from January to June, $9,712 in July, $40,077.04 in August, $38,106.84 in September, and $36,989.03 in October. (ECF Nos. 184-2 and 194). Projections for November and December were $5,000 and $0, respectively. The Debtor originally projected $81,000 in revenue for October, thus underestimating what he hoped would be the month with the highest revenue by over $44,000.
Through October, the Debtor's total revenue and expenses for 2018 were $152,508.11 and $106,941.60, respectively, and the Debtor projected an additional $17,860 in revenue and $18,878 in expenses for November and December, leaving just $44,548.51 to make payments to the Trustee and creditors pursuant to the Fourth Amended Plan. With committed minimum annual payments of nearly $58,000, the Debtor is not even close. As a result, the Debtor will have a shortfall even with significantly lower expenses. The Fourth Amended Plan also provides no means or methods for reimbursing his son Ryan for funds advanced in 2018 to fund his farming operation.14
When engaging in a feasibility analysis, courts often give Chapter 12 debtors the benefit of the doubt. See In re Keith's Tree Farms , 519 B.R. at 637 ("[T]he court should give the Chapter 12 debtor the benefit of the doubt regarding the issue of feasibility when the debtor's plan projections use reasonable data in light of the current economic climate." (quoting In re Hughes , No. 06-80219, 2006 WL 2620438, at *3 (Bankr. M.D.N.C. Sept. 11, 2006) ) ).
[T]he simple fact is that family farming is not an exact science; the success or failure of any one farm is largely dependent upon luck and upon the farmer's skill, resourcefulness, spirit, and grit. No one knows with any real certainty what tomorrow will bring. Many perils face family farmers: Recessions, depressions, droughts, hail storms, and even locusts. In the face of such possible perils, certainly it is not error for a court to consider, along with the hard numbers, the human factor, which may be the deciding factor when fortune-or nature-works against the efforts of the farmer.
In re Rape , 104 B.R. at 751. Nonetheless, "[s]incerity, honesty, and willingness are not sufficient to make the plan feasible." Id. (quoting In re Clarkson , 767 F.2d 417, 420 (8th Cir. 1985) ).
In this case, the Debtor testified that weather played a large role in his decreased profits. Not only did record amounts of rain from Hurricanes Florence *372and Michael destroy some of the Debtor's crops, but the storms also heavily impacted areas of North and South Carolina where the Debtor sells much of his produce. If the Court were to give the Debtor the benefit of the doubt and accept the original revenue projection for 2018 ($228,010) (ECF No. 123-3), in comparison to the most favorable expense projection of 2018 ($119,342.83) (ECF No. 184-2), the Debtor's revenue would exceed his expenses by $108,667.17.
However, a review of the Debtor's 2017 operating reports shows that his 2018 revenue did not fall far below the prior year's earnings, thus indicating that the original 2018 projections were overly optimistic. The Debtor's operating reports for June through December of 2017 list total revenue from produce that year of $165,968.35. The Court does not have reports from January through May; however, of all the 2018 projections the Debtor has filed, none projected any revenue from produce during those months. Thus, the Court may reasonably assume that the Debtor received negligible, if any, revenue from produce during those months in 2017. The Debtor also did not report any revenue from cattle sales in his 2017 reports. If the Court assumes the Debtor would have earned the same amount from his cattle operation that he projects for 2018 (see ECF No. 182-2 (projecting $36,654 in revenue from cattle sales) ), the total revenue would have been $202,622.35. Based on the more optimistic expenses from October, this would result in annual net income of $83,279.52. However, the Debtor has already demonstrated that his expense projection of $119,342.83 is unsustainable, as his actual expenses increased only a month after filing his October projections. If the Court assumes expenses similar to the actual expenses reported during 2018, the Debtor will have net income of approximately $76,802.75, and if the Court uses the Debtor's earliest projected expenses of $186,297 before plan payments, that number falls even lower to $16,325.35. Thus, in all but the most optimistic scenarios, the Debtor would not have income sufficient to make all his required payments. Accordingly, the Court finds it improbable that the Debtor will comply with the terms of his plan.
Moreover, these calculations all rely on several significant assumptions-namely, that the Debtor's expenses and revenue will remain relatively steady. Unfortunately, that appears unlikely as the Debtor has cut expenses to the bone. For example, the Debtor testified that he has cut expenses by over 35%; however, in doing so, he reduced his cost of purchasing seeds and plants from $23,000 to $5,400. Although the Debtor testified that he could avoid this cost because he had sufficient seed on hand for 2018, he likely cannot sustain this decrease. Based on the Debtor's history over the last two years, if his expenses increase in the future, it is unlikely he could sufficiently increase his revenue to cover the added costs. In fact, the Debtor has testified that he has already borrowed money from his son to pay some expenses.
Most importantly, these calculations assume the accuracy of the Debtor's record keeping and projections. At several points during the case, the creditors and the Court have each expressed doubt about the veracity of the Debtor's records. For example, at the May 16, 2018 hearing for the Debtor's Second Amended Plan, the Debtor could not provide an even approximately accurate number of cattle currently in his possession. He later estimated that he had about one hundred cattle, but the operating report for May listed only seventy-six.
Granted, the Court can now review what the Debtor has provided as his *373actual revenue and expenses from 2017 and 2018; however, the Court finds it difficult to rely on this documentation, as it contains numerous inaccuracies. The Debtor conceded at one hearing that the projections filed as an exhibit contained incorrect or outdated figures. At least one monthly operating report had an obvious mathematical error which the Debtor knew about before he came to Court but did not mention until the Court spotted it. Counsel for the Debtor suggested that this supports feasibility because the error was in the Debtor's favor, decreasing expenses by $6,201.22. To the contrary, the Debtor's inability to perform simple addition or point out errors he knew about in advance casts doubt on the entirety of his record keeping. As stated in In re Blake , feasibility "requires the Court to 'carefully scrutinize the proposed payments in light of projected income and expenses and consider whether they are based upon realistic and objective facts and whether they are capable of being met.' " 585 B.R. 539, 550 (Bankr. S.D. Ill. 2018) (quoting In re Szudera , 269 B.R. 837, 842 (Bankr. D.N.D. 2001) ). The Debtor has not met that burden.
Several other inconsistencies further plague the Debtor's case. For example, he received several loans from his son Ryan in both 2017 and 2018 that he has listed as income on his monthly operating reports. (See June 2017 Report, ECF No. 49 ($41,171.33); July 2017 Report, ECF No. 50 ($6,717.67); July 2018 Report, ECF No. 170 ($11,603.64); Aug. 2018 Report, ECF No. 176 ($3,206.53).) As of the October 17, 2018 hearing, the Debtor testified that he owed his son approximately $14,000; however, repayment of these loans is not factored into the feasibility calculations above or the Fourth Amended Plan. Notably, the Debtor's Fourth Amended Plan also does not account for Farm Credit's deficiency claim after selling property owned through an LLC. In fact, at the hearing, none of the parties knew the amount of the deficiency off hand. Farm Credit has since amended one of its proofs of claim to reflect an unsecured claim of $49,344.35 resulting from that sale. The Debtor's Fifth Amended Plan attempts to resolve this issue by adding yet another balloon payment, but the Debtor has not established that he can afford the payments currently proposed in his Fourth Amended Plan.
Despite his projections, the Debtor points to his consistent ability to make payments pursuant to the Court's Orders as evidence of feasibility. It is true that as the case has proceeded for the last year and a half, the Debtor has made his required payments. However, that the Debtor has remained current on his obligations to date does not necessarily prove his ability to make future payments or to make balloon payments in seven years, either through refinancing or accumulation of funds.15 The Debtor has not demonstrated he can comply with the terms of his plan by making annual payments going forward.
*374The Debtor's uncompelling testimony and mistake-laden projections and operating reports do not persuade the Court that the Debtor can comply with the Fourth Amended Plan. The Debtor has had five opportunities to propose a confirmable plan. At three consecutive evidentiary hearings, the Debtor's financial projections were deficient. Although the Debtor's evidence improved in some instances over time, it remains insufficient to meet the burden imposed by Section 1225. Accordingly, the Court finds that the Debtor's Fourth Amended Plan fails to meet the feasibility requirement of Section 1225(a)(6).
Because the Court finds that the plan is not feasible, it declines to address Farm Credit's alternative argument that the plan improperly treats its secured claims under Sections 1222 and 1225 or the Trustee's argument that the Debtor provided insufficient notice to unsecured creditors based on the language of the plan.
II. Leave to Amend
Since the Court held a hearing on the Debtor's Fourth Amended Plan, the Debtor has filed yet another modified plan. Debtors proceeding in Chapter 12 must file a plan "not later than 90 days after the order for relief ... except that the court may extend such period if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable." 11 U.S.C. § 1221. The Debtor filed his Chapter 12 case over a year and a half ago on May 3, 2017, and has not yet proposed a confirmable plan. Because the Debtor has not filed a confirmable plan within the ninety-day period required by the Bankruptcy Code, he may file further amended plans only pursuant to leave from this Court. The Court has not entered any Order granting further leave to amend the Debtor's Fourth Amended Plan. Thus, the Court construes the Fifth Amended Plan as a request for leave to amend, which the Court denies.
In In re Keith's Tree Farms , this Court denied leave to amend where the farm "failed to show any reasonable likelihood of reorganization." 519 B.R. at 643. It stated that "the Court does not believe authorizing additional time to file a fourth amended plan is in the best interest of creditors, as such a plan would suffer from the same infirmities as the Third Amended Plan. Authorizing leave to amend would be fruitless." Id.
Similarly, in In re Bentson , the Bankruptcy Court for the District of Minnesota addressed a request to extend the time for filing an amended Chapter 12 plan. There, the court determined that when debtors seek additional time to file amended plans, courts should consider "when the first chapter 12 plan was filed, how comprehensive and complete the first plan was, the reasons for denial of confirmation of the first plan, the likelihood of successful confirmation of a new plan, and how long an extension is requested." 74 B.R. 56, 58 (Bankr. D. Minn. 1987). See also Novak v. DeRosa , 934 F.2d 401 (2d Cir. 1991) (applying the Bentson factors to a request for leave to file an amended Chapter 12 plan).
This Court often provides the benefit of the doubt to debtors who make progress toward developing confirmable plans and will grant leave to amend in appropriate cases. In this case, however, the Debtor notes, "[t]here is no reason to take additional evidence in the case, because the evidence regarding the debtor's cash flow and his feasibility of making the plan payments, even in light of the increased claims, remains the same." (Debtor's Memo. in Support of Confirmation, ECF No. 199, at 1.) The Court has denied confirmation after the Debtor failed to satisfy the feasibility requirement of *375Section 1225(a). Importantly, this decision did not result merely from a calculated inability to make payments proposed in the Debtor's Fourth Amended Plan, but also from the Court's questions about the credibility of the Debtor's projections-even where the Debtor estimates an ability to make his payments, those projections appear overly optimistic and so far inaccurate as compared to actual performance. If the Debtor intends to rely on the same information in support of his Fifth Amended Plan, the likelihood of confirmation is unlikely. The October 2018 monthly operating report casts further doubt on what were already unpersuasive projections.
The Court believes that, despite the Debtor having made payments to date when put on terms by the Court, this case is fraught with "unreasonable delay, or gross mismanagement, by the debtor that is prejudicial to creditors." 11 U.S.C. § 1208(c)(1). A similar situation was addressed in In re Keith's Tree Farms, Inc. , 519 B.R. 628 (Bankr. W.D. Va. 2014). There, Chief Judge Connelly stated:
Unreasonable delay is not defined by the Bankruptcy Code, but according to case law, unreasonable delays can result from failure to timely file documents, failure to file a confirmable plan, failure to file a modified plan, or failure to perform under a confirmed plan. In re French , 139 B.R. 476, 476 (Bankr. D.S.D. 1992). Similarly, gross mismanagement can be demonstrated by failure to provide accurate financial information and failure to provide insurance on collateral. In re Pertuset , 492 B.R. 232, 252 (Bankr. S.D. Ohio 2012), aff'd, 485 B.R. 478 (6th Cir. BAP 2012).
Id. at 643. The District Court affirmed on appeal stating that " '[b]ankruptcy courts are given a great deal of discretion to say when enough is enough' when it comes to granting or denying the opportunity to amend reorganization plans." Keith's Tree Farms v. Grayson Nat. Bank , 535 B.R. 647, 654 (W.D. Va. 2015) (quoting Matter of Woodbrook Assocs. , 19 F.3d 312, 322 (7th Cir. 1994) ). The District Court also confirmed dismissal was appropriate, observing "[h]ere, the bankruptcy court granted [the lender's] motion to dismiss based on its conclusion that '[t]he inaccurate financial information [provided by the Farm] and the [Farm's] inability to file a confirmable plan[ ] amount to an unreasonable delay that is prejudicial to creditors.' ... The court finds no abuse of discretion in this conclusion, for the reasons discussed above." Id.
The Court made it clear at the July confirmation hearing that the Debtor would be given one final chance to get this case to confirmation. Now, the Debtor asks for yet another bite at the apple. Farm Credit has had to make its point repeatedly that the Debtor's financial projections are unreliable and inaccurate. The Court agrees, and the Fifth Amended Plan does nothing to persuade the Court otherwise. The case will be dismissed.16
CONCLUSION
The Court finds that the Debtor's records and projected revenue and expenses are inaccurate and unpersuasive such that they do not demonstrate the Debtor's *376probable compliance with the plan terms. Accordingly, the Debtor has failed to carry his burden on the feasibility prong of Section 1225, and confirmation of his Fourth Amended Chapter 12 Plan must be denied. Furthermore, the Debtor has failed to state any appropriate grounds for leave to amend such that the Court will deny such leave and decline to consider the Debtor's Fifth Amended Plan. Because the Debtor has had multiple opportunities to present a confirmable plan and has been unable to do so, the Case will be dismissed.
An appropriate Order will be entered consistent with the terms of this Opinion.
Although several of the parties reference the Debtor's Fifth Amended Plan (ECF No. 196) in their briefs, the Court has not granted leave to amend the Fourth Amended Plan and has not heard any evidence as to why the Fifth Amended Plan should be confirmed. Accordingly, this Memorandum Opinion will focus on confirmation of the Debtor's Fourth Amended Plan and construe the Debtor's Fifth Amended Plan as a request for leave to amend the plan further. See infra Conclusions of Law Part II (addressing leave to amend).
A first Amended Plan was filed October 4, 2017 and set for confirmation on November 15, 2017. The Debtor, the Chapter 12 Trustee, and the objecting parties all agreed that further amendment was necessary, and this agreement led to filing of the Second Amended Plan.
A hearing was scheduled and held on June 20, 2018 on a motion to incur debt from the Debtor's son. Debtor's counsel represented to the Court the Motion was filed June 11, 2018, and that he was not expecting an objection. However, the motion was actually filed on Friday June 15, 2018, three business days before the hearing. Farm Credit and the Chapter 12 Trustee objected to the motion, primarily because feasibility of the Debtor's plan was a continuing issue and no repayment terms for the proposed loan were described in the motion. There were no exhibits filed in support of the motion, and when the matter was called on the docket, the Debtor was not present in Court. The motion to incur debt was subsequently continued to July 2, 2018, and the parties were able to ultimately work out an agreed order on the borrowing from the Debtor's son.
The Court uses the colloquial phrase "ballpark" simply to show how far the Debtor's financial projections missed their mark. As further explained below, "[t]he Court must be persuaded that it is probable , not merely possible or hopeful, that the Debtors can actually pay the restructured debt and perform all obligations of the plan." In re Rape , 104 B.R. 741, 749 (W.D.N.C. 1989) (quoting In re Kloberdanz , 83 B.R. 767, 773 (Bankr. D. Colo. 1988) ).
The Debtor, to his credit, has managed to make every payment ordered by the Court in this case. That is not lost on the Court. The Debtor is a hard-working individual, devoted to his farm and family. Nevertheless, the Court has to follow the requirements of the Bankruptcy Code in order to approve confirmation, and proof of feasibility going forward has been a continuing challenge in this case, especially given the Debtor's haphazard financial reporting.
The Debtor reflected further borrowings from his son of $3,206.53 as income on his August 2018 operating report. (ECF No. 176).
Post-trial briefing reflects the Debtor's projected produce sales numbers for October were $69,000, down from $81,000 as projected at the July hearing. (Compare ECF No. 184-2 with ECF No. 152-3). The monthly operating report for October shows actual sales revenue of $36,989.03, a 47% decrease off the October projection.
Debtor's counsel argued at confirmation that "believed" does not mean that the Debtor meant that unsecured creditors would in fact be paid in full. Given the potential wide variance in payment from in full to what the unsecured creditors would actually get if Farm Credit participated in the unsecured creditor pool, the Court finds counsel's argument disingenuous.
Farm Credit filed an unsecured claim in the amount of $49,344.35 on November 8, 2018.
Skyline originally filed a limited objection to confirmation of the Debtor's Fourth Amended Plan, but noted at the hearing that the Debtor had agreed to language in any subsequent confirmation order that would resolve its objection. Skyline did not put on any evidence at the hearing and did not file a supplemental memorandum.
Skyline has worked out a payment arrangement with the Debtor and not since pursued its feasibility objection.
The Debtor's ongoing annual real estate tax expense of approximately $5,900.00 due to Carroll County is factored into his annual expense projections. These payments are due each December.
The Debtor's original projection from May 2018 estimated expenses of $186,297 before factoring in plan payments. His latest projection from October 10, 2018 estimated expenses of $119,342.82. Later the Debtor filed his October operating report, which had greater expenses than projected. Adding together his actual expenses through October and his projections for November and December, his 2018 expenses are more accurately stated as $125,819.60, a decrease from the original projection of approximately 32.5%.
The Debtor did not rule out future need to borrow additional funds from his son during the life of the Plan.
The Debtor points to this Court's prior ruling in In re Terry Properties, LLC , 569 B.R. 76 (Bankr. W.D. Va. 2017), as providing the road map for confirmation of this Chapter 12 case, including the provision of balloon payments once a track history is developed that can be taken to financial markets at some point in the future. This case is far different than Terry Properties in that the Court was more able to find feasibility with the support of what had been proven to be a steady revenue stream through confirmation along with fairly accurate financial reporting. Thus, Terry Properties may well provide an appropriate structure for other Chapter 12 cases. Given the instability of the Debtor's financial reporting and actual performance versus projected performance in this case, the Court does not have the same level of comfort here.
The October 17, 2018 confirmation hearing was also on the Chapter 12 Trustee's Notice to Show Cause. Included in the show cause was a request for dismissal under 11 U.S.C. § 1208 if the Debtor was not current in plan payments or for other grounds as indicated in the show cause. One of those grounds was lack of feasibility. (ECF. Nos. 38, 169). The Debtor's attempt to file yet another plan does change what the Court heard on October 17, 2018. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501803/ | JOHN S. HODGE, UNITED STATES BANKRUPTCY JUDGE
Before the Court is the confirmation of Debtor's Chapter 13 Plan (Doc. No. 28) and the objection thereto (Doc. No. 29) filed by the holder of a secured claim. For the following reasons, confirmation of the Plan is DENIED .
I. Jurisdiction, Core Status and Judicial Power to Enter this Order
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and by virtue of the reference by the district court pursuant to 28 U.S.C. § 157(a) and LR 83.4.1. All claims presented to this Court are "core" pursuant to 28 U.S.C. § 157 (b)(2)(A), (L) and (O).
The Supreme Court's ruling in Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), sets forth certain limitations on the constitutional authority of bankruptcy courts to enter final orders. BP RE, L.P. v. RML Waxahachie Dodge, L.L.C., 735 F.3d 279, 286 (5th Cir. 2013) (" 'the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.' ") (quoting Stern, 131 S.Ct. at 2618 ); Thus, under Stern , in addition to determining whether each claim is core or non-core, this Court must also determine whether the underlying issue "stems from the bankruptcy itself or it would necessarily be resolved in the claims allowance process." BP RE, 735 F.3d at 286. Absent both statutory and constitutional authority, this Court may not enter a final order, and instead must issue proposed findings of fact and conclusions of law to be considered by the district court.
The Supreme Court has made clear that an order denying confirmation of *378a proposed Chapter 13 plan is not a final order. Bullard v. Blue Hills Bank, --- U.S. ----, 135 S.Ct. 1686, 1690, 191 L.Ed.2d 621 (2015) ("The question presented is whether such an order denying confirmation is a 'final' order that the debtor can immediately appeal. We hold that it is not."). Moreover, even if this Order could be construed to constitute a final order, the issues presented in this case stem from the bankruptcy itself as a dispute over the confirmation of a plan can only arise in a bankruptcy case. Therefore, there are no Stern issues in this case.
II. Procedural Background
On May 31, 2018 (the "Petition Date "), James Smith, Jr. ("Debtor ") filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code (Doc. 1). On June 12, 2018, Debtor filed his Chapter 13 plan (Doc. 9). After objections were raised by the Trustee (Docs. 19, 20), Debtor filed an Amended Plan (Doc. 23). After subsequent objections by both the Trustee (Doc. 27) and JPMorgan Chase Bank, National Association ("Creditor ") (Doc. 26), Debtor filed a second Amended Plan (Document No. 28). Creditor once again objected (Doc. 29) to confirmation of the Plan because it provided for an interest rate (6.75%) less than the contractual rate (9.25%) on Debtor's principal residence and the proposed interest rate is less than the presumptive rate contemplated by the Supreme Court's holding in Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004).
Creditor's claim of approximately $11,000 (Claim No. 6) is secured by a first-priority mortgage on Debtor's principal residence valued at approximately $95,000 as evidenced by Debtor's schedules. (Doc. No. 8). Debtor's loan is scheduled to mature on May 1, 2022, and the final payment under Debtor's sixty (60) month Plan is scheduled for May 1, 2023. (Doc. 32). As a result, it is undisputed that: (1) Creditor is the holder of over-secured claim because the value of the collateral far exceeds the amount of the debt; and (2) Debtor's last payment on the original payment schedule is due to Creditor before the due date of the last payment under the Plan.
Creditor objected to the confirmation of the Plan on two grounds. First, Creditor argued it is entitled to its contractual interest rate (9.25%) from the Petition Date through the confirmation date pursuant to the provisions of § 506(b) of the Bankruptcy Code. Second, Creditor argued it is entitled to the Till interest rate as calculated on the confirmation date rather than the Petition Date. Importantly, Creditor did not challenge Debtor's "prime plus" formula used to calculate the Till rate (national prime rate plus 2%). Instead, with respect to the calculation of the Till rate, Creditor's sole objection was that Debtor used the wrong date. In this case, the date used for calculating the Till rate is significant because the prime rate increased after the Petition Date. Because the prime rate as of the Petition Date and the prime rate as of the confirmation date are different, the Court must determine which of these two dates to use-or whether to use some other date to calculate the cramdown interest rate under Till .
III. Analysis
For the reasons set forth below, this Court holds: (i) pursuant to the provisions of § 506(b) of the Bankruptcy Code, a secured creditor is entitled to the allowance of its contractual rate of interest from the Petition Date until the day before the confirmation date; and (ii) pursuant to the provisions of § 1325(a)(5)(B)(ii) of the Bankruptcy Code, a debtor may modify a secured creditor's rights, including the *379contractual interest rate, as of the date of the entry of the confirmation order.
1. Anti-Modifications provisions of § 1322(b) do not apply in this case .
Ordinarily, a chapter 13 debtor may not modify the contractual interest rate on a home mortgage through a confirmed plan because the Bankruptcy Code provides that a debtor's plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence." 11 U.S.C. § 1322(b)(2). The Code grants an exception to the above exception when:
[T]he last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor's principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to Section 1325(a)(5).
11. U.S.C. § 1322(c)(2).
In this case, all parties agree that the exception to the exception under § 1322(c)(2) applies which permits Debtor to modify the contractual interest rate on his home mortgage through a confirmed chapter 13 plan pursuant to § 1325(a)(5).
2. Cramdown confirmation standards
As noted by the Supreme Court, in order to obtain confirmation of a Chapter 13 plan, "the plan must accommodate each allowed secured creditor in one of three ways: (1) by obtaining the creditor's acceptance of the plan [ 11 U.S.C. § 1325(a)(5)(A) ]; (2) by surrendering the property securing the claim [ 11 U.S.C. § 1325(a)(5)(C) ]; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total 'value, as of the effective date of the plan, ... is not less than the allowed amount of the claim." Till, 541 U.S. at 468, 124 S.Ct. 1951 (citing and quoting § 1325(a)(5)(B)(ii) ). The third avenue-which Debtor has chosen in the case at bar-is "commonly known as the 'cram down option' because it may be enforced over a claim holder's objection." Id. at 469, 124 S.Ct. 1951. Typically, under a cramdown, the plan pays the creditor's claim through installment payments, which requires that "over time, the creditor receives disbursements whose total present value equals or exceeds that of the allowed claim." Id. (stating that because the claim is paid over time, it must bear interest).
A debtor opting for the cramdown option must satisfy three (3) requirements imposed by § 1325(a)(5)(B). These are that the plan provide: (1) that the holder of a secured claim retain its lien until "payment of the underlying debt ... or discharge under Section 1328," (2) that payment on the debt be made in "equal monthly amounts," and (3) that the plan may be confirmed with respect to an allowed secured claim if "the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim." 11 U.S.C. § 1325(a)(5)(B)(i)-(iii) (emphasis added).
In this case, Debtor's Plan satisfies the first two requirements of § 1325(a)(5)(B). The question is whether the Plan satisfies the third requirement mandating that it provide for the present value of the claim on the effective date of the Plan.
3. The Till rate should be calculated as of the Confirmation Date
In Till, the Supreme Court mandated a prime-plus formula for interest *380rates in the case of cramming down a claim. Such an approach begins with the national prime rate and then adjusts that rate, typically upwards, on account of the risk of nonpayment. This modified prime-plus approach is often described as the " Till rate."
Determination of the cramdown interest rate is governed by the cramdown provision in the Bankruptcy Code which reads as follows: "...[T]he court shall confirm a plan if ... with respect to each allowed secured claim provided for by the plan-the plan provides that ... the value, as of the effective date of the plan , of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim ...." 11 U.S.C. § 1325(a)(5)(B)(ii) (emphasis added).
By its terms, § 1325(a)(5)(B)(ii) focuses on the value of property as of the effective date of the Plan. In re Texas Grand Prairie Hotel Realty, L.L.C., 710 F.3d 324, 333 n.53 (5th Cir. 2013) ("The general consensus that has emerged provides that a one to three percent adjustment to the prime rate as of the effective date [of the plan] is appropriate.")(emphasis added). The Bankruptcy Code, however, does not define a plan's effective date. Likewise, the Chapter 13 uniform plan used in this District does not include or define the effective date. For purposes of calculating the cramdown interest rate under § 1325(a)(5)(B)(ii), this Court has determined the effective date of the plan means the date on which the plan is confirmed.
In the case at bar, Debtor interprets the phrase "as of the effective date of the plan" as used in § 1325(a)(5)(B)(ii) to mean the petition date. This Court rejects Debtor's interpretation. The Court concludes that a plan must be confirmed before it can have an effective date. The plan is not "effective" until it is confirmed, as § 1327 "Effect of Confirmation" clearly implies. While confirmation and the "effective date of the plan" may not always be the same date (which is commonplace in a Chapter 11 Plan), confirmation must happen first. To choose the petition date as the "effective date" would be to give effect to the plan before it has been confirmed, something the Bankruptcy Code does not permit.
Interpretation of the Bankruptcy Code "begins where all such inquiries must begin: with the language of the statute itself." United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). "[I]t is also where the inquiry should end, for where, as here, the statute's language is plain, the sole function of the courts is to enforce it according to its terms." Id. (internal quotation omitted). Section 1325(a)(5)(B)(ii) is no exception. Nothing in the text of that provision purports to make the petition date the effective date of the plan. In contrast, elsewhere in the Bankruptcy Code, Congress demonstrated its ability to identify the date of the petition or the entry of the order for relief as the magic date for other consequences. See , for example, 11 U.S.C. §§ 348(d) ; 1305(a)(2). When interpreting a statute, a court should give meaning to each word in the statute and rely on the plain language of the statute itself. TRW, Inc. v. Andrews , 534 U.S. 19, 31, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001) (quoting Duncan v. Walker , 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001) ("It is a 'cardinal principle of statutory construction that a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence or work shall be superfluous, void, or insignificant.' ").
Courts and commentators have generally agreed that for purposes of applying the cramdown provision of § 1325(a)(5)(B)(ii), the phrase "effective date of the plan" means the confirmation date.
*381Rake v. Wade , 508 U.S. 464, 469, 113 S.Ct. 2187, 2191, 124 L.Ed.2d 424, (1993) (superseded on other grounds by statute , 11 U.S.C. § 1322(e) ) (noting that " § 1325(a)(5)(B)(ii) guarantees that property distributed under a plan on account of a claim, including deferred cash payments in satisfaction of the claim ... must equal the present dollar value of such claim as of the confirmation date .")(emphasis added and citations omitted); In re Turcotte , 570 B.R. 773, 784 (Bankr. S.D. Tex. 2017) (calculating the cramdown interest rate under § 1325(a)(5)(B)(ii) using the date the confirmation order is entered); In re Campbell , 513 B.R. 846, 855 (Bankr. S.D.N.Y. 2014), aff'd, 539 B.R. 66 (S.D.N.Y. 2015) (for purposes of § 1325(a)(5), "as of the effective date, presumably the confirmation date , the appropriate interest rate is a rate that will afford the creditor the present value of its secured claim as of that date.") (emphasis added); Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 111.1, at ¶ 6, www.Ch13online.com ("For § 1325(a)(5)(B)(ii) purposes, 'effective date of the plan' is most reasonably understood to mean the date of confirmation.").
Although the instant case deals with the meaning of the phrase "effective date of the plan" as used in the cramdown provision of the Bankruptcy Code, § 1325(a)(5)(B)(ii), other courts have confronted the meaning of that same phrase as used in different provisions of the Code. For example, when applying the "disposable income test" of § 1325(b)(1)(B), the Supreme Court interpreted the meaning of the phrase "as of the effective date of the plan" to mean the date the plan is confirmed and becomes binding. Hamilton v. Lanning, 560 U.S. 505, 518, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010) (" § 1325(b)(1)(B) directs courts to determine projected disposable income 'as of the effective date of the plan,' which is the date on which the plan is confirmed and becomes binding .") (emphasis added). Despite the Supreme Court's interpretation of the phrase "effective date of the plan" for purposes of "disposable income test" of § 1325(b)(1)(B) and its mention of the cramdown provision of § 1325(a)(5)(B) in Rake , 508 U.S. at 469, 113 S.Ct. 2187, lower courts have struggled to interpret the meaning of that same phrase when applying the "best-interests-of-creditors-test" found in § 1325(a)(4) which requires a plan to provide that unsecured creditors will receive as much through the plan as they would if a debtor liquidated under Chapter 7. In re Goudreau , 530 B.R. 783, 788 (Bankr. D. Kan. 2015) (collecting cases and concluding that for purposes of the § 1325(a)(4) liquidation analysis, "the Court finds that the better view is that the date the Chapter 13 petition was filed should be considered the "effective date of the plan".); Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 1601.1, at ¶ 3, www.Ch13online.com ("The phrase 'effective date of the plan' is not defined by the Code. Without directly deciding the question, most best-interests-of-creditors test [ § 1325(a)(4) ] cases perform the hypothetical liquidation as of the date of the Chapter 13 petition.").
Notwithstanding the lack of uniformity of interpretation of the phrase "effective date of the plan" for the best-interests-of-creditors-test, this Court holds that for purposes of applying the cramdown provision of § 1325(a)(5)(B)(ii), the phrase "effective date of the plan" means the date the confirmation order is entered.1
*3824. Oversecured creditor is entitled to contract rate of interest from the Petition Date until the "effective date" of the Plan
Having determined that the Till rate should be calculated as of the effective date of the Plan and that the Plan is not effective until the date it is confirmed, the Court now directs its attention to the determination of the proper interest rate between the Petition Date and the confirmation date. This is often referred to as "pendency interest" because it deals with the accrual of interest during the pre-confirmation pendency of the bankruptcy case.
In this case, there is no question that Creditor is oversecured. Section 506(b) provides that an oversecured creditor is entitled to interest on its claims. It is settled law in the Fifth Circuit that an oversecured creditor is entitled to the allowance of contract interest rates during the pendency of the bankruptcy case from the petition date until the effective date of the plan. In re Laymon, 958 F.2d 72, 75 (5th Cir. 1992) ("when an oversecured creditor's claim arises from a contract, the contract provides the rate of post-petition interest."); Matter of Southland Corp. 160 F.3d 1054, 1060 (5th Cir. 1998) (affirming use of default contract rate for period "between pre-bankruptcy default and the effective date of the reorganization plan"); In re T-H New Orleans Ltd., 116 F.3d 790, 797 (5th Cir. 1997) (the rights granted under § 506 apply "only from the date of filing through the confirmation date."); In re Turcotte , 570 B.R. at 787 (concluding that § 506(b) requires the use of the contract rate from the petition date until the date the chapter 13 plan is confirmed); SJT Ventures, LLC, 441 B.R. 248, 252 (Bankr. N.D. Tex. 2010) ("the allowance of contract interest rates to apply to so-called 'pendency interest,' which is interest that accrues after filing of petition but prior to reorganization plan's effective date, is settled law in the Fifth Circuit .")(emphasis added).
Although the Fifth Circuit has dealt with pendency interest in the context of Chapter 11 cases, other Circuits have applied §§ 506(b) and 1325 together, and they have concluded those sections mean that contractual interest accrues under § 506(b) only until confirmation of the plan and upon confirmation of the plan, the cramdown interest rate calculated under § 1325(a)(5)(B) applies. In re Garner , 663 F.3d 1218, 1221 (11th Cir. 2011) ("our holding in this case is that an oversecured creditor is only entitled to the contract rate of interest from the date of filing until confirmation of the bankruptcy plan in a Chapter 13 case where the debtor invokes the 'cram down' power of 11 U.S.C. § 1325(a)(5)(B)."); In re Hoopai, 581 F.3d 1090, 1099-1100 (9th Cir. 2009) (pursuant to § 506(b), oversecured creditor is entitled to interest at the contract rate from the petition date through the confirmation date, but new cramdown rate may be applied after confirmation of chapter 13 plan); In re Milham, 141 F.3d 420, 423 (2d Cir. 1998) (" Section 506(b)... defines the allowed claim of an oversecured creditor; treatment of that claim after confirmation is governed by Section 1325...").
Pursuant to the provisions of § 506(b), an oversecured creditor is entitled to the "benefit of his bargain" from a debtor until a confirmed plan becomes effective. Prior to the effective date of the plan, § 506(b) requires that a debtor pay the contract rate of interest-thus the secured creditor gets the benefit of its bargain, because if the creditor did not receive its prepetition interest rate on an oversecured claim, it *383would result in a windfall to a debtor holding the equity position. Upon the effective date of the plan, a new bargain is made through the cramdown provision of the Bankruptcy Code, and § 1325(a)(5)(C)(ii) requires that a creditor simply receive the "present value" of its secured claim for a cramdown confirmation to succeed.
IV. Conclusion
Pursuant to § 506(b) of the Bankruptcy Code, an oversecured creditor is entitled to the allowance of its contractual interest rate after the filing of the petition but prior to the date of the entry of the confirmation order (the pendency period). In this case, the Plan failed to provide for the payment of the contractual rate of interest on Creditor's claim during the pendency period.
Once a debtor invokes the cramdown power of § 1325(a)(5) of the Bankruptcy Code, a secured creditor's rights, including the contractual interest rate, are subject to modification as of the effective date of the plan. For purposes of § 1325(a)(5)(B)(ii) of the Bankruptcy Code, the effective date of the plan means the date the confirmation order is entered. In this case, Till bars Debtor from obtaining confirmation of the Plan because the proposed cramdown rate of 6.75% relied on the prime rate as of the petition date instead of the date the confirmation order is entered. Therefore, Debtor did not satisfy § 1325(a)(5)(B)(ii).
ACCORDINGLY, IT IS ORDERED that Debtor's request for confirmation of the chapter 13 Plan is denied without prejudice to Debtor filing an amended plan within 14 days of the entry of this Order that proposes to pay Creditor the contractual rate during the pendency period and the Till rate calculated as of the date of the entry of the confirmation order. Assuming the Court confirms a Plan, the effective date of the Plan will be the date of the entry of the confirmation order. Because no one knows what the prime rate will be on that date, the Plan will need to be further modified to reflect the change in the prime rate if another change occurs by that date.
SO ORDERED.
Technically, the effective date is the date the confirmation order becomes final. However, for purposes of implementing § 1325(a)(5)(B)(ii), the effective date is the date the order is entered confirming the plan which, in most cases, is the date of the confirmation hearing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501805/ | Gregory R. Schaaf, Bankruptcy Judge
Farm Credit Mid-America, PCA moved for summary judgement on all counts in its Complaint. [ECF Nos. 26 - 28.] The Defendants, Derek and Chelsey Tingle, responded [ECF Nos. 41 - 42] and the matter is submitted for a decision. [ECF No. 40.] Farm Credit is granted summary judgment on its request to deny a discharge pursuant to 11 U.S.C. § 727(a)(3) and (a)(5). Summary judgment is denied on all other counts.
I. BACKGROUND.
Derek and Chelsey Tingle obtained loans from Farm Credit between 2009 and 2011 to support Derek's cattle and tobacco operations. The first loan was made on August 14, 2009, in the amount of $202,500 ("Note 7200"). [ECF No. 1, Exh. 1.] Note 7200 is secured by a lien on all equipment and crops. [Id. ] As part of the application process, the Tingles provided a balance sheet dated June 24, 2009, that valued investments in growing crops at $478,125 and equipment at $134,550. [ECF No. 27-1 ("Moore Affidavit"), Exh. 2.]
Farm Credit made another loan to the Tingles on April 8, 2010, for $86,000 ("Note 1600"). [ECF 1, Exh. 2.] Note 1600 is secured by a lien on crop insurance proceeds, livestock, equipment and crops. [Id. ] As part of the application process, the Tingles provided a balance sheet dated December 31, 2009, that valued various cattle at $150,250, tobacco at $80,100, and equipment at $143,916. [Moore Affidavit, Exh. 4.]
On September 30, 2011, Farm Credit made a third loan to the Tingles for $25,000 ("Note 6600"). [ECF No. 1, Exh. 4.] Note 6600 is secured by a lien on livestock, equipment, and crops. [Id. ] As part of the application process, the Tingles provided a balance sheet dated December 31, 2010, that valued various cattle at $198,200, tobacco at $148,750, and equipment *400at $204,666. [Moore Affidavit, Exh. 7.]
Farm Credit sued the Tingles in Henry Circuit Court after they defaulted on the notes and was granted judgment in the amount of $305,159.82 on September 12, 2014. [Moore Affidavit, Exh. 9.] The Tingles then filed a chapter 13 petition on October 7, 2014, which was dismissed without a discharge in 2016. [Case No. 14-30492, ECF No. 230.] Derek ceased his farming operations while the chapter 13 case was active. He testified that he liquidated his remaining farming assets after the case was dismissed. [See ECF No. 27-2 at 258.]
The Tingles filed the current chapter 7 case on November 22, 2017. The schedules list Farm Credit as an unsecured creditor with a claim for $180,000.00. [Case No. 17-30531, ECF No. 1 at 27.] Farm Credit filed this adversary proceeding seeking a determination that the Tingles' obligations are non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (2)(B), (4), and (6). In the alternative, Farm Credit seeks denial of a discharge in the chapter 7 proceeding pursuant to 11 U.S.C. § 727(a)(3), (4), (5), and (7).
II. JURISDICTION AND SUMMARY JUDGMENT STANDARD.
Jurisdiction is proper pursuant to 28 U.S.C. § 1334 and venue is proper pursuant to 28 U.S.C. § 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b).
Civil Rule 56 allows entry of summary judgment if there is no dispute over the material facts and those facts support a judgment. FED. R. CIV. P. 56(a), made applicable by FED. R. BANKR. P. 7056. A fact is material if it would affect the outcome of the dispute under applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A court must assume all inferences from the facts in favor of the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
If there is an issue of fact related to intent or credibility determinations, then the claim is better suited for trial. "It is inappropriate for a court to make credibility determinations when considering a motion for summary judgment." FDIC v. Jeff Miller Stables, 573 F.3d 289, 295 (6th Cir. 2009) (citing Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000) ); see also Hoover v. Radabaugh, 307 F.3d 460, 467 (6th Cir. 2002) ("When the defendants' intent is at issue, 'summary judgment is particularly inappropriate.' ") (quoting Marohnic v. Walker, 800 F.2d 613, 617 (6th Cir. 1986) ).
III. DISCUSSION.
A. A Trial is Required to Resolve Farm Credit's § 523(a)(2)(A) Claim.
The first count in the Complaint asserts the Farm Credit debt is excluded from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). Farm Credit argues for a finding of actual fraud based on an allegedly fraudulent scheme to transfer assets that occurred after the loans were made. [ECF No. 28 at 26-30.] The Debtors have provided explanations that deny any actual fraud occurred. Evaluation of the evidence on this count raises intent and credibility concerns that are the type best left for trial.
Therefore, summary judgment is denied on Farm Credit's claim for non-dischargeability pursuant to § 523(a)(2)(A).
B. A Trial is Required to Resolve Farm Credit's § 523(a)(2)(B) Claim.
The second count in the Complaint asserts the Farm Credit debt is *401excluded from discharge pursuant to § 523(a)(2)(B). This provision excludes discharge for money obtained by a statement in writing:
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by-
...
(B) use of a statement in writing-
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive;
11 U.S.C. § 523(a)(2)(B). Farm Credit must prove these elements of the claim by a preponderance of the evidence. Grogan v. Garner , 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Farm Credit alleges the balance sheets that induced it to make the loans were materially false. Farm Credit argues this is confirmed in part by the Tingles' Response to Request for Admission No. 23. [ECF No. 28 at 31-32.] The Request asked the Tingles to admit they sold collateral listed on one or more balance sheets. [ECF No. 28 at 31-32.] The Tingles denied the Request and indicated: "None of those items were owned by the Defendants." [Id. at 32.]
A denial of ownership of collateral previously disclosed as owned does suggest a problem. But denial of a request for admission does not conclusively establish a fact. See FED. R. CIV. P. 36(b). Further, this was an example and more is required when the Tingles have suggested defenses (e.g. , the Tingles claim the balance sheets were prepared by Farm Credit, see Part E.5, infra ).
Evaluating the evidence in the light most favorable to the Tingles requires further evaluation that is better left for trial. Therefore, summary judgment is denied on Farm Credit's claim for non-dischargeability pursuant to § 523(a)(2)(B).
C. A Trial is Required to Resolve Farm Credit's § 523(a)(4) Claim.
The third count in the Complaint asserts the Farm Credit debt is non-dischargeable pursuant to § 523(a)(4). This provision excludes from discharge three types of debt: "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). Farm Credit has failed to prove it is owed a type of debt that is covered by this provision; until it does so, it cannot prevail. See generally Feldman v. Pearl (In re Pearl), 577 B.R. 513, 530 (Bankr. E.D. Ky. 2017) (explaining that proof of the existence of a debt covered by this provision is a prerequisite to judgment).
Farm Credit has not alleged that the Tingles were acting in a fiduciary capacity or that embezzlement occurred. Farm Credit's argument is that the Tingles' use of their collateral and any related proceeds is a larceny. [ECF No. 28 at 34.] Larceny requires a wrongful taking of property with the intent to use the property for the defendant's benefit. See 4 COLLIER ON BANKRUPTCY ¶ 523.10[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010). Derek testified at several points that he either gave Farm Credit the proceeds of any sale or he used the proceeds to protect Farm Credit's collateral. [E.g., ECF No. 27-2 at 130.] Thus, there is a dispute over whether the Tingles used sale proceeds solely for their benefit. This is enough to survive the request for summary judgment on this issue.
*402Summary judgment is denied on Farm Credit's claim for non-dischargeability pursuant to § 523(a)(4).
D. A Trial is Required to Resolve Farm Credit's § 523(a)(6) Claim.
The fourth count in the complaint asserts that the Farm Credit debt is excepted from discharge pursuant to § 523(a)(6), which excludes from discharge any obligation caused by a "willful and malicious injury" to an entity or to property. 11 U.S.C. § 523(a)(6). The Tingles caused a willful and malicious injury if (1) they intended their actions; and (2) intended their actions to cause injury. Kawaauhau v. Geiger , 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) ; see also Markowitz v. Campbell (In re Markowitz) , 190 F.3d 455, 465 (recognizing that Kawaauhau controls); Tomlin v. Crownover (In re Crownover) , 417 B.R. 45, 55 (Bankr. E.D. Tenn. 2009) (recognizing the two elements).
Farm Credit again refers to the allegedly false balance sheets and argues that the Tingles converted their assets by transferring them for less than reasonably equivalent value. [ECF No. 28 at 37.] The Tingles' intent is critical to this count and their credibility is best addressed at trial. For example, Derek's claim that he paid or intended to pay the proceeds of sales to Farm Credit [ECF No. 27-2 at 129-30] is impacted by, among other things, a credibility determination.
Summary judgment is denied on Farm Credit's claim for non-dischargeability pursuant to § 523(a)(6).
E. Farm Credit Is Entitled to Judgment on Its Claim Seeking Denial of Discharge Based on the Failure to Keep or Preserve Records and Explain the Loss of Assets.
The final count of the Complaint seeks denial of the discharge pursuant to § 727(a)(3), (4), (5) and (7). Summary judgment is granted pursuant to § 727(a)(3) and (a)(5), so an analysis of the other parts of § 727(a) is not necessary.
1. Section 727(a)(3) and (5) Apply in this Action.
Section 727(a)(3) provides that a court shall grant a discharge unless:
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. § 723(a)(3). Section 727(a)(5) provides that a court shall grant a discharge unless "the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities ...." 11 U.S.C. § 723(a)(5).
The goal of § 727(a)(3) is to provide creditors "with enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present." Turoczy Bonding Co. v. Strbac (In re Strbac) , 235 B.R. 880, 882 (6th Cir. BAP 1999) ). The required compliance "removes the risk to creditors of 'the withholding or concealment of assets by the bankrupt.' " Caneva v. Sun Communities Operating Ltd. P'ship (In re Caneva ), 550 F.3d 755, 761 (9th Cir. 2008) (quoting Burchett v. Myers, 202 F.2d 920, 926 (9th Cir. 1953) ). The goal of § 727(a)(5) is similar, but it imposes strict liability when a debtor cannot explain a material loss of assets.
*403Baker v. Reed (In re Reed ), 310 B.R. 363, 368 (Bankr. N.D. Ohio 2004).
2. The Burden of Proof Starts with the Objecting Party and Shifts to the Debtor.
Discharges are favored in bankruptcy, so the party objecting to discharge has the initial burden of proof under § 727(a)(3) and (5). FED. R. BANKR. P. 4005. The elements of a § 727(a)(3) claim require that the plaintiff:
(1) offer evidence of the general nature of [the debtor's] business or personal financial position and the types of transactions about which recorded information is sought, (2) present evidence identifying the recorded information he alleges has been concealed, destroyed, mutilated, falsified or not kept or preserved by [the debtor], and (3) show how the missing recorded information 'might' enable [the debtor's] actual financial condition or business transactions to be ascertained under the circumstances of the case.
McDermott v. Neff (In re Neff), Case No. 14-33442, Chapter 7, Adv. Pro. No. 15-3026, 2015 WL 9488240, at *2, 2015 Bankr. LEXIS 4361, at *5 (Bankr. N.D. Ohio Dec. 28, 2015). Farm Credit needs to show the missing records are material to understanding the Tingles' financial status. See Stiff , 512 B.R. at 897. The burden then shifts to the Tingles to explain the failure to produce records. See id.
Under section § 727(a)(5), the plaintiff must "identify assets which the debtor at one time owned and claims, in his schedules, to no longer possess." See Crocker v. Stiff (In re Stiff) , 512 B.R. 893, 900 (Bankr. E.D. Ky. 2014). Judge Lee explained the important distinctions between § 727(a)(3) and (5) in Stiff :
Section 727(a)(5), while serving a similar purpose to § 727(a)(3), differs from § 727(a)(3) in several respects. First, § 727(a)(5) concerns itself exclusively with the loss of assets, while § 727(a)(3) is not limited to records documenting the disposition of lost assets. Second, to prevail on a § 727(a)(5) action, a debtor must offer a satisfactory explanation of a loss of assets, whereas in a § 727(a)(3) action a debtor may prevail by showing only that his failure to keep or preserve records documenting the disposition of lost assets was reasonable. Third, a debtor can defeat a § 727(a)(5) action by offering persuasive testimonial explanations of his loss of assets, see [PNC Bank v. ] Buzzelli [ (Buzzelli ) ], 246 B.R. [75] at 117 [ (Bankr.W.D.Pa.2000) ] ; Losinski [v. Losinski (In re Losinski ) ], 80 B.R. [464] at 470 [ (Bankr.D.Minn.1987) ], while a testimonial explanation of lost assets will not defeat a § 727(a)(3) action absent a reasonable explanation of the absence of records of same.
Id.
Farm Credit does not need to prove that the Tingles acted with fraudulent intent under either provision. See In re Settembre , 425 B.R. 423, 431 (Bankr. W.D. Ky. 2010) (analyzing § 727(a)(3) ); Reed , 310 B.R. 363 at 368 (2004) (analyzing § 727(a)(5) ).
3. Farm Credit Has Satisfied Its Initial Burden of Proof.
Farm Credit points to large differences between assets owned by the Tingles shown on the balance sheets they provided and the Tingles' bankruptcy schedules.
The Tingles granted Farm Credit security interests in equipment, cattle, and crops. The difference between the disclosures on the December 31, 2010 balance sheet and the schedules filed in the Tingles'
*404chapter 13 case is summarized in the following chart:
12/31/10 10/07/14 (Decrease) Equipment $204,666 $139,750 ($64,916) Cattle $198,200 $0 ($198,200) Tobacco $148,750 $0 ($148,750) ____________________________________ $551,616 $139,750 ($411,866)
The schedules filed by the Tingles in their chapter 7 proceeding show that they disposed of all remaining equipment after filing chapter 13 but before filing chapter 7. These differences are material, particularly because they exceed the amount of the debt. Further, these asset groups represent the primary assets used in and generated by Derek's farming operations, so an explanation of the reason for the dissipation of these assets and absence of records regarding the losses are necessary to understand the business.
Farm Credit has therefore satisfied its burden. The Tingles are now obligated to explain what happened to these assets and why they failed to produce financial records to avoid denial of discharge. The following discussion confirms the Tingles have not carried their burden to explain the significant losses in equipment, cattle, and tobacco, or their failure to produce records regarding these losses.
4. The Tingles Have Failed to Satisfy Their Burden to Explain Missing Records and Lost Assets.
The Tingles disputed facts in their response to the summary judgment motion and responded to the demand for judgment under § 523(a)(2). [ECF No. 41.] The Tingles did not specifically respond to the demand for judgment under any other counts, including the demand for judgment under § 727(a)(3) and (5). Despite the lack of argument, all evidence was reviewed to determine the facts in the light most favorable to the Tingles.
The evidence presented by the Tingles is almost entirely testimonial explanations for the disappearance of assets. This provides little help under the § 727(a)(3) claim. Derek conducted farming operations during the relevant period, including raising cattle and crops. It is reasonable to expect him to maintain records of sales, particularly because the numbers involved are so large. But, as the subsequent discussion shows, he cannot produce documentation regarding cattle and crop sales, or transfers of equipment used in the farming operations. Further, the Tingles had a duty to preserve these records for a reasonable period. See Stiff, 512 B.R. at 898.
Testimonial explanations might provide more help under § 727(a)(5), Stiff, 512 B.R. at 900, but testimony is not always enough under either section. See, e.g., Bond v. Burson , No. 3:94-CV-502, 1996 WL 943413, at *3-4, 1996 U.S. Dist. LEXIS 22062, at *9-12 (E.D. Tenn. March 4, 1996) (discussing Sixth Circuit law that requires convincing evidence from the non-moving party). The nonmoving party cannot simply refute an argument; it must provide some proof there is a triable issue of fact. See FED. R. CIV. P. 56(c)(1) ; see also Sinclair v. Schriber, 916 F.2d 1109, 1112 (6th Cir. 1990) ("Although the nonmoving party's evidence ... need not be of the sort admissible at trial, he must employ proof *405other than his pleadings and own affidavits to establish the existence of specific triable facts."). A motion for summary judgment is one way to challenge an opposing party to "put up or shut up" on a critical element of the case. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1478 (6th Cir. 1986) ; see also Caruso v. Clemmens, Civil Action No. 5:17-CV-325-KKC, 2018 WL 5793851, *1-2, 2018 U.S. Dist. LEXIS 188862, *4-5 (E.D. Ky. Nov. 5, 2018) (summary judgment is appropriate if the non-moving party fails to make a sufficient showing when he bears the burden of proof).
The following discussion shows the Tingles only provided statements that events occurred. There is no support backing up those bare assertions and the Tingles did not even attempt to explain the lack of records. General, unsubstantiated statements are not sufficient to explain away material discrepancies at the summary judgment stage. See Dolin v. Northern Petrochemical Co. (In re Dolin) , 799 F.2d 251, 253 (6th Cir. 1986).
a. The Tingles Have Not Explained the Decreased Value of Equipment Before the Chapter 13 Case Equal to Almost $65,000.
The decrease in value of equipment from 2011 to the chapter 13 filing was $64,916. The only explanation in the record that addresses this decline in value is the reference to an expected sale of $43,500 worth of equipment in the December 31, 2010, balance sheet. [ECF No. 27-7, Exh. 3.] Derek testified that the equipment was sold prior to the chapter 13 petition date [ECF No. 27-6 at 96], but he did not provide the date of the sale, the amount of any proceeds, or link the proceeds of the sale to a payment made to Farm Credit.
The Tingles have not supported the existence of the alleged sale, so there is an unexplained and undocumented loss of equipment of $64,916. This is a material amount.
b. The Tingles Have Adequately Explained the Decreased Value of Equipment After the Chapter 13 Case.
The decline in equipment value after the chapter 13 was $139,750. The loss of value between the bankruptcy cases is sufficiently explained. The Tingles auctioned most of their remaining farm equipment on April 4, 2016, for a gross price of $84,088.25. [Moore Affidavit, Exh. 10.] A comparison of the equipment identified in the chapter 13 schedules with the auction records shows that all equipment was auctioned except a few items valued on the schedules at $12,500. [Compare Chapter 13, ECF No. 133 at 4 with Moore Affidavit, Exh. 10.] Derek also testified that several pieces of unsold equipment valued at $3,500 fell into disrepair. [ECF No. 42 at 4, ¶ 5.]
Therefore, the unexplained decrease in value of the equipment between the bankruptcy cases is approximately $9,000. This amount is not considered material.
c. The Tingles Have Not Explained Losses from Cattle of Over $114,000.
The Tingles have provided some information supporting the $198,200 decrease in the value of cattle from 2011 to the chapter 13 filing. Derek testified that approximately one-third of his cattle died in 2011 and 2012. [ECF No. 42 at 4, ¶ 3.] One third of the value of cattle at the beginning of 2011 explains approximately $66,000 ($198,200 x 1/3) of the loss of value of the cattle.
Derek also testified that he transferred some cattle to his father in 2012 in exchange for his parents' help paying expenses. [ECF No. 27-6 at 42.] The Tingles produced checks showing Derek's parents paid $17,250 in expenses from February 1, *4062013, through January 14, 2014. [ECF No. 42 at 13-16.] Accepting these explanations as true, the Tingles have explained $83,250 of the $198,200 loss in value of cattle. This still leaves $114,950 of the decline unaccounted for.
The only other information that explains the loss is Derek's testimony that he sold some cattle to stockyards. [ECF No. 27-6 at 40.] He also testified that any proceeds from sales of cattle, less proceeds used for production expenses, went to pay Farm Credit. [ECF No. 27-2 at 129-30.] But Derek did not provide any record of the sales or link any payments to the proceeds of such sales. Further, Schedule F to his federal tax returns from 2011 and 2012 does not identify any money received from livestock sales. [ECF No. 27-2 at 689, 694.]
Based on this, the Tingles have failed to explain a $114,950 decline in the value of their cattle. The unexplained decline is material in amount and as a percentage of the beginning cattle value on the balance sheet (58%).
d. The Tingles Have Not Explained Losses from Tobacco of $17,992.
The decrease in the tobacco value from 2011 to the chapter 13 petition date was $148,750. On January 18, 2012, the Tingles received $79,955 in crop insurance proceeds, with a net distribution of $74,534.08. [ECF No. 27-2 at 209; ECF No. 28 at 23, n.4.] The record also shows the Tingles received $50,803.07 for 28,239 pounds of tobacco from Philip Morris between November 29, 2011, and January 10, 2012. [ECF No. 28 at 21-22.]
Derek testified that 2011 and 2012 were drought years. [ECF No. 42 at 5, ¶ 7.] This testimony might account for some portion of the resulting lost tobacco value. But the Tingles have provided no evidence to account for how much of this loss in tobacco value is attributable to a drought.
Giving credit for these factors leaves an unexplained decline in the value of the tobacco of $17,992, 12% of the beginning value on the balance sheet. The unexplained decline is possibly material on its own, but it has increased significance based on the previously described fluctuations. Therefore, records and an explanation are required. None were provided.
5. The Tingles Have No Financial Records or Explanations to Account for Lost Collateral Worth Nearly Two-Thirds of the Total Debt to Farm Credit.
The above analysis confirms that the Tingles have no records to explain a loss of value of collateral of almost $198,000 ($64,916 equipment; $114,950 cattle; $17,992 tobacco). Farm Credit claims its debt exceeds $315,000, so the unexplained losses are almost two-thirds of the obligation. This is a material amount that requires documentation and explanation pursuant to § 727(a)(3) and (a)(5).
The above analysis shows the Tingles received the benefit of the doubt wherever possible. Other information was also considered to see if the question should survive the request for summary judgment. For example, there are multiple deposits into Derek's checking account between 2012 to 2016 that could reflect some sale proceeds. But Derek did not identify any sale proceeds in the deposits. [ECF No. 27-2 at 171-175; see also ECF No. 42 at 5, ¶ 6.] Similarly, the Tingles did not trace any payments to Farm Credit in 2011 as a means of documenting and explaining the losses. [See Moore Affidavit, Exh. 13.]
The Tingles also argue that the loan officer assigned the monetary values used for the assets in the December 31, 2010 balance sheet and the amounts are wrong. [See ECF No. 41 at 3.] It is impossible to determine if any difference is material because the Tingles did not provide information *407to show the true value of the assets identified in the December 31, 2010 balance sheet.
The Tingles have not offered sufficient financial records or other evidence to justify the failure to keep, preserve and produce records. They have also failed to sufficiently explain the losses beyond general possibilities that provide little or no detailed information. Therefore, the Tingles have not met their burden. See FED. R. CIV. P. 56(e)(3) ; see also Iberiabank v. Yocum (In re Yocum), 488 B.R. 748, 754-58 (Bankr. N.D. Ala. 2013) (granting summary judgment to the plaintiff pursuant to § 727(a)(3) because the burden had shifted to the debtor to explain why he did not keep records, and the debtor did not offer any evidence); Chusid v. First Union Nat'l Bank, Civil Action No. 97-4134, 1998 WL 42292, at *3-6, 1998 U.S. Dist. LEXIS 479, at *11-17 (E.D. Penn. Jan. 21, 1998) (affirming summary judgment on § 727(a)(5) and holding that generalized explanations of losses without documentation are unsatisfactory).
Farm Credit is entitled to judgment on its request to deny discharge pursuant to § 727(a)(3) and (a)(5).
IV. CONCLUSION.
Farm Credit has demonstrated that there are no genuine disputes as to material facts, and it is entitled to judgment as a matter of law, pursuant to § 727(a)(3) and (a)(5). Farm Credit has not proven that it is entitled to judgment as a matter of law on the remaining claims. A judgment will be entered in conformity with this opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501806/ | SHON HASTINGS, JUDGE
I. INTRODUCTION
Bankruptcy Trustee Kip M. Kaler filed a Complaint alleging Debtors/Defendants Darrell H. and Susan M. Vasvick's transfer of real property located at 1509 17th Street South, Fargo ("the Property")1 to their son, Defendant Justin Vasvick, resulted in unjust enrichment warranting the imposition of a constructive trust on the Property (Count I). Doc. 1. The Trustee also seeks a declaratory judgment: (1) ruling that Debtors, who have resided in the Property since 1976, retained the equitable interest in the Property despite transferring the legal interest to their son, and (2) finding that the Property is property of the bankruptcy estate (Count III). Id. Additionally, the Trustee seeks turnover of the Property (Count IV). Id. In the alternative, the Trustee alleges that Debtors "performed or caused to be performed $24,041.96 worth of improvements to the Property" he claims are avoidable as fraudulent transfers under 11 U.S.C. § 548 (Count II). Id.
Defendants filed an Answer, claiming the Trustee failed to state a cause of action for which relief may be granted and asserting that the Trustee's claims are barred by the applicable statute of limitations. Doc. 4.
On March 1, 2018, Defendants filed a Motion for Partial Summary Judgment that the Trustee opposed. The Court found that evidence offered by the Trustee relating to transactions between the parties after Debtors transferred the Property to Justin Vasvick raised questions of fact bearing on the elements of unjust enrichment and whether imposition of a constructive trust is an appropriate remedy. Doc. 28. The Court also found the Trustee's claims were not barred by the statute of limitations the Defendants asserted as a defense. Id. Consequently, the Court denied Defendants' motion. Id.
At the request of the parties, the Court bifurcated the Trustee's claims. Specifically, it continued trial on the fraudulent transfer claim, and the parties tried Counts I, III and IV to the Court on May 15 and 16, 2018. For the reasons discussed below, the Court finds in favor of Defendants and dismisses Counts I, III and IV of the Complaint. The Clerk shall schedule *410a status conference to discuss scheduling a trial on Count II.
II. BACKGROUND
Debtors purchased the Property in 1976 and have lived there ever since. In 2005, Debtors refinanced the debt secured by the Property and granted a mortgage to Popular Finance Services in the sum of $186,400. Ex. T-4. Wynn Appraisals, Inc. performed an appraisal at the time of refinance and estimated that the value of the Property was $233,000 in June 2005. Ex. T-1. Assuming the appraisal was accurate, Debtors held $46,600 in equity in the Property in 2005.
In 2006, Debtors began experiencing financial difficulties associated with a business they owned, 3-D Printing. In 2006 or early 2007, the business ceased operations. Darrell Vasvick and two other individuals owed over $500,000 to the Small Business Administration. After 3-D Printing went out of business, Darrell Vasvick was unemployed for eight months.
At about the same time, Debtors determined they could not afford to stay current on their monthly mortgage payments on the Property. They began talking about moving their residence to a Minnesota lake home they owned with Susan Vasvick's brother and his wife, Steve and Pam Zinniel.2 Defendants claim Justin Vasvick overheard Debtors' conversation about moving to the lake home and approached them about purchasing the Property.3
On April 30, 2007, Debtors conveyed the Property to Justin Vasvick via warranty deed. SUF ¶ 4, 5. On the same day, Justin Vasvick executed a note promising to repay Homecoming Financial, LLC the sum of $205,000, the appraised value of the Property.4 To secure the note, Justin Vasvick granted Homecoming Financial, LLC a mortgage against the Property. Justin Vasvick paid $210,105.82 for the Property, including $5,105.82 in settlement charges. SUF ¶ 4. Debtors used the proceeds they received to satisfy the existing balance of their mortgage on the Property, which totaled approximately $194,000 at the time of transfer.5 SUF ¶ 6. The Cass County Recorder recorded a "Satisfaction of Mortgage" on May 25, 2007. Ex. T-5.
Despite selling the Property to Justin Vasvick, Debtors continued to live at the Property.6 According to Defendants, Debtors *411and Justin Vasvick negotiated an oral rental agreement. Under the terms of the purported agreement, Debtors agreed to pay Justin Vasvick $1,500 per month for rent because this sum was close to the sum of Justin Vasvick's mortgage payment plus taxes, mortgage insurance and homeowner's insurance. Defendants also considered $1,500 to be "fair rental value" based on advertisements of homes and apartments for rent in the Forum of Fargo-Moorhead, the local newspaper.
According to Darrell Vasvick, Debtors could not afford to pay the full $1,500 rent payment at the beginning of Defendants' agreement. If Debtors were unable to make the full rent payment in any month, Justin Vasvick accepted the sum Debtors could afford with the understanding that Debtors would pay the remaining balance due sometime in the future. Defendants did not keep a contemporaneous written accounting of arrearages owed.7
This oral agreement continued until November 2013 when Debtors entered into a written lease agreement with Justin Vasvick and his wife, Jessica Vasvick. Ex. T-20. The written lease is a month-to-month periodic tenancy requiring Debtors to pay rent of $1,300 per month. Debtors were still paying $1,300 per month in rent pursuant to the terms of the written lease at the time of trial.
The parties offered extensive records and testimony regarding the history of rent and promissory note payments on the debt secured by the Property.8 From May to December 2007 (with the exception of August), Debtors paid Justin Vasvick $500 per month for rent because they could not afford to pay the entire $1,500 per month. Exs. T-23, T-25. In 2008, Debtors paid Justin Vasvick $1,604.00 for January rent; $1.626.26 for April rent; and $1,628.32 in October and November. Exs. T-23, T-25. Debtors paid Justin Vasvick's lender $1,628.32 in December 2008. In 2009 and 2010, Debtors paid rent to Justin Vasvick for most months,9 writing checks in sums ranging from $1,578.49 to $1,692.67 per month. Ex. T-23. Justin Vasvick recalled making the payments to his lender from 2007-2010, though he provided documentation of only four checks that he personally signed. See Ex. T-25 pp. 200, 201, 203, 205.
Beginning in 2011, the bank statements show a general pattern in which Darrell Vasvick transferred funds by writing a check from Debtors' checking account to the joint checking account he held with Justin Vasvick at State Bank & Trust (the "Joint Account"). Exs. T-27, T-26. Darrell Vasvick then paid Justin Vasvick's mortgage lender from the Joint Account.10 Ex. T-27. As before, these payments included *412the promissory note payment, taxes, mortgage insurance and homeowner's insurance. Defendants maintained this arrangement until May 2013, when Darrell Vasvick began paying the lender directly by writing checks from Debtors' checking account or electronically transferring funds from Debtors' checking account to the lender. Ex. T-23. Darrell Vasvick continued this practice until September 2016, when Justin and Jessica Vasvick decided to stop using the Joint Account for rent and promissory note payments. See Ex. T-23. Instead, Justin and Jessica Vasvick began using the Joint Account for savings and emergency purposes only.
In October 2016, Justin Vasvick and Darrell Vasvick opened a new joint account at Gate City Bank. Ex. T-30. From October 2016 to May 2018, Darrell Vasvick transferred $1,300 each month from Debtors' checking account to the new joint account at Gate City Bank. In November 2016, either Darrell Vasvick or Justin Vasvick made arrangements for monthly automatic electronic payments from the new joint account to Justin Vasvick's lender. Ex. T-30.
Defendants admitted that Debtors rarely paid Justin Vasvick the exact amount owed under the terms of either the verbal rental agreement or the written lease until after October 2016. Instead, Debtors typically paid the exact amount due under the promissory note secured by the Property. For example, from August 2013 to February 2014, Darrell Vasvick made monthly payments of $1,589.73 from Debtors' checking account directly to Wells Fargo rather than paying Justin Vasvick the sum Debtors owed him under the terms of their agreements ($1,500 prior to November 2013 and $1,300 after November 2013). See Exs. T-23, T-26.
In May 2014, Justin Vasvick made arrangements with a new lender to refinance his debt secured by the Property, which totaled $204,000 in May 2014. Under the terms of the new promissory note, Justin Vasvick's lender charged a lower interest rate and eliminated charges for private mortgage insurance, resulting in a lower monthly payment of $1,119.47. After Justin Vasvick refinanced the debt, Darrell Vasvick began paying the new lender $1,119.47 per month, the exact amount of the note payment rather than paying Justin Vasvick the $1,300 per month required by the written lease. Exs. T-26, T-23.
From May 2007 (the month after Debtors sold the Property to Justin Vasvick) to May 2018, Debtors paid a total of $164,035.83 in rent. In addition to rent, Debtors occasionally paid real estate taxes and homeowner's insurance directly, even though the rent payment supposedly included these expenses.11 Debtors also typically paid expenses necessary to maintain the property, and they incurred significant expenses on major repairs and renovations. In 2015 and 2016, Debtors paid Rokke Construction a total of $23,302.96 for repairs to the deck and roof. Exs. T-22, T-28 p. 591. In 2015, Debtors spent $9,680 on carpet, materials and installation to replace carpet their dog ruined. Exs. T-23, T-21, T-28 at 606. In summary, Debtors spent a total of $200,746 related to the *413Property from May 2007 to May 2018, itemized as follows:
• $164,035.83 rent
• $263.21 real estate taxes (See n.12)
• $3,464.00 homeowner's insurance (2015 and 2016)
• $32,982.96 repairs and renovations
While the parties offered extensive records of the payments Debtors made related to the Property, the record does not include documentation of all of Justin Vasvick's payments. For example, the Court received written documentation substantiating only six payments Justin Vasvick made to the mortgage company for the years 2007 through 2010. Ex. T-23. Justin Vasvick testified that he made all the payments during those years, however. Additionally, trial exhibits and summaries show that the large majority of these payments were made. See Exs. T-10; D-142, D-143. Justin Vasvick still owns the Property, and there is no evidence Justin Vasvick has ever missed a payment or otherwise defaulted on his mortgage-related debt.
Despite the rental agreement and the "rent" payments Debtors made to Justin Vasvick or his lender, Justin Vasvick did not claim rental income on his federal income tax return for any of the years 2007 through 2016. Ex. T-8 through T-17. He claimed the mortgage interest deduction every year, however. Id.
The Trustee also highlighted evidence showing that Justin Vasvick violated his mortgage agreement by renting the Property to his parents. On May 23, 2014, Justin and Jessica Vasvick initialed a document titled "Second Home Rider," which provided:
Borrower and Lender further covenant and agree ...:
6. Occupancy. Borrower shall occupy, and shall only use, the Property as Borrower's second home. Borrower shall keep the Property available for Borrower's exclusive use and enjoyment at all times, and shall not subject the Property to any timesharing or other shared ownership arrangement or to any rental pool or agreement that requires Borrower either to rent the Property or give a management firm or any other person any control over the occupancy or use of the property.
8. Borrower's Loan Application. Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower's knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to Provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower's occupancy of the Property as Borrower's second home.
Ex. T-7, p. 117.
When Justin Vasvick sought to refinance his debt totaling $204,000 in 2014,12 the lender obtained an appraisal of the Property. According to First Look Appraisals, the value of the Property as of April 21, 2014, *414was $255,000.13 Therefore, it appears that the Property increased $50,000 in value, and Justin Vasvick acquired $51,000 in equity, from February 2007 to April 2014. At the end of 2017, the principal balance of the debt secured by the Property totaled $186,980.92. Ex. T-18. The Court did not receive evidence of the current value of the Property.
Debtors filed for relief under Chapter 7 of the Bankruptcy Code on December 15, 2016. Doc. 1.
III. ANALYSIS
The Trustee seeks a determination that Debtors' transfer of the Property to Justin Vasvick as well as the ongoing transactions between Defendants related to the Property show Justin Vasvick was unjustly enriched. He requests the Court to impose a constructive trust on the Property.14
The Trustee's unjust enrichment claim is governed by North Dakota law. See In re Falzerano, 454 B.R. 81, 85 (8th Cir. BAP 2011) (citing In re Wade, 219 B.R. 815, 821 (8th Cir. BAP 1998) ). "Unjust enrichment is an equitable doctrine applied in the absence of a contract and used to prevent one person from being unjustly enriched at another's expense." Schroeder v. Buchholz, 2001 ND 36, ¶ 14, 622 N.W.2d 202, 206-07 (citations omitted); Lord & Stevens, Inc. v. 3D Printing, Inc., 2008 ND 189, ¶ 9, 756 N.W.2d 789, 792 (quoting Ritter, Laber and Assocs., Inc. v. Koch Oil, Inc., 2004 ND 117, ¶ 26, 680 N.W.2d 634 ). In other words, the " 'essential element in recovering under a theory of unjust enrichment is the receipt of a benefit by the defendant from the plaintiff which would be inequitable to retain without paying for its value.' " Schroeder, 2001 ND 36 at ¶ 14, 622 N.W.2d 202 (quoting Zuger v. North Dakota Ins. Guar. Ass'n, 494 N.W.2d 135, 138 (N.D. 1992) ). Accordingly, "[e]ven when a person has received a benefit from another, that person is liable only if the circumstances of the receipt or retention are such that, as between the two persons, it is unjust to retain the benefit." Ritter, Laber and Assoc., Inc., 2004 ND 117 at ¶ 26, 680 N.W.2d 634 (quoting Apache Corp. v. MDU Res. Grp., Inc., 1999 ND 247, ¶ 14, 603 N.W.2d 891, 895 ).
To prove unjust enrichment, the Trustee must establish the following elements:
1. An enrichment; 2. An impoverishment; 3. A connection between the enrichment and the impoverishment; 4. Absence of a justification for the enrichment and impoverishment; and 5. An absence of a remedy at law.
*415Schroeder, 2001 ND 36 at ¶ 15, 622 N.W.2d 202 (quoting Apache Corp., 1999 ND 247 at ¶ 13, 603 N.W.2d 891 ); Markgraf v. Welker, 2015 ND 303, ¶ 23, 873 N.W.2d 26, 34.
The Trustee claims Justin Vasvick received the transfer of the home and the benefit of all the payments, taxes, insurance, maintenance and repairs Debtors paid. He also maintains that Justin Vasvick received additional benefits from this arrangement by neglecting to report rental income on his tax return and acquiring equity in the home due to debt payment and the increase in the value of the Property between May 2007 and the date of trial. He argues that Defendants' rental agreements-both oral and written-were a "shell game" designed to protect their home from creditors. Doc. 38 at 14.
Beginning with the transfer of the Property from Debtors to Justin Vasvick in 2007, the Trustee points to a lack of evidence regarding the disposition of $11,000 in equity and speculates that Justin Vasvick used these funds to pay "closing costs and monthly mortgage payments." Doc. 38 at 6; see also Doc. 39 at 3 n.2. The evidence shows Debtors conveyed the Property to Justin Vasvick via warranty deed on April 30, 2007. SUF ¶ 4, 5. On the same day, Justin Vasvick executed a note promising to repay Homecoming Financial, LLC the sum of $205,000, the appraised value of the Property. To secure the note, Justin Vasvick granted Homecoming Financial, LLC a mortgage against the Property. Justin Vasvick paid $210,105.82 for the Property, including $5,105.82 in settlement charges. Debtors used the proceeds they received to satisfy the existing balance of their mortgage on the Property, which totaled approximately $194,000 at the time of transfer. The parties provided no documentary evidence of the disposition of the $11,000 of equity in the Property at the time of the transfer, but Darrell Vasvick and Justin Vasvick testified that the $11,000 benefited Debtors either through the payment of sale costs or profit to Debtors. The Court finds this testimony more credible than the Trustee's speculation that Justin Vasvick received the funds.
Applying the first two elements of the unjust enrichment claim, the Court finds that Justin Vasvick was both enriched by acquiring legal title to the Property and equally impoverished by incurring the legal obligation to pay the promissory note he signed. At the same time, Debtors were impoverished by the initial transfer because they transferred legal ownership to the Property and were equally enriched by satisfaction of their outstanding mortgage balance and receipt of the fair market value of the Property. The Trustee did not meet his burden of showing that Justin Vasvick was enriched or that Debtors were impoverished by the transfer of the Property in April 2007.
The Trustee also argues that the transactions between Justin Vasvick and Debtors between May 2007 and May 2018 show Justin Vasvick was unjustly enriched. Specifically, the Trustee asserts that, beginning in May 2007, Debtors made all payments related to the Property and incurred "all incidences and burdens of ownership while retaining none of the benefit." Doc. 38 at 15. Justin Vasvick, on the other hand, acquired equity in a home "for which he has contributed nothing to improve the value." Doc. 38 at 14. Accordingly, the Trustee argues Debtors were impoverished and Justin Vasvick was enriched by the transactions related to the Property.
The evidence shows that Debtors made numerous payments related to the Property, including the promissory note installment payments together with real estate taxes, mortgage insurance and homeowner's *416insurance (which the Defendants characterize as rent), some real estate taxes and insurance (in addition to those included in the "rent" payments), regular maintenance and major repairs and renovations to the Property including new carpet and repairs to the roof and deck. While Debtors spent money on these items, this financial loss does not necessarily translate to impoverishment as the Trustee suggests. The Trustee's argument ignores the fundamental benefit Debtors received under the agreement-a place to live. According to the evidence at trial, $1,500 per month is a fair rental value of the Property.15 Therefore, the benefit of residing in the Property from May 2007 to May 2018 (130 months) is worth $195,000. If the Court reduces Debtors' benefit to reflect the "rent" to which Defendants agreed-$1,500 from May 2007 to October 2013 and $1,300 from November 2013 to May 2018-the benefit of residing in the Property totals $188,500.
The evidence shows that Debtors paid $200,746 for the benefit of living at the Property (including the cost of renovations and carpet replacement). The difference between either $195,000 or $188,500 and $200,746 ($5,746 or $12,246) is not the receipt of a benefit by Justin Vasvick from Debtors that would be inequitable to retain without paying for its value. See Schroeder, 2001 ND 36 at ¶ 14, 622 N.W.2d 202. In other words, this disparity is not unjust enrichment justifying the imposition of a constructive trust against the Property in its entirety.16
The Trustee argues that Justin Vasvick realized other benefits that must be factored into the unjust enrichment analysis. For example, the Trustee maintains Justin Vasvick "should have received" $11,000 in equity when he sought a debt refinance in 2009, and Justin Vasvick held $50,000 in equity when he received a debt refinance in 2014. Doc. 38. He argues that these sums should be added to the enrichment calculation.
There are several flaws in the Trustee's argument that the $50,000 increase in the Property's market value (or Justin Vasvick's equity) between 2007 and 2014 is an impoverishment to Debtors. First, the Court received no evidence regarding the value of the property or the total debt against it as of May 2018. Consequently, Justin Vasvick's equity in the Property at the time of trial could be more or less than $50,000. Since enrichment and impoverishment are determined as of the time of trial, the Trustee's evidence is incomplete.
More importantly, the increase in the value of the Property is not a "benefit at the direct expense of" Debtors. See *417Apache Corp., 1999 ND 247 at ¶ 15, 603 N.W.2d 891 (citation omitted) (finding that plaintiff's loss "resulted from its use of a percentage of proceeds as a pricing factor in its agreements," not as a result of defendant's conduct). It is undisputed that Debtors owed more than $500,000 to the SBA in 2007. Darrell Vasvick testified that he was unemployed for months after 3-D Printing closed, and Debtors could not afford to make their mortgage payments. They sold their home to Justin Vasvick. With the transfer of the home, Debtors relinquished the opportunity to earn equity in the Property. For several months after the sale, Debtors did not pay $1,500 "rent" or even the sum of Justin Vasvick's installment payment because they could not afford to pay more than $500. The evidence shows that Justin Vasvick made (or ensured that Debtors paid) the installment payments on the promissory note secured by the Property, real estate taxes and insurance from May 2007 to May 2018. The evidence also shows that property values in Fargo generally increased in the last 10 years. Justin Vasvick benefited from this general increase in property values and the reduction in his debt against the home, but this benefit was not at the expense of Debtors. Debtors' sale of the Property to Justin Vasvick benefited both parties by allowing Debtors to live in a home they could not afford and by transferring property to Justin Vasvick that increased in value from 2007 to 2014.17 Consequently, the Court is not convinced that Justin Vasvick received the benefit of equity in the Property that would be inequitable to retain.
The Trustee also maintains that Justin Vasvick "should have received" $11,000 in equity when he sought a debt refinance in 2009. The Trustee offered no evidence that Justin Vasvick withdrew or received $11,000 in equity in 2009. He surmises that Justin Vasvick held equity in the Property based on the fact that the principle balance of his loan totaled $205,000 in 2007, and the sum of the refinanced note in 2009 totaled $217,745. He then speculates that, after closing costs of approximately $1,000, Justin Vasvick "should have received" $11,000 during the 2009 refinance process. Doc. 38 at 6. The Trustee offered no evidence in support of this theory. Justin Vasvick testified that he could not recall whether he received funds during the refinance process. The Trustee's speculation, without more, is not sufficient to influence the unjust enrichment analysis. Even if the Trustee had offered evidence that Justin Vasvick withdrew $11,000 in equity in 2009, the Court is not convinced that this benefit to Justin Vasvick impoverished Debtors. For the reasons stated above, Justin Vasvick did not receive the benefit of equity in the Property at Debtors' expense.
Likewise, the Court rejects the Trustee's suggestion that it must consider Justin Vasvick's failure to declare rental income on his federal income tax return as enrichment justifying the imposition of a constructive trust. While Justin Vasvick may have inappropriately benefited from neglecting to report rental income on his tax return, it was not a "benefit at the direct expense of" Debtors. See Apache Corp., 1999 ND 247 at ¶ 15, 603 N.W.2d 891.
Similarly, Justin Vasvick did not benefit at the direct expense of Debtors when he ignored the clause in the mortgage agreement he signed, prohibiting him from renting the Property. The Trustee argues *418Debtors' "rent" payments from May 2014 to the present should be subtracted from the overall benefit because Justin Vasvick was in breach of the Second Home Rider to the 2014 mortgage refinance. Doc. 39 at 6. The Trustee claims that because Justin Vasvick signed the Second Home Rider, indicating the Property was a second home and not a rental property, he should not be able to benefit from this "fraud against the mortgage company." Doc. 39 at 7. The Trustee argues: "If the Debtors lived in the home after the 2014 refinance, they should have been doing so rent free." Doc. 39 at 7. If Justin Vasvick benefitted by ignoring this agreement, it was to the detriment of his mortgage lender, not Debtors. There is no connection between Justin Vasvick's alleged enrichment arising from his decision to ignore the Second Home Rider and Debtors' impoverishment. See Schroeder, 2001 ND 36 at ¶ 15, 622 N.W.2d 202. The Trustee failed to meet this element of his unjust enrichment claim.
To be clear, the Court does not condone Defendants' conduct. Defendants' cumbersome and complicated efforts to make it appear as though Justin Vasvick made payments to his mortgage lender or to conceal the fact that Debtors made these payments raise suspicion. Likewise, Justin Vasvick's failure to report rental income and his failure to comply with the terms of his 2014 mortgage by allowing his parents to lease the Property give the Court pause. But the Court is not required to judge Defendants' credibility or intentions in the abstract. Rather, it must decide if the evidence shows whether Justin Vasvick was enriched at Debtor's expense. The Trustee did not meet this burden of proof.
The Court considered all the Trustee's other arguments and finds that they do not justify the imposition of a constructive trust on the Property.
IV. CONCLUSION
For the reasons stated above, IT IS ORDERED that the Trustee's causes of action under Counts I, III and IV of the Trustee's Complaint are dismissed with prejudice. The Clerk shall schedule a status conference to discuss scheduling a trial on Count II.
The legal description of the Property is: Lot 3, Block 3, replat of Harold A. Johnson's First Addition to the City of Fargo, Cass County, North Dakota.
Darrell Vasvick testified that Debtors moved to the lake home in 2007 and changed their permanent residence to Minnesota for tax purposes. According to Debtors, they lived at the lake home for only a short period of time. Due to the cost of gasoline and the amount of time they spent commuting to work, Debtors moved back to the Property shortly after Justin Vasvick purchased it.
The Trustee argued that Debtors and Justin Vasvick entered into an agreement providing that Justin Vasvick would purchase the Property from Debtors to protect the asset from creditors. Doc. 38 at 2, 8-9. To support this argument, he offered testimony from the Zinniels. Although uncertain about specific details, Pam Zinniel testified that "sometime in 2007 or 2008" Darrell Vasvick told her he put the house "in Justin's name" because he was having financial difficulty and, if he ever had to file bankruptcy, the house would be secure. Steven Zinniel testified that he recalled the conversation and reiterated Pam's account.
Carter G. Wynne with Wynn Appraisals estimated that the value of the Property was $205,000. The effective date of the appraisal was February 20, 2007. Ex. T-2.
The parties provided no evidence of the disposition of the $11,000 of equity in the Property at the time of the transfer, but Darrell Vasvick and Justin Vasvick testified that the full value inured to the benefit of Debtors either through the payment of sale costs or profit to Debtors.
Justin Vasvick also resided at the Property until 2014.
In preparation for trial, Defendants reviewed check blanks and bank statements to calculate the arrearage Debtors owed to Justin Vasvick. Defendants claim that Debtors were in arrears to Justin Vasvick from 2007 through 2014. By May 2018, Debtors paid the arrearage and were entitled to a credit on rent in the sum of $2,566.7 Ex. T-23.
The Court received check register data for some of the months between 2007 and 2010, bank statements from 2011 to the present and certain credit card statements. See Exs. T-25, 26, 28, 29, 30.
There is no evidence that Debtors paid rent to Justin Vasvick in August or November 2009, but Debtors made two rent payments in October 2009. In March 2009, Darrell Vasvick paid Justin Vasvick's lender directly. In 2010, Debtors paid rent to Justin Vasvick for every month except March. Exs. T-23, T-25.
Both Darrell and Justin Vasvick were signors on the Joint Account, but Justin Vasvick made the payments to the lender only three times from January 2011 to April 2013: March 2011, April 2011 and April 2012. Ex. T-27. Darrell Vasvick made the payments from the Joint Account for the remaining months. Ex. T-27.
Justin Vasvick reimbursed Debtors for some of these expenses. For example, Debtors paid $2,844.51 in real estate taxes on December 31, 2014 (check # 4466, cleared on January 1, 2015). Ex. D-127. Debtors also paid $3,030.70 in real estate taxes on December 30, 2015 (check # 4382, cleared on January 3, 2016). Ex. D-129. On May 12, 2015, Justin Vasvick deposited $3,712.00 into Debtors' checking account. Ex. T-26 at 362. On July 13, 2015, Justin Vasvick paid $300 to Debtors and, on April 26, 2016, he paid $1,600 to Debtors. Ex. T-26 at 375, 429.
SUF at ¶ 9. Justin Vasvick had previously arranged to refinance $217,745 in debt secured by the Property in 2009. SUF at ¶ 8; Exs. T-6, D-106. The Trustee observed that this debt figure is $12,745 more than the principal sum of the promissory note Justin Vasvick signed in 2007. Doc. 38 at 6. The Trustee suggests that, after closing costs of approximately $1,000, Justin Vasvick should have received $11,000 of the $12,745 in equity when he sought to refinance his debt. Justin Vasvick testified that he could not recall whether he received funds during the refinance process. The Trustee offered no evidence supporting his argument that Justin Vasvick should have received $11,000.
Christina Everett, a real estate appraiser with 15 years of experience in the Fargo-Moorhead market, testified at trial. She opined that the property market conditions in Fargo, North Dakota, in the last 10 years were "stable to increasing." Additionally, she testified that, in the past four years, property values (in general) increased.
In his Complaint, the Trustee pled a claim for constructive trust in Count I. See Doc. 1. A constructive trust is a remedy, not a cause of action. Sosne v. Fed. Dep. Ins. Corp., 2016 WL 775176, at *2 n.3 (E.D. Mo. 2016) ; St. Jude Med. S.C., Inc. v. Hanson, 2015 WL 2101055, at *6 (D. Minn. May 6, 2015) ; Secure Energy, Inc. v. Coal Synthetics, LLC, 2010 WL 1691184, at *3 (E.D. Mo. Apr. 27, 2010) ; Alliance Commc'ns Coop., Inc. v. Global Crossing Telcoms., Inc., 663 F.Supp.2d 807, 839-40, n.19 (D.S.D. 2009) ; Neher v. eBanker USA.Com, Inc., 2005 WL 1006417, at *18 (W.D. Mo. Apr. 1, 2005). The Trustee's factual allegations in the Complaint and the legal allegations in Count I are sufficient to plead a cause of action for unjust enrichment with a request for a constructive trust as a remedy.
The Trustee quibbles with Defendants' evidence regarding fair rental value, but he offered no evidence contradicting Darrell Vasvick's testimony that $1,500 per month was a fair charge for renting the Property in 2007 or any subsequent year.
A survey of North Dakota Supreme Court cases reveals that North Dakota courts typically award an equitable remedy to a plaintiff on an unjust enrichment claim involving real estate only when the defendant's enrichment and plaintiff's impoverishment is significant. See e.g., Paulson v. Meinke, 389 N.W.2d 798, 801-02 (N.D. 1986) (finding that a transfer of land for less than one-third the land's value, an "apparent windfall of nearly $60,000," was clearly unjust enrichment); Wildfang-Miller Motors, Inc. v. Miller, 186 N.W.2d 581, 586 (N.D. 1971) (finding enrichment and impoverishment where land was acquired for approximately 60-77% of market value); Schroeder v. Buchholz, 2001 ND 36, ¶¶ 16-19, 622 N.W.2d 202 (finding unjust enrichment would result from party's attempt to evict second party from land, where second party paid half the purchase price of the land, built a home on the land and jointly improved the land with the first party, but did not hold title).
Defendants' arrangement also burdened both Debtors and Justin Vasvick-Debtors paid "rent" and Justin Vasvick assumed the legal and personal responsibility to pay the debt secured by the Property, real estate taxes and homeowners insurance. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501808/ | Honorable Mike K. Nakagawa, United States Bankruptcy Judge
On October 30, 2018, a trial was conducted in the above-captioned adversary proceeding. The appearances of counsel were noted on the record.
After consideration of the evidence and arguments presented at trial, the court enters this Memorandum Decision, which constitutes the court's findings of fact and conclusions of law pursuant to FRBP 7052 and FRCP 52.
FACTUAL AND PROCEDURAL BACKGROUND
On June 15, 2017, a "skeleton" Chapter 13 petition was filed by Laura L. Faulkiner ("Debtor"). (ECF No. 1). Administration of the Debtor's Chapter 13 proceeding was assigned to panel trustee Kathleen A. Leavitt and the Debtor's meeting of creditors was scheduled for July 25, 2017. (ECF No. 4).
On July 18, 2017, Debtor filed her schedules of assets and liabilities ("Schedules"), Statement of Financial Affairs ("SOFA"), and other required information. (ECF No. 12). In response to Question 9 of the SOFA, Debtor disclosed that a lawsuit entitled Christopher Shults ("Plaintiff") v. Laura Faulkiner, Case No. A-16-734705-C ("State Court Action") was pending in the Eighth Judicial District Court, Clark County, Nevada ("State Court").2 On her Schedule "A/B," Debtor listed her current residence located at 6048 Tokara Avenue, Las Vegas, Nevada, as well as a variety of personal property assets. On her Schedule "C," she claimed all of the equity in her scheduled assets as exempt under Nevada *430law. Her meeting of creditors was concluded on July 25, 2017 (ECF No. 20), and no one objected to her claimed exemptions.
On September 25, 2017, Plaintiff commenced the instant adversary proceeding against the Debtor by filing a "Complaint for Determination of Dischargeability and Objecting to Debtor's Discharge Pursuant to Section 523 of the Bankruptcy Code ("Complaint").3 (AECF No. 1). Plaintiff alleges that the Debtor borrowed funds from him before the Chapter 13 proceeding was commenced and that the Debtor's personal liability for those funds is excepted from discharge under Sections 523(a)(2)(A) and 523(a)(2)(B).4
On November 22, 2017, Debtor filed an answer ("Answer") to the Complaint. (AECF No. 7).
On November 28, 2017, an order was entered confirming the Debtor's Chapter 13 plan. (ECF No. 36).5
On November 29, 2017, Debtor filed an amended answer to the Complaint. (AECF No. 9).
On February 21, 2018, Debtor filed a modified Chapter 13 plan. (ECF No. 38).6
On March 7, 2018, a joint discovery plan was filed, wherein the parties agreed that discovery would close by July 23, 2018. (AECF No. 11).
On March 30, 2018, an order was entered scheduling a pretrial conference for October 11, 2018, and a one-day trial for October 30, 2018. (AECF No. 12).
On May 25, 2018, an order was entered confirming the modified Chapter 13 plan. (ECF No. 47).7
On September 27, 2018, Plaintiff filed his trial statement ("Plaintiff Trial Statement"). (AECF No. 14).
*431On October 4, 2018, Debtor filed her trial statement (AECF No. 17).8
On October 8, 2018, Debtor filed an amended trial statement to correct the adversary case caption ("Debtor Trial Statement"). (AECF No. 20).
On October 11, 2018, the pretrial conference was completed.
THE EVIDENTIARY RECORD
Both the Plaintiff and the Debtor were subject to direct and cross-examination at trial. Prior to trial, Plaintiff provided a binder that included nine exhibits, but only Exhibit "7" consisting of Debtor's response to Plaintiff's request for admissions ("ROA")9 propounded in the State Court Action,10 was admitted at trial. Similarly, Debtor provided a binder that included seven exhibits, but only Exhibit "A" and Exhibit "F" were admitted at trial. Exhibit "A" consists of a copy of a transcript of the Debtor's deposition taken on April 18, 2017, in the State Court Action ("Depo Transcript")11 and Exhibit "F" consists of an email string between the parties on October 9, 2014, and another email on November 16, 2014.
*432The October 9, 2014, email is in two parts. The first part is from the Plaintiff to the Debtor and states as follows:
Laura
As you know it's been a year since the condo was purchased. I would like to know what your intentions are to either pay interest on the loan or purchase the property outright. As I recall we discussed an interest payment of $215 per month plus the reimbursement of the moving expenses I advanced.
Let me know what your thoughts are.
Chris
The second part of the October 9, 2014 email is from the Debtor to the Plaintiff and states as follows:
Hi Chris,
Your note caught me by surprise for a few reasons. Mostly because, as I (and others) recall, this was something we were going to deal with in two years, not one. Please be assured when I can, I will reimburse you, but it is not possible for me to do so at this time.
I won't go into details of my finances, which you were aware of last year. They really are not much better now. As you know, it helps when your house sells. I hope mine will do so in the spring. Meanwhile, I continue to have living expenses in Kansas, help support my mother, and help Janet with the kids' expenses. Jane and Emma still love coming to Vegas, and as long as I can afford to bring them, I will. You promised if I got the condo you would fly them out twice a year, but obviously things changed. This year I could only take them for spring break, which is still a wonderful gift to them and to Janet as it gives her a break. I have done the best I can with the limited resources I have. The condo is a luxury that I may have to do without someday. Until then, please don't dampen my joy unnecessarily. I appreciate everything you have done for me and my family.
You have moved on, and I wish you well. But some things are between you and me. The condo is one of them. We had lots of conversations about a lot of things. Again, I won't go into details. Life changes things. I promise to do my best to make it right when I can, just as you helped me when you could.
So those are my thoughts.
The November 16, 2014 email is from the Debtor to the Plaintiff and states as follows:
Chris,
There was never an agreement between us regarding funding the condo other than that I would pay you back sometime; most likely when I sold the condo. Details were bandied about, but nothing actually agreed upon. It was a loose, friend-to-friend transaction - everything to be determined in the future. To say otherwise, is simply not true.
I didn't come close to getting $5000 from my adjusted income tax returns. From the much smaller amount I received, Janet's fee was $450, which I paid immediately. The balance was used to pay the taxes I owed for the current tax year. We did not discuss that money going to you at all. The only comment about the amended returns was when you asked the receptionist to put my fee on your bill. She said she could not, but that you could pay it when I was billed. Again, that was a generous offer, but I did not ask (or expect) you to pay for it.
You clearly know what my financial situation has been and still is. I believed that knowledge and our friendship is why you helped me and my family until you took on Jana and her family to care for and help. I mention that because I feel Jana's resentment toward me is the *433reason you are pressuring me now. That does not mean you should come to me and expect immediate compensation for your previous generosity. You did what you could when you could. Thank you; I will do the same.
Furthermore, interest is not an issue as there was no agreement on interest at all. In fact, you totally resisted any conversation about interest and/or payback until now. Hopefully you will, in the future, reach a clear and firm agreement with people - like having a legal pre-nup, for instance - to avoid misunderstandings.
As I said earlier, I will let you know when I sell my house or the condo and am able to return the money you offered me so willingly. I suggest you accept that and leave me alone in the meantime.
Thank you.
Laura.
Other than the copies of the ROA response, Depo Transcript, and emails, no other written materials were admitted at trial.
APPLICABLE LEGAL STANDARDS
Under Section 1328(a), a Chapter 13 discharge is entered as soon as practicable after the debtor completes all payments required under the confirmed plan. Section 1328(a) also provides that the Chapter 13 discharge does not include debts of the kind specified, inter alia , under Section 523(a)(2). See 11 U.S.C. § 1328(a)(2).
Section 523(a)(2) excepts from discharge debts "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; [or]
(B) use of a statement in writing -
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive..."
11 U.S.C. § 523(a)(2) (A and B) (emphasis added).12
Unlike Section 523(a)(2)(B), the elements that must be proven by the objecting creditor under Section 523(a)(2)(A) are not set forth in the statute. The elements required under Section 523(a)(2)(A), however, have been established under case law. In this circuit, a claim for actual fraud under Section 523(a)(2)(A) requires a creditor to prove: "(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct." Turtle Rock Meadows, etc. v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000) (emphasis added). See Sachan v. Huh (In re Huh), 506 B.R. 257, 262 (9th Cir. BAP 2014).13 The "intent to defraud *434is a question of fact," and the "intent to deceive can be inferred from the surrounding circumstances." Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1018 (9th Cir. 1997).14
Where a creditor's claim under Section 523(a)(2) is based on a forbearance, the creditor must prove that "it had valuable collection remedies at the time it agreed to renew, and that such remedies lost value during the renewal period." See Stevens v. Nw. Nat'l Ins. Co. (In re Siriani), 967 F.2d 302, 306 (9th Cir. 1992) (claim brought under Section 523(a)(2)(B) ); Cho-Hung Bankv. Kim (In re Kim), 163 B.R. 157, 161 (9th Cir. BAP 1994), aff'd and adopted, 62 F.3d 1511 (9th Cir. 1995) (claim brought under Section 523(a)(2)(A) ). See, e.g., Hillsman v. Escoto (In reEscoto), 2017 WL 1075046 (9th Cir. BAP Mar. 21, 2017), aff'd, 713 Fed.Appx. 722 (9th Cir.), cert. denied, --- U.S. ----, 139 S.Ct. 321, --- L.Ed.2d ---- (2018) (creditor failed to meet burden of proving that he had valuable collection remedies at the time of undisclosed settlements and that the remedies lost value).
The plaintiff seeking a determination of nondischargeability under Section 523(a) bears the burden of proof by a preponderance of the evidence. See In re Slyman, 234 F.3d at 1085 ; In re Huh, 506 B.R. at 262.
DISCUSSION
There is no dispute that a condominium located at 3400 Cabana Drive, Unit 1020, in Las Vegas, Nevada ("Las Vegas Condo"), was acquired by the Debtor on or about October 10, 2013, for the purchase price of $73,500. There is no dispute that the Plaintiff provided the funds for that purchase, but that title to the Las Vegas Condo was only in the Debtor's name. There also is no dispute that in October 2013, Plaintiff provided another $5,000 to the Debtor ostensibly to furnish the Las Vegas Condo. There is no dispute that the purchase price was a loan from the Plaintiff to the Debtor, but there is a dispute as to whether the additional $5,000 was a loan or a gift.
There is no dispute that the Plaintiff and the Debtor were personally acquainted for many years before the acquisition of the Las Vegas Condo. There is no dispute that prior to providing the loan and the additional funds, Plaintiff had knowledge of certain real property assets of the Debtor located in Russell, Kansas, as well as certain personal property assets. There also is no dispute that prior to providing the loan and additional funds, Plaintiff had certain knowledge regarding the Debtor's financial circumstances and ability to acquire the Las Vegas Condo.
There is no dispute that the loan for the purchase price was not secured by a deed of trust against the Las Vegas Condo. There is no dispute that neither a promissory *435note nor a loan agreement was executed by the Debtor with respect to the loan nor to the additional funds provided by the Plaintiff. There is no dispute that neither the loan nor the additional funds have been repaid to the Plaintiff by or on behalf of the Debtor.
There is no dispute that the Plaintiff and the Debtor exchanged email messages regarding the loan and the additional funds on October 9, 2014, as well as on November 16, 2014. There is no dispute that Plaintiff subsequently requested repayment of the loan and additional funds. There is no dispute that on April 7, 2016, Plaintiff commenced the State Court Action to collect the loan and additional funds after his request was not met. There is no dispute that after the State Court Action was commenced, Debtor sold the Las Vegas Condo and used the proceeds towards the purchase of the property in which she currently resides. There is no dispute that after Plaintiff filed a motion for summary judgment in the State Court Action, Debtor commenced the instant bankruptcy proceeding.15
There is no dispute under the Debtor's confirmed modified Chapter 13 Plan, the unpaid amount of the loan and the additional funds would share pro rata from the limited funds available for payment of non-priority, general unsecured claims. See discussion at note 6, supra. There is no dispute that if Plaintiff prevails in this adversary proceeding, the Debtor's personal liability for the loan and perhaps additional funds will not be discharged even if she completes her Chapter 13 plan and the Plaintiff could continue to pursue collection from the Debtor's non-exempt property.16
Against this backdrop and limited documentary evidence, the court is presented with the testimony of two former friends who essentially accused each other of "misremembering" at best and misrepresenting the facts at worst.17 For example, Plaintiff testified that he had numerous discussions with the Debtor about her personal financial situation and ability to finance the purchase of the Las Vegas Condo, while the Debtor testified that the discussions never occurred. Likewise, Plaintiff testified that the parties reached an understanding *436about the repayment of the loan and additional funds, while Debtor testified that no such understanding was ever reached. Either someone's memory of the events is faulty, or someone's testimony is intentionally false.18 Resolution of this conflicting testimony, if necessary, may determine whether the Plaintiff has met his burden of proof of the elements required by Sections 523(a)(2)(A) or 523(a)(2)(B). As a threshold matter, however, the parties also dispute whether the Plaintiff is barred by the Statute of Frauds from attempting to collect the loan.
1. The Statute of Frauds.
Appropriate to the instant case, the original Statute of Frauds enacted under English law in 1677 was entitled "An Act for the Prevention of Frauds and Perjuries." See Restat 2d of Contacts, § Scope (2nd 1981), citing 29 Charles II, c.3. By requiring certain agreements to be memorialized in writing, the statute was designed to prevent fraud from being perpetrated through perjured testimony as to the existence and terms of an agreement. Thus, the primary purpose of the Statute of Frauds is evidentiary. See Restat 2d of Contracts, supra, § 132, comment a. ("The requirements of the Statute of Frauds, designed primarily to serve an evidentiary purpose, are less rigorous than those of the Statute of Wills, which is designed to serve cautionary and channeling purposes as well."); id. at § 132, comment a. ("The rule of this Section reflects the general assumption that the primary purpose of the Statute of Frauds is evidentiary, that it is not intended to facilitate repudiation of oral contracts."). Compare Restat 2d of Contracts, supra, § 130, comment a (The English Statute of Frauds applied to an action 'upon any agreement that is not to be performed with the space of one year from the making thereof.' The design was said to be not to trust the memory of witnesses for a longer time than one year, but the statutory language was not appropriate to carry out that purpose."). Except for Louisiana, a similar Statute of Frauds exists in every State, including Nevada, either through legislation or by judicial decision.19 See Restat 2d of Contracts, supra, § Scope.20
In Nevada, a specific Statute of Frauds exists for the creation of estates in land, see NRS 111.205, for land sale or lease contracts for periods longer than one year, see NRS 111.210, and for the assumption of liabilities by personal representatives of a decedent's estate. See NRS 147.230.21 A more general Statute of *437Frauds exists under NRS 111.220, which provides as follows:
In the following cases every agreement is void, unless the agreement, or some note or memorandum thereof expressing the consideration, is in writing, and subscribed by the person charged therewith:
1. Every agreement that, by the terms, is not to be performed within 1 year from the making thereof.
2. Every special promise to answer for the debt, default or miscarriage of another.
3. Every promise or undertaking made upon consideration of marriage, except mutual promises to marry.
4. Every promise or commitment to loan money or to grant or extend credit in an original principal amount of at least $100,000 made by a person engaged in the business of lending money or extending credit.
5. Every promise or commitment to pay a fee for obtaining a loan of money or an extension of credit for another person if the fee is $1,000 or more.
(Emphasis added). The "note or memorandum" required to satisfy the Statute of Frauds may consist of multiple writings that relate to the same transaction, see Restat 2d of Contracts, supra, § 132, and may be made or signed any time after the agreement is formed. See Restat 2d of Contracts, supra, § 136.
The Statute of Frauds is an affirmative defense that must be raised by the defendant in its answer to the plaintiff's complaint. See FED.R.CIV.P. 8(c)(1) ; NEV.R.CIV.P. 8(c). Affirmative defenses that are not raised in the defendant's answer, are deemed waived. See John R. Sand & Gravel Co. v. United States, 552 U.S. 130, 133, 128 S.Ct. 750, 169 L.Ed.2d 591 (2008) ; In re Adbox, Inc., 488 F.3d 836, 842 n.2 (9th Cir. 2007) ; The Mirage Casino-Hotel, LLC v. Eighth Judicial District Court, 2018 WL 3625673, at *2 (Nev. July 26, 2018) ; Hefetz v. Beavor, 397 P.3d 472, 477-78 (Nev. 2017).
Under Nevada law, a party whose breach of contract claim is barred by the Statute of Frauds is not without a remedy. Under a theory of unjust enrichment, the party may pursue a claim for legal restitution based on the common law concept of a "quasi-contract" between the parties. In Unionamerica Mortg. and Equity Trust v. McDonald, 97 Nev. 210, 626 P.2d 1272 (Nev. 1981), the Nevada Supreme Court explained:
The terms "restitution" and "unjust enrichment" are the modern counterparts of the doctrine of quasi-contract. Smith v. Smith, 95 Idaho 477, 511 P.2d 294 (1973). The purpose of quasi-contractual relief is to do justice to the parties regardless of their intention. Trollope v. Koerner, 106 Ariz. 10, 470 P.2d 91 (1970).
"The essential elements of quasi contract are a benefit conferred on the defendant by the plaintiff, appreciation by the defendant of such benefit, and acceptance and retention by the defendant of such benefit under circumstances such that it would be inequitable for him to retain the benefit without payment of the value thereof." Dass v. Epplen, 162 Colo. 60, 424 P.2d 779, 780 (Colo. 1967).
Unjust enrichment occurs whenever a person has and retains a benefit which in equity and good conscience belongs to another. L & A Drywall, Inc. v. Whitmore Const. Co. Inc., 608 P.2d 626 (Utah 1980).
*43897 Nev. at 212, 626 P.2d at 1273-74. See Wynn Las Vegas, LLC v. Tofani, 2017 WL 6541827, at *6 n.7 (Nev. Ct. of Appeals, Dec. 14, 2017).22 See also Pribyl v. Allstate Insurance Company, 2018 WL 4088015, at *6 (D.Nev. Aug. 27, 2018) ("[U]njust enrichment is a quasi-contract theory that applies only when there does not exist an express contract.").
In this instance, the Debtor did not raise the Statute of Frauds as an affirmative defense in her Answer to the Complaint.23 No pleading motions, nor summary adjudication motions were ever prosecuted in this adversary proceeding. Notwithstanding Debtor's apparent waiver of the affirmative defense, however, Plaintiff raised the Statute of Frauds in the trial statement that he filed on September 27, 2018. See Plaintiff Trial Statement at 9:25 to 11:3.24 He maintains that email messages exchanged with the Debtor on October 9, 2014, and November 16, 2014, see 5-7, supra, were sufficient to satisfy the Statute of Frauds. Id. at 10:26 to 11:3. Not surprisingly, Debtor argues that there was no written contract and that the only writings admitted into the record, i.e., the email messages, are insufficient to establish the terms of a binding contract. See Debtor Trial Statement at 5:12 to 7:15.
Because the absence of an enforceable written contract would not bar an alternative claim under Nevada law for restitution based on unjust enrichment, it is unnecessary to determine whether the email messages constitute a "note or memorandum thereof expressing the consideration" for an agreement between the parties. More important, the evidentiary purpose of the Statute of Frauds is not an overriding concern in this case: Debtor testified that she received the $73,500 loan as well as the additional $5,000 from the Plaintiff, that none of the funds were repaid, and that she intended to pay the Plaintiff back.
Thus, assuming the funds provided by the Plaintiff to purchase the Las Vegas Condo was a loan to the Debtor, rather than a gift, the question is whether that prepetition debt is excepted from discharge.
*4392. Application of Section 523(a)(2)(A) and Section 523(a)(2)(B).
The Complaint is framed as separate claims under Section 523(a)(2)(A) and Section 523(a)(2)(B). By its terms, a claim under Section 523(a)(2)(A) for money or an extension or renewal of credit obtained by false pretenses, false representations, or actual fraud, may not be based on a "statement respecting the debtor's financial condition." If the claim is based on such a statement, that statement must be made in writing under Section 523(a)(2)(B). Due to the structure of Section 523(a)(2), debts incurred on the basis of oral statements respecting the debtor's financial condition simply are not excepted from discharge. See Lamar Archer & Cofrin v. Appling, --- U.S. ----, 138 S.Ct. 1752, 1757 and 1764, 201 L.Ed.2d 102 (U.S. 2018).
In this case, the Complaint alleges that the Debtor made promises to repay the loan without the intention of ever repaying the loan. See Complaint at ¶¶ 24, 25. It also alleges that the Debtor made statements that she had sufficient resources to repay the loan. Id. at ¶ 30. The Complaint further alleges that the Debtor made additional promises to repay the loan that caused the Plaintiff to stall any collection efforts. Id. at ¶¶ 19, 24. Against these allegations, the court has considered the testimony of the parties and the documentary evidence admitted at trial. Based on these considerations, the court concludes that the Plaintiff has failed to meet his burden of proof under both Section 523(a)(2)(A) and Section 523(a)(2)(B).
At trial, Plaintiff testified that neither the loan, nor the additional funds, were a gift to the Debtor, and that he always expected to be repaid.25 He testified that none of the information he received from any source concerning the Debtor's assets, income, pension payments, Social Security benefits, or employment status, was incorrect or misrepresented in any fashion. Plaintiff attested, however, that when he provided the $73,500 to the Debtor, as well as the additional $5,000, the Debtor never had the intention to repay him. Not unexpectedly, Debtor denied this accusation, and testified at trial that she fully intended to repay the Plaintiff when she was able to do so.
Having considered the testimony of the witnesses at trial, in addition to the portions of the Depo Transcript cited and the response to the ROA, the court finds the Debtor's testimony to be credible. Although the court is not impressed that the Debtor would throw her state court counsel under the bus for allegedly providing an inaccurate or unauthorized response to ROA No. 3, the court concludes that the Debtor's trial testimony is not inconsistent with her deposition testimony and email correspondence to the Plaintiff. Debtor candidly acknowledged that she considered the possibility that the Plaintiff might not expect to be repaid when he provided the funds for the Las Vegas Condo, but that she nonetheless intended to repay him back when she was able to do so. Although commencement of even de minimus monthly payments to the Plaintiff might have bolstered the Debtor's testimony, even the Plaintiff testified that neither of the parties contemplated any repayment before one year. Under these circumstances, the court concludes that the Debtor intended to repay the loan and did not have an intent to deceive the Plaintiff at the time the loan was made.26 Plaintiff's claim under Section 523(a)(2)(A) therefore lacks merit.
*440Plaintiff's claim under Section 523(a)(2)(B) fares no better. Because the Plaintiff also testified that he received nothing in writing before the loan was made in October 2013, and nothing in writing about the loan before the emails in October and November 2014, there can be no doubt that the loan and additional funds were not "obtained by" the use of a written statement that was materially false. Because the Plaintiff concedes that any information he received respecting the Debtor's financial condition was not incorrect nor misrepresented, he also has not met the first element required under the statute, i.e., that he was provided materially false information. Moreover, Plaintiff also testified that the information he had respecting the Debtor's financial condition may have been obtained through his personal observations of the Debtor's assets and knowledge gleaned from personal experience. There is no suggestion that the Debtor caused this information to be made in writing or published to the Plaintiff, much less with the intent to deceive. Plaintiff's claim under Section 523(a)(2)(B) therefore lacks merit.
But Plaintiff also alleges that the Debtor made additional, subsequent deceptive statements of her intent to repay so as to prevent the Plaintiff from taking steps to collect the funds. As previously noted, Plaintiff's own testimony was that repayment was to begin one year after the loan was made. Because the loan was provided on October 10, 2013, when the Las Vegas Condo was purchased in the Debtor's name, the repayment period would have begun no earlier than October 10, 2014, according to the Plaintiff's own testimony. Moreover, Plaintiff testified that if the entire loan amount was not paid, then monthly interest payments of $215 were to commence.
To prevail on a forbearance theory, the Plaintiff must prove by a preponderance of the evidence that he had valuable collection remedies at the time the Debtor made any additional deceptive statements, and that his collection remedies lost value during the forbearance period. See discussion at 8, supra. In this instance, the evidence establishes that the repayment period for the subject loan commenced no earlier than October 10, 2014, and the forbearance period ended no later than April 7, 2016, when the Plaintiff commenced the State Court Action.
During that period, there is no dispute that the Plaintiff was never on title to the Las Vegas Condo, that he never received a deed of trust against the property to secure repayment of the funds, and that he never obtained a judgment against the Debtor. There is no suggestion that the Plaintiff had a lien against any other real property owned by the Debtor, nor that he obtained a security interest, perfected or unperfected, against any personal property of the Debtor. Absent a deed of trust, Plaintiff could not pursue a non-judicial foreclosure of the Las Vegas Condo. Likewise, he could not pursue a non-judicial foreclosure sale of any other real property owned by the Debtor. Absent a judgment in his favor in the State Court Action and recordation of a judicial lien against the *441Las Vegas Condo, Plaintiff also could not seek an execution sale of the Las Vegas Condo even if the Debtor failed to claim Nevada's $550,000 homestead exemption under NRS 115.010. Likewise, absent any judgment in the State Court Action or from any other court of competent jurisdiction, Plaintiff could not record a judgment against any other real property of the Debtor and then seek an execution sale.
Similarly, absent a lien or security interest in the Debtor's personal property, Plaintiff would have been required to obtain a judgment in the State Court Action and then pursue execution of the judgment under Nevada law. In addition to the Nevada homestead exemption, Debtor could claim the exemptions available under NRS 21.090(1). If the Debtor has any non-exempt assets available to satisfy a judgment, the value of any collection remedies could be established.
In this case, however, Plaintiff has not offered sufficient evidence to establish the value of any collection remedies that may have existed at the time of any of the additional deceptive statements allegedly made by the Debtor. Even if the November 16, 2014 email is sufficient to establish an intentionally deceptive statement that caused Plaintiff to forbear from immediately pursuing an available collection remedy, he has offered no evidence sufficient to establish the amount he could have collected at that time. Without that benchmark, the court has no basis on which to determine that the Plaintiff's remedies lost value during the forbearance period. Obviously, the unpaid total amount of the original loan and additional funds establish a ceiling for the Plaintiff's claim, but it does not establish the amount of the collection value that was lost. Moreover, while the Plaintiff intimated that the Debtor gave repeated, deceptive assurances that she would repay, neither the dates on which the assurances were given, nor the value of the available collection remedies on those dates, has been established. Thus, even on a forbearance theory, Plaintiff has failed to meet his burden of proof under both Section 523(a)(2)(A) and Section 523(a)(2)(B).
CONCLUSION
Because the parties agree that the Plaintiff provided $73,500, plus an additional $5,000 to the Debtor to purchase and furnish the Las Vegas Condo, and that none of those amounts were repaid, it is not necessary to apply the Statute of Frauds. Moreover, even if the Statute of Frauds was not waived and is applied in this proceeding, an unjust enrichment claim for restitution on a quasi-contract theory could still be pursued without necessity of a writing.
The evidence presented at trial, however, was insufficient to meet the Plaintiff's burden of proof under both Section 523(a)(2)(A) and Section 523(a)(2)(B). Plaintiff failed to demonstrate by a preponderance of the evidence that the Debtor had the requisite intent to deceive under either exception to dischargeability of debt. Moreover, Plaintiff failed to prove that he had any valuable collection remedies at the time of any subsequent nondischargeable conduct by the Debtor, or that any such collection remedies lost value.
Therefore, a judgment will be entered dismissing this adversary proceeding with prejudice. Each party shall bear their own attorney's fees and costs.
The court takes judicial notice of the docket in the State Court Action pursuant to FRE 201. See Burbank-Glendale-Pasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998) (taking judicial notice of court filings in a state court case where the same plaintiff asserted similar and related claims); Hott v. City of San Jose, 92 F.Supp.2d 996, 998 (N.D. Cal. 2000) (taking judicial notice of relevant memoranda and orders filed in state court cases).
Although the title of the Complaint states that the Plaintiff is objecting to the Debtor's discharge, the prayer of the Complaint does not do so. Instead of seeking to deny the Debtor a discharge of all debts, the Complaint seeks only a determination that her debt to the Plaintiff will not be discharged by her bankruptcy.
The Complaint seeks a determination of dischargeability solely under Section 523(a)(2). Thus, Plaintiff does not allege, nor has he offered evidence, that the Debtor's obligations are excepted from a Chapter 13 discharge based on larceny, embezzlement, or defalcation by a fiduciary under Section 523(a)(4), nor that they are the product of willful or malicious injury under Section 1328(a)(4).
The Chapter 13 plan that was initially confirmed provided that over a five-year period, the Debtor will pay a total of $16,764, as well as contribute the non-exempt portion of any tax refunds from 2017 through 2021, to the Chapter 13 trustee for distribution to creditors. That Plan estimated that the amount of $10,476 will be available for payment of non-priority, general unsecured claims.
The modified Plan provides that over a five-year period, the Debtor will pay a total of $17,726, as well as contribute the non-exempt portion of any tax refunds from 2017 through 2021, to the Chapter 13 trustee for distribution to creditors. It also provides an estimate of $5,000 in additional administrative expenses for representation by her attorney in the instant adversary proceeding. Due to the increased administrative expenses, the modified Plan estimates that the amount of only $5,842.40 will be available for payment of non-priority, general unsecured claims. According to the claims register maintained in this Chapter 13 proceeding, six creditors filed timely proofs of claim, including the Plaintiff's claim in the amount of $95,977.26, of which $102,592.26 represents claims for non-priority, general unsecured debts. Assuming there is no objection to the amount set forth in Plaintiff's proof of claim, he would receive a pro rata distribution of approximately six percent of the amount in his claim.
Debtor properly disclosed her Social Security benefits and Pension receipts in her Chapter 13 Statement of Current Monthly Income filed on July 18, 2017. (ECF No. 13). The Social Security benefits were properly excluded from the calculation of current monthly income under Section 101(10A)(B). Debtor apparently did not include her monthly Social Security benefits in calculating projected disposable income contributions to her confirmed Chapter 13 plan. No one asserted, however, that the confirmed plan was not proposed in good faith as required by Section 1325(a)(3), and no one appealed the order confirming the modified Chapter 13 plan that was entered on May 25, 2018.
Along with the trial statement, Debtor filed a motion in limine to exclude as hearsay certain statements contained in an Affidavit of Elena Santiago. (AECF Nos. 15 and 16). On October 16, 2018, the parties filed a stipulation resolving the motion. (AECF No. 23). The subject affidavit, however, was never introduced nor admitted at trial.
The ROA was propounded in the State Court Action and the response is dated April 6, 2017. It is signed by the Debtor's state court counsel and does not include a verification by the Debtor. Request No. 3 asks for an admission that when the Debtor took the "$73,500 from Plaintiff that you never intended to pay him back." The response in the ROA states "ADMIT" but at trial the Debtor disputed that she ever made such an admission and that it was provided only by her then-counsel. When her deposition was taken twelve days later on April 18, 2017, Debtor testified in response to various questions about her intention in connection with the loan. Both the Depo Transcript and the ROA response were used by the Plaintiff in this adversary proceeding in attempting to impeach the Debtor's testimony at trial.
NRCP 36(b) provides that "Any matter admitted under this rule is conclusively established unless the court on motion permits withdrawal or amendment of the admission." (Emphasis added.) There is no evidence in the record that the Debtor filed a motion before the State Court to withdraw or amend her responses to the ROA. However, NRCP 36(b) also concludes with the following: "Any admission made by a party under this rule is for the purpose of the pending action only and is not an admission for any other purpose nor may it be used against the party in any other proceeding." (Emphasis added.) Thus, while any admissions in response to the ROA might have been conclusive in the State Court Action, those admission are not conclusive in this adversary proceeding.
The Depo Transcript was included as Exhibit "3" in the Plaintiff's exhibit binder as well as Exhibit "A" to the Debtor's binder. For some reason, Debtor objected to the Plaintiff's use of Exhibit "3" to cross-examine the Debtor at trial, so the Debtor's Exhibit "A" was used instead. Ordinarily, a certified copy of a deposition transcript is published at trial, but neither side objected to use of the photocopy. Additionally, only portions of a deposition transcript typically are offered at trial for impeachment purposes.
Section 523(a)(2)(C) credits a rebuttable presumption of nondischargeability under Section 523(a)(2)(A) when an individual debtor incurs certain consumer debt for "luxury goods and services" or obtains cash advances shortly before seeking bankruptcy relief. That presumption does not apply in this proceeding.
In Husky Int'l Electronics v. Ritz, --- U.S. ----, 136 S.Ct. 1581, 1586, 194 L.Ed.2d 655 (U.S. 2016), the Court determined that a nondischargeable claim under Section 523(a)(2)(A) does not require proof that a debt was obtained through representations by the debtor that induced the creditor to extend credit. Rather, actual fraud also may be demonstrated by proof that the debtor engaged in a fraudulent scheme of transferring assets to place them out of reach of the creditor. Plaintiff does not assert such a theory of actual fraud in the instant case.
As a threshold matter, a prebankruptcy debt "for money...or an extension, renewal, or refinancing of credit" is excepted from discharge under Section 523(a)(2) only to the extent "obtained by" the conduct described in subsections (A) and (B). Additional debt that arises from money obtained by fraud, such as treble damages, fines or attorney's fees, also are excepted from discharge. See Cohen v. de la Cruz, 523 U.S. 213, 219-220, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998).
The docket in the State Court Action reflects that the Plaintiff recorded a lis pendens with respect to the Debtor's current residence on or about March 14, 2017. The docket also reflects, however, that an order granting Debtor's motion to expunge the lis pendens was entered on or about May 4, 2017.
No one objected, however, to the Debtor's exemption of her current residence and personal property. See discussion at 2, supra. As a result, those assets are exempt in her bankruptcy proceeding under Section 522(l). According to the Debtor's Schedule I, her monthly income is derived from two sources: Social Security ($1,586.00) and Pension or Retirement Income ($4,857.00). If those sources of income are otherwise exempt from execution, the Plaintiff ultimately may collect very little on a judgment for the loan and additional amount, even if he prevails in this adversary proceeding.
A bizarre thread emerged in this case that the Plaintiff's generosity to other women in addition to the Debtor somehow impacted the validity of the claims he is pursuing against the Debtor. It is not clear to the court if the Plaintiff's largesse to others was thought to be relevant to whether the $73,500 and additional $5,000 was actually intended or thought to be a gift to the Debtor rather than a loan. This thread was not developed at trial. Plaintiff previously received an admonition from the Debtor in the November 16, 2014, email to "get it in writing" next time, and it is clear that the Debtor's confirmed Chapter 13 will pay him back only a fraction of his money. In Winter v. Natural Resources Defense Council, 555 U.S. 7, 31, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008), Chief Justice Roberts included the oft-quoted observation that "no good deed goes unpunished." That observation may well apply in this case.
Under Section 524(f), an individual who receives a discharge is not prohibited from voluntarily repaying a debt even though the debt can no longer be pursued as a personal liability of the debtor. This provision permits an individual who receives a discharge to repay a discharged debt even if the individual is not legally required to do so.
Presumably, a Statute of Frauds was not immediately adopted in Louisiana because its legal system is based on the civil laws of France rather than on English common law traditions.
The Restatement (Second) of Contracts commonly is followed by courts in Nevada in applying contract law principles. See, e.g., Road & Highway Builders v. N. Nev. Rebar, 128 Nev. 384, 392, 284 P.3d 377, 382 (Nev. 2012) ; 26 Beverly Glen, LLC v. Wykoff Newberg Corp., 334 Fed.Appx. 62, 63-64 (9th Cir. 2009) ; Andrew v. Century Sur. Co., 134 F.Supp.3d 1249, 1263 (D.Nev. 2015) ; In re Seare, 493 B.R. 158, 200 (Bankr. D.Nev. 2013).
Nevada also adopted the Uniform Commercial Code, see NRS 104.1101 to 104.9717, including the various specific Statute of Frauds applicable, e.g., in sales and leasing transactions. See NRS 104.2201(1), NRS 104A.2201(1)(b). Negotiable instruments consisting of unconditional promises or orders to pay a fixed amount of money, see NRS 104.3104(1), also must be in writing. See NRS 104.3103(1) (e and h).
In Tofani, the Nevada intermediate appellate court observed that "An equitable claim like unjust enrichment requires no proof whatsoever of intent or state of mind; it's a strict liability claim based solely on notions of equity." Id. Although bankruptcy courts are courts of equity, the exception to discharge of any claim under Section 523(a)(2) is not based on strict liability. Rather, the plaintiff must prove that the debtor had the intent to deceive when it obtained the benefit at issue.
Before she filed an answer to the complaint in the State Court Action, Debtor filed a motion for summary judgment asserting that the loan obligation was unenforceable based on, inter alia , the Statute of Frauds. In addition to his breach of contract claim, however, Plaintiff's state court complaint included a cause of action for unjust enrichment. Plaintiff opposed the Debtor's summary judgment motion and the Debtor filed a reply. On June 6, 2016, at the end of a hearing on the motion, the state court denied summary judgment. It is not clear from the minutes of the hearing whether summary judgment was denied as a matter of law, or, due to the presence of genuine disputes of fact. Thereafter, Debtor answered the state court complaint on June 29, 2016, but she did not raise the Statute of Frauds as an affirmative defense.
Plaintiff attached ten exhibits to his trial statement, most of which apparently were included in the binder of exhibits submitted before trial. Because counsel would not stipulate to the admission of their respective exhibits at the beginning of the trial, however, the exhibits were admitted only if specifically offered and admitted during the trial. As previously noted, only Plaintiff's Exhibit "7" and Debtor's Exhibits "A" and "F" were admitted into evidence.
He also testified that the parties never intended that the funds be repaid within one year, but that the Debtor was not prohibited from repaying the sums back within one year.
Because the court finds that the Debtor did not misrepresent her intention to repay, the Plaintiff's failure to obtain a deed of trust against the Las Vegas Condo, or to require a promissory note or other written agreement, is not attributable to any misconduct by the Debtor. If the court concluded otherwise, the Debtor's alleged misrepresentation as to her intent to repay a trusted friend arguably would satisfy the first four elements of a claim under Section 523(a)(2)(A). See discussion at 7-8, supra. Unlike a forbearance theory, see discussion at 8, supra, the fifth and final element arguably would be satisfied by the uncontested amount of the unpaid loan and additional funds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501811/ | James R. Sacca, U.S. Bankruptcy Court Judge
The primary issue before the Court is what are the respective interests of the estate and a judgment creditor in cash deposited with the state court pre-petition in lieu of a supersedeas bond when the debtor loses on appeal and all applicable time periods related to the appeal expire post-petition.
This issue arose out of Snap Line Services, Inc. ("Snap Line")'s Motion for Turnover of Estate Property and for Sanctions as to Ted Ridlehuber and Russell Hodges [Doc. No. 12], as well as Ted Ridlehuber, Trustee of VM Trust # 1 and G & M International, LLC ("Ridlehuber")'s Motion for Relief from the Automatic Stay [Doc. No. 15]. Additionally, the Court asked the parties to brief the following issues: (1) what distinction, if any, exists between a supersedeas bond and a deposit *504of cash made with the Clerk of Court and the possible legal consequences of that distinction, (2) whether Snap Line had any interest in the cash deposited with the Clerk of Court at the time of filing such that it became property of the bankruptcy estate, and (3) what is the current legal status of the cash deposit now that Snap Line has exhausted all legal remedies in state court.
BACKGROUND
These contested matters arise from attempts by Ridlehuber to collect $62,500 that was placed by Snap Line as or in lieu of a supersedeas bond with the Clerk of the Superior Court of Forsyth County pending the appeals process of a judgment Ridlehuber obtained against Snap Line in the amount of $572,000 [Doc. No. 16]. The final order and judgment in the Superior Court was entered on May 23, 2016, nunc pro tunc to May 19, 2016 [Doc. No. 16]. Snap Line was ordered to post a supersedeas bond in the amount of $62,500 on November 21, 2016 and posted the cash deposit with the Clerk [Doc. No. 16]. Snap Line appealed the judgment to the Court of Appeals of Georgia, which affirmed the trial court on October 31, 2017 and denied Snap Line's motion for reconsideration on November 17, 2017 [Doc. No. 16]. On June 18, 2018 the Georgia Supreme Court denied Snap Line's petition for certiorari [Doc. No. 16]. Snap Line filed its Chapter 11 petition the next day on June 19, 2018 [Doc. No. 1]. Ridlehuber filed a motion with the Superior Court of Forsyth County on July 9, 2018 seeking release of the deposit [Doc. No. 32]. The appellate court sent a remittitur to the trial court on July 10, 2018 [Doc. No. 30].
DISCUSSION
Snap Line contends that the supersedeas cash became property of the bankruptcy estate upon the filing of the petition as the appellate process was not complete at that time so the post-petition attempt by Ridlehuber to obtain the funds was a violation of the automatic stay [Doc. No. 12]. Snap Line requests that this Court order the Clerk to turn over the money to it as estate property and sanction Ridlehuber and his attorney. Ridlehuber asserts that Snap Line had, at most, a contingent non-vested interest in the supersedeas cash that terminated upon the completion of the appellate process. It appears to be Ridlehuber's position now that the automatic stay was terminated in regard to the collection of the supersedeas bond on August 18, 2018, after the 60-day extension (from the petition date) provided by 11 U.S.C. § 108(b) had expired, but he has nevertheless requested relief from the stay to pursue collection of the bond as well as another civil action1 [Doc. No. 15]. Greg Allen, Clerk of Superior Court of Forsyth County, filed a response to the motions, indicating that he would wait for direction from this Court regarding the disbursement of the funds [Doc No. 25].
During the hearing on September 7, 2018, counsel for Snap Line first raised the issue of there being a legal distinction between a supersedeas bond involving a third-party surety and a deposit of cash directly from the party ordered by the court to post one or the other. In the briefing that ensued, counsel for Snap Line asserted that the cash deposit is not a bond at all, but rather an asset of Snap Line that became estate property upon filing of the petition [Doc. No. 33]. Citing to *505In re Legend Homes, Inc. , 69 B.R. 797 (Bankr. D. Ariz. 1987) and In re Hammon , 180 B.R. 220 (9th Cir. BAP 1994), Snap Line argues that there is a distinction between cash and the "contractual promise" of a bond such that a cash deposit with the Clerk of Court becomes property of the estate as of the filing of the petition (and presumably, a standard third-party surety bond would not). This Court notes that both Legend Homes and Hammon are Ninth Circuit cases involving a contractor's bond, which is cash placed with the state licensing board in order to ensure payment of possible future claims against the contractor. In re Hammon , 180 B.R. at 221. However, a supersedeas bond or cash deposit is made in response to a claim that resulted in a judgment against the party making the deposit, which seems to be a fairly important distinction. Additionally, while both Legend Homes and Hammon found that the cash became estate property, both courts also indicated that "there is both statutory basis and common law basis for different treatment of the class of creditors entitled to make a claim to all or part of the monies." In re Legend Homes, Inc. , 69 B.R. at 801. In other words, the cash deposit was not just more cash to be added to the pool of funds used to pay general unsecured creditors; rather, the creditor(s) who had claims against the construction bond preserved their equitable interest in the cash even after it became property of the estate. In re Hammon , 180 B.R. at 223. Should this Court choose to follow the full line of reasoning in these cases, it appears that the result would be that the cash enters the estate, but subject to the interest of Ridlehuber, the only creditor that has a claim to the funds.2
Snap Line suggests that there were only two ways Ridlehuber would have an interest in the cash upon the filing of a bankruptcy petition: (1) had the appeals process been exhausted and Ridlehuber requested disbursement of the funds and actually took possession of said funds, or (2) if Ridlehuber had taken an action to attach his judgment to the funds, such as by garnishing the bank account where they were held [Doc. No. 33]. Snap Line relies on In re Johnson , 479 B.R. 159 (Bankr. N.D. Ga. 2012) to assert that judgments do not attach to cash under Georgia law unless the judgment holder files a garnishment, but Johnson concerns the garnishment of a debtor's paycheck, not a third-party bank account containing funds that the debtor deposited there pursuant to court order to satisfy a judgment against them pending appeal. This Court disagrees with the notion that a party who has won a judgment and is waiting for the end of the appeals process should have to attempt to garnish funds held by the court as security for that judgment. Snap Line has cited no authority to support the contention that a judgment creditor must either physically possess the cash or garnish the holding account in order to obtain an interest in a supersedeas cash deposit . In fact, courts have held that the supersedeas bond process "secur[es] the Defendant's judgment" and its sole purpose is to "furnish security to the appellee."
*506In re Vescovo , 125 B.R. 468, 472-73 (Bankr. W.D. Tex. 1990) (holding that a cash deposit placed in lieu of a standard bond with the clerk of court creates a "lien perfected in favor of the Defendant.") The Court of Appeals of Georgia addressed the status of a "cash bond" in Landau v. Davis Law Group, P.C. : "The cash bond would have the legal effect of standing in lieu of a lien which otherwise attaches and remains by way of the recorded writs although their enforcement is stayed by the supersedeas..." Landau , 269 Ga. App. 904, 908, 605 S.E.2d 461 (2004). This Court believes that Ridlehuber's interest in the cash did not just vanish when Snap Line filed for bankruptcy, which would have resulted in Ridlehuber having the same status as a general unsecured creditor. To hold otherwise would result in a situation where any party with a judgment against them ordered by the court to place a supersedeas bond could make a cash deposit, file a bankruptcy petition, file a request to turnover property of the estate, and then use the cash to pay creditors other than the judgment holder. This would defeat the primary purpose of a supersedeas bond, which is to protect the appellee's judgment "from non-satisfaction in the event appellant has insufficient assets to satisfy...when the judgment is affirmed on appeal." Bank S., N.A. v. Roswell Jeep Eagle, Inc. , 200 Ga. App. 489, 489, 408 S.E.2d 503 (1991).
The Eleventh Circuit does not appear to have adopted a position regarding the issue of whether (or when) a supersedeas bond or cash deposit becomes property of the estate as the time of a bankruptcy filing. Other courts are split, but the majority seem to conclude that if the appeals process is not complete, then the bond does become property of the estate, at least temporarily. See Keene Corp. v. Acstar Ins. Co. (In re Keene Corp.) , 162 B.R. 935 (Bankr. S.D.N.Y. 1994) ("If at the time of filing the petition the appellate process has not been concluded, the debtor still has an interest in the supersedeas bond cognizable under Section 541..."); In re Duplitronics , Inc., 183 B.R. 1010 (Bankr. N.D. Ill. 1995) ("The appellant retains a reversionary interest in the bond subject to divestment."); But see In re Spiro , 305 B.R. 142 (Bankr. D. Conn. 2004) ("[T]he underlying bond itself is not property of a bankruptcy estate unless and until the debtor's appeal succeeds.")
Similarly, courts are split on the issue of what happens to the debtor's interest in the bond when the appellate process is exhausted and the judgment against the debtor is upheld. Some hold that the bond simply drops out of the estate at the conclusion of the appellate process, divesting the debtor of the contingent reversionary interest that it had, and allowing the creditor to proceed as it normally would. See In re Duplitronics, Inc. , 183 B.R. 1010, 1014 (Bankr. N.D. Ill. 1995) (holding that upon conclusion of the appellate process "the appellant no longer has a property interest in the bond"); In re Celotex Corp. , 128 B.R. 478 (holding that upon unsuccessful appeal "[the estate's] property interest can be divested and any efforts by the debtor to prevent the judgment creditor from [collecting the bond] must be sought under Section 105.] (Bankr. M.D. Fla. 1991); In re Keene , 162 B.R. 935 )(holding that the automatic stay does not prevent judgment creditors from seeking to collect the bond after appeal).
Other courts require that the judgment creditor move for relief from the stay to obtain the bond. In re Koksal , 424 B.R. 470 (Bankr. D. Kan. 2010) (" Koksal 1"), is one such case, and Snap Line relies heavily in its Motion to Compel Turnover on a subsequent proceeding in the same case, In re Koksal , No. ADV. 09-5079, 2010 WL 3277858 (Bankr. D. Kan. Aug. 17, 2010) (" Koksal 2") in an attempt to assert *507that the entire cash deposit is estate property subject to normal distribution. Similarly to the analysis of Legend Homes and Hammon by Snap Line in its supplemental brief, Snap Line provides the Court with portions of the holding that support its position, but fails to note some of the conclusions that the court had reached in Koksal 1 that were contrary to that position, and provide some important background to Koksal 2. Koksal 1 certainly stands for the proposition that a cash bond is property of the estate upon filing, but it also indicates that when the appellate process concludes the judgment creditor may move for relief from the stay in order to begin the appropriate state court procedures to determine who should receive the funds. Koksal , 424 B.R. at 478. Therefore Snap Line is incorrect when it argues that "on those facts [in Koksal ], the cash [in the instant case] should be paid to the estate for the benefit of all creditors." [Doc. No. 12]. In fact, the further procedural history of Koksal is worth noting. In Koksal 2, the court explains that the state court had found that the creditor was entitled to the bond funds (which were at that time being held in the creditor's attorney's escrow account pending the bankruptcy litigation), but they also held that the trustee was entitled to turnover of the amount of the bond that represented the "estate's interest...which value certainly is significantly less that the total Cash Bond amount." Koksal 2 at *4. After evidentiary hearings, in an order dated July 11, 2011, Judge Somers found that the "estate's interest" had no value whatsoever , because the "contingency, the forfeiture of Debtor's interest in the Cash Bond, deprived the estate of any interest in the Cash Bond." (Case 09-05079, Doc. No. 134, Bankruptcy Court of the District of Kansas).
The parties also disagree on when the appellate process was completed, which is relevant to both the Motion for Sanctions and a determination of the parties' interests in the bond at various times. Both agree that, in general, a motion for reconsideration may be filed with the Georgia Supreme Court within ten days from the denial of certiorari. The denial occurred on June 18, 2018, giving Snap Line until June 28, 2018 to file the motion under state law. Snap Line did not file a motion for reconsideration by then, but in the interim it filed its Chapter 11 petition on June 19, 2018 [Doc. No. 1]. This complicates the timeline because 11 U.S.C. § 108(b) provides:
(b) Except as provided in subsection (a) of this section, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of--
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief.
Therefore, pursuant to § 108(b), Snap Line had until August 18, 2018 to file the motion. It is worth noting that Snap Line did not file a Motion for Reconsideration at any time before, or after August 18, 2018. Presumably because the Supreme Court was not considering the effect of § 108(b), the remittitur from the appellate court was sent to the trial court on July 10, 2018, at which point Title 5 of the Georgia Code provides that "the supersedeas shall cease and execution shall issue at once for the original judgment." O.C.G.A § 5-6-12. Ridlehuber *508filed his motion with the state court to release the supersedeas on July 9, 2018, one day before the remittitur vested jurisdiction back in the trial court [Doc. No 44].
This Court finds that Ridlehuber's action to collect the cash deposit was a violation of the automatic stay because it occurred after the bankruptcy petition had been filed, and before the appeals process was terminated regardless of whether it occurred on either July 10, 2018 or August 18, 2018. However, given the confusion regarding an assessment of when the appellate process concluded, the unsettled law on the issue of the nature of the estate's interest in the cash deposit, and the fact that no motion for reconsideration was ever filed by Snap Line in the Georgia Supreme Court, the Court has determined that the violation of the stay was not willful and that Snap Line was not damaged by it; therefore, the violation was not sanctionable in this instance.3
Even if the supersedeas cash deposit became property of Snap Line's bankruptcy estate upon the filing of the petition, this Court finds that the contingent, unvested interest that Snap Line had in said cash either terminated upon the date that the appellate process concluded, in which event the stay dissolved by operation of law such that Ridlehuber is entitled to proceed without further order of the court, or cause exists to modify the stay to allow him to proceed to exercise his state law rights and remedies to enforce his right to the cash deposit because Snap Line cannot adequately protect Ridlehuber's interest in the cash. Either way, Ridlehuber is now free to proceed in state court to obtain release of the funds. Accordingly, it is hereby
ORDERED that Snap Line's Motion for Turnover of Estate Property and for Sanctions is DENIED ; it is further
ORDERED that, to the extent it is necessary given that the automatic stay may not currently be in place as regards the supersedeas bond, Ridlehuber is granted relief from the stay to pursue the collection of the bond from the Clerk of Court and the Superior Court of Forsyth County may proceed with the procedures established by state law regarding the disposition of the supersedeas bond posted by Snap Line in the amount of $62,500; and it is further
ORDERED that the automatic stay is still in place regarding all other matters because Ridlehuber has agreed that he would not proceed against Snap Line in the Cobb County Action.
Ridlehuber has agreed not to proceed against Snap Line in a civil action he previously filed in Cobb County that includes multiple defendants, Snap Line originally being one.
This Court was able to find a few cases where a court referred to a cash deposit as a bond or supersedeas bond or treated the two interchangeably. See In re Toy King Distributors, Inc., No. 90-00528-BKC-6C1, 2000 WL 33961158, at *2 (Bankr. M.D. Fla. Dec. 15, 2000) ("The bond shall be a bond with...defendant as principal and a surety company...or cash deposited with the clerk of court."); In re Nat. Land Corp. , 84 B.R. 815, 816 (Bankr. M.D. Fla. 1988) ("a supersedeas bond which initially provided a monthly payment of $8,000 into the registry of the Court."). In short, the nature of the supersedeas, be it cash or a third-party surety, does not have any bearing on the disposition of the instant case.
In addition, Section 362(k) authorizes damages to be paid to an individual, as opposed to a person, who is injured by a willful violation of the stay. Because Snap Line is a corporation, it is debatable at best whether it is entitled to damages under this section. The Court, however, is not ruling on that or whether it can award damages to a non-individual under some other section, including Section 105. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501812/ | DECISION ON WELLS FARGO BANK, N.A.'S MOTION FOR IN REM RELIEF FROM THE AUTOMATIC STAY PURSUANT TO 11 USC § 362(d)(4)(B)
Honorable Peter G. Cary, United States Bankruptcy Court
I. Introduction.
Wells Fargo Bank, N.A. ("Wells Fargo") seeks in rem relief from the automatic stay with respect to the property of debtor Debbie L. Anderson located in Wells, Maine (the "Property"). An evidentiary hearing was held on October 9, 2018. Ms. Anderson was the sole witness and four joint exhibits were admitted into evidence. Based upon the evidence presented by the parties, including the evidence adduced at the hearing and available on the dockets of this Court, Wells Fargo is entitled to relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(4)(B) for the reasons set forth here.
II. Jurisdiction.
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 and 1409. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(G).
*511III. Facts.1
In 1999, Ms. Anderson and her then husband borrowed $94,000 from Norwest Mortgage. They memorialized the loan with a promissory note and secured the obligations of the note by granting Norwest Mortgage a mortgage deed to the Property, which they jointly owned. Norwest later merged into Wells Fargo, and began a foreclosure action in 2005 concerning the Property in the York District Court for the State of Maine. Wells Fargo obtained a foreclosure judgment in June of 2005, and upon the expiration of the foreclosure redemption period in September of 2005, Wells Fargo scheduled a foreclosure sale of the Property for November 8, 2005. The day before the auction was scheduled to occur, Ms. Anderson filed the first of her five chapter 13 bankruptcy cases (Case No. 05-22975) and the automatic stay of 11 U.S.C. § 362(a) prevented the foreclosure sale from occurring. Her initial schedules indicated that the Property had a market value of $185,000, that she owned a one-half joint interest in it, and that Wells Fargo had a secured claim of $90,000. This case was short-lived. Ms. Anderson never filed the required chapter 13 plan and, as a result, this Court dismissed the case on January 9, 2006.
The next day, Ms. Anderson filed her second chapter 13 bankruptcy case (Case No. 06-20007) and the automatic stay again prevented Wells Fargo from proceeding forward with the sale of the Property. Her initial schedules again indicated that the Property had a market value of $185,000, that she owned a one-half joint interest in it,2 and that Wells Fargo had a secured claim of $90,000. Wells Fargo filed a proof of claim in the second case which described its claim as secured in the amount of $106,351.52. The proof of claim contained an itemization of the arrearage claimed by Wells Fargo and provided supporting documentation.
Wells Fargo also filed a motion for relief from the automatic stay, which included a worksheet itemizing its claim of $106,351.42 and providing supporting documentation. While Ms. Anderson initially challenged Wells Fargo's claim and requested an updated payment history, the parties ultimately stipulated that Ms. Anderson was $1,190.14 in arrears and that relief from stay could enter if she failed to repay the arrearage or make her current monthly payments. However, two months later, on December 13, 2010, she voluntarily dismissed her second case because she was told that with no steady employment, she would not be able to modify her loan with Wells Fargo.
Two months after that, Ms. Anderson filed her third chapter 13 bankruptcy case (Case No. 11-20143) and again the automatic stay prevented Wells Fargo from proceeding with its efforts to sell the Property. Unlike in her prior two cases, this time Ms. Anderson initially alleged that the Property was worth $84,000, that she was its sole owner, and that Wells Fargo had a secured claim of $84,000. As in the prior case, Wells Fargo filed a proof of claim, describing its secured claim in the amount of $98,671.58. The proof of claim also included supporting documentation *512and delineated the various components of the claim, including the principal amount due, arrearages, late charges, attorneys' fees, escrow shortages, appraisal costs, and inspection fees. On January 27, 2012, the Court confirmed Ms. Anderson's chapter 13 plan on an interim basis and reserved the resolution of Ms. Anderson's challenge to Wells Fargo's claimed arrearages to a later date. Ms. Anderson filed four motions challenging the arrearage claim but withdrew all of them prior to any court determination.
Ms. Anderson and Wells Fargo engaged in loan modification discussions, and though the details are cloudy, Ms. Anderson acknowledged that she received a loan modification proposal from Wells Fargo on March 25, 2013, which provided for a reduced monthly payment but extended the loan term from 30 to 40 years, decreased the interest rate and increased the modified unpaid balance by $17,303.45. Ms. Anderson claimed that she did not consent to this proposed modification because she never received an adequate explanation of the modified unpaid balance and, on August 14, 2013, she voluntarily converted her chapter 13 case to one under chapter 7. Ms. Anderson received a chapter 7 discharge in due course, and her third bankruptcy case was closed on November 25, 2013.
With no bankruptcy stay in effect, Wells Fargo moved forward in the state court foreclosure action and obtained an order extending the deadline to publicize and conduct the foreclosure sale. However, before the sale could occur, Ms. Anderson filed her fourth chapter 13 bankruptcy case on March 24, 2014 (Case No. 14-20199). She testified that she did so to save her home from a foreclosure sale, and the automatic stay again prevented continued foreclosure activity by Wells Fargo. In her fourth case, Ms. Anderson reported that the Property was worth $160,000, that she was its sole owner, and that Wells Fargo had a secured claim of $98,000. As in her most recent two bankruptcy cases, Wells Fargo filed a proof of claim, identifying its secured claim in the amount of $102,891.37. This proof of claim included documentation supporting the bank's claim, including a three-page "Mortgage Proof of Claim Attachment", which described each element of Wells Fargo's claim along with the principal amount due, the total interest due with relevant dates and interest rates, and the total pre-petition fees, expenses and charges. This document also provided a description of each fee or charge and the date each was incurred.
In August of 2015, Wells Fargo proposed a trial loan modification, and approximately one month later, Ms. Anderson moved this Court to approve it. Her motion and its attachments informed the Court that the unpaid principal balance on her loan to Wells Fargo was $77,309.34, the additional amount to be capitalized on that loan was $31,189.26, and the new principal balance was $108,498.60. It also noted that the interest rate would be lowered from 8.00% to 3.75%, the term would extend from 30 years to 40 years, and the modified monthly payment would decrease from $959.72 to $836.51. On October 28, 2015, this Court granted Ms. Anderson's motion for approval of a trial loan modification agreement3 and four months later, *513confirmed Ms. Anderson's third amended chapter 13 plan which was premised upon the modification. Notwithstanding this Court's approval of her plan and the trial loan modification, Ms. Anderson ultimately refused to enter into the final loan modification as she disputed the amount of the unpaid principal balance which was the same amount set forth in the trial loan modification approved by the Court. She then defaulted on her post-petition payments to Wells Fargo and, on June 1, 2017, Wells Fargo filed a motion seeking relief from the automatic stay. As with its other motions for relief from stay, this one included a worksheet which provided detailed information for the basis of its claim. It also contained the affidavit of Erika Anthony, a vice president of loan documentation for Wells Fargo, which did the same. Ms. Anderson initially objected to Wells Fargo's motion but subsequently withdrew her objection, and the Court granted Wells Fargo relief from stay on July 12, 2017. Approximately three weeks later, Ms. Anderson's fourth bankruptcy case was dismissed without prejudice due to her failure to file an amended motion to allow and disallow claims.
Again, with no stay in place to prevent it from doing so, on January 25, 2018, Wells Fargo filed a motion to enlarge time to publish the sale of the Property in the state court foreclosure action. Ms. Anderson objected to that motion on the grounds that Wells Fargo dawdled in enforcing its foreclosure remedies and therefore could not meet the "good cause" requirement of 14 M.R.S.A. § 6323(3). The York District Court overruled her objection on April 26, 20184 and the sale of the Property was scheduled for July 11, 2018.
Three days before the scheduled foreclosure sale, Ms. Anderson filed her current chapter 13 bankruptcy (Case No. 18-20376), her fifth in thirteen years. In this case, Ms. Anderson values the Property at $210,590, claims to be its sole owner and maintains that Wells Fargo's secured claim totals $89,879.64. Wells Fargo filed the pending motion for in rem relief from the automatic stay on August 28, 2018, maintaining that as of August 21, 2018, Ms. Anderson owed it $116,680.67, less any partial payments or suspense balance. On September 11, 2018, Ms. Anderson filed her opposition to Wells Fargo's motion for relief from stay noting, among other things, that (a) she has not abused the bankruptcy process, (b) she has made numerous payments on the Wells Fargo loan since the foreclosure judgment entered in 2005, (c) Wells Fargo has never provided her with an explanation as to the modified unpaid loan balance in its proposed loan modifications, and (d) she has not been the sole source of the delay in Wells Fargo's attempt to enforce its foreclosure judgment.
IV. Discussion.
While the filing of a bankruptcy case automatically operates as a stay of various creditor activity, 11 U.S.C. § 362(a), this Court must grant relief from *514it in specific instances. For example, 11 U.S.C. § 362(d)(4)(B), the subsection through which Wells Fargo seeks relief, provides:
On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay--... with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved ... multiple bankruptcy filings affecting such real property (emphasis added).
Relief under this subsection is broad and is generally binding in future bankruptcy cases commenced within two years of the entry of a court's relief from stay order. 11 U.S.C. § 362(d)(4). Although there is no binding First Circuit Court of Appeals authority on this subsection, see In re Taal, 520 B.R. 370, 377 (Bankr. D.N.H. 2014), this Court reads the statute to require relief from stay when three things are established: (a) the existence of a creditor whose claim is secured by an interest in real property, (b) that the filing of the latest bankruptcy petition was part of a scheme with the purpose of delaying, hindering or defrauding the creditor, and (c) the real property was affected by multiple bankruptcies. Here, Wells Fargo, as the party seeking in rem stay relief, carries the burden of proving that it is entitled to it. In re Olayer, 577 B.R. 464, 468 (Bankr. W.D. Pa. 2017). A court presented with such a motion should examine all of the facts concerning the various bankruptcy cases. In re Khurana, 2015 WL 4464508, at *10 (Bankr. D. Idaho July 21, 2015) ; In re Taal, 520 B.R. at 379 ; In re Briggs, 2012 WL 3780542, at *6 (Bankr. N.D. Ill. Aug. 31, 2012) ; In re Young, 2007 WL 128280, at *9 (Bankr. S.D. Tex. Jan. 10, 2007). Essentially it should consider the totality of the circumstances.
Applying the legal standard to the relevant evidence, this Court concludes that Wells Fargo clearly met its burden. Ms. Anderson does not contest that the first and last elements are satisfied for good reason. As to the first, there is no dispute that Ms. Anderson's obligations to Wells Fargo are secured by the Property. Wells Fargo is the holder of a validly recorded mortgage deed for the Property and a perfected foreclosure judgment. As to the third element, the Property was directly affected by the successive bankruptcies by, among other things, the effect of the automatic stay in each of those cases. The chronology shows that the stays in the first and fifth cases prevented the imminent sale of the Property by Wells Fargo. Further, Wells Fargo's motions for relief from stay in the second, third and fourth cases establish that the stays in those cases affected Wells Fargo's attempts to move forward with the state foreclosure process.
That leaves the second element, and because Wells Fargo conceded at trial that it does not seek in rem relief on the grounds that Ms. Anderson's actions hindered or defrauded it, the question is limited to whether the filing of Ms. Anderson's fifth bankruptcy petition was part of a scheme to delay Wells Fargo from exercising its rights against the Property. Congress did not define the word "scheme" in the Bankruptcy Code and courts construe the word in a variety of ways. Some hold that a "scheme" warranting in rem relief implies "a level of insidiousness or deceitfulness." In re 177 Weston Rd., LLC, 2011 WL 3032745, at *2 (Bankr. D. Conn. July 22, 2011). Others require a "scheme" to be "an intential artful plot or plan."
*515In the matter: House, 2018 WL 1505572, at *5 (Bankr. E.D. Wis. Mar. 26, 2018) citing In re Wilke, 429 B.R. 916, 922 (Bankr. N.D. Ill. 2010) ; In re Khurana, 2015 WL 4464508, at *2 ; In re Hymes, 2013 WL 653060, at *5 (Bankr. D. Alaska Feb. 20, 2013).
When a word is not described in a statute, courts should afford it "its ordinary or natural meaning." F.D.I.C. v. Meyer, 510 U.S. 471, 476, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994) ; Minor v. Mechanics' Bank of Alexandria, 26 U.S. (1 Pet.) 46, 64, 7 L.Ed. 47 (1828). According to the Oxford English Dictionary, the noun "scheme" means: "A plan of action devised in order to attain some end; a purpose together with a system of measures contrived for its accomplishment; a project, enterprise. Often with unfavorable notion, a self-seeking or an underhand project, a plot (cf. scheme v. , scheming adj. ), or a visionary or foolish project." Oxford English Dictionary (2018). Black's Law Dictionary has two definitions for the noun "scheme": "A systemic plan; a connected or orderly arrangement, esp. of related concepts < legislative scheme>. 2. An artful plot or plan, usu. to deceive others < a scheme to defraud creditors>." Black's Law Dictionary (10th ed. 2014). In the context raised here and based upon a review of the case law, the structure of the Code, the plain language of § 362(d), and the general usage of the word "scheme", this Court understands the word to mean an intentional plan to accomplish a particular result.
While most debtors may not admit to creating a scheme, a court may extrapolate or infer from the circumstances and evidence in a case that a scheme exists. In re Tejal Inv., LLC, 2012 WL 6186159, at *5 (Bankr. D. Utah Dec. 12, 2012) ; In re Briggs, 2012 WL 3780542, *5. "Relevant to this analysis is whether a debtor has evinced no true intention to reorganize their financial affairs and whether a debtor's previous filings were prosecuted to any meaningful degree." In re Valid Value Properties, LLC, 2017 WL 123751, at *7 (Bankr. S.D.N.Y. Jan. 5, 2017) (quotations and citations omitted). "Facts from which courts will extrapolate include not only how many cases make up the 'multiple filings' element, but case resolution. Were the prior cases dismissed without confirmation, or without discharge? ... Were the debtor's prior cases 'strategically timed' vis-a-vis potentially adverse state court action? ... Is there evidence of a change in circumstances necessitating the filings? ... Did the debtor have a legitimate belief she could reorganize, in each case? ... Is there a 'tag-team' pattern of serial filings by each co- debtor?" House, 2018 WL 1505572, at *5 (citations and parentheticals omitted). A court can infer an intent to hinder, delay, or defraud creditors based solely upon serial filings without the need for an evidentiary hearing. In re Valid Value Properties, LLC, 2017 WL 123751, at *8.
Although Ms. Anderson originally challenged Wells Fargo's assertion that such a scheme existed, she backed away from that strategy at trial.5 She testified that the primary design of all of her bankruptcies *516was to save her house or, at least initially in the second case, to preserve her interests in it. The automatic imposition of the stays in each of her five cases prevented Wells Fargo from moving forward with the culmination of the foreclosure process commenced in 2004 - the sale of the Property. Her use of the automatic stay to forestall foreclosure sales or to engage in loan modification negotiations with Wells Fargo does not necessarily evince bad intent, deceit, fraud, or abuse. The Code offered her a tool, § 362(a), and she had the right to try to use it. However, a debtor's right to the automatic stay is not unfettered. The Code also provides protections for Wells Fargo, including those under § 362(d)(4). The evidence here establishes that several of Ms. Anderson's cases, including this one, were strategically filed on the eve of a scheduled foreclosure sale. Two of the cases were dismissed or converted without a confirmed final plan. In one of her cases, Ms. Anderson refused to enter into a final loan modification on the same terms for which she sought and obtained court approval. Although she initially testified that she entered into a permanent loan modification with Wells Fargo, upon further examination she conceded that the modification was only temporary. During the span of the 13 years from Ms. Anderson's first bankruptcy through this one, Ms. Anderson has failed to resolve the treatment of Wells Fargo's claim either by agreement or by court determination. Although Ms. Anderson testified that Wells Fargo failed to provide her with adequate information with which to determine the basis of its claim against her, that testimony is undercut by the evidence presented to the Court, which included Wells Fargo's proofs of claim, its motions for relief from stay, and its opposition to her motion to allow and disallow claims. These and other papers filed by Wells Fargo establish that Wells Fargo provided detailed explanations and supporting documentation of its claim to Ms. Anderson on multiple occasions and Ms. Anderson never raised any meaningful challenge to Wells Fargo's accounting.
Reviewing all of the facts surrounding Ms. Anderson's five cases leads this Court to the conclusion that the filing of this latest case was part of an intentional effort by Anderson to prevent Wells Fargo from completing the foreclosure sale of the Property. In other words, this fifth case was part of a plan to delay Wells Fargo from exercising its state law rights respecting the Property. Wells Fargo has successfully established the elements for in rem relief under § 362(d)(4) and therefore this Court has no option but to grant Wells Fargo the relief it seeks.
V. Conclusion.
For these reasons, Wells Fargo is entitled to relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(4)(B).
The parties stipulated to many facts (see Docket Entry "DE" 47). Other are taken from the dockets of Ms. Anderson's five bankruptcy cases in this Court. Fed. R. Evid. 201(c)(1) made applicable by Fed. R. Bankr. P. 9017. In re Reed, 587 B.R. 202, 204 note 1 (Bankr. D. Me. 2017). Finally, some of the facts here came from the evidence presented at the October 9, 2018 hearing.
During the pendency of her second case, Ms. Anderson and Mr. Barrager were divorced and he conveyed his interest in the Property to her.
Although not dispositive of the issues before this Court, there was conflicting evidence presented as to the loan modification agreement. The loan modification cover letter from Wells Fargo to Ms. Anderson was dated March 17, 2006 and included a warning to Ms. Anderson that if she failed to sign and return the loan modification within 15 days, Wells Fargo would cancel the modification request. Page one of the loan modification agreement represented that it was executed on August 21, 2015 but the agreement was signed by Ms. Anderson and acknowledged before her attorney on June 1, 2016.
The York District Court stated in part: "The court finds the good cause has been shown. Good cause is generally a fact specific inquiry. In the present matter this is no indication that the Plaintiff acted in bad faith in delaying the sale of foreclosed property. While the Plaintiff could at several points have asked the bankruptcy court to allow the sale of the property go forward, Plaintiff's failure to take advantage of that opportunity has not disadvantaged the Defendant or, apparently, anyone else. Instead the Defendant has enjoyed the significant benefit of staying in the property ever since the foreclosure judgment was entered. Under these circumstances, Plaintiff has met its burden of showing the existence of good cause." See Joint Exhibit 1, at p 2.
Instead, she apparently conceded the filings were part of a scheme, but argued that such scheme was necessary to "get Wells Fargo's attention" after the bank purportedly breached a final loan modification and refused to provide the account history she requested. The evidence does not support either of these points, however. Her pretrial stipulation with Wells Fargo made it clear that the loan modification offered by Wells Fargo and approved by the Court was a trial loan modification. Stipulation of Uncontested Facts, ¶ 18 (Docket No. 47). Ms. Anderson further stipulated that she refused to enter into a final loan modification because she disagreed with the amounts Wells Fargo claimed were due. Id. at ¶ 19. The evidence also established that she did not make all of her required payments to Wells Fargo. See, e.g., Stipulation in Connection with Motion for Relief, Case No. 06-20007, Docket 137, ¶ 1 ("The Debtor(s) failed to make regularly scheduled post-petition mortgage payments to the Movant [Wells Fargo] for the months of April, 2010 through July, 2010 failed to make payments April - June 2010.") | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501813/ | Enrique S. Lamoutte, United States Bankruptcy Judge
The above alleged debtors are before the court upon several motions aimed at disposing of the involuntary petitions. Alleged debtors pray for the dismissal of both involuntary petitions and the petitioning creditors pray for the entry of an order of relief under chapter 11.
The pending motions are: (1) Motion of the Alleged Debtor Betteroads Asphalt LLC to Dismiss the Involuntary Bankruptcy Petition (Lead Case No. 17-04156, Docket No. 46) and the Motion of the Alleged Debtor Betterecycling Corporation to Dismiss the Involuntary Bankruptcy Petition (Lead Case No. 17-04157, Docket No. 27) alleging that these petitions should be dismissed due to the following: (i) most *523of the Petitioning Creditors' claims are not eligible because their claims are subject to a bona fide dispute and are not in conformity with 11 U.S.C. § 303(b)(1) ; (ii) the Petitioning Creditors filed these petitions as a bad faith litigation tactic and thus the same warrant dismissal; (iii) the court should dismiss these cases based on the doctrine of abstention pursuant to 11 U.S.C. § 305(a)(1) ; and (iv) the alleged Debtors should be awarded the fees, costs and damages pursuant to 11 U.S.C. § 303(i). (2) the Opposition to the Motion to Dismiss filed in both cases by Firstbank Puerto Rico ("Firstbank"), Banco Santander de Puerto Rico ("Banco Santander"), the Economic Development Bank for Puerto Rico ("EDB"), and Banco Popular de Puerto Rico ("Banco Popular" or the "Administrative Agent" and collectively with Firstbank, Banco Santander, EDB and Banco Popular, the "Lenders") (Lead Case No. 17-04156, Docket No. 74, Lead Case No. 17-04157, Docket No. 52). Lenders argue the following: (i) the involuntary petitions satisfy 11 U.S.C. § 303(b) because each involuntary petition was commenced by at least three (3) qualified petitioning creditors whose claims are not subject to a bona fide dispute and whose unsecured and uncontingent claims aggregate at least $15,775. Eight (8) petitioning creditors filed the involuntary petition for Betteroads Asphalt, LLC ("Betteroads") and seven (7) petitioning creditors filed the involuntary petition against Betterecycling Corporation ("Betterecycling"); (ii) the Lenders deny all of the bad faith allegations. The Lenders also argue that bad faith is not a cognizable defense to contest an involuntary petition. A number of courts following the plain meaning of 11 U.S.C. § 303 have decided that bad faith is not an independent basis to contest a properly filed involuntary petition; (iii) the Debtors are not paying their debts as they become due; (iv) the Debtors' request for abstention should be denied because the abstention doctrine should not be used as a remedy in substitution of a motion to dismiss under other applicable sections of the Bankruptcy Code; (v) the Debtors fail to establish or argue that the interests of the creditors would be better served by abstention rather than by allowing these properly-filed involuntary bankruptcy cases to continue; (vi) the Debtors have been transferring their assets (as described in the Motion to Appoint a Trustee) and creditor remedies to avoid these transfers are available only in bankruptcy; (vii) the state court litigation would not resolve or avoid the substantial avoidable transfers that the Debtors have undertaken prior to the bankruptcy filing nor provide an orderly process for all creditors to assert their claims; and (viii) the Debtors have not met their burden of establishing that abstention under 11 U.S.C. § 305(a) is in the best interest of both the Debtors and all the creditors. (3) The Debtors' Reply to Motion to Dismiss and Request for Immediate Dismissal Against Certain Petitioners (Lead Case No. 17-04156, Docket No. 88, Lead Case No. 17-04157, Docket No. 68). (4) Lenders' Sur-Reply to Debtors' Reply to the Lenders' Opposition to Motion to Dismiss ensued thereafter (Lead Case No. 17-04156, Docket No. 100, Lead Case No. 17-04157, Docket No.79). (5) Sargeant Marine, Inc. ("Sargeant Marine") and Sargeant Trading LTD's ("Sargeant Trading") Amended Motion for Summary Judgment on Involuntary Petition and Memorandum of Law in Support Thereof (Lead Case No. 17-04156, Docket No. 108). (6) Initial Opposition to Premature Amended Motion for Summary Judgement by Sargreant (Lead Case 17-04156, Docket No. 131). (7) Sargent Marine and Sargeant Trading's Reply to Initial Opposition to Premature Amended Motion for Summary Judgment by Sargent (Lead Case No. 17-04156, Docket No. *524153). (8) Lenders' Motion for Summary Judgment and Memorandum of Law in Support Thereof (Lead Case No. 17-04156, Docket No. 120, Lead Case No. 17-04157, Docket No. 87). (9) Debtors' Initial Opposition to Premature Amended Motion for Summary Judgment by Lenders (Lead Case No. 17-04156, Docket No. 167; Lead Case No. 17-04157, Docket No. 123). (10) Alleged Debtors' Motion in Compliance with Order: Alleged Debtor's Supplemental Brief on Pending Legal Issues (Lead Case No. 17-04156, Docket No. 169, Lead Case No. 17-04157, Docket No. 125). (11) Lenders' Memorandum and Brief in Compliance with Order (Lead Case No. 17-04156, Docket No. 170, Lead Case No. 17-04157, Docket No. 126). (12) The Debtors' Reply to Lenders' Memorandum at (Docket No. 170 on Case No. 17-04156) (Docket No. 126 on Case No. 1[7]-04157) (Lead Case No. 17-04156, Docket No. 181, Lead Case No. 17-04157, Docket No. 136). (13) Lenders' Reply to "Motion in Compliance with Order" (Docket No. 169 and Docket No. 125) followed (Lead Case No. 17-04156, Docket No. 182, Lead Case 17-04157, Docket No. 137).
For the reasons stated below, the Debtors' Motions to Dismiss are denied in part. Sargeant Marine and Sargeant Trading, LTD's motion for summary judgment is granted in part and denied in part. The Lenders' motions for summary judgment are granted in part and denied in part.
Jurisdiction
The court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (b)(2)(A). Venue of this proceeding is proper under 28 U.S.C. §§ 1408 and 1409.
Procedural Background
On June 9, 2017, St. James Security Services, Inc., Sargeant Marine, Inc., Sargeant Trading, Ltd, Facsimil Paper Connection Corp. and the Lenders filed an involuntary bankruptcy petition against Betteroads Asphalt, LLC. The petitioning creditors and the Lenders in line item 11 of the petition allege that, "[t]he debtor is generally not paying its debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount." Line item 13 of the petition discloses that the total of petitioners' claims is in the amount of $98,271,671.29. St. James Security Services, Inc.'s unsecured claim is based on a Judgment dated December 8, 2016 in St. James Security Services, Inc. v. Betteroads Asphalt LLC & Betterecycling Corporation- civil case no.KCD 2016-0453 (604). The claim is in the amount of $184,242.84. Sargeant Marine's unsecured claim is based on a final Judgment dated September 3, 2015 in Sargeant Trading Ltd. & Sargeant Marine, Inc. vs. Betteroads Asphalt Corp., --1:15 cv 04879-Civil 4879 (JPO) in which Sargeant Marine's unsecured claim is in the amount of $165,074.84. Sargeant Trading's unsecured claim is based on the same Judgment in the amount of $104,335.38. Facsimil Paper Connection Corp.'s unsecured claim is based upon a Judgment dated January 11, 2017, Facsimil Paper Connection Corp. vs. Betteroads Asphalt Corp./Betteroads Asphalt LLC, civil case no. KCM 2016-3675 (905). The claim is in the amount of $9,874.80. Banco Popular has the following claims, all of which list as undetermined the amount of the claim above the value of any lien: (i) Loan Agreement (line of credit, Note 4001) in the amount of $11,840,690.92; (ii) Loan Agreement (Term Loan I, Note 9008) in the amount of $6,790,317.53; and (iii) Loan Agreement (Term Loan II, Note 9009) in the amount of $16,647,238.05. Banco Santander has the following claims all of which it lists as undetermined the amount of claim above the value of any lien: (i) Loan Agreement *525(Term Loan I, Note 9008) in the amount of $2,068,170.71; (ii) Loan Agreement (Term Loan II, Note 9009) in the amount of $4,841,943.64; (iii) Loan Agreement (Term Loan III, Note 9010) in the amount of $9,259,182.29; and (iv) Loan Agreement (Line of Credit, Note 4001) in the amount of $3,606,395.44. FirstBank has the following claims all of which it lists as undetermined the amount of claim above the value of any lien: (i) Loan Agreement (Line of Credit, Note 4001) in the amount of $6,458,768.31; (ii) Loan Agreement (Term Loan I, Note 9008) in the amount of $3,703,929.78; and (iii) Loan Agreement (Term Loan II, Note 9009) in the amount of $9,078,644.32. EDB has the following claims all of which it lists as undetermined the amount of claim above the value of any lien: (i) Loan Agreement (line of credit, Note 4001) in the amount of $1,152,939.72; (ii) Loan Agreement (Term Loan I, Note 9008) in the amount of $661,179.90; and (iv) Loan Agreement (Term Loan IV, Note 9011) in the amount of $4,137,250.82. Other loans between Banco Popular and Betteroads are the following: (i) Loan Agreement (Loan No. xxx-xxxx-xxxxxxx-2001) in the amount of $8,271,387.12; (ii) Loan Agreement (Loan No. xxx-xxxx-xxxxxxx-9004) in the amount of $4,256,358.95; and (iii) Loan Agreement (Loan No. xxx-xxxx-xxxxxxx-9005) in the amount of $3,753,088.80. Other loans between FirstBank and Betteroads are the following: (i) Loan Agreement (Loan No. xxxxxx-00005) in the amount of $1,280,239.46; and (ii) Loan Agreement (Loan No. xxxxxx-90003) in the amount of $397.67.
Also on June 9, 2017, St. James Security Services, Inc., Champion Petroleum, Inc., Control Force, Corp. and the Lenders filed an involuntary bankruptcy petition against Betterecycling Corporation. The petitioning creditors and the Lenders in line item 11 of the petition alleged that, "[t]he debtor is generally not paying its debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount." Line item 13 of the petition discloses that the total of petitioners' claims is in the amount of $96,649,583.80. The involuntary petitions disclose that Betteroads and Betterecycling are affiliates. St. James Security Services, Inc.'s unsecured claim is based on a Judgment dated December 8, 2016 in St. James Security Services, Inc. v. Betteroads Asphalt LLC & Betterecycling Corporation- civil case no.KCD 2016-0453 (604). The claim is in the amount of $60,020.48. Control Force Corp.'s unsecured claim is based upon a Judgment dated March 7, 2017, Control Force, Corp. vs. Betterecycling Corp., civil case no. KCD 2016-2093 (503). The claim is in the amount of $56,872.14. Champion Petroleum Inc.'s unsecured claim is based upon a Judgment dated March 20, 2017, Champion Petroleum, Inc. vs. Betterecycling Corp., civil case no. KCM 2017-0361 (902). The claim is in the amount of $5,204.88. Banco Popular has the following claims all of which it lists as undetermined the amount of claim above the value of any lien: (i) Loan Agreement (line of credit, Note 4001) in the amount of $11,840,690.92; (ii) Loan Agreement (Term Loan I, Note 9008) in the amount of $6,790,317.53 and (iii) Loan Agreement (Term Loan II, Note 9009) in the amount of $16,647,238.05. Banco Santander has the following claims all of which it lists as undetermined the amount of claim above the value of any lien: (i) Loan Agreement (Term Loan I, Note 9008) in the amount of $2,068,170.71; Loan Agreement (Term Loan II, Note 9009) in the amount of $4,841,943.64; (iii) Loan Agreement (Term Loan III, Note 9010) in the amount of $9,259,182.29; and (iv) Loan Agreement (Line of Credit, Note 4001) in the amount of $3,606,395.44. FirstBank has the following claims all of which it lists as undetermined *526the amount of claim above the value of any lien: (i) Loan Agreement (Line of Credit, Note 4001) in the amount of $6,458,768.31; (ii) Loan Agreement (Term Loan I, Note 9008) in the amount of $3,703,929.78; and (iii) Loan Agreement (Term Loan II, Note 9009) in the amount of $9,078,644.32. EDB has the following claims all of which it lists as undetermined the amount of claim above the value of any lien: (i) Loan Agreement (line of credit, Note 4001) in the amount of $1,152,939.72; (ii) Loan Agreement (Term Loan I, Note 9008) in the amount of $661,179.90; and (iv) Loan Agreement (Term Loan IV, Note 9011) in the amount of $4,137,250.82. Other loans between Banco Popular and Betteroads are the following: (i) Loan Agreement (Loan No. xxx-xxxx-xxxxxxx-2001) in the amount of $8,271,387.12; (ii) Loan Agreement (Loan No. xxx-xxxx-xxxxxxx-9004) in the amount of $4,256,358.95; and (iii) Loan Agreement (Loan No. xxx-xxxx-xxxxxxx-9005) in the amount of $3,753,088.80.
On June 27, 2017, Betteroads filed its Motion of the Alleged Debtor Betteroads Asphalt LLC to Dismiss the Involuntary Bankruptcy Petition . Also on that same date, Betterecycling filed its Motion of the Alleged Debtor Betterecycling Corporation to Dismiss the Involuntary Bankruptcy Petition . The alleged Debtors argue that these petitions should be dismissed pursuant to Fed. R. Civ. P. 12(b) due to the following: (i) most of the Petitioning Creditors' claims are not eligible because their claims are subject to a bona fide dispute and thus are not in conformity with 11 U.S.C. § 303(b)(1) ; (ii) the Petitioning Creditors filed these petitions as a bad faith litigation tactic and thus the same warrant dismissal; (iii) the court should dismiss these cases based on the doctrine of abstention pursuant to 11 U.S.C. § 305(a)(1) ; and (iv) the alleged Debtors should be awarded the fees, costs and damages pursuant to 11 U.S.C. § 303(i) (Lead Case No. 17-04156, Docket No. 46, Lead Case No. 17-04157, Docket No, 27).
On June 27, 2017, creditor Banco Popular filed a Motion Submitting Joinder to Involuntary Petition by which it requested the court to join as an additional eligible and qualifying petitioning creditor of Betteroads. Banco Popular alleges that pursuant to 11 U.S.C.§ 303(c), a creditor holding an unsecured claim that is not contingent may join an involuntary petition. BPPR states that as of the date of the filing of the petition, it is a holder of an unsecured, non-contingent claim against the Debtor in the total amount of $80,057.15 on account of credit card debts (Lead Case No. 17-04156, Docket No. 50).
On August 3, 2017, the Lenders filed their Opposition to the Motion to Dismiss in both cases by which they argue the following: (i) under the standard of Fed. R. Civ. P. 12(b), the Petitioning Creditors have established a prima facie case for relief pursuant to 11 U.S.C. § 303 ; (ii) the involuntary petitions satisfy 11 U.S.C. § 303(b) because each involuntary petition was commenced by at least three (3) qualified petitioning creditors whose claims are not subject to a bona fide dispute and whose unsecured and uncontingent claims aggregate at least $15,775. Eight (8) petitioning creditors filed the involuntary petition for Betteroads Asphalt, LLC ("Betteroads") and seven (7) petitioning creditors filed the involuntary petition against Betterecycling Corporation ("Betterecycling"); (iii) the Lenders deny all of the bad faith allegations. The Lenders argue that bad faith is not a cognizable defense to contest an involuntary petition. A number of courts following the plain meaning of 11 U.S.C. § 303 have decided that bad faith is not an independent basis to contest a properly filed involuntary petition; (iv) the Debtors are not paying their debts as they *527become due given that: (a) the Debtors admit that since July 2016, when the Lenders started to exercise remedies under the syndicated credit facilities, the Debtors are not 'conducting their affairs in a manner consistent within the established course of business with its lenders and supplies;' (b) the record shows that since the filing of the Involuntary Petitions, additional unpaid claims (in addition to those of the Petitioning Creditors) have been filed against the Debtors. Eight (8) additional claims have been filed against Betteroads and five (5) additional claims have been filed against Betterecycling; (c) the proof of claims filed by the IRS disclose that both of the Debtors have outstanding federal tax liabilities since the year 2015; (d) the additional proof of claims disclose that the Debtors are not paying their utility creditors such as PREPA and the Puerto Rico Telephone Company; (e) during the past year, dozens of the Debtors' creditors and suppliers have filed collection of monies lawsuits against the Debtors for past due amounts; (v) the Debtors' request for abstention should be denied because the abstention doctrine should not be used as a remedy in substitution of a motion to dismiss under other applicable sections of the Bankruptcy Code; (vi) the Debtors fail to establish or argue that the interests of the creditors would be better served by abstention rather than by allowing these properly-filed involuntary bankruptcy cases to continue; (vii) the Debtors have been transferring their assets (as described in the Motion to Appoint a Trustee) and creditor remedies to avoid these transfers are available only in bankruptcy; (viii) the involuntary petitions do not involve a "two-party dispute" that the pending state court litigation could fully resolve; (ix) the state court litigation would not resolve or avoid the substantial avoidable transfers that the Debtors have undertaken prior to the bankruptcy filing nor provide an orderly process for all creditors to assert their claims; (x) the Debtors have not met their burden of establishing that abstention under 11 U.S.C. § 305(a) is in the best interests of both the Debtors and all the creditors; and (xi) the involuntary petitions are the proper remedy to address the Debtors' pre-filing transfers of property, maximize recoveries for creditors, and orderly resolve the various and substantial claims against the Debtors (Lead Case No. 17-04156, Docket No. 74, Lead Case No. 17-04157, Docket No. 52).
On September 1, 2017, the Debtors' filed their Reply to Motion to Dismiss and Request for Immediate Dismissal Against Certain Petitioners. Certain petitioning creditors have failed to reply to the motion to dismiss and thus, the same should be granted as unopposed and eliminated as a petitioner. In the involuntary petition for Betteroads, the petitioning creditors that have not replied are the following: (i) St. James Security Services, Inc.; (ii) Sargeant Marine, Inc.; (iii) Sargeant Trading, LTD; (iv) Facsimil Paper Connection Corp.; (v) any independent claim of Banco Popular beside the Lender's group; and (vi) any independent claim of Firstbank beside the Lender's group. In the involuntary petition for Betterecycling, the petitioning creditors that have replied consist of: (i) Champion Petroleum Corp.; (ii) St. James Security Inc.; (iii) Control Force Corporation; (iv) any independent claim of Banco Popular beside the Lender's group; and (v) any independent claim of Firstbank beside the Lender's group (Lead Case No. 17-04156, Docket No. 88, Lead Case No. 17-04157, Docket No. 68).
On September 12, 2017, Firstbank filed a Motion Joining Opposition to Motion to Dismiss by which it stated its position as a creditor in a separate and distinct commercial loan from the syndicated commercial loan agreements and joined the Syndicated *528Lenders in their opposition to the motion to dismiss (Lead Case No. 17-04156, Docket No. 97).
On September 18, 2017, the Lenders filed their Sur-Reply to Debtors' Reply to the Lenders' Opposition to Motion to Dismiss contending that: (i) the failure of a petitioning creditor to formally oppose the motion to dismiss is not a basis for dismissal; (ii) "[i]n deciding a Rule 12(b)(6) motion to dismiss, it has been consistently held that when pleadings are themselves sufficient to withstand dismissal, failure to respond to a 12(b)(6) motion cannot constitute a 'default' justifying dismissal of the complaint;" See McCall v. Pataki, 232 F.3d 321 (2d Cir. 2000) ; see also; Maggette v. Dalsheim, 709 F.2d 800, 802 (2nd Cir. 1983) ; and (iii) for both of the involuntary petitions, the Lenders filed the opposition and contested all the allegations made by the Debtors in their motion to dismiss (Lead Case No. 17-04156, Docket No. 100, Lead Case No. 17-04157, Docket No.79).
On October 27, 2017, Sargeant Marine and Sargeant Trading filed their Sur-Reply to Debtor's Reply to Opposition to Motion to Dismiss and Request for Immediate Dismissal Against Certain Petitioners and Notice of Joinder in the Opposition to Motion to Dismiss and Request for Immediate Dismissal Against Certain Petitioners in which they assert the following: (i) the fact that Sargeant did not file a separate motion to dismiss is not grounds to dismiss the case, given that the motion to dismiss is meritless. "Plaintiffs are not required to submit evidence to defeat a Rule 12(b)(6) motion, but need only sufficiently allege in their complaint a plausible claim" Foley v. Wells Fargo Bank, N.A., 772 F.3d 63, 71 (1st Cir., 2014) ; (ii) Sargeant joins the Lenders' opposition to the motion to dismiss that evidences that the involuntary petition establishes a prima facie case for relief pursuant to 11 U.S.C. § 303 ; (iii) even considering Sargeant's claim as a single claim, which is incorrect, the prima facie case for relied under section 303 is not rebutted; and (iv) Sargeant clarifies that the non-appealable, bona fide Judgment includes two separate obligations of the Debtor as to two distinct entities (Lead Case No. 17-04156, Docket No. 106).
Also on said date, Sargeant Marine and Sargeant Trading filed in the Betteroads involuntary lead case, their Statement of Uncontested Material Facts and their Amended Motion for Summary Judgment on Involuntary Petition and Memorandum of Law in Support Thereof (Lead Case No. 17-04156, Docket Nos. 105 & 108). Sargeant Marine and Sargeant Trading contend the following in their amended motion for summary judgment: (i) there are currently four (4) creditors that hold bona fide claims that are not contingent as to liability and are not subject to bona fide dispute as they are evidenced by final and non-appealable judgments; (ii) Sargeant Marine and Sargeant Trading are two separate and distinct entities that each hold a claim against the Debtor; (iii) however, even if Sargeant Marine and Sargeant Trading's claim were considered to be one claim, it is undisputed that Sargeant holds a final and non-appealable Judgment; and (iii) it is uncontested that there are at least three (3) creditors with bona fide claims as they hold final and non-appealable judgments; thus the Petitioning Creditors have established a prima facie case under 11 U.S.C.§ 303(b) and the motion to dismiss fails to comply with the Fed. R. Civ. P. 12(b) standard and therefore must be denied.
On November 14, 2017, Sargeant Marine and Sargeant Trading filed a Motion for Entry of Order as Unopposed regarding its Amended Motion for Summary Judgment (Docket Nos. 105 & 108) and to deny *529Betteroads' motion to dismiss (Lead Case No. 17-04156, Docket No. 125). On November 15, 2017, Betteroads filed its Opposing Statement of Material Facts and its Initial Opposition to Premature Amended Motion for Summary Judgement by Sargeant (Lead Case 17-04156, Docket Nos. 130 & 131). Betteroads argues the following in its opposition to the premature amended motion for summary judgment: (i) Sargent wants to move forward with summary judgment before the alleged Debtor has the opportunity to access the documents, evidence and testimony to expose their intent. The alleged Debtor is in the process of gathering relevant documental evidence to put the court in the position to dismiss this petition due to the bad faith of the creditors; (ii) Sargeant seeks a competitive advantage in the local asphalt market. "The alleged Debtor's demise will certainly grant this competitive advantage as the alleged debtor and Sargeant hold two out of three tank farm terminals/ports in Puerto Rico;" (iii) "[t]he petitioners in this case, did not join the petition to immerse the alleged debtor in this process with the other creditors best interest at heart. Simply, they were motivated either by competitive market advantages and a check to be written by the syndicate lenders;" (iv) "...it appears that the syndicate lender[s] were forced to make a promise of payment to those unsecured creditors which agreed to join as petitioners. By information and belie[f], this payment or distribution would be in addition to that which they would be entitled to within the statutory bankruptcy distribution structure of their corresponding potential class;" (v) "[a]s such, it appears that the other petitioners may be under the paycheck of the "Syndicate Lenders" seeking a distribution contrary to the orderly scheme of the bankruptcy code and in preference to any potential unsecured creditor in the same classification; and (vi) "[f]rom the alleged [D]ebtor's perspective, the petitioners' interests became so intertwined that they have become and should be considered as a single entity for purposes of the proceedings" (Docket No. 131). Thereafter, on December 8, 2017, Sargeant Marine and Sargeant Trading filed their Opposition to "New Set of Proposed Uncontested Facts (Lead Case No. 17-04156, Docket No. 152) and their Reply to Initial Opposition to Premature Amended Motion for Summary Judgment by Sargeant (Lead Case No. 17-04156, Docket No. 153).
On November 13, 2017, the Lenders filed a Motion for Summary Judgment and Memorandum of Law in Support Thereof and a Statement of Uncontested Material Facts (Lead Case No. 17-04156, Docket Nos. 120, 121, Lead Case No. 17-04157, Docket Nos. 87, 88). The Lenders in their Motion for Summary Judgment contend the following: (i) the involuntary petitions satisfy the requirements under 11 U.S.C. § 303(b), given that each involuntary petition is supported by at least three (3) petitioning creditors with claims that are not contingent or the object of a bona fide dispute as to liability or amount and the aggregate of their unsecured, noncontingent, undisputed claims aggregate more than the statutory threshold of $15,775; (ii) each of the Petitioning Creditors for both of the involuntary petitions holds a final and unappealable judgment that has not been contested by the Debtors; (iii) the alleged Debtors are not paying their debts as they become due in conformity with 11 U.S.C. § 303(h)(1). Moreover, the Debtors have failed to deny that they are generally not paying their debts as they become due; (iv) the record shows that since the filing of the Involuntary Petitions, additional unpaid claims as of the Petition Date have been filed against the alleged Debtors; (v) these additional proof of claims filed by *530unpaid creditors, which claims are deemed allowed, evidence that Betteroads and Betterecycling owe at least $4,264,380.85 to creditors, without considering the claims of the Petitioning Creditors which exceed $90 million. Moreover, the proof of claims filed by the Internal Revenue Service evince that both of the Debtors' outstanding federal tax liabilities which amount to approximately $980,875.21 date back as far as the year 2015. There are also proof of claims filed by the Puerto Rico Electric Power Authority ("PREPA"), the Puerto Rico Telephone Company and real estate taxes filed owed to CRIM; (vi) Debtors have accumulated a substantial amount of litigation related to claims from suppliers and other entities; and (vii) the Aging Report ending on June 30, 2017 and produced by Betteroads discloses that at least 90.4% of Betteroads accounts payables are over 90 days old that amount to $10,073,646.65. The Aging Report ending on June 30, 2017 and produced by Betterecycling discloses that 98.66% of Betterecycling accounts payables are over 90 days old that amount to $16,957,259.71.
On November 17, 2017, a status conference was held in which the parties gave an overview regarding the motion for appointment of trustee and also discussed the motion to dismiss the involuntary petition and the motions for summary judgment filed by Sargeant Marine/ Sargeant Trading and the petitioning creditors. The court stated that assuming the creditors in the syndicate lender facility are considered to be creditors subject to a bona fide dispute, there are at least three (3) other creditors. Counsel for the Debtors contested the validity of the three (3) creditor requirement based on a questionable agreement. Counsel for petitioning creditors stated that the creditors hold final judgments against the Debtors and that the agreement is presented as part of the bad faith defense, and that the agreement was not accepted, and was based on a carve-out proposition. Counsel for Banco Popular stated that it also has debts and claims which are not part of the syndicate lender facility. Counsel for Firstbank clarified that Firstbank has two claims, including a secured claim that is not part of the syndicate lender agreement. Counsel for the Involuntary Debtors challenged that Debtors are not paying debts as they become due. Counsel for the petitioning creditors replied by stating that the Debtors have not opposed in writing. Moreover, the Debtors have seventeen (17) debt collection actions, and 90% of their accounts payable are over 90 days old. The court stated that petitioning creditors have made a prima facie showing that debtors were not generally paying debts as they became due and that it behooves the debtors to oppose this matter.
The court also stated the following: "There is no statutory requirement that petitioning creditors commence an involuntary petition in good faith. The critical issue is whether bad faith is a valid ground to dismiss an involuntary petition. Bad faith is a fact intensive issue which generally relies on equitable principles. In view of the above, the court posed two questions: 1-why should the court apply equity under section 105(a) after the Supreme Court's decision in Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), and this court's decision in In re Edgar A. Reyes Colón, 558 B.R. 563 (Bankr. D. P.R. 2016)1 .... 2- Is there a difference between filing a voluntary petition and filing an involuntary petition in relation to the 'good faith' requirement?"
*531(Lead Case No. 17-04156, Docket No. 135, Lead Case No. 17-04157, Docket No. 98).
Subsequently, on December 27, 2017, the alleged Debtors filed their Initial Opposition to Premature Amended Motion for Summary Judgment by Lenders by which they argued that: (i) the Debtors have stated to the court that the "... facts surrounding the filing of the petition[s] are relevant to put the Court and parties in interest as to the motives of the filing, as well as to the effects of the same inasmuch there are relevant to the adjudication and dismissal of the case either due to bad faith pursuant to section § 303 or section § 305 ;" (ii) "[a]ny and all claims asserted by the Lenders as Syndicate Lenders, as well as BPPR and Firstbank individually in case no. 17-04156 & case no. 17-04157, are subject to a bona fide dispute and subject to state court adjudication of the alleged debtors' counterclaim[s]. Further, it should be observed that simultaneous filing of these [s]tate [c]ourt actions reveals that all these entities behave as one. Discovery in this matter should be allowed and not unwarrantedly be thwarted under the allegations of the protective order as the Lenders apparently intend;" (iii) "[t]o attempt to achieve the involuntary petition [i]n case no. 17-04156, between March and May 2017, Firstbank, Banco Popular, Banco Santander and the Economic Development Bank for Puerto Rico, executed an agreement with the other petitioners to wit, St. James Security Services, Inc., Sargeant Marine, Sargeant Trading and Facsimile Corporation in which these additional and supposedly uncontested petitioners offered payment in preference of those creditors with the same unsecured classification in exchange for their assistance in achieving the liquidation of the corporations assets;" (iv) "[t]o attempt to achieve the involuntary petition [i]n case no. 17-04157, between March and May 2017, Firstbank, Banco Popular, Banco Santander and the Economic Development Bank for Puerto Rico, executed an agreement with the other petitioners to wit, St. James Security Services, Inc., Champion Petroleum, Inc. and Control Force, Corp, in which these additional and supposedly uncontested petitioners offered payment in preference of those creditors with the same unsecured classification in exchange for their assistance in achieving the liquidation of the corporations assets;" (v) "[t]hese petitioners (1) have obligated themselves to litigate [in] unison; (2) none is permitted to deviate from their common interest and strategy; (3) they have settle[d] to participate from the same distribution upon the sale and liquidation of the alleged debtor's assets; (4) all in preference of those creditors with the same unsecured classification;" (vi) "[a]round August of 2016, claiming among other things, alleged breaches of the loan agreements and foreclosure of real and personal property collaterals the syndicate lenders performed an unwarranted extrajudicial foreclosure of over $45 million in accounts receivables, purportedly to satisfy their contested claim of $75 million;" (vii) "[a]lso, the movants unlawfully seized and garnished over $2 million from the companies' operational accounts which contained funds destined for the payment of taxes, employees' salaries, employees' benefits and the repayment of suppliers' raw materials;" (viii) "[e]ven when the alleged Debtors assert that certain debts were not being paid as they became due, as some are evidenced by proof of claims subject to review and/or objections, the alleged debtors contend that these primarily respond to lenders unwarranted intervention;" (ix) petitioning creditors filed these bankruptcy petitions based on improper purposes and thus, bad faith. "In the case at bar, the syndicate lenders seek to circumvent the jurisdiction of the State Court, by forum shopping in *532the Bankruptcy Court. First, their failure to obtain execution remedies that would grant them control of the stock of the corporation coupled with the prohibition to sell the contested credit facilities to a competitor or investors, have driven them to buy their way in the bankruptcy forum through the promise of preferential dividends to the volunteered petitioners, in order to snatch the company from its officers. In regards to other petitioners, they do not seek an equitable relief, they have only entered this proceeding upon a promise of payment, contrary to the bankruptcy equitable distribution scheme." "The petitioners in this case, did not join in the petition to immerse the alleged debtor in this process with the other creditors' best interest at heart. Simply, they were motivated either by competitive market advantages and a check to be written by the syndicate lenders" (Lead case No. 17-04156, Docket No. 167, Lead Case No. 17-04157, Docket No. 123). Also on said date, the alleged Debtors filed their Initial Opposition to Statement of Material Facts (Lead Case No. 17-04156, Docket No. 168, Lead Case No. 17-04157, Docket No. 124).
On December 28, 2017, the Debtors filed their Motion in Compliance with Order: Alleged Debtor's Supplemental Brief on Pending Legal Issues in which they argue that: (i) the court's authority to grant dismissal of these involuntary petitions based upon the grounds of bad faith, improper motive and/or improper bankruptcy purpose is not only pursuant to its equitable powers under 11 U.S.C. § 105 but also based on the statutory provisions of 11 U.S.C. § 303 ; (ii) In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (3rd Cir. 2015) is in harmony with the most conservative reading of Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) and In re Edgar Reyes Colon, 558 B.R. 563 (Bankr. D. P.R. 2016). "It is unquestionable that its ruling is based on a sound interpretation of the code provisions which support a court's statutory authority to dismiss a case for bad faith;" (iii) "[s]ection 303(b) does not require that an involuntary petition be filed in good faith, any more than section 301 requires that a voluntary petition be filed in good faith. Nevertheless, in the former situation (as well as in the latter), the courts have developed a requirement of good faith" See Alan N. Resnick & Henry J. Sommer, 3 Collier on Bankruptcy ¶ 303.16 (16th ed. 2017); (iv) "... good faith requirements provided by the code and even case law, is part of a long lasting judicial policy and congressional intent, applicable to any party which invokes the jurisdiction of the Bankruptcy Court, not just the debtors;" (v) "...a good faith standard protects the jurisdictional integrity of the bankruptcy courts by rendering their powerful equitable weapons (i.e., avoidance of liens, discharge of debts, marshalling and turnover of assets) available only to those debtors and creditors with 'clean hands' " In re Little Creek Dev. Co., 779 F.2d 1068, 1072 (5th Cir. 1986) ; (vi) "[t]he rulings of Law v. Siegel, and Marrama, upholding that debtor's bad faith conduct constitutes a 'cause' for dismissal, further strengthens the legal contention that Section § 303 should statutorily be read allowing and providing for the dismissal of involuntary petition upon the founding of bad faith from creditors;" (vii) and "the alleged debtors contend that all the necessary elements are present to conclude that the court should abstain from exercising its jurisdiction and issue an order of dismissal inasmuch it is in the best interest[s] of [the] debtors and its creditors" (Lead Case No. 17-04156, Docket No. 169, Lead Case No. 17-04157, Docket No. 125).
On December 28, 2017, the Lenders filed their Memorandum and Brief in Compliance with Order in which they contend the *533following: (i) the alleged Debtors' allegations to somehow consolidate all creditors into one, has no basis in law or in fact and, thus should be rejected; (ii) there is no legal basis within the Bankruptcy Code to request a dismissal of an involuntary petition premised on bad faith allegations; (iii) 11 U.S.C.§ 303 does not provide for the inclusion of additional requirements to grant an involuntary petition as it would have if it had included a non-exhaustive list of additional requirements anteceded by the word "including;" (iv) the term "bad faith" is not included in sections 303(b) and (h) as a defense to be raised by the debtor upon the petitioning creditors' filing of an involuntary petition. "Bad faith" is not an independent basis for dismissing an involuntary petition; (v) it is only pursuant to 11 U.S.C. § 303(i)(2) that the Code mentions the term "bad faith" and only on the basis of the awarding of damages if the court dismisses an involuntary petition; (vi) "[t]he language of section 303 is unambiguous to the extent that although 'bad faith,' 'good faith,' and the term 'cause' as a non-exhaustive basis for dismissal, have been included in other sections of the Code, they were explicitly not included here." "That is strictly construing, as the Lenders are requesting this Court to do, the terms of the statute, section 303 only states that a 'prerequisite for a claim of bad faith is that the court must have dismissed the petition' " In re Knoth, 168 B.R. 311, 315 (Bankr. D.S.C. 1994) ;" (vii) "[t]here is no legal basis for this Court not to read the statute literally, since the exclusion by Congress of the term 'bad faith,' 'good faith,' or 'cause' from section 303 was done, as evidenced by the explicit inclusion of these terms in other areas of the Code, purposely;" (viii) "... this court should determine that, pursuant to the case law regarding statutory interpretation of the Code, as applied by Law and In re [Reyes] Colón, the explicit exclusion of a good faith requirement in the filing of an involuntary petition was not the result of inadvertence since '[u]nder normal statutory construction, we would not assume that the failure to include some item in a statute is an oversight that the court may correct.' " United States v. Neal, 249 F.3d 1251, 1255 (10th Cir. 2001) ; (ix) "...in the case of involuntary petitions, besides the mention of bad faith in section 303(i)(2), '[g]ood or bad faith is not an explicit requirement for granting involuntary relief under § 303. And the plain language of § 303(i) -where bad faith is mentioned-contemplates bad faith only as a requirement for the recovery of actual or punitive damages after the involuntary petition is dismissed. Thus, where, as here, a petitioning creditor meets the prerequisite requirements under § 303 a finding of bad faith [is] appropriate. In re Kennedy, 504 B.R. 815, 823-824 (Bankr. S.D. Miss. 2014) ;" (x) contrary to the provisions of Chapter 7, 11, 12 and 13, section 303 does not allow for the dismissal for bad faith or for "cause." "The latter is the notable difference between the good faith requirement in a voluntary petition versus the existence of no such requirement in the statute within the context of an involuntary petition. The presence of the words 'cause,' 'includes,' 'including,' and 'bad faith' or 'good faith' permeate multiple areas of the Code. Accordingly, this Court should not incorporate to the Code additional provisions that were purposely excluded by Congress since equitable powers under section 105 do 'not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law or constitute a roving commission to do equity.' " United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986) (Lead Case No. 17-04156, Docket No. 170, Lead Case No. 17-04157, Docket No. 126). *534On January 2, 2018, Firstbank filed a Motion Joining the Lenders' Memorandum and Brief in Compliance with Order (Lead Case No. 17-04156, Docket No. 172, Lead Case No. 17-04157, Docket No. 128). On January 8, 2018, Sargeant Marine and Sargeant Trading filed a Notice of Joinder in the Lenders' Memorandum and Brief in Compliance with Order (Lead Case No. 17-04156, Docket No. 174).
On January 17, 2018, the alleged Debtors filed their Reply to Lenders' Memorandum contending that: (i) the syndicate lenders comprised of Banco Popular, Firstbank, Banco Santander and the BDE are subject to bona fide dispute and should be considered as one entity pursuant to their syndicate agreement which they have failed to produce pursuant to Fed. R. Bankr. P. 2019(c)(4) ; (ii) "[a]ny and all of the claims asserted by the Lenders as Syndicate Lenders, as well as BPPR and Firstbank individually on case no. 17-04156 & case no. 17-04157, are subject to a bona fide dispute and subject to a state court adjudication of the alleged debtors' counterclaim[s];" (iii) the Lenders have ".... executed 'confidential' agreements with the other petitioners in which these additional and supposedly uncontested petitioners were offered payment in preference of those creditors with the same unsecured classification in exchange for their assistance in achieving the liquidation of the corporations' assets;" (iv) "[a]s such, against other parties in interest, they as well have become so entangled with syndicate lenders, that they shouldn't be considered different and/or independent entities for purposes of Section 303(b). In re Iowa Coal Min. Co., Inc., 242 B.R. 661 (1999), (resolving that relationships between certain parties were so intertwined that it would be unfair for the court to attempt to disentangle them to meet § 303(b) requirements);" (v) Lenders' reliance on In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993)"...is misplaced and their secret agreements and preferential distributions over other parties in interest are not without consequence;" (vi) "[t]heir agreement on how to distribute liquidation proceeds among them from a common pot is not only made in bad faith when viewed as a preference over other creditors, but that being a binding agreement demonstrates that substance over form, they have consolidated their interest;" (vii) [t]he rulings of Law v. Siegel, and Marrama, upholding that debtor's bad faith conduct constitutes 'cause' for dismissal on § 1112, further strengthens the legal contention that section 303 should be statutorily be read as allowing and providing for the dismissal of involuntary petition upon the founding of bad faith from creditors, as they have preserved through interpretation of the Code what Congress failed to expressly provide for on the Bankruptcy Abuse Prevention and Consumer Protection Act;" (viii) "...the reading of the Code by the Third Circuit's ruling in In re Forever Green Athletic Fields, Inc., is the most coherent with Congressional intent. It should be uncontested that within the confines of section 303, bad faith is a conduct that is condemned by Congress inasmuch it grants the Court the express authority to grant even punitive damages for incurring in such conduct;" (ix) "... if in fact a debtor is not paying its debts, a court is not automatically and/or mandatorily required to issue an order of relief;" (x) "....the syndicate Lenders once again have self-crafted the alleged compliance with section 303(h)(1) inasmuch pending claims or balances were primarily provoke[d] by them;" (xi) "[t]he Lenders come with 'unclean hands' upon this court and parties waving the flag of alleged debtors' purported incompliance with certain creditors, when it was them which authorized or deauthorized payments and which seized *535monies destined for payment of taxes, employees' salaries, employees' benefits and, the repayment of suppliers' raw materials;" (xii) "...the pendency of state law liquidation proceedings or the existence of unsettled issues of state law is relevant to an abstention decision under section 305(a)(1) ;" and (xiii) "Lenders have no risk, outside the bankruptcy forum, and have to their avail a court with jurisdiction to grant any remedy to which they are entitled. However, alleged debtors, parties in interest and other creditor[s] are undoubtedly to be affected if an order for relief was granted at this point as the lenders, together with its competitors, will seek t[he] transfer and liquidation of their assets in what they purport is an encumbered estate" (Lead Case No. 17-04156, Docket No. 181, Lead Case No. 17-04157, Docket No. 136).
On January 17, 2018, the Lenders filed their Reply to "Motion in Compliance with Order" contending that: (i) it is uncontested that the Petitioning Creditors satisfy the requirements to commence an involuntary petition under 11 U.S.C. §§ 303(b) and 303(h)(1). The Lenders' brief and the Debtors' failure to rebut or address the issue in their brief establish that the involuntary petitions satisfy 11 U.S.C. § 303(b) ; (ii) it is uncontested that the Debtors are generally not paying their debts as they become due. The Debtors have failed to contest or even address this point in their brief; (iii) after Law v. Siegel and In re Edgar Colón, the court's analysis should focus only in the requirements of 11 U.S.C. §§ 303(b) and 303(h)(1) which are uncontested and enter the corresponding orders for relief; (iv) the court should not create a separate and independent defense of bad faith to dismiss an involuntary petition; (v) the Bankruptcy Code only mentions the term "bad faith" as a basis to award damages once and if the court dismisses an involuntary petition pursuant to 11 U.S.C. § 303(i)(2) ; (vi) it is uncontested that the courts that have inserted an independent defense of bad faith to a properly filed involuntary petition have done so on equitable grounds; (vii) following In re Edgar Reyes Colón, this court should not use equity to create exceptions or requirements that are not explicitly included in section 303(b) of the Code and thus, should not allow a defense of bad faith to involuntary petitions; (viii) none of the cases cited by the Debtors in their brief contest the fact that section 303, contrary to the pertinent sections of all other chapters in the Code regarding dismissal, does not include non-exhaustive language such as "cause," or "including," that the pertinent sections of Chapter 9, 11, 12, and 13 do have. This expansive reading attached to the word "cause" and "include" or "including" is present in Chapter 11 and all other chapters of the Code pertaining to voluntary petitions. Section 303 does not allow for a dismissal for bad faith or for "cause;" (ix) in the case of involuntary petitions, besides the mention of bad faith in section 303(i)(2), "[g]ood or bad faith is not an explicit requirement for granting involuntary relief under § 303. And the plain language of § 303(i) -where bad faith is mentioned contemplates bad faith only as a requirement for the recovery of actual or punitive damages after the involuntary petition is dismissed; (x) the Debtors' request to abstain has no basis because it is based on the unfounded allegation that once the Lenders "...dismantle the alleged debtor's defenses/counterclaims in the State Court complaint or through the appointment of a trustee the result will be that we will be dealing with fully over encumbered estates in which the Syndicate Lenders will control and resolve in their exclusive favor all assets of this company." The Debtors' allegations are incorrect because they have numerous creditors, and some of *536which are owed material amounts of money. Moreover, multiple creditors have filed collection actions against the Debtors; and (xi) the Debtors have been unable to state why the abstention is in the best interests of creditors. "Granting an abstention motion pursuant to § 305(a)(1) requires more than a simple balancing harm to the debtor and creditors; rather the interests of both the debtor and its creditors must be served by granting the requested relief" In re Costa Bonita Beach Resort, Inc., 479 B.R. 14, 46 (Bankr. D.P.R. 2012) (Lead Case 17-04156, Docket No. 182, Lead Case No. 17-04157, Docket No. 137).
On March 9, 2018, Betteroads filed a Motion Submitting Exhibits of Docket No. 168 with Certified English Translations (Lead Case 17-04156, Docket No. 212). Also on said date, Betterecycling filed a Motion Submitting Exhibits of Docket No. 124 with Certified English Translations (Lead Case No. 17-04157, Docket No. 169).
On March 13, 2018, petitioning creditor Control Force Corp., filed a Motion to Inform Joinder to Lenders' Motions. The petitioning creditor Control Force, Corp., joined the following motions: (i) Emergency Motion to Appoint a Trustee (Docket No. 8); (ii) Motion for Protective Order (Docket No. 51); (iii) Opposition to Motion to Dismiss (Docket No. 52); (iv) Sur-Reply to Debtor's Reply to Motion to Dismiss (Docket No. 79); (v) Motion for Summary Judgment and Memorandum of Law (Docket No. 87); (vi) Statement of Uncontested Material Facts (Docket No. 88); (vii) Lenders' Memorandum and Brief (Docket No. 126); and (viii) Response to Motion to Comply with Order (Docket No. 167) (Lead Case No. 17-04157, Docket No. 173). Also on March 13, 2018, petitioning creditor Champion Petroleum, Inc., filed a Motion to Inform Joinder to Lenders' Motions. The petitioning creditor Champion Petroleum, Inc., joined the following motions: (i) Emergency Motion to Appoint a Trustee (Docket No. 8); (ii) Motion for Protective Order (Docket No. 51); (iii) Opposition to Motion to Dismiss (Docket No. 52); (iv) Sur-Reply to Debtor's Reply to Motion to Dismiss (Docket No. 79); (v) Motion for Summary Judgment and Memorandum of Law (Docket No. 87); (vi) Statement of Uncontested Material Facts (Docket No. 88); (vii) Lenders' Memorandum and Brief (Docket No. 126); and (viii) Response to Motion to Comply with Order (Docket No. 167) (Lead Case No. 17-04157, Docket No. 174).
On March 22, 2018, petitioning creditor Facsimil Paper Connection, Inc., filed a Motion to Inform Joinder to Lenders' Motions . The petitioning creditor Facsimil Paper Connection, Inc. joined the following motions: (i) Emergency Motion to Appoint a Trustee (Docket No. 14); (ii) Motion for Protective Order (Docket No. 73); (iii) Opposition to Motion to Dismiss (Docket No. 74); (iv) Sur-Reply to Debtor's Reply to Motion to Dismiss (Docket No. 100); (v) Motion for Summary Judgment and Memorandum of Law (Docket No. 120); (vi) Statement of Uncontested Material Facts (Docket No. 121); (vii) Lenders' Memorandum and Brief (Docket No. 170); and (viii) Response to Motion to Comply with Order (Docket No. 209) (Lead Case No. 17-04156, Docket No. 220). Also on March 22, 2018, petitioning creditor, St. James Security Services, LLC2 filed a Motion to Inform Joinder to Lenders' Motions. The petitioning creditor, St. James Security Services, LLC joined the following motions: (i) Emergency Motion to Appoint a Trustee (Docket No. 14); (ii) Motion for Protective Order (Docket No. 73); (iii) Opposition to Motion to Dismiss (Docket No. 74); (iv)
*537Sur-Reply to Debtor's Reply to Motion to Dismiss (Docket No. 100); (v) Motion for Summary Judgment and Memorandum of Law (Docket No. 120); (vi) Statement of Uncontested Material Facts (Docket No. 121); (vii) Lenders' Memorandum and Brief (Docket No. 170); and (viii) Response to Motion to Comply with Order (Docket No. 209) (Lead Case No. 17-04156, Docket No. 221).
Subsequently, on April 4, 2018, the Lenders and the Petitioning Creditors filed a Joint Motion to Inform and Submitting Documents after considering the allegations made by the U.S. Trustee in its Objection to Alleged Debtors' Request to File Documents under Seal , "... in order to avoid any further delay in the Court's adjudication of the involuntary petitions, the Lenders and the Petitioning Creditors wish to disclose Confidential Documents... The present disclosure is made voluntarily" (Lead Case No. 17-04156, Docket No. 230, Lead Case No. 17-04157, Docket No.186). On September 17, 2018, the Lenders filed in both cases a Motion Seeking Expedited Summary Judgment and Status Conference (Lead Case No. 17-04156, Docket No. 241, Lead Case No. 17-04157, Docket No.191), and on October 15, 2018, the alleged Debtors filed their Position as to Docket Nos. 241 & 245 : Case No. 17-04156, Docket No. 250, Lead Case No. 17-04157, Docket No. 196).
Material Uncontested Facts
Betteroads in its Initial Opposition to Statement of Material Facts (Lead Case No. 17-04156, Docket No. 168, pg. 9) which had been proposed by the Lenders in its Statement of Uncontested Material Facts , only admitted to statement number 23 which is that on June 27, 2017, Betteroads filed a "Motion of the Alleged Debtor Betteroads Asphalt, LLC to dismiss the Involuntary Bankruptcy Petition (Lead Case No. 17-04156, Docket No. 121, pg. 4). Betterecycling in its Initial Opposition to Statement of Material Facts (Lead Case No. 17-04157, Docket No. 124, pg. 15) which had been proposed by the Lenders in its Statement of Uncontested Material Facts , only admitted to statement number 43 which is that on June 27, 2017, Betterecycling filed a "Motion of the Alleged Debtor Betterecycling Corporation to dismiss the Involuntary Bankruptcy Petition (Lead Case No. 17-04157, Docket No. 88, pg. 7). In addition, Betteroads in its Opposing Statement of Material Facts (Lead Case No. 17-04156, Docket No. 130) which had been proposed by Sargeant Marine and Sargeant Trading in their Statement of Uncontested Material Facts did not admit to any of the uncontested material facts proposed by Sargeant Marine and Sargeant Trading (Lead Case No. 17-04156, Docket No. 105). Betteroads as part of its opposition included a new set of proposed uncontested facts and Sargeant Marine and Sargeant Trading filed their Opposition to "New Set of Proposed Uncontested Facts" (Lead Case No. 17-04156, Docket No. 152) in which it admitted various statements. Sargeant Marine and Sargeant Trading admitted and clarified the following new proposed uncontested facts:
1. On March 29, 2017, the Court denied a motion for preventive garnishment filed by the Syndicate Lenders. Sargeant clarifies that this alleged fact is inconsequential and immaterial as to the issues presented in the Motion for Summary Judgment .
2. On August 24, 2014, Sargeant received payment for $192,000. Sargeant clarifies that this payment was made before the appointed arbitration panel entered a Decision and Final Award against the Debtor and before the U.S. District Court for the Southern District of New York entered the final Judgment and *538thus, the amounts stated in such Award and Judgment include credit for the amount of such payment.
3. On October 16, 2014, Sargeant received payment for $100,000. Sargeant clarifies that this payment was made before the appointed arbitration panel entered a Decision and Final Award against the Debtor and before the U.S. District Court for the Southern District of New York entered the final Judgment and thus, the amounts stated in such Award and Judgment include credit for the amount of such payment.
4. On October 28, 2016, Sargeant collected the amount of $140,017.80. Sargeant admitted in its Statement of Uncontested Facts, collection $142,026.72, which includes this amount.
5. The alleged Debtor has had disputes with Sargeant aside of the purported claim as evidence per case No. 15-03681 (Docket Nos. 184, 191, 192, 197, 202 & 209). Sargeant states that this fact is inconsequential and immaterial as to the issues presented in the Motion for Summary Judgment .
The Debtors denied as drafted the majority of the uncontested material facts submitted by the Lenders and petitioning creditors Sargeant Marine and Sargeant Trading based upon the following common denominators: (i) the Debtors admit that the Petitioning Creditors at some point had their claims adjudicated by a state court. However, they "... deny any inference that these petitioners should be considered independent petitioners, inasmuch they have consolidated their interests prior [to] the filing of this involuntary proceeding in exchange for payment in preference of those creditors with the same unsecured classification;" (ii) Sargeant Marine and Sargeant Trading act as one and thus, should constitute one claimant. Moreover, all references to the mentioned award is made collectively without any distinction as to either entity. "Finally, as per the alleged Confidential Agreement with the Syndicate Lenders, Sargeant Marine, Inc. and Sargeant Trading LTD, present their claim as one, jointly settle with Syndicate Lender on distribution ... without distinction of one another;" and (iii) regarding the proof of claims that have been filed in both cases and as to the Aging Reports for the Debtors as of June 30, 2017 in which 90.4% of Betteroads' debts are over 90 days old and in the case of Betterecycling 98.66% of its debs are over 90 days old, the Debtors deny the same as drafted and state the following: "[i]t is a fact that lender's intervened, controlled, authorized or deauthorized payments to creditors of the alleged debtors. Further, lender unwarrantedly extrajudicially foreclosure of over $45 million in accounts receivables and all cash equivalents of the alleged debtor provoking a default on certain debts. It is Lender['s] unwarranted and illegal actions which are subject to the State Court's adjudication which restitution may provide for the payments of the creditors' claims, which they themselves hindered."
The material facts that are in controversy and which the court will delve into are directly related with the requirements of the numerosity of creditors and whether the Debtors are not paying their debts as they become due the pursuant under 11 U.S.C. § 303(b) and (h)(1). Thus, these material facts in controversy are related to some of the legal controversies in this case.
Legal Issues
There is before the court a motion to dismiss filed by each alleged Debtor in each lead bankruptcy case. There is also before the court a motion for summary *539judgment filed by the Lenders and the opposition filed by each alleged Debtor. In addition, there is a motion for summary judgment filed by petitioning creditors Sargeant Marine and Sargeant Trading in the Betteroads involuntary bankruptcy proceeding. The legal issues in the Debtors' motion to dismiss in the Betteroads and Betterecycling involuntary bankruptcy petition and the motions for summary judgment are all related and intertwined because they all gravitate around the same central issues which are namely: whether these involuntary bankruptcies satisfy the requirements of 11 U.S.C. §§ 303(b)(1) and 303(h). The other key legal issue is whether "bad faith" is a "cause" for dismissal in involuntary bankruptcy proceedings pursuant to 11 U.S.C. § 303. Moreover, the other legal issue that the alleged Debtors bring forth in their motion to dismiss is whether the court should abstain from delving into these involuntary bankruptcy proceedings pursuant to 11 U.S.C. § 305(a)(1). For the sake of expediency and judicial economy, the court has combined both involuntary bankruptcy proceedings into one opinion and order given that the legal issues before the court are very similar. The court's analysis is in stages because whether it goes to the next stage is dependent upon the outcome of the prior stage. The court will start by delving into whether the Lenders and Petitioning Creditors satisfy the requirements of 11 U.S.C. §§ 303(b) and 303(h)(1) for the alleged Debtors. If these requirements are satisfied, then the court will consider whether "bad faith" is a "cause" for dismissal in involuntary bankruptcy proceedings. Lastly, the court will consider the alleged Debtors' request for discretionary abstention pursuant to 11 U.S.C. § 305(a)(1) is appropriate in these involuntary bankruptcy proceedings.
Legal Analysis & Discussion
Fed. R. Civ. P. 12(b)(6)
A debtor may contest an involuntary petition by presenting defenses through a motion in the manner prescribed by Fed. R. Civ. P. 12 or by presenting defenses in an answer. Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, § 14.23 (5th ed.2018). In both of the involuntary bankruptcy petitions, the Debtors disclosed that the motion to dismiss was under Fed. R. Civ. P. 12(b), but did not specify under which particular defense its motion to dismiss was based upon. However, the debtors' motion to dismiss or answer presented the affirmative defenses regarding the lack of legal grounds by the petitioning creditors for failure to comply with 11 U.S.C. §§ 303(b) and 303(h)(1) therefore, resulting in the ineligibility of the debtor to be an involuntary debtor.
"The purpose of a motion to dismiss under Fed. R. Civ. P. 12(b)(6) is to assess the legal feasibility of a complaint, not to weigh the evidence which the plaintiff offers or intends to offer." Velez Arcay v. Banco Santander de P.R. (In re Velez Arcay), 499 B.R. 225, 230 (Bankr. D.P.R. 2013), citing Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2nd Cir.1984) ; Citibank, N.A. v. K-H Corp., 745 F.Supp. 899, 902 (S.D.N.Y. 1990). Therefore, to survive a Fed. R. Civ. P. 12(b)(6) motion to dismiss, a complaint must contain sufficient factual matter that, accepted as true, "state[s] a claim to relief that is plausible on its face." Bell Atlantic 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 pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. at 556, 127 S.Ct. 1955. The Twombly standard was further developed *540in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), advising lower courts that "determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." 556 U.S. at 679, 129 S.Ct. 1937. "In keeping with these principles, a court considering a motion to dismiss can choose to begin by identifying pleadings that, 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 679, 129 S.Ct. 1937. In sum, allegations in a complaint cannot be speculative and must cross "the line between the conclusory and the factual". Peñalbert-Rosa v. Fortuño-Burset, 631 F.3d 592, 595 (1st Cir. 2011). "[A]n adequate complaint must provide fair notice to the defendants and state a facially plausible legal claim." Ocasio-Hernandez v. Fortuño-Burset, 640 F.3d 1, 11 (1st Cir. 2011).
In Schatz v. Republican State Leadership Committee, 669 F.3d 50, 55 (1st Cir. 2012), the U.S. Court of Appeals for the First Circuit (the "First Circuit") established a two-step standard for motions to dismiss under Fed. R. Civ. P. 12(b)(6). Step one: isolate legal conclusions. Step two: take the complaint's well-pleaded (non-conclusory) allegations as true, drawing all reasonable inferences in favor of the plaintiff and determine if they plausibly narrate a claim for relief. Also see Pérez v. Rivera (In re Pérez), 2013 WL 1405747 at *3, 2013 Bankr. LEXIS 1561 at **9-10 (Bankr. D.P.R. 2013) ; Zavatsky v. O'Brien, 902 F.Supp.2d 135, 140 (D. Mass. 2012) ; Guadalupe-Báez v. Pesquera, 819 F.3d 509, 514-15 (1st Cir. 2016).
After considering the above legal analysis and for the reasons discussed below, the Debtors' (Betteroads and Betterecycling) motion to dismiss are hereby denied in part at this juncture, pending an adjudication of whether the petitioning creditors filed the involuntary petitions in bad faith.
Standard for Motion for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, is applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure. Summary judgment should be entered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Bankr. P. 7056 ; see also , In re Colarusso, 382 F.3d 51 (1st Cir. 2004), citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
"The summary-judgment procedure authorized by Rule 56 is a method for promptly disposing of actions in which there is no genuine issue as to any material fact or in which only a question of law is involved." Wright, Miller & Kane, Federal Practice and Procedure, 3d, Vol 10A, § 2712 at 198. " Rule 56 provides the means by which a party may pierce the allegations in the pleadings and obtain relief by introducing outside evidence showing that there are no fact issues that need to be tried." Id. at 202-203. Summary judgment is not a substitute for a trial of disputed facts; the court may only determine whether there are issues to be tried, and it is improper if the existence of a material fact is uncertain. Id. at 205-206.
*541Summary judgment is warranted where, after adequate time for discovery and upon motion, a party fails to make a showing sufficient to establish the existence of an element essential to its case and upon which it carries the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party must "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).
For there to be a "genuine" issue, facts which are supported by substantial evidence must be in dispute, thereby requiring deference to the finder of fact. Furthermore, the disputed facts must be "material" or determinative of the outcome of the litigation. Hahn v. Sargent, 523 F.2d 461, 464 (1st Cir. 1975), cert. denied, 425 U.S. 904, 96 S.Ct. 1495, 47 L.Ed.2d 754 (1976). When considering a petition for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 473, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962) ; Daury v. Smith, 842 F.2d 9, 11 (1st Cir. 1988).
The moving party invariably bears both the initial as well as the ultimate burden in demonstrating its legal entitlement to summary judgment. Adickes v. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). See also López v. Corporación Azucarera de Puerto Rico, 938 F.2d 1510, 1516 (1st Cir. 1991). It is essential that the moving party explain its reasons for concluding that the record does not contain any genuine issue of material fact in addition to making a showing of support for those claims for which it bears the burden of trial. Bias v. Advantage International, Inc., 905 F.2d 1558, 1560-61 (D.C. Cir. 1990), cert. denied, 498 U.S. 958, 111 S.Ct. 387, 112 L.Ed.2d 397 (1990).
The moving party cannot prevail if any essential element of its claim or defense requires trial. López, 938 F.2d at 1516. In addition, the moving party is required to demonstrate that there is an absence of evidence supporting the nonmoving party's case. Celotex, 477 U.S. at 325, 106 S.Ct. 2548. See also, Prokey v. Watkins, 942 F.2d 67, 72 (1st Cir. 1991) ; Daury, 842 F.2d at 11. In its opposition, the nonmoving party must show genuine issues of material facts precluding summary judgment; the existence of some factual dispute does not defeat summary judgment. Kennedy v. Josephthal & Co., Inc., 814 F.2d 798, 804 (1st Cir. 1987). See also, Kauffman v. Puerto Rico Telephone Co., 841 F.2d 1169, 1172 (1st Cir. 1988) ; Hahn, 523 F.2d at 464. A party may not rely upon bare allegations to create a factual dispute but is required to point to specific facts contained in affidavits, depositions and other supporting documents which, if established at trial, could lead to a finding for the nonmoving party. Over the Road Drivers, Inc. v. Transport Insurance Co., 637 F.2d 816, 818 (1st Cir. 1980).
The moving party has the burden to establish that it is entitled to summary judgment; no defense is required where an insufficient showing is made. López, 938 F.2d at 1517. The nonmoving party need only oppose a summary judgment motion once the moving party has met its burden. Adickes, 398 U.S. at 159, 90 S.Ct. 1598.
For the reasons explained below, the Lenders' Motion for Summary Judgment is granted in part and denied in part and Sargeant Marine and Sargeant Trading's Motion for Summary Judgment is also granted in part and denied in part.
*542Involuntary Bankruptcy Petitions
Involuntary bankruptcies may only be filed under chapters 7 and 11 of the Bankruptcy Code and certain persons are expressly excluded from being subject to an involuntary bankruptcy pursuant to 11 U.S.C. § 303(a). Generally, involuntary bankruptcies are filed by creditors in cases of business mismanagement and in cases in which the potential debtor is transferring assets in anticipation of creditor lawsuits and/or proceedings because the involuntary filing can serve as a vehicle to prevent diminution of assets by an involuntary debtor and provide unsecured creditors with a more equitable treatment. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.01 (16th ed. 2018); Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, § 14.1 (5th ed.2018). The decision to file an involuntary petition is a serious one, which might result in drastic consequences for both the debtor and the petitioning creditors. If an order for relief is entered, the debtor's ability to use or transfer the properties is compromised and the debtor faces the consequences from the denial of credit. If the involuntary petition fails, the petitioning creditors may be subject to sanctions and damages. See Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, §§ 14.1 & 14.2 (5th ed.2018). Petitioning creditors must diligently investigate and therefore, fully understand the debtor's assets, liabilities and financial condition before filing an involuntary petition since there are multiple factors which must be evaluated. Id. at § 14.2.
Once the involuntary bankruptcy petition is filed a bankruptcy estate is created under 11 U.S.C. § 541(a) and the provisions of the automatic stay come into effect. If the petitioning creditors believe that the debtor is depleting estate assets, they may request the appointment of an interim trustee under 11 U.S.C. § 303(g), before the order of relief is entered pursuant to 11 U.S.C. § 303(h).
Requirements under 11 U.S.C. § 303(b)
11 U.S.C. § 303 governs involuntary bankruptcy petitions under cases under Chapter 7 or 11 and provides in pertinent part that:
"(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title -
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $15,775 of such claims." 11 U.S.C. § 303(b)(1), (2).
Therefore, there are three (3) requirements that must be satisfied to commence an involuntary bankruptcy petition against a debtor that has twelve or more creditors; namely: (i) there must be three (3) or more petitioning creditors; (ii) each petitioning creditor must hold a claim *543against the debtor that is not contingent as to liability or the subject of a bona fide dispute; and (iii) the claims must aggregate at least $15,775 more than the value of liens on the debtor's property. The time for determining issues regarding the numerosity requirement is the date of the filing of the involuntary petition.
A petitioning creditor must be the holder of a claim. The term "claim" pursuant to 11 U.S.C. § 101(5) 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; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured." 11 U.S.C. § 101(5)(A), (B).
Bona fide dispute as to liability or amount
The petitioning creditors cannot hold a claim that is subject to a bona fide dispute as to liability or amount. The Bankruptcy Code does not define the term "bona fide dispute," and its meaning has resulted in considerable litigation and disagreement. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.01 (16th ed. 2018). The petitioning creditor has the burden to establish a prima facie case that there is no bona fide dispute as to both liability and amount. Once the petitioning creditor satisfies its burden, the burden shifts to the debtor to demonstrate that a bona fide dispute exists as to liability or amount Id. at ¶ 303.11[3]. "The term 'bona fide dispute as to liability or amount' also appears in section 303(h), and although many courts treat the terms interchangeably, they refer to different situations. In the context of section 303(b), bona fide disputes disqualify specific entities from filing an involuntary petition. Section 303(h) provides that an order for relief may be entered upon an involuntary petition if the debtor is generally not paying its debts as they become due. The standard of section 303(h), however, contains an important qualification: The determination of 'generally not paying' excludes debts that are subject to a bona fide dispute as to liability or amount. It is possible that the petitioning creditor (whose claim is subject to a bona fide dispute under section 303(b) ) may be a creditor whose claim is excluded from the calculation of the 'generally not paying' standard under section 303(h), for example because of the existence of a counterclaim. Counterclaims may not make the petitioner's claim disputed for purposes of disqualifying the creditor as a petitioner, but it may render the claim disputed for section 303(h) purposes because the debtor argues that it does not owe the creditor anything." Id. at ¶ 303.11. To determine whether a claim is subject to a bona fide dispute as to liability or amount, most courts use the objective standard. Under the objective approach, if there are substantial factual or legal questions raised by the debtor, the debtor can preclude the creditor from being an eligible petitioning creditor. However, application of the objective standard by the courts has been considerably difficult. Id. at § 303.11[11]. "In short, a bona fide dispute exists if there is an objective basis for either a factual or legal dispute as to the validity of the debt or the amount owed. In determining the existence of a bona fide dispute, it is not the role of the court to resolve disputed issues of fact or law, but only to determine if such issue exists. However, this does not mean the court is prohibited from addressing the legal merits *544and may be required to conduct a limited analysis of factual or legal issues." See Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, § 14.10 (5th ed.2018).
The burden is on the Petitioning Creditors to establish a prima facie case that there is no bona fide dispute as to both liability or amount. If this burden is satisfied, then the burden shifts to the alleged Debtors to demonstrate that a bona fide dispute exists as to liability or amount. The Lenders' position is that even if the court found that the Lenders' claims under the syndicated credit facility are subject to a bona fide dispute, such disputed facts are immaterial and irrelevant, given that the Petitioning Creditors have presented a prima facie case supported by at least three (3) petitioning creditors with claims that are not contingent or the subject of a bona fide dispute as to liability or amount. At this juncture, and as expressed below, it is not necessary for the court to delve into whether there is a bona fide dispute as to liability or amount between the Lenders and each of the alleged Debtors because there are at least three (3) petitioning creditors with claims which have a final, firm and unappealable state court judgment.
Joint Claims
The issue of joint claims may be a determining factor because it may affect the number of petitioning creditors. "Joint holders of one obligation, such as those debts owed to joint payees under a promissory note, are counted as one creditor and are not counted as separate creditors for the purposes of the number of petitioning creditors if payment on the obligation could only be enforced jointly. However, if each creditor holds a claim and can enforce the obligation, each is counted for the purposes of counting the number of petitioning creditors. The affiliation of the petitioning creditors does not preclude them from being counted as separate creditors if each one is a separate entity with a distinct claim and they were not formed for the purpose of subverting the three petitioner requirement." See Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, § 14.9 (5th ed.2018).
A judgment held by two (2) creditors can constitute one single claim or two distinct claims depending on state law and the parties' intention and behavior are also considered. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.14[7] (16th ed. 2018). "If there were distinct and independent obligations giving rise to the judgment, each holder may be separate for qualifying as a petitioning creditor under section 303(b)." Id. at ¶ 303.14[7].
The Debtors pose two main arguments regarding the numerosity requirement of the Petitioning Creditors. The first argument is that the Syndicate Lenders' claims are subject to a bona fide dispute and subject to state court adjudication of the alleged debtors' counterclaims. Moreover, the simultaneous filing of the various state court actions reveals that all of these entities behave as one. However, this particular argument is moot given that the Lenders and Petitioning Creditors contend and have shown that they have the necessary three petitioning (3) creditors with claims that are not contingent or the subject of a bona fide dispute as to liability or amount for each bankruptcy petition.
The second argument is that the alleged Debtors are cognizant that the Petitioning Creditors' claims were adjudicated by a state court. However, the alleged Debtors argue that these petitioners should not be considered independent petitioners because they consolidated their interests prior *545to filing these involuntary petitions in exchange for payment in preference of those creditors with the same unsecured classification. The consolidation of the Lenders and the Petitioning Creditors' interests was executed through various Carve Out and Settlement Agreements by which the Lenders and each creditor agreed that the former "... [u]pon the occurrence of a Carve-Out Recovery Event, from the gross cash proceeds recovered therefrom (and, for the avoidance of doubt, actually received by the Lenders in cash, free and clear of any claims, counterclaims, liens, or encumbrances, pursuant to order of the Bankruptcy Court) (the 'Carve-Out Recovery Event Cash Proceeds')" either a certain amount or a certain percentage of the Allowed Creditor Unsecured Claim, whichever is lower, shall be delivered by the Lenders to the creditor on account of the Allowed Creditor Unsecured Claim (Lead Case No. 17-04156, Docket No. 230, Lead Case no. 17-04157, Docket No. 186). The Lenders executed Carve Out and Settlement Agreements with the following Petitioning Creditors: (i) Champion Petroleum, Inc. (Betterecycling); (ii) St. James Security Services, LLC. (Betteroads); (iii) Facsimil Paper Connection Corp. (Betteroads); (iv) Control Force, Corp. (Betterecycling); (v) Sargeant Marine Inc. and Sargent Trading, LLC (Betteroads; and (vi) St. James Security Services, LLC (Betterecycling). Therefore, the Debtors' contend that these petitioning creditors in exchange for their assistance in achieving the liquidation of the corporations' assets obligated themselves to do the following: (i) litigate in unison; (ii) not to deviate from their common interest and strategy; (iii) they have settled to participate from the same distribution upon the sale and liquidation of the alleged debtor's assets and (iv) all in preference of those creditors with the same unsecured classification.
The alleged Debtors argue that the petitioning creditors have become so entangled with the Syndicate Lenders that they should not be considered different and/or independent entities for purposes of the numerosity requirement of 11 U.S.C. § 303(b). The alleged Debtors base their argument in the case of In re Iowa Coal Min. Co., Inc., 242 B.R. 661 (Bankr. S.D. Iowa 1999). The court finds that the alleged Debtors' reliance in In re Iowa Coal Min. Co., Inc. is misplaced because in this particular case the bonding companies presented themselves to the court as one creditor with one claim based on the reclamation agreement. Moreover, the court concluded that for purposes of 11 U.S.C. § 303(b) the bonding companies constituted one creditor with one claim because the relationships of the bonding companies and the coal companies were so intertwined and the petitioning creditors had been dealing with the debtors as one entity for an extended period of time. The court stated that the following factors taken together persuaded that the court that the bonding companies was basically one creditor with one claim: (i) all of the petitions for each of the coal mining companies filed by the bonding companies were virtually identical. The creditors' claims were evinced by the same documentary evidence. Nowhere in the petitions or exhibits do the bonding companies allocate the amount of debt owed to each one of them by the coal companies; (ii) in their petitions the bonding companies refer to the reclamation agreement and modifications to the same as the basis of their claim; (iii) the bonding companies alleged that certain indemnity agreements and subrogation rights serve as an added basis for their claims but they did not itemize the payments, or identify for which bond or company's benefit the payments were made; (iv) the coal companies executed a mortgage *546and security interest based upon the reclamation agreement jointly to the three bonding companies. The court noted that based upon this particular fact; "[i]t would appear that through the reclamation agreement and the subsequent mortgage and security agreement, the bonding companies have subordinated their individual rights to security for that group;" and (v) as evidenced from the reclamation agreement, mortgage, correspondence and testimony, the bonding companies made a concerted effort to come together to protect the bonds. In re Iowa Coal Min. Co., Inc., 242 B.R. at 669-670. The court in this case determined that the bond companies' claims were based on a joint obligation which constituted a single claim and a single creditor entity for purposes of section 303(b).
In the instant case, each of the petitioning creditors' claims is based on a different and independent obligation which stems from a state court judgment. Therefore, the court finds that all of the petitioning creditors' claims do not constitute a single claim and thus a single creditor entity for purposes of section 303(b). The court clarifies that a different issue is whether these Carve-Out and Settlement Agreements between the Lenders and the Petitioning Creditors constitute bad faith and therefore "cause" to dismiss the involuntary petitions.
The issue of joint claims may be a determining factor under section 303(b) because it may have a direct effect on the number of petitioning creditors. However, the court concludes that it need not adjudicate the issue of whether two creditors; namely Sargeant Marine and Sargeant Trading's judgment constitutes a single claim or two independent (separate) claims. The court finds that that the Petitioning Creditors for involuntary petitions (Betteroads and Betterecycling) have met the threshold test of three (3) holders of claims against each Debtor whose claims are not contingent as to liability or the subject of a bona fide dispute, whose claims aggregate at least $15,775 of unsecured claims. The petitioning creditors that meet this standing requirement in the Betteroads involuntary petition are the following: (i) St. James Security Services, Inc.'s unsecured claim is based on a final and unappealable Judgment rendered by the Puerto Rico Court of First Instance, San Juan Part on December 8, 2016 in St. James Security Services, Inc. v. Betteroads Asphalt LLC & Betterecycling Corporation- civil case no.KCD 2016-0453 (604). The claim is in the amount of $184,242.84; (ii) Facsimil Paper Connection Corp.'s unsecured claim is based upon a final and unappealable Judgment rendered by the Puerto Rico Court of First Instance, San Juan Part on January 11, 2017, Facsimil Paper Connection Corp. vs. Betteroads Asphalt Corp./Betteroads Asphalt LLC, civil case no. KCM 2016-3675 (905). The claim is in the amount of $9,874.80; and (iii) Sargent Marine and Sargeant Trading's claims are based on a final and unappealable Judgment confirming an arbitration award rendered by the U.S. District Court for the Southern District of New York on September 3, 2015 in Sargeant Trading Ltd. & Sargeant Marine, Inc. vs. Betteroads Asphalt Corp., --1:15 cv 04879-Civil 4879 (JPO) in which Sargeant Marine's unsecured claim is in the amount of $165,074.84. Sargeant Trading's unsecured claim is based on the same Judgment in the amount of $104,335.38.3
*547(Lead Case No. 17-04156, Docket No. 121, Exhibits B, C, D, & E).
The petitioning creditors that meet this standing requirement in the Betterecycling involuntary petition are the following: (i) St. James Security Services, Inc.'s unsecured claim is based on a final and unappealable Judgment rendered by the Puerto Rico Court of First Instance, San Juan Part on December 8, 2016 in St. James Security Services, Inc. v. Betteroads Asphalt LLC & Betterecycling Corporation- civil case no.KCD 2016-0453 (604). The claim is in the amount of $60,020.48; (ii) Champion Petroleum Inc.'s unsecured claim is based upon a final and unappealble Judgment rendered by the Puerto Rico Court of First Instance, San Juan Part on March 20, 2017, Champion Petroleum, Inc. vs. Betterecycling Corp., civil case no. KCM 2017-0361 (902). The claim is in the amount of $5,204.88; and (iii) Control Force, Corp.'s unsecured claim is based upon a final and unappealable Judgment rendered by the Puerto Rico Court of First Instance, San Juan Part on March 7, 2017, Control Force, Corp. vs. Betterecycling Corp., civil case no. KCD 2016-2093 (503). The claim is in the amount of $56,872.14 (Lead Case No. 17-04157, Docket No. 88, Exhibits B, I & J).
Therefore, the court finds that the Petitioning Creditors for both Betteroads and Betterecycling (involuntary Debtors) have satisfied the requirements of 11 U.S.C. § 303(b). However, an order for relief can only be entered if "the debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount." 1 U.S.C. § 303(h)(1). Thus, the court's next step is to determine whether the Petitioning Creditors have satisfied their burden under 11 U.S.C. § 303(h)(1).
Requirements under 11 U.S.C. § 303(h)(1)
The Petitioning Creditors must also establish that the alleged involuntary Debtors were not generally paying their debts as they became due. Section 303(h) provides:
"[i]f the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed. Otherwise, after trial, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed only if-
(1) the debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount." 11 U.S.C. § 303(h)(1).
The "generally not paying" test is determined as of the date of the involuntary petition. The petitioning creditors have the burden of demonstrating that the alleged involuntary debtor is not generally paying the debts as they become due, excluding debts that are subject to bona fide disputes as to liability or amount. 11 U.S.C. 303(h)(1) ; In re Brooklyn Res. Recovery, Inc., 216 B.R. 470, 482 (Bankr. E.D.N.Y. 1997). To satisfy the burden it, "... requires a more general showing of the debtor's financial condition and debt structure than merely establishing the existence of a few unpaid debts." Liberty Tool & Mfg., Inc. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1072 (9th Cir. 2002) (quoting *548Gen. Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1504 n. 41 (11th Cir. 1997) ). It is important for the court to consider the evidence bearing in mind that the filing of an involuntary petition is an extreme remedy with very serious consequences to the involuntary debtor. In re Bates, 545 B.R. 183, 186 (Bankr. W.D. Texas 2016), quoting In re Reid, 773 F.2d 945, 946 (7th Cir. 1985).
Once they satisfy their burden, the burden shifts to the involuntary debtor to evince that the debts are subject to a bona fide dispute as to liability or amount. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.31[5] (16th ed. 2018). The "generally not paying" standard is not defined in the Bankruptcy Code and; therefore, application of the same has led to a wide range of definitions and interpretations amongst courts of this particular standard. Id. at ¶ 303.31. Moreover, it is important to note that the "generally not paying standard" is not a balance-sheet insolvency test or an "equity-insolvency" standard that considers whether the debtor can pay its debts, not whether it is paying its debts. Id. at ¶ 303.31. However, there is a general consensus amongst the courts that have been faced with this dilemma that the determination of the "generally not paying" standard is a multifactor test that cannot be employed in a rigid mechanical manner. "It is a factual, as distinguished from legal, determination. There is no single mathematical formula that can be used to determine whether the standard has or has not been met." Id. at ¶ 330.31.
The "generally not paying" standard begins with the analysis of the concept of "generally" which is a comparative one. "The question is how many debts are being paid in proportion to the total number of debts. Not paying one debt out of a sizable number of debts. Not paying one debt out of a sizable number of debts does not satisfy the 'generally' in the 'generally not paying' standard. Failing to pay one significant creditor can satisfy the standard." Id. at ¶ 330.31[1]. There is no fixed standard for determining whether a debtor is generally not paying its debts. Moreover, the First Circuit has not established a specific standard. Courts have adopted several different approaches to the "generally not paying standard." However, "[m]ost courts have adopted a flexible 'totality of the circumstances' test for determining whether a debtor is generally not paying debts as they become due." See Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, § 14.15 (5th ed.2018). There are several common factors that courts have consistently applied to determine whether the "generally not paying standard" is satisfied such as: (i) the number and amount of unpaid debts in default compared to current debts; (ii) the amount of delinquency of debt; (iii) the length of time of delinquencies; (iv) the materiality of nonpayment; (v) the nature of the debtor's conduct of its financial affairs; and (vi) the number and dollar amount of debts in default. Id. at § 14.15; See also; Crown Heights Jewish Cmty. Council Inc. v. Fischer (In re Fischer), 202 B.R. 341, 350 (E.D.N.Y. 1996) ; Perez v. Feinberg (In re Feinberg ), 238 B.R. 781, 783 (8th Cir. BAP 1999) (vacated Dec. 16, 1999); Murrin v. Hanson (In re Murrin), 477 B.R. 99, 106-107 (Bankr. D. Minn. 2012) ; In re Mikkelson, 499 B.R. 683, 689 (Bankr. D.N.D. 2013). "Although the test is one of the totality of the circumstances and there is no strict requirement for a court to address each and every factor, most courts addressing this question rely heavily on the number and amount of the unpaid claims and compare those values with the debts the debtor is paying. In re Murrin, 477 B.R. at 107.
*549Additional factors that may be considered in determining whether the "generally not paying standard is satisfied are the following: (i) the debtor's ability to satisfy only small periodic payments, not long-term obligations; (ii) the debtor's making regular payments only on small, recurring obligations, not on larger debts; (iii) the rapid decline in the value of the debtor's assets resulting from asset sales rather than profit generating activity; (iv) the amount of the debtor's debts compared to the debtor's yearly income; (v) the debtor's voluntary shutdown of operations; (vi) insiders' deferred payments on account of loans payable to them; (vii) payments made by third parties or a waiver of claims by a third party; (viii) the debtor's liquidation of its assets; (ix) the fact that debtor's defaults are only on extraordinary debts; and (x) the fact that the due and unpaid debts are made up entirely of the claims of the petitioning creditors while other nonpetitioning creditors are all paid. Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.31[2] (16th ed. 2018).
In the instant case, the Petitioning Creditors contend that Betteroads is not generally paying the debts as such debts become due excluding debts that are subject to bona fide disputes as to liability or amount based upon the following: (i) Betteroads' Aging Report of accounts payables as of June 30, 2017 discloses that there were a total of $11,139,712.94 of which $826,333.96 were current; $168,594.99 were 31-60 days old; $6,732.30 were 61-90 days old; and $10,073,646.65 of its accounts payables were over 90 days old. Therefore, 90.4% of Betteroads' accounts payables have been outstanding for more than sixty-seven (67) days given that the date of the bankruptcy petition was June 7, 2017 and the report is as of June 30, 2017. Moreover, the percentage of accounts payables as of June 7, 2017 would probably be higher because the current accounts payables amount to $826,333.96 and these were incurred from June 1- June 30, 2017. It is important to consider that the Accounts Payable Aging Report as of June 30, 2017 is divided into four main categories. The first category are the Trade Vendors accounts payables that as of June 30, 2017 the report reflects that there were a total of $6,163,679.44 of which $755,729.47 were current; $8,534.29 were 31-60 days old; $6,732.30 were 61-90 days old; and $5,389,117.64 were over 90 days old, meaning that approximately 87.43% of the trade vendors accounts payables were in the range of being over 90 days old. It is important to note that there was only $6,732.30 of accounts payables in the category of 61-90 days old. The following trade vendors are included in the current aging accounts payable category: (i) $500,647.71 to the law firm Nolla Palou & Casellas LLC; (ii) $3,215.78 to Corretjer LLC; and (iii) $252,420.98 to Puerto Rico Asphalt LLC. The next category of accounts payables are the Utilities, Withholdings, Bank Cards and Taxes that as of June 30, 2017, the aging report discloses that there were a total of $1,970,304.52 of which $70,604.49 were current; $160,060.70 were 31-60 days old; $0 were 61-90 days old; and $1,739,639.33 were over 90 days old, meaning that approximately 88.29% of the utilities, withholdings, bank cards and taxes accounts payables were in the range of being over 90 days old. The third category of accounts payables are the Petty Cash & Other Refunds accounts payables that as of June 30, 2017 the report details that its entire balance of $40,922.09 was over 90 days old for this particular category. Lastly, the Subcontract Payable category as of June 30, 2017, the aging report discloses that there were a total of $2,964,806.89 of which $2,903,967.59 were over 90 days old and $60,839.30 are in the hold/retn column, *550meaning that 97.95% of the subcontract accounts payables were in the range of being over 90 days old (Lead Case 17-04156, Docket No. 121, Exhibit F).
The Lenders also argue that in the involuntary petition for Betteroads since the petition date, proof of claims have been filed that amount to over $2,736,010.45 for unpaid utilities, taxes and suppliers, among others. The court notes that pursuant to the claims register nineteen4 claims have been filed and the total amount claimed for all the claims is $18,828,296.21 of which $13,781,226.85 is listed as secured; $503,419.43 is disclosed as being priority and the remaining $4,543,649.93 is disclosed as unassigned (unsecured) claims. The Lenders have not analyzed whether the proof of claims that were filed by the unsecured claimants match the accounts payables that are listed in the Aging Repot as of June 30, 2017 or whether the same are in addition to those accounts payables listed in the Aging Report or whether there are discrepancies. For example, under the Trade Vendors category in the Aging Report, Betteroads lists Total Petroleum as a vendor with a total accounts payable of $27,470.55 (over 90 days). However, Total Petroleum Puerto Rico, Corp. filed an amended unsecured proof of claim # 8-2 in the amount of $339,476.80 for goods sold. Another example, under the Trade Vendors category in the Aging Report, Betteroads disclosed that it has an account payable balance of $0 with Puma Energy Caribe LLC. However, Puma Energy Caribe, LLC filed an unsecured proof of claim # 13-1 in the amount of $2,566,884.21 for unpaid product. Puma Energy Caribe, LLC filed the same proof of claim (proof of claim # 10-1) in the case of Betterecycling.
The Lenders further argue that as of the petition date, a considerable number of lawsuits have been commenced against Betteroads before the Puerto Rico Court of First Instance as well as before the United States District Court for the District of Puerto Rico collection actions against Betteroads (Lead Case 17-04156, Docket No. 121, Exhibit G). The Lenders did not attach a list of the cases that have been filed against Betteroads before the United States District Court for the District of Puerto Rico. Moreover, the court notes that from the list submitted of the state court cases that have been filed there appears (3) different types of entities; namely Betteroads Asphalt Corporation; Betteroads Asphalt, Inc.; and Betteroads Asphalt LLC. The court also notes that in the Involuntary Petition filed against Betteroads Asphalt, LLC, on line item # 3, the petitioning creditors stated that the involuntary debtor has used for the last eight (8) years the following names: Betteroads Asphalt Corporation and Betteroads Asphalt II, LLC. The court notes that the majority of lawsuits that have been filed against Betteroads from the years 2015 and 2017 are collection of monies actions. Creditors' actions in the collection of debts through lawsuits and unsatisfied judgements are indicators that the debtor is not paying its debts as they become due.
Moreover, in the instant case, the Internal Revenue Center filed proof of claim # 4-1 in the amount of $668,599.40 and disclosed that the claim was secured in the amount of $439,324.59 and the unsecured portion of its claim was in the amount of $229,274.81. The municipal revenue collection center or CRIM (Centro de Recaudaciones de Ingresos Municipales) filed proof of claim 14-1 in the amount of $24,849.32 *551and listed the same as unsecured. CRIM also filed proof of claim # 15-1 in the amount of $446,587.28 of which $409,637.81 is secured by a statutory lien and the remaining $36,949.47 is unsecured. The Puerto Rico Department of Treasury filed proof of claim # 16-1 in the amount of $377,118.96 of which it listed the amount of $277,417.77 as a priority pursuant to 11 U.S.C. § 507(a)(8).
Betteroads denies all of the Petitioning Creditors' allegations regarding the issue of whether the debtor is paying its debts as they become due. The alleged involuntary Debtor contends that: (i) "...the lender's intervened, controlled, authorized or deauthorized payments to creditors of the alleged debtor. Further, lender unwarrantedly extrajudicial foreclosure of over $45 million in accounts receivables and all cash equivalents of the alleged debtor provoking a default on certain debts. It is [the] Lender['s] unwarranted and illegal actions which are subject to the State Court's adjudication which restitution may provide for the payments of the creditors' claims, which they themselves hindered;" and (ii) "Lenders took possession of funds destined for suppliers, taxing authorities, ongoing projects and employees' salaries, etc." (Lead Case 17-04156, Docket No. 168). The Debtor's defense is in essence that they have defaulted on their debts because the Lenders' seized $45 million of its accounts receivables and also foreclosed on its bank account that had a balance of $2 million. The Debtor did not offer evidence that it was paying its debts as they became due such as its track record in paying debts, the records of its financial accounts, its ordinary course of business as to payment of its debts.
Petitioning Creditors also contend that Betterecycling is not generally paying the debts as such debts become due excluding debts that are subject to bona fide disputes as to liability or amount based upon the following: (i) Betterecycling' Aging Report of accounts payables as of June 30, 2017 discloses that there were a total of $17,186,901.39 of which $118,942.73 were current; $171,691.36 were 31-60 days old; $4,178.27 were 61-90 days old; and $16,957,259.71 of its accounts payables were over 90 days old. Therefore, 98.66% of Betterecycling' accounts payables have been outstanding for more than sixty-seven (67) days given that the date of the bankruptcy petition was June 7, 2017 and the report is as of June 30, 2017. The percentage of accounts payables as of June 7, 2017 would probably be higher because the current accounts payables amount to $118,942.73 and these were incurred from June 1- June 30, 2017. It is important to consider that the Accounts Payable Aging Report as of June 30, 2017 is divided into three main categories.
The first category are the Trade Vendors accounts payables that as of June 30, 2017 the report reflects that there were a total of $14,236,152.28 of which $101,38.08 were current; ($775.29) were 31-60 days old; ($425.52) were 61-90 days old; $14,123,447.48 were over 90 days old, and $12,587.53 were classified as hold/retn, meaning that approximately 99.21% of the trade vendors accounts payables were in the range of being over 90 days old. It is important to note that there was a negative ($425.52) of accounts payables in the category of 61-90 days old. The following trade vendors are included in the current aging accounts payable category: (i) $1,994,503.81 to Puerto Rico Asphalt LLC; and (ii) $94,244.97 to the law firm of Nolla Palou & Casellas LLC. The next category of accounts payables are the Utilities, Withholdings, Bank Cards and Taxes that as of June 30, 2017, the aging report discloses that there were a total of $1,726,532.48 of which $17,624.65 were current; $72,466.65 were 31-60 days old;
*552$4,603.79 were 61-90 days old; and $1,631,837.39 were over 90 days old, meaning that approximately 94.52% of the utilities, withholdings, bank cards and taxes accounts payables were in the range of being over 90 days old. The third category of accounts payables are the Subcontract Payable category as of June 30, 2017, the aging report discloses that there were a total of $1,224,216.63 of which $1,201,974.84 were over 90 days old and $22,241.79 are in the hold/retn column, meaning that 98.18% of the subcontract accounts payables were in the range of being over 90 days old (Lead Case 17-04157, Docket No. 121, Exhibit K).
The Lenders allege that in the involuntary petition for Betterecycling since the petition date, proof of claims have been filed that amount to $1,528,370.40 for unpaid utilities, taxes and suppliers, among others.
The court notes that pursuant to the claims register fifteen (15) claims have been filed and the total amount claimed for all the claims is $17,321,397.75 of which $13,169,308.44 is listed as secured; $355,121.76 is disclosed as being priority and the remaining $3,796,967.55 is disclosed as unassigned (unsecured) claims. The Lenders have not analyzed whether the proof of claims that were filed by the unsecured claimants match the accounts payables that are listed in the Aging Report as of June 30, 2017 or whether the same are in addition to those accounts payables listed in the Aging Report or whether there are discrepancies amongst the accounts payables in the Aging Report and the proof of claims that have been filed.
For example, under the Trade Vendors category in the Aging Report, Betterecycling lists Multiventas y Servicios Inc. as a vendor with a total accounts payable of $18,494.19 (over 90 days). However, Multiventas y Servicios PR, Inc. filed an amended unsecured proof of claim # 15-1 in the amount of $21,088.69 for goods sold. Another example, under the Trade Vendors category in the Aging Report is the vendor S & S Import, Inc. which Betterecycling lists as a vendor with a total accounts payable of $8,589.85 (over 90 days old). However, S & S Import Inc. filed an unsecured claim # 9-1 in the amount of $11,454.36 for goods sold.
The Lenders allege that as of the petition date, a considerable number of lawsuits have been commenced against Betterecycling before the Puerto Rico Court of First Instance as well as before the United States District Court for the District of Puerto Rico collection actions against Betterecycling (Lead Case 17-04157, Docket No. 88, Exhibit L). The Lenders did not attach a list of the cases that have been filed against Betterecycling before the United States District Court for the District of Puerto Rico. The court notes that the lawsuits that have been filed against Betterecycling from the years 2016 and 2017 are collection of monies actions. Creditors' actions in the collection of debts through lawsuits and unsatisfied judgements are indicators that the debtor is not paying its debts as they become due.
Moreover, in the instant case, the Internal Revenue Center filed proof of claim # 1-1 in the amount of $4,168.77 and disclosed that the claim was secured in the amount of $4,076.87 and the unsecured portion of its claim was in the amount of $91.90. The municipal revenue collection center or CRIM filed proof of claim 11-1 in the amount of $24,849.32 and listed the same as unsecured. CRIM also filed proof of claim # 12-1 in the amount of $215,054.09. CRIM disclosed that the claim was unsecured in its entirety. The Puerto Rico Department of Treasury filed proof of claim # 13-1 in the amount of $1,995,627.57 *553of which it listed the amount of $1,145,939.41 as a priority pursuant to 11 U.S.C. § 507(a)(8).
Betterecycling denies all of the Petitioning Creditors' allegations regarding the issue of whether the debtor is paying its debts as they become due. The alleged involuntary Debtor contends that: (i) "...the lender's intervened, controlled, authorized or deauthorized payments to creditors of the alleged debtor. Further, lender unwarrantedly extrajudicial foreclosure of over $45 million in accounts receivables and all cash equivalents of the alleged debtor provoking a default on certain debts. It is [the] Lender['s] unwarranted and illegal actions which are subject to the State Court's adjudication which restitution may provide for the payments of the creditors' claims, which they themselves hindered;" and (ii) "Lenders took possession of funds destined for suppliers, taxing authorities, ongoing projects and employees' salaries, etc." (Lead Case 17-04157, Docket No. 124). The Debtor's defense is in essence that they have defaulted on their debts because the Lenders' seized $45 million of its accounts receivables and also foreclosed on its bank account that had a balance of $2 million. The Debtor did not offer evidence that it was paying its debts as they became due such as its track record in paying debts, the records of its financial accounts, its ordinary course of business as to payment of its debts.
The court finds that Betteroads' Aging Report as of June 30, 2017, the proof of claims that have been filed as of the petition date, and the collection of monies legal actions all evince that the alleged Debtor is not paying its debts as they become due regardless of whether the debts or accounts payable were for trade vendors, utilities, withholdings, bank cards, taxes and subcontractors. Moreover, overdue taxes, tax liens, collection actions, commencement of lawsuits, unsatisfied judgments are indicators that the debtor is not paying its debts as they become due.
The court finds that Betterecycling' Aging Report as of June 30, 2017, the proof of claims that have been filed as of the petition date, and the collection of monies legal actions all evince that the alleged Debtor is not paying a substantial percentage of its debts as they become due regardless of whether the debts or accounts payable were for trade vendors, utilities, withholdings, bank cards, taxes and subcontractors. Moreover, overdue taxes, tax liens, collection actions, commencement of lawsuits, unsatisfied judgments are indicators that the debtor is not paying its debts as they become due.
Therefore, the court concludes that Petitioning Creditors have established that Betteroads and Betterecycling have not been paying their debts as they come due, thus they have established the required elements under 11 U.S.C. § 303(h).
Accordingly, the court finds and concludes that the petitioning creditors have satisfied the three prong requirement for filing an involuntary petition, that is, there are three creditors whose claims are not contingent as to liability, or the subject of a bona fide dispute, the claims exceed $15,775, and the alleged debtors are not paying their debts as they become due.
Notwithstanding the above, the court must address if "bad faith," is grounds for the dismissal of an involuntary petition and, if so, if the facts demonstrate that the involuntary petition was filed in bad faith. In other words, does bad faith defeat invoking bankruptcy jurisdiction? Is Bad Faith an Independent "cause" for Dismissal under 11 U.S.C. § 303(b)
*554Debtors' arguments
The alleged Debtors argue that Law v. Siegel does not prohibit this court to grant a dismissal under both statutory and equitable principles. The Debtors contend that the holding of Law v. Siegel should be read with a limited scope, mainly that a bankruptcy court in exercising those statutory and inherent powers, "may not contravene specific statutory provisions" in "exercising its inherent equitable power." [citing 2 Collier on Bankruptcy ¶ 105.0[2], p. 105-106].
The Debtors argue that 11 U.S.C. § 303(b)(1) only provides the minimum hurdle for petitioning creditors to plead their allegations before the bankruptcy court, but that they are not entitled per se, mandatorily to an order for relief. The Debtors reference the decision of the Third Circuit in In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (2015) to support their position that the ruling and findings in said opinion that resulted in the dismissal of an involuntary petition on bad faith grounds were based not only on equity but on a sound interpretation of the bankruptcy code provisions. The Debtors' argument, based on In re Forever Green Athletic Fields, Inc., is that the better view is that by including an express reference to bad faith in § 303, Congress intended for bad faith to serve as a basis for both dismissal and damages.
The Debtors contend that In re Forever Green Athletic Fields, Inc., is in harmony even with the most conservative reading of Law v. Siegel, which they reject, as its ruling is based on a sound interpretation of the code's provisions that support a court's statutory authority to dismiss a case for bad faith. In tune with the limited scope of Law v. Siegel, nothing in section 303, or elsewhere in the Bankruptcy Code, prohibits courts from using its equity power to dismiss an involuntary bankruptcy case due to the petitioning creditors' bad faith. Courts have a clear mandate to deter improper conduct as sections 303(e), (i), and (k) prohibit courts from using its equity powers to dismiss an involuntary bankruptcy case due to the petitioning creditors' bad faith.
Debtors allege that, a court may dismiss an involuntary case for bad faith using its equitable powers pursuant to section 105(a) if it is not expressly prohibited or in contradiction with other provisions of the Bankruptcy Code. The Debtors argue that the petitioning creditors' reasoning will lead to inconsistent results and threatens the integrity of the judicial system because the court cannot engage in bad faith inquiry under section 303 regarding the creditor's motivations for filing involuntary bankruptcies because they are irrelevant and, thus have no place in the analysis under section 303 as to whether an order of relief should be entered.
The alleged Debtors contend that as to the good faith requirement there is no difference between filing a voluntary petition and an involuntary petition. It is the Debtors' contention that the good faith requirement provided by the code and case law are applicable to any party that invokes the jurisdiction of the bankruptcy courts, not just the debtors. A good faith requirement protects the jurisdictional integrity of the bankruptcy courts by rendering their powerful equitable weapons (i.e. avoidance of liens; discharge of debts, marshalling and turnover of assets) available only to those debtors and creditors with "clean hands." In re Little Creek Dev. Co., 779 F.2d 1068, 1072. The Debtors argue that the rulings of Law v. Siegel and Marrama in which it has been upheld that debtor's bad faith conduct constitutes a "cause" for dismissal further support the legal position that section 303 should be statutorily read as allowing for the dismissal *555of an involuntary petition upon the founding of bad faith from creditors. " Section 303(b) does not require that an involuntary petition be filed in good faith, any more than section 301 requires that a voluntary petition be filed in good faith. Nevertheless, in the former situation (as well as in the latter), the courts have developed a requirement of good faith." 2 Collier on Bankruptcy ¶ 303.16 (16th ed. 2017). The Debtors citing Collier on Bankruptcy, further argue that Judge Markell's dissenting opinion in Marciano v. Fahs (In re Marciano ), 459 B.R. 27 (9th Cir. BAP 2011) is more aligned with bankruptcy theory and precedent than the majority opinion. Judge Markell's dissenting opinion is based on the bankruptcy courts' broad discretion to analyze the equity of the bankruptcy filing. "[B]ankruptcy courts have broad discretion to examine the equity of the bankruptcy filing and to compare the motivation underlying the subject bankruptcy filing with the purposes behind the enactment of chapter 11." He pointed to the "broad discretion" that bankruptcy courts have to dismiss petitions under section 1112, which he believed was applicable to the case before the panel." 2 Collier on Bankruptcy ¶ 303.16 (16th ed. 2017).
Petitioning Creditors' arguments
Petitioning creditors argue that bad faith is not an independent cause of dismissal (or defense) for involuntary bankruptcy proceedings under 11 U.S.C. § 303(b) and that the court should not apply principles of equity under 11 U.S.C. § 105(a) to create exceptions that do not exist according to the Bankruptcy Code. The Supreme Court in Law v. Siegel, 571 U.S. 415, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) restricted the use of equity in bankruptcy to expand the text of the Bankruptcy Code and this court adhered to this principle in the case of In re Reyes Colón, 558 B.R. 563 (Bankr. D.P.R. 2016) in which this court refused to create an exception to the requirements to commence an involuntary petition pursuant to 11 U.S.C. § 303(b) based on equity principles. Contrary to the directive of Law v. Siegel, the Third Circuit in In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (3rd Cir. 2015) equated voluntary and involuntary petitions and their requirements and considered bad faith as an independent basis for dismissal relying on the Court's equitable powers pursuant to 11 U.S.C. § 105(a). The Lenders argue that the court should not incorporate to the Bankruptcy Code additional provisions that were purposely excluded by Congress because equitable powers under section 105(a) do "not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity." United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986).
Moreover, for involuntary relief to be granted pursuant to section 303(b) the following requirements must be satisfied: (i) the involuntary petition must be filed by at least three (3) petitioning creditors; (ii) with claims that are not contingent as to liability or that are not the subject of a bona fide dispute as to liability or amount; and (iii) whose unsecured, noncontingent, undisputed claims are at least in the aggregate amount of $15,775. See 11 U.S.C. § 303(b). Section 303(b) does not provide for the inclusion of additional requirements to granting an involuntary petition given that it does not include a non-exhaustive list of additional requirements anteceded by the word "including." Contrariwise, section 303 contains a limited and exhaustive list of requirements for granting or denying an order for relief in relation to an involuntary petition. The term "bad faith" is not included in 11 U.S.C. § 303(b), (h) as a defense to be raised by the debtor upon the petitioning creditors' filing of an involuntary *556petition. Therefore, there is no statutory requirement that the petitioning creditors commence an involuntary petition in good faith.
Only section 303(i)(2) includes the term "bad faith" on the basis of awarding damages if the court dismisses an involuntary petition. Section 303(i)(2) provides in pertinent part:
"(i) [i]f the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment-
(1) against the petitioners and in favor of the debtor for-
(A) costs; or
(B) a reasonable attorney's fee; or
(2) against any petitioners that filed the petition in bad faith, for-
(A) any damages proximately cause by such filing; or
(B) punitive damages." 11 U.S.C. § 303(i)(2).
Bad faith is only mentioned in section 303(i)(2) in which bad faith is a requirement for the recovery of actual or punitive damages after the involuntary petition is dismissed. Thus, if the petitioning creditors meet the requirements pursuant to 11 U.S.C. § 303 a finding of bad faith is inappropriate. See In re Kennedy, 504 B.R. 815, 823-24 (Bankr. S.D. Miss. 2014).
The Petitioning Creditors also argue that the court should limit its analysis of section 303 to the clear and unequivocal language of the statute as "it is also where the inquiry should end, for where, as here, the statute's language is plain, 'the sole function of the courts is to enforce it according to its terms.' " United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) citing Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917) (other internal citations omitted). The language of section 303 is clear because the terms "bad faith," "good faith," and the term "cause" as a non-exhaustive basis for dismissal are not included in this section, but have been explicitly included in other sections of the Code such as 11 U.S.C. §§ 1112(b)(1) ; 921(c); 930(a); 707(a); 1208(c); and 1307(c).
Therefore, under section 303(b) it is irrelevant whether any involuntary bankruptcy petitions are filed in good or bad faith because such requirement is lacking in this particular statute. The Petitioning Creditors further argue that, "... since bad faith was explicitly included in section 303(i)(2) but explicitly excluded from the rest of section 303, this Court should find that if Congress had intended to include 'bad faith' as a defense or as an independent basis for dismissal of an involuntary petition, it would have included the term in that particular section of the Code or it would have created a non-exhaustive list of bases for dismissal for 'cause.' Applying equity under section 105 following the Law determination would equate erroneously and unfoundedly with assuming 'that Congress has omitted from its adopted text requirements that it nonetheless intends to apply,' particularly, 'when Congress has shown elsewhere in the same statute that it knows how to make such a requirement manifest.' " Watt v. GMAC Mortg. Corp., 457 F.3d 781, 783 (8th Cir. 2006). Moreover, this court in In re Reyes Colón followed the directive of Law v. Siegel and refused to apply equity to create an exception to the three (3) petitioning creditor requirement when a debtor has twelve or more creditors pursuant to 11 U.S.C. § 303(b)(1) Thus, based upon case law regarding statutory interpretation of the Code as applied by Law and In re Reyes Colón , the explicit exclusion of a good faith *557requirement in the filing of an involuntary petition was not the result of inadvertence, given that, "[u]nder normal statutory construction, we would not assume that the failure to include some item in a statute is an oversight that the court may correct." United States v. Neal, 249 F.3d 1251, 1255 (10th Cir. 2001).
Analysis
After carefully pondering this particular legal issue, this court concludes that bad faith is a cause for dismissal in involuntary bankruptcy petitions and that such holding is not contrary to Law v. Siegel or this court's decision in In re Reyes Colón. This court finds that good faith is a fundamental tenet of the Bankruptcy Code, and we should adhere to the same whether the filing of a bankruptcy petition is voluntary or involuntary. A filing debtor in a voluntary petition and petitioning creditors in an involuntary petition should both be required to file the bankruptcy petitions, be it voluntary or involuntary in good faith, and if not, bad faith is a cause for dismissal in both scenarios. To hold otherwise, would allow for involuntary bankruptcies to be filed for improper purposes and be tantamount to an abuse of the bankruptcy process.
Our analysis starts with 11 U.S.C. § 301 and § 303. Section 301 states:
"(a) [a] voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.
(b) The commencement of a voluntary case under a chapter of this title constitutes an order for relief under such chapter." 11 U.S.C. § 301.
Section 303 provides in pertinent part:
"(a) [a]n involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced.
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title-
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $15,775 of such claims." 11 U.S.C. § 303(a), (b)(1), (2).
There is no requirement under section 301 or 303(b) that a voluntary or an involuntary petition be filed in good faith. However, under both sections the courts have developed a requirement of good faith. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.16 (16th ed. 2018) ("Nevertheless in the former situation (as well as in the latter), the courts have developed a requirement of good faith. The standard is high"). "There is a presumption in favor of good faith filing, and the burden is on the debtor to show by *558a preponderance of the evidence that the filing is in bad faith." Id. at ¶ 303.16.
Section 303(i)(2) is the only reference to bad faith. Said section provides in pertinent part:
"[i]f the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment-
(1) against the petitioners and in favor of the debtor for-
(A) costs; or
(B) a reasonable attorney's fee; or
(2) against any petitioner that filed the petition in bad faith, for-
(A) any damages proximately caused by such filing; or
(B) punitive damages." 11 U.S.C. § 303(i)(2).
The majority of the litigation that is generated in involuntary bankruptcies in which section 303(i)(2) is triggered is when the involuntary petition is dismissed because it fails to satisfy the requirements of section 303(b), (h) and thus, the involuntary debtor argues that the same was filed in bad faith because it fell short of the statutory requirements and thus, requests damages due to the "bad faith" filing. "Most of the courts, determining whether to award fees and costs under 303(i)(1) and damages under 303(i)(2) to the debtor have adopted a 'totality of the circumstances' test, in which certain factors are to be considered. These include: (1) the merits of the involuntary petition; (2) the role of any improper conduct on the part of the alleged debtor; (3) the reasonableness of the actions taken by the petitioning creditors; and (4) the motivation and objectives behind the filing of the petition." Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 303.33[1] (16th ed. 2018). "The determination of bad faith for purposes of section 303(i)(2) is the same as determining bad faith more generally under section 303." Id. at ¶ 303.33[5][a].
The issue before the court which has not been litigated as much as bad faith under section 303(i)(2) is simply whether bad faith is an independent cause for dismissal under section 303(b) even if petitioning creditors have satisfied the statutory requirements of 11 U.S.C. § 303(b), (h). This court aligns itself with the holding of In re Forever Green Ath. Fields, Inc., 804 F.3d at 334, in which the Third Circuit held that bad faith serves as a basis for both dismissal and damages and supported its position on the good faith filing requirements in bankruptcy which are intertwined with the equitable nature of bankruptcy. Equitable remedies are not granted to a party that fails to act in an equitable manner. See Richard Levin & Henry J. Sommer, 7 Collier on Bankruptcy ¶ 1112.07[3] (16th ed. 2018) ("As a general matter, bankruptcy relief is equitable in nature, and, as a general rule, equitable remedies are not available to any party who fails to act in an equitable fashion. As the Fifth Circuit noted, 'a good faith standard protects the jurisdictional integrity of the bankruptcy courts by rendering their powerful equitable weapons (i.e., avoidance of liens, discharge of debts, marshaling and turnover of assets) available only to those debtors and creditors with 'clean hands.' ") (quoting Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir. 1986).
If the contrary were held, petitioning creditors that meet the statutory requirements of 11 U.S.C. § 303(b), (h), but that filed the petition in bad faith would have no impediment in proceeding with the involuntary petition. This court agrees with bankruptcy Judge Coleman'
*559statement in In re Forever Green Ath. Fields, Inc., 500 B.R. 413, 425 (Bankr. E.D. Pa. 2013), that: "[t]o invoke this Court's jurisdiction, a petitioner must possess a valid bankruptcy purpose. In re Integrated Telecom Express, Inc., 384 F.3d at 119-20." The "good faith" principle is not a statutory requirement for the filing of either a voluntary or an involuntary bankruptcy petition. However, the filing of a bankruptcy petition for an improper bankruptcy purpose constitutes cause for the dismissal of the petition; be it voluntary or involuntary. In the case of an involuntary petition, lack of good faith, is also a factor to consider in awarding damages.
The court notes that Judge Markell in his dissent in In re Marciano, 459 B.R. at 635 , reasoned that if bankruptcy courts have broad equitable powers to dismiss bankruptcy petitions under section 1112(b), it should follow that bankruptcy courts' equitable powers should be extensive to dismiss involuntary bankruptcy petitions in which the petitioning creditors abused the bankruptcy process and that good faith filing should be an implicit prerequisite for filing a petition for both a debtor and a petitioning creditor. "In addition to granting relief for one of the reasons enumerated in section 1112(b), the court may also dismiss a chapter 11 case for lack of good faith. No provision of the Code expressly authorizes a court to dismiss a case on this ground. Nevertheless, even in the absence of express statutory authorization, the requirement of good faith has been held to be an implicit condition to the filing and maintenance of a bankruptcy case for over a century. As the Court of Appeals for the Fifth Circuit maintained: 'Every bankruptcy statute since 1898 has incorporated literally, or by judicial interpretation, a standard of good faith for the commencement, prosecution, and confirmation of bankruptcy proceedings.' " See Richard Levin & Henry J. Sommer, 7 Collier on Bankruptcy ¶ 1112.07 (16th ed. 2018).
In In re Reyes Colón, this court analyzed the purpose of equity in bankruptcy in the following manner:
"Equity in bankruptcy has been generally related to the 'fresh start' principles. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Section 105(a) of the Bankruptcy Code, which allows bankruptcy judges to issue orders that are necessary or appropriate to carry out the provisions of the Code, has been used as the basis to claim equitable powers in bankruptcy. Marrama v. Citizens Bank of Massachussetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). This was the rule in the First Circuit after Marrama.See Malley v. Agin, 693 F.3d 28 (1st Cir. 2012). The rule has been admittedly limited to exercising equitable powers to facilitate other code provisions and not a roving commission to do equity. In re Ludlow Hospital Society, Inc., 124 F.3d 22 (1st Cir. 1997). See also In re Nosek, 544 F.3d 34 (1st Cir. 2008). However, the legal scenario changed in 2014.
*560Change in bankruptcy is not a strange concept. As stated by the Supreme Court in Wright v. Union Central Life Ins. Co., 304 U.S. 502, 513, 58 S.Ct. 1025, 82 L.Ed. 1490 (1938) : '[t]he subject of bankruptcies is incapable of final definition. The concept changes.' " In re Reyes Colón, 558 B.R. at 566.
The court concludes that its application of the Supreme Court's decision in Law v. Siegel to the case of In re Reyes Colón is distinguishable from the issue of whether bad faith is an independent cause of dismissal under section 303(b). In the case of In re Reyes Colón one of the controversies was whether a bankruptcy court could apply the judicially created "special circumstances" exception to the numerosity requirement of 11 U.S.C. § 303(b). Section 303(b)(1) specifically requires that if an alleged debtor has twelve or more creditors, then the involuntary petition is commenced by three or more entities. This court concluded that The Supreme Court's decision in Law v. Siegel had limited its ability to exercise its equitable powers and held as follows: "[i]n this case there is a specific statutory requirement for the filing of an involuntary petition against a debtor who has more than twelve creditors. The involuntary petition must be filed by three or more creditors. A fraudulent scheme, after Law v. Siegel, is not a basis for a bankruptcy court to obviate the statutory requirement that there be three or more creditors joining the involuntary petition when there are twelve or more creditors." In re Reyes Colón, 558 B.R. at 568. In Law v. Siegel, the Supreme Court held that equitable considerations do not allow a bankruptcy court to contravene express provisions of the Bankruptcy Code. "A bankruptcy court has the statutory authority to 'issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of' the Bankruptcy Code. 11 U.S.C. § 105(a). And it may also possess 'inherent power... to sanction 'abusive litigation practices.' Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375-376, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). But in exercising those statutory and inherent powers, a bankruptcy court may not contravene specific statutory provisions." Law v. Siegel, 571 U.S. 415, 420-424, 134 S.Ct. 1188, 1194, 188 L.Ed.2d 146 (2014). The court finds that the controversy of whether bad faith is a cause for dismissal under section 303(b) is distinguishable from Law v. Siegel and from its analysis in In re Reyes Colón because the court's analysis based on the requirement of good faith as an implicit condition for filing a bankruptcy petition which is intertwined with equitable considerations is not contrary to the specific requirements of a particular statute as in the case of Law v. Siegel and In re Reyes Colón.
Therefore, this court concludes that there is a good faith filing requirement for both voluntary and involuntary petitions.6
*561Abstention pursuant to 11 U.S.C. § 305(a)(1)
Section 305(a)(1) provides in pertinent part:
"[t]he court, after notice and a hearing, may dismiss a case under this title or may suspend all proceedings in a case under this title, at any time if-
(1) the interests of creditors and the debtor would be better served by such dismissal or suspension." 11 U.S.C. § 305(a)(1).
The movant bears the burden to prove that dismissal or suspension benefits both the debtor and its creditors. Dismissing a case pursuant to 11 U.S.C. § 305(a)(1) is a discretionary remedy determined by the courts on a case by case basis. See In re Monitor Single Lift I, Ltd., 381 B.R. 455, 464 (Bankr. S.D.N.Y. 2008) ; In re ELRS Loss Mitigation, LLC, 325 B.R. 604, 634 (Bankr. N.D. Okla. 2005). This particular remedy should not be used as a substitute for a motion to dismiss under other applicable sections of the Bankruptcy Code. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 305.02 (16th ed. 2018). "Accordingly, parties who wish to seek dismissal of a case based primarily on the debtor's misconduct or bad faith should invoke, in most instances, the dismissal provisions contained in the relevant chapter under which the case was filed." Id. at ¶ 305.02[1]. Moreover, " section 305 is reserved for those rare occasions when both the creditors and generally and the debtor itself are better served by dismissal or suspension." Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 305.01[1] (16th ed. 2018); See also; In re Monitor Single Lift I, Ltd., 381 B.R. at 462. ("Granting an abstention motion pursuant to § 305(a)(1) requires more than a simple balancing of harm to the debtor and to the creditors; rather, the interests of both the debtor and its creditors must be served by granting the requested relief."). "The Court is not required to hold a separate hearing on the issue of abstention if the Court has conducted a hearing which allowed for the garnering of facts necessary to support the decision to abstain." In re ELRS Loss Mitigation, LLC, 325 B.R. at 634 (citing Hurley v. Kujawa (In re Kujawa), 224 B.R. 104, 107 08 (E.D. Mo. 1998) ); see also; Efron v. Candelario (In re Efron ), 529 B.R. 396, 408 (1st Cir. BAP 2015).
The factors some courts consider to dismiss an involuntary case under section 305(a)(1) include: (i) the motivation of the parties in seeking bankruptcy jurisdiction; (ii) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court; (iii) economy and efficiency of administration; and (iv) the prejudice to the parties. See Hon. Joan N. Feeney, Hon. Michael G. Williamson & Michael J. Stepan, Esq., Bankruptcy Law Manual, § 14.21 (5th ed.2018); See also; In re Seff Enters. & Holdings, LLC, 2010 WL 7326760, **1-2, 2010 Bankr. Lexis 862, **4 (Bankr. D.N.H. 2010) citing In re Deacon Plastics Machine, Inc., 49 B.R. 982, 982 (Bankr. D. Mass. 1985) ; In re Nesenkeag, Inc., 131 B.R. 246, 247 (Bankr. D.N.H. 1991). Some courts for involuntary bankruptcies apply a three-part test for abstention under section 305(a)(1) which consists of the following factors: (i) the petition was filed by a few disgruntled creditors and most creditors oppose the bankruptcy proceeding; (ii) there is an out-of-court restructuring *562in progress; and (iii) the debtor's interests are furthered by dismissal. See Richard Levin & Henry J. Sommer, 2 Collier on Bankruptcy ¶ 305.02[2][a] (16th ed. 2018).
The alleged Debtors argue that the court should dismiss this involuntary proceeding based on the doctrine of abstention pursuant to section 305(a)(1) due to the following reasons: (i) "[b]ringing this case into the bankruptcy court would only add an additional layer of expense to the resolution of the principal contested issue which is the litigation with the financial institutions and it would be inefficient and excessively costly to process this debt through this [c]ourt. None of the costs that will be incurred here are necessary, since there is no legitimate bankruptcy purpose to be served by this filing. Therefore, economy and efficiency favor dismissal; (ii) the Puerto Rico Court of First Instance is available for both parties to protect their interests and proceedings are pending before state court. Federal proceedings are not necessary because the primary claims are based on state law and the claims can be adequately determined in state court; (iii) Federal bankruptcy proceedings are unnecessary and improper because there is no legitimate bankruptcy purpose; (iv) "[i]f there is no bankruptcy proceeding, the Company will be able to continue its ongoing litigation with the Petitioning financial institutions and move forward with its business plan, benefitting all other creditors and eventually the stockholders;" (v) "[t]his action was not filed in [the] best interests of creditors or stockholders, but rather in the interest of a narrow few who seek to facilitate the forced sale of the business assets so they or their allies can snap it up at a distressed price. The Company has had good relationships with the majority of its creditors, and is able to work with them is allowed without issue;" and (vi) "[c]urrently there is no non-federal insolvency proceeding, as the Company has maintained good working relationships with the majority of its creditors" (Lead case 17-04156, Docket No. 46, pgs. 18-20, Lead case 17-04157, Docket No. 27, pgs. 16-18).
The Debtors further argue that the court should dismiss this involuntary case based on the doctrine of abstention pursuant to section 305(a)(1) based upon the following: (i) "[f]irst of all, in terms of what is the nature of this potential bankruptcy estate. It could be fairly stated that as it is relevant to all other potential creditors of the alleged Debtor in the event the Syndicate Lender succeed[s] on dismantling the alleged debtor's defenses/counterclaims in the [s]tate [c]ourt complaint or through the appointment of a trustee, the result will be that we will then be dealing with fully over encumbered estate in which the Syndicate Lender will control and resolve in their exclusive factor all assets of the company; (ii) the alleged debtor's assertion is that in the event that if the case is dismissed, the Syndicated Lenders will not suffer as they would retain their lien unaffected on the state court proceedings, which they themselves commenced and which retains the proper jurisdiction even to provide them with any ultimate or provisional remedy to which they may be entitled; (iii) "...if they are allowed to continue with their ill-founded intent to seize Debtor's assets and remove the existing management through this unwarranted bankruptcy process, no benefit would be received by the debtor nor other parties in interest, aside from these secured lenders and the other petitioners which now participate with them in their winnings;" (iv) "... if the alleged debtor were allowed to pursue their counterclaims and prevail in [s]tate [c]ourt, they would be in a position even to satisfy other creditors in 100%;" and (v) "l]enders have to their avail a [c]ourt with jurisdiction *563to grant any remedy to which they are entitled. However, alleged debtors, parties in interest and other creditor are undoubtedly to be affected if an order for relief was granted at this point as the lenders which, together with its competitors, will seek to transfer and liquidate the entities assets in a transaction controlled by them" (Lead case 17-04156, Docket No. 169, pgs. 25-26, Lead case 17-04157, Docket No. 125, pgs. 25-26).
The Lenders argue that the Debtors' request for abstention should be denied based upon the following: (i) the Debtors fail to establish or even argue that the interests of their creditors would be better served by abstention rather than by allowing these involuntary proceedings to continue; (ii) the ongoing litigation in these involuntary cases, the number of petitioning creditors joining in the involuntary petitions, and the record of lawsuits that have been commenced against the Debtors during the past two (2) years clearly evince that abstention and dismissal of these involuntary proceedings would not be in the best interest of creditors; (iii) "...the Debtors have been transferring their assets as described in the Motion to Appoint a Trustee, and creditor remedies to avoid these transfers are available only in bankruptcy;" (iv) the involuntary petitions do not involve a two party dispute that the pending state court litigation could resolve. The involuntary petitions were filed by at least seven (7) creditors with different claims; (v) the Debtors have numerous creditors, some of which have filed collection actions against the Debtors. Numerous creditors have filed multimillion dollar proofs of claims; and (vi) the state court litigation would not resolve or avoid the substantial transfers that the Debtors have undertaken prior to the bankruptcy filing or provide an orderly process for all creditors to assert their claims (Lead case 17-04156, Docket No. 74, pgs. 18-20, Docket No. 182, pgs. 14-15; Lead case 17-04157, Docket No. 52, pgs. 18-20, Docket No. 137, pgs. 14-15).
The Debtors argue that if the case is dismissed, the Syndicate Lenders will not suffer because they would retain their lien unaffected in the state court proceedings. They also argue that the only ones that would benefit from the involuntary bankruptcies would be the secured lenders and the other petitioning creditors and that no benefit would be derived by the Debtors or other parties in interest. The Debtors further allege that if they are allowed to pursue their counterclaims and prevail in the state court litigation, they would be in a position even to satisfy other creditors in 100%.
This court finds that the Debtors' arguments are based upon unsupported and contradictory allegations that fail to establish how dismissal will benefit both the Debtors and its creditors. The secured lenders' liens will not suffer and will remain secured whether the Debtors are in bankruptcy or not. The only ones that would benefit from the state court litigation are the plaintiffs (syndicate lenders) that have commenced state court proceedings and have secured claims. Moreover, the court notes that the state court litigation in which the Syndicate Lenders were the plaintiffs was barely commencing, meaning a complaint, an answer to the complaint, a counter- claim were filed and the court's resolution by which it denied a motion for preventive garnishment filed by Banco Popular. To the court's knowledge no discovery had begun. The court notes that the other creditors that could benefit are the ones that already have Judgments and would need to race to the Property Registry in order for the Judgments to be secured by collateral. However, if the Debtors are in bankruptcy, piecemeal litigation would be halted and other unsecured *564creditors could potentially receive dividends from the bankruptcy estate. The Debtors' argument that if they are allowed to pursue their counterclaims and prevail in state court litigation, they would be in a position to satisfy other creditors in 100% of their claims is unfounded and speculative.
The court finds that the Debtors have failed to show how dismissal would serve its interest and those of its creditors. Therefore, this court concludes that the Debtors' request for dismissal pursuant to section 305(a)(1) is unfounded and thus, should not be used as an alternative remedy for a motion to dismiss. Moreover, this court has held that bad faith in the filing of an involuntary petition are a "cause" for dismissal of the same. Thus, this court finds that the Debtors have failed to satisfy their burden of proof on this particular issue.
Conclusion
In view of the foregoing, the court finds and concludes as follows:
(1) The Petitioning Creditors have satisfied the three-prong requirement for filing an involuntary petition.
(2) Bad faith is an independent cause for dismissal of an involuntary petition under section 303(b).
(3) The alleged Debtors have failed to show that dismissal pursuant to section 305(a)(1) abstention is in the best interest of both the creditors and the debtor.
An evidentiary hearing will be scheduled to consider whether or not the involuntary petitions were filed in bad faith, that is, for an improper purpose that constitutes an abuse of the bankruptcy process.
SO ORDERED.
Reversed and remanded on August 9, 2017, 2017 WL 6365433, on other grounds, and pending appeal before the U.S. Court of Appeals before the First Circuit.
The court notes that the initial Petitioning Creditor is St. James Security Services, Inc. Thereafter, the petitioning creditor is referred to as St. James Security Services, LLC.
The court clarifies that the Judgment entered on September 3, 2015 regarding the arbitral award against Betteroads and in favor of Sargeant was for the total amount of $392,642.23 plus attorneys' fees and costs in the amount of $14,496.23 (Lead Case 17-04156, Docket No. 105, Exhibit II). On December 1, 2016, Sargeant collected $142,026.72 on the Judgment and applied the same pro rata to decrease the indebtedness amount owed by Betteroads to Sargeant Marine and Sargeant Trading.
The court notes that claim # 1-1 filed by Popular Auto was withdrawn on 06/26/2017. Thus, there are eighteen (18) claims remaining in total (Lead Case 17-04156, Docket No, 43).
"As stated in Van Owen Car Wash, '[t]he legislative history of § 1112(b) indicates Congress' intent that the bankruptcy court retain broad equitable powers to dismiss petitions; '[t]he court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.' ' Id. (quoting H.R. Rep. No. 95-595, at 405-06 (1977) and S. Rep. No. 95-989, at 117-18 (1978) ). In re Van Owen Car Wash, Inc., 82 B.R. 671 (Bankr. C.D.Cal. 1988) further emphasized that good faith should be 'viewed as an implicit prerequisite to the filing or continuation of a proceeding under Chapter 11 of the Code.' Id. at 674 (quoting In re Victory Constr. Co., Inc., 9 B.R. 549, 558 (Bankr. C.D. Cal. 1981) )."
The Third Circuit reasoned as follows:
"[t]he bigger flaw in the Dawsons' argument is that it overlooks the equitable nature of bankruptcy. Time and again, we have emphasized that 'good faith' filing requirements have 'strong roots in equity.' In re SGL Carbon, 200 F.3d 154, 161 (3d Cir. 1999) ; see also In re Tamecki, 229 F.3d 205, 207 (3d Cir. 2000). 'At its most fundamental level, the good faith requirement ensures that the Bankruptcy Code's careful balancing of interests is not undermined by petitioners whose aims are antithetical to the basic purposes of bankruptcy.' In re Integrated Telecom Express, Inc., 384 F.3d 108, 119 (3d Cir. 2004). As courts of equity, bankruptcy courts are equipped with the doctrine of good faith so that they can patrol the border between good- and bad-faith filings. See In re SGL Carbon, 200 F.3d at 161 ; In re Little Creek Dev. Co., 779 F.2d 1068, 1072 (5th Cir. 1986) (explaining that the 'good faith' requirement protects the 'integrity of the bankruptcy courts by rendering their powerful equitable weapons ... available only to those debtors and creditors with 'clean hands' '). We will not depart from this general 'good faith' filing requirement in the context of involuntary petitions for bankruptcy. The majority of courts agree." In re Forever Green Ath. Fields, Inc., 804 F.3d at 334. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501814/ | MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE
This dispute concerns an involuntary chapter 11 petition filed against Taberna *580Preferred Funding IV, Ltd., a structured finance entity known as a collateralized debt obligation (commonly referred to as a "CDO"), that issued several series of notes, which descend in priority ("Taberna"). The involuntary petition was filed by three holders of the two most senior classes of notes, Opportunities II Ltd., HH HoldCo Co-Investment Fund, L.P., and Real Estate Opps Ltd. (collectively, the "Petitioning Creditors"), and is opposed by Taberna, its collateral manager, and five holders of the junior classes of notes issued by Taberna. The movants seek a judgment that three Petitioning Creditors have failed to establish a prima facie case that they meet one of the requirements, set forth in section 303(b) of the Bankruptcy Code, to qualify as petitioning creditors eligible to commence this involuntary case, and as such, dismissal of this involuntary petition.
Although the parties opposing the involuntary petition have raised a number of arguments,1 they now seek judgment that the Petitioning Creditors have not made out a prima facie case with regard to only one of the eligibility requirements for filing an involuntary petition, namely, that Petitioning Creditors hold claims against the putative debtor, Taberna. The parties opposing the involuntary petition argue that the notes are nonrecourse, and accordingly, the Petitioning Creditors only hold claims against the collateral securing the notes; i.e. they do not hold claims against Taberna.
Whether the Petitioning Creditors hold claims against Taberna on account of the notes turns in the first instance on whether the notes are nonrecourse and, if the notes are nonrecourse, on whether sections 1111(b) and 102(2) of the Bankruptcy Code eliminate any distinction between recourse and nonrecourse claims in bankruptcy for purposes of determining the eligibility of a petitioning creditor under section 303(b) such that, notwithstanding the nonrecourse nature of the claims, the Petitioning Creditors hold the requisite claims against Taberna.
This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(c) of the Federal Rules of Civil Procedure, made applicable here by Rule 7052 of the Federal Rules of Bankruptcy Procedure.2 For reasons set forth *581herein, the Court concludes that the Petitioning Creditors do not meet the requirements of section 303(b) of the Bankruptcy Code and are not eligible to commence an involuntary case against Taberna. Accordingly, judgment should be entered dismissing this case.
In addition, the Court finds that this involuntary case serves no legitimate bankruptcy purpose, Petitioning Creditors would not be prejudiced by dismissal, and it is in the best interest of the creditors and the estate that the case be dismissed. Accordingly, pursuant to sections 1112 and 105 of the Bankruptcy Code, in the exercise of the Court's discretion, the Court concludes that the case should be dismissed for cause.
JURISDICTION
This Court has jurisdiction over this chapter 11 case pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). The determination of whether an order for relief should be granted in an involuntary case is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(A) and (O). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. All parties to this motion consent to the entry of a final judgment or order with respect to all matters now before the Court. See Joint Pretrial Order (the "JPO") § II [ECF No. 132]; see also Objecting Parties Proposed Findings of Fact and Conclusions of Law [ECF No. 144-1]; Petitioning Creditors Proposed Findings of Fact and Conclusions of Law [ECF No. 147-1] (stating that the parties have agreed that these proceedings are matters as to which the Court can enter final orders and judgment "including the specific issue presented by the Rule 52(c) Motion ....").
I.
A. Factual Background
In 2005, Taberna issued eleven classes of notes in the aggregate principal amount of $630,175,000, which descend in priority and have a stated maturity date of May 5, 2036 (collectively, the "Notes"). See JPO § III Stipulated Fact ("Stip. Fact") ¶¶ 4-6; JX13 at 55-56. The Notes are governed by an indenture dated December 23, 2005 (the "Indenture"). See JPO § III Stip. Fact ¶ 3; Indenture § 14.9. The funds generated by the issuance of the Notes were used to purchase various types of securities that were intended to generate proceeds sufficient to repay the Notes and serve as collateral securing the Notes (collectively, the "Collateral"). See Petitioning Creditors' Statement About the Involuntary Chapter 11 Petition Regarding Taberna Preferred Funding IV, Ltd. (the "PC Stmt.") [ECF No. 2] ¶¶ 1, 2; JPO § III Stip. Fact ¶ 1. The Collateral consists mostly of long-term securities issued by real estate investment trusts ("REITS") and other real estate entities, see PC Stmt. ¶ 10; JPO § III Stip. Fact ¶ 7, and is held in trust for the benefit and security of, inter alia , holders of Notes (collectively, the "Noteholders"). See INDENTURE, Granting Clauses. The Indenture defines *582"Secured Parties" to include, among others, the Noteholders. See INDENTURE at 1, 44.
At all times, Taberna has paid Class A Noteholders pursuant to the terms of the Indenture. See JPO § III Stip. Fact ¶¶ 12, 22. In August 2009, an event of default occurred under the Indenture due to Taberna's payment default on Class B Notes, notes junior to those now held by the Petitioning Creditors. See JPO § III Stip. Fact ¶ 17. The Notes were accelerated the following month. See JPO § III Stip. Fact ¶ 18. Over six years later, on March 22, 2016, the Petitioning Creditors purchased a total of $135,525,044.37 of the most senior class of Notes (the "A-1 Notes") and a total of $16.9 million of the second most senior class of notes (the "A-2 Notes"). See JPO § III Stip. Fact ¶¶ 29, 30. By virtue of these purchases, at the time of filing, the Petitioning Creditors held 100% of the A-1 Notes and approximately 34% of the A-2 Notes. See PC Stmt. ¶ 4.
As the Indenture does not permit the Petitioning Creditors unilaterally to liquidate the Collateral without the consent of other parties, prior to filing the involuntary petition, the Petitioning Creditors took a number of steps in a failed effort to liquidate the Collateral. See PC Stmt. ¶ 6; JPO § III Stip. Fact ¶¶ 35-40. Petitioning Creditors' principal, Vikaran Ghei, demonstrated at trial that he has experience and expertise in working with complex financial instruments, and has a sophisticated understanding of the workings of the Bankruptcy Code. See 11/28/17 Tr. 47:24-50:24, Adv. Pro. No. 17-01087 ECF No. 15 ("11/28/17 Tr."); see also 11/29/17 Tr. 177:1-17, Adv. Pro. No. 17-01087 ECF No. 16 ("11/29/17 Tr."). After hiring counsel that was specifically experienced bankruptcy counsel, see 11/30/17 Tr. 108:2-110:24, Adv. Pro. No. 17-01087 ECF No. 17 ("11/30/17 Tr."); see also JPO § III Stip. Fact ¶ 1, among the steps the Petitioning Creditors took to break open the CDO, in November 2016, Mr. Ghei, on behalf of Petitioning Creditors, reached out to the indenture trustee and "requested that the indenture trustee solicit consents to allow the underlying collateral to be liquidated." PC Stmt. ¶ 6; see also JPO § III Stip. Fact ¶ 35; Email from Thomas Ji to Vik Ghei, [JX 66]. Mr. Ghei did not offer any consideration in exchange for the requested consents, and the Petitioning Creditors ultimately failed to receive sufficient consent to sell the Collateral. See Consent Solicitation [JX 66]; See email from Brandon Meyer To Vik Ghei [JX 67]; JPO § III Stip. Fact ¶ 35. In March 2017, Mr. Ghei, on behalf of Petitioning Creditors, and with the advice and assistance of their current bankruptcy counsel, launched a tender offer to purchase Notes from each class in amounts sufficient to allow them to direct the Trustee to auction the Collateral. 11/28/17 Tr. 183:17-184:1, Adv. Pro. No. 17-01087 ECF No. 15; email from Vik Ghei to Brandon Meyer, [JX 69]; See JPO § III Stip. Fact ¶ 36; PC Stmt. ¶ 6. When that also failed to draw consent, the Petitioning Creditors subsequently amended their offer, 11/30/17 Tr. 210:22-211:18, Adv. Pro. No. 17-01087 ECF No. 17; JPO § III Stip. Fact ¶¶ 38-39, but ultimately did not purchase any Notes pursuant to the original or amended offer. 11/29/17 Tr. 44:9-16, Adv. Pro. No. 17-01087 ECF No. 16; See JPO § III Stip. Fact ¶ 40.
The Petitioning Creditors thereafter immediately purchased the remaining A-1 Notes that they did not already own, 11/29/17 Tr. 46:8-10, Adv. Pro. No. 17-01087 ECF No. 16; see JPO § III Stip. Fact ¶ 41, and two months later filed the involuntary petition. See Involuntary Petition [ECF No. 1]. Petitioning Creditors simultaneously filed a document described as a 'partial waiver' and incorporated the waiver into the involuntary petition. Involuntary *583Petition [ECF No. 1], Exh. 3; see also JPO § III Stip. Fact ¶ 57. Through this document, each of the three Petitioning Creditors waived its right to benefit from security interests in any asset of the alleged debtor solely on account of its ownership interest in the Class A-2 Notes up to, but not to exceed, the amount of $5,259.00. JPO § III Stip. Fact ¶ 57; see also Involuntary Petition [ECF No. 1], Exh. 3.
At the time the involuntary petition was filed, the Petitioning Creditors had prepared a draft chapter 11 plan and stated that they were "ready to file their plan and accompanying documents, and then they will promptly pursue confirmation of that plan." PC Stmt. ¶ 8. The plan drafted by the Petitioning Creditors permits an auction of the Collateral at the option of a majority of the holders of the A-2 Notes. See Notice of Filing of Certain Unredacted Exhibits to Affidavit of H. Peter Haveles, Jr. Pursuant to Order Amending Prior Order Granting Ex Parte Motion to File Documents Under Seal [ECF No. 82], Exh. D. While Petitioning Creditors do not control a majority of the A-2 Notes with their 34 percent stake, a company named Anchorage owns 50 percent of the A-2 Notes. 11/28/17 Tr. Adv. Pro. No. 17-01087 183:19-22, ECF No. 15. Prior to commencing this case, Petitioning Creditors coordinated with Anchorage, an investor that had previously put another CDO into bankruptcy involuntarily, to effectuate the Chapter 11 proposed plan, which Anchorage agreed to support so long as Anchorage was not "on the front lines". 11/29/17 Tr. 31:20- 35:1, Adv. Pro. No. 17-01087 ECF No. 16; see also JX 102 (Mr. Ghei's notes from his phone call with Anchorage discussing how to accomplish an accelerated liquidation of Taberna prior to the involuntary petition). The day after filing the Involuntary Petition, Petitioning Creditors moved to terminate the alleged debtor's exclusivity period in which to file a chapter 11 plan to enable Petitioning Creditors to pursue their proposed plan. See Notice of Motion to Terminate the Debtor's Plan Exclusivity Periods [ECF No. 8].
B. Procedural History
Soon after filing the involuntary petition, the parties entered a stipulation, which the Court so ordered, establishing a schedule for expedited discovery including expert discovery and the briefing of any threshold legal issues. So Ordered Stipulation [ECF No. 45]. At the close of discovery, the Petitioning Creditors moved for partial summary judgment, seeking a ruling that, having filed waivers of the lien on the collateral, see JPO § III Stip. Fact ¶ 57, they now held unsecured claims against Taberna, thereby satisfying one of the eligibility requirements in dispute under section 303(b) of the Bankruptcy Code (i.e. a different requirement than the one at issue on this motion). See Petitioning Creditors' Motion for Partial Summary Judgment [ECF No. 51].4 TP Management LLP, as collateral manager (the "Collateral Manager"), and several holders of Notes junior to the A-1 and A-2 Notes (collectively, the "Junior Noteholders"5 and together with the Collateral Manager, the "Objecting *584Parties") opposed the summary judgment motion, arguing that summary judgment should be denied because the Petitioning Creditors' Note claims are both oversecured and non-recourse. See Opposition to Petitioning Creditors' Motion for Partial Summary Judgment [ECF No. 65]. By decision dated November 27, 2017, the Court denied the Petitioning Creditors' summary judgment motion on the issue of whether they hold unsecured claims against Taberna on the grounds that they had failed to establish that there were no material issues of fact and that they were entitled to judgment as a matter of law. See Decision Denying Motion for Partial Summary Judgment [ECF No. 133] (the "Summary Judgment Decision").
Thereafter, a bench trial commenced on the disputed issue of the eligibility of Petitioning Creditors to maintain this case. After five days of trial, at which Vikaran Ghei (one of two Principals of the Petitioning Creditors) and two experts (who testified with respect to valuation issues not relevant on this motion) testified, excerpts of depositions were offered, and over 140 exhibits were received into evidence. At the close of the Petitioning Creditors' case in chief, the Objecting Parties moved pursuant to Rule 52(c) of the Federal Rules of Civil Procedure for a judgment on partial findings (the "Motion" or "Mtn."). See The Objecting Parties' Motion Under Rule 52(c) of the Federal Rules of Civil Procedure for Judgment on Partial Findings [ECF No. 144].
In their Motion, the Objecting Parties seek a determination that the Petitioning Creditors' claims with respect to the Notes (the "PC Note Claims") are nonrecourse and, as holders of nonrecourse claims, the Petitioning Creditors are ineligible under section 303(b) of the Bankruptcy Code to file an involuntary petition. Taberna supports the Motion. See Alleged Debtor's Joinder in The Objecting Parties' Motion Under Rule 52(c) of the Federal Rules of Civil Procedure for Judgment on Partial Findings [ECF No. 145]. The parties submitted findings of fact and conclusions of law and thereafter the Court heard oral argument on the motion. ECF Nos. 144-152. The narrow issues before the Court on this Motion are (1) whether the PC Note Claims are nonrecourse, and (2) whether the Petitioning Creditors nonetheless meet the eligibility criteria of section 303(b) of the Bankruptcy Code requiring that they hold claims against Taberna.
While the Rule 52 motion was pending, the Second Circuit issued a decision in Wilk Auslander LLP v. Murray (In re Murray) , affirming that a bankruptcy court has the authority to dismiss sua sponte an involuntary chapter 7 bankruptcy case for cause. 900 F.3d 53 (2d Cir. 2018). In light of Murray , the Court issued an order directing the parties to show cause with respect to whether this case should be dismissed for cause pursuant to section 1112(b) of the Bankruptcy Code. [ECF No. 153]. The parties submitted briefing on the issue [ECF Nos. 154-159], and on October 18, 2018, the Court heard oral argument on the section 1112 issue.
II.
LEGAL STANDARDS WITH RESPECT TO MOTION FOR JUDGMENT ON PARTIAL FINDINGS
A. Rule 52(c) of the Federal Rules of Civil Procedure
Rule 52(c) of the Federal Rules of Civil Procedure, which applies here pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure,6 provides:
*585If 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. The court may, however, decline to render any judgment until the close of the evidence. A judgment on partial findings must be supported by findings of fact and conclusions of law as required by Rule 52(a).
Fed. R. Civ. P. 52(c). Thus, judgment under Federal Rule 52(c) is appropriate where a plaintiff has failed to make out a prima facie case. Latin Am. Music Co., Inc. v. Spanish Broad. Sys., Inc. , 254 F.Supp.3d 584, 587 (S.D.N.Y. 2017), aff'd , 738 F. App'x 722 (2d Cir. 2018) ("A defendant's Rule 52(c) motion may be granted when 'the plaintiff has failed to make out a prima facie case or where the plaintiff has made out a prima facie case but the court determines that a preponderance of the evidence goes against the plaintiff's claim.' "); see also Pal v. New York Univ. , No. 06 CIV. 5892 PAC FM, 2013 WL 4001525, at *1 (S.D.N.Y. Aug. 6, 2013), aff'd , 583 F. App'x 7 (2d Cir. 2014).
When considering a motion under Federal Rule 52(c), a court does not consider the evidence in the light most favorable to the non-moving party or draw any special inferences in the non-movant's favor. See Wechsler v. Hunt Health Sys., Ltd. , 330 F.Supp.2d 383, 433 (S.D.N.Y. 2004) ; Desiderio v. Celebrity Cruise Lines, Inc. , No. 97 Civ. 5185(AJP), 1999 WL 440775, at *19 (S.D.N.Y. June 28, 1999). "Instead, the court acts as both judge and jury, and decides the case based upon where the preponderance lies." Empire State Bldg. Co. v. New York Skyline, Inc. (In re New York Skyline, Inc.) , Adv. Nos. 09-1107 (SMB), 09-1145(SMB), 2013 WL 655991, at *4 (Bankr. S.D.N.Y. Feb. 22, 2013) (citing Desiderio v. Celebrity Cruise Lines, Inc. , 1999 WL 440775, at *19 ).
B. Bankruptcy Code Section 303(b)
Section 303 of the Bankruptcy Code governs involuntary bankruptcy cases under chapters 7 and 11 and stipulates that an involuntary case may be commenced "only against a person ... that may be a debtor under the chapter under which such case is commenced." 11 U.S.C. § 303(a). Section 303 goes on to set forth the minimum number of creditors required to commence an involuntary case and contains restrictions as to which types of creditors may commence an involuntary bankruptcy case. Specifically, pursuant to section 303(b)(1), an involuntary case may be commenced
by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.
*58611 U.S.C. § 303(b)(1) (emphasis added). Section 303(b) thus requires that an involuntary petition be brought by at least three qualifying creditors7 and that each such creditor holds a claim against the target of the involuntary petition . 11 U.S.C. § 303(b)(1).
A petitioning creditor bears the initial burden of establishing a prima facie case that it meets the eligibility requirements set forth in section 303(b) of the Bankruptcy Code. See, e.g. , In re Persico Contracting and Trucking, Inc. , No. 10-22736 (RDD), 2010 WL 3766555, at *3 (Bankr. S.D.N.Y. Aug. 10, 2010) ; see also Platinum Fin. Servs. Corp. v. Byrd (In re Byrd) , 357 F.3d 433, 437 (4th Cir. 2004) ; In re Gutfran , 210 B.R. 672, 673 (Bankr. D. Conn. 1997). Once a prima facie case has been established, the burden then shifts to the entity against whom the involuntary petition has been filed to demonstrate that the eligibility requirements have not been met. See In re Persico Contracting and Trucking, Inc. , 2010 WL 3766555, at *3 ; In re Byrd , 357 F.3d at 439 ; In re Gutfran , 210 B.R. at 673.
The Petitioning Creditors have been fully heard on the section 303 eligibility requirements. Therefore, if the Court finds that the Petitioning Creditors have not met their burden of establishing a prima facie case that they satisfy the eligibility requirement in section 303(b) of the Bankruptcy Code, the Court may enter judgment against them on this issue and the petition in this involuntary case should be dismissed.
III.
FINDINGS OF FACT AND CONCLUSION OF LAW WITH RESPECT TO WHETHER PETITIONING CREDITORS HOLD A CLAIM AGAINST TABERNA
A. The Notes are Nonrecourse
The Objecting Parties assert that pursuant to the terms of the Indenture, the Notes are nonrecourse and therefore the Petitioning Creditors do not hold claims against Taberna since their claims are limited to the Collateral. See Mtn. ¶¶ 17, 20, 22. The Petitioning Creditors, on the other hand, assert that the Indenture does not yet, if ever, preclude claims against Taberna or otherwise limit the PC Note Claims to claims against the Collateral. See Petitioning Creditors' Opposition to the Objecting Parties' Motion under Rule 52(c) of the Federal Rules of Civil Procedure for Judgment on Partial Findings (the "Opposition" or "Opp.") [ECF No. 147] ¶¶ 34-51. Based on its review of the Indenture [JX1], the Court finds that the Notes are nonrecourse.
The term "nonrecourse" describes a type of debt that is "of, relating to, or involving an obligation that can be satisfied only out of the collateral securing the obligation and not out of the debtor's other assets." Black's Law Dictionary (10th ed. 2014). A nonrecourse note is "[a] note that may be satisfied upon default only by means of the collateral securing the note, not by the debtor's other assets." Id. Similarly, a "nonrecourse creditor is a creditor who has agreed to look only to its collateral for satisfaction of its debt and does not have any right to seek payment of any *587deficiency from a debtor's other assets." In re 680 Fifth Ave. Assocs. v. Mut. Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.) , 156 B.R. 726, 732-33 (Bankr. S.D.N.Y. 1993), aff'd , 169 B.R. 22 (S.D.N.Y. 1993)aff'd , 29 F.3d 95 (2d Cir. 1994) ; see also In re Montgomery Ward, LLC , 634 F.3d 732, 740 (3d Cir. 2011) ("A claim secured by a nonrecourse security interest is, by definition, enforceable only against the debtor's property. A claim secured by a recourse security interest is enforceable against both the collateral and, to the extent the claim exceeds the value of the collateral, against the debtor.").
To determine whether the Notes are nonrecourse, the Court looks to the Indenture [JX1], which is governed by New York state law. See JX 1 INDENTURE § 14.9. The plain meaning of the language controls the construction of contracts governed by New York state law. See City of Hartford v. Chase , 942 F.2d 130, 134-35 (2d Cir. 1991) (quoting Berger v. Heckler , 771 F.2d 1556, 1568 (2d Cir. 1985) ); V.C. Vitanza Sons v. New York City Hous. Auth. , 7 A.D.3d 398, 776 N.Y.S.2d 472 (1st Dep't 2004) ("In interpreting a contract, the plain meaning of words and phrases should be determined and the language construed so as to give full meaning and effect to all provisions of the agreement."). When called upon to construe a contract, a court should ascribe to the contract terms their ordinary meanings unless doing so would lead to an absurd result. See Mastrovincenzo v. City of New York , 435 F.3d 78, 104 (2d Cir. 2006). A court's role in construing a contract is to "give effect to the intent of the parties as revealed by the language they chose to use." Seiden Assocs. Inc. v. ANC Holdings, Inc. , 959 F.2d 425, 428 (2d Cir. 1992) (citing Slatt v. Slatt , 64 N.Y.2d 966, 488 N.Y.S.2d 645, 477 N.E.2d 1099 (N.Y. 1985) ). Moreover, it is presumed that every clause in a contract was intended to have an effect. See City of Hartford v. Chase , 942 F.2d 130, 135 (2d Cir. 1991). If a contract is unambiguous, its meaning should be determined without reference to extrinsic evidence. Goldman v. Comm'r of Internal Revenue , 39 F.3d 402, 406 (2d Cir. 1994) (citing Goodheart Clothing Co. v. Laura Goodman Enters. , 962 F.2d 268, 272 (2d Cir. 1992) ). Whether the language in a contract is ambiguous is a question of law, see Seiden Assocs. , 959 F.2d at 429, determined by reference to the contract alone. See Goodheart , 962 F.2d at 272.
The Court finds that the relevant provisions of the Indenture are unambiguous. Section 2.6(h) of the Indenture, [JX 1], provides as follows:8
The obligations of the Co-Issuers under the Notes and this Indenture are non-recourse obligations of the Co-Issuers payable solely from the Collateral and in accordance with the Priority of Payments, and following realization of the Collateral and its reduction to zero any claims of the Noteholders shall be extinguished and shall not thereafter revive.
No recourse shall be had against any Officer, Preferred Shareholder, director, manager, employee, security holder or incorporator of the Issuer, the Co-Issuer, the Collateral Manager, the Trustee, any Rating Agency, the Placement Agent or their respective successors or assigns for the payment of any amounts payable under the Notes or this Indenture.
It is understood that the foregoing provisions of this Section 2.6(i) [sic] shall not (i) prevent recourse to the Collateral for the sums due or to become due under any security, instrument or agreement that is part of the Collateral or (ii)
*588constitute a waiver, release or discharge of any indebtedness or obligation evidenced by the Notes or secured by this Indenture until such Collateral has been realized, whereupon any outstanding indebtedness or obligation shall be extinguished.
It is further understood that the foregoing provisions of this Section 2.6(i) [sic] shall not limit the right of any Person to name either Co-Issuers as a party defendant in any action or suit or in the exercise of any other remedy under the Notes or this Indenture, so long as no judgment in the nature of a deficiency judgment or seeking personal liability shall be asked for or (if obtained) enforced against any such Person or entity.
JX 1, INDENTURE, § 2.6(h). Non-recourse provisions are enforceable under New York state law. See, e.g. , Bronxville Knolls, Inc. v. Webster Town Ctr. P'ship , 221 A.D.2d 248, 634 N.Y.S.2d 62 (2d Dep't 1995) (holding that "non-recourse clause of integrated mortgage and mortgage note precluded the underlying action by the plaintiffs for a personal judgment as against the defendants" because "the only recourse in connection with the underlying loan was the mortgaged property").
Applying the plain meaning of the language in section 2.6(h) and other provisions of the Indenture, the Court concludes that the Indenture explicitly provides that the Notes are nonrecourse and that Taberna shall have no personal liability with respect to the Notes. The first line of section 2.6(h) is unambiguous in stating that the Notes are nonrecourse: "[t]he obligations of the Co-Issuers under the Notes and this Indenture are non-recourse obligations of the Co-Issuers payable solely from the Collateral ...." JX 1, INDENTURE § 2.6(h). The Co-Issuers include Taberna, as Issuer, and Taberna Preferred Funding IV, Inc., as Co-Issuer. See JX 1, INDENTURE, p. 1. The remainder of the first line of section 2.6(h) provides that once the Collateral (here, various types of long-term securities) has been fully liquidated, the Noteholders' claims shall be extinguished. JX 1, INDENTURE § 2.6(h). This is consistent with the nature of nonrecourse debt; as once the Collateral has been exhausted, the Noteholders cannot look to Taberna to recover any deficiency because payment on the Notes will be "solely from the Collateral" and not from Taberna. Similarly, the fourth line of section 2.6(h) provides that although Noteholders may name Taberna as a defendant in an action when exercising other remedies under the Indenture, they are prohibited from either seeking a deficiency judgment or any personal liability against Taberna. JX 1, INDENTURE § 2.6(h).
The Petitioning Creditors argue, that the third line of section 2.6(h) limits the first line of section 2.6(h) (each quoted above) by providing that the Notes do not become nonrecourse until the Collateral has been realized. See Opp. ¶ 42. Thus, according to the Petitioning Creditors, the Noteholders' claims are not presently limited to the Collateral because the Collateral has not been fully liquidated, and only when the Collateral eventually is fully liquidated, will the Noteholders' claims then be limited to the Collateral. In other words: The Noteholders' claims will not be limited to the Collateral until after the Collateral has been liquidated.
The Court disagrees with this construction of the third line of section 2.6(h), which is not supported by the plain meaning of the provision, any other provision of the Indenture, or common sense. This proposed construction is belied by the first *589line of section 2.6(h), which contains an unqualified statement that the Notes are (as opposed to "will be, once the Collateral is liquidated") nonrecourse, as well as the fourth line of section 2.6(h), which prohibits Noteholders, with no temporal limitation, from seeking to hold Taberna personally liable on account of the Notes. The fourth line of section 2.6(h) does not qualify its prohibition on actions seeking a deficiency judgment against Taberna until after the Collateral has been liquidated. Moreover, the third line of section 2.6(h) is unambiguous. It does not provide that the Notes only become nonrecourse upon the occurrence of a subsequent event; i.e. the liquidation of the Collateral. Instead, it simply explains that, notwithstanding the first and second lines of section 2.6(h), section 2.6(h) shall not be construed as either preventing recourse to the Collateral or affecting a "waiver, release or discharge of any indebtedness or obligation evidenced by the Notes or secured by [the] Indenture until such Collateral has been realized." This is consistent with the first line of section 2.6(h), which provides that "following realization of the Collateral and its reduction to zero" the Noteholders' claims shall be extinguished. In this context, the claims are to be extinguished precisely because they are limited to the Collateral.
The Petitioning Creditors also point to several other provisions of the Indenture that contain generalized references to Taberna's payment obligations with respect to the Notes. See Opp. ¶ 36 (referencing sections 2.4(a),9 5.3(c),10 7.111 and 14.1212 ). While these sections reference a payment obligation of Taberna under the Indenture, they by no means give rise to any obligation to repay the Notes from any of its assets other than the Collateral. Nor do they provide that Taberna shall bear any personal liability on account of the Notes. Moreover, these provisions neither conflict with, nor give rise to any ambiguity concerning, *590the plain language of section 2.6(h).
B. The Bankruptcy Code Does Not Eliminate the Distinction Between Recourse and Non-Recourse Debt for the Purposes of Considering Eligibility to Commence an Involuntary Chapter 11 Case.
The Petitioning Creditors contend that even if the Notes are nonrecourse, the Petitioning Creditors nevertheless hold claims against Taberna because section 102(2) and, in cases commenced under chapter 11 of the Bankruptcy Code, section 1111(b)(1), eliminates any distinction between recourse and nonrecourse debt against Taberna for the purposes of determining their eligibility under section 303(b). See Opp. ¶¶ 2, 12-32. The Court concludes that the Bankruptcy Code does differentiate between recourse and nonrecourse Notes and that the Notes should not be characterized as recourse for the purposes of determining eligibility to commence an involuntary Bankruptcy Case.
1. Bankruptcy Code Section 1111(b)
The Petitioning Creditors argue that section 1111(b) of the Bankruptcy Code"eliminates any distinction in chapter 11 between recourse and nonrecourse debt," and therefore, when determining whether a petitioning creditor holds a claim against the entity that is the subject of an involuntary petition as required under section 303(b), nonrecourse creditors must be treated as holding recourse claims. Opp. ¶¶ 2, 12. The Objecting Parties, on the other hand, contend that section 1111(b) takes effect only after a bankruptcy case has been commenced and an estate comes into existence, and that it does not operate to render a party eligible to file an involuntary petition based on subsequent events that may or may not occur, particularly when that party otherwise would not meet the requirements of section 303(b). See The Obj. Parties' Reply Mem. of Law in Supp. of Their Mot. Under Rule 52(c) of the Fed. Rules of Civil Proc. for J. on Partial Findings (the "Reply Brf.") ¶¶ 5, 6 [ECF No. 15]. TP Management joins the Objecting Parties' position that section 1111(b) is not applicable here, however for different reasons. TP Management argues that section 1111(b) is inapplicable because the "Noteholders here have contractually forfeited any right to assert a deficiency claim under section 1111(b) or otherwise since they agreed in the Indenture that 'no judgment in the nature of a deficiency judgment or seeking personal liability shall be asked for or (if obtained) enforced against' the Issuer." TP Management LLC's Answer to the Involuntary Chapter 11 Petition [ECF No. 20 ¶ 43].
The Court turns to the plain language of both statutes to resolve this issue. If a statute's language is plain, the court's only function is to enforce the statute according to its terms. See United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). By its terms, Section 1111(b) governs how undersecured nonrecourse claims are to be treated under a debtor's chapter 11 plan "for allowance and distribution purposes," and provides as follows:
(1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of [the Bankruptcy Code] the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless
(i) the class of which such claim is a part elects, by at least two-thirds in amount and more than half in number of allowed claims of such class, application *591of paragraph (2) of this subsection; or
(ii) such holder does not have such recourse and such property is sold under section 363 of [the Bankruptcy Code] or is to be sold under the plan.
(B) A class of claims may not elect application of paragraph (2) of this subsection if -
(i) the interest on account of such claims of the holders of such claims in such property is of inconsequential value; or
(ii) The holder of a claim of such class has recourse against the debtor on account of such claim and such property is sold under section 363 of [the Bankruptcy Code] or is to be sold under the plan.
(2) If such an election is made, then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed.
11 U.S.C. § 1111(b) (emphasis added).
The language of section 1111(b) is clear and unambiguous, and provides that an undersecured, nonrecourse creditor in a chapter 11 case may, for allowance and distribution purposes , have its claim split into an allowed secured claim equal to the value of the collateral and an allowed unsecured claim for the deficiency (notwithstanding that the claim is nonrecourse), unless either (a) the class of which the creditor's claim is a part elects to have the claim treated as a fully secured claim or (b) the creditor holds a nonrecourse claim and the collateral is sold under section 363 of the Bankruptcy Code or pursuant to a chapter 11 plan.
As an initial matter, the plain language of section 1111(b) makes clear that "the recourse transformation is for distribution purposes only. The Code provision does not change the nature or terms of a creditor's security interest." In re Montgomery Ward, LLC , 634 F.3d at 740 (citing In re DRW Prop. Co. , 57 B.R. 987, 992 (Bankr. N.D. Tex. 1986) ); see id. ("The transformation of non-recourse claims into recourse claims is for distribution purposes only in a Chapter 11 reorganization case where the debtor has been given the power to retain encumbered property (over the objection of the secured creditor) for use in its plan of reorganization."); Travelers Ins. Co. v. 633 Third Assocs. , No. 91 CIV. 5735 (CSH), 1991 WL 236842, at *2 (S.D.N.Y. Oct. 31, 1991) (citing In re DRW Prop. Co. , 57 B.R. at 992 ); 11 U.S.C. § 1111(b) ("A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse ....")(emphasis added); see also 7 Collier on Bankruptcy ¶ 1111.03[1](c) (16th ed. 2018) ("Thus, although the claim becomes recourse against the debtor for purposes of distribution, it remains a nonrecourse claim for all other purposes.").
Section 1111(b) does not, as the Petitioning Creditors argue, unequivocally treat all nonrecourse claims as recourse under all circumstances, or, for our purposes, at commencement of every chapter 11 case. Instead, for allowance purposes , it permits an undersecured nonrecourse claim to be allowed as recourse claim only if certain requirements are met: i.e. if the claim is not treated as fully secured under section 1111(b)(1)(A)(i)and the collateral securing the claim is not sold pursuant to either section 363 or pursuant to a plan. The second condition is based on the rationale that if the "collateral is to be sold, the undersecured creditor does not get recourse because the nonrecourse lender may, under 11 U.S.C. § 363(k), bid in the *592undersecured portion of its claim when the collateral is sold." In re 680 Fifth Ave. Assocs. v. Mut. Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.) , 156 B.R. 726, 733 (Bankr. S.D.N.Y. 1993), aff'd , 169 B.R. 22 (S.D.N.Y. 1993)aff'd , 29 F.3d 95 (2d Cir. 1994). Thus, if an order for relief were to be granted with respect to the involuntary petition, and if the Collateral were subsequently sold either pursuant to section 363 or as part of a chapter 11 plan, the Petitioning Creditors' nonrecourse claims would not be entitled to recourse treatment under section 1111(b). Id. ("[I]f the plan of reorganization provides that collateral is to be sold, the undersecured creditor does not get recourse because the lender may ... bid in the undersecured portion of its claim when the collateral is sold."); 124 Cong. Rec. 32, 406-07 (1978) (explaining that section 1111(b) does not afford recourse status to nonrecourse creditors "if the property securing the loan is sold under section 363 or is to be sold under the plan"). Because it is not clear at this stage of the proceedings whether the claims will ultimately qualify for recourse treatment under section 1111(b), there is no reason for the Court to conclude at this time that the Petitioning Creditors' nonrecourse claims are presently entitled to allowance as recourse claims under section 1111(b).13 In any event, allowance of Petitioning Creditors' claim is not the issue now before the Court.
Moreover, even if the Court were to conclude that the language of section 1111(b) is ambiguous and fails in itself to resolve the conflicting interpretations offered by the parties, a review of the purpose underlying section 1111(b) supports the Court's conclusion. See Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp. , 846 F.3d 1, 6 (2d Cir. 2017) ("If resorting to the plain text alone fails to resolve the question," courts may test competing interpretations against both the text of the statute and the legislative purpose and history).
Section 1111(b) was designed to protect the rights of nonrecourse lienholders in chapter 11 reorganizations "where the debtor elects to retain the collateral property." 680 Fifth Ave. Assocs. v. Mutual Benefit Life Ins. (In re 680 Fifth Ave. Assocs.) , 29 F.3d 95, 97 (2d Cir. 1994). Congress enacted section 1111(b) in response to one case, In re Pine Gate Associates, Ltd. , 2 Bankr.Ct. Dec. 1478 (Bankr. N.D. Ga. 1976), which was brought under Chapter XII of the former Bankruptcy Act of 1898, which allowed a debtor to utilize its "cramdown" powers to retain collateral (in the form of real property) that was subject to a nonrecourse lien. See In re 680 Fifth Ave. Assocs. , 156 B.R. at 730-31 ; In re B.R. Brookfield Commons No. 1 LLC , 735 F.3d 596, 599 (7th Cir. 2013) (citing Great Nat'l Life Ins. Co. v. Pine Gate Assocs. , 2 Bankr. Ct. Dec. 1478 (Bankr. N.D. Ga. 1976) ). The Pine Gate Associates case concerned a debtor that was able to retain its collateral by ascribing a low value to it through a judicial valuation, as opposed to an auction. See In re B.R. Brookfield Commons No. 1 LLC , 735 F.3d at 599-600 (citing In re Atlanta West VI , 91 B.R. 620, 623 (Bankr. N.D. Ga. 1988) ). In Pine Gate , a depressed real estate market enabled the debtor to undervalue the collateral (relative to the outstanding debt *593secured by the collateral), and "cash out" its secured lender by paying only the valuation amount to the nonrecourse undersecured lender. In re B.R. Brookfield Commons No. 1 LLC , 735 F.3d at 599-600. The debtor in Pine Gate was able to retain the collateral in large part because "the absence of a public sale prevented the mortgagee from bidding in its liens, and the nonrecourse nature of the loan barred the lender from asserting an unsecured deficiency claim." In re 680 Fifth Ave. Assocs. , 156 B.R. at 730. To avoid this type of result, "Congress enacted § 1111(b) to give undersecured creditors 'a voice in the Chapter 11 process to the extent that the undersecured creditor may dominate the vote within the unsecured class ...,' " Id. at 731, and because a judicial valuation of collateral (as opposed to a public sale or foreclosure) "was not part of a nonrecourse creditor's bargain." B.R. Brookfield Commons , 735 F.3d at 600.
Thus, section 1111(b) gives the nonrecourse lender a voice by enabling it to vote using its unsecured deficiency claim in connection with the debtor's chapter 11 plan. "Absent the unsecured deficiency claim, the undersecured nonrecourse creditor would not be able to vote so long as it received the collateral's appraised value." In re Montgomery Ward, LLC , 634 F.3d 732, 740 (citing 11 U.S.C. §§ 1124(1), 1126(f) ). The purpose and legislative history of section 1111(b) make clear that this section of the Bankruptcy Code was enacted to protect undersecured lenders in cases where debtors seek to retain the collateral, through a judicial valuation of the collateral, in the context of a cramdown. Section 1111(b) was not enacted to give nonrecourse lenders (i.e. secured lenders up to the value of their collateral who hold no unsecured claims against their borrower) a right to commence an involuntary bankruptcy case against their borrower.
Notwithstanding that the apparent goal of Petitioning Creditors is to liquidate Taberna,14 see JPO § III Stip. Fact ¶¶ 29-39, curiously, Petitioning Creditors elected to file this involuntary case under Chapter 11 and not under Chapter 7.15
It is pivotal to recognize that creditors' ability to bring a debtor into bankruptcy can be abused. "In part because of the unusual nature of involuntary petitions, Congress provided bankruptcy courts with a variety of tools with which to police their use." Wilk Auslander LLP v. Murray (In re Murray) , 900 F.3d 53 (2d Cir. 2018). By enacting section 303 Congress entrusted bankruptcy courts with the tools necessary *594to protect debtors from abusive involuntary petition practice. Fundamentally, Section 303(b) is a "gating" provision, intended to place limitations on the commencement of involuntary cases. The Court rejects Petitioning Creditors' bootstrapping attempt to invoke section 1111-a provision dealing with the allowance of claims in a Chapter 11 case-to support an argument regarding their eligibility to commence an involuntary Chapter 11. By its terms section 1111 applies only once a Chapter 11 case exists; it cannot be used to validate an otherwise ineligible Chapter 11 involuntary petition.
In short, Petitioning Creditors' attempt to invoke section 1111 as authority to support their eligibility under section 303 must be rejected. The Court concludes that section 1111(b) is not applicable for the purposes of determining a party's eligibility to initiate an involuntary bankruptcy under section 303. Questions of whether a claim should be allowed and regarding its secured status are properly entertained not in connection with the validity of the involuntary bankruptcy petition, but only later, at trial or a hearing on the allowance of the claim itself after the involuntary bankruptcy case is underway. Here, the Court has not entered an order for relief, and therefore there is no Chapter 11 case such that section 1111(b) can be triggered. See In re Allen-Main Assocs. Ltd. P'ship , 223 B.R. 59, 63 (2d Cir. BAP 1998) (" Section 1111(b) applies only to proceedings under Chapter 11 of the Bankruptcy Code."); see also Travelers Ins. Co. v. 633 Third Assocs. , No. 91 CIV. 5735 (CSH), 1991 WL 236842, at *2 (S.D.N.Y. Oct. 31, 1991) ("[ Section 1111(b) ] was not intended as a device for non-recourse creditors to enhance their position under state law-thereby repudiating their bargain-in advance of any bankruptcy proceeding that may or may not take place."). To hold otherwise would allow a would-be petitioner to lift itself up by its own bootstraps "to status of 'holder of a claim' under § 303(b)(1)." In re Curtis , 38 B.R. 364, 369 (Bankr. N.D. Okla. 1983).
2. Bankruptcy Code Section 102(2)
The Petitioning Creditors also argue that section 102(2) of the Bankruptcy Code eliminates any distinction between recourse and nonrecourse claims in bankruptcy, including for purposes of the eligibility requirements in section 303(b). See ¶¶ Opp. 24-32. Section 102(2) provides that a "claim against the debtor includes [a] claim against property of the debtor." 11 U.S.C. § 102(2). Thus, the Petitioning Creditors contend that they meet the requirement under section 303(b) of the Bankruptcy Code that they hold a "claim against such person" (i.e. against Taberna) since under section 102(2), a claim against Taberna includes a claim against property of Taberna (i.e. the Collateral).
The Court construes the requirement in section 303(b) that a petitioning creditor hold a "claim against such person," by looking to the precise language used by Congress. See Reiter v. Sonotone Corp. , 442 U.S. 330, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979) ("Statutory construction must begin with the language employed by Congress."). Section 303(b) does not employ the phrase "claim against the debtor" that is defined in section 102(2). Instead, section 303(b) selectively16 requires that a petitioning creditor hold an *595unsecured claim "against such person" - i.e. the actual person or entity that is the subject of the involuntary petition. The term "person" is separately defined in section 101(41) of the Bankruptcy Code to include an individual, partnership and corporation or, under certain circumstances, a government. 11 U.S.C. § 101(41). Section 101(41)'s definition of a "person," does not , however, include such person's property. If Congress had intended to allow commencement of an involuntary case by a creditor holding a claim against a person's property, as opposed to a claim against the person , it just as easily could have used the phrase "claim against the debtor" (as the statute does elsewhere), and not the more specific "claim against such person ."
Alternatively, Congress could have added the language "or against such person's property" to the qualifying language in section 303(b). Instead, Congress used the narrower phrase "claim against such person," which is not defined in section 102(2).17 As such, the plain language of section 303(b), when considered together with the definitions set forth in sections 101 and 102 of the Bankruptcy Code, make clear that the phrase "claim against such person" does not include a "claim against such person's property."
Such a limitation is consistent with the purpose underlying the restrictions contained in section 303(b) :
The Code's provisions and the rules of procedure governing involuntary cases are strict because of the severe nature of involuntary relief and the extreme consequences to the debtor in being forced into bankruptcy. On the one hand, involuntary petitions are favored because they can prevent the diminution of assets by a debtor and provide equality of treatment among creditors . On the other hand, the filing of an involuntary petition has the potential of doing great harm the debtor [sic.], including loss of the right to use or transfer property, consequences from the denial of credit, and even embarrassment. An involuntary petition is a powerful weapon and therefore the Code and Federal Rules of Bankruptcy Procedure include numerous requirements and restrictions to curtail misuse and to insure that the remedy is sought only in appropriate circumstances .
In re Murray , 543 B.R. 484, 496-97 (Bankr. S.D.N.Y. 2016) (quoting Hon. Joan Feeney, Hon. Michael Williamson and Michael Stepan, Bankruptcy Law Manual (5th ed. 2014) ) (emphasis in original), aff'd , 565 B.R. 527 (S.D.N.Y.), aff'd , 900 F.3d 53 (2d Cir. 2018).
The Court is aware of only one prior decision that squarely addressed this definitional issue; it concluded that a non-recourse creditor is not eligible to be a petitioning creditor under section 303. See In re Green , No. 06-11761, 2007 WL 1093791, at *8 (Bankr. W.D. Tex. 2007). In that case, the issue before the Court was whether nonrecourse creditors qualify as holders of claims "against such person" as used in section 303(b)(1), particularly in light of section 102(2) of the Bankruptcy Code. See id. at *7. The court concluded that "[i]t is clear that for a creditor to be 'counted' under § 303(b)(1) it must hold a claim against the 'person,' i.e. the alleged debtor must be personally liable for the creditor's claim in order for that creditor *596to be 'counted.' " Id. at *8. The court explained that "the primary reason why claims against property were most likely not included is that holders of those claims have a remedy outside of bankruptcy [by means of a state court foreclosure proceeding] whereas holders of unsecured claims against the person do not." Id. ; accord In re Amanat , 321 B.R. 30, 38 (Bankr. S.D.N.Y. 2005) ("As a leading treatise concludes, with regard to a partially secured creditor, the amount of its claim for purposes of being a petitioning creditor is the amount of the unsecured portion of its debt.") (quoting Collier on Bankruptcy , ¶ 303.03 (15th ed. 1979)(internal quotations omitted); In re Tsunis , 39 B.R. 977, 979 (E.D.N.Y. 1983) (holding that if a creditor's claims "[can] be satisfied in state court then the creditors would not be permitted to bring a petition for involuntary bankruptcy. If the claims cannot be satisfied in a state [foreclosure] action, then the creditors remain unsecured and are entitled to bring an action in bankruptcy court").
The Petitioning Creditors nevertheless argue that two cases within this Circuit require a different result. The first case involved an involuntary petition commenced by holders of mechanics' liens, which pursuant to applicable state law, were limited to the debtor's property identified in the lien. See Carteret Savs. Bank, F.A. v. Nastasi-White, Inc. (In re East-West Assocs.) 106 B.R. 767, 771 (S.D.N.Y. 1989). In East-West Associates , approximately three months after the involuntary petition was granted, a secured lender moved for relief from the automatic stay, to proceed with a foreclosure on the debtor's property, or for dismissal of the involuntary petition. Id. at 769. The Bankruptcy Court ultimately required the petitioning creditors to make certain adequate protection payments to the lender and ruled that the lender's motion to dismiss would be granted if the petitioning creditors failed to make the payments. See id. On appeal to the District Court, the lender argued that the case should have been dismissed because the holders of the mechanics' liens did not qualify as petitioning creditors under section 303 of the Bankruptcy Code, as they did not hold claims "against the debtor." Id. at 770. District Judge Conboy stated that because, under section 102(2) a claim "against the debtor" includes a claim against the debtor's property, "it seems that the Petitioning Creditors are eligible under Section 303(b)." Id. at 771 (emphasis added).
This Court concludes that the East-West case is distinguishable from this case. Although the East-West Associates decision contains very little analysis, it appears that the decision was based, at least in part, on the fact that the involuntary petition already had been granted. The District Court was ruling not on whether to enter an order for relief (as here), but on a subsequent motion to dismiss the pending chapter 11 case under section 1112 of the Bankruptcy Code, id. at 769, pursuant to which a case may be dismissed, inter alia , for cause. See 11 U.S.C. § 1112. This explains why the Court based its decision on the Code's definition of the phrase "against the debtor" -a phrase that is not used in section 303(b) -and not the section 303 statutory eligibility language which requires that a petitioning creditor hold a claim "against such person." No other court in this Circuit has cited the East-West Associates decision for the proposition urged by the Petitioning Creditors.
In the only other case to address the subject in this Circuit, the Bankruptcy Court rejected the Petitioning Creditors argument. See In re Allen-Main Assocs. L.P. , 218 B.R. 278 (Bankr. D. Conn. 1998), aff'd , 223 B.R. 59 (2d Cir. BAP 1998). The issue before the Bankruptcy Court in *597Allen-Main was "whether a non-recourse secured creditor may be a sole petitioner in an involuntary Chapter 7 case." Id. Unlike section 1111(b), section 102(2) applies in both chapter 11 and chapter 7 cases. In the Allen-Main Associates case, the Court focused its analysis on the plain language of section 303(b) and reasoned that because a nonrecourse creditor had agreed to look only to its collateral for the satisfaction of its debt, "the alleged debtor is not personally liable on the note. Without personal liability, there can be no unsecured claim." Id. at 279-280. Moreover, the court noted that to the extent that " East-West Associates suggest[s] that a nonrecourse secured creditor is eligible to act as the sole petitioning creditor under § 303(b), the court rejects the reasoning in [that] decision[ ]." Id. at 280. The Court further explained that "[i]n holding that a non-recourse secured creditor may not act as the sole petitioning creditor under § 303(b), the court notes that for the past one hundred years, U.S. bankruptcy statutes have required creditors filing involuntary petitions to hold unsecured debt." Id. On appeal, the Second Circuit Bankruptcy Appellate Panel (the "Panel") upheld the Allen Main Associates decision. CC Britain Equities, L.L.C. v. Allen-Main Assocs. (In re Allen-Main II) , 223 B.R. 59 (2d Cir. BAP 1998). In affirming the Bankruptcy Court's decision, the Panel explained that the plain language of section 303(b) requires a petitioning creditor to hold a claim against "such person," and reasoned that a nonrecourse creditor, which has no right to payment from either the debtor or the debtor's other property, fails to meet the eligibility requirements in a chapter 7 case. See id. at 61-62. The Court stated that it did not consider the impact of section 1111(b) of the Bankruptcy Code, which applies only in chapter 11 bankruptcy cases, but noted, in dicta , that with certain exceptions, section 1111(b) does not distinguish between recourse and nonrecourse claims. See id. at 63. However, having considered section 102(2) and its legislative history, the Panel rejected the argument now advanced by the Petitioning Creditors. See id. at 62.
For these reasons, this Court concludes that because the Petitioning Creditors hold claims against only the Collateral, and do not hold claims against Taberna, they fail to meet the requirement under section 303(b) of the Bankruptcy Code.
3. Claims of Nonrecourse Creditors
The Petitioning Creditors next argue that even if they have no in personam claims against Taberna due to the nonrecourse nature of the Notes, they nonetheless hold claims against Taberna within the meaning of section 303(b)(1). See Opp. ¶¶ 40- 42. None of the cases cited by the Petitioning Creditors support this contention. For example, the Petitioning Creditors argue that under Johnson v. Home State Bank , 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991), a nonrecourse lender holds a personal claim against the borrower in bankruptcy. See Opp. ¶¶ 4, 26, 41. Johnson had nothing to do with eligibility requirements under section 303(b) or with an involuntary bankruptcy case in any respect. Rather, Johnson concerned a mortgage loan that had been administered in a borrower's chapter 7 bankruptcy case, where the borrower received a discharge of personal liability with respect to the loan, while the mortgage lender retained its security interest in the mortgaged property. 501 U.S. at 80, 111 S.Ct. 2150. After the debtor received a discharge with respect to the mortgage, the holder of the mortgage lien reinstated its foreclosure proceeding, which prompted the borrower to commence a second bankruptcy case, this time under chapter 13 of the Bankruptcy Code. In his chapter 13 case, the *598debtor sought to treat the mortgage holder's lien against the mortgaged property as a claim to be administered under his chapter 13 plan of reorganization, and the mortgage lender objected. Id. at 80-81, 111 S.Ct. 2150. The issue before the court was whether the mortgage lender's security interest in the borrower's mortgaged property constituted a claim that could be included in his chapter 13 plan. Id. at 80, 111 S.Ct. 2150. Noting that the mortgage lender had a right to payment in the form of the proceeds from a sale of the debtor's mortgaged property as well as a right to an equitable remedy (foreclosure), the Court concluded that the surviving mortgage interest constituted a claim against the debtor within the meaning of section 101(5). Id. at 83-84, 111 S.Ct. 2150. The Court also noted that since under section 102(2), a claim against a debtor includes a claim against a debtor's property, the mortgage interest constituted a claim against the debtor to be administered in the chapter 13 case. Id. at 85, 111 S.Ct. 2150. While Johnson provides that a security interest in property of a debtor constitutes a claim that may be administered in a chapter 13 case, it does not stand for the proposition that a holder of a security interest under a nonrecourse loan holds a "claim against such person" as required to qualify as a petitioning creditor under section 303(b) of the Bankruptcy Code. To construe Johnson in such a way would negate the express requirement of section 303(b)(1) that petitioning creditors hold "noncontingent, undisputed claims [that] aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims ..." 11 U.S.C. § 303(b)(1) (emphasis added). Johnson simply stands for the proposition that a secured lender's foreclosure right and right to sale proceeds constitute a "claim" within the meaning of the Bankruptcy Code. However, Johnson does not stand for the proposition that such rights constitute a claim against the debtor above the value of its lien on property; i.e. an unsecured claim within the meaning of section 303(b).
The Petitioning Creditors' reliance on Midland Funding LLC v. Johnson , --- U.S. ----, 137 S.Ct. 1407, 197 L.Ed.2d 790 (2017), is similarly misplaced. See Opp. ¶¶ 41. In Midland Funding , a party filed a proof of claim for a credit card debt that was time-barred and noted on its proof of claim that the statute of limitations had expired. --- U.S. ----, 137 S.Ct. 1407, 1411, 197 L.Ed.2d 790 (2017). The claim ultimately was disallowed, and the chapter 13 debtor sued the claimant alleging that the filing of the proof of claim constituted a violation of the Fair Debt Collection Practices Act (the "FDCPA") because it was false, deceptive and misleading, and an unconscionable and unfair means of collecting a debt. Id. The Supreme Court held that the claimant's filing of the proof of claim was not actionable under the FDCPA because the Bankruptcy Code's definition of "claim" includes a right to payment, "whether or not such right is ... disputed" or enforceable, id. at 1412 (quoting 11 U.S.C. § 101(5)(A) ), and a proof of claim is merely "a statement by the creditor that he or she has a right to payment subject to disallowance." Id. at 1413. While Midland Funding may stand for the proposition that a disputed and ultimately unenforceable claim still constitutes a claim, section 303(b)(1) explicitly requires that a petitioning creditor hold a claim that is not subject to a bona fide dispute. 11 U.S.C. § 303(b). Thus, the Court rejects the Petitioning Creditors argument that based on Midland Funding they may hold an as yet unspecified claim against Taberna with respect to the Notes. Even then, the Petitioning Creditors must also establish a prima facie case that any such claim, once *599identified to the Court, is not subject to a bona fide dispute and otherwise meets the requirements of section 303. See Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC) , 330 F.3d 111, 117 (2d Cir. 2003), abrogated on other grounds by Adams v. Zarnel (In re Zarnel) , 619 F.3d 156 (2d Cir. 2010). Not only have the Petitioning Creditors failed to establish a prima facie case that they hold an undisputed claim against Taberna, they have failed even to identify any claim against Taberna. The Court is also not convinced by the cases cited by the Petitioning Creditors construing treatment of nonrecourse claims for tax purposes, as the rationale underlying those decisions reflects policies unique to the Internal Revenue Code, as opposed to the Bankruptcy Code. See Opp. ¶ 40.
4. This Court's Prior Summary Judgment Decision Does Not Render Petitioning Creditors Eligible To File An Involuntary Case
The Petitioning Creditors' final argument is that this Court previously found, in connection with the denial of their Motion for Summary Judgment that the Petitioning Creditors do not hold the lien on the Collateral (under the Indenture, the lien is held by the Trustee for the benefit of the Noteholders ), and therefore the Petitioning Creditors hold unsecured claims for purposes of the eligibility requirements in section 303(b). See Opp. ¶¶ 52-62. Specifically, the Petitioning Creditors rely on the language in section 303(b)(1), which provides that the three petitioning creditors must hold claims that "aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims ." 11 U.S.C. § 303(b)(1) (emphasis added). Thus, the Petitioning Creditors argue that although they are the holders of the PC Note Claims, they are not the holders of the lien, and therefore the value of any lien they hold is zero. As such, they argue that because the PC Note Claims aggregate more than the value of any lien held by the holders of the PC Note Claims, the Petitioning Creditors meet the requirements of section 303(b)(1).
The Court notes initially that the denial of summary judgment has no precedential effect. Paquin v. Fed. Nat. Mortg. Ass'n , 20 F.Supp.2d 94, 96 (D.D.C. 1998), aff'd sub nom. Paquin v. Fed. Nat. Mortg. Ass'n , 194 F.3d 174 (D.C. Cir. 1999) ("Moreover, denial of a motion for summary judgment does not constitute the 'law of the case' because it 'does not purport to decide the factual question, it merely denies the motion because, in the court's then view, there were 'issuable facts.' Such a denial merely postpones decision of any question; it decides none.") (internal citations and quotation marks omitted); see 10A Wright & Miller, Federal Practice and Procedure § 2712 (4th ed. 2008) ("[A] denial of summary judgment is not a decision on the merits, it simply is a decision that there is a material factual issue to be tried."). Moreover, the Petitioning Creditors, at the outset of their argument, rely upon an erroneous premise. In denying its Motion for Summary Judgment, the Court did not find, as Petitioning Creditors claim, that Petitioning Creditors hold unsecured claims for the purposes of the eligibility requirements under section 303(b). See Kramer v. Ayer , No. 68 CIV. 2652, 1971 WL 308, at *2 (S.D.N.Y. Dec. 6, 1971) ("Since summary judgment was denied there is no 'law of this case.' A denial of summary judgment is not a judgment on the merits."); see also In re Foxmeyer Corp. , 286 B.R. 546, 557 (Bankr. D. Del. 2002) ("[A]mple case authority exists for the precisely contrary position that denial of a summary judgment motion does not constitute law of the case.") (collecting cases). Rather the Court only addressed *600whether the Petitioning Creditors, as the movant, had established that no genuine dispute as to any material fact exists, and that they were entitled to judgment as a matter of law on the issue of whether they hold unsecured claims against Taberna. See Summary Judgment Decision [ECF No. 133]. In disposing of the Petitioning Creditors' motion for summary judgment, the Court ruled that the Petitioning Creditors failed to establish that no genuine dispute as to any material fact exists and that they were entitled to judgment as a matter of law. Petitioning Creditors argue in favor of an unnaturally rigid reading of the statute. Such a reading would yield the absurd result of permitting secured nonrecourse parties to qualify as the petitioning creditors simply because their liens are held in trust by a third party such as the Indenture Trustee. Because the Petitioning Creditors hold secured nonrecourse claims, they do not qualify as petitioning creditors under section 303(b).
IV.
DISMISSAL FOR CAUSE
The Court also concludes, in the exercise of its discretion, that even if the Petitioning Creditors were eligible under section 303(b), dismissal is appropriate in this case pursuant to Section 1112 of the Bankruptcy Code and the Second Circuit's recent decision in Wilk Auslander LLP v. Murray (In re Murray) , 900 F.3d 53 (2d Cir. 2018).
Section 1112 authorizes dismissal of a case for cause when it is in the best interest of the creditors and the estate to do so. 11 U.S.C. § 1112. Section 1112(b) lists circumstances that constitute cause to dismiss a case and grants the bankruptcy court broad equitable discretion to grant relief based upon the facts and circumstances of a particular case. Lynch v. Barnard , 590 B.R. 30, 34-35 (E.D.N.Y. 2018), appeal docketed , No. 18-2934, 2018 WL 6031362 (2d. Cir. Oct. 03, 2018). The list of circumstances that justify dismissal for cause specified in section 1112(b)"is illustrative, not exhaustive." C-TC 9th Ave. P'ship v. Norton Co., Maplewood Colonie Common Sch. Dist., Town of Colonie (In re C-TC 9th Ave. P'ship) , 113 F.3d 1304, 1311 (2d Cir. 1997) ; see also id. at n.5 (quoting H.R. Rep. No. 95-595, at 405-6, as reprinted in 1978 U.S.C.C.A.N. 5787, 6363-64) ("The list contained in § 1112(b) is not exhaustive. The Court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.").
The Court may dismiss a case sua sponte , after notice and a hearing, under section 1112(b) if there is cause. In re Munteanu , No. 06 CV 6108(ADS), 2007 WL 1987783, at *3 (E.D.N.Y. June 28, 2007). ("Although the plain language of Section 1112 states that dismissal is required 'on request of a party in interest,' Courts generally hold that after the 1986 amendments to section 105 of the Bankruptcy Code, the Bankruptcy Court has the authority to dismiss a bankruptcy petition for cause under section 1112(b) on its own motion."); see also In re C-TC 9th Ave. P'ship , 113 F.3d at 1310 (holding that the bankruptcy court may dismiss a bad faith filing pursuant to 11 U.S.C. § 1112(b)sua sponte ); In re Coram Graphic Arts , 11 B.R. 641, 644 (Bankr. E.D.N.Y. 1981).
Recently, in Wilk Auslander LLP v. Murray , the Second Circuit upheld the District Court's affirmance of the Bankruptcy Court's sua sponte dismissal of an involuntary chapter 7 petition, holding that "even if a petition meets the statutory requirements of section 303... a bankruptcy court may dismiss it for cause under section 707(a) after notice and a hearing."
*601900 F.3d 53, 60. The Second Circuit made clear that this authority is not limited to cases arising under chapter 7; bankruptcy courts also have the authority to dismiss an involuntary case under Chapter 11 for cause, sua sponte , after notice and a hearing. Id. at n.4.
As the Second Circuit held in Murray , cause is a fact-specific inquiry and a variety of factors may be relevant. The court specifically held that "[i]nappropriate use of the Bankruptcy Code may constitute cause to dismiss ...." Id. at 60. An involuntary chapter 11 is appropriate where the petitioning creditor seeks to guard against other creditors obtaining an unfair and disproportionate share of the alleged debtor's assets. See In re Bayshore Wire Prod. Corp. , 209 F.3d 100, 105 (2d Cir. 2000) (citing In re Better Care, Ltd. , 97 B.R. 405, 411 (Bankr. N.D. Ill. 1989) ; see also In re Luxeyard, Inc. , 556 B.R. 627, 640 (Bankr. D. Del. 2016) ("[A] creditor may use the device of an involuntary petition when bankruptcy is necessary to assure equal distribution among creditors."). Thus, an involuntary petition that seeks to achieve objectives that benefit all creditors is consistent with the Bankruptcy Code's goal to "secure equal distribution among creditors." Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co. , 547 U.S. 651, 655, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006). Specifically, under chapter 11, the Code's objective is to "preserv[e] going concerns and maximiz[e] property available to satisfy creditors ... and [to]achieve fundamental fairness and justice." In re Am. Capital Equip., LLC , 688 F.3d 145, 157 (3d Cir. 2012) (collecting cases).
A bankruptcy petition therefore "must seek to create or preserve some value that would otherwise be lost-not merely distributed to different a stakeholder -outside of bankruptcy." In re Integrated Telecom Express, Inc. , 384 F.3d 108, 129 (3d Cir. 2004) (emphasis added); see also S. REP. 95-989, 32-33, 1978 U.S.C.C.A.N. 5787, 5818-19 ("Because the assets of an insolvent debtor belong equitably to his creditors, the bill permits involuntary cases in order that creditors may realize on their assets through reorganization as well as through liquidation."). Accordingly, courts have found cause based on bad faith where a party filed an "involuntary bankruptcy petition in order to take control of a corporation or its assets." In re Glob. Energies, LLC , 763 F.3d 1341, 1350 (11th Cir. 2014). While a finding that the filer acted in bad faith is often invoked as a reason to dismiss for cause, the Court "need not ... classify misuse of the Bankruptcy Code as bad faith in order to accept it as cause to dismiss, particularly when, as here, misuse is one of a number of factors supporting cause to dismiss." In re Murray , 900 F.3d at 60.
"The bankruptcy court has this discretion whether dismissal is sought on a basis specified in the Code, or on bad faith or other unenumerated cause ... 'A bankruptcy court has discretion to determine what additional circumstances, not enumerated in the statute, may constitute cause.' " In re Murray , 543 B.R. at 492 (quoting Clear Blue Water, LLC v. Oyster Bay Mgmt. Co., LLC , 476 B.R. 60, 67 (E.D.N.Y. 2012). Here, the Objecting Parties have alleged bad faith, and based upon Petitioning Creditor's case in chief, there are certainly facts that could support such a finding. Nonetheless, Opposing Creditors have not moved for judgment based on bad faith and the Court makes no determination as to whether the Petitioning Creditors have brought this case in bad faith.
The Petitioning Creditors, for their part, allege that their actions were taken in good faith. Specifically, the Petitioning Creditors cite to *602In re Zais Investment Grade Limited VII , 455 B.R. 839, 849 (Bankr. D.N.J. 2011), in which another bankruptcy court found similar motivations and actions to be consistent with the purpose of the bankruptcy code and of chapter 11. Indeed, Petitioning Creditor's principal (and only fact witness at trial), Vikaran Ghei, freely admitted that he was involved in and carefully followed the Zais case. 11/30/17 Tr. 78:8-18; 164:2-25, Adv. Pro. No. 17-01087 ECF No. 17. As explained below however the Zais case does not support Petitioning Creditors' request for an entry of an order for relief in this case.
The Court concludes that cause to dismiss exists because no bankruptcy purpose is served by this filing. Moreover, Petitioning Creditors will not suffer any prejudice if the case is dismissed. Indeed, in the Court's view it would be an injustice for the Court to find that the Petitioning Creditors, sophisticated business entities who analyzed and bargained for Taberna's current liquidation scheme, are prejudiced by the contractual terms and conditions they freely sought out and entered. See In re Murray , 900 F.3d at 62.
The Court concludes in the exercise of its discretion that the interests of the (putative) estate and all creditors are best served by dismissal of this case. See In re Balco Equities Ltd., Inc. , 312 B.R. 734, 748-49 (Bankr. S.D.N.Y. 2004) (Cause under section 1112(b)"may be found based on unenumerated factors, including ... failure to deal with creditors fairly even where 'bad faith' is not found"); see also In re AMC Realty Corp. , 270 B.R. 132, 147 (Bankr. S.D.N.Y. 2001) (dismissing the chapter 11 case for cause without finding bad faith); In re Glob. Energies, LLC , 763 F.3d 1341, 1350 (11th Cir. 2014) (stating that cause exists where a party files an "involuntary bankruptcy petition in order to take control of a corporation or its assets"). Specifically, the following facts support this conclusion:
• The alleged debtor is not an operating business and does nothing other than hold securities that generate cash flow to pay noteholders pursuant to the terms of the Indenture. See JPO § III Stip. Facts ¶¶ 1-2, 14; see TP Management LLC's Answer [ECF No. 20], Ex. B (Taberna has no employees or operations of its own, and instead contracts with outside parties for all functions); see Petitioning Creditor's Statement [ECF No. 2, ¶ 20]; 11/30/17 Tr. 95:14-97:21, Adv. Pro. No. 17-01087 ECF No. 15.
• By the terms of the Indenture, Taberna is intended to exist only for a finite period of time, investing cash and paying out to investors pursuant to the notes, which under the Indenture have a maturity date of May 5, 2036. JPO § III Stip. Facts ¶ 5.; JX 1 INDENTURE pp. 9-14.
• The alleged debtor does not need, or want, a discharge. See TP Management LLC's Answer [ECF No. 20], ¶ 5 ("As a result of being a CDO in run-off, the alleged debtor has no business to 'rehabilitate' or to bestow with a 'fresh start' under chapter 11."); see also Taberna Preferred Funding IV, LTD's Answer [ECF No. 84].
• No assets would be lost or dissipated if the bankruptcy case were dismissed. See JX 49.
• Petitioning Creditors are being paid pursuant to the Indenture. See JPO § III Stip. Facts ¶¶ 12, 22.
• Pursuant to the terms of the Indenture, the Petitioning Creditors have adequate remedies for any grievances under nonbankruptcy law. See, e.g. , JX 1 INDENTURE pp. 173-190 *603(the Indenture provides for bargained-for contractual remedies); see also 11/30/17 Tr. 97:11-24, Adv. Pro. No. 17-01087 ECF No. 15; see also 10/18/18 Tr. 16:9-6, ECF No. 161.
• Under the terms of the Indenture, Petitioning Creditors' Notes are fully secured.
• The Petitioning Creditors previously engaged in unsuccessful serial efforts to liquidate the collateral. See, e.g. , Petitioning Creditor's Statement [ECF No. 2], ¶ 39.
• In tandem with filing this involuntary petition, each Petitioning Creditor waived its right to benefit from security interests in any assets of the alleged debtor solely on account of their ownership interest in the Class A-2 Notes up to, but not to exceed, the amount of $5,259.00, to collectively achieve the section 303 statutory requirement of claims aggregating $1,5775. JPO § III Stip. Facts ¶ 57.
• One day after filing the involuntary petition, Petitioning Creditors moved to terminate the putative debtor's exclusivity period to file a plan, see ECF No. 1-3, thereby seeking authorization to file their own plan, having circulated pre-filing, but failing to obtain other creditors consent to, a proposed plan that would liquidate the collateral.
• The record evidence makes clear that Petitioning Creditors are seeking to liquidate the collateral solely for their benefit, and at the expense of other Note holders. See email from Joseph Furmari to Vikaran Ghei [JX 40]; see also Notice of Filing of Certain Unredacted Exhibits to Affidavit of H. Peter Haveles, Jr. Pursuant to Order Amending Prior Order Granting Ex Parte Motion to File Documents Under Seal [ECF No. 82], Exh. D, ¶¶ 2.1-3.19 (noting that junior noteholders are impaired classes deemed to reject the plan.); 11 U.S.C. ¶ 1126(g) ("Notwithstanding any other provision of this section, a class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests.").
• Petitioning Creditors purchased the notes in Taberna fully aware that it had defaulted (several years earlier). see, e.g. , 11/29/18 Tr. 153:14-23, Adv. Pro. No. 17-01087 ECF No. 16.
• After these earlier attempts to liquidate the collateral failed, two months before filing this involuntary petition, Petitioning Creditors paid 91.1875 percent on the outstanding principal amount to purchase the remaining Class A notes, thereby giving Petitioning Creditors a controlling share of Class A notes. A mere three weeks earlier Petitioning Creditors' had offered to buy at 76 percent of the outstanding principal. 11/30/17 Tr. 103:18-23, Adv. Pro. No. 17-01087 ECF No. 17.
• Petitioning Creditors' principal, Vikaran Ghei, relying on his experience and expertise with respect to complex financial instruments such as CDOs, the workings of the Bankruptcy Code, and the Zais case, endeavored to follow and pattern his initiatives here after those he believed led to the positive result in Zais . See 11/28/17 Tr. 47:24-50:24, Adv. Pro. No. 17-01087 ECF No. 15; see also 11/29/17 Tr. 177:1-17, Adv. Pro. No. 17-01087 ECF No. 16;
*60411/30/17 Tr. 108:2-110:24, Adv. Pro. No. 17-01087 ECF No. 17; JPO § III Stip. Fact ¶ 1; PC Stmt. ¶ 6; JPO § III Stip. Fact ¶ 35; see [email from Thomas Ji to Vik Ghei, JX 66]; See Consent Solicitation [JX 66]; see also JPO § III Stip. Fact ¶ 35.
• Despite Petitioning Creditors Rule 1003 affidavit, [ECF No. 1 Exh. 2] the Court finds, based on the evidence and testimony offered at trial, that Petitioning Creditors purchased the defaulted notes with an eye towards commencing this involuntary petition. See JX 84; 11/30/2017 Tr. 115:20-119:202, Adv. Pro. No. 17-01087 ECF No. 17 (Petitioning Creditors' principal testifying that they engaged bankruptcy counsel prior to purchasing the notes); see also JPO § III Stip. Facts ¶ 33; Cf Federal Rule of Bankruptcy Procedure 1003 ("An entity that has transferred or acquired a claim for the purpose of commencing a case for liquidation under chapter 7 or reorganization under chapter 11 shall not be a qualified petitioner.").
The foregoing facts, taken as a whole, readily support the conclusion that under the reasoning of Murray this case should be dismissed for cause pursuant to 11 U.S.C. § 1112(b). In making this determination the Court considers the purpose and goals of the Bankruptcy Code. See In re Murray, 900 F.3d at 59. "The legislative purpose of Chapter 11 is the speedy rehabilitation of financially troubled businesses." In re 312 W. 91st St. Co., Inc. , 35 B.R. 346, 347 (Bankr. S.D.N.Y. 1983) ; see also In re Murray , 543 B.R. at 495 ("Through orderly and centralized liquidation or through reorganization or rehabilitation, creditors of equal priority receive ratable and equitable distributions designed to serve 'the prime bankruptcy policy of equality of distribution among creditors of the debtor.' ") (quoting 1 Collier on Bankruptcy (16th ed. 2015) ¶ 1.01[1] ); In re Metrogate, LLC , No. 15-12593 (KJC), 2016 WL 3150177, at *7 (Bankr. D. Del. May 26, 2016) ("The purpose of requiring at least three creditors to launch an involuntary case is to necessitate some joint effort between creditors.")(internal quotation marks and citation omitted); see also David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy Law in America at 42 (2001) ("[O]nly with involuntary bankruptcy, [commercial groups and their advocates] insisted, would creditors be assured a fair share of debtors' assets.").
It is undisputed that Taberna is not an operating business, and there is therefore no rehabilitative objective that can be served by allowing a bankruptcy case to proceed. See In re Murray, 900 F.3d at 59 ; see also In re C-TC 9th Ave. P'ship , 113 F.3d 1304, 1308 (holding that the "primary purpose of Chapter 11 is to enable businesses to reorganize and emerge from bankruptcy as operating enterprises ") (emphasis added). Furthermore, the fact that the Petitioning Creditors proposed a liquidating plan, see Notice of Filing of Certain Unredacted Exhibits to Affidavit of H. Peter Haveles, Jr. Pursuant to Order Amending Prior Order Granting Ex Parte Motion to File Documents Under Seal [ECF No. 82], Exh. D, strongly suggests that the Petitioning Creditors elected Chapter 11, rather than Chapter 7, solely in an attempt to obtain the benefits of Section 1111(b) which, in turn, allowed them to make a colorable (albeit incorrect and meritless) argument regarding their eligibility to commence an involuntary case.
There is, however, no need for bankruptcy protection here since the Taberna Indenture independently establishes the *605parties' agreements as to liquidation. JX 1, INDENTURE § 11.1. The Petitioning Creditors' stated goal, which they were unable to achieve through a series of earlier initiatives, is to rewrite the terms of the Indenture agreement, thereby enabling Petitioning Creditors to alter Taberna's governance structure and increase its disclosures, with the ultimate goal of forcing an accelerated liquidation-not a reorganization. JX 111; JX 113, 2; see 11/30/18 Tr. 15:6-12, Adv. Pro. No. 17-01087 ECF No. 17. This is unnecessary (and indeed, inappropriate) since Taberna is a static pool investment vehicle, intended to exist for only a limited time. In contemplation of the possibility that Taberna would lack the funds necessary to pay timely interest or principal, all noteholders (including Petitioning Creditors) expressly agreed to terms for how the indenture trustee will manage the remaining portfolio and how losses will be distributed among the noteholders. Here, the alleged debtor faces no involuntary creditors and the rules for liquidating this single purpose, single use entity were set forth by contract. Everyone, including Petitioning Creditors who purchased the already defaulted notes, agreed to those rules.
The Court does not view these facts in isolation but considers them within the context of the entire case. Here, Petitioning Creditors took intricate-choreographed-steps to manufacture eligibility to file an involuntary case. For example, the only reasonable inference to draw from Petitioning Creditors' waiver [ECF No. 1-3] is that Petitioning Creditors waived their rights to benefit from any security interest up to the statutory eligibility filing requirement in an attempt to artificially create eligibility to file an involuntary petition under section 303 as partially unsecured creditors. However, the cumulative actions by the Petitioning Creditors including knowingly purchasing a controlling stake of class A notes after previous failed attempts to liquidate the collateral, drafting a liquidating plan for the exclusive benefit of class A noteholders, filing the involuntary petition under chapter 11 (rather than under chapter 7) to invoke the benefits of section 1111(b), and waiving their right to benefit from any security interest up to the statutory eligibility filing requirement, makes clear to the Court that Petitioning Creditors intended to abuse the bankruptcy code and bankruptcy process. With the benefit of experienced counsel, see 10/18/18 Tr. 25:23-25, [ECF No. 161], Mr. Ghei-himself a sophisticated investor, knowledgeable both with respect to complex financial transactions including CDOs and the workings of Bankruptcy Code, see 11/28/17 Tr. 47:24-50:24, Adv. Pro. No. 17-01087 ECF No. 15; see also 11/29/17 Tr. 177:1-17, Adv. Pro. No. 17-01087 ECF No. 16-orchestrated a process whereby the Petitioning Creditors cited selective Code provisions in the hope that it would enable them to effectuate an accelerated liquidation of an already self-liquidating securitization vehicle, for their own benefit at the expense of the larger creditor community.
As noted, this filing comes on the heels of Petitioning Creditors' other unsuccessful attempts to initiate the liquidation of the collateral by means of, inter alia , a tender offer and a consent solicitation. Petitioning Creditors are sophisticated parties who carefully, and after much study, knowingly and voluntarily bought notes in the secondary market for an already defaulted CDO. See 11/28/17 Tr. 150:10-158:11, Adv. Pro. No. 17-01087 ECF No. 15. Petitioning Creditors knowingly agreed to the terms of the underlying securitization documents when they purchased the notes at issue. Under sections 5.4, 5.5, 5.8, 5.13 and 11.1 of the Indenture, the Petitioning Creditors agreed to prohibit the A-1 *606Noteholders (i.e. themselves) from forcing a liquidation of the collateral, contractually signed on to a no-action clause in order to prohibit a single bondholder (or a small group of bondholders) from bringing a suit against the issuer which would be contrary to the collective economic interests of the other bondholders, and agreed that in the event of a default a comprehensive priority of payments be applied. JX 1, INDENTURE at pp. 54-178. The Petitioning Creditors seek bankruptcy solely as a means to alter the terms of a contract they freely entered.
The Court concludes that it "is clear from the totality of circumstances that this is not the type of case for which Congress enacted Chapter 11 of the Bankruptcy Code."18 In re 312 W. 91st St. Co., Inc. , 35 B.R. at 347. There is no genuine attempt to reorganize the putative debtor so that it can reemerge from bankruptcy as a viable on-going business. Rather, this case is a last-ditch effort by a senior sophisticated noteholder to further its personal, tactical and pecuniary aims and to coerce a redemption of its notes to the detriment of junior creditors . See 11/29/17 Tr. 31:2-32:7, Adv. Pro. No. 17-01087 ECF No. 16 (indicating that Anchorage believed the value of the notes could increase dramatically within a couple of years). This type of scheme conflicts with the goal of Bankruptcy Code, which is to afford a debtor an opportunity to continue business, preserve equity, and provide a collective remedy, goals which serve to protect the interests of all creditors equally and fairly. While liquidation is an appropriate purpose of a chapter 11 case, it cannot be used to frustrate equitable treatment of all creditors. See In re Murray , 543 B.R. at 486 ("Bankruptcy was created as a collective remedy , to achieve pari passu distribution amongst creditors ...."); see also Travelers Ins. Co. v. 633 Third Assocs. , No. 91 CIV. 5735 (CSH), 1991 WL 236842, at *2 (S.D.N.Y. Oct. 31, 1991) (stating that Congress did not intend for section 1111(b) of the Bankruptcy Code to be invoked by parties as a way to repudiate their bargain in order to enhance their position in advance of a possible bankruptcy); In re Luxeyard, Inc. , 556 B.R. 627, 640-41 (Bankr. D. Del. 2016) ("[I]t is proper to file an involuntary petition to protect against other creditors obtaining a disproportionate share of the debtor's assets. Conversely, it is an improper use of the bankruptcy system to file an involuntary petition to obtain a disproportionate advantage for a petitioner's own position."); id. at 641 (listing examples of disproportionate advantages which include, inter alia , filing in order to change corporate control.).
The Court is also convinced that if the Petitioning Creditor's tactics were permitted and rewarded with an entry of an order for relief, this would create significant uncertainty across the capital markets. See Brief for the Structured Finance Industry Group, Inc. as Amicus Curiae *607Supporting Objecting Parties at 8 [ECF No. 97]. As noted in In re Zais Investment Grade Limitd VII , a case heavily relied upon by Petitioning Creditors, and as conceded by Petitioning Creditors at trial [11/28/17 Tr. 157:7-25, Adv. Pro. No. 17-01087 ECF No. 15], "CDO's are designed to avoid bankruptcy." 455 B.R. at 847.
Rather than support Petitioning Creditors request for entry of an order for relief here, the Court concludes that the Zais case is legally and factually distinguishable from this case. In re Zais , 455 B.R. at 839. Most significantly, in Zais the debtor and the other non-petitioning creditors did not oppose the involuntary bankruptcy filing. Id. at 846 (the parties "failed to contest the petition and the order for relief was entered by default"). The noteholders in Zais moved to dismiss on grounds unrelated to § 303 eligibility after the court had entered an order for relief. In short, the debtor in Zais took no position with respect to whether the case should proceed in the bankruptcy court, Id. at 847, whereas here the putative debtor asks that the Court to dismiss this case. See ECF No. 20; ECF No. 32. Indeed, Mr. Ghei testified that he would not have filed this case if he knew that the putative debtor would oppose an order for relief. 11/28/2017 Tr. 84:15-23, Adv. Pro. No. 17-01087 ECF No. 16. The Zais court denied the junior noteholders' motion to dismiss and held, on the differing facts before it, that the movants had failed to demonstrate that the involuntary petition was brought in bad faith. In re Zais , 455 B.R. at 848.
The Zais case does not mandate entry of an order for relief here. As an initial matter, the facts established at trial support the Court's conclusion that Petitioning Creditors have, in a very methodical and deliberate process, set out to force an accelerated liquidation of Taberna:
• Petitioning Creditors retained adept bankruptcy counsel prior to Petitioning Creditor's failed attempts to liquidate the collateral outside of bankruptcy.
• Mr. Ghei candidly admitted at trial that he patterned his behavior with respect to Taberna after what he believed were the initiatives that led to denial of the motion to dismiss in Zais , a case in which he was involved and carefully followed. See, e.g. , 11/28/2017 Tr. 158-19, Adv. Pro. No. 17-01087 ECF No. 15.
• After Petitioning Creditor's failed attempts to liquidate the collateral outside of bankruptcy, Petitioning Creditors, in April 2017, purchased additional defaulted notes which gave them a majority stake of the Class A Notes. 11/30/17 Tr. 103:14-23, Adv. Pro. No. 17-01087 ECF No. 17.
• Immediately after Petitioning Creditor's April 2017 Note purchases, Petitioning Creditors, and their bankruptcy counsel, formally expanded the scope of counsel's retention to include a bankruptcy filing. Compare JPO § III Stip. Fact ¶ 33 with JPO § III Stip. Fact ¶ 44.
• In their motion to terminate putative debtor's exclusivity-filed the day after they commenced this case, Petitioning Creditors tout the fact that they own enough notes to deliver a class that will vote for their proposed plan (thereby ensuring liquidation).
The court in Zais found that the case was brought in good faith and for a proper purpose because the petitioning creditors desired to realize the greatest present value for themselves without negatively impacting junior creditors who had no prospect of recovery under the status quo. Id. at 849. Here, by contrast, Mr. Ghei conceded *608that junior creditors are not necessarily out of the money outside of bankruptcy. 11/29/18 Tr. 161:19-24, Adv. Pro. No. 17-01087 ECF No. 16. Yet, in direct contradiction of a basic goal of the bankruptcy code, the Petitioning Creditor's case would increase their recovery at the expense of the junior noteholders. See JPO § III Stip. Fact ¶ 22; Compare JPO § III Stip. Fact ¶¶ 10-12 with Notice of Filing of Certain Unredacted Exhibits to Affidavit of H. Peter Haveles, Jr. Pursuant to Order Amending Prior Order Granting Ex Parte Motion to File Documents Under Seal [ECF No. 82], Exh. D, ¶¶ 2.1-3.19. This distinction is critical and dispositive. Significantly, Anchorage, the Petitioning Creditor in Zais , is also a Taberna noteholder and although it reportedly indicated it would support Petitioning Creditor's liquidation efforts, it did not file or join the involuntary petition here and refused to be "on the front line" in connection with this case. 11/29/17 Tr. 31:20- 35:1, Adv. Pro. No. 17-01087 ECF No. 16.
Not only is this involuntary petition fundamentally at odds with the purpose of securitization vehicles, but the Court concludes it also violates the spirit and purpose of the Bankruptcy Code. "An involuntary petition is powerful weapon and therefore the Code and Federal Rules of Bankruptcy Procedure include numerous requirements and restrictions to curtail misuse and to insure that the remedy is sought only in appropriate circumstances." In re Murray , 543 B.R. at 497. If the Court allowed this case to continue, allowing a party to force a CDO into bankruptcy at the expense of all noteholders other than the Petitioning Creditors, the Court would encourage other parties put to disregard bargained-for contractual remedies in an Indenture and pursue bankruptcy as a way to redefine the terms of the contracts they freely entered. See 11/28/2017 Tr. 158-19, Adv. Pro. No. 17-01087 ECF No. 15 (Petitioning Creditor's principal Mr. Ghei explaining that his understanding of the Zais case helped to form the basis for bringing this involuntary petition) ("I think [I] would be negligent for any potential investor in a defaulted CDO not to consider [an involuntary petition] after the Zais case in 2011 where that CDO was reorganized through a bankruptcy."). Such a result is antithetical to the goals of the bankruptcy system and to the public interest. "Were we to ignore those interests, we would likely see an increase of new bankruptcy filings in cases that are more appropriately handled in [other forums]." In re Murray , 900 F.3d at 63.
For the foregoing reasons, the Court concludes in the exercise of its discretion that, even if the Petitioning Creditors met the eligibility requirements under section 303, cause exists to dismiss this case pursuant to section 1112(b) of the Bankruptcy Code.
CONCLUSION
For the reasons set forth above, the Court finds and concludes that the Petitioning Creditors have failed to establish a prima facie case that they hold claims against Taberna. The PC Note Claims are nonrecourse claims under the Indenture and the PC Note Claims are limited to the Collateral. The Objecting Parties are therefore entitled to judgment on partial findings that the Petitioning Creditors do not qualify as petitioning creditors under section 303(b) of the Bankruptcy Code. The Court has considered the Petitioning Creditors' remaining arguments, and to the extent not specifically addressed herein, concludes that they lack merit.
In the alternative, the Court in the exercise of its discretion, concludes this involuntary case should be dismissed for cause pursuant to 11 U.S.C. § 1112(b).
*609As a result of this decision, the Alleged Debtor's interpleader complaint is now moot, see Adv. Pro. No. 17-1087(mkv), and Adversary Proceeding 17-1087 is DISMISSED.
The parties are directed to settle a judgment on notice.
The Objecting Parties oppose the involuntary petition on a number of other grounds that are not at issue here. Specifically, they contend that an order for relief should not be entered in this case because the Indenture prohibits the Petitioning Creditors from commencing an involuntary bankruptcy case against Taberna and that the Petitioning Creditors are ineligible under section 303(b) of the Bankruptcy Code because they hold oversecured claims. See Noteholders' Prehearing Brief (I) Opposing Granting of the Involuntary Petition and (II) Requesting Dismissal of, or Abstention from this Chapter 11 Case [ECF No. 104]. The Objecting Parties also argue that the case should be dismissed because the Petitioning Creditors filed the involuntary petition in bad faith. See id. The Petitioning Creditors maintain that nothing in the Indenture or the Notes prohibits holders of A-1 Notes from commencing an involuntary bankruptcy case against Taberna and that the Petitioning Creditors satisfy all of the requirements of section 303 of the Bankruptcy Code, including those not at issue on this motion. See Petitioning Creditors' Opening Brief (I) In Support of an Order for Relief and (II) In Opposition to Dismissal or Abstention [ECF No. 87].
The opinion contains both findings of fact ("Findings") and conclusions of law ("Conclusions"). To the extent any findings may be deemed conclusions of law, they shall also be considered Conclusions. To the extent that any Conclusions may be deemed findings of fact, they shall also be considered Findings. See, e.g. , Bison Capital Corp. v. ATP Oil & Gas Corp. , No. 10 CIV. 714 SHS, 2011 WL 8473007, at *1 n.1 (S.D.N.Y. Mar. 8, 2011), aff'd , 473 F. App'x 40 (2d Cir. 2012) (citing Miller v. Fenton , 474 U.S. 104, 113-14, 106 S.Ct. 445, 88 L.Ed.2d 405 (1985) ; 9C Wright & Miller, Federal Practice and Procedure § 2579 (3d ed. 2002) (discussing that it is often difficult to categorize a particular matter as a finding of fact or a legal conclusion).
JX1 refers to Joint Exhibit 1, which is identified in the Joint Pretrial Order as the Indenture (defined below) and hereinafter will be referred to as the Indenture. Other Joint Exhibits will be referred to throughout as "JX" followed by the exhibit number.
Pursuant to the So Ordered Stipulation among the Parties [ECF No. 45] the Summary Judgment Motion was filed in the main bankruptcy case, Case No. 17-11628-MKV, and the Adversary Proceeding commenced by the putative debtor, Adv. Pro. No. 17-1087-MKV (seeking dismissal of this case or abstention) has been held in abeyance.
The Junior Noteholders include Hildene Opportunities Master Fund II, Ltd. ("Hildene"), Waterfall Asset Management LLC ("Waterfall"), Investors Trust Assurance SPC ("ITA"), EJF Capital LLC ("EJF") and Citigroup Global Markets Inc. ("Citibank"). Collectively, they hold over $85 million in principal amount of Notes.
Although Bankruptcy Rule 7052 provides that Federal Rule 52 applies in adversary proceedings, the parties are in agreement that Federal Rule 52(c) applies here, where Taberna initially raised the issues addressed herein in an adversary proceeding entitled Taberna Preferred Funding IV, Ltd. v. Opportunities II Ltd, et al. , Adv. Pro. No. 17-01087 (MKV) (the "Adversary Proceeding") and the parties subsequently agreed that all pleadings shall be filed solely in the main case, not the Adversary Proceeding, pending the outcome of the trial, and that all further proceedings in the Adversary Proceeding would be held in abeyance. See So Ordered Stipulation [ECF No. 45].
Section 303(b)(2) of the Bankruptcy Code contains a variation on these requirements for circumstances, not present in this case, where there are fewer than twelve creditors. The number of creditors required under section 303(b) is not in dispute on this motion.
The Court has added spaces in between sentences for ease of reference.
Section 2.4(a) provides as follows: "All Notes and Combination Notes issued and authenticated upon any registration of transfer or exchange of Notes and Combination Notes shall be the valid obligations of [Taberna] ... evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes and Combination Notes surrendered upon such registration of transfer or exchange." JX1, INDENTURE § 2.4(a).
Section 5.3(c) provides as follows: "The Co-Issuers covenant ... that if a Default shall occur in respect of the payment of any principal of or interest on ... any Class A Note or Class B Note ... Class C Note, Class D Note or Class E Note ... the Co-Issuers ... will upon demand of the Trustee or any affected Noteholder, pay to the Trustee, for the benefit of the Holder of such Note, the whole amount, if any, then due and payable on such Note for principal and interest ... and, to the extent that payments of such interest shall be legally enforceable, upon overdue installments of interest at the applicable Note Interest Rate and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee and such Noteholder and their respective agents and counsel." JX1, INDENTURE § 5.3(c). The Petitioning Creditors also cite section 5.3(a) of the Indenture, which authorizes the Trustee to file and prove a claim with respect to the notes in any bankruptcy case concerning Taberna. See Opp., ¶ 44.
Section 7.1 provides as follows: "The Co-Issuers will duly and punctually pay all principal, interest ... and other amounts owing hereunder or under any other agreement or instrument to which the Issuer or the Co-Issuer is a party in accordance with the terms of the Notes, this Indenture and such other agreements or instruments." JX1, INDENTURE § 7.1.
Section 14.12 provides that "payment obligations of [Taberna] under this Indenture and the Notes shall not be discharged by any amount in another currency." JX1, INDENTURE § 14.12.
The construction of section 1111(b) urged by the Petitioning Creditors also has the potential to lead to an inequitable scenario given the Petitioning Creditors' ultimate desire to liquidate the Collateral, such that section 1111(b) would operate to treat their nonrecourse claims as recourse claims for purposes of their eligibility under section 303(b), but not affect the nonrecourse nature of their claims for allowance and distribution purposes.
One day after filing the involuntary petition, the Petitioning Creditors moved to terminate the exclusivity period under the code for a debtor to file a chapter 11 plan, in order to move forward with their own proposed plan immediately. [ECF No. 8]. Petitioning Creditors' Proposed Chapter 11 Plan is a liquidating plan, which contemplates accelerated payment on the notes. See Notice of Filing of Certain Unredacted Exhibits to Affidavit of H. Peter Haveles, Jr. Pursuant to Order Amending Prior Order Granting Ex Parte Motion to File Documents Under Seal [ECF No. 82], Exh. D.
Objecting Creditors argue that this, along with other facts, call into question Petitioning Creditor's good faith, and that Section 1112(b) provides an independent ground for dismissal for cause by reason of a bad faith filing. See Noteholders' Brief (I) Opposing Granting of the Involuntary Petition and (II) Requesting Dismissal of, or Abstention from, This Case [ECF No. 101] ¶ D. Objecting Creditors have not moved for judgment on grounds of a bad faith filing, and accordingly, the Court does not address the issue of Petitioning Creditors' good faith, or lack therefore, at this time. As noted below in Section IV, however, this fact when viewed in the totality of all of the circumstances, contributes to the Court's conclusion that cause exists to dismiss this case under section 1112.
The phrase "against such person" utilized in § 303 is used in only three places within the Bankruptcy Code. The other two other sections which use the term "against such person" are sections 526 and 741. The former authorizes the court to impose an appropriate civil penalty "against such person" who fails to comply with the restrictions on debt relief agencies. The latter provides for definitions specific to stockbroker liquidation.
The Court also notes that section 102 contains other definitions which are instructive. The first, set forth in section 102(1), provides that the definition for the phrase "after notice and a hearing" applies not only to that phrase, but also to any "similar phrase." 11 U.S.C. § 102(1). Section 102(2), by contrast, does not provide that its definition of "against the debtor" applies to any similar phrases. 11 U.S.C. § 102(2).
In response to this Court's Order to Show Cause, ECF No. 153, the Petitioning Creditors, through counsel, argued for the first time that section 1123(a)(5)(F) permits cancelling or modifying an indenture. 10/18/18 Tr. 25:23-27:11. Therefore, the Petitioning Creditors argue, there is a valid purpose here and the Court should enter an order for relief. As an initial matter, under the Code the term 'indenture' has a specific meaning. The Petitioning Creditors have not the Petitioning Creditors have not established that the Indenture here falls within the meaning of the term 'indenture' as used in section 1123(a)(5)(F), defined in section 101(28). Second, this argument puts the cart before the horse. Section 1123(a) provides a list of the tools one may use to implement a plan. A bankruptcy case, let alone a plan, may only utilize these tools after the Court determines that the underlying case can properly be maintained consistent with the goals of the Code. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501816/ | Honorable Michael E. Wiles, United States Bankruptcy Judge
Access Global Capital LLC ("Access Global ") and Global Commodities Group, LLC ("Global Commodities ," and, together with Access Global, the "Debtors ") are debtors in chapter 11 cases that are pending in the United States Bankruptcy Court for the District of New Jersey. The Debtors also are defendants in a civil action that was filed in the New York State Supreme Court in February 2016, long prior to the date of the New Jersey bankruptcy filings. The plaintiff in the New York State court lawsuit is a Panamanian company named Multibank, Inc. The named defendants include the two Debtors plus an individual named James Besch and a Swiss company named Novel Commodities S.A. ("Novel "). Multibank claimed that the defendants breached certain contracts and committed fraud, made negligent misrepresentations and/or breached fiduciary duties in connection with the purchase of insured accounts receivable.
In January 2017 the New York State Supreme Court ruled that Multibank had properly pleaded a claim for breach of contract by Mr. Besch and Debtor Access Global and had also properly pleaded a claim for tortious interference of contract against Debtor Global Commodities. Although the complaint in the state court action alleged that Mr. Besch signed the relevant contracts in his individual capacity and that Mr. Besch was a contracting party, the state court held in its January 2017 ruling that Mr. Besch had not signed the contracts in his personal capacity. However, the state court permitted the contract claim to proceed against Mr. Besch based on allegations that Mr. Besch and the Debtors were "alter egos" of each other. The court dismissed other claims against the Debtors and Mr. Besch, and directed the entry of a default judgment against Novel in the amount of $4,057,693.53. See Decision & Order, Multibank, Inv. v. Access Global Capital LLC , Index No. 650637/2016, 2017 WL 162282 (N.Y. Sup. Ct. N.Y. Cnty. January 9, 2017) [Dkt No. 115 at 23-24].
One portion of the state court decision that is of particular relevance is the following statement as to the judgment to be entered against Novel:
ORDERED that the motion by plaintiff Multibank, Inc. for a default judgment against defendant Novel Commodities S.A. is granted, and the Clerk is directed to enter judgment in favor of said plaintiff, and against said defendant, in the amount of $4,057,693.53 plus 9% statutory pre-judgment interest from September 23, 2011 to the date judgment is entered; and it is further
ORDERED that such judgment is hereby severed and the action shall continue *621against the remaining defendants ...
Id. at 24. The parties disagree as to the nature and significance of the severance of the judgment against Novel, as discussed more fully below.
On June 14, 2018, Access Global and Global Commodities filed their voluntary chapter 11 petitions in New Jersey. Shortly thereafter they filed a notice of removal to remove the Multibank state court action from the New York State Supreme Court to the United States District Court for the Southern District of New York. They also filed a motion to transfer the removed Multibank state court action to the United States District Court for the District of New Jersey, where presumably it would then be transferred to the Bankruptcy Court for that District. The District Court has referred the removed action, and pending transfer motion, to this Court, pursuant to standing orders under which bankruptcy-related matters are automatically referred to the bankruptcy judges.
Multibank has opposed the transfer motion and has also urged that I return the matter to the New York State Supreme Court on various abstention and remand grounds. See 28 U.S.C. §§ 1334(c), 1452. The Debtors have suggested that I should transfer the case to the New Jersey District Court, see 28 U.S.C. §§ 1404(a), 1412, and permit that court (or the New Jersey bankruptcy court) to decide the abstention and remand issues. Multibank argues that I should decide the abstention and remand issues before considering the requested transfer.
While the parties disagree as to the order in which I should consider these issues, it is quite plain that in this particular case the issues overlap. From Multibank's perspective, for example, the consideration of whether mandatory abstention is applicable depends at least in part on whether the "action" against the Debtors and Mr. Besch has already been severed from the action against Novel. The severance issue, in turn, overlaps with some of the issues that are relevant to the transfer that the Debtors are seeking. On the other hand, the whole purpose of the removal, from the point of view of the Debtors, is to obtain a transfer of the case to New Jersey. No party has argued that any purpose would be served by keeping the case in this Court; instead, the ability to transfer the action is key to all of the Debtors' arguments as to whether I should exercise my discretion to remand the case or as to whether I should abstain on discretionary grounds. In this particular case, therefore, it is more efficient to discuss all of the issues together, while of course recognizing and giving full effect to the "mandatory abstention" provisions to the extent they are applicable.
Relevant Statutes
The Debtors argue that I should transfer the removed matter to New Jersey pursuant to section 1412 of title 28 of the United States Code or, alternatively, pursuant to section 1404(a). See 28 U.S.C. §§ 1404(a), 1412. Multibank contends that the matter is subject to mandatory abstention pursuant to section 1334(c)(2) of title 28, or alternatively that I should exercise my discretion to abstain and/or to remand pursuant to sections 1334(c)(1) and 1452(b) of title 28. See 28 U.S.C. §§ 1334(c), 1452(b).
I have previously ruled that one of the statutes cited by the parties ( section 1412 of title 28 ) is applicable only to a proceeding that arises "under" the Bankruptcy Code and is not available for a proceeding that "arises in" or is merely "related to" a pending bankruptcy case. See *622Onewoo Corp. v. Hampshire Brands, Inc. , 566 B.R. 136, 139-40 (Bankr. S.D.N.Y. 2017).
Section 1412 states that "[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties." 28 U.S.C. § 1412. The reference to title 11 is, of course, a reference to the Bankruptcy Code. As I noted in Onewoo , the wording of section 1412 differs from many other sections of title 28 that relate to bankruptcy cases and to bankruptcy-related matters. Onewoo , 566 B.R. at 139. For example, section 1334 provides that the district courts have jurisdiction over "civil proceedings arising under title 11 or arising in or related to a case under title 11." See 28 U.S.C. § 1334(b). Section 157(a) provides that the district court may refer civil proceedings "arising under title 11, or arising in or related to a case under title 11" to the bankruptcy judges pursuant to section 157(a) of title 28. See 28 U.S.C. § 157(a). Section 1409 of title 28 defines the proper venue for civil proceedings "arising under title 11 or arising in or related to a case under title 11." See 28 U.S.C. § 1409.
There is a substantial body of case law under these provisions of title 28 that deals with the separate questions of whether a matter arises "under" title 11, or whether it "arises in" a case under title 11, or whether it is "related to" a case under title 11. However, section 1412 does not use all three of those phrases. Instead, section 1412 only refers to transfers of cases or proceedings "under" title 11. There is no reference in section 1412 to cases or proceedings "arising in" or "related to" cases under the Bankruptcy Code.
The Multibank state court action plainly is not a case or proceeding "under" the Bankruptcy Code. A case is "under" title 11 if it is the main bankruptcy case itself, and a proceeding is one that is "under" the Bankruptcy Code if it asserts causes of action that are created by the Bankruptcy Code itself. Neither of those situations applies here. The matter that has been removed to me was filed long before any bankruptcy case was pending. It asserts breach of contract claims and other state law theories of liability and asserts no claims created by the Bankruptcy Code. The action also is based entirely on conduct that pre-dates the bankruptcy filings.
The Debtors have argued in recent submissions that Multibank has filed proofs of claim in the New Jersey bankruptcy cases and that the resolution of the claims against the Debtors are "core" proceedings as to the Debtors. However, the filing of the claims in the New Jersey cases does not change the nature of the claims themselves. The state court action, and the claims asserted in it, did not arise "under" the Bankruptcy Code, and the proofs of claim do not change that fact.
As I noted in my decision in Onewoo , there are some prior court decisions that have held that section 1412 grants authority for the transfer of lawsuits that relate to pending bankruptcy cases, even if the lawsuits assert claims that do not arise "under" the Bankruptcy Code. Onewoo, 566 B.R. at 139-140. The Debtors urge me to follow those decisions, and some additional decisions they have cited. However, I am not persuaded by the Debtors' arguments or by the cited decisions, and I elect instead to reaffirm my own prior decision in the Onewoo case.
One argument that has been made in some prior cases is that section 1412 must govern the transfer of all bankruptcy-related actions and proceedings that are removed to the federal courts, because section 1412 contains a reference to title 11 and section 1404(a) refers only to civil *623actions generally. See, e.g. , Dunlap v. Friedman's Inc. , 331 B.R. 674, 677 (S.D. W. Va. 2005). However, section 1412 does not apply generally to all bankruptcy-related cases and proceedings. For example, it does not say that a court may transfer any case or proceeding over which the court has jurisdiction under section 1334. Instead, section 1412 expressly applies to cases or proceedings "under" the Bankruptcy Code. Treating the statute as though the limiting language simply does not exist is not a proper way of interpreting the statute.
Another argument that has been made is that a former statute, section 1475 of title 28, provided that a bankruptcy court could transfer "a case under title 11 or a proceeding arising under or related to such a case to a bankruptcy court for another district, in the interest of justice and for the convenience of the parties." See Pub. L. No. 95-598, § 1475, 92 Stat. 2549, 2670. This provision was repealed as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984. Some courts have argued that the 1984 amendments to title 28 were only intended to address issues raised by the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co. , 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) ; under this theory, section 1412 was not intended to change anything else, and so section 1412 should be read as though it has the same terms and the same scope as the former section 1475. See Dunlap , 331 B.R. at 678-79. I respectfully disagree. I do not believe it is proper, in interpreting a statute, to add words to it based on the fact that a prior statute was worded differently. If Congress changed the language, the presumption ought to be that the change was deliberate.
The court in Dunlap noted that section 1409 of title 28 governs the venue of "proceedings arising under title 11 or arising in or related to a case under title 11" and held that the word "proceedings" (as used in section 1412 ) should be interpreted as though it included all of the words that are used to modify the term "proceedings" in section 1409. Id. at 678-79. Again, I respectfully disagree. The word "proceeding" does not appear by itself in section 1412. Instead, the statute uses the phrase "a case or proceeding under title 11 ." 28 U.S.C. § 1412 (emphasis added). The modifying language means what it says. If the word "proceeding" were automatically interpreted to mean a "proceeding arising under title 11 or arising in or related to a case under title 11" then the additional qualifying words "under title 11," which plainly appear in section 1412, would serve no function at all. Ignoring the words that the statute actually uses, and substituting other words that do not appear in the statute, is not a proper way to interpret it.
Finally, some courts have referred to the fact that Rule 7087 of the Federal Rules of Bankruptcy Procedure refers to the transfer of "adversary proceedings" pursuant to section 1412. See, e.g. , In re Bruno's, Inc. , 227 B.R. 311, 323 (Bankr. N.D. Ala. 1998). But there are adversary proceedings that assert claims that arise "under" the Bankruptcy Code, such as fraudulent transfer claims or preference claims. The fact that Rule 7087 refers to section 1412 does not imply that section 1412 has a broader scope than its actual wording would support.
Many of the decisions that apply a broad scope to section 1412 reflect a clear frustration with the limited statutory language and a desire to enforce an approach that might make more sense. But the statutory language is clear. Section 1412 applies by its terms only to cases or proceedings "under" the Bankruptcy Code. There is nothing ambiguous about that language. It *624is plainly different from the language used elsewhere in title 28, including in other provisions (such as section 1409 ) that almost immediately precede section 1412. I am not free to ignore the limiting language, or to treat section 1412 as though it includes extra language that Congress used in other sections of title 28 but that Congress did not include in section 1412 itself. Nor am I free to rewrite section 1412 based on arguments that it would make more sense if section 1412 had a broader application. The terms of section 1412 simply do not grant me the power to transfer a New York State litigation that is not a case or proceeding "under" the Bankruptcy Code.
As I noted in Onewoo , the Second Circuit Court of Appeals has not ruled on this issue, but there is a very long line of decisions in the District Court of this district that agree with this conclusion and that have held that section 1412 only applies to cases and proceedings "under" the Bankruptcy Code. See Onewoo , 566 B.R. at 140. It is not necessary to repeat those citations here but they provide further support for my conclusions.
Whether the Removed Action Could Have Been Filed in Federal Court in the Absence of Jurisdiction under Section 1334
Civil actions may be transferred under section 1404(a) of title 28, and in many respects the standards that courts apply in ruling on transfer motions under sections 1404(a) and 1412 are similar. But there is one big difference. Under section 1404(a), transfer is not permitted unless the transferee district is one where the action "might have been brought" in the first place, unless all parties consent to the transfer. 28 U.S.C. § 1404(a).
Multibank does not consent to a transfer, so I cannot transfer the case to the New Jersey District Court unless it could have been filed there in the first instance. Mr. Besch and the Debtors currently favor the transfer motion, but the Supreme Court held long ago that this kind of after-the fact "consent" by defendants to a transfer is not sufficient to establish, under section 1404(a), that the case could have been filed in New Jersey. Instead, the requirement that the transferee district be a place where the case could have been brought means that the transferee district must be a place where the plaintiff, as a matter of right, could have filed the action in the first place. Hoffman v. Blaski , 363 U.S. 335, 343-44, 80 S.Ct. 1084, 4 L.Ed.2d 1254 (1960).
In this case, Multibank is a foreign entity. One of the original defendants (Novel) is also a foreign entity. The Debtors argued in their initial papers that the presence of foreign entities on both sides did not destroy diversity because US defendants had also been named. See Access Global Capital LLC's and Global Commodities Group, LLC's Reply (i) in Opp'n to Pl.'s Mot. to Remand Action to the New York Supreme Court, and (ii) in Further Support of Mot. to Transfer Action [Dkt. No. 11] (the "Debtors' Opposition Memorandum") at 6-7. However, that argument was plainly wrong. See In re Arab Bank , 808 F.3d 144, 160 (2d Cir. 2015) ("[D]iversity is lacking ... where the only parties are foreign entities, or where on one side there are citizens and aliens and on the opposite side there are only aliens") (quoting Universal Licensing Corp. v. Paola del Lungo S.p.A. , 293 F.3d 579, 581 (2d Cir.2002) ).
Novel's presence as a party to the action would bar a transfer to the New Jersey District Court under section 1404, because an action asserting state law claims filed by Multibank (a foreign entity) that included Novel (another foreign entity) as a defendant could not have been brought in the *625New Jersey District Court. Novel's presence as a party would also affect the mandatory abstention analysis under section 1334(c)(2) of title 28, which requires this court to abstain (and to return the case to state court) if the action "could not have been commenced in a court of the United States absent jurisdiction under this section" and if the action could be timely adjudicated by the state court where an action is pending. If diversity jurisdiction is lacking, and if section 1334 is the sole basis for federal jurisdiction, then mandatory abstention would be applicable so long as the state court were capable of timely adjudicating the removed action.
The Debtors argued in their reply papers, however, that Novel was simply a "dispensable" party and that Novel could be severed from the removed action pursuant to Fed. R. Civ. P. 21 if necessary to avoid an impediment to transfer. See Access Global Capital LLC's and Global Commodities Group, LLC's Reply to Pl.'s Opp'n to Mot. to Transfer Case [Dkt. No. 15] (the "Debtors' Reply Memorandum") at 4-5. The Debtors also argued that the state court had already severed the judgment against Novel and that as a result Novel was not a party to the removed action. Id. at 5.
At oral argument on September 12, 2018, I noted that the Debtors had only raised the "severance" issues in their final reply papers and that Multibank had not had a fair opportunity to address the Debtors' contentions. I also noted that the effect of the New York State court's order that the judgment against Novel be "severed" was not clear and required further briefing. I therefore directed the parties to submit further briefs as to the meaning and effect of the state court's order, and more particularly: (a) whether the order had the effect of creating two separate actions in the New York State court, and (b) if so, whether the application of the transfer and abstention statutes should be based on the identities of the parties to the original action, or whether instead there is now a separate "action" that has been removed to this Court that should be treated for transfer and abstention purposes as though it only involves claims against the Debtors and Mr. Besch and as though Novel had never been a party to it. I further noted that the Second Circuit Court of Appeals has held that in some circumstances a court may sever claims against one or more defendants who are only indirectly connected to a matter for the purpose of permitting the transfer of an action against the remaining defendants, and I asked the parties to address those authorities and how, if at all, they should be applied here. See Wyndham Assocs. v. Bintliff, 398 F.2d 614 (2d. Cir. 1968).
The parties have made their additional submissions. While I had hoped there would be clear answers, there are not.
Strictly speaking, a "severance" of actions occurs when an order is entered that "takes one action and separates it into two or more ... While the severance cleaves the action in two and sends each claim off as a distinct case for all purposes (separate judgments, etc.), the separate trial can often accomplish the same thing without the cleavage." See Siegel's New York Practice § 127 ; see also id. at § 129 ("The severance is the ubiquitous device for lopping off claims and making separate actions of them."); Carmody-Wait 2d New York Practice 18:1 ("Severance of actions divides one lawsuit into two or more independent causes of action, as distinguished from severance of issues or parties for separate trials within the same lawsuit. Unlike separate trials within the same cause of action, causes of action created by severance are prosecuted separately and *626result in separate judgments"). In practice, however, the word "severance" is often used in a broader sense. "Severance" is often used to describe a situation in which issues are separated from each other for certain purposes (separate trials being a common example) but nevertheless remain part of the same action. See, e.g. , Vogel v. Merck & Co., Inc. , 476 F.Supp.2d 996, 999 (S.D. Ill. 2007) (noting the confusion and holding that "the mere fact that an order of a state court purports to have 'severed' claims generally is insufficient to make a case removable"); see also Phillips v. Unijax, Inc. , 625 F.2d 54, 56 (5th Cir. 1980) ; Taylor v. Fortis Ins. Co. , No. CV-08-65-E-BLW, 2008 WL 1803930 at *3 (D. Id. Apr. 17, 2008) ; Johnson v. Snapper Div. of Fuqua Indus., Inc , 825 F.Supp. 127, 129 (E.D. Tex. 1993).
In this case, the parties agree that the state court issued its order pursuant to section 3215 of the New York Civil Practice Law and Rules. Section 3215 provides that if a default judgment is entered "against less than all defendants, the clerk shall also enter an order severing the action as to them." See N.Y.C.P.L.R. § 3215(a). The parties also agree that section 3215 includes this language to address a procedural problem that arose under prior New York practice, under which state courts were unable to enter a judgment (including a default judgment) against only one defendant in a multi-defendant case, at least where there were allegations of joint and several liability. See Citibank Eastern, N.A. v. Minbiole , 50 A.D.2d 1052, 377 N.Y.S.2d 727, 728 (1975). The severance device is the mechanism that as a matter of New York law permits separate judgments to be entered. See Grullon v. Servair, Inc. , 121 A.D.2d 502, 504 N.Y.S.2d 14, 15 (1986). In this regard, section 3215 allows the state court, through an action that is denominated as a "severance," to accomplish what the federal courts could do more directly pursuant to Rule 54(b) of the Federal Rules of Civil Procedure.
A separate judgment under Rule 54(b), however, does not give rise to a separate action under federal practice and procedure. Under federal practice, only a severance of the kind envisioned by Rule 21 results in the creation of a separate action. See Fed. R. Civ. P. 21. Notably, Black's Law Dictionary also explicitly distinguishes between a severance that gives rise to a separate action and a severance that merely allows otherwise interlocutory orders to become final. It defines "severance" as "[t]he separation, by the court, of multiple parties' claims either to permit separate actions on each claim or to allow certain interlocutory orders to become final." See Severance , Black's Law Dictionary 1583 (10th ed. 2014) (emphasis added).
It appears that the severance of the "judgment" against Novel merely had the effect of creating an order that could be immediately enforced, and that it has not been treated by the parties and the New York State court as though it gave rise to a new and separate action. For example, the judgment against Novel was entered in the same case, with the same index number, as the case against the Debtors and Mr. Besch that has been removed to this Court. Requests for discovery or other actions in aid of enforcement of that judgment also continue to be filed in the same state court action. Indeed, it was not until the Debtors filed their final reply papers on September 7, 2018 that the Debtors first took the position that the state court had already severed the action against Novel. Prior to that time the Debtors did not dispute Novel's status as a party; the Debtors argued instead that there was diversity jurisdiction despite Novel's presence *627in the case. See Debtors' Opposition Memorandum at 6-7.
We have attempted to find guidance, in the New York cases or procedural rules, as to whether a true "severance" of claims (one that actually divides a case into separate cases) ordinarily triggers the assignment of a new index number to the "severed" action. We have found some instances in which courts have ordered the assignment of new index numbers to actions that have been severed from the initial actions of which they were a part. See, e.g. , Belair Care Ctr., Inc. v. Cool Insuring Agency, Inc. , Index. No. 901476/2014, 2017 WL 6816689, at *2 (Sup. Ct. Albany Cnty. Nov. 6, 2017) (noting that a prior severance had been granted and that the court had directed the plaintiffs to circulate a "complaint to be filed under a separate index number" for the severed action). It seems intuitive that if actions have truly been separated they should ordinarily be given different case numbers. But we have found no conclusive indication in the applicable New York rules and case law as to what the ordinary practice is.
Nor did we find helpful guidance as to whether the "severance" permitted by section 3215 of the CPLR differs from the "severance" that might occur when one litigation is literally split into two separate actions that thereafter proceed on their own separate tracks with separate discovery, separate trials and separate filings. The Debtors have cited to the decision in Frolish v. Ryder Truck Rental, Inc. , 63 A.D.2d 799, 404 N.Y.S.2d 929 (1978), in which a default judgment had been "severed" under CPLR § 6215 and the plaintiffs thereafter sought to hold the remaining defendants liable on theories of collateral estoppel and res judicata. The appellate division quite properly rejected that notion. In the course of doing so it observed that as a result of the severance the remaining defendants were not part of the "action" in which judgment had been rendered. Id. at 929. But it is quite clear in context that what the court was holding was that the remaining defendants were not subject to the severed "judgment," regardless of whether that judgment was in the same action or not. The distinction that is relevant here - namely, whether the severance of the "judgment" was just for purposes of separate enforcement or instead was for the purpose of creating an independent action - was not present in the Frolish case and was not decided by that court.
Some prior federal court decisions have considered whether an order that severs claims for the purpose of separate trials is an order that has actually created two independent cases, but the factors considered by those courts are not particularly helpful here. For example, these decisions consider whether the "severance" order merely contemplates a separate trial rather than the entry of a separate judgment. See Johnson v. Snapper Div. of Fuqua Indus., Inc , 825 F.Supp. 127, 129 (E.D. Tex. 1993). Certainly an order that merely bifurcates trials, without the potential even for a separate judgment, would hardly qualify as the kind of "severance" that creates a separate case. But that does not necessarily mean that the converse is true, and that the entry of a separate "judgment" automatically should be treated as giving rise to a separate action. Separate trials are not the only kinds of "severance" rulings that may fall short of actually giving rise to a separate action.
Another factor identified by the Johnson court was whether the severed claims were treated as a separate case to which a new case number was assigned. Id. Here, the severance of the Novel judgment did not result in the creation of a new, independent *628action or the assignment of a new case number. That factor strongly suggests that the severance did not create a separate action against Novel. But some prior cases have found a true "severance" to exist even in the absence of the assignment of a new case number, at least where the court felt that the circumstances made clear that a true severance of actions had occurred. See, e.g. , Crump v. Wal-Mart Group Health Plan , 925 F.Supp. 1214, 1219 (W.D. Ky. 1996) (holding that the state court's failure to assign a different civil action number to a severed action "is a difference that makes no difference" since the state court had made clear that the severed action would be treated as a separate action and had realigned the parties accordingly).
It appears to the Court, in this case, that if Novel were to wish to reopen its default, it would need to file a motion to do so in the action to which it was originally named as a party (which is the action that has been removed to this court), as there is no other pending action in which such an application could be made. As noted above, proceedings to enforce the judgment against Novel also are part of the action that has been removed to me. The notice of removal refers to "the above-entitled civil action from the Supreme Court of New York, County of New York (Index No. 650637/2016)" and expressly encompasses "all claims and causes of action asserted therein." See Notice of Removal, Multibank, Inc. v. Access Global Capital LLC, et al. , Civ. A. No. 18-cv-05664 (S.D.N.Y. June 21, 2018). In their initial papers the Debtors themselves treated the removal as though it included the action against Novel, and it was not until the Debtors filed reply papers that the Debtors argued otherwise.
Regardless of the "severance" of the Novel judgment, as a practical matter the case against Novel has not been completely delinked from the action against the Debtors and Mr. Besch. As a result, it does not appear that I could transfer the action to New Jersey, as the action presently stands, without also transferring to the New Jersey federal court any actual or hypothetical further proceedings that might occur with regard to Novel. Since that is the case, I do not see how I could treat the removed action as though Novel is no longer a party to it and as though the state court has separated all proceedings regarding Novel from the proceedings against the Debtors and Mr. Besch, as the Debtors urge me to do. The severance of the judgment permits enforcement actions to continue against Novel, but that appears merely to be the kind of "severance" that permits an otherwise interlocutory order to be treated as final for purposes of appeal, and does not appear in any observable respect to have created a completely separate action against Novel that no longer bears any connection to the removed action.
The burden of showing that the Multibank action may be transferred under section 1404(a) rests with the Debtors, who are seeking the transfer. See Mohsen v. Morgan Stanley & Co., Inc. , No. 11 Civ. 6751, 2013 WL 5312525, at *3 (S.D.N.Y. Sept. 23, 2013) (citations omitted). It is therefore the Debtors' burden to prove that the alleged "severance" of the judgment against Novel had the effect of completely separating the actions and of creating a new action against the Debtors and Mr. Besch that is independent of the action against Novel and that may be transferred under section 1404(a). The Debtors have not carried that burden.
In addition, the mandatory abstention provisions of section 1334(c)(2) require me to abstain from this matter if the only ground for federal jurisdiction is the fact *629that the removed action is related to a bankruptcy case and if the state court action could be timely adjudicated by the state court. Since Novel remains a party to the case it is plain that the sole ground for federal jurisdiction is the relation of the removed Multibank action to the New Jersey bankruptcy cases. Mandatory abstention therefore applies in the absence of a showing that the action could not be timely adjudicated in the New York State court.
Remand and Abstention
It is the Debtors' burden to show that mandatory abstention is not applicable, including the burden of proving that a matter could not be timely adjudicated in the state court. See Parmalat Capital Fin. Ltd. v. Bank of Am. Corp. , 639 F.3d 572, 582 (2d Cir. 2011) ; In re AOG Entrn't, Inc. , 569 B.R. 563, 573 (Bankr. S.D.N.Y. 2017) (holding that courts since Parmalat have placed the burden of proof on the party opposing remand); MHS Capital v. Goggin , No. 16-cv-1794 (VM), 2016 WL 3522198, at *4 (S.D.N.Y. June 13, 2016) (holding that the party opposing abstention has the burden of showing that an action is not capable of timely adjudication in the state court); Allstate Ins. Co. v. Ace Sec. Corp. , No. 11 Civ. 1914 (LBS), 2011 WL 3628852, at *7 (S.D.N.Y. Aug. 17, 2011). The Debtors have failed to carry that burden. The Debtors contend that the case was not trial-ready, but the determination of whether a case may be timely adjudicated by the state court does not depend on whether the case is trial-ready. Such a determination ordinarily requires a comparison of the dockets in the different courts and of factors that might indicate that a decision is required more quickly than the state court will be able to provide. See Parmalat , 639 F.3d at 580-81. The Debtors have not even attempted to make such a showing in this case.
Even if abstention were not required it appears that in the absence of a potential transfer there is no reason to keep the case in this Court. The entire argument in favor of removal hinged on the availability of transfer, and on allegations that it would be more efficient for the Multibank action to be transferred to the bankruptcy court where the underlying bankruptcy cases are pending. No party has argued that there is any efficiency benefit or any other reason why the cases should be in this court as opposed to the New York State court, and I cannot think of any.
The Suggestion that This Court Should Sever the Action Against Novel to Permit a Transfer of the Remainder of the Case
In Wyndham Assoc. v. Bintliff , 398 F.2d 614, 618 (2d Cir. 1968), the Second Circuit Court of Appeals held that a federal court may issue an order of severance in order to permit the transfer of a portion of a litigation to another court, "at least in cases where ... the defendants as to whom venue would not be proper in the transferee district are alleged to be only indirectly connected to" the matters that form the main subject matter of the action. The theory of the Wyndham decision is that if this power is invoked then a new and separate "action" exists that does not involve the severed party. It is implicit in Wyndham that if this power is invoked a court should treat the newly created action as though the severed party had never been part of it. If a different view were taken - if the transferability of the action were to be based on the persons who were parties to the action prior to the severance - then the severance would not actually have the effect of permitting a transfer under section 1404(a).
Most lower courts have held that the use of severance powers to create a transferable action is something that should be *630done only in exceptional circumstances. See Crede CG III, Ltd. v. 22nd Century Grp., Inc. , No. 16 Civ. 3103 (KPF), 2017 WL 280818 at *11, 2017 U.S. Dist. LEXIS 8143 at *30 (S.D.N.Y., Jan. 20, 2017) ; Dickerson v. Novartis Corp. , 315 F.R.D. 18, 24-25 (S.D.N.Y. 2016). They have particularly noted that courts should hesitate to use severance powers to create federal jurisdiction that otherwise would not exist. See Kips Bay Endoscopy Center, PLLC v. Travelers Indem. Co. , No. 14 Civ. 7153 (ER), 2015 WL 4508739, at *4 (S.D.N.Y. July 24, 2015) (noting that courts should be more hesitant to use severance powers to create federal court jurisdiction that otherwise would be lacking); Sons of the Revolution in New York, Inc. v. Travelers Indemnity Co. of America , No. 14 Civ. 03303 (LGS), 2014 WL 7004033, at *2-3 (S.D.N.Y. Dec. 11, 2014) (expressing reluctance to use severance powers to create federal court jurisdiction that otherwise would be lacking).
It would be one thing to consider a potential severance if the requirements of section 1404(a) were the only obstacles to a transfer of the removed action, which is the situation that courts confronted in Wyndham and in cases that have followed Wyndham . In this case, however, I have determined that mandatory abstention principles apply. So far as we have been able to determine, no court has ever purported to use the severance power to create a new action that would evade the mandatory abstention provisions of section 1334(c). Frankly, it does not make sense to suggest that severance powers could be used to accomplish such a result. The very act of ordering a severance under Rule 21 would be an exercise of jurisdiction over the action and over the parties - and exercising jurisdiction is precisely what the statute mandates that I abstain from doing.
In short, the mandatory abstention provisions require that I consider the status of the case as it has been removed to me before I exercise any authority over the claims and the parties. I cannot evade the mandatory abstention rules by reconstructing the case, or by dividing it into parts, because the issuance of any such ruling would itself be a violation of the mandatory abstention statute.
Further Proceedings
As I noted above, a strong argument might be made that transfers of bankruptcy-related cases should not be subject to the limitations of sections 1404(a) and 1412. Similarly, one might argue that the mandatory abstention provisions should be relaxed in cases such as the one presently before the Court. But those are decisions for Congress to make. As the case presently stands, I do not believe I have the statutory right to retain jurisdiction, and I would not have the statutory power to transfer the case even if mandatory abstention principles did not apply. For these reasons, I will issue an Order that denies the transfer motion and that directs that the case be remanded to the state court. However, it is not clear to me that doing so should be of any real consequence to the Debtors.
The state court action against the Debtors themselves is stayed by virtue of the Debtors' bankruptcy filings. Accordingly, the state court action may not proceed against the Debtors unless and until the New Jersey Bankruptcy Court grants relief from the stay. No person or court should construe my remand of the case as affecting the application of the automatic stay. Any relief from that stay must be sought from the New Jersey Bankruptcy Court, where the Debtors' cases are pending.
*631As noted above, it appears that the only "claim" against Mr. Besch in the state court action is a contention that he should be held liable on "alter ego" theories. The New York Court of Appeals has made clear that under New York law an "alter ego" or "veil piercing" argument is not a separate, stand-alone cause of action. See Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157, 1160-61 (1993). Instead, piercing the corporate veil, or awarding alter ego relief, is a remedy that a plaintiff may pursue to collect a claim against a company. Id. If New York law (or the law of a state that applies similar rules) governs the alter ego assertions in the remanded case, then the purported "claims" against Mr. Besch would not really be separate "claims" at all. Instead, they would constitute purported remedies for the collection of claims owed by the Debtors. It is hard to see how such contentions could proceed separately from the claims against the Debtors themselves. If the alter ego contentions are just remedies, then it would appear that at a minimum the claims against the Debtors would need to be resolved (which may happen in the New Jersey Bankruptcy Court) before "remedies" against Mr. Besch could be pursued.
In addition, even if alter ego arguments give rise to separate "claims" (as they do in some jurisdictions) there may be disputes in the New Jersey Bankruptcy Court as to whether such claims belong to the Debtors' estates as opposed to Multibank. See, e.g. , Music Mix Mobile LLC v. Newman (In re Stage Presence, Inc.) , 592 B.R. 292, 297-301 (Bankr. S.D.N.Y. 2018). Those potential disputes raise issues that would need to be resolved in the New Jersey Bankruptcy Court, as that court has exclusive jurisdiction over the Debtors' property. If the claims were found to belong to the estate (and not to Multibank), then the automatic stay would bar Multibank from pursuing them, as doing so would constitute an attempt to exercise control over the Debtors' property.
Finally, the Debtors remain free to ask the state court to clarify the scope of the severance that it has ordered, or (to the extent necessary) to issue an order that actually does separate the Novel action from the action against the Debtors and Mr. Besch. Such an order might permit the Debtors to renew a removal of the case and to renew their transfer motion.
Conclusion
For the foregoing reasons, the Debtors' motion to transfer the removed action is denied, and Multibank's request that I abstain and that I remand the removed action to the New York State Supreme Court is granted, without prejudice to the defendants' rights to move in the New York State Supreme Court for a severance of the action insofar as it relates to the Debtors and to James Besch, and without prejudice to a further removal and a renewal of the motion to transfer in the event the New York State court grants such a severance to the extent that such removal and renewal are permitted under applicable law and rules. A separate order will be entered to this effect. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501817/ | MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
R.M. Hermans, Ph.D., LL.M., M.Sc. ("Hermans" or "Foreign Representative"), filed chapter 15 petitions and asks the Court to recognize what is essentially an insurance company rehabilitation proceeding in Curaçao as a "foreign main proceeding" and to recognize him as the "foreign representative," both as defined in the Bankruptcy Code. (The "Petitions," ECF Doc. # 4.)
Hermans filed the Petitions on behalf of ENNIA Caribe Holding N.V. ("ENNIA"), the largest insurance company in Curaçao.2 ENNIA consists of three Curaçao-based insurance companies ("Insurer Debtors")3 and three of their unregulated *634affiliates ("Asset Manager Debtors,"4 collectively with the Insurer Debtors, the "Foreign Debtors"). All the Foreign Debtors are directly or indirectly owned by non-debtor Parman International B.V. ("Parman"). Parman filed an objection to the motion for recognition. (The "Objection," ECF Doc. # 24.) The Central Bank of Curaçao and St. Maarten ("CBCS") regulates Curaçao insurance companies, including the Insurer Debtors.
The genesis of the dispute between the parties-which has been building over the last two or more years-is the liquidity levels of the Insurer Debtors. In July of 2018, the CBCS' solvency concerns grew so great that they revoked the insurers' licenses and initiated a procedure to rehabilitate the companies under a statute known as the LTV, which authorizes a court upon the application of the CBCS to pronounce "Emergency Regulations." Upon receiving approval from a Curaçao court to implement the Emergency Regulations, the CBCS replaced most of the Insurer Debtors' management, effectively removing Parman's control. The CBCS is now in control of the Insurer Debtors' continued operation during the pendency of the rehabilitation proceeding, which will hopefully avoid liquidation. The CBCS appointed the Foreign Representative and supports recognition.
The CBCS authorized the Foreign Representative to file chapter 15 petitions on behalf of the Foreign Debtors because, allegedly, over $240 million of the Foreign Debtors' assets are held in accounts at Merrill Lynch in New York. Some of this money is in accounts in the names of the Insurer Debtors and some is in accounts in the names of the Asset Manager Debtors. The Foreign Representative wants the funds at Merrill Lynch returned to Curaçao to help the Insurer Debtors satisfy policyholder claims. Parman wants to block the return of the funds, or at least the portion of these funds that are in the accounts of the Asset Manager Debtors.5 Parman also is attempting to use the proceeding in this Court-improperly, in the Court's view-as an opportunity to relitigate issues of Curaçao law that it has so far lost in Curaçao, although various judicial proceedings remain pending in Curaçao.
The principal issue before this Court is whether the Curaçao insurance company rehabilitation proceeding is a "foreign proceeding" under chapter 15 of the Bankruptcy Code. A "foreign proceeding" is "a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation." 11 U.S.C. § 101(23). Parman argues that *635the Curaçao proceeding is not a "collective proceeding," and that it is not a proceeding in which "the assets and affairs of the debtor are subject to control or supervision by a foreign court ...." Parman also argues that even if the Curaçao proceeding would satisfy the requirements to be a "foreign proceeding," this Court should nevertheless refuse to recognize the Curaçao proceeding because, in Parman's view, it is "manifestly contrary to the public policy of the United States," 11 U.S.C. § 1506, because the Curaçao statutory procedure violates due process.
For the reasons explained below, Parman's Objection to recognition is overruled, the Curaçao proceeding is recognized as a foreign main proceeding, and Hermans is recognized as the Foreign Representative.
I. BACKGROUND
A. The Foreign Debtors
The Foreign Debtors are part of ENNIA. ENNIA is the largest insurance company in Curaçao and St. Maarten. (Foreign Representative Declaration ¶ 7.) ENNIA is considered to be systemically important to Curaçao and St. Maarten. (Id. ¶ 8.) ENNIA's total assets constitute approximately 50% of the total assets of the insurance sector of Curaçao and St. Maarten. (Id. ) ENNIA's total assets are estimated to be greater than 50% of annual revenue of the government of Curaçao and St. Maarten, and approximately 25% of the annual gross domestic product of Curaçao and St. Maarten. (Id. ) Furthermore, ENNIA is, to a large extent, responsible for the provision of pensions in Curaçao. (Id. ¶ 8.)
ENNIA's corporate structure includes at least two types of entities: Insurer Debtors and Asset Manager Debtors. The Insurer Debtors provide insurance products and are subject to the regulatory authority of the CBCS. (Id. ¶ 6.) The Insurer Debtors have invested most of their assets with the Asset Manager Debtors. (Id. ¶ 12.)
B. Relevant Curaçao Law6
Curaçao is a constituent country of the Kingdom of the Netherlands. (Declaration of Professor Arthur Hartkamp, ECF Doc. # 51, Ex. B-4 (the "Hartkamp Declaration"), ¶ 22.) The codes of Curaçao and the Netherlands share the same origins, contain a large number of almost identical articles, and have been developed in largely the same manner. (Id. ¶ 25.) The Supreme Court of the Netherlands is the highest court of the Kingdom of the Netherlands. (Id. ¶ 26.) The insolvency landscape in the Netherlands and Curaçao is significantly similar. (Id. ¶ 30.)
The Curaçaoan insolvency code, the Faillissementsbesluit 1931 (which means "Bankruptcy Decree 1931"), contains the following two insolvency proceedings: the *636faillissement (which means "bankruptcy") and surseance van betaling (which means "suspension of payments"). (Id. ) The Curaçaoan insolvency code allows for insurance companies to declare bankruptcy, but it does not permit insurance companies to initiate suspension of payment proceedings. (Id. ¶ 31.) Instead, insurance companies may be restructured only through a special insolvency proceeding known as the noodregeling ("which means, "emergency regulation" ("Emergency Regulations"). (Id. ) Authorization for the Emergency Regulations is codified in the "Landsverordening Toezicht Verzekeringsbedrijf" (which means "National Ordinance on the Supervision of the Insurance Industry") ("LTV"). (Declaration of Sabine Altena, ECF Doc. # 6, ¶ 1.)
The CBCS is responsible for supervising insurance companies operating in Curaçao and St. Maarten. (Foreign Representative Declaration ¶ 6.) The CBCS has the power to revoke an insurer's license to practice insurance without court approval. If the CBCS revokes an insurer's license, it may petition a Curaçao court to pronounce Emergency Regulations against an insurance company supervised by the CBCS. LTV Art. 60(1).7 When a petition for Emergency Regulations is filed, a Curaçao court must hold a public hearing to decide whether to approve the Emergency Regulations "with the utmost urgency." LTV Art. 60(4). Both the CBCS and the insurer must be heard. LTV Art. 60(6). Following the hearing, the Curaçao court may pronounce the Emergency Regulations if "the interest of the joint creditors of [the] insurer ... requires a special measure." LTV Art. 60(1).
If the Curaçao Court orders the Emergency Regulations, the LTV authorizes the CBCS to "(a) liquidate all or part of the insurer's portfolio; (b) transfer all or part of the rights and liabilities resulting from or pursuant to any insurance contracts; or (c) restructure the business of the insurer." LTV Art. 60(2). The LTV directs the CBCS to "exercise, exclusively, all powers of the directors, the members of the supervisory board or the representative of the insurer," and to "look after the interests of the joint creditors." LTV Art. 63(1) and (2). The LTV also permits the CBCS to "authorize the board of directors or the representative of the insurer to perform specific acts" and to "dismiss members of the board of directors, members of the supervisory board or the representative on behalf of the insurer." LTV Art. 63(4) and (5). Furthermore, any decisions by the insurer's shareholders or members require the approval of the CBCS. LTV Art. 63(6).
While the Emergency Regulations are in effect, and with certain exceptions, "the insurer cannot be forced to pay its debts that arose before the pronouncement, nor to pay its debts that arise after the pronouncement." LTV Art. 65(1).8 The Emergency Regulations allow the CBCS to modify insurance contracts in certain circumstances, though only after receiving court approval. LTV Art. 67(1). The CBCS also needs court approval to compensate professionals hired to exercise the CBCS' powers under the LTV. LTV Art. 63(8).
If the CBCS successfully restructures the insurer, it may request that the court withdraw the Emergency Regulations. LTV Art. 61(3). If it becomes apparent that the insurer's equity capital is negative and the objectives pursued under the *637Emergency Regulations cannot be achieved, the CBCS must request bankruptcy on behalf of the insurer. LTV Art. 71(1). That essentially means that the debtor will be liquidated.
C. The Proceeding in Curaçao
Between 2015 and 2018, the CBCS and ENNIA had ongoing discussions to restructure ENNIA to comply with Curaçao solvency requirements. (Declaration of Abdallah Andraous, ECF Doc. # 24-4, "Andraous Declaration," ¶ 6-8.) As of July 2018, the CBCS and ENNIA were unable to resolve these issues. (Foreign Representative Declaration ¶ 17.)
On July 3, 2018, the CBCS revoked the Insurer Debtors' insurance license9 and filed an order seeking application of the Emergency Regulations to the Insurer Debtors. (Andraous Declaration ¶ 10.) Upon receipt of the application, the Court of First Instance of Curaçao ("Curaçao Court") scheduled a hearing for 10:00 A.M., July 4, 2018. (Id. ¶ 15.) The Foreign Debtors were given notice of the scheduled hearing, but at 10:30 A.M., the Foreign Debtors received notice that the Emergency Regulations hearing had been moved to 2:15 P.M. (Objection, at 10.) The Curaçao court "pronounce[d]" the Emergency Regulations with respect to the Insurer Debtors and Asset Manager Debtors ECH and ECI at the hearing. ("Curaçao Court Opinion," ECF Doc. # 5, at 24.) The Curaçao court extended the Emergency Regulations to EC Holding, the remaining Asset Manager Debtor, two days later. (Andraous Declaration ¶ 19.)
Under the authority granted by the Curaçao court, the CBCS removed all but one of the Insurer Debtors' board members and delegated management of the Insurer Debtors' day-to-day affairs to new management under a "limited scope proxy." (Foreign Representative Declaration ¶ 23.) The Foreign Representative claims that the CBCS "has assumed control of the operations of the Debtors and is using such authority to recover assets of the Debtor and restructure the debts of the Debtors in a manner that is in the interest of the collective creditors of each Debtor." (Id. )
On September 25, 2018, the CBCS appointed R.M. Hermans as the foreign representative of each of the Foreign Debtors to commence these chapter 15 cases. (Foreign Representative Declaration ¶ 4.) The Foreign Representative filed the Petitions the same day. The Petitions ask the Court to (1) recognize the rehabilitation proceeding commenced by the Curaçao court (the "Proceeding") as a foreign main proceeding, and (2) recognize R.M. Hermans as the foreign representative.
II. DISCUSSION
Parman argues that recognition should be denied because (A) the Proceeding does not meet the definition of a foreign proceeding, and (B) recognition of the Proceeding would be manifestly contrary to the public policy of the United States. The Court is not persuaded by either argument. Accordingly, the Objection is overruled and the Petitions are GRANTED .
A. Whether the Proceeding is a Foreign Proceeding
Parman argues that the Proceeding cannot be recognized as a foreign main *638proceeding. The Bankruptcy Code provides that, after notice and hearing, a court shall enter an order recognizing a foreign proceeding as a foreign main proceeding if (1) such foreign proceeding is a foreign main proceeding within the meaning of section 1502 of the Bankruptcy Code, (2) the foreign representative applying for recognition is a person or body, and (3) the petition meets the requirements of section 1515 of the Bankruptcy Code. See 11 U.S.C. § 1517(a). The Code defines a foreign main proceeding as "a foreign proceeding pending in the country where the debtor has the center of its main interests." 11 U.S.C. § 1502(4).10 Section 101(23) of the Bankruptcy Code defines a "foreign proceeding" as:
a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
11 U.S.C. § 101(23). Courts applying section 101(23) look for:
(i) [the existence of] a proceeding;
(ii) that is either judicial or administrative;
(iii) that is collective in nature;
(iv) that is in a foreign country;
(v) that is authorized or conducted under a law related to insolvency or the adjustment of debts;
(vi) in which the debtor's assets and affairs are subject to the control or supervision of a foreign court; and
(vii) which proceeding is for the purpose of reorganization or liquidation.
In re Ashapura Minechem Ltd. , 480 B.R. 129, 136 (S.D.N.Y. 2012).
Parman argues that the Proceeding does not meet the statutory definition of a foreign proceeding because the Proceeding is not "collective in nature" and because the seized assets in this case are not "subject to control or supervision by a foreign court." (Objection, at 23-24 (quoting 11 U.S.C. § 101(23) ).) Neither argument is persuasive.
When determining whether a proceeding is "collective in nature," the primary question is whether the proceeding considers the rights and obligations of all creditors. Ashapura , 480 B.R. at 140 ("The main test of whether a proceeding is collective is whether all creditors' interests were considered in the proceeding."); 8 COLLIER ON BANKRUPTCY ¶ 1501.03 (16th ed. 2018) ("The 'collective proceeding' requirement is intended to limit access to chapter 15 to proceedings that benefit creditors generally and to exclude proceedings that are for the benefit of a single creditor."); In re ABC Learning Centres Ltd. , 445 B.R. 318, 328 (Bankr. D. Del. 2010), aff'd , 728 F.3d 301 (3d Cir. 2013) (citing In re Betcorp Ltd. , 400 B.R. 266, 281 (Bankr. D. Nev. 2009) ) ("A proceeding is collective if it considers the rights and obligations of all creditors.").
The plain language of the LTV establishes that rehabilitation proceedings pursuant to the Emergency Regulations are collective in nature. First, Emergency Regulations may only be pronounced if a Curaçao court finds that doing so would be in "the interest of the joint creditors."
*639LTV Art. 60(1); (Hartkamp Declaration ¶ 38.) In fact, this is the only factor that the LTV instructs Curaçao courts to consider. See LTV Art. 60(1). Second, the LTV explicitly mandates that the CBCS must "look after the interests of the joint creditors" while the Emergency Regulations are in place. See LTV Art. 63(2); (Hartkamp Declaration ¶ 39.). Third, the LTV permits the CBCS to adopt a resolution, even if the resolution requires the approval of the company's shareholders or members and the shareholders or members do not approve it. See LTV Art. 63(7). The Explanatory Memorandum to the LTV explains that this provision ensures that the CBCS can perform its tasks in the interests of the joint creditors. (Hartkamp Declaration ¶ 40.) Finally, the LTV prohibits the CBCS from transferring a portion of the insurer's assets and liabilities if the transaction would prejudice the creditors whose liabilities remain. See LTV Art. 68 ("Any transfer of rights and obligations pursuant to this chapter shall not prejudice the rights of the remaining creditors."); (Hartkamp Declaration ¶ 41).
Parman argues that the Proceeding is not collective in nature because it does not provide creditors with the right to participate. (Objection, at 14.) The Foreign Representative disputes whether creditors have a right to participate in the Proceeding. ("Foreign Representative's Supplemental Brief," ECF Doc. # 50, ¶¶ 24-26.) Even if Parman is correct that the Proceeding does not allow creditors to participate, this does not prevent the Court from finding that the Proceeding is collective in nature. See Ashapura , 480 B.R. at 141 (quoting Judge Peck, who stated at a hearing, "even if there were no opportunity by practice and custom for unsecured creditors to participate, I think this may still be a collective proceeding, because it involves parties other than just one class of creditor or just party-in-interest."). Accordingly, considering the plain language of the LTV, the Court finds that the Proceeding is collective in nature.
Parman also argues that the Proceeding does not meet the definition of a foreign proceeding because the Foreign Debtors' assets are not "subject to control or supervision by a foreign court," as required by 11 U.S.C. § 101(23). This argument fails as well, as either the Curaçao court or the CBCS qualifies as a "foreign court" with control or supervision over the Foreign Debtors' assets.
The Bankruptcy Code defines "foreign court" as "a judicial or other authority competent to control or supervise a foreign proceeding." 11 U.S.C. § 1502(3) ; see also The Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency ¶ 87 ("A foreign proceeding ... should receive the same treatment irrespective of whether it has been commenced and supervised by a judicial body or an administrative body. Therefore, in order to obviate the need to refer to a foreign non-judicial authority whenever reference is made to a foreign court, the definition of "foreign court" in subparagraph (e) includes also non-judicial authorities."). The CBCS, as a national regulatory authority tasked with oversight of the insurance industry, clearly qualifies as an authority competent to control or supervise a foreign proceeding. Furthermore, the Emergency Regulations grant the CBCS essentially complete control over the Foreign Debtors' assets. See, e.g. , LTV Art. 63(1) ("If the Court pronounces the emergency regulations, the [CBCS] shall exercise, exclusively, all powers of the directors, the members of the supervisory board or the representative of the insurer."). Thus, this element of the definition of "foreign proceeding" is satisfied by the CBCS' control over the Foreign Debtors' assets. See *640In re Tradex Swiss AG , 384 B.R. 34, 42 (Bankr. D. Mass. 2008) ("Even if the decree of the [Swiss Federal Banking Commission] were not subject to appeal to the Swiss Federal Administrative Court, and then the Swiss Federal Supreme Court, the [Swiss Federal Banking Commission] itself comes within the definition of a foreign court. Thus the SFBC proceeding is a foreign proceeding ....").11
The Curaçao court also qualifies as a foreign court because the Foreign Debtors' assets are subject to its supervision. Curaçao court approval is required to initiate Emergency Regulations. See LTV Art. 60(1); (Hartkamp Declaration ¶ 44.). And Curaçao court approval is required to terminate Emergency Regulations. (See Hartkamp Declaration ¶ 48-49 (citing LTV Art. 61(3) and 71(1) ).) During the pendency of the Emergency Regulations, the CBCS needs the approval of a Curaçao court to (a) modify an insurance contract, in the event of a transfer of the rights and obligations under or pursuant to that contract, and (b) reduce the duration of insurance contracts. (See Hartkamp Declaration ¶ 46 (citing LTV Art. 67(1) ).) The CBCS also needs the approval of a Curaçao court to compensate professionals hired to exercise the CBCS' powers under the LTV. (See Hartkamp Declaration ¶ 45 (citing LTV Art. 63(8) ).) Thus, this element of the definition of foreign proceeding is met. See In re Betcorp Ltd. , 400 B.R. at 283-84 (holding that section 101(23) was satisfied by either the supervision and control of the Australian Securities and Investment Commission-a regulatory agency-or by the oversight of the "more traditional judicial authority" of the Australian courts).
B. Whether the Public Policy Exception Applies
Parman argues that the Court should not recognize the Proceeding because ENNIA did not receive adequate notice of the hearing on July 4, 2018. Parman contends that this renders the Proceeding "manifestly contrary to the public policy of the United States." (Objection, at 14.) The Court disagrees.
Section 1506 of the Bankruptcy Code states that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States." 11 U.S.C. § 1506. Courts interpret this exception as a narrow one that should be applied sparingly. In re Toft , 453 B.R. 186, 193 (Bankr. S.D.N.Y. 2011). The key determination is whether the procedures used in the foreign court "meet our fundamental standards of fairness ...." Id. at 194 (quoting Metcalfe & Mansfield Alt. Invs. , 421 B.R. 685 (Bankr. S.D.N.Y. 2010) ). Far from manifestly contrary to public policy, Curaçao's regulation of insurance companies, and its statutory authority for insurance company rehabilitation procedures, are largely consistent with the approaches to such issues utilized in this country and in most countries around the world, with *641variations reflecting local approaches to administrative and judicial allocation of authority.12
Parman argues that the Proceeding is manifestly contrary to the public policy of the United States because ENNIA did not receive sufficient notice of the Proceeding. The parties dispute precisely how much notice ENNIA received. Parman states that ENNIA received notice of the hearing less than four hours in advance. (See "October 31 Hearing Transcript," ECF Doc. # 49-10, 30:5-10; see also Objection, at 18.) The Foreign Representative claims that ENNIA received notice one day in advance and notes that the hearing came after years of discussion between ENNIA and the CBCS. (Foreign Representative's Supplemental Brief ¶ 9.) Even if the Court accepts Parman's version of the facts, the Court does not find that the amount of notice given would violate due process, let alone be manifestly contrary to the public policy of the United States. See In re Cozumel Caribe, S.A. de CV , 482 B.R. 96, 116 (Bankr. S.D.N.Y. 2012) ("Due process is not violated by the entry of ex parte orders, provided that notice and an opportunity to appear and defend are promptly given.").
"[D]ue process is flexible and calls for such procedural protections as the particular situation demands." Morrissey v. Brewer , 408 U.S. 471, 481, 92 S.Ct. 2593, 33 L.Ed.2d 484 (1972). The amount and type of due process necessary for a particular situation depends on the "precise nature of the government function involved as well as of the private interest that has been affected by governmental action." Id. (quoting Cafeteria & Restaurant Workers Union v. McElroy , 367 U.S. 886, 895, 81 S.Ct. 1743, 6 L.Ed.2d 1230 (1961). The Curaçao legislature determined that applications for Emergency Regulations should be handled with the utmost urgency. LTV Art. 60(4); (Hartkamp Declaration ¶ 67). Thus, the LTV instructs Curaçao courts, upon receipt of an application for Emergency Regulations, to "hold a public hearing ... with the utmost urgency." Id. The Curaçao legislature balances the desire to handle applications for Emergency Regulations quickly with the desire to protect the rights of interested parties by requiring Curaçao courts to hear from both the insurer and the CBCS before issuing a ruling. LTV Art. 60(6). The Curaçao court in this case appears to have followed the instructions of its legislature. The Curaçao court received an application for Emergency Regulations on July 3, 2018, initially scheduled a hearing on the matter for July 4, 2018 at 10:00 A.M., and then moved the hearing time to 2:15 P.M. The Curaçao court did not issue a ruling until hearing from counsel for both the insurers and the CBCS.
This Court may not second guess the decision of the Curaçao legislature or the Curaçao court. To do so would be particularly inappropriate here, considering our States afford insurance companies with a similar amount of due process notice in insolvency proceedings. In the United States, the laws of several jurisdictions allow a regulator to seize an insurance company based on an order obtained ex parte . See, e.g. , 18 Del. C. § 5943 (Upon a petition from the state insurance commissioner, "the Court may issue forthwith, ex *642parte and without a hearing, the requested order which shall direct the Commissioner to take possession and control of all or a part of the property" of the insurer); Ohio Rev. Code § 3903.10 (substantially the same); 40 Pa. Stat. Ann. § 221.12 (substantially the same); Wis. Stat. § 645.22 (substantially the same); Tex. Ins. Code Ann. § 443.051 (substantially the same). U.S. courts often grant temporary restraining orders and injunctions on four hours' notice (or less), if circumstances dictate. Providing four hours' notice is not manifestly contrary to the public policy of the United States when even less notice is permitted in state and federal courts in the United States.
Moreover, any due process concerns raised by notice afforded to ENNIA are obviated by the fact, as explained by the Foreign Representative's experts on Curaçao and the Netherlands law, that Curaçao law offers a variety of legal procedures that permitted Parman to challenge the implementation of Emergency Regulations. While the LTV does not permit a direct appeal of the order pronouncing Emergency Regulations,13 Dutch law and Curaçao law appear to provide procedures for challenging administrative or judicial determinations in certain situations even where statutes prohibit direct appeals. For instance, Dutch law permits appeals where the lower court has breached fundamental principles of law, such as the principle of due process. (Hartkamp Declaration ¶ 74.) The Supreme Court of the Netherlands (the highest court that can review decisions of the courts in Curaçao) also allows appeals if the lower court has misjudged the scope of a statute. (Id. )
Parman also argues that recognition is inappropriate on foreign policy grounds because the "Curaçao Court lacked statutory authority over the non-regulated entities." ("Supplemental Objection," ECF Doc. # 49, at 15.) Parman made and lost this argument in the court in Curaçao. Therefore, this argument amounts to no more than an improper request for another bite of the apple. SNP Boat Serv. S.A. v. Hotel Le St. James (In re SNP Boat Serv. S.A.) , 483 B.R. 776, 786 (S.D. Fla. 2012) ("To inquire into a specific foreign proceeding is not only inefficient and a waste of judicial resources, but more importantly, necessarily undermines the equitable and orderly distribution of a debtor's property by transforming a domestic court into a foreign appellate court where the creditors are always provided the proverbial 'second bite at the apple.' "). The Court concludes that Parman's argument is also an inaccurate statement of the law of Curaçao and the Netherlands. In appropriate circumstances courts in those countries may extend emergency regulations to unregulated affiliates of insurance companies. (Hartkamp Declaration ¶ 69-70.) The court in Curaçao determined that the Emergency Regulations should be extended to the Insurer Debtors' unregulated affiliates. It is not the role of a bankruptcy court in a chapter 15 case to second guess the decisions of the Curaçao court.
III. CONCLUSION
For the reasons explained above, the Proceeding is recognized as foreign main proceeding, as defined in section 1502(4), and the Foreign Representative is recognized as the "foreign representative," as *643defined in section 101(24) of the Bankruptcy Code.
IT IS SO ORDERED.
While insurance companies-including foreign insurance companies-are not eligible to be debtors in cases under chapters 7 or 11, they may be foreign debtors in chapter 15 cases. See Fogerty v. Petroquest Resources, Inc. (In re Condor Ins. Ltd.) , 601 F.3d 319, 321 (5th Cir. 2010). Insurance company insolvency and rehabilitation proceedings in the U.S. are specifically exempted from the provisions of the Bankruptcy Code by section 109(b). Indeed, most insurance company regulation is exempted from federal law. See McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq .
The Insurer Debtors are the entities known as ECL, ECS, and ECZ. (Declaration of R.M. Hermans, ECF Doc. # 5 (the "Foreign Representative Declaration"), ¶ 12.)
The Asset Manager Debtors include EC Holding, ECH, and ECI. (Foreign Representative Declaration ¶ 12.)
At the recognition hearing on December 12, 2018, the Foreign Representative and Parman reached an agreement to permit $103 million held in accounts at Merrill Lynch in the names of the Insurer Debtors to be returned to Curaçao. The agreement was supposed to be documented and entered in the days following the hearing. The Insurer Debtors need the money to remain current in making pension payments in Curaçao. For reasons that are unclear to the Court, negotiations of a consent order broke down. As a result, the Court has completed this Opinion recognizing the Curaçao proceeding as a foreign main proceeding. The Foreign Representative may now move for discretionary relief under section 1521 seeking an order directing the transfer of funds on deposit in Merrill Lynch in New York to the Foreign Debtors in Curaçao under section 1521(b).
This Opinion includes the Court's determinations regarding the law of Curaçao and the Netherlands to the extent necessary. The Court's determinations of Curaçao and Netherlands law are rulings on questions of law, not fact. F. R. CIV. P. 44.1 ("A party who intends to raise an issue about a foreign country's law must give notice by a pleading or other writing. In determining foreign law, the court may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence. The court's determination must be treated as a ruling on a question of law."). The parties submitted declarations of experts on the law of Curaçao and the Netherlands. The experts provided English language translations of relevant statutes and case law. The experts disagreed on some legal issues. The Court concludes that the law of Curaçao and the Netherlands is as stated in the Declaration of Professor Arthur Hartkamp.
A translation of the LTV may be found at ECF Doc. # 6, Ex. A.
While there was some dispute about the meaning of this section during the recognition hearing, the plain language of this section appears to mandate the effect of a moratorium (equivalent to our automatic stay).
The Insurer Debtors filed an administrative objection with the CBCS protesting the revocation of the insurance licenses the same day. (Andraous Declaration ¶ 10.) Once the CBCS took control of the Debtors, the CBCS caused the Debtors to withdraw their appeal of the license revocation. (Objection, at 13.) On August 13, 2018, Parman filed a notice of appeal in the Curaçao court seeking annulment of the order revoking the insurance licenses. (Declaration of Bouke Boersma, ECF Doc. # 24-5, ¶ 44.) The appeal remains pending.
It is unchallenged that each of the Foreign Debtors has its center of main interests in Curaçao.
At the recognition hearing, Parman's counsel argued that the CBCS could not be the "foreign court" because, under the Emergency Regulations, the CBCS has essentially taken over the Foreign Debtors. Parman's counsel believes that this means that CBCS cannot be the "foreign court" because that would be akin to saying that the CBCS is supervising itself. This argument misconstrues the law, however. The statutory definition of a foreign proceeding requires that "the assets and affairs of the debtor are subject to control or supervision by a foreign court." 11 U.S.C. § 101(23) (emphasis added). Thus, the requirements of the statute are met so long as the CBCS controls the assets and affairs of the Foreign Debtor, even if it cannot be said that the CBCS does not also supervise the assets and affairs of the Foreign Debtor.
Parman's attack on the Curaçao statutory authority for insurance company rehabilitation as manifestly contrary to U.S. public policy, if accepted, would effectively block many foreign insurance regulators operating under similar statutes from enforcing their regulatory authority when they seek to recover U.S. dollar denominated investments of foreign insurance companies that are customarily held in the U.S., as is the case of the Foreign Debtors.
The LTV states "No appeal shall be possible against the decision, save an appeal in cassation in the interest of the law." LTV Art. 60(9). An appeal in cassation in the interest of the law may only be pursued by the procureur-generaal to the Supreme Court, and such an appeal would not affect the validity of the lower court's ruling. (Hartkamp Declaration ¶ 73.) It would only provide guidance to lower courts on the subject matter. (Id. ) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501818/ | Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE
Before the Court in this adversary proceeding (the "Adversary Proceeding") is a Motion to Compel1 pursuant to the Federal Arbitration Act (the "FAA")2 filed by Allied Title Lending, LLC d/b/a Allied Cash Advance ("Allied") in response to the Amended Complaint3 filed by the plaintiff, Shirley Dean Taylor (the "Debtor"). The issue presented by the Motion to Compel is whether the Court should stay this Adversary Proceeding and compel arbitration of the Amended Complaint. A hearing on the Motion to Compel took place on November 15, 2018 (the "Hearing"). The Court ruled at the Hearing that it would deny the Motion to Compel. This memorandum sets forth the reasons for the Court's ruling.
Jurisdiction and Venue
The United States Bankruptcy Court for the Eastern District of Virginia (the *645"Court") has subject matter jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding4 under 28 U.S.C. § 157(b)(2)(A), (B), (C), and (O), as the Adversary Proceeding concerns "the administration of the estate," the "allowance or disallowance of claims against the estate," "counterclaims by the estate against persons filing claims against the estate," and "other proceedings affecting the liquidation of the assets of the estate."
Count II of the Amended Complaint wholly implicates the allowance and disallowance of claims against the estate as it objects to Allied's claim on the grounds that it arises out of a null and void contract, which would disallow the claim under section 502(b)(1) of Title 11 of the United States Code (the "Bankruptcy Code"). See 11 U.S.C. § 502(b)(1) (Claims against the estate are allowed except to the extent they are "unenforceable against the debtor and property of the debtor, under any agreement or applicable law."). Count III involves not only the allowance or disallowance of claims against the estate but also counterclaims under Virginia's usury laws against persons filing claims against the estate. Thus, Counts II and III are core proceedings under 28 U.S.C. § 157(b)(2) such that the Court retains jurisdiction to hear and decide these claims.5
Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. A substantial part of the events or omissions giving rise to the claims asserted in the Amended Complaint against Allied took place in this judicial district.
Background and Procedural History
Background
The Debtor is a salaried employee of the U.S. Probation Office. Am. Compl. ¶ 21. Allied, a Delaware limited liability company, offers "short-term, small-dollar loans to Virginians that mimic payday loans but are in the form of open-end credit plans." Id. ¶¶ 10, 15. Cerastes, LLC ("Cerastes") is a co-defendant in this action and a Delaware limited liability company that "buy[s] defaulted consumer accounts from debt sellers where the debtor has filed for Chapter 13 bankruptcy protection" and then "prosecute[s] Proofs of Claims on those accounts." Id. ¶¶ 17-18.
In July 2016, the Debtor submitted an application to Allied requesting a loan in the amount of $1500. Mot. to Compel ¶ 6. On July 25, 2016, the Debtor executed a line of credit agreement with Allied (the "Credit Agreement"). Am. Compl. ¶ 22. Under the terms of the Credit Agreement, Allied agreed to loan the Debtor $1500 in cash, and the Debtor agreed to repay the $1500 along with interest accruing at a rate of 0.75% per day, which equates to an *646annualized interest rate of 273.75%. Id. ¶¶ 22-23. The Credit Agreement provided that interest would not begin accruing on the Debtor's account until twenty-eight days after she opened her account (the "Grace Period"). Id. ¶ 30 Ex. 1, at 3. Allied also assessed a $100 origination fee (the "Origination Fee") on the Debtor's account. Id. ¶ 24. Unlike the $1500 the Debtor initially borrowed, the Origination Fee "was not subject to the Grace Period." Id. ¶ 30. The Credit Agreement contained the following arbitration provision (the "Arbitration Provision"):
Before signing this Agreement, you should carefully review the Arbitration Agreement located on pages 5 and 6. The Arbitration Agreement provides that all Claims arising from or relating to this Agreement or any other agreement that you and we have ever entered into must be resolved by binding arbitration if the person or entity against whom a Claim is asserted elects to arbitrate the Claim. Thus, if the person or entity against whom you assert a Claim elects to arbitrate the Claim, then you will not have the following important rights:
• You may not file or maintain a lawsuit in any court except a small claims court.
• You may not join or participate in a class action, act as a class representative or a private attorney general, or consolidate your Claim with the claims of others.
• You will have to pay the arbitration firm certain fees in order to commence an arbitration proceeding, unless you ask us to pay those fees to the arbitration firm for you.
• You give up your right to have a jury decide your Claim.
• You will not be afforded the procedural, pre-trial discovery and appellate rights in an arbitration proceeding that you would enjoy in a court or judicial proceeding.
If you do not want to arbitrate all Claims as provided in the Arbitration Agreement, then you have the right to reject the Arbitration Agreement. To reject arbitration, you must deliver written notice to us at the following address within 30 days following the date of this Agreement: Allied Cash Advance, Attn: Arbitration Opt-Out, P.O. Box 36381, Cincinnati, Ohio 45236. Nobody else can reject arbitration for you; this method is the only way you can reject the Arbitration Agreement. Your rejection of the Arbitration Agreement will not affect your right to credit, how much credit you receive, or any contract term other than the Arbitration Agreement.
Mot. to Compel Ex. B, at 2.
Bankruptcy Proceeding
On January 11, 2017, (the "Petition Date") the Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code in this Court (the "Bankruptcy Case"). On March 21, 2017, Allied filed proof of claim 8-1 in the Bankruptcy Case in the amount of $2756.92 for "Money loaned" ("Claim 8-1"). The Debtor filed her initial objection to Claim 8-1 on August 29, 2017, alleging that Allied had "neither attached a copy of the writing upon which the claim is based nor a statement of the circumstances of the loss or destruction of such writing" in contravention of Rule 3001 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). Obj. Claim No. 8-1 & Mem. Supp. Thereof ¶ 13, In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 29. On September 1, 2017, the Court entered an order confirming the Debtor's chapter 13 plan. Order Confirming Plan, *647In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 31.
On September 28, 2017, Cerastes filed a transfer of claim, indicating that Allied had transferred Claim 8-1 to Cerastes. Transfer Claim Other Than Security, In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 38.6 The same day, Cerastes filed an amended proof of claim 8-2 to include the writing upon which the claim was based ("Claim 8-2").7 Cerastes also filed a response to the Debtor's claim objection, explaining that the "Amended Claim in effect moots the Debtor's Objection." Resp. Obj. Claim No. 8-1 ¶ 11, In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va. Sept. 28, 2017), ECF No. 40.
Adversary Proceeding
On January 15, 2018, the Debtor initiated this Adversary Proceeding by filing a complaint against Allied and Cerastes. Compl. Objecting Claim No. 8-1 & No. 8-2, Damages, Costs, & Att'y Fees Pursuant FDCPA 15 U.S.C. § 1692, Classwide Rel., Declaratory Rel., Injunctive Rel., & Equit. Rel. Pursuant 11 U.S.C. § 105, ECF No. 1 ("Original Complaint").8 On January 25, 2018, Allied filed a transfer of claim, this time indicating that Claim 8-2 had been transferred from Cerastes back to Allied. Transfer Claim Other Than Security, In re Taylor , No. 17-30142-KRH (Bankr. E.D. Va.), ECF No. 57. In response to the Original Complaint, Allied and Cerastes both filed motions to dismiss or, in the alternative, to stay the proceeding. Mot. and Mem. Law Supp. Mot. Cerastes, (1) To Dismiss Compl. or (2) In Altern. Stay Adv. Proc. Pending Res. State Ct. Lawsuit, ECF No. 11; Mot. Dismiss Pursuant Fed. R. Civ. P. 12(b)(1) & 12(b)(6); In Altern., Mot. Abstain Adjud. Compl. or Mot. Stay & Mem. P. & A., ECF No. 12. On March 1, 2018, Allied also filed a motion to withdraw its proof of claim with respect to Claims 8-1 and 8-2, Mot. Leave Withdraw Proof of Claim No. 8 & Mem. P. & A., ECF No. 14, which was denied by order entered May 29, 2018, Order Den. Allied's Mot. Leave Withdraw Claim No. 8, ECF No. 63.
On March 15, 2018, the Debtor filed the Amended Complaint. The Amended Complaint contained five counts. Count I objects to Claims 8-1 and 8-2 on the grounds that fees and interest were assessed after the Petition Date, the claims were not properly identified as open-end credit, and Claim 8-2 falsely asserted that no interest or fees had been added. Count II seeks to disallow the claims pursuant to section 502(b)(1) of the Bankruptcy Code because they are unenforceable under Virginia Law governing consumer finance and because they neither provide the writing underlying the claims nor provide all information required for a claim based on open-end credit as required by Bankruptcy Rule 3001. Count II also seeks to assert a class claim objection against Allied on behalf of other similarly situated debtors in the Eastern District of Virginia.9 Count III
*648asserts claims against Allied for violation of Virginia law governing consumer finance, Va. Code §§ 6.2-1500 to 6.2-1543, and Virginia usury law. It also seeks declaratory relief, injunctive relief, and relief for the recovery of claims on behalf of other similarly situated debtors in the Eastern District of Virginia. Count IV is a class claim under the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 to 1692p, against Cerastes.10 Count V is a request for equitable relief under section 105 of the Bankruptcy Code and Bankruptcy Rule 3001. Am. Compl. ¶¶ 74-149.11
On March 29, 2018, the Court received, among other filings, (i) Allied's Motion to Dismiss the Amended Complaint, Mot. Dismiss Pursuant Fed. R. Civ. P. 12(b)(1) & 12(b)(6); & Mem. P. & A., ECF No. 35 ("Allied's Motion to Dismiss"),12 and (ii) Allied's Motion to Compel. The Motion to Compel asserted that the Court need not address it until it had resolved Allied's Motion to Dismiss. Mot. to Compel ¶ 4. In the event the Court did not grant Allied's Motion to Dismiss, the Motion to Compel asked for entry of an order staying the Adversary Proceeding, "compelling arbitration pursuant to the agreement to arbitrate," and "determin[ing] that the Class Action Claims are non-core proceedings." Id. ¶¶ 13-14. Specifically, the Motion to Compel sought arbitration of the "Class Action Claims ... in Counts II and III." Id. ¶ 12.
On April 12, 2018, the Debtor filed several responses, including a response to the Motion to Compel. Pls.' Mem. Opp'n Def. Allied's Mot. Compel Arb., ECF No. 47. Allied filed replies to the Debtor's responses on April 19, 2018. See Allied's Reply Supp. Mot. Entry Order Staying Adv. Pro. & Compelling Arb., ECF No. 53. The Court set a hearing on, among other motions, Allied's Motion to Dismiss and the Motion to Compel for July 24, 2018. Prior to the hearing on July 24, 2018, Allied submitted a new motion asking the Court to certify the questions of state law, pertinent to Counts II and III of the Amended Complaint, to the Supreme Court of Virginia. See Mot. Certif. Questions State Law; & Mem. P. & A., ECF No. 71 ("Motion for Certification").13 At the hearing on July 24, 2018, the Court granted the Motion for Certification and stayed this Adversary Proceeding. The Court thereupon certified Allied's questions to the Supreme Court of Virginia by order entered August 20, 2018.
*649See Order of Certif. to Supreme Court of Virginia, ECF No. 78.
On August 31, 2018, the Supreme Court of Virginia respectfully declined to accept the certified questions of state law that the Court had submitted to it. See Letter, ECF No. 81. On September 18, 2018, the Supreme Court of Virginia denied Allied's motion for reconsideration of the certification of questions of state law. See Letter, ECF No. 88.14 The Court then scheduled a pre-trial conference on October 10, 2018 (the "Pre-trial Conference"). At the Pre-trial Conference, the parties represented that the matters pertaining to the motions previously scheduled for July 24, 2018, were fully briefed and ripe for determination. The Court scheduled the November 15, 2018, Hearing to consider the Motion to Compel, Allied's Motion to Dismiss, and a motion to dismiss filed by Cerastes, Mot. & Mem. Law Supp. Mot. Cerastes, LLC, Dismiss Am. Compl., ECF No. 30 ("Cerastes's Motion to Dismiss"). The Court also announced at the Pre-trial Conference that it would hear any motions filed by the Office of the Attorney General of Virginia (the "Virginia Attorney General") at the Hearing.
On November 8, 2018, the Virginia Attorney General filed a motion to intervene and file pleadings in intervention in this Adversary Proceeding. Commonwealth's Mot. Leave File Pleadings Interven., ECF No. 108 ("Motion to Intervene"). The Virginia Attorney General alleged that it met the criteria for intervening in this Adversary Proceeding under Federal Rule of Civil Procedure 24(b) as incorporated by Bankruptcy Rule 7024. Mot. to Intervene 1. The Virginia Attorney General attached as an exhibit its proposed complaint in intervention, which seeks disallowance of Allied's claim against the Debtor for violation of Virginia consumer finance laws and Virginia usury law and seeks relief from Allied in the form of "restitution, civil penalties, attorney's fees and costs, as well as injunctive relief" arising out of Allied's "loans that the Commonwealth alleges are void." Id. Ex. A, at 2. Specifically, the Virginia Attorney General asserts that Allied extended loans to debtors that violated Virginia's consumer finance statutes and filed proofs of claim in bankruptcy proceedings based on those illegal lending arrangements. Id. On November 13, 2018, Allied filed an objection to the Virginia Attorney General's Motion to Intervene. Allied's Prelim. Obj. & Reserv. Rights Regarding Commonwealth's Mot. Leave File Pleadings Interven., ECF No. 109.
At the Hearing, after entertaining arguments from all parties, the Court granted the Motion to Intervene, permitting the Virginia Attorney General to intervene in this Adversary Proceeding. The Court also denied the Motion to Compel. The Court took Allied's Motion to Dismiss under advisement and granted Cerastes's Motion to Dismiss with respect to Count V of the Amended Complaint.
Analysis
In its Motion to Compel, Allied asks the Court to stay this Adversary Proceeding and refer Counts II and III of the Debtor's Amended Complaint to arbitration "pursuant to the agreement to arbitrate set forth in the [Credit] Agreement." Mot. to Compel ¶ 13. The Motion to Compel also asks the Court to determine that Counts II and III are "non-core proceedings that are otherwise related to a case under title 11." Id. ¶ 14. At the Hearing, the Court denied the Motion to Compel because Counts II and III are constitutionally core claims. As such, referring the claims to *650arbitration would conflict with the essential purpose of the bankruptcy process to quickly and efficiently resolve claims against the Debtor's estate and also would undermine the Virginia Attorney General's statutory prerogative to intervene in this Adversary Proceeding.
The Federal Arbitration Act provides that written contracts to arbitrate "shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or equity for the revocation of any contract."15 9 U.S.C. § 2. The FAA establishes "a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." 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). "[A]rbitration policies implemented under the [FAA] are to be robustly followed." Moses v. CashCall, Inc. , 781 F.3d 63, 71 (4th Cir. 2015) (per curiam) (internal citation omitted). This stems from the "fundamental principle that arbitration is a matter of contract," and contracts should be enforced according to their terms. AT&T Mobility LLC v. Concepcion , 563 U.S. 333, 339, 334, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) (quoting Rent-A-Center, W., Inc. v. Jackson , 561 U.S. 63, 66, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) ).
Arbitration agreements, though "on an equal footing with other contracts," are not inviolate. Id. at 339, 131 S.Ct. 1740. A party seeking to prevent enforcement of an arbitration agreement must show that "Congress has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue." Green Tree Fin. Corp.-Ala. v. Randolph , 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). A court may deduce such congressional intent from "(1) the statute's text; (2) its legislative history; or (3) 'an inherent conflict between arbitration and the statute's underlying purposes.' " CashCall , 781 F.3d at 71 (quoting Shearson/Am. Express, Inc. v. McMahon , 482 U.S. 220, 227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) ). Upon discovery of congressional intent to preserve judicial remedies for the statutory rights at issue, the court has the discretion to withhold arbitration, a decision subject to an abuse of discretion standard of review at the appellate level. Id. at 71-72.
In Moses v. CashCall , the United States Court of Appeals for the Fourth Circuit applied this framework in the bankruptcy context. The Fourth Circuit recognized that sending a constitutionally core claim to arbitration pursuant to an arbitration agreement would "inherently conflict with the purposes of the Bankruptcy Code." Id. at 72. See also Anderson v. CreditOne Bank, N.A. (In re Anderson ), 884 F.3d 382, 387 (2d Cir. 2018) ("If the matter involves a core proceeding, the bankruptcy court is tasked with engaging in a 'particularized inquiry into the nature of the claim and the facts of the specific bankruptcy.' " (quoting MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006) ) ).
28 U.S.C. §§ 157(b)(1) categorizes bankruptcy proceedings as either core or non-core proceedings. A bankruptcy court can hear and determine core bankruptcy proceedings arising under Title 11 or arising in a case under Title 11. These include the "allowance or disallowance of claims against the estate" and "counterclaims by the estate against persons filing claims against the estate."
*651CashCall , 781 F.3d at 70 (quoting 28 U.S.C. § 157(b)(2)(B)-(C) ). "A bankruptcy court may also hear related non-core claims, but it cannot finally resolve them and must instead submit proposed findings of fact and conclusions of law to the district court." Id. (citing 28 U.S.C. § 157(c)(1) ).
The Fourth Circuit recognized the distinction the Supreme Court had drawn in Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), between constitutionally core and constitutionally non-core bankruptcy proceedings. Id. at 69-70. In Stern v. Marshall , the Supreme Court segmented counterclaims into two new categories: constitutionally core claims on the one hand and statutorily core but constitutionally non-core claims on the other. 564 U.S. at 499, 131 S.Ct. 2594. Article III of the United States Constitution prohibits bankruptcy courts from issuing final orders concerning counterclaims that are not constitutionally core. Id. The counterclaim must "stem[ ] from the bankruptcy itself or would necessarily be resolved in the claims allowance process" in order to be considered constitutionally core. Id. In the wake of Stern , a statutorily core but constitutionally non-core counterclaim-a so-called "Stern Claim"-must be treated "as if it were statutorily non-core." CashCall , 781 F.3d at 70 ; see also Exec. Benefits Ins. Agency v. Arkison , 573 U.S. 25, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014).16
In CashCall , on facts strikingly similar to those presented in the case at bar, a loan servicer filed a motion asking the bankruptcy court to compel arbitration for two of a debtor's claims: a claim to declare the loan between the loan servicer and debtor illegal and void under North Carolina law and a claim to obtain damages for the loan servicer's debt collection practices. Id. at 68. The Fourth Circuit held that the first claim was constitutionally core because "the validity of the Loan Agreement 'would necessarily be resolved' in adjudicating CashCall's proof of claim and Moses' objections thereto." Id. at 70 (quoting Stern , 564 U.S. at 499, 131 S.Ct. 2594 ). Constitutionally core claims strike at the heart of the bankruptcy process Congress has established through the Bankruptcy Code, which is designed to "provide debtors and creditors with 'the prompt and effectual administration and settlement of the ... estate' " and "centralize disputes over the debtor's assets and obligations in one forum." Id. at 72 (quoting Katchen v. Landy , 382 U.S. 323, 328, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) ). Therefore, the bankruptcy court's refusal to refer the debtor's objection to the allowance of CashCall's claim to arbitration was proper because arbitration "would 'substantially interfere' with [the debtor's] efforts to reorganize" and would "inherently conflict" with the purposes of the Bankruptcy Code and with Congress's intent in enacting the Bankruptcy Code. Id. at 73 (quoting Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co. ), 403 F.3d 164, 169-70 (4th Cir. 2005) ).
The Fourth Circuit held that the second claim in CashCall , a counterclaim seeking *652damages under the North Carolina Debt Collection Act, was constitutionally non-core, and it reversed the district court's decision to uphold the bankruptcy court's denial of arbitration. Id. at 66. While it was recognized that the success or failure of the counterclaim would have ancillary effects on the bankruptcy case, they were found to be "too attenuated ... to constitute an 'inherent conflict' with the Bankruptcy Code's purpose of facilitating an efficient reorganization." Id. at 82 (Gregory, J., concurring). The damages were found to be "unrelated to the Defendant's proof of claim" and were "only related to the bankruptcy case in that if successful, the bankruptcy estate will recover any non-exempt funds and disburse them to claims in accordance with the bankruptcy code." Id. at 82 (internal quotations omitted).
Of importance to the Fourth Circuit was that the counterclaim was not related to the debtor's proof of claim. The counterclaim involved "an allegation that CashCall sought to collect on an invalid debt." Id. at 85. The constitutionally non-core litigation surrounding the counterclaim was "entirely peripheral to the core claim" dealing with the allowance of the proof of claim. Id. at 86. The counterclaim would not necessarily be resolved in the claims allowance process but would "require detailed and time-consuming findings regarding CashCall's conduct in trying to collect on the loan, other violations of the state statute, and damages like emotional distress." Id. at 85. Although tangentially related to the constitutionally core function of the bankruptcy court to administer the claims allowance process, the counterclaim primarily implicated the collection process, not "whether an individual was owed money by a debtor." Id. The Fourth Circuit concluded there was "no reason to believe that arbitration in these circumstances would substantially interfere with Moses's bankruptcy and present an inherent conflict with the purposes of the Bankruptcy Code." Id. at 86.
Based on this analysis of the Fourth Circuit's opinion in CashCall , the Court finds that Counts II and III of the Amended Complaint present constitutionally core claims and that referring those core claims to arbitration would inherently conflict with the purposes of the Bankruptcy Code in contravention of Fourth Circuit precedent. The Debtor asks the Court in Count II of her Amended Complaint to disallow Allied's claim because it is unenforceable under Virginia law. Am. Compl. ¶ 101. The Debtor alleges that Allied charged her 273.75% interest plus an origination fee of $100.00. Id. ¶ 92. The Debtor maintains that because Allied did not obtain a consumer finance license and does not otherwise qualify under the exception provided by section 6.2-312(A) of the Virginia Code, Allied's loan to her is null and void. Id. ¶¶ 89-91, 93-99. The Debtor also requests in Count II that the Court certify a class of similarly situated claimants under Federal Rule of Civil Procedure 23(a) as incorporated by Bankruptcy Rule 7023. Id. ¶¶ 79-88; see also Fed. R. Bankr. P. 7023.17 Upon certification, the Debtor asks the Court to "disallow" Allied's claims *653against those class members as well. Am. Compl. ¶ 104. In support of the requested relief, the Debtor alleges that the loans Allied made to the other similarly situated debtors violated section 6.2-1541(A) of the Virginia Code and were therefore void and unenforceable, such that any proofs of claim related thereto should be disallowed under section 502(b)(1) of the Bankruptcy Code. Id. ¶¶ 100-01.
The relief requested in Count II is substantially similar to that requested in the first claim in CashCall , which "sought a declaratory judgment that CashCall's loan was illegal and unenforceable, in violation of N.C. Gen. Stat. § 24-1.1(c) and § 53-166(a)." 781 F.3d at 69 (per curiam); see Am. Compl. ¶ 99 ("Under Va. Code § 6.2-1541(A), the loan was void and is uncollectible against the Plaintiff or her estate in any amount."). Like the first claim in CashCall , Count II is constitutionally core because this issue involves the claim allowance process and the Debtor's objection to Allied's proof of claim. Count II concerns the validity of the very Credit Agreement that undergirds Allied's claim in the Bankruptcy Case. "[R]esolution of [the Debtor's] claim that the Loan Agreement ... was illegal could directly impact claims against her estate and her plan for financial reorganization ...." CashCall , 781 F.3d at 72. Accordingly, it would conflict with Congress's intent in enacting the Bankruptcy Code to refer this claim, which directly pertains to the Debtor's plan of reorganization and the claims allowance process of the bankruptcy court, to arbitration under the terms of Arbitration Provision.
In Count III, the Debtor asks the Court to determine that Allied's credit was usurious such that it is not entitled to any interest pursuant to section 6.2-304 of the Virginia Code. Am. Compl. ¶¶ 105-16. Like Count II, it also seeks to certify a class of claimants similarly situated to the Debtor under Federal Rule of Civil Procedure 23(a). Id. Upon certification, the Debtor asks the Court for "injunctive relief or declaratory relief with respect to the Usury Class as a whole." Id. ¶ 115.
Count III attacks the loans Allied made to the Debtor and to other similarly situated debtors as null and void under section 6.2-1541 of the Virginia Code, which would invalidate the contract Allied is using as the basis for its claims. Count III also asks the Court to find that "Allied knowingly filed Proofs of Claim on null and void loans, attempting to collect debts that cannot be enforced against debtors in bankruptcy pursuant to 11 U.S.C. § 502(b)(1)." Id. ¶ 115. Count III is readily distinguishable from the CashCall counterclaim. The CashCall counterclaim involved a completely separate cause of action arising out of the creditor's purported violation of applicable state consumer finance statute for improper collection efforts-over and above just filing the proof of claim. A determination on the first core count "that the underlying Loan Agreement was illegal" was not outcome determinative of whether CashCall's collection efforts "inherently violate[d] the North Carolina Debt Collection Act." CashCall , 781 F.3d at 70-71. Rather, the CashCall counterclaim "regarding CashCall's conduct in trying to collect on the loan, other violations of the state statute, and damages like emotional distress ... [was] unrelated to the Defendant's proof of claim and [was] only related to the bankruptcy case in that if successful, the bankruptcy estate will recover any non-exempt funds and disburse them to claims in accordance with the bankruptcy code." Id. at 85-86 (Gregory, J., concurring) (internal citations omitted).
Unlike the counterclaim in CashCall , which the Fourth Circuit deemed to be *654constitutionally non-core, Count III concerns "whether an individual is owed money by a debtor - a classic core claim." Id. at 85. Specifically, by Count III, the Court is to decide whether Allied has an allowable claim against the Debtor and similarly situated debtors, such that Allied is owed money by the Debtor. To the extent Allied does not have an allowable claim because the underlying loan agreement is void, Count III then asks for a declaratory judgment that Allied filed proofs of claim for unenforceable debts.
Count III would necessarily be resolved by the Court in the claims allowance process when considering Allied's proofs of claim.18 On the one hand, if the Court concludes that the Credit Agreement is valid, then Allied's proof of claim would be allowed. On the other hand, if the Court concludes that the loan agreement Allied is using is void, then Allied was not entitled to collect the usurious interest that it charged and the proof of claim should be disallowed. The Court must make this determination in its consideration of the validity of Allied's proof of claim pursuant to its constitutionally mandated duties. Thus, it would conflict with Congress's vision of the bankruptcy process to refer Count III to arbitration under the terms of the Arbitration Provision.
The Court also denied the Motion to Compel for a second reason. A court should not compel arbitration in scenarios where it would hinder the ability of an agency to pursue the relief it is statutorily charged with seeking. In light of the Court's decision to grant the Virginia Attorney General's Motion to Intervene in this Adversary Proceeding, referring Counts II and III to arbitration would violate the Supreme Court's explicit command in EEOC v. Waffle House, Inc. 534 U.S. 279, 295-96, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002).19 At the Hearing on November 15, 2018, this Court granted the Virginia Attorney General's Motion to Intervene as a plaintiff to object to Allied's proof of claim against the Debtor and to object to the proofs of claim filed by Allied against other similarly situated debtors on a class-wide basis. See Mot. to Intervene 2-3. Thus, to the extent Allied now asks the Court to refer Counts II and III to arbitration, it asks the Court to enforce the Arbitration Provision against the plaintiff-intervenor, the Virginia Attorney General. "It goes without saying that a contract cannot bind a nonparty." Waffle House , 534 U.S. at 294, 122 S.Ct. 754. "[T]he proarbitration goals of the FAA do not require [an] agency to relinquish its statutory authority if it has not agreed to do so." Id. Compelling arbitration with respect to Counts II and III would require *655the Virginia Attorney General to either participate in or monitor ongoing actions in multiple fora, including an arbitration, which would undermine the Virginia Attorney General's statutory function and infringe upon the Virginia Attorney General's right to pursue the remedies afforded to it by law. Accordingly, the Court denies the Motion to Compel as to the Amended Complaint.
Conclusion
For the foregoing reasons, the Motion to Compel is denied. A separate order shall issue.
Mot. Entry Orders (I) Staying Adv. Pro. & Compelling Arb. & (II) Determining Class Action Claims this Pro. Are Non-Core Pursuant 28 U.S.C. § 157(b)(3), ECF No. 39 ("Motion to Compel").
9 U.S.C. §§ 1 -307 (2018).
Am. Compl. Objecting Claim No. 8-1 & No. 8-2, Damages, Costs, & Att'y Fees Pursuant FDCPA 15 U.S.C. § 1692, Classwide Rel., Declaratory Rel., Injunctive Rel., & Equit. Rel. Pursuant 11 U.S.C. § 105, ECF No. 23 ("Amended Complaint").
A distinction is drawn here between statutorily core and constitutionally core proceedings as it affects the jurisdictional analysis for bankruptcy courts for reasons stated infra .
Allied challenges this position in its Motion to Compel, arguing that "the Class Action Claims are non-core proceedings otherwise related to a case under title 11" and "do not qualify under any of the sixteen core proceedings listed in 28 U.S.C. § 157(b)(2)." Mot. to Compel ¶¶ 5, 31.
While the Debtor objects to Allied's claim and requests relief on behalf of her herself in Counts II and III of the Amended Complaint, she also requests class certification on the grounds that other debtors in the Eastern District of Virginia have been similarly affected by Allied's common course of conducting business by allegedly charging interest in excess of the legal limit. The Court has not yet addressed the issue of class certification on either Count II or Count III.
See Fed. R. Bankr. P. 3001(e)(2).
The Debtor alleges that her transaction history on the account shows that in the five-and-one-half month period between the time her loan was funded and the Petition Date, she repaid Allied a total of $795.62. Am. Compl. ¶ 69.
The Bankruptcy Rules require an objection to the allowance of a claim to be brought as part of an adversary proceeding when it includes a demand for the recovery of property, Fed R. Bankr. P. 7001(1), equitable relief, id. 7001(7), or declaratory relief, id. 7001(9). See id. 3007(b).
The claim objection class members are defined as "[a]ll debtors in the Bankruptcy Court for the Eastern District of Virginia who, before filing bankruptcy, entered into a credit agreement with Allied based upon a purportedly open-end credit basis, and a claim was filed regarding the agreement." Am. Compl. ¶ 79. The Court has not addressed the merits of the proposed class certification.
Count IV of the Amended Complaint was dismissed without prejudice by consent order. Agreed Order Dismissing Without Prejudice Class Claim Against Cerastes, LLC Violations FDCPA (15 U.S.C. § 1692e ), ECF No. 50.
At the Hearing, the Court ruled that it would dismiss Count V as to Cerastes.
Allied's Motion to Dismiss asks the Court to determine whether the Debtor's credit agreement with Allied violated Virginia's consumer finance law and usury law. Specifically the Court must decide whether the credit agreement qualifies as an open-end credit facility. If the Court determines that the credit agreement is actually a closed-end facility, then the agreement between the Debtor and Allied would be void and unenforceable because Allied would not meet the exception provided by Virginia to its usury law.
Allied brought the Motion for Certification under section 105 of the Bankruptcy Code and Rule 5:40 of the Rules of the Supreme Court of Virginia. The Motion for Certification asserted that the interpretation of Allied's credit agreement with the Debtor and the legal meaning of section 6.2-312 of the Virginia Code were questions of Virginia law for which there was no controlling state court precedent. The Motion for Certification also represented that the resolution of these state law questions was determinative of the relief sought by the Debtor in Counts II and III of the Amended Complaint.
On September 6, 2018, Allied filed a "motion for reconsideration of denial of certified question" with the Supreme Court of Virginia. See Letter, ECF No. 88.
While it was not argued by any party at the Hearing, the Court questioned whether legal grounds exist for revocation of the arbitration contract if the Credit Agreement was in fact void as the Virginia Attorney General maintains. Query whether there exists consideration to support the contract if the agreement containing the Arbitration Provision is void.
The distinction between a constitutionally core claim and a "Stern claim" is whether the counterclaim arises out of the same nucleus of fact. See Stern , 564 U.S. at 497-498, 131 S.Ct. 2594. For example, assume a proof of claim is filed based on amounts allegedly owed by the debtor to a claimant under the terms of a contract. A counterclaim by the debtor for breach of the contract would be a constitutionally core claim as a valid claim for first breach would have a direct effect on the validity of the creditor's proof of claim. A counterclaim by the debtor for allegedly defamatory statements made by the claimant about the debtor's performance under the contract, while potentially a compulsory counterclaim, would be a statutorily core but constitutionally non-core "Stern claim" as that claim arises from a different set of facts.
See supra note 9. While class actions are unusual in the bankruptcy context, they may be permissible under certain circumstances. See Gentry v. Siegel , 668 F.3d 83, 90 (4th Cir. 2012) ("In the absence of some prohibiting rule or principle, the Bankruptcy Rules should be construed ... to allow Civil Rule 23 to be applied if doing so would result in a more practical and efficient process for the adjudication of claims."). The Court has not addressed the issue of class certification in this Adversary Proceeding, but notes that a favorable ruling on the declaratory and injunctive relief sought in the Amended Complaint may obviate any need for class certification.
As stated by Allied in its Motion for Certification:
[T]he legal meaning of Virginia Code § 6.2-312 is determinative of the issues presented in Counts II and III of the Amended Complaint.... [T]he fulcrum of Taylor's class claims is a dispute over the legal meaning of Virginia Code § 6.2-312. She contends that the Origination Fee is a "finance charge under the statute, and that, as such, Allied did not qualify for the open-end credit exemption because, according to Taylor, finance charges can only be assessed on unpaid balances following a 25-day grace period. If Taylor is correct, then Allied does not qualify for the exemption; if Taylor is incorrect on either of these questions of law, then her claims must be dismissed.
Mot. for Certification ¶¶ 23-24.
The Supreme Court explained that the FAA directs courts "to place arbitration agreements on equal footing with other contracts, but it 'does not require parties to arbitrate when they have not agreed to do so.' " Id. at 293, 122 S.Ct. 754 (quoting Volt Info. Scis. v. Bd. of Trs. of Leland Stanford Junior Univ. , 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989) ). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501822/ | (A) in that person's absence, the court cannot accord complete relief among existing parties; or
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person's absence may:
(i) as a practical matter impair or impede the person's ability to protect the interest; or
(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.
Fed. R. Civ. P. 19. This rule applies in adversary proceedings. Fed. R. Bankr. P. 7019. "Under Federal Rule of Civil Procedure 19, a nonparty is indispensable to an action if (1) the nonparty is necessary; (2) the nonparty cannot be joined; and (3) the action cannot continue in equity and good conscience without the nonparty." U.S. ex rel. Steele v. Turn Key Gaming, Inc., 135 F.3d 1249, 1251 (8th Cir. 1998). PWE has the burden to show these elements. In re Brooke Corp., 443 B.R. 847, 851 (Bankr. D. Kan. 2010).
PWE has not met its burden to show these elements. First, PWE failed to show that the United States is a necessary party. The United States has already removed itself from these matters by returning the funds it received under the Settlement Agreement. It will not be prejudiced if the *687adversary continues without it. PWE's assertion that the United States is a necessary party so that it can "comment on whether it deems the entire agreement rescinded" is unpersuasive. The United States does not need to be joined to provide its view on the ultimate issue in this adversary.
Even if the United States were a necessary party, it could be joined. Federal Rule 19(a)(2) requires a court to order that a necessary party be joined in an action. Fed. R. Civ. P. 19(a)(2). The Court could order the United States to be joined as a defendant under Bankruptcy Rule 7020 and Federal Rule 20(a)(2). Fed. R. Bankr. P. 7020 ; Fed. R. Civ. P. 20(a)(2). While PWE suggests that the United States could not be so joined because of the doctrine of sovereign immunity, this analysis misses 11 U.S.C. § 106, which provides for the abrogation and waiver of sovereign immunity under certain circumstances applicable here. 11 U.S.C. §§ 106(a)(1), (a)(3) (citing 11 U.S.C. § 363 ). The United States was a party to the Settlement Agreement, which was approved under 11 U.S.C. § 363. Thus, the sovereign immunity of the United States was waived under 11 U.S.C. § 106, and the Court could order the United States to be joined as a party in this adversary proceeding if necessary.
Finally, even if the United States was necessary and could not be joined, the adversary could still "continue in equity and good conscience without" it. U.S. ex rel. Steele, 135 F.3d at 1251. Neither the United States, nor any other party, will be prejudiced by continuing without the United States. PWE has not alleged prejudice, nor persuasively explained why the United States must be joined. The United States voluntarily removed itself from the Settlement Agreement when it returned the money and assets after the forfeiture was reversed. PWE has not met its burden to show why resolution of the current matter requires the United States to be pulled back in.
Because the Court has found that Bala has standing to prosecute this adversary and that that United States is not an indispensable party, the Court will consider the merits of the summary judgment motions.
II. Bala's Motion for Summary Judgment
As noted, Bala moves for summary judgment. Summary judgment is appropriate when "the record, when viewed in the light most favorable to the non-moving party, shows there is no genuine issue of material fact and the moving parties are entitled to judgment as a matter of law." Graning v. Sherburne Cnty., 172 F.3d 611, 614 (8th Cir. 1999) ; see also Fed. R. Civ. P. 56(c) ; Myers v. Richland Cnty., 429 F.3d 740, 750 (8th Cir. 2005). "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Here, the parties agree on the material facts, but disagree about how the law applies to those facts. In particular, they agree on what the Settlement Agreement and Order approving it say, and what related events occurred. They disagree about the legal effect of the relevant documents and events.
(a) Jurisdiction
Bala first argues for summary judgment on the grounds that the Court did not have jurisdiction to approve the Settlement Agreement. Bala argues that the District Court, not the Bankruptcy Court, has jurisdiction over criminal forfeiture matters. Bala notes that criminal *688forfeiture is not a core proceeding and concludes that this Court did not have jurisdiction to enter its Order approving settlement when the debt at issue involved a criminal forfeiture. Bala cites a number of cases to support this contention. GuildMaster. Inc. v. United States (In re GuildMaster, Inc. ), Bankr. No. 12-62234, 2013 WL 1331392 (Bankr. W.D. Mo. Mar. 29, 2013) ; In re Ankoanda, 495 B.R. 599 (Bankr. N.D. Ga. 2013) ; In re Fidler, 442 B.R. 763 (Bankr. D. Nev. 2010) ; In re Medlin, 269 B.R. 591, 594 (Bankr. E.D.N.C. 2001). Bala relies on GuildMaster in particular. Bankr. No. 12-62234, 2013 WL 1331392. There, the court noted that: "[A]ll of the relief sought... necessarily involve the interpretation and application of the criminal statutes at issue in a pending criminal matter.... As a result, I find that this Court lacks jurisdiction...." Id. at *8. Bala argues that, for the same reasons note in GuildMaster. that the Court lacked jurisdiction to dispose of RSI's forfeiture by approving the Settlement Agreement. This Court disagrees.
Approving the Settlement Agreement here did not "necessarily involve the interpretation and application of the criminal statutes at issue in a pending criminal matter." Guildmaster, Bankr. No. 12-62234, 2013 WL 1331392, at *8. The forfeiture judgment had already been rendered. The United States had a substantial claim against RSI's bankruptcy estate based on that forfeiture order. The Settlement Agreement addressed and disposed of the property subject to forfeiture as between the United States and RSI. In approving the Settlement Agreement, the Court never had to interpret or apply any criminal statutes. The Bankruptcy Court simply exercised authority over the adjustment of the debtor-creditor relationship, a key facet of a bankruptcy court's jurisdiction. 28 U.S.C. § 157(b)(2)(O).
Moreover, Bala's attack on this Court's judication is barred by the doctrine of res judicata. The Court already found in the Order approving the Settlement Agreement that: "This Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157 and 1334 [and] The Motion is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (E), (M), (N) and (O)." In re Racing Services, Inc., Bankr. No 04-30236, Docket No. 470 at 2. The case law is clear that "[a] court's determination of its own jurisdiction is subject to the principles of res judicata." In re Heritage Org. LLC, 459 B.R. 911, 919-20 (Bankr. N.D. Tex. 2011). subsequently aff'd sub nom. In re Heritage Org., LLC, 544 F. App'x 512 (5th Cir. 2013), and subsequently aff'd sub nom. In re Heritage Org., LLC, 544 F. App'x 512 (5th Cir. 2013) (internal quotation marks omitted). "Res judicata, or claim preclusion, provides that a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." In re Advanced Contracting Sols., LLC, 582 B.R. 285, 298 (Bankr. S.D.N.Y. 2018).
Bala could have raised the issue of the Court's jurisdiction when the Order was entered, or she could have appealed it. She was a party to the proceeding and had a full and fair opportunity to challenge the Court's jurisdiction. She did not raise the issue at that time or appeal the Order on the basis of jurisdiction. The Court's determination of its jurisdiction is entitled to res judicata effect on the undisputed facts of this case.
The only other permissible means by which a party may challenge a court's finding that it had jurisdiction is to bring a challenge under rule 60(b). In re TLFO, LLC, 572 B.R. 391, 429 (Bankr. S.D. Fla. 2016). Bala did not bring her substantive challenge under rule 60(b), instead *689she brought this motion for declaratory judgment. "[T]he Defendants merely filed Counterclaims seeking declaratory judgments-they did not seek to actually overturn the Sale Order. The Court believes this constitutes an impermissible collateral attack of the Sale Order... In the absence of an appeal of a final sale order, the only manner in which a sale order may be challenged is through Rule 60(b)." Id. at 429-30 (footnote omitted).
Bala's motion for declaratory judgment was not the proper vehicle to bring substantive challenge to the Court's jurisdiction. In spite of Bala's procedural error, the Court will examine her challenge as if it had been brought under the correct vehicle, Rule 60(b).
Rule 60(b) states that a court "may relieve a party... from a final judgment, order, or proceeding [because]... the judgment is void...." Fed. R. Civ. Pro. 60(b). If an order or judgment was entered without jurisdiction then it is void, and a party may seek relief under 60(b). Proving a claim under 60(b)(4), however, is no easy task.
Because a court's determination that it has subject-matter jurisdiction to enter a judgment is res judicata-that is, only susceptible to direct review, not collateral attack-60(b)(4) motions (a form of collateral attack) premised on a lack of subject-matter jurisdiction would seem to always be foreclosed by res judicata. Courts finessed this paradox by carving out an exception to the preclusive effect of jurisdictional determinations when those determinations were inarguably wrong. The arguable basis rule is that exception
In re Alma Energy, LLC, 521 B.R. 1, 19 (Bankr. E.D. Ky. 2014).
The "arguable basis" rule is so named because a court's ruling on its own jurisdiction will not be overturned so long as there is some "arguable basis" that it had jurisdiction. A judication challenge under Rule 60(b) will "succeed only if the absence of jurisdiction was so glaring as to constitute a 'total want of jurisdiction' or a 'plain usurpation of power' so as to render the judgment void from its inception." Kocher v. Dow Chem. Co., 132 F.3d 1225, 1230 (8th Cir. 1997) (emphasis supplied) (quoting Kansas City S. Ry. Co. v. Great Lakes Carbon Corp., 624 F.2d 822, 825 (8th Cir. 1980) ). This is because "federal courts have 'jurisdiction to determine jurisdiction,' that is, 'power to interpret the language of The jurisdictional instrument and its application to an issue by the court.' " Kansas City S. Ry. Co., 624 F.2d at 825 (quoting Stoll v. Gottlieb, 305 U.S. 165 at 171, 59 S.Ct. 134, 83 L.Ed. 104 (1938) ). As a result, "error in interpreting a statutory grant of jurisdiction is not equivalent to acting with total want of jurisdiction." Kansas City S. Ry. Co., 624 F.2d at 825.
Even if the Court took Bala's jurisdiction arguments at face value, she has not alleged an "absence of jurisdiction... so glaring as to constitute a 'total want of jurisdiction' or a 'plain usurpation of power....' " Kocher, 132 F.3d at 1230 (internal citations omitted). Bala has failed to make a showing necessary for relief under Rule 60(b).
Bala's jurisdiction challenge fails on the merits. This Court had jurisdiction to enter the Order approving the Settlement Agreement. The Court's finding that it had jurisdiction within the Order approving the Settlement Agreement is subject to res judicata. Bala's motion for declaratory judgment is an improper vehicle for her substantive challenge and even if she'd brought her challenge under the correct vehicle, Rule 60(b), she would fail. For the forgoing reasons, the Bala's motion for *690declaratory judgment that the Settlement Agreement is void due to lack of jurisdiction is denied.
(b) Mutual Mistake
Bala also argues that the parties to the agreement made it based on the mutual mistake that the forfeiture was valid. Bala points to Trustee's statements in support of the Settlement Agreement noting that the impetus for the settlement was the substantial and looming forfeiture to the United States. Bala concludes that, when the forfeiture was later invalidated on appeal, it was revealed that the entire agreement was premised on a mutual mistake. Bala argues that, under North Dakota law, the doctrine of mutual mistake renders that the Settlement Agreement voidable and that the parties are required to take action to void the contract.
The doctrine of mutual mistake allows a court to reform or revise a contract where it finds the contract does not truly express the intent of the parties due to a mistake of fact. See N.D.C.C. § 32-04-17. Courts do not grant this remedy lightly. "The party seeking reformation of a written instrument must establish by clear and convincing evidence that the document does not state the parties' intended agreement." Johnson v. Hovland, 795 N.W.2d 294, 299 (N.D. 2011). "Courts grant the 'high remedy of reformation' only upon the 'certainty of error.' " Id. (quoting Ell v. Ell, 295 N.W.2d 143, 150 (N.D. 1980) ).
The doctrine of mutual mistake sets a high bar for proof that no agreement was reached. Bala has not presented "clear and convincing evidence that the document does not state the parties' intended agreement." Id. Trustee and PWE both argue that there was no mutual mistake. They both state that the Settlement Agreement accurately reflected their intentions at the time.
Even if there were grounds for this Court to find mutual mistake, one of the parties to the Settlement Agreement would need to take action to void it. A finding of mutual mistake makes the contract voidable, not void. Armstrong v. United States, 277 F.Supp.2d 1040, 1044 (D.N.D. 2003) ("A mutual mistake alone does not, as the Armstrongs suggest, render a contract void or without legal force and binding effect under state law. Rather, it renders the contract voidable"). The fact that a contract is voidable does not, as Bala states, mean that a party to the contract must take action to void it. Armstrong, which Bala cites to support her argument that a party must take action to void a contract where there are grounds for mutual mistake, reached the exact opposite conclusion. Id. Armstrong found that the contract in question, which was potentially voidable under the doctrine of mutual mistake, was not void because the parties failed to take action to void it. Id. ("Regardless of whether the assignment was voidable, the fact remains that it was never voided and any efforts to void the assignment were never followed through to completion").
Bala contends that, although no party came before a court claiming mutual mistake, the parties nonetheless voided the Settlement Agreement through their conduct. The United States returned $132,500 to RSI's bankruptcy estate along with the other property. Trustee accepted and disposed of the returned property without objection. Bala posits that these actions show a tacit acknowledgement by the United States and Trustee that the Settlement Agreement was based on a mutual mistake. She argues that the United States' act of returning the money and property and Trustee's act of accepting it, *691were all that was required to void the contract under the doctrine of mutual mistake.
The Court does not agree. The United States returning the money and property and Trustee accepting it does not sufficiently establish that the entire Settlement Agreement was premised on a mutual mistake and voided. Even if these actions alone were sufficient to satisfy the doctrine of mutual mistake, Bala would have shown, at most, that the agreement was voided between the United States and Trustee. Bala has made no showing that the Settlement Agreement was void between Trustee and PWE.
III. Severability
PWE points out that even if the Court finds that the Settlement Agreement was voided between the United States and Trustee, it remains in full force between PWE and Trustee because it is severable. Severability is a contract issue. "The language of a contract is to govern its interpretation if the language is clear and explicit and does not involve an absurdity." N.D.C.C. § 9-07-02. "A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties." N.D.C.C. § 9-07-08.
The Settlement Agreement contains the following severability provision:
Partial Invalidity. Any provision of this Agreement which is found to be invalid or unenforceable by any court in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability, and the invalidity or unenforceability of such provision shall not affect the validity or enforceability of the remaining provisions hereof.
PWE's Exhibit l at 4.
The plain language of the severability clause makes clear that the Settlement Agreement is to remain effective even if a portion is invalidated. In the absence of substantial evidence to the contrary, the Court assumes that the unambiguous language of a contract reflects the parties' intentions. Here, the contract language is clear. PWE and Trustee both attest that they intended the severability clause to have its plain meaning at the time they entered into the Settlement Agreement. The severability clause makes clear that, regardless of the actions of the United States, the contract remains enforceable between Trustee and PWE.
Even if the Settlement Agreement did not contain a severability clause, the Court would not assume that acts of rescission by one or two parties to a multi-party contract invalidate the entire contract. Under North Dakota law, a contract is severable, even in the absence of a clear severability clause, if the contract has two or more parts that are "not necessarily dependent on each other." Hofmann v. Stoller, 320 N.W.2d 786, 789 (N.D. 1982). The test is "whether or not the parties consented to all the promises as a single whole, so that there would have been no bargain whatever if any promise or set of promises were struck out." Id."Whether or not a contract is severable ordinarily depends upon such factors as 'the terms of the contract, its subject matter, and other circumstances disclosed by the evidence, including the conduct of the parties.' " Matter of Guardianship of Sorum, 273 N.W.2d 710, 712 (N.D. 1979) (quoting Kopald Elec. Co. v. Mandan Creamery & Produce Co., 76 N.D. 503, 37 N.W.2d 253, 256 (1949) ).
*692There are two distinct parts to the Settlement Agreement. There is the part between Trustee and the United States and the part between Trustee and PWE. These two parts are related only in the sense that they both settle claims and dispose of property of the bankruptcy estate. They are not "dependent" on each other. Even if the Court did not find the severability clause enforceable, which it does, the parties' inclusion of that clause in the contract is further evidence that the parties intended the agreement to be severable. The actions of the parties also strongly indicate that they intended it to be severable. The United States returned the property to the bankruptcy estate over a decade ago. Since that time, neither PWE nor Trustee has taken any actions to indicate that they consider the Settlement Agreement to be void.
There is no indication in the language of the Settlement Agreement or in the evidence presented by the parties that "the parties consented to all the promises as a single whole" such that the invalidity of one portion would invalidate the entire agreement. Hofmann, 320 N.W.2d at 789. This Court finds that under the terms of the agreement and North Dakota law, the Settlement Agreement is severable. The Court further finds that any action to void the agreement between Trustee and the United States has no impact on the continuing validity of the Settlement Agreement between Trustee and PWE.
IV. PWE's 12(b)(6) Motion to Dismiss and Motion for Summary Judgment.
In addition to its motion to dismiss for lack of standing and failure to join a necessary party, addressed above, PWE filed a Motion to Dismiss for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). In the alternative, PWE moves for a motion for Summary Judgment. If the Court considers matters outside the pleadings in ruling on a 12(b)(6) motion to dismiss, it must treat it as a motion for summary judgement under Federal Rule 56. Fed. R. Civ. P. 12(d). In ruling on PWE's motion, the Court has considered matters outside the pleadings and thus treats the motion as one for summary judgment.
Summary judgment is appropriate when "the record, when viewed in the light most favorable to the non-moving party, shows there is no genuine issue of material fact and the moving parties are entitled to judgment as a matter of law." Graning v. Sherburne Cnty., 172 F.3d 611, 614 (8th Cir. 1999). As stated in the background section above, the parties do not present any factual dispute; their dispute involves only how the law should be applied to the agreed upon facts.
Bala's complaint contains two counts: (1) the Settlement Agreement is void because this Court lacked jurisdiction to approve it, (2) the Settlement Agreement is void due to mutual mistake and was voided by the United States when it returned property to RSI's bankruptcy estate.
Both of these arguments are fully addressed above. Viewed in the light most favorable to Bala, the Court finds that she cannot prevail on count one because this Court had jurisdiction to approve the Settlement agreement and the Court's finding that it had jurisdiction is subject res judicata. Bala cannot succeed on count two because, even if the Settlement Agreement was voided between the United States and Trustee, the Court finds that the agreement is severable such that it is still effective between PWE and Trustee. Because Bala cannot succeed on either count of her complaint, PWE is entitled to judgement as a matter of law.
*693PWE's remaining arguments regarding 11 U.S.C. § 363(m) and statutes of limitations are moot as the Court has determined it is entitled to summary judgment.
CONCLUSION
WHEREFORE, PWE's Motion to Dismiss for Lack of Standing is DENIED.
FURTHER, PWE's Motion to Dismiss for Failure to Join a Necessary Party is DENIED.
FURTHER, Bala's Motion for Summary Judgment is DENIED.
FURTHER, PWE's Motion for Summary Judgement is GRANTED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501823/ | Joseph G. Rosania, Jr., United States Bankruptcy Judge
This matter comes before the Court on the objection filed by the Chapter 13 Trustee ("Trustee") to the Debtors' motion to confirm their Chapter 13 Plan ("Plan"), on the basis of eligibility.1
The issue presented in this case has sparked a wave of cases around the country recently, starting in October 2017, with a case written as recently as last week on the subject. Three cases agree with the Trustee's position. See In re Mendenhall , 2017 WL 4684999 (Bankr. D. Idaho October 17, 2017), In re Bailey-Pfeiffer , 2018 WL 1896307 (Bankr. W.D. Wis. March 23, 2018) ; and *694In re Petty , 2018 WL 1956187 (Bankr. E.D. Tex. April 24, 2018). Two cases agree with the Debtors' position. See In re Pratola , 578 B.R. 414 (Bankr. N.D. Ill. 2017) and In re Fishel , 583 B.R. 474 (Bankr. W.D. Wis. March 30, 2018).
Debtors Joseph A. Alonzo and Cynthia A. Alonzo ("Debtors") filed for relief under Chapter 13 of the Bankruptcy Code on November 17, 2017. It is their first bankruptcy case. They filed their Plan a day later. The Trustee objected to the Plan on December 22, 2017. The Court held several confirmation status conferences, and must resolve the Trustee's threshold objection that the Debtors are not eligible for relief under chapter 13 because their unsecured debt exceeds the debt limitations for unsecured debt for chapter 13 debtors.
The Trustee's position, which is reflected in the Mendenhall , Bailey-Pfeiffer , and Petty cases, is that because Debtors exceed the chapter 13 debt limitations, they are not eligible for chapter 13 relief, and their case must either be dismissed or converted to a case under chapter 7 or chapter 11.
The facts are not in dispute. The Debtors are married with four dependents, including a granddaughter. Mr. Alonzo works for Bennett's Barbeque and is in the Army Reserves. Mrs. Alonzo is a college instructor, and they are showing gross income of $8,200 monthly. They own their home in Fort Collins, which they are trying to save through the bankruptcy, and they owe some taxes. The Plan they filed provides for a monthly payment of $363 for 60 months, so they have committed to the five-year chapter 13 plan period. The total they are going to pay in to the Plan is around $21,780, most of which will pay administrative expenses, taxes, and a cure on one of the secured debts. The Plan provides very little for unsecured creditors.
The Debtors argue, based on this new wave of cases that has been created because of the heartburn that our country has over student loans, that because a majority of their unsecured debt is student loan debt, such debt is not cause for dismissal of their chapter 13 case because the standard is the best interest of the creditors and bankruptcy estate, the decision to convert or dismiss is uniquely within the discretion of the bankruptcy court, and the Court should exercise such discretion and allow them to continue in chapter 13 because the creditors and Debtors will fare better in a chapter 13 case with a repayment plan, than the alternatives. They also assert that because § 1307 uses the words "may" dismiss and not "shall," and because exceeding the debt limitation is not one of the eleven enumerated reasons for cause for dismissal, the Court should examine the legislative history and public policy behind the Bankruptcy Code, as did Judge Baer in the Pratola case.
The parties briefed the legal issues. The Court has jurisdiction over the subject matter of this core proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A), as it involves a matter concerning the administration of the estate.
The Debtors owe, in their words, "massive student loan debt." Their summary of schedules reflects nonpriority unsecured debts of $458,283. Certain student loan creditors have filed unsecured claims in this case totaling $398,048. Since the 11 U.S.C. § 109 eligibility standard for chapter 13 debtors is currently $394,725, there is no dispute the Debtors owed more than the debt limitation for noncontingent, liquidated unsecured debts on the date of filing.
The Bankruptcy Code contains debt limitations for chapter 13 debtors. The debt limitation has been increased by Congress several times and 11 U.S.C. § 104 provides *695for the adjustment of the dollar amounts for inflation every three years. 11 U.S.C. § 109(e) provides that "only an individual ... that owes, on the date of filing the petition, noncontingent, unliquidated, unsecured debts of less than $394,725...may be a debtor under chapter 13 of this title." 11 U.S.C. § 1307(c) provides, "the court may convert a case under ... chapter 13 to a case under chapter 7 of this title, or may dismiss a case under ... chapter 13, whichever is in the best interest of creditors and the estate, for cause." The Court must examine the enumerated factors under this section on a case-by-case basis.
The burden of proof is on the Debtors to confirm their Plan. To rule on the motion to confirm and objection, the Court must resolve a legal issue with respect to which there is a split of authority.
The Debtors cite the recent case of In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. 2017) in support of their argument. In Pratola , the student loan debt of the debtor alone exceeded the chapter 13 debt limitations. The chapter 13 trustee moved to dismiss the case because the debtor exceeded the chapter 13 debt limitations and the debtor objected. The bankruptcy court found that although the debtor exceeded the chapter 13 debt limitations, it did not find cause to dismiss the case. The bankruptcy court ruled that ineligibility for chapter 13 relief is not an absolute cause for dismissal and that the court has discretion to dismiss or not dismiss a case for cause because the statute uses the word "may" and not "shall." The court therefore found the statute ambiguous, allowing it to examine public policy on this issue.
The court found that allowing the debtor to proceed in chapter 13 would serve public policy because there would be funds available to remain current on educational debt, pay a dividend to general unsecured creditors and obtain a fresh start. The Pratola case focused on the well known fact that educational costs in our country are rising much more than the paltry three-year increases in the chapter 13 debt limitation. Pratola was recently followed in In re Fishel , 583 B.R. 474 (Bankr. W.D. Wis. March 30, 2018). Thus, those two cases stand for the proposition that the bankruptcy court, as a court of equity, has discretion to allow debtors to continue in chapter 13 even though their unsecured debts exceed the limitation. The commentators have found that Judge Baer, by finding the chapter 13 unsecured debt limit fails to account for the increasing amount of educational debt, essentially erased chapter 13 debt limits on student loans by judicial fiat.
The opposing cases hold there is no ambiguity, and that if you are ineligible for chapter 13 relief, it is cause for dismissal. In the case of In re Bailey-Pfeiffer, 2018 WL 1896307 (Bank. W.D. Wis. Mar. 23, 2018), similar to this case and the Pratola case, the chapter 13 unsecured debt limitation was exceeded by the student loan debt alone. The bankruptcy court analyzed the language of the statute and concluded there was no ambiguity. It concluded the plain terms of the Bankruptcy Code require dismissal of a case not eligible for chapter 13. It recognized the following equitable arguments: (i) Congress enacted debt limitations to keep large business owners from filing chapter 13 to avoid the more stringent requirements of a chapter 11 case; (ii) it would be in the best interest of creditors to allow debtors to continue under chapter 13 and pay creditors; and (iii) the Bankruptcy Code treats educational debts differently from other debts, in certain circumstances. However, the court found the words of the statute were clear on its face that an individual who is ineligible to be a chapter 13 debtor cannot continue in chapter 13. The courts in the *696Mendenhall and Petty cases used similar analyses to reach the same conclusion.
After careful consideration of the issue, the Court agrees with the reasoning of the Bailey-Pfeiffer line of cases. The statute is clear on its face that a debtor is not eligible for chapter 13 if such debtor exceeds the unsecured debt limitations. If the debtor is not eligible, the debtor cannot proceed in a chapter 13 case. Although ineligibility is not expressly identified as cause under 11 U.S.C. § 1307(c), simple logic indicates ineligibility is cause for dismissal. The Court may only confirm a chapter 13 plan if it "complies with the provisions of this chapter and with the other applicable provisions of this chapter." U.S. Student Aid Funds v. Espinosa, 559 U.S. 260, 277, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010). Other courts have reached the same conclusion. In re Day, 747 F.2d 405, 407 (7th Cir. 1984) (affirming dismissal when a debt deemed to be unsecured caused the debtor to exceed the unsecured debt limit); In re Salazar, 348 B.R. 559 (Bankr. D. Colo. 2006) (eligibility is a threshold determination and a finding a debtor is ineligible simply means debtor has the right to dismiss the chapter 13 case or convert to a chapter under which debtor is eligible); and In re Dobkin, 12 B.R. 934, 936 (Bankr. D. Ill. 1981) (dismissing case after debtors amended their schedules post-confirmation to add unsecured debt that caused them to exceed the limit).
Chapter 13 is one of the most important laws we have in our country, and it has been referred to as a "social insurance policy." Many districts in our country have thousands of chapter 13 cases. So chapter 13 works, but unfortunately, I cannot legislate from the bench, change the law, or ignore the plain language of the statute.
Our country is faced with $1.48 trillion of student loan debt (federal.reserve.gov). The questions of whether chapter 13 debt limitations should be raised generally, or just as to student loan debts, or whether and to what extent the dischargeability standards for student loan debt need to be relaxed are legislative decisions for the halls of Congress. Currently, the standard for discharging student loan debts is a high threshold of undue hardship. While the bankruptcy courts in the Pratola and Fishel cases offer compelling policy arguments, courts faced with a clear statutory command may not rewrite the Bankruptcy Code.
Thus, the Court orders the Debtors have ten days from the date of this order to convert this case to a case under either chapter 7 or chapter 11, failing which this case shall be dismissed without further notice or hearing.
On May 4, 2018, the Court issued an oral ruling on the Motion, and appropriate orders have been entered. This ex post facto Memorandum Opinion details the reasoning behind the Court's ruling, in order to aid practitioners in the district. See In re Sunland, Inc. , 2014 WL 7011747 (Bankr. D. N.M. 2014) at *1 (citing, inter alia , In re Dow Corning Corp. , 198 B.R. 214, 218-19 (Bankr. E.D. Mich. 1996). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501824/ | Elizabeth E. Brown, Bankruptcy Judge
THIS MATTER is before the Court on the Objection of David E. Lewis, chapter 7 trustee (the "Trustee") to the Debtors' Amended Claim of Exemption. To resolve this dispute, the Court must interpret the 2005 amendments to 11 U.S.C. § 522(b)1 to determine whether the Debtors are able to claim a homestead exemption. Having considered the parties' briefs, the Court hereby FINDS AND CONCLUDES:
The Debtors filed this chapter 7 case on May 10, 2017. Shortly before filing, they moved from Colorado to Illinois. The venue restrictions set forth in 28 U.S.C. § 1408(1) require individual debtors to file bankruptcy in the place of residence where *699they had lived for the greatest portion of the six-month period prior to filing. They had resided in Colorado from September 2011 through April 2017.2 Thus, they were required to file in Colorado instead of their new home state.
Prepetition, the Debtors withdrew $28,900 from their IRA account to purchase a home in Decatur, Illinois (the "Property"). On the date of their bankruptcy, they lived in the Property and owned it free and clear of any liens or encumbrances. They initially claimed a homestead exemption for it under Colo. Rev. Stat. §§ 38-41-201(1)(a), 38-41-201.6 and 38-41-202, to which the Trustee timely objected. The Debtors then filed an amended claim of exemption, relying on both Colorado law and § 522(d)(1), to which the Trustee still objected.
I. THE PRIOR VERSION OF § 522(b)
When debtors move from one state to another shortly before filing bankruptcy, it affects not only where they must file the case, but it may also affect what exemptions they can claim. The Bankruptcy Code has a choice of law provision to govern this determination in § 522(b). Prior to 2005, § 522(b)(2)(A) contained the following domiciliary provision:
(2)(A) any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition at the place in which the debtor's domicile has been located for the 180 days immediately preceding the date of the filing of the petition, or for a longer portion of such 180-day period than in any other place ....
11 U.S.C. § 522(b)(2)(A) (2000) (amended 2005) (emphasis added). Thus, wherever the debtor lived for the greater portion of the six months prior to filing would be considered his domicile for purposes of claiming exemptions. This dovetailed nicely with the venue statute. In most cases, the state where the debtor had to file his case would also provide the applicable state law for claiming his exemptions.
However, the application of this domiciliary provision sometimes caused debtors to lose their exemptions. Many states have residency and property location restrictions on their exemptions. Some state exemption laws provide that they only apply to residents of the state. See, e.g. , Ind. Code § 34-55-10-2(c). Thus, if Indiana's exemption law applied under this formula and a debtor had moved his home and all of his possessions from Indiana to another state before filing, Indiana would deny him the use of any of its exemptions. A residency requirement coupled with a broadly worded opt-out statute could leave a debtor with no ability to substitute with bankruptcy exemptions. Such was the case in In re Hawkins , 15 B.R. 618 (Bankr. E.D. Va. 1981), where the court found the debtor could not claim Virginia exemptions because she was no longer a Virginia resident and Virginia had opted out of federal exemptions for all debtors. The court declined to strip the debtor of all exemptions, however, instead fashioning a de facto safety net by its conclusion that Virginia's residency requirement meant Virginia law was not "applicable to" the debtor under the prior version of § 522(b)(1) and, therefore, the debtor could choose the federal exemptions.
Colorado is one of many states that has a property location requirement. For *700its personal property exemptions there is no such requirement, but there is in its homestead statute:
Every homestead in the state of Colorado shall be exempt from execution and attachment arising from any debt, contract, or civil obligation not exceeding in actual cash value in excess of any liens or encumbrances on the homesteaded property in existence at the time of any levy of execution thereon: (a) The sum of seventy-five thousand dollars if the homestead is occupied as a home by an owner thereof or an owner's family....
Colo. Rev. Stat. § 38-41-201(1) (emphasis added). This unambiguous language dictates that it only applies to real property located within the state of Colorado. See also In re Jevne , 387 B.R. 301, 303-04 (Bankr. S.D. Fla. 2008) (plain language of Colorado's homestead exemption explicitly limits application to property within the state); In re Kelsey , 477 B.R. 870, 874 (Bankr. M.D. Fla. 2012) (same). Thus, the Debtors in this case cannot use the Colorado statute to exempt their Illinois home.
II. SECTION 522(B) AND THE BAPCPA AMENDMENTS
With the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Congress made two significant changes to § 522(b). It lengthened the domiciliary requirement in subsection (3)(A) and it added a safety net in an unnumbered paragraph following subsection (3)(C).3 For ease of reading, the Court has eliminated some language, highlighted other language, and added shorthand references for key provisions. In relevant part, it provides:
(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection ....
(2) Property listed in this paragraph is property that is specified under subsection (d) [the "bankruptcy exemptions "], unless the State law that is applicable to the debtor under paragraph (3)(A) specifically does not so authorize. [This last clause is referred to as the "Opt-out Clause "].
(3) Property listed in this paragraph is-
(A) subject to subsections (o) and (p), any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition [the "non-bankruptcy exemptions "] to the place in which the debtor's domicile has been located for the 730 days immediately preceding the date of the filing of the petition [the "Qualifying Period "] or if the debtor's domicile has not been located in a single State for such 730-day period, the place in which the debtor's domicile was located for 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than in any other place [the "Tiebreaker Period " and this paragraph as a whole is referred to as the "Domiciliary Provision "];
(B) ...; and
(C) ....
*If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, *701the debtor may elect to exempt property that is specified under subsection (d). [This paragraph is referred to as the "Hanging Paragraph " or the "Safety Net "].
11 U.S.C. § 522(b) (2005) (emphasis added).
Under the prior version of this statute, the bankruptcy court looked to where the debtor had resided for the longest portion of the six months before filing. The amendment requires the court to look back two years pre-filing. If the debtor did not live in the same state for the entire two-year Qualifying Period, then the court has to look back even further to the six-month period immediately before the Qualifying Period. In this six-month window, or the Tiebreaker Period, the court must determine where the debtor lived for the longest portion. This formula is almost always going to make applicable the law of the state immediately preceding the debtor's move to his new state. However, in rare cases, a debtor might reside in more than two states in the two and one-half years prior to bankruptcy. For example, if a debtor lived in Kansas during the greater portion of the Tiebreaker Period, then moved to Colorado for most of the Qualifying Period, and finally moved to Illinois shortly before filing, then in this example, the formula would make Kansas law the governing law.
Under both the prior version and the amendments, this statute has always given debtors two choices for claiming exemptions. They may choose to exempt the property listed in § 522(d) (the "bankruptcy exemptions") or property designated as exempt under applicable local, state, and non-bankruptcy federal law (the "non-bankruptcy exemptions"). There is, however, one large exception. Section 522(b)(2) allows states to "opt-out" of the bankruptcy exemptions, thereby preventing their residents from claiming the bankruptcy exemptions. Thirty-two states have opted out. Colorado is among them. Colo. Rev. Stat. § 13-54-107.
III. INTERPRETING THE 2005 AMENDMENTS
In lengthening the domiciliary requirement for claiming non-bankruptcy exemptions, Congress sought to curb forum shopping before a bankruptcy filing. Some legislators believed that the prior law's 180-day period made it too easy for debtors to relocate to states with more generous exemption laws, especially those with more generous homestead exemptions. Texas, Florida, Kansas, Iowa, Arkansas, and Oklahoma have unlimited homestead exemptions, meaning that their debtors may exempt an unlimited amount of home equity. Tex. Property Code Ann. §§ 41.001(a) and 41.002, Fla. Const. art. X, § 4 (a)(1), Kan. Const. art. 15, § 9, Iowa Code § 561.16, Ark. Const. art. 9, §§ 3 - 5, Okla. Const. art. XII, § 2, Okla. Stat. tit. 31, § 2. By way of contrast, Colorado provides a homestead exemption of only $75,000 of equity or $105,000 if the debtor is elderly or disabled. Colo. Rev. Stat. § 38-41-201(1). By requiring debtors to live in a state for two years or more prior to claiming a state's exemptions, Congress endeavored to restrict the "mansion loophole." H.R. Rep. No. 109-31, pt. 1, at 15-16 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 102. Otherwise a Colorado debtor who was attempting to shield $1,000,000 in non-exempt assets could convert those assets to money and then purchase a mansion in Texas and move to Texas to claim its unlimited homestead exemption, thereby shielding the $1,000,000 from his creditors.
With the addition of a Safety Net in the Hanging Paragraph, Congress clearly signaled it did not want debtors to lose their exemptions due to the domiciliary *702requirements in § 522(b)(3)(A). Under the former six-month requirement, some debtors had lost them and undoubtedly Congress anticipated that this would occur much more frequently with the new Domiciliary Provision's longer requirement.
In a sense, the Safety Net preempts a state's opt-out law. It does so when the combination of the Domiciliary Provision and state law restrictions deny a debtor any exemption to which he otherwise would have been entitled had he not moved out of state. Both amendments work together to disincentivize debtors from moving to obtain more generous exemptions, but not to leave them without any exemption. The debtor can "opt-in" to the bankruptcy exemptions whenever this combination causes him to lose any exemption.
While these amendments may appear to be straightforward, courts and commentators have recognized ambiguities when attempting to apply them. Despite the passage of BAPCPA more than a dozen years ago and the highly mobile society in which we live, there are relatively few published decisions interpreting these amendments. Those who have made the attempt cannot agree on its proper interpretation. No less than three interpretative camps exist.
A. The Differing Interpretations
Before describing the different interpretations, the Court wishes to acknowledge the very helpful summary of the state of the law and commentary presented by now retired Judge Eugene R. Wedoff in A Mobile Debtor Asks: Where Do I Find My Exemptions? , Bankruptcy Law Letter, Vol. 37, Issue 6 (June 2017) ("Wedoff "). This author divides the decisions and the commentary into: (1) the "Anti-extraterritoriality Interpretation"; (2) the "State-specific Interpretation"; and (3) the "Preemption Interpretation." Finally, he advocates for a hybrid between the Preemption and State-specific Interpretations, which this Court will refer to as the "Fourth Approach." This Court will now shamelessly plagiarize the author's good work.
1. The Anti-extraterritorial Interpretation
In general, this approach follows federalist principles. This means that, when federal law allows state law to determine an issue, then the court must interpret state law as the courts in that state would, regardless of the federal context in which it arises (i.e. its application in a bankruptcy case). But it further holds that a state's exemption scheme has no enforceability against property located in another state. In other words, one state's exemption laws have no extraterritorial effect on property located outside the state. "The rationale is that, in the non-bankruptcy context, exemption laws are part of 'a given state's mechanisms for the enforcement of judgments' and that one state 'cannot impose' its enforcement system on property located in another state." Wedoff at 4 (quoting In re Fernandez , 445 B.R. 790, 798 (Bankr. W.D. Tex. 2011) (" Fernandez I ") ). However, if the result of this interpretation causes a debtor to lose all his exemptions, then the Safety Net in the Hanging Paragraph would allow that debtor to claim federal exemptions.
2. The State-Specific Interpretation
On appeal, the district court reversed the bankruptcy court's ruling in Fernandez I . Fernandez v. Miller (In re Fernandez) , 2011 WL 3423373 (W.D. Tex. Aug. 5, 2011) (" Fernandez II "). It applied a "state-specific" construction. Under this approach, if the Bankruptcy Code's choice of law provisions determine that Colorado law applies, then the bankruptcy court must apply the Colorado exemptions in the same way that a Colorado state court would.
*7033. The Preemption Interpretation
The third approach, championed by Professor Laura Bartell, advocates for removing both residency and location restrictions from state exemption laws before applying them. Laura B. Bartell, The Peripatetic Debtor: Choice of Law and Choice of Exemptions , 22 Emory Bankr. Dev. J. 401 (2006) ("Bartell "). The author argues that "Congress simply incorporated by reference property types and exemption amounts in the law of debtor's former domicile and made those provisions applicable to the debtor's current domicile." Wedoff at 7. In other words, the Bankruptcy Code preempts state law to the extent of state location and residency limitations.
4. The Fourth Approach
In his article, Judge Wedoff advocates for a preemption approach to the extent that § 522(b)(1) exempts the "property listed." This language, he posits, preempts any residency requirements within state exemption law because it is the property exempted by state law that matters, not the residency of a debtor. Residency is only relevant to determining the applicable state law. But it would not erase the state's location requirements. With this interpretation, he then argues that courts should follow the State-specific Interpretation, which would require the court to take into account any other restrictions, including location requirements.
With four possible, well-reasoned interpretations of this statute, clearly § 522(b) is susceptible to varying interpretations. "[A]mbiguity exists when a statute is capable of being understood by reasonably well-informed persons in two or more different senses." Norman J. Singer & Shambie Singer, Statutes and Statutory Construction , § 45:2 at 17-18 (7th ed. 2014). Once a statute has been identified as ambiguous, the court must engage in an interpretative process to attempt to discern the legislature's intent. In doing so, "[c]ourts may consider the history of the subject matter involved, the end to be attained, the mischief to be remedied, and the purpose to be accomplished." Id. , § 45:5 at 39.
As previously mentioned, legislative history indicates that Congress was attempting to restrict the "mansion loophole" when it adopted the longer domiciliary requirements. That was the "mischief" it sought to remedy. With the Safety Net, Congress made it clear that it did not want the domiciliary restrictions to render the debtor "ineligible for any exemption."
In the Tenth Circuit, we have no binding precedent as to how to interpret this statute. The closest we come is dicta in Stephens v. Holbrook (In re Stephens) , 402 B.R. 1 (10th Cir. BAP 2009). In Stephens , the debtor moved from Iowa to Oklahoma less than two years prior to filing her chapter 7 bankruptcy. At the time she filed, she held the proceeds from the sale of her Iowa homestead in a segregated bank account in Oklahoma and she claimed these proceeds exempt under Iowa's homestead exemption. Iowa's opt-out statute applied not only to Iowa residents, but to all debtors to whom the Iowa exemption law applied under § 522(b)(3)(A). The court ultimately decided that Iowa's exemption of proceeds held from the sale of the homestead applied to property located in another state. However, it noted that the Safety Net protects debtors who are unable to claim a homestead exemption because of territorial limitations in state law. It stated that Congress intended the Safety Net to provide relief to debtors when the interrelationship between state law and the domiciliary requirements of the Bankruptcy Code would otherwise deprive them of their exemptions. 402 B.R. at 5-6.
*704Without a binding precedent, this Court must attempt to discern which of these interpretations or some other approach is most persuasive. With the Anti-extraterritorial Interpretation, the Debtor's former state's law would never apply to property in another state and, therefore, the peripatetic debtor would always have to resort to the bankruptcy exemptions. Yet the clear intent of the Domiciliary Provision is to direct the application of the former state's exemption law, not to automatically substitute state exemptions with bankruptcy exemptions. If Congress had intended that mobile debtors should not claim any state exemptions, it would have stated that any debtor who had moved from one state to another within the relevant time frame would have to claim exemptions under § 522(d)(2), bypassing the former state's law altogether.
Moreover, this Court does not find any statutory support for an Anti-extraterritorial Interpretation in § 522(b) itself. If state law expressly states that both residents and non-residents may claim its exemptions, what in § 522(b) forbids this result? The court in Fernandez I may be right that one state's exemption laws have no extraterritorial effect on property in another state. See Sandberg v. McDonald , 248 U.S. 185, 195, 39 S.Ct. 84, 63 L.Ed. 200 (1918) ("Legislation is presumptively territorial and confined to limits over which the law-making power has jurisdiction."). This question of the extra-territorial reach of state law arises beyond the narrow arena of exemption law and implicates all state collection law. This Court has long wondered whether Colorado courts would recognize a "citation lien" in states like Illinois that purport to place an automatic blanket lien on all personal property interests of a debtor against whom the creditor has obtained a judgment, regardless of the property's location in another state. See, e.g. , 735 Ill. Comp. Stat. 5/2-1402(m)(1). Whether it involves exemption law in particular, or collection law in general, a fundamental choice of law question exists as to the extraterritorial effect of another state's law. But this Court does not see any language in § 522(b) that resolves this question or attempts to do so.
One commentator has suggested that the proper inquiry is not whether state law has extraterritorial effect but whether federal law, in § 522(b), has preempted the field of state law exemptions by giving them extraterritorial effect. Bartell at 415-16. The Preemption Interpretation advocates for viewing § 522(b) as a preemption of both the residency and location requirements in any state's exemption law. This would mean that it strips state law of these particular restrictions.
Certainly, Congress has the constitutional authority to preempt state law in such a fashion, but did it do so in § 522(b) to the extent the Preemption Interpretation claims? As the Fourth Approach suggests, it effectively did so to the extent of any residency requirement. If the former state has a residency requirement for claiming its exemptions, then application of that former state's law would deny the debtor any exemptions, triggering the Safety Net's option of claiming bankruptcy exemptions. This Court also agrees with both the Fourth Approach and the State-specific Interpretation that an opt-out state's law ought to be applied to the fullest extent possible, including whatever conditions, qualifications, or restrictions it imposes on a claim of exemption.
There is a significant difference between the State-Specific and Preemption Interpretations. As mentioned, Colorado only provides a homestead exemption for real property located within the state. Under the Preemption Interpretation, we would strip this Colorado statute to remove its *705location requirement and the debtor would still receive Colorado's $75,000 homestead exemption. Under the State-specific Interpretation, we would give effect to all the conditions and limitations in state law. This would disqualify the debtor from receiving a $75,000 exemption. Instead, he would receive through the Safety Net, the bankruptcy homestead exemption of only $23,675.
B. The "Any Exemption" Ambiguity
What some of these interpretations acknowledge and others do not is that there is another ambiguity in this statute. The Safety Net provides: "[i]f the effect of the domiciliary requirement ... is to render the debtor ineligible for any exemption , the debtor may elect to exempt property that is specified under subsection (d)." 11 U.S.C. § 522(b)(3) *. There are two perfectly plausible interpretations of this two-word phrase.
The first is that the Safety Net only applies when the debtor has been denied all his exemptions. In other words, it is triggered only when it renders the debtor ineligible for "any exemption at all." This is the more restrictive reading. The more flexible interpretation is that it applies whenever the debtor is ineligible for "any exemption" or "any of his exemptions." It means the loss of any particular exemption will trigger the substitution of the counterpart bankruptcy exemption, if one exists.
The Anti-extraterritorial Interpretation never needs to reach this issue. It bypasses state law altogether because it holds that no state's law has extraterritorial reach and, therefore, the peripatetic debtor must always claim the bankruptcy exemptions. The Preemption Interpretation assumes without analysis that it applies only when the debtor has been denied all exemptions under state law. Bartell at 424.
Some of the courts applying the State-specific Interpretation have analyzed this issue and others have not. In In re Capelli , 518 B.R. 873 (Bankr. N.D. W. Va. 2014), the court discussed the issue and suggested that a debtor's eligibility for one state exemption would not preclude his use of the federal exemptions. 518 B.R. at 877, n.4. Similarly, in In re Kelsey , 477 B.R. at 878-79, the court ruled, without extensive analysis, that the debtors could use Colorado personal property exemptions and the federal homestead exemption. On the flip side, the courts in In re Katseanes , 2007 WL 2962637, *3 (Bankr. D. Idaho Oct. 9, 2007) and In re Capps , 438 B.R. 668, 673-74 (Bankr. D. Idaho 2010), interpreted the Safety Net restrictively, denying any federal exemption to a debtor who could claim some, but not all, state exemptions. Some courts, especially those upholding a debtor's right to claim a state exemption, do not mention the Safety Net at all. See, e.g. In re St. James , 560 B.R. 15 (Bankr. D. Mass. 2016). And some discuss the Safety Net, but do not decide this precise issue. See, Sheehan v. Ash , 889 F.3d 171, 174 n.4 (4th Cir. 2018) (expressly declining to reach the issue); Sheehan v. Ash , 574 B.R. 585, 589 n.2 (N.D. W. Va. 2017) (same); In re Townsend , 2012 WL 112995, *5-6 (Bankr. D. Kan. Jan. 12, 2012) (same). The court in Ku v. Brown (In re Ku ), 2017 WL 2705301, *3 (9th Cir. BAP June 21, 2017) (unpublished opinion) described the Safety Net in broad terms, saying that it applies if a debtor is ineligible for "any state exemptions," but the question this Court faces did not arise in the case. Finally, in an alternative holding in In re Long , 470 B.R. 186, 191 (Bankr. D. Kan. 2012), the court observed that the Safety Net would allow a debtor to claim federal exemptions if she could not claim state exemptions, but it did not have to decide what would happen if a debtor could claim one or more, but not all, state exemptions.
*706C. This Court's Interpretation
This Court adopts the State-specific Interpretation as well as the flexible reading of "any exemption." These two interpretations best give effect to all the provisions of § 522(b) and the purpose behind the amendments. It does not immediately bypass state law, doing violence to the Domiciliary Provision, as the Anti-extraterritorial Interpretation does. It gives greater effect to the Opt-out Clause because it keeps state law intact to the fullest extent, unlike the Preemption Interpretation. And when the State-specific Interpretation is coupled with a flexible reading of "any exemption" it prevents the combination of state law and the Domiciliary Provision from denying a debtor any of the necessities that exemptions are intended to provide.
In In re Kelsey , the court reached this same conclusion. The debtors moved from Colorado to Florida less than two years prior to their bankruptcy case and claimed their Florida home exempt under Colorado's homestead exemption statute. The court ruled that Colorado's opt-out statute prohibited them from claiming the federal exemptions and Colorado's homestead statute did not apply to real property in Florida. 477 B.R. at 873-74. The court then said that "this scenario triggers the hanging paragraph of § 522(b)(3)... [which] is in effect a savings clause." Id. at 878. The court ruled that the debtors could claim the federal homestead exemption in § 522(d)(1) for their Florida home, even though both Colorado and Florida were opt-out states. Id. (citing In re Jevne , 387 B.R. 301, 305 n.2 (Bankr. S.D. Fla. 2008) and In re Fabert , 2008 WL 104104, *5 (Bankr. D. Kan. Jan. 9, 2008) ).
This approach also fosters the underlying policies at play. "[E]xemptions in bankruptcy cases are part and parcel of the fundamental bankruptcy concept of a 'fresh start.' " Schwab v. Reilly , 560 U.S. 770, 791, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). Homestead exemptions, in particular, further the government's interest in protecting the debtor and the debtor's dependents by preserving their interest in their home. David Dorsey Distrib., Inc. v. Sanders (In re Sanders) , 39 F.3d 258, 260 (10th Cir. 1994). Given the importance exemption law places on the homestead, it is hard to imagine that Congress would have intended a restrictive reading of "any exemption," leaving many debtors with personal property exemptions, but no homestead exemption. Its aim was only to close the mansion loophole.
What this interpretation does not mean is that a debtor is assured of claiming every exemption that his new state would offer or all the exemptions in the Bankruptcy Code. The categories of property listed in paragraph (2)'s incorporation of the bankruptcy exemptions is unlikely to be identical to the categories of exempt property under paragraph (3) with the non-bankruptcy exemptions. For example, § 522(d)(5), known as the "wild card" exemption, exempts "any property" up to certain dollar limits. This is not an exemption available under Colorado's exemption law. If the Domiciliary Provision triggers the application of Colorado law, but Colorado does not have a wild card exemption, then the debtor has lost an exemption otherwise available under paragraph (2). Would the debtor in this example be allowed to claim the wild card exemption under § 522(d)(5) because applicable state law denies him this exemption? No.
Read as a whole, the statute allows a debtor to claim either bankruptcy exemptions under (2) or non-bankruptcy exemptions under (3). But if a state has opted out of the bankruptcy exemptions, then as a general rule the bankruptcy *707exemptions are not an available choice for the debtor in that state. He is stuck with the state law exemptions. If applicable state law does not provide for an exemption for a certain kind of property, then it is not the Domiciliary Provision that has harmed him, but only state law. The Safety Net is not implicated merely because the debtor cannot claim exemptions for everything available under the Bankruptcy Code or under his new state's laws. It is only applicable when state law and the Domiciliary Provision combined have caused him to lose an otherwise available non-bankruptcy exemption.
IV. APPLICATION TO THIS CASE
Under the Court's interpretation, the Debtors in this case are eligible to claim the bankruptcy homestead exemption under § 522(d)(1). It provides that a debtor may exempt "[t]he debtor's aggregate interest, not to exceed $23,675 in value, in real property ... that the debtor or a dependent of the debtor uses as a residence." The Debtors valued their Illinois home at $28,900 and the Trustee has not disputed this valuation. If the Debtors were restricted to one homestead exemption, then their home would only be partially exempt. However, the interest of each Debtor in the homestead is exempt up to the dollar limit. Thus, joint filing debtors may "stack" two bankruptcy homestead exemptions. See In re Kelsey , 477 B.R. at 879 ; In re Morgan , 2009 WL 3617613, *1 n.2 (Bankr. D. N.M. Oct. 28, 2009) ; Black Brollier Building Materials v. Truan (In re Truan) , 121 B.R. 9, 10 (Bankr. S.D. Tex. 1990). This allows them to exempt a total of $47,350 in home equity. As a result, their new home is fully exempt.
V. CONCLUSION
For the foregoing reasons, the Court hereby OVERRULES the Trustee's objection and the Debtors' Illinois homestead is hereby EXEMPT.
All references to "§" or "section" shall refer to Title 11, United States Code, unless expressly stated otherwise.
Since the Debtors lived in Colorado for five and one-half months of the six-month period preceding their bankruptcy filing, the Debtors properly filed this case in Colorado. 28 U.S.C. § 1408(1).
The Court will cite this unnumbered paragraph as § 522(b)(3) *. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501825/ | Joseph G. Rosania, Jr., United States Bankruptcy Judge
An individual debtor is ineligible for relief under Chapter 13 if such debtor's secured debts exceed $1,184,200.00 or unsecured debts exceed $394,725.00. Due to these debt limitations, in recent years, a growing number of professionals, entrepreneurs, and high net-worth individuals have sought relief under Chapter 11 to restructure their personal finances and maintain control of their businesses and investments. An individual Chapter 11 case is not merely a large Chapter 13. To the contrary, individual Chapter 11 cases present complex challenges and encapsulate the Chapter 11 doctrines of absolute priority and new value.
ISSUES
James Michael Summers ("Debtor") filed a voluntary Chapter 11 bankruptcy petition on October 13, 2016. Thereafter, he filed his Plan of Reorganization Dated April 19, 2018 (the "Plan;" Doc. No. 89).1
*709The confirmation issues the Court must determine are whether the Plan satisfies the absolute priority rule and whether the Debtor can retain his interest in property of the estate by providing new value.
BACKGROUND
The Debtor's Schedule E/F reflects a total of $450,479.00 in unsecured debt. According to the claims filed in this case, the Debtor's unsecured debt includes, but is not limited to, a priority unsecured claim held by Rachelle A. Summers ("Ms. Summers") in the amount of $45,112.22 (Claim No. 6-1), and a non-dischargeable claim for a student loan held by the U.S. Department of Education in the amount of $114,555.61 (Claim No. 4-1).
Under the Plan, Ms. Summers's claim comprises Class 8, and the Plan provides for treatment of her claim in accordance with the settlement agreement attached as Exhibit C to the Plan. Class 7 consists of all unsecured claims other than Ms. Summers's claim. The Plan provides for total payment of $30,000.00 in satisfaction of Class 7 claims (i.e., approximately a 7% distribution). Both Class 7 and Class 8 are impaired under the Plan.
The Plan also states the following:
Class 9 includes the Interests of the Debtor in his property. Class 9 is unimpaired by this Plan. On the Effective Date of the Plan Class 9 shall retain its interests in all assets owned prior to the Confirmation Date. If confirmation of this Plan is sought pursuant to 11 U.S.C. § 1129(b), all property of the Debtor which is property of the Debtor's bankruptcy case as of the Effective Date of the Plan shall remain property of the estate during the term of the Plan .
VIII § 8.1 (emphasis added).
The Court held a hearing on confirmation of the Plan on August 28, 2018 (the "Confirmation Hearing"). No objections to confirmation were filed. The Debtor, with counsel, appeared at the Confirmation Hearing and represented that only two impaired classes of creditors voted on the Plan. Specifically, Class 8 voted to accept the Plan, and Class 7 voted to reject the Plan. According to the Summary of Voting Results, only two creditors in Class 7 voted on the plan: Feldman Nagel, LLC, with a claim of $14,867.16, voted to accept the Plan, and the U.S. Department of Education, with its claim of $114,55.61, voted to reject the Plan (Doc. No. 113). The Debtor argued that, notwithstanding a dissenting class of creditors, the Plan can be confirmed under § 1129(b).
The Debtor's arguments in support of confirmation under § 1129(b) were twofold. First, the Debtor argued that the absolute priority rule is not at issue in this case because the Debtor will not receive or retain any property under the Plan. The Plan provides that all the Debtor's property which is property of the estate as of the effective date of the Plan will not revest in the Debtor upon confirmation. Rather, said property will remain property of the estate during the term of the Plan.
Alternatively, the Debtor argued that even if the Court finds that the Debtor is receiving or retaining property under the Plan, the Plan can be confirmed using the concept of new value. The Debtor contends that because the property does not revest in the Debtor but instead remains property of the estate during the term of the Plan, this contribution constitutes new value. According to the Amended Disclosure Statement (Doc. No. 102) which was previously approved by this Court (Doc. No. 106), the assets in this case are valued at *710$705,944.00, without accounting for liens and exemptions.
At the close of the Confirmation Hearing, the Court ordered (Doc. No. 117) that on or before September 14, 2018, the Debtor should file (i) authority supporting his arguments in favor of confirmation; or (ii) an amended Chapter 11 plan. On September 12, 2018, the Debtor filed the Brief in Support of Plan Confirmation Under 11 U.S.C. § 1129(b) (Doc. No. 119). No amended plan was filed.
ANALYSIS
I. The Plan does not comply with the absolute priority rule.
Section 1129 of the Bankruptcy Code sets forth the general requirements for confirmation of a Chapter 11 plan. Section 1129(a) allows for confirmation where each impaired class of creditors consents. Alternatively, § 1129(b) provides a "cram-down" mechanism that allows for confirmation without the consent of each impaired class if, among other things, the plan is "fair and equitable."
Section 1129(b)(2) outlines the criteria that must be satisfied for a plan to be deemed fair and equitable. Among the criteria is the absolute priority rule, which "requires that certain classes of claimants be paid in full before any member of a subordinate class is paid." Richard M. Allen v. Geneva Steel Co. (In re Geneva Steel Co.) , 281 F.3d 1173, 1181 n. 4 (10th Cir. 2002). This requirement is codified in § 1129(b)(2)(B)(ii), which, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), provides that:
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, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115 ....
11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added).
Section 1115, added by BAPCPA, in turn states the following:
(a) In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541-
(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
(b) Except as provided in section 1104 or a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.
11 U.S.C. § 1115.
Section 1141 governs the effect of confirmation. Under § 1141(b), "[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor." 11 U.S.C. § 1141(b).
In the years following BAPCPA, a significant split of authority developed among courts regarding the effect of its amendments on the absolute priority rule where a Chapter 11 debtor is an individual. See e.g. , Dill Oil Co., LLC v. Stephens (In re Stephens) , 704 F.3d 1279 (10th Cir. 2013) (collecting cases and analyzing the dual views of the applicability of the absolute priority rule in individual Chapter 11 cases). In Stephens , the Tenth Circuit declined *711to find that the BAPCPA amendments eliminated the absolute priority rule as applied to an individual's entire estate. See id. at 1287. Rather, the Court agreed with the view that the amendments can be best understood as preserving the status quo. See id. at 1286. To wit, only the post-petition property which § 1115 adds to an individual Chapter 11 debtor's estate is exempt from the absolute priority rule, but the absolute priority rule continues to apply to the pre-petition property defined by § 541. See id. at 1285. In so holding, the Court reversed the bankruptcy court's order confirming a Chapter 11 plan that allowed two individual debtors to "retain possession and control of their property." See id. at 1282.
The Plan in the present case attempts to circumvent the absolute priority rule by providing that, contrary to § 1141, "all property of the Debtor which is property of the Debtor's bankruptcy case as of the Effective Date of the Plan shall remain property of the estate during the term of the Plan." Thus, the Debtor contends that he will not receive or retain any property under the Plan on account of his interest (which is junior to that of Class 7). However, the Plan also provides that the Debtor will remain in possession of his assets, including his pre-petition property that falls within the purview of § 541. The Debtor maintains that his continued possession of property is not a result of the Plan, but rather by operation of § 1115. But this is a distinction without a difference. Here, as in Stephens , the Plan runs afoul of the absolute priority rule because it allows the Debtor to "retain possession and control" of prepetition property notwithstanding a senior dissenting class of creditors.
Nonetheless, the Debtor argues that if the absolute priority rule is implicated, which the Court finds that it is, the Plan can still be confirmed under the concept of new value.
II. The Debtor's proposed contribution does not satisfy the requirements of the new value exception.
The new value exception allows courts to find that an interest holder in a Chapter 11 debtor whose plan violates the absolute priority rule may in some circumstances retain the interest because they provide "new value" to the debtor, in the form of new capital or similar contributions. CRE/ADC Venture 2013, LLC v. Rocky Mountain Land Co., LLC (In re Rocky Mountain Land Co., LLC), 2014 WL 1338292 at *15 (Bankr. D. Colo., Apr. 3, 2014) (citations omitted). New value contributions must be substantial, necessary to the success of the reorganization, and equal to or exceeding the value of the retained interest in the estate. Unruh v. Rushville State Bank of Rushville, Mo. , 987 F.2d 1506, 1510 (10th Cir. 1993) (citing Case v. Los Angeles Lumber Prod. Co. , 308 U.S. 106, 122, 60 S.Ct. 1, 10, 84 L.Ed. 110 (1939).
Because the new value exception was developed with corporate debtors in mind, courts have struggled to apply the exception in the context of individual Chapter 11 cases. In re Rogers , No. 14-40219-EJC, 2016 WL 3583299, at *9 (Bankr. S.D. Ga. June 24, 2016) ; see also In re East, 57 B.R. 14 (Bankr. M.D. La. 1985) ("[i]t is easier in a corporate context to consider the concept of the injection of outside capital; when an individual is involved, it is difficult to imagine the source of such funds: perhaps a relative or friend might make a gift; perhaps there are other sources"). Indeed, some courts have expressed doubt as to whether the new value exception should ever apply to individual Chapter 11 debtors. See e.g. , *712In re Harman , 141 B.R. 878, 887 (Bankr. E.D. Pa. 1992) (noting that the new value exception should not be extended to individual Chapter 11 debtors "very far, if at all"). Courts that have applied the new value exception in this context have emphasized that, for individual Chapter 11 debtors to meet the requirements of new value, the contribution must come from a source other than the debtor. See e.g., In re Rocha, 179 B.R. 305, 307 (Bankr. M.D. Fla. 1995) ("The difficulty with extending the new value exception to an individual is that the new value must come from an 'outside' source, meaning it cannot come from the [d]ebtor himself."); In re Cipparone, 175 B.R. 643, 643 (Bankr. E.D. Mich. 1994) ("The court holds that the 'new value' exception to the absolute priority rule is inapplicable because the proposed contribution comes from the debtors themselves rather than from an outside source.").
The proposed contribution in the present case comes from the Debtor, not an outside source. The Debtor proposes to contribute "all property of the Debtor which is property of the Debtor's bankruptcy case as of the Effective Date of the Plan" (emphasis added). Therefore, to the extent that the new value exception applies in individual Chapter 11 cases, the Court finds that the Debtor has failed to satisfy the requirements of the exception.
CONCLUSION
The Court finds that the Plan does not comply with the absolute priority rule. The Court further finds that, to the extent that the new value exception applies in individual Chapter 11 cases, the Debtor has failed to satisfy the requirements of the exception. The Debtor's attempt to circumvent the absolute priority rule by manipulating whether property of the estate revests in him upon confirmation is an effort which, if permitted, would be an exception that swallows the rule.
Accordingly, it is
ORDERED confirmation of the Plan (Doc. No. 89) is denied.
IT IS FURTHER ORDERED that the Debtor shall file an amended Chapter 11 plan within 14 days from the date of this order, failing which the case will be dismissed.
As corrected by the Debtor's Notice of Filing of Errata to correct a typographical error in paragraph 2.26 of the Plan (Doc. No. 104). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501828/ | Hon. David T. Thuma, United States Bankruptcy Judge
Before the Court is plaintiff's complaint that its $30,000 claim against defendant is nondischargeable. After a trial on the merits, and for the reasons set forth below, the Court determines that the debt is nondischargeable.
I. FACTS
The Court finds the following facts:
William Crawley is the President and owner of Plaintiff, a New Mexico corporation. Mr. Crawley has known Defendant for many years; the acquaintance started when Defendant helped get Mr. Crawley his first loan.
Defendant's background is in banking. He worked as a banker in California from about 1981 through 1999. Defendant's banking career ended when he plead guilty to 24 counts of grand theft of personal property (in the nature of fraud and embezzlement) and served several years in prison. After his release, Defendant moved back to New Mexico. Defendant started a "house flipping" business in 2007 or 2008.
The Court finds that Mr. Crawley was a credible witness. The Court finds that Defendant was not a credible witness.
Plaintiff owned a restaurant in Albuquerque, New Mexico known as Murphy's Mule Barn. In late July or early August 2015, Defendant investigated whether to buy the restaurant from Plaintiff.
The parties had about 20 telephone calls and five or six meetings to discuss the sale of the restaurant. Several of the meetings were in the restaurant. Defendant personally conducted a walk-through of the restaurant and was aware of the general condition of the equipment.
On September 10, 2015, Plaintiff and Loop DL, LLC signed an asset purchase agreement for the restaurant assets. Loop is wholly owned by Defendant. The agreement was drafted by Defendant's attorney, Tim Padilla. Plaintiff did not have counsel.
The agreed-upon purchase price was $350,000, of which $50,000 was allocated to the restaurants' physical assets (tables, chairs, stoves, refrigerators, etc.). Loop agreed to pay $30,000 at closing, $20,000 15 days after closing, and sign a note for the remaining $300,000. The note was to accrue interest at 4%.
Before the agreement was signed, Plaintiff and Defendant discussed a possible all cash sale. At that time, Defendant had a Swiss bank account with at least $220,000 on deposit. The parties ultimately decided to proceed as outlined above.
The purchase agreement was signed on the same day as the closing, i.e., September 10, 2015. Loop signed the $300,000 note and delivered a cashier's check for $30,000. However, at closing Defendant borrowed $15,000 from Plaintiff, so the net cash Plaintiff received was $15,000.
The note does not contain standard terms that protect the holder in the event of a default. For example, there is no *786"acceleration clause," no grace period, no late fee, and no default rate of interest.
Defendant and Loop took possession of the restaurant immediately. Despite the prior visits to the restaurant, Defendant claims he was shocked by the condition of the restaurant and its equipment. Allegedly because of the poor condition of the equipment, Loop did not make the $20,000 payment due on September 25, 2015. The first note payment of $3,656.78 was due November 1, 2015. Loop did not make that payment, nor any subsequent note payments.
Defendant borrowed an additional $15,000 from Plaintiff before December 11, 2015, allegedly for payroll. The net effect of the second personal loan is that Plaintiff received no money for the restaurant.
Although allegedly withholding payments because of the condition of the restaurant equipment, Defendant never gave Plaintiff notice of default under the purchase agreement.1
On January 29, 2016, Plaintiff sued Loop and Defendant in state court, case no. D-202-CV-2016-00656 ("State Court Action").2 Loop filed a counterclaim for damages caused by the condition of the restaurant assets.
The action was tried on March 13 and 14, 2017, to Judge Valerie Huling. She found, inter alia:
• Defendant never repaid the $15,000 he personally borrowed from Plaintiff when he cashed the $30,000 cashier's check.
• Defendant did not repay the $15,000 payroll loan.
• The net result is that neither Loop nor Defendant made any payment of either interest or principal as required by the purchase agreement or promissory note.
• The failure to pay was a breach of the contract by Loop and Defendant, as Defendant borrowed the money that was intended for payment and used it for other purposes. In addition, no payments have been made although Defendant and Loop continue to benefit from the use of the assets.
• Considering the Defendants are continuing to benefit from the use of the property, and have breached the contract, and intentionally refused to make payments as required under the APA and the promissory note, acceleration of the amounts due under the APA and promissory note is justified.
• Plaintiff's compensatory damages resulting from the breach of contract are $350,000 plus prejudgment interest of 4% per annum on the unpaid balance, beginning September 10, 2015.
• Loop is liable for all damages awarded to Plaintiff.
• In addition, Defendant is personally liable for $30,000 of the total damages awarded to Plaintiff, as a result of the loan from Plaintiff.
• Although the actions of Defendant resulting in breach of the contract were intentional, there is insufficient evidence that he did not believe he was justified in temporarily delaying payment due to the condition of the assets and the unexpected expenses.
*787• Plaintiff is not entitled to punitive damages, as the Plaintiff has failed to prove a culpable mental state on the part of Defendant or Loop.
• Plaintiff failed to prove the elements of tortious interference with contract, fraud, negligence, or violation of the Unfair Practices Act.
• The damages incurred by Loop for breach of contract due to equipment in need of repair totaled $2,805.73.
Judge Huling also concluded:
• If the Plaintiff was contesting the limited liability status of Loop DL, LLC, Plaintiff had the burden of proving that Loop DL, LLC was not a limited liability company, and Plaintiff failed to meet that burden.
• The loan of $15,000 from the $30,000 cashier's check and the additional $15,000 payroll loan were loaned to Defendant personally and in his capacity as manager of Loop, and were never repaid.
• The intentional failure to make any payments pursuant to the APA or the promissory note is a substantial and material breach of the contracts and has resulted in compensatory damages incurred by Plaintiff in the amount of $350,000, plus prejudgment interest of 4% on the amount outstanding, beginning September 10, 2015.
• As $30,000 was loaned to Defendant in his individual capacity and to Loop, both Defendants are jointly and severally liable to pay $30,00 of the total amount awarded.
• Although intent has been proven on the part of Defendant, the requisite culpable mental state has not been proven to support a punitive damages award against any party, and therefore, no punitive damages are awarded.
On June 2, 2017, Judge Huling entered a money judgment in favor of Plaintiff against Loop for $347,194.273 and a money judgment in favor of Plaintiff and against Defendant for $30,000.
Defendant/Loop operated the restaurant until the June 2, 2017, judgment was entered. Shortly thereafter, Defendant purported to perfect a security interest in the restaurant assets, and then "repossessed" the assets.
Post-judgment, Plaintiff went to the restaurant to see if there was any way to collect. While there, Plaintiff saw Defendant removing the restaurant equipment, furniture, and dishes. By the time Plaintiff gained access to the restaurant, little tangible property remained. Defendant/Loop later sold the assets and kept the proceeds.
On September 14, 2017, Defendant filed this chapter 7 case. Plaintiff brought this adversary proceeding on December 18, 2017.
Mr. Crawley was counting on the restaurant sale to finance his retirement. Because of Defendant's and Loops' failure to pay anything, Mr. Crawley, age 74, is forced to drive a truck to earn a living.
II. DISCUSSION
A. § 523(a)(6).
Plaintiff argues that Defendant's $30,000 debt is nondischargeable under § 523(a)(6), which applies to debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." To satisfy the "willful" element of § 523(a)(6), there must be both "an intentional act and an intended harm;
*788an intentional act that leads to harm is not sufficient." In re Parra , 483 B.R. 752, 771 (Bankr. D.N.M. 2012). The debtor "must 'desire ... [to cause] the consequences of his act ... or believe [that] the consequences are substantially certain to result from it' "; See also In re Longley , 235 B.R. 651, 656 (10th Cir. BAP 1999) (quoting Dorr, Bentley & Pecha, CPA's, P.C. v. Pasek (In re Pasek) , 983 F.2d 1524 (10th Cir. 1993) ); In re Parra , 483 B.R. at 771 (quoting Longley ).
For a debtor's actions to be malicious, they must be intentional, wrongful, and done without justification or excuse. In re Deerman , 482 B.R. 344, 369 (Bankr. D.N.M. 2012) (citing Bombardier Capital, Inc. v. Tinkler , 311 B.R. 869, 880 (Bankr. D. Colo. 2004) ).4 See also Saturn Systems, Inc. v. Militare (In re Militare) , 2011 WL 4625024, *3 (Bankr. D. Colo. Sep. 30, 2011) (a "wrongful act, done intentionally, without just cause or excuse"); Tso v. Nevarez (In re Nevarez) , 415 B.R. 540, 544 (Bankr. D.N.M. 2009) (without justification or excuse); America First Credit Union v. Gagle (In re Gagle) , 230 B.R. 174, 181 (Bankr. D. Utah 1999) (without justification or excuse).
It is an open question whether intentional breaches of contract can come within § 523(a)(6). 4 Collier on Bankruptcy ¶ 523.12 [1] states "Section 523(a)(6) generally relates to torts and not to contracts." Some cases have held that no breach of contract claim, intentional or otherwise, can come within § 523(a)(6). See, e.g., In re Best , 109 Fed. Appx. 1, 4 (6th Cir. 2004) (contract claim insufficient to § 523(a)(6) purposes; some tortious conduct must be shown). Other cases have held that in certain circumstances intentional contract breach cases fall within § 523(a)(6). In re Jercich , 238 F.3d 1202, 1206 (9th Cir. 2001) ; Wish Acquisition, LLC v. Salvino , 2008 WL 182241, *3-4 (N.D. Ill.2008) (same). See also In re Barton , 465 F.Supp. 918, 924 (S.D.N.Y. 1979) (discussing the case law); Texas v. Walker , 142 F.3d 813, 823-24 (5th Cir. 1998) (claim for breach of contract and tort of conversion may arise from the same set of facts, and hence may be nondischargeable under § 523(a)(6) ).
The discussion in Rivera v. Moore McCormack Lines, Inc. , 238 F.Supp. 233 (S.D.N.Y. 1965), is informative and often cited:
Clearly the form of the judgment itself does not control and resort may be had to the entire record to determine dischargeability. Greenfield v. Tuccillo , 129 F.2d 854 (2nd Cir. 1942). An act may be merely negligent to predicate civil liability, or it may be the result of wilfulness and malice. This is an issue to be resolved before dischargeability is determined, and the theory of recovery-tort or contract-is immaterial. McIntyre v. Kavanaugh , 242 U.S. 138, 37 S.Ct. 38, 61 L.Ed. 205 (1916) ; Greene v. Lane , 87 F.2d 951, 109 A.L.R. 1188 (7th Cir.1937) ; Barbery v. Cohen , 183 App. Div. 424, 170 N.Y.S. 762 (1918).
Rivera v. Moore-McCormack Lines, Inc. , 238 F.Supp. at 234 (construing the predecessor to § 523(a)(6).
In the Tenth Circuit, the door is open to declaring certain intentional breach debts nondischargeable under § 523(a)(6). See, e.g., Sanders v. Vaughn (In re Sanders) , 210 F.3d 390, at *2 (10th Cir. 2000) (unpublished) (nothing indicates the Supreme Court's intention to immunize debtors under § 523(a)(6) for willful and malicious breach of contact); In re Militare , 2011 WL 4625024, at *3 (Bankr. D. Colo. 2011) (a knowing breach of contract is not necessarily *789excluded from "willful and malicious" injury).
The Court holds that there is nothing in the language of the Bankruptcy Code, including § 523(a), preventing a breach of contract judgment from being declared nondischargeable under § 523(a)(6), so long as the requirements of that subsection are met.
Here, the Court finds that Defendant, acting through Loop, concocted a scheme to take Plaintiff's restaurant assets without paying for them. At the time of closing and thereafter, Defendant extended the scheme to the $30,000 he personally borrowed from Defendant. The Court finds that neither Loop nor Defendant ever intended to repay Plaintiff. Thus, the Court finds that Defendant willfully injured Plaintiff, knowing, as he must have, that his actions would result in $30,000 in damages.
The Court also finds that Defendant's actions were malicious, in that they were wrongful, intentional, and taken without justification or excuse. The Court finds and concludes that the professed reason for withholding payment, i.e., the condition of the restaurant equipment, was known to Defendant before closing, and was a pretext. The Court finds that Defendant/Loop intended to close the purchase paying as little cash as possible, default on all payment obligations, and then either "re-trade the deal" or simply not pay at all.
The Court agrees with the case law that, in general, the failure to pay a debt does not come within § 523(a)(6). See, e.g., Byrnes v. King , 2010 WL 2733394, at *2 (Bankr. D.N.J. July 8, 2010) (party's failure to pay mortgage was insufficient to show party's intention of injury under § 523(a)(6) ); In re Abdallah , 2012 WL 631845, at *1 (Bankr. M.D. Pa. Feb. 27, 2012) ("If the failure to pay a just debt were the only criteria that would qualify under this exception to discharge [§ 523(a)(6) ], then no debt would ever be dischargeable. Congress clearly meant to limit this exception to acts done with the actual intent to cause injury."); In re Gucciardo , 577 B.R. 23, 38 (Bankr. E.D.N.Y. 2017) ("Absent evidence of intent to injure, and of malice, the failure to repay, even if combined with payment to other creditors, does not constitute a "willful and malicious act" under § 523(a)(6)"); In re Salzillo , 2013 WL 4525199, at *6 (Bankr. W.D. Tex. Aug. 27, 2013) ("The Defendant's failure to pay the Plaintiffs their money, while regrettable, is not proof in and of itself of willful and malicious injury."). It is and should be the rare breach of contract case that comes within § 523(a)(6).
The Court finds and concludes that this is one of the rare cases. Defendant's failure to repay was not the result of inability to pay, as is usually the case in bankruptcy. Rather, it was the culmination of a scheme to deprive Plaintiff of its cash and restaurant, preying on Defendant's eagerness to sell the restaurant and finance Mr. Crawley's retirement. All of the trial evidence: the long-standing friendship between Debtor and Mr. Crawley; Mr. Crawley's lack of sophistication and lack of representation; Mr. Crawley's eagerness to sell the restaurant; the one-sided terms of the purchase agreement and promissory note; borrowing of $15,000 on the closing date; borrowing another $15,000; the complete failure to pay, or attempt to pay, any amounts due; the last-minute security agreement and repossession; the failure to use the Swiss bank account money to pay any part of the debt; and Defendant's general lack of credibility, all point to the fact that Defendant's failure to repay the $30,000 loan was a willful and malicious injury to Plaintiff and its property.
*790B. Res Judicata.5
A final judgment from another court can have a preclusive effect in a subsequent bankruptcy case. In re Crespin , 551 B.R. 886, 895 (Bankr. D.N.M. 2016). Preclusion can occur in two forms: claim preclusion and issue preclusion.
1. Claim Preclusion. In the Tenth Circuit, a claim that arises out of the same " 'transaction, or series of connected transactions' as a previous suit, which concluded in a valid and final judgment, will be precluded." Yapp v. Excel Corp. , 186 F.3d 1222, 1227 (10th Cir. 1999). In Brown v. Felsen , 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), the Supreme Court determined that res judicata (claim preclusion) does not apply when "considering the dischargeability of debt." Id. at 442 U.S. at 138, 99 S.Ct. 2205.
In Brown v. Felson , the Supreme Court stressed "that the bankruptcy court has exclusive jurisdiction to determine the nature of a debt for dischargeability purposes, and concluded that applying res judicata [claim preclusion] to the dischargeability decision would undercut that jurisdiction." In re Crespin , 551 B.R. at 896-97. Claim preclusion principles therefore cannot prevent a bankruptcy court from determining the dischargeability of debts. Thus, Judge Huling's judgment is res judicata on the amount Defendant owes Plaintiff, but not on whether the debt is nondischargeable under § 523(a)(6).
2. Issue Preclusion. Issue preclusion bars "successive litigation of [1] an issue of fact or law [2] actually litigated and resolved in a valid court determination [3] essential to the prior judgment, even if the issue recurs in the context of a different claim." In re Zwanziger , 741 F.3d 74, 77 (10th Cir. 2014) (citing Taylor v. Sturgell , 553 U.S. at 892, 128 S.Ct. 2161 ) (emphasis in original). If the party invoking the doctrine establishes a prima facie case, then the burden shifts to the party opposing collateral estoppel to show that he was not afforded a fair opportunity to litigate the issue in the prior proceeding. Simon v. Taylor, 2013 WL 5934420 at *25 (D.N.M. Sep. 26, 2013), citing Padilla v. Intel Corp. , 125 N.M. 698, 701, 964 P.2d 862 (Ct. App. 1998), and State v. Bishop , 113 N.M. 732, 734, 832 P.2d 793 (Ct. App. 1992). Res judicata is an affirmative defense; the party raising it bears the burden of proof. Simon v. Taylor , 2013 WL 5934420 at *26.
Here, Defendant did not plead res judicata as an affirmative defense. Defendant did, however, file a motion for summary judgment, arguing that Judge Huling's finding regarding Defendant's state of mind precluded a § 523(a)(6) judgment. Although the Court denied the motion, issue preclusion was raised by the Defendant and will be addressed.
The Judge Huling's key findings are:
Although the actions of Mr. Rylant resulting in breach of the contract were intentional, there is insufficient evidence that he did not believe he was justified in temporarily delaying payment due to the condition of the assets and the unexpected expenses.
The Plaintiff is not entitled to punitive damages, as the Plaintiff has failed to prove a culpable mental state on the part of Mr. Rylant or Loop.
Although intent has been proven on the part of Mr. Rylant, the requisite culpable mental state has not been proven to *791support a punitive damages award against any party, and therefore, no punitive damages are awarded.
The Court concludes that entry of a nondischargeability judgment against Defendant personally under § 523(a)(6) on the $30,000 debt is not precluded by Judge Huling's findings or conclusions. First, Judge Huling's ruling about Defendant's state of mind relates to Loop's default under the note and purchase agreement, not to Defendant's failure to repay the $30,000 personal loan. Judge Huling never addressed why Defendant did not pay back the $30,000. As best the Court can tell, Plaintiff did not ask for punitive damages for this failure to pay, only for Loop's failure to pay for the restaurant assets.6
Second, the standards for assessing punitive damages for intentional breach of contract in New Mexico are unclear and are difficult to compare to the willful and malicious standards under § 523(a)(6). In Bogle v. Summit Investment Co., LLC , 137 N.M. 80, 107 P.3d 520 (Ct. App. 2005), the Court of Appeals held:
our case law clearly establishes that punitive damages may be recovered for breach of contract when the defendant's conduct has been sufficiently malicious, oppressive, fraudulent, or committed recklessly with a wanton disregard for the plaintiff's rights. Paiz v. State Farm Fire & Cas. Co. , 118 N.M. 203, 210, 880 P.2d 300, 307 (1994). An award of punitive damages for breach of contract may be sustained on appeal only if the evidence shows a culpable state of mind. Allsup's Convenience Stores, Inc. v. N. River Ins. Co. , 1999-NMSC-006, ¶ 45, 127 N.M. 1, 976 P.2d 1. "Our rule on punitive damages never was intended to make punitive damages available for every intentional breach of a contract." Romero v. Mervyn's , 109 N.M. 249, 256, 784 P.2d 992, 999 (1989). An intentional breach by itself ordinarily cannot form the predicate for punitive damages, not even when the breach is flagrant, that is, when there is no question that the conduct breaches the contract, even if the other party will clearly be injured by the breach. Cafeteria Operators, L.P. v. Coronado-Santa Fe Assocs., L.P. , 1998-NMCA-005, ¶ 43, 124 N.M. 440, 952 P.2d 435 (Hartz, C.J., concurring in part and dissenting in part). Circumstances which could make punitive damages appropriate in a breach of contract case include, for example, an intentional breach accompanied by fraud. See, e.g., Whitehead v. Allen , 63 N.M. 63, 65-66, 313 P.2d 335, 336 (1957) (affirming a punitive damages award for the falsification of weight records by purchaser of alfalfa).
Also, when the breaching party intends to inflict harm on the non-breaching party or engages in conduct which violates community standards of decency, punitive damages are appropriate. [Construction Contracting & Management, Inc. v. ]McConnell , 112 N.M. [371] at 375, 815 P.2d [1161] at 1165 [1991]. See Romero v. Mervyn's , 109 N.M. 249, 258, 784 P.2d 992, 1001 (1989) ("Overreaching, malicious, or wanton conduct" justifying punitive damages "is inconsistent with legitimate business interests, violates community standards of decency, and tends to undermine the stability *792of expectations essential to contractual relationships.").
137 N.M. at 90, 107 P.3d 520. This rather vague standard contrasts with the well-defined willful and malicious standard in § 523(a)(6). It is difficult to apply Judge Huling's on punitive damages against Loop to the § 523(a)(6) action against Defendant.
Based on all of the trial evidence, the Court concludes that Judge Huling' findings and conclusions may preclude a § 523(a)(6) judgment against Loop (had Loop filed its own bankruptcy case, for example), but do not preclude Plaintiff from proving, as it did, that Defendant's failure to repay the $30,000 was willful and malicious.
III. CONCLUSION
Plaintiff succeeded in the difficult task to proving that a debt for breach of contract is nondischargeable under § 523(a)(6). The state court's findings of fact do not preclude this conclusion. A separate judgment will be entered.
The purchase agreement has a representation that the restaurant equipment is in good operating condition and repair. It also has a default provision requiring the non-defaulting party to give notice of default, which triggers a ten-day cure period.
Neither party provided the Court with a copy of the state court complaint or counterclaim.
$350,000 minus the $2,805.73 in repair damages.
Tinkler got the "wrongful act, done intentionally, without just cause or excuse" language from Tinker v. Colwell , 193 U.S. 473, 486, 24 S.Ct. 505, 48 L.Ed. 754 (1904).
Res judicata encompasses both claim preclusion and issue preclusion. See In re Crespin , 551 B.R. 886, 895 (Bankr. D.N.M. 2016), citing Taylor v. Sturgell , 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008).
Because Defendant never gave the Court a copy of the state court pleadings, he failed to carry his burden of proving that Judge Huling's state of mind ruling applied to the $30,000 loan as well as the restaurant asset purchase obligations. Judging from Judge Huling's findings and conclusions, and without the benefit of the pleadings, it does not appear that Judge Huling addressed Defendant's state of mind regarding his failure to repay the $30,000 loan. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501829/ | Sarah A. Hall, United States Bankruptcy Judge
On June 18 and 19, 2018, the Court conducted a trial on the Second Amended Complaint (the "Complaint") [Doc. 9] filed on January 3, 2017, by debtor David E. Terrell ("Terrell") against the United *797States of America ex rel. the Internal Revenue Service (the "IRS"), seeking a determination that his 1998 and 1999 tax debts were discharged in his 2010 bankruptcy case. Attorney Gary D. Hammond appeared on behalf of Terrell, and attorneys Gretchen E. Nygaard and Richard G. Rose appeared on behalf of the IRS. As directed by the Court at the conclusion of trial, the parties filed their written closing arguments on July 31, 2018.
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)(I).
BACKGROUND
Terrell filed a voluntary chapter 7 petition in 2010 and was granted a discharge in early 2011, and his bankruptcy case was closed shortly thereafter. The IRS then attempted to collect taxes relating to tax years prior to Terrell's 2010 bankruptcy. In response, Terrell filed a motion to reopen his case in 2015 and subsequently initiated this adversary proceeding seeking a determination that his taxes for the 1998 and 1999 tax years had been discharged. The IRS contends that, pursuant to 11 U.S.C. § 523(a)(1)(C),1 these taxes are not dischargeable because Terrell made fraudulent returns and/or willfully attempted to evade or defeat the taxes. The actual amount of taxes Terrell owes the IRS is not at issue in this proceeding, but instead will be determined in a case pending before the United States District Court for the Western District of Oklahoma after this Court has determined whether or not the tax debts are dischargeable.
In making the following Findings of Fact and Conclusions of Law, the Court considered:
a. The Final Pretrial Order [Doc. 102] (the "Pretrial Order"), entered on June 11, 2018;
b. The trial record, including exhibits introduced by the IRS and Terrell and admitted by the Court,2 and the testimony of the following witnesses:
(i) Terrell;
(ii) Linda Poindexter ("Poindexter"), Terrell's long-time business bookkeeper;
(iii) Laurie Day ("Day"), Revenue Officer in the Oklahoma City office of the IRS;
(iv) Randall K. Calvert ("Calvert"), Terrell's previous tax attorney; and
(v) Pamela Jackson, formerly Pamela Terrell ("Jackson" or "Mrs. Terrell") (the IRS presented her designated deposition testimony taken on July 25, 2017, by reading into the record).
c. United States' Post-Trial Submission filed on July 31, 2018 [Doc. 121] ("IRS Closing Argument"); and
d. David Terrell's Closing Arguments filed on July 31, 2018 [Doc. 122] ("Terrell Closing Argument").
*798FINDINGS OF FACT 3
Terrell's Relevant Business Background
1. After graduating from college and working in his father's windows and siding business in Indiana, in the 1970s Terrell opened his own patio and sunroom company in Cincinnati, Ohio. At some point, Terrell relocated his business to Terre Haute, Indiana and thereafter moved his business to Oklahoma in the early 1980s. Over the past 40 plus years, Terrell has continued to operate a business that includes one or more of the following: roofing, siding, windows, remodeling, and home interior services.4 Terrell testimony, Transcript of Proceedings Held on June 18, 2018 (the first day of trial, hereafter "Tr. 1"), pp. 15-17.
2. At all times, Terrell has been the owner and president of the home improvement business he has operated. Terrell testimony, Tr. 1, pp. 15-17; Poindexter testimony, Tr. 1, p. 118; Jackson testimony, Tr. 1, p. 194.
3. Terrell's home improvement business in Terre Haute, Indiana, "had a lot of different names through the years." Jackson testimony, Tr. 1, p. 194.
4. Since being established in Oklahoma, Terrell's business has been located in three different places in the Oklahoma City/Edmond area: 8005 S. I-35, Oklahoma City; 8825 S. Santa Fe, Oklahoma City; and at his home in Edmond, Oklahoma. Terrell testimony, Tr. 1.
5. Since being operated in Oklahoma, Terrell's home improvement business has been in continuous existence and, although consisting of substantially similar activities, has been incorporated under Oklahoma law and operated under the following different names: Terrell's, Terrell Inc., Terrell Roofing, Terrell Siding, Terrell Home Center, Inc., T-Square, L.L.C., and David Terrell, Inc.5 Terrell testimony, Tr. 1; Poindexter testimony, Tr. 1, pp. 120-21; Exhibits 70-74. The Court notes that this list of corporations may not be exhaustive.6
*7996. Terrell admitted it was "possible" that he changed the names of his home improvement business in order to avoid creditors. Terrell testimony, Tr. 1, p. 20.
7. During the tax years in question, Terrell's business changed banks to avoid garnishment by creditors. Poindexter testimony, Tr. 1, p. 129.
8. At all times, Terrell was in complete control of the finances of his business and could determine the salary paid to him from the business, if any. Terrell testimony, Tr. 1; Poindexter testimony, Tr. 1, p. 128.
9. In addition to his home improvement business, during the tax years in question, Terrell owned InfoTel Solutions, Inc., a software company that sold predictive dialers and operated on the premises of his home improvement business. Terrell testimony, Tr. 1, p. 20; Poindexter testimony, Tr. 1, p. 120; Exhibit 42.
Terrell's Relevant Personal/Financial Background Prior to and During Tax Years in Issue
10. The Terrells filed for bankruptcy protection in early 1986. After the chapter 7 trustee issued his final report of no assets for distribution, the Terrells were granted a discharge on November 24, 1986, in Case No. 86-00832.7
11. In August of 1990, Terrell was invited to and accepted membership for his family in Oak Tree Country Club in Edmond, Oklahoma. Exhibit 68.
12. At some point in 1997, Terrell bought a house on Fox Lake Lane in Edmond, Oklahoma. Terrell testimony, Tr. 1. Although the purchase price of the new home was not introduced into evidence during trial, the evidentiary record indicates that Terrell placed the following values on his home for purposes of interactions with the IRS and bankruptcy filings: (i) $297,500 in November 1999, Exhibit 40; (ii) $235,000 in April 2001, Exhibit 8; (iii) $275,000 in December 2008, Exhibit 51; and (iv) $320,580 in November 2010, Exhibit 23.
13. At the time Terrell purchased his home on Fox Lake Lane in 1997, he owned another home located on Barrington Lane, also in Edmond. Mrs. Terrell had been living in the previous home during a period of marital separation. When the Terrells resumed their marriage and both moved into the home on Fox Lake Lane, the home on Barrington Lane was rented out to Ted and Linda Tate (collectively, the "Tates"). Terrell testimony. Tr. 1, pp. 28-29 ; Jackson testimony, Tr. 1, p. 200.
14. During the tax years in question, Terrell's teenage daughter drove a 1994 Toyota Camry, his teenage son drove a 1996 Dodge truck, and his wife drove a 1996 Ford Explorer. The combined total of the monthly payments for the three vehicles was $1,527. Exhibit 33; Terrell testimony, Tr. 1, pp. 34-35.
15. At some point in 1998, Terrell purchased a pair of jet skis for his family's use. Terrell testimony, Tr. 1, p. 56; Jackson testimony, Tr. 1, pp. 205-06.
16. In October 1999, Terrell had a custom deck built onto his house that cost at least $1,254. Exhibit 81; Terrell testimony, Tr. 1, pp. 50-51.
*80017. In December 1999, Terrell purchased an elliptical machine for his personal home use that cost $1,410.34. Exhibit 82; Terrell testimony, Tr. 1, pp. 53-54.
The Terrells' 1997, 1998, and 1999 Tax Returns
18. Terrell incorporated Terrell Home Center, Inc. on June 1, 1998. Exhibit 72.
19. On October 15, 1998, the Terrells filed a joint federal personal income tax return for tax year 1997 and signed it under the penalty of perjury. Exhibit 16 at p. 19.
20. For tax year 1997, the Terrells reported adjusted gross income of $10,000. The income consisted solely of W-2 wages for Terrell from Terrell, Inc. The Terrells' reported taxable income was zero, and therefore, their tax liability was zero. In fact, they claimed an Earned Income Tax Credit due them by way of refund. Exhibit 41 at p. 8810-16; Terrell testimony, Tr. 1, p. 72.
21. On April 15, 1999, the Terrells filed a joint federal personal income tax return for tax year 1998 and signed it under the penalty of perjury. Pretrial Order ¶ 3.
22. For tax year 1998, the Terrells reported adjusted gross income of $26,156. The income consisted of:
a. W-2 wages for Terrell from Terrell Home Center, Inc.;
b. "Sales Consultation Income" for Terrell reported on Schedule C-EZ (business name was stated as David Terrell - Sales, and the business address as 1128 Fox Lake Lane, Edmond, OK); and
c. Business Income for Mrs. Terrell reported on Schedule C-EZ.
The Terrells' reported taxable income was $3,957, and, after claiming an Education Tax Credit and a small Earned Income Tax Credit, their income tax liability was $121.8 Exhibit 1.
23. On April 17, 2000, the Terrells filed a joint federal personal income tax return for tax year 1999 and signed it under the penalty of perjury. Pretrial Order ¶ 4.
24. For tax year 1999, the Terrells reported adjusted gross income of $45,066. The income consisted of:
a. W-2 wages for Terrell from Terrell Home Center, Inc.;
b. 1099-MISC income for Mrs. Terrell from James M. Taylor Designs;
c. Business Income for Mrs. Terrell reported on Schedule C; and
d. Business Loss for Terrell Home Center reported on Schedule K.
The Terrells' reported taxable income was $6,940, and their income tax liability was $709. Exhibit 2.
Terrell's Initial Interactions with the IRS re: Trust Fund Employment Taxes
25. At some point in 1999, the IRS issued a Proposed Assessment of Trust Fund Recovery Penalty in the amount of $117,518.53 for nonpayment of employment taxes by "Terrell Roofing Corporation" ("Trust Fund Recovery Penalty"). Absent evidence in the record of the incorporation of Terrell Roofing Corporation, it was necessary for the Court to search the Oklahoma Secretary of State business records for clarification. Based on that search, it appears Terrell Roofing Corporation may have been a DBA for Terrell's, Inc. and/or was merged into Terrell's, Inc.9 Nonremittance *801of the trust fund taxes included the third and fourth quarters of 1997 and first and second quarters of 1998. Terrell consented to assessment and collection of the penalty on August 13, 1999. Exhibit 40 at p. 8765.
26. Also on August 13, 1999, Terrell executed a Form 2848 Power of Attorney and Declaration of Representative (the "POA"), authorizing Randall Tollison of Compromise Consultants and Paul McCurtain of C. Michael Clark & Associates to represent him before the IRS with respect to the Trust Fund Recovery Penalty. Curiously, representation under the POA also pertains to Terrell's personal income taxes for years 1997, 1998, and 1999. Exhibit 40 at p. 8763.
27. In November 1999, Randall Tollison, on behalf of Terrell, submitted an Offer in Compromise ("OIC") with respect to the Trust Fund Recovery Penalty against Terrell Roofing Corporation. The November 1999 OIC (the "1999 OIC"), based on doubt as to collectibility due to insufficient assets and income to pay the full amount, offered to pay the IRS only $500 of the $117,518.53 penalty. Exhibit 40 at p. 8757.
28. Although the 1999 OIC related to taxes owed by Terrell Roofing Corporation, the 1999 OIC contained no Collection Information Statement regarding Terrell Roofing Corporation, Terrell's, Inc., or any other business owned by Terrell. The Collection Information Statement for Individuals submitted with the 1999 OIC stated Terrell was employed as the sales manager for Terrell Home Center, Inc., and Mrs. Terrell was self-employed and doing business as Terrell Interiors. Their combined monthly income was stated as $3,664. The only bank account listed was an account at MidFirst Bank allegedly in Mrs. Terrell's name with a balance of $226. Further, the 1999 OIC computes the Terrells' net disposable income as a negative $163 per month and net realizable equity in their assets as $226. Exhibit 40 at pp. 8772, 8875, 8780.
29. When he signed the 1999 OIC on November 10, 1999, claiming only one bank account in Mrs. Terrell's name with a balance of $226, another undisclosed bank account in Mrs. Terrell's name at MidFirst Bank had a balance of $5,363.66. Exhibit 80 at p. 3620.
30. On December 8, 1999, Terrell dissolved two of his corporations: Terrell's, Inc. and Terrell Siding, Inc. Exhibits 71 & 74.
31. In the last two weeks of March 2000, Terrell withdrew funds from and caused cashiers checks, or checks made out to himself, to be issued from the Terrell Home Center Inc. bank account at MidFirst Bank that totaled over $30,000. Exhibit 109.
32. On March 31, 2000, Terrell formed a new corporation named T-Square, L.L.C. Exhibit 73.
33. In July 2000, Terrell completed a "Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax" with respect to Infotel Solutions, Inc. The Report asked the question "Have you ever been involved with another company which had tax problems?" Terrell responded "N/A," notwithstanding the recent Trust Fund Recovery Penalty issues with Terrell Roofing Corporation. Exhibit 42 at p. 8845.
34. In September 2000, Terrell submitted another OIC, this time apparently without professional assistance, with respect to the Trust Fund Recovery Penalty for nonpayment of taxes by Terrell Roofing *802Corporation and Infotel Solutions, Inc. (the "2000 OIC"). Again, the 2000 OIC offered to pay the IRS only $500 on the basis of doubt as to collectibility due to insufficient assets and income to pay. Exhibit 43 at p. 8828.
35. Notwithstanding his representations to the IRS that he could only afford to pay $500 on his tax liability, on November 11, 2000, Terrell purchased a new Acura paying $5,000 cash toward the purchase price. On February 10, 2001, Terrell purchased yet another new Acura, again paying $5,000 cash toward the purchase price. Terrell testimony, Tr. 1, pp. 74-75.
36. Upon inquiry from the IRS, in March 2001, Terrell submitted a letter together with additional documents in support of the 2000 OIC. The letter states "I personally do not have a checking account, nor am I an authorized signer on any checking account." Exhibit 47 at p. 8839. Also included in the documents is an affidavit by Terrell that states "I never personally owned the assets of Terrell Home Center, Inc." Exhibit 47 at p. 8441. Further, the documents include a declaration made under penalty of perjury by Terrell that states "[d]uring the past twelve month period, I have not maintained a checking or savings account in my name or any other name. As of the date shown below, the total cash on hand in my possession or control is $-0-." Exhibit 47 at p. 8842.
37. In March 2001, Terrell also submitted a Form 433-B Collection Information Statement for Businesses with respect to Terrell Home Center, Inc. that stated Mrs. Terrell was president of the corporation, and that it had no bank accounts, no assets, and approximately $610,000 in liabilities. Exhibit 48.
38. At trial, the IRS demonstrated that none of these statements were true. First, Terrell admitted he was the owner and president of Terrell Home Center, Inc., and, during the twelve-month period prior to making the statements, he had authority to issue checks from the account Terrell Home Center, Inc. maintained at MidFirst Bank. Terrell testimony, Tr. 1, pp. 88-91. Second, Terrell admitted he has always had a bank account since 1997. Terrell testimony, Transcript of Proceedings Held on June 19, 2018 (second day of trial, hereafter "Tr. 2"), p. 43. Third, during the relevant time period, checks made out to Terrell were deposited into Mrs. Terrell's account at MidFirst Bank. Exhibits 109-110.
39. Terrell's March 2001 submission to the IRS in support of the 2000 OIC did not contain a Form 443-B with respect to T-Square, L.L.C., which Terrell incorporated in March 2000 to conduct the same home improvement business previously operated as Terrell Home Center, Inc. Exhibit 73; Terrell testimony, Tr. 1, pp. 80-82.
The Terrells 2001 Chapter 7 Bankruptcy Filing
40. IRS agents contacted and interviewed Poindexter, Terrell's bookkeeper, with respect to Terrell's personal income tax issues sometime in 2000 or 2001. Poindexter testimony Tr. 1, p. 129.
41. The Terrells filed a joint voluntary chapter 7 petition on April 26, 2001, in this Court, Case No. 01-14289. Pretrial Order ¶ 5.
42. The Terrells' 2001 Schedule B does not list ownership of any business interests. Schedule I states that Terrell has been employed by "Terrell's" as a salesman for a period of one month and has monthly gross wages of $1,000. Exhibit 8. However, the corporation named Terrell's, Inc. was dissolved on December 8, 1999, and Terrell's business was, therefore, likely being operated under T-Square, L.L.C., which was incorporated on March 31, 2000. Exhibits 73 & 74.
*80343. The Terrells' 2001 Schedule B lists $100 cash on hand, no checking, savings, or other bank accounts, and no vehicles. Exhibit 8.
44. The Terrells' 2001 Schedule E lists a debt to the IRS in the amount of $50,000. Exhibit 8. No information is given regarding the tax year or tax type of the scheduled IRS debt.
45. During the pendency of the 2001 bankruptcy case, Terrell submitted a POA dated August 23, 2001, authorizing Randall Tollison and Norma Woodard to represent him before the IRS with respect to both personal and corporate income taxes for years 1996, 1997, 1998, 1999, and 2000. Exhibit 49.
46. Also during the pendency of the bankruptcy case, on January 28, 2002, Terrell purchased a 2002 Acura MDX, paying $41,000 in the form of a cashier's check issued by BankOne, payable to Bob Howard Acura and endorsed by Terrell. Terrell testimony, Tr. 1, pp. 98-99; Exhibit 61.
47. After the chapter 7 trustee filed a report of no distribution to creditors [Doc. 35], the Terrells received a discharge on November 12, 2002 [Doc. 37], and the case was closed on January 13, 2003 [Doc. 39]. Exhibit 7.
Terrell's Criminal Personal Income Tax Case
48. Terrell admitted that he learned of the IRS's criminal investigation into his personal income taxes sometime before 2003. Terrell testimony, Tr. 1, p. 103.
49. On October 1, 2004, a federal criminal information was filed against Terrell for filing a fraudulent income tax return for tax year 1997 in the United States District Court for the Western District of Oklahoma ("District Court"). Pretrial Order ¶ 6.
50. Terrell was initially represented in the tax matter by criminal attorney Merle Gile and entered a plea of guilty. Exhibit 9. However, because he thought his sentence was to include a term of imprisonment, Terrell then stated he was not guilty. Therefore, the District Court did not accept the guilty plea. Terrell testimony, Tr. 1; Calvert testimony, Tr. 2, pp. 51-52.
51. Terrell then retained Calvert, a tax attorney and certified public accountant, to represent him in the criminal tax matter. Terrell testimony, Tr. 1; Calvert testimony, Tr. 2, p. 52.
52. During the IRS's criminal investigation of Terrell, the IRS agents had to "create two separate sets of books out of one set of books." Calvert testimony, Tr. 2, p. 52. It is not clear what books were required to be separated, but it may have been separation of Terrell's home improvement business books from those of InfoTel Solutions, Inc., and/or separation of the books of the three different corporations Terrell conducted business through during the relevant tax years: Terrell's, Inc., Terrell Siding Inc., and Terrell Home Center, Inc. See Exhibit 50. Terrell's business books also needed to be separated from his personal books.
53. On March 4, 2005, Terrell signed a Petition to Enter Plea of Guilty with respect to the charge of filing a fraudulent income tax return for tax year 1997. Pretrial Order ¶ 7.
54. On the Petition, Terrell stated his employer as Terrell's, Inc., but Terrell's, Inc. was dissolved in 1999. Exhibits 14 & 74.
55. As part of the Petition, Terrell specifically acknowledged he owed taxes for tax years 1997, 1998, and 1999. Pretrial Order ¶ 7.
56. A Plea Agreement was filed on March 9, 2005, in which Terrell pled guilty to violating 26 U.S.C. § 7206(1) by filing a *804fraudulent income tax return for tax year 1997. Terrell's guilty plea is an admission that: "1) he made and subscribed a tax return; 2) the return contained a written declaration that the return was made under the penalties of perjury; 3) he did not believe the return was true and correct as to every material matter; and 4) he acted willfully in filing the return." Exhibit 15 at p. 2. The Plea Agreement contains several important provisions:
a. First, it specifies that for purposes of sentencing "the parties agree that the total tax loss (for the tax years 1997-99) is greater than $13,500.00 but less than $23,500.00." Exhibit 15 at p. 4. However, the Plea Agreement also clearly states that it "binds only the United States Attorney's Office of the Western District of Oklahoma and does not bind any other federal, state or local prosecuting, administrative or regulatory authority." Exhibit 15 at p. 1.
b. Second, it provides that "[i]f defendant enters a plea of guilty as described above and fully meets all obligations under this agreement, he will not be further prosecuted by the United States for any crimes related to his participation in making and subscribing false tax returns during the period from 1998 through 2000." Exhibit 15 at p. 10.
c. Third, it requires Terrell "to bring his tax obligations current and amend any necessary tax returns." Exhibit 15 at p. 8; Pretrial Order ¶ 8.
57. At the plea proceedings, Terrell admitted to the District Court that he deliberately filed his 1997 tax return stating his income as $10,000 when he in fact knew that his income was approximately $130,000. Exhibit 16 at p. 19.
58. On July 5, 2005, the District Court entered a criminal judgment against Terrell for filing a fraudulent 1997 tax return. Pretrial Order ¶ 9.
59. The maximum penalty that could have been imposed on Terrell for his crime was "three (3) years imprisonment or a fine of $100,000.00 (or possible alternative fine of $250,000.00 pursuant to 18 U.S.C. § 3571 ), or both such fine and imprisonment, as well as a mandatory special assessment of $100.00, and a term of supervised release of one (1) year." Exhibit 15 at p. 2.
60. At sentencing, the District Court imposed a fine of only $5,000 and did not incarcerate Terrell. Additionally, the criminal judgment ordered Terrell to pay restitution in the amount of $16,422. One of the probation terms of the criminal judgment was that Terrell "comply with the Internal Revenue Service in the compilation and payment of all federal tax due and owing." Exhibit 20 at p. 4; Pretrial Order ¶ 9.
61. According to Calvert, Terrell believed that the restitution ordered in the criminal matter was the amount of the his income taxes due for 1997 and that, when he paid it, he would have paid his 1997 income taxes in full. Calvert testimony, Tr. 2, p. 68.
62. Calvert advised Terrell that there would be a subsequent civil assessment of liabilities against him for tax years 1997, 1998, and 1999. Calvert testimony, Tr. 2, p. 72.
63. Calvert did not represent Terrell with respect to civil tax matters after the criminal matter was resolved. Calvert testimony, Tr. 2, pp. 60-61.
IRS Interactions Following Terrell's Criminal Judgment and Sentencing
64. On October 27, 2005, Terrell and Jackson, the former Mrs. Terrell,10 signed *805IRS Form 4549 (Income Tax Examination Changes) (the "Form 4549") consenting to assessment and collection of taxes for tax years 1997, 1998, and 1999. Exhibit 50.
65. The Form 4549 Terrell signed states that the deficiency (additional tax due) for tax year 1998 is $98,738. The deficiency for tax year 1999 is stated as $51,422. After the addition of the civil fraud penalty and interest, the amount due for tax year 1998 is stated as $264,712.46, and the amount due for tax year 1999 is stated as $127,190.57. Above Terrell's signature, the Form 4549 states: "I do not wish to exercise my appeal rights with the Internal Revenue Service or to contest in the United States Tax Court the findings of this report. Therefore, I give my consent to the immediate assessment and collection of any increase in tax and penalties ... plus additional interest as provided by law." Exhibit 50.
66. The IRS assessed the additional tax due and interest for tax years 1997, 1998, and 1999 on January 2, 2006. Exhibits 4 & 5.
67. On February 6, 2006, the IRS issued notices of intent to levy with respect to taxes for tax years 1998 and 1999. Exhibit 4 at p. 7 & Exhibit 5 at p. 8.
68. Terrell submitted an OIC on May 3, 2007 (the "2007 OIC"), which the IRS rejected several months later. Exhibits 4 & 5 at p. 4; Day testimony, Tr. 1, p. 185.
69. On October 31, 2008, Terrell satisfied payment of his criminal restitution of $16,422. Exhibit 9.
70. On December 12, 2008, only two months after payment in full of his criminal restitution, Terrell submitted another OIC to the IRS, this time with the assistance of Roderick H. Polston (the "2008 OIC"). The 2008 OIC purported to relate to the Trust Fund Recovery Penalty for nonpayment of taxes by Terrell Roofing Corporation, the Trust Fund Recovery Penalty for nonpayment of employment taxes by Infotel Solutions, Inc., and personal and/or corporate income taxes for the thirteen tax years 1996 through 2008. The 2008 OIC states that the total debt owed exceeds $1,500,000, but Terrell offered to pay the IRS only $15,831.19 in $500 monthly payments over a two-year period, with a final payment of $3,831.19. The 2008 OIC is premised, once again, on the basis of doubt as to collectibility due to insufficient assets and income to pay. Exhibit 51.
71. With the 2008 OIC, Terrell submitted a Form 433-A Collection Information Statement for Individuals stating his occupation as self-employed contractor and listing his monthly income as $2,481, composed of $1,000 in wages and $1,481.26 in net business income. Yet, no employer paying wages is identified, and Sections 5 and 6 of the form pertaining to self-employed taxpayers, which Terrell claimed to be, was left blank. Exhibit 51 at pp. 9225-26. The 2008 OIC further indicates Terrell has no cash on hand, no personal bank accounts of any kind, and no assets other than his residence and its furniture contents.
72. Terrell's 2008 OIC neither disclosed ownership of, nor gave any information about, his home improvement business. But it appears that in 2008, Terrell was conducting business under David Terrell, Inc., which he incorporated in June 2005. Exhibit 70. At trial, the IRS established that, during 2008, David Terrell, Inc. maintained a bank account at Bank of Oklahoma and one at Chase Bank. Exhibit 38. Additionally, Terrell admitted he has always had a bank account since 1997. Terrell testimony, Tr. 2, p. 43.
73. Terrell withdrew the 2008 OIC on June 11, 2009. Exhibits 4 & 5.
*80674. The IRS issued a statutory notice of intent to levy on the 1997, 1998, and 1999 taxes on June 29, 2009. Exhibits 4 & 5 at p. 8.
Terrell's 2010 Chapter 7 Bankruptcy Filing
75. Terrell filed a voluntary chapter 7 petition on November 1, 2010, in this Court, Case No. 10-16662. Pretrial Order ¶10.
76. Terrell's 2010 Schedule B listed ownership of 1,000 shares of "Terrills Siding" valued at zero. His Schedule I states his occupation as owner of "Terrill's Siding" (employed 9 years) with gross monthly wages of $2,766.67. Exhibit 23 at p. 16. However, Terrell's Siding, Inc. was dissolved as a corporation in 1999. Exhibit 71 at p. 8920. The document filed as Employee Income Records/Pay Advices [Bankruptcy Doc. 13] was issued by David Terrell, Inc., which was incorporated in June 2005. It states the employee wages total for the period March 1, 2010, to December 31, 2010, as $5,018.78. However, the total amount was received between July 27, 2010, and September 30, 2010.
77. Under Question 18 of his 2010 Statement of Financial Affairs regarding nature, location and name of business, Terrell listed only "Terrill's Siding". Exhibit 23 at p. 25.
78. Terrell's 2010 Schedule B listed no cash on hand and $55 in a checking account. Exhibit 23 at p. 4.
79. Terrell's 2010 Schedule E listed the IRS as an unsecured priority creditor in the amount of $95,000. Pretrial Order ¶ 11. No information is given regarding the tax year or tax type of the scheduled IRS debt.
80. The day before he filed his bankruptcy schedules on November 17, 2010, Terrell traveled for non-business purposes to Austin, Texas, with various expenses paid by check drawn on the David Terrell, Inc. account at Bank of Oklahoma. In December 2010, the same account paid expenses incurred at the luxury resort and spa Devil's Thumb Ranch in Tabernash, Colorado. Exhibit 123; Terrell testimony, Tr. 1 at pp. 145-48.
81. On January 31, 2011, the chapter 7 trustee filed a report of no distribution to creditors [Dkt. sheet]. Thereafter, Terrell received his discharge on February 16, 2011, and the bankruptcy case was closed on April 5, 2011. Pretrial Order ¶ 12.
Post 2010 Bankruptcy Events
82. Shortly after Terrell's bankruptcy case was closed, the IRS again issued a statutory notice of intent to levy on 1998 and 1999 taxes on August 8, 2011. Exhibits 4 & 5 at p. 8.
83. Terrell then filed another OIC on October 25, 2011, this time assisted by Jay Flinton, CPA, Inc., paying the $150 OIC submission fee and an additional $400 (the "2011 OIC"). The 2011 OIC purports to relate to personal income taxes for 1997, 1998, 1999, 2008, and 2009, as well as to a "1998 Civil Penalty," and offers to pay a total of $2,000. Exhibit 54; Day testimony, Tr. 1 at pp. 190-91.
84. During the pendency of his 2011 OIC, on February 13, 2012, Terrell wrote himself a check from a "Terrell's" bank account at Bank of Oklahoma for $7,000. Exhibit 86; Terrell testimony, Tr. 1 at p. 161.
85. Terrell withdrew his 2011 OIC on May 10, 2012. Exhibits 4 at p. 5 & Exhibit 5 at p. 6.
86. Other than the $550 submitted with the 2011 OIC, which was credited to his 1999 tax liabilities, Terrell has made no payments toward the 1998 or 1999 taxes he owes. Day testimony, Tr. 1 at pp. 186, 190-91; Exhibits 4 & 5.
*80787. After Terrell withdrew his 2011 OIC, the IRS again issued statutory notices of intent to levy on the 1998 taxes on June 4, 2012, and the 1999 taxes on July 9, 2012. Exhibits 4 & 5 at p. 8.
88. In December 2012, Terrell moved to reopen his bankruptcy case for purposes of determining the dischargeability of his taxes, and the Court entered an order granting the motion on January 4, 2013. However, Terrell took no further action, and the bankruptcy case was subsequently closed on February 25, 2014. Pretrial Order ¶ 13.
89. The IRS issued yet another statutory notice of intent to levy on the 1998 and 1999 taxes on January 12, 2015. Exhibits 4 & 5 at p. 8.
90. In June 2015, Terrell again moved to reopen his bankruptcy case for the purpose of determining the dischargeability of his income taxes, and the Court again entered an order granting the motion on July 14, 2015. Pretrial Order ¶ 14.
Adversary Proceeding No. 15-01272 regarding Dischargeability of the 1997 Taxes
91. Notwithstanding that he pled guilty to and was convicted of filing a fraudulent return for tax year 1997, on November 3, 2015, Terrell filed Adversary Proceeding No. 15-01272 seeking a determination that his 1997 taxes had been discharged in his 2010 bankruptcy case. Pretrial Order ¶ 15.
92. On March 21, 2016, the Court granted summary judgment in favor of the IRS in Adversary Proceeding No. 15-01272 on the ground that Terrell's prior fraud conviction for tax year 1997 collaterally estopped him from challenging the nondischargeability of the associated tax debt. Pretrial Order ¶ 16.
93. Terrell appealed this Court's summary judgment in Adversary Proceeding No.15-01272 to the United States Bankruptcy Appellate Panel for the Tenth Circuit, which affirmed this Court's decision on February 17, 2017. Pretrial Order ¶ 17.
Adversary Proceeding No. 16-01109 regarding Dischargeability of the 1998 and 1999 Taxes
94. While Adversary Proceeding No. 15-01272 relating to his 1997 taxes was pending on appeal, Terrell commenced this adversary proceeding on October 31, 2016, seeking a determination that his 1998 and 1999 tax obligations were discharged in his 2010 bankruptcy case. Pretrial Order ¶ 18.
95. After the Scheduling Conference [Doc. 17] was held and the Scheduling Order entered [Doc. 18], the IRS served Terrell with its Interrogatories, Requests for Admissions, and Requests for Production of Documents on March 24, 2017. On April 18, 2017, Terrell provided a combined response to the IRS's discovery requests and produced no documents. The IRS followed-up Terrell's responses with a letter highlighting the deficiencies in his discovery responses. Terrell unsatisfactorily supplemented his answers to the discovery requests, and the IRS was then forced to file a motion to compel [Doc. 20]. The Court entered an order compelling Terrell to answer interrogatories and produce documents [Doc. 45] on July 19, 2017.
96. Terrell eventually produced some of the more recent documents that were requested by the IRS. However, Terrell ultimately failed to produce any documents reflecting his actual income received or reported in 1998 and 1999, failed to produce any documents relating to the businesses he operated during that period, and failed to produce any documentation of his business or personal expenses from 1998 to 2007. See United States' Motion to Shift the Burden of Proof and Notice of Opportunity for Hearing [Doc. 51]; Terrell Production Stipulation [Doc. 53]; David E.
*808Terrell's Response with Brief in Support to United States' Motion to Shift the burden of Proof and Notice of Opportunity for Hearing [Doc. 54].
97. On October 30, 2017, the IRS filed a motion for summary judgment [Doc. 64] arguing it was entitled to judgment as a matter of law because Terrell willfully attempted to evade or defeat the taxes. The summary judgment motion did not argue that Terrell had filed fraudulent returns. The Court denied the IRS's summary judgment motion by order entered on February 6, 2018 [Doc. 90] because the issue of Terrell's intent to willfully evade or defeat taxes was a disputed material fact.
Additional Evidence Specifically Relating to Filing Fraudulent Returns For 1998 and 1999
98. Terrell admitted he knew he had a duty to file accurate federal income tax returns. Terrell testimony, Tr. 1, p. 21.
99. Terrell admitted he knew he had a duty to report his business income in some form on his personal income tax return. Terrell testimony, Tr. 1, p. 20-21.
100. Terrell's business paid personal expenses on his behalf. He testified it was his practice to account for these expenses by having them booked to his "draw account," with those amounts being reported as income to him by issuance of a Form 1099. Terrell testimony, Tr. 1, p. 22.
101. Poindexter testified that Terrell would tell her whether an expense should be noted as his personal expense in the general ledger account of the business' bookkeeping software program, and that, at the end of the year, Terrell and his accountant would get together to review the personal expenses. Poindexter testimony, Tr. 1, p. 127.
102. Terrell admitted he provided his tax preparer with the financial information necessary to complete his tax returns and reviewed the returns before he signed them. Terrell testimony, Tr. 1, p. 22.
103. For tax year 1998, Terrell reported no partnership/S corporation income from Terrell's, Inc., Terrell's Siding, or Terrell's Home Center, Inc. Exhibit 39. Additionally, no 1099's were issued to Terrell by his business on account of the personal expenses paid or, if issued, were not reported. At trial, the IRS demonstrated the Terrells had at least $42,738.54 in income during 1998 that was not reflected in their 1998 return.11 That unreported income is made up of the following items:
Rental income $4,500 Exhibit 102 Business checks deposited in personal account $21,873 Exhibit 96 Country club fees paid by business12 $6,461 Exhibit 99 Family car payments paid by business $9,904.54 Exhibit 97
[Editor's Note: The preceding image *809contains the reference for footnote12 ].
104. For tax year 1999, Terrell reported no partnership/S corporation income from Terrell's, Inc. or Terrell's Siding, Inc. For Terrell's Home Center, Inc., Terrell reported a $1,139 loss. Exhibit 39. No 1099's were issued to Terrell by his business on account of the personal expenses paid or, if issued, were not reported. At trial, the IRS demonstrated the Terrells had at least $65,923.24 in income during 1999 that was not reflected on their return. That unreported income is made up of the following items:
MISC-1099 James M. Taylor Designs $13,984 Exhibit 43 MISC-1099 Terrell Home Center $27,500 Exhibit 43 (Pam Terrell) Business checks deposited in personal account $9,612.10 Exhibit 105 Country club fees paid by business $4,493.91 Exhibit 106 Family car payments paid by business $7,668.89 Exhibit 103 Deck on house paid by business $1,254.00 Exhibit 81 Elliptical purchased by business $1,410.34 Exhibit 82
Additional Evidence Specifically Relating to Willful Evasion or Defeat of Taxes
105. Between the time he submitted his 2008 OIC on December 12, 2008, and the time he filed his schedules in his 2010 bankruptcy on November 17, 2010, Terrell appears to have made considerable principal payments with respect to the note and mortgage on his home. The 2008 OIC, Exhibit 51, states the fair market value of Terrell's home at $275,000 and the outstanding mortgage as $204,168.81. Less than two years later, his 2010 Schedules A and D lists the fair market value at $320,580 and the outstanding mortgage as $170,000. Exhibit 23 at pp. 3, 8.
106. Several months after Terrell's 2010 bankruptcy case closed, and immediately prior to filing his 2011 OIC offering *810to pay only $2,000 (a very small fraction of the taxes he owed), Terrell vacationed in Israel. Terrell testimony, Tr. 1, p.153; Exhibit 123.
107. While Terrell's 2011 OIC was pending, he incurred the following expenses:
(a) During late December 2011 and early January 2012, Terrell vacationed in Puerto Vallarta, Mexico. Terrell testimony, Tr. 1, p. 153; Exhibit 123.
(b) On February 23, 2012, Terrell spent almost $5,000 at Golf USA in Oklahoma City. Terrell testimony, Tr. 1, p. 157; Exhibit 127.
(c) Also in February 2012, Terrell wrote a check to his son in the amount of $9,500 for a vacation in Hawaii. Terrell testimony, Tr. 1, p. 154-55; Exhibit 85.
(d) Several months later, in April 2012, Terrell vacationed in Hawaii, paying for all of his family's expenses. Terrell testimony, Tr. 1, p. 154; Exhibit 123.
(e) During April and May 2012, Terrell incurred expenses of almost $2,000 at Plantation Golf Co. Exhibit 127.
108. Between December 2012 and March 2017, Terrell continued to incur expenses for travel to Las Vegas, Disney World, cruises, and more. Altogether, the IRS quantified $30,794.05 vacation-related expenses between August 2008 and March 2017, exclusive of airfare. Exhibit 123. According to the IRS, Terrell's airfare expenses between August 2010 and August 2017 totaled $18,060. Exhibit 126.
109. Since at least 2008, Terrell has routinely spent hundreds of dollars a month on non-medically prescribed health and wellness products. All tolled, for the period 2008 to February 2017, the IRS quantified health and wellness expenses of $51,975.14. Exhibit 125.
110. Between February 2011 and April 2017, the IRS quantified expenses of $25,262.57 incurred by Terrell for seminar fees. Exhibit 121.
111. Between December 2008 and June 2017, the IRS quantified investment expenses of $69,969.05 incurred by Terrell. Exhibit 124.
112. At some point, Terrell became a member of Ranch Country Club, located in Westminster, Colorado. Between July 2014 and July 2017, Terrell spent over $20,000 on Ranch Country Club fees and expenses. Terrell testimony, Tr. 1, p. 166; Exhibit 122; Pretrial Order at p. 14.
113. Between February 2012 and May 2016, the IRS quantified golf-related expenses (independent of the Ranch Country Club fees) of $21,649.22 incurred by Terrell. Exhibit 127.
114. For the tax years 2008 to 2016, Terrell took charitable contribution deductions on his tax returns in the total amount of $42,041. Exhibit 129.
115. On June 27, 2017, Terrell wrote a letter to Senator Jim Inhofe of Oklahoma thanking him for his and his staff's "help in my IRS matter." In that letter, Terrell stated "When we left Criminal Court that day, I felt we had won and it was finally behind me ... But my attorney said 'they will probably come after you on the civil side now.' " Terrell's letter to Senator Inhofe also suggests that the IRS is targeting him because he is a "Conservative Christian businessman." Exhibit 58.
116. Nevertheless, at trial Terrell testified that after he made payment of the restitution ordered by the District Court in the amount of $16,422, he believed the "IRS was paid in full," and "they would not be coming after [him] for any more money." Terrell testimony, Tr. 2, p. 7.
*811Credibility of the Witnesses
117. The Court found Day, Poindexter, and Calvert all to be credible witnesses, but it cannot say the same of Terrell.
118. When being examined by counsel for the IRS, Terrell was evasive, uncooperative, defensive, and often pretended to be confused. His testimony was inconsistent with prior depositions and requests for admission. Terrell repeatedly gave gratuitous information beyond the scope of the question asked, even after being admonished not to do so by the Court. He remembered very little and would have the Court believe he never read anything he ever signed, even important documents submitted to the IRS, which must be signed under penalty of perjury. However, when being examined by his counsel, Terrell had a completely different temperament and demeanor, a much better memory, and much improved mental acuity.13 In other words, Terrell was far from a credible witness.
CONCLUSIONS OF LAW
The Bankruptcy Code endeavors to provide the honest but unfortunate debtor a fresh start, but at the same time, it may not be used as a tax evasion device. Dalton v. IRS, 77 F.3d 1297, 1300-01 (10th Cir. 1996). While a fresh start unburdened by what may be an overwhelming liability for accumulated taxes is consistent with its goals, the Bankruptcy Code acknowledges that not all tax debts are created equal and, therefore, excepts certain categories from discharge pursuant to Section 523(a)(1). See Griffith v. United States (In re Griffith ), 206 F.3d 1389, 1395 (11th Cir. 2000). Relevant here is Section 523(a)(1)(C), which provides:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt-
(1) for a tax or a customs duty-
...
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax [.]
Thus, there are two prongs - or two different types of activity by a debtor - that can lead to nondischargeability of taxes under Section 523(a)(1)(C) : (i) filing a fraudulent return; or (ii) attempting to evade or defeat a tax obligation. The Section 523(a)(1)(C) exception to discharge contains no time restrictions or limitations period. As a result, any tax liability involving a fraudulent return or a willful attempt to evade or defeat payment of the tax liability is nondischargeable, regardless of when it arose.14 Klayman v. United States (In re Klayman), 333 B.R. 695, 699 (Bankr. E.D. Pa. 2005) ; Myers v. IRS (In re Myers), 216 B.R. 402, 405 (6th Cir. BAP 1998). Like other exceptions to discharge, Section 523(a)(1)(C) must be strictly construed in favor of the debtor. United States v. Fegeley (In re Fegeley ), 118 F.3d 979, 983 (3d Cir. 1997) (citing Dalton v. IRS, 77 F.3d at 1300 ).
*812Terrell filed this adversary proceeding seeking a determination that his 1998 and 1999 taxes were discharged by his 2010 bankruptcy filing. The IRS argues Terrell's 1998 and 1999 taxes are not dischargeable because Terrell both filed fraudulent returns and willfully evaded payment of taxes owed for those years. Although Terrell is the plaintiff in this proceeding, as creditor, the IRS bears the burden of proving by a preponderance of the evidence that the taxes are nondischargeable. Dalton, 77 F.3d at 1302 (citing Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). Based on the analysis below, the Court concludes that Section 523(a)(1)(C) excepts Terrell's 1998 and 1999 taxes from his discharge.
I. TERRELL'S 1998 AND 1999 TAXES ARE NOT DISCHARGEABLE BECAUSE HE FILED FRAUDULENT RETURNS.
A. Elements and Evidence for Establishing a Fraudulent Return .
A discharge under Section 727 does not discharge an individual debtor from any debt for a tax with respect to which the debtor made a fraudulent return. The elements of a claim for nondischargeability under Section 523(a)(1)(C) based on a fraudulent return are similar to both (i) the fraud and false statements criminal offense in Section 7206(1) of the Internal Revenue Code,15 see ¶ 56 above, and (ii) the standard for justifying the imposition of a civil fraud penalty under Section 6663 of the Internal Revenue Code.16 United States v. Krause (In re Krause ), 386 B.R. 785, 824 (Bankr. D. Kan. 2008) ; Dagostini v. Wisconsin Dep't of Revenue (In re Dagostini ), 482 B.R. 597, 600 (Bankr. E.D. Wis. 2012) ; Sommers v. IRS (In re Sommers ), 209 B.R. 471, 481 (Bankr. N.D. Ill. 1997). Thus, analysis contained in nonbankruptcy tax fraud cases is often instructive.
The IRS may prove Terrell filed fraudulent returns for tax years 1998 and 1999 within the meaning of Section 523(a)(1)(C) by establishing that he: (1) had knowledge of the falsehood of the returns; (2) had an intent to evade taxes; and (3) underpaid his taxes. Krause, 386 B.R. at 824 (citing In re Fliss, 339 B.R. 481, 486 (Bankr. N.D. Iowa 2006) ; Schlesinger v. United States (In re Schlesinger), 290 B.R. 529, 536 (Bankr. E.D. Pa. 2002) ). See also Estate of Trompeter v. Comm'r of Internal Revenue, 279 F.3d 767, 773 (9th Cir. 2002) (quoting Conforte v. Comm'r, 692 F.2d 587, 592 (9th Cir. 1982) ("A debtor makes a 'fraudulent return' if he knowingly states a falsehood on his tax returns and specifically intends to avoid federal taxes.") ). A tax return is considered fraudulent in its entirety if it contains any fraudulent item. Foxworthy, Inc. v. C.I.R., T.C. Memo 2009-203, 2009 WL 2877850, *14 (T.C. 2009) ; In re Harris, 59 B.R. 545, 548 (Bankr. W.D. Va. 1986).
*813Because direct evidence of fraud is seldom demonstrated, a court may infer fraud from the record after a survey of the taxpayer's entire course of conduct. Patton v. Comm'r of Internal Revenue, 799 F.2d 166, 171 (5th Cir. 1986) ; Ankerberg v. Comm'r of Internal Revenue, 115 T.C.M. (CCH) 1001 (T.C. 2018) ; Ernle v. Comm'r, 100 T.C.M. (CCH) 367, *4 (T.C. 2010) (court may draw inferences from taxpayer's entire course of conduct). In other words, the IRS may prove fraudulent intent by circumstantial evidence, and a court may infer fraud from "any conduct, the likely effect of which would be to mislead or to conceal." Kosinski v. Comm'r of Internal Revenue, 541 F.3d 671, 679-80 (6th Cir. 2008) (quoting Richardson v. Comm'r, 509 F.3d 736, 743 (6th Cir. 2007) (internal quotation marks omitted) ). Further, a court's analysis of a taxpayer's conduct under Section 523(a)(1)(C) should include both acts of commission and acts of omission. Toti v. United States (In re Toti ), 24 F.3d 806, 809 (6th Cir. 1994).
A taxpayer's conduct prior to filing a tax return is relevant evidence concerning whether the taxpayer's subsequent actions were the result of honest mistake or deliberate evasion. Matter of Birkenstock, 87 F.3d 947, 951 (7th Cir. 1996) (pattern of debtor's behavior is relevant). See also United States v. Daraio, 445 F.3d 253, 264 (3d Cir. 2006) (defendant's past taxpaying record is admissible to prove willfulness circumstantially). A taxpayer's conduct subsequent to filing a tax return may also be used to establish fraud. United States. v. Voorhies, 658 F.2d 710, 715 (9th Cir. 1981) (so-called badges of fraud may be established by acts both prior and subsequent to the indictment period may be probative of the defendant's state of mind). For example, courts have attributed importance to post-filing actions and tactics employed by taxpayers and/or counsel that are calculated to prevent meaningful resolution of their case. See Stringer v. Comm'r of Internal Revenue, 84 T.C. 693, 715 (T.C. 1985), aff'd sub nom. 789 F.2d 917 (4th Cir. 1986). In sum, even in criminal cases, evidence of a taxpayer's questionable tax compliance, both in years before and after the years in question, is probative of a taxpayer's willfulness and intent to evade taxes. United States v. Upton, 799 F.2d 432, 433 (8th Cir. 1986).
The Fifth Circuit Court of Appeals has held that consistent understatement of income with consequent underpayment of taxes is strong evidence of the intent to evade taxes required for a finding of fraud. Patton, 799 F.2d at 171. See also Holland v. United States, 348 U.S. 121, 139, 75 S.Ct. 127, 99 L.Ed. 150 (1954) (determining that "evidence of a consistent pattern of underreporting large amounts of income ... support[s] an inference of willfulness"); Temple v. Commissioner, T.C. Memo. 2000-337, *9 (T.C.), aff'd, 62 F. App'x 605 (6th Cir. 2003) ("Consistent failure to report substantial amounts of income over a number of years is, standing alone, highly persuasive evidence of fraudulent intent."). But omission of income is not the only form of taxpayer misconduct that results in a finding of fraud. Fraudulent intent can also be inferred from a taxpayer's wrongful overstatement of a deduction or the claiming of an unallowable exemption or credit. For example, in the context of disallowed deductions, fraud has been found where purely personal or capital items are claimed as current business expenses. Ramsey v. Comm'r of Internal Revenue, T.C. Memo 1984-251, 1984 WL 14497 (T.C.). Further, a taxpayer's failure to maintain accurate records " 'is a strong indicum of fraud with intent to evade taxes.' " Cole v. Comm'r of Internal Revenue, 637 F.3d 767, 781 (7th Cir. 2011) (quoting *814Toushin v. Comm'r, 223 F.3d 642, 647 (7th Cir. 2000) ).
B. Terrell Filed Fraudulent Returns for Tax Years 1998 and 1999.
The record before this Court is replete with evidence to support a determination of nondischargeability of Terrell's taxes under Section 523(a)(1)(C) for filing fraudulent income tax returns for tax years 1998 and 1999. Terrell's conduct before and after his filing of the returns in question on April 15, 1999, and April 17, 2000, reflect numerous circumstantial hallmarks of fraud: (i) a failure to maintain accurate business records; (ii) a multitude of false statements made under penalty of perjury; (iii) concealment of assets from both the IRS and the bankruptcy court; (iv) the constant formation of new corporations under which to conduct the same continuing business with the admitted goal of evading creditors; and, last but not least, (v) a plea of guilty to filing a fraudulent return for tax year 1997.
1. Terrell Failed to Remit Trust Fund Taxes, Concealed Assets, and Made False Statements in Connection with the 1999 and 2000 OICs Submitted to the IRS.
Terrell's failure to pay over employment (income and FICA) taxes withheld from the paychecks of "Terrell Roofing Corporation's" employees is the first of many indicia of his cavalier attitude towards legal tax duties and obligations. As owner and president of his business, Terrell was a responsible party17 for collecting, accounting for, and/or paying the employment taxes to the IRS. See Exhibit 40, p. 8765. In the second half of 1997 and the first half of 1998, Terrell failed to remit trust fund taxes in the amount of $117,518.53. See ¶ 25 above. Additionally, toward the end of that period (June 1998), Terrell formed a new corporation to conduct business under - Terrell Home Center, Inc. - and the Court seriously doubts that is mere coincidence. Terrell even admitted that he changed the name of his business to avoid creditors, and the Court feels certain that includes the IRS. See ¶ 6 above.
Although he may have formed a new corporation in an attempt to protect his business assets, as a responsible party, Terrell could not escape personal liability for the employment taxes of Terrell Roofing Corporation. Nonremittance of trust fund taxes withheld from employees' paychecks is effectively stealing from the U.S. Treasury. United States v. David D. Patton & Assoc., P.C., 2012 WL 5389325 (E.D. Mich. 2012). Therefore, a responsible party is subject to the trust fund recovery 100% penalty imposed by Section 6672 of the Internal Revenue Code.18 Terrell consented to assessment and collection of the penalty on August 13, 1999, but then attempted to compromise the debt by filing an OIC.
The Internal Revenue Code authorizes compromises of tax liabilities (usually by filing an OIC) when it is unlikely that the tax liabilities can be collected *815in full. 26 U.S.C. § 7122. During the pendency of an OIC, the IRS is prohibited from collecting the unpaid taxes by levy or proceeding in court. 26 U.S.C. § 6331(k). Generally speaking, the IRS will not accept an OIC unless the amount the taxpayer proposes to pay is equal to or greater than the "reasonable collection potential." Chandler v. Comm'r of Internal Revenue, 660 F. App'x 694, 696 (10th Cir. 2016) (citing Murphy v. Comm'r, 469 F.3d 27, 33 (1st Cir. 2006) (explaining IRS "will not accept a compromise that is less than the reasonable collection value of the case") ). Therefore, in order for the OIC program to work properly, it is necessary for taxpayers to make adequate compromise proposals consistent with their ability to pay and to provide reasonable documentation to verify their ability to pay. See Internal Revenue Manual 1.2.14.1.17 Policy Statement 5-100.19 Additionally, after 2006, when a lump sum offer of compromise is made, the taxpayer's OIC submission is required to be accompanied by payment of 20% of such lump sum offered. If a compromise offer consists of periodic installment payments by the taxpayer over time, the first proposed installment payment must be made with submission of the OIC. 26 U.S.C. § 7122(c).
Beginning with the first OIC he filed in November 1999, Terrell repeatedly used the OIC process not as a sincere attempt to pay such part of his tax liabilities that he was legitimately able to pay, but instead as a ploy to delay paying taxes and prevent the IRS from being able to take collection action. Terrell's 1999 OIC offered to pay only $500 of the $117,518.53 penalty. See ¶ 27 above. Terrell claimed insufficient assets and income to pay the taxes but was not forthcoming with truthful information. In fact, the 1999 OIC was incomplete and/or inaccurate and, therefore, did not accurately portray Terrell's actual financial condition and ability to pay. First and foremost, Terrell did not disclose his business interests in or ownership of Terrell's, Inc., Terrell's Siding, Inc., Terrell Home Center, Inc., or Infotel Solutions, Inc. In fact, he provided no information whatsoever about his business interests, other than to identify himself as "sales manager of Terrell Home Center." Further, Terrell failed to disclose a personal bank account in Mrs. Terrell's name. See ¶¶ 28-29 above. Moreover, less than a month after submitting the 1999 OIC, Terrell dissolved Terrell's, Inc. and Terrell's Siding, Inc., having already incorporated Terrell Home Center, Inc. in June 1998. See ¶¶ 5, 30 above.
In July 2000, Terrell was again interacting with the IRS regarding nonremittance of trust fund taxes, this time with respect to Infotel Solutions, Inc. Terrell submitted another OIC in September 2000 with respect to both Terrell Roofing Corporation's and Infotel Solutions, Inc.'s outstanding employment taxes, again offering to pay a measly $500. Like the 1999 OIC, the 2000 OIC was demonstrably false and misleading, containing only outdated 1999 information similar to that given in connection with the previously submitted 1999 OIC, and most importantly, again failing to disclose his business interests. See Exhibit 43.
In connection with the 2000 OIC, Terrell, once more, blatantly lied to the IRS, under penalty of perjury, by stating that he never owned the assets of Terrell Home Center, Inc., and that his wife was president of the corporation. However, by that time, Terrell had already withdrawn all the funds in Terrell Home Center, Inc.'s bank account and formed a new corporation named T-Square, L.L.C. (not disclosed on *816the 2000 OIC), leaving Terrell Home Center, Inc. with zero assets and $610,000 in liabilities. See ¶¶ 31-39 above. The 2000 OIC remained pending from September 2000 at least through March of 2001, staying the IRS's levy or collection. Nevertheless, during that time period, Terrell purchased two new Acuras paying $5,000 in cash toward each purchase. See ¶ 35 above.
Thus, when the IRS detected Terrell's nonremittance of the employment taxes and sought to impose a penalty on him, Terrell attempted to compromise the penalty but did not deal with the IRS in a forthcoming or good faith manner. He obfuscated his true circumstances rather than providing all relevant information while simultaneously transferring his business operations to new corporations to escape detection. As discussed further below, Terrell repeats this concealment of assets and true financial condition numerous times with respect to OICs and even bankruptcy filings. The Court concludes Terrell's pattern of conduct - his consistent failure to disclose assets in legal documents made under penalty of perjury - is circumstantial evidence that Terrell knowingly filed fraudulent returns for tax years 1998 and 1999.
2. Terrell Failed to Disclose Assets on the 2001 Bankruptcy Schedules.
In April 2001, after Terrell learned the IRS had begun investigating his personal income tax returns, the Terrells filed for chapter 7 bankruptcy relief. The bankruptcy petition triggered the Section 362 automatic stay, again protecting Terrell from any collection efforts by the IRS. In his 2001 chapter 7 filing, Terrell failed to schedule ownership of his home improvement business. His 2001 schedules portray Terrell as a salesman employed by "Terrell's" (a corporation no longer in existence) for a period of one month with monthly gross wages of $1,000, rather than the 100% owner of a home improvement business in continuous operation in Oklahoma City since the early 1980s (probably under the corporate name T-Square, L.L.C. at that time). See ¶ 42 above. In addition to concealing assets, Terrell failed to accurately schedule his tax obligations. Terrell's Schedule E lists a debt of only $50,000 to the IRS, with no additional information provided. However, at that time, he was actively negotiating with the IRS via submission of OICs with respect to the trust fund penalty of at least $117,518.53, a nondischargeable tax, see Section 507(a)(8)(C), with respect to which he had already consented to assessment and collection.
Moreover, Terrell's schedules indicated he had $100 cash on hand and no checking, savings, or other bank accounts, yet during the pendency of the 2001 bankruptcy case, he purchased a 2002 Acura MDX with a $41,000 cashier's check. A few months later, the Terrells received a bankruptcy discharge wiping their slate clean, but their creditors received no distribution whatsoever. See ¶¶ 42, 43, 46, 47 above.
3. Terrell Filed a Fraudulent 1997 Tax Return.
In October of 1998, Terrell filed an admittedly fraudulent personal income tax return for tax year 1997. After the 2001 bankruptcy case was closed in 2003, the IRS pursued its criminal investigation of the Terrells with respect to tax years 1997, 1998, and 1999. Terrell eventually pled guilty to filing a fraudulent 1997 return. On his 2005 Petition to Enter Plea of Guilty, Terrell stated his employer as "Terrell's, Inc." even though that corporation had been dissolved in 1999 and never identified himself as a business owner. See ¶ 54 above. During the sentencing hearing, Terrell admitted to reporting only $10,000 in income for 1997 when he knew he had *817income close to $130,000. See ¶¶ 53, 57 above.
Terrell's admission about his 1997 tax return gives the Court reason to believe he also knowingly filed fraudulent returns for tax years 1998 and 1999 in April 1999 and April 2000, respectively. This is especially the case when considered together with Terrell's other evasive actions during the relevant time period: (i) Terrell submitted OICs in 1999 and 2000 with respect to trust funds taxes in which he neglected to divulge his business ownership interests; (ii) Terrell dissolved corporations and formed new corporations to carry on the same business in an effort to avoid creditors (see footnote 5); and (iii) Terrell failed to disclose assets in his 2001 chapter 7 bankruptcy case.
Further, in his 1997 fraudulent return Plea Agreement, Terrell admitted that there was a tax loss to the IRS for tax years 1998 and 1999. The Plea Agreement states that "[i]f defendant enters a plea of guilty as described above and fully meets all obligations under this agreement, he will not be further prosecuted by the United States for any crimes related to his participation in making and subscribing false tax returns during the period from 1998 through 2000."See ¶ 56(b) above. Clearly, the IRS was investigating Terrell's 1998 and 1999 returns as fraudulent and believed it could have charged him with a criminal offense for those tax years, and its forbearance was part of the consideration for Terrell's guilty plea for tax year 1997.
Additionally, following Terrell's criminal judgment and sentencing, he signed IRS Form 4549 consenting to assessment and collection of taxes for tax years 1998 and 1999, including civil fraud penalties . See ¶ 65 above. Terrell's signature on the Form 4549 may not be a legally binding admission by Terrell that he filed fraudulent returns, but it constitutes another valuable piece of circumstantial evidence to take into consideration.
4. Terrell Concealed Assets and Made False Statements in Connection with the 2008 OIC Submitted to the IRS.
After the IRS assessed the 1997-1999 tax deficiencies and fraud penalties and issued notices of intent to levy, Terrell filed another OIC in May 2007. The 2007 OIC was rejected by the IRS, but Terrell followed it up with yet another OIC in December 2008. Terrell's 2008 OIC offered to pay only one percent of the more than $1,500,000 in taxes, interest, and penalties owed. He proposed to pay $15,831.19 by remitting $500 with the 2008 OIC submission and then making 23 monthly installments of $500 and a final payment of $3,831.19. He did not remit the first $500 payment with his 2008 OIC. Exhibits 4 & 5. Moreover, the 2008 OIC once again neglected to disclose any information about his business interests. Instead, Terrell claimed to be a self-employed contractor with monthly income of $2,481. The 2008 OIC remained pending until Terrell withdrew it in June 2009. See ¶¶ 66-73 above.
5. Terrell Failed to Disclose Assets on His 2010 Bankruptcy Schedules.
After Terrell withdrew the 2008 OIC and the IRS issued notices of intent to levy, Terrell filed his 2010 chapter 7 bankruptcy case staying any IRS action against him. Terrell's 2010 Schedule B listed ownership of 1,000 shares of "Terrills Siding" valued at zero. His Schedule I states his occupation as owner of "Terrill's Siding" (employed 9 years) with gross monthly wages of $2,766.67. Similarly, Terrell's 2010 statement of financial affairs regarding nature, location and name of business, discloses only "Terrill's Siding." However, Terrell's Siding, Inc. was dissolved as a corporation in 1999, more than ten years *818prior to Terrell's 2010 bankruptcy filing. Instead, the home improvement business was likely being operated under David Terrell, Inc., incorporated in 2005, which Terrell did not disclose in his schedules or statement of financial affairs.
Terrell's 2010 Schedule E lists a debt to the IRS in the amount of $95,000, but no further information is given regarding the type of tax or year to which the taxes related. The amount of tax liabilities, as well as the lack of detail, is surprising given that Terrell (i) had been under investigation by the IRS with respect to personal income taxes for 1997, 1998, and 1999, and in 2005 plead guilty to filing a fraudulent tax return for 1997, (ii) thereafter consented to assessment and collection of tax deficiencies and fraud penalties by signing Form 4549, and (iii) subsequently submitted the 2008 OIC to the IRS attempting to compromise his outstanding tax liabilities of over $1,500,000 (with no payments on such debt having been made in the interim). Notwithstanding Terrell's nondisclosure of assets, as in his previous bankruptcy case, the trustee filed a report of no distribution, i.e., Terrell received a discharge, and his creditors received nothing. See ¶¶ 75-81 above.
6. Terrell Failed to Maintain Accurate Business Records Which Led to Understatement of Income on His Tax Returns.
As noted above, a taxpayer's failure to maintain accurate records is a strong indicum of fraud with intent to evade taxes. Terrell did not maintain adequate records because, according to Calvert, "one set of books had to be separated into two sets of books" by the IRS agents during their criminal investigation of Terrell. See ¶ 52 above. But, moreover, the IRS produced concrete evidence that Terrell both neglected to report numerous items of income and overstated legitimate deductions from his business income by paying personal expenses. First, in both 1998 and 1999, Terrell deposited checks representing business income into the Terrells' personal checking accounts. Second, in 1998, the Terrells neglected to report rental income from the Tates who were renting his Barrington Lane home. Third, in 1999, the Terrells neglected to report the income on their return from two separate Forms 1099-MISC issued to Jackson (formerly Mrs. Terrell), one from a third party, but the other from "Terrell Home Center, Inc." And fourth, in both 1998 and 1999, Terrell had his corporation pay personal expenses but did not book them to his draw account so that a Form 1099 could be issued to report income on the Terrells' returns. See ¶¶ 103, 104 above.
At trial, Terrell admitted he knew that personal expenses paid by his company should be booked to his draw account and that they should be reported as income to him on a Form 1099. But no Form 1099 was issued to Terrell for this purpose in either tax year 1998 or 1999. The Court would perhaps understand a personal expense here or there inadvertently not being recorded in Terrell's draw account and then reported as income on a Form 1099. However, in this case, no personal expenses whatsoever were recorded to the draw account - not even monthly recurring car payments and country club fees. Therefore, no Form 1099 was issued. Failure to report personal expenses paid by one's business is a "type of unreported income the courts view with disfavor." Krause, 386 B.R. at 825-26. Evidence in this regard supports a conclusion that Terrell intentionally misstated his income for tax purposes. In addition, the Court surmises that the family car payments, country club fees, deck expenses, and purchase of the elliptical machine were probably only the tip of the iceberg, considering the *819IRS had no business books or records to work with and was forced to build its case primarily on bank records it obtained.20
7. Terrell's Argument That He Relied on His Tax Accountant Has No Merit.
Terrell's primary excuse for filing "inaccurate" tax returns in 1998 and 1999 is that he relied on his tax accountant. This does not, however, mitigate Terrell's culpability. Bernstein v. United States (In re Bernstein ), 2017 WL 3314242, at *6 (Bankr. D. N.J. June 7, 2017). "In general, individuals are charged with knowledge of the contents of documents they sign-that is, they have 'constructive knowledge' of those contents." Consol. Edison Co. of N.Y., Inc. v. United States, 221 F.3d 364, 371 (2d Cir. 2000). "A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents." United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012) (quoting Greer v. Comm'r of Internal Revenue, 595 F.3d 338, 347 n. 4 (6th Cir. 2010) ); United States v. McBride, 908 F.Supp.2d 1186, 1206 (D. Utah 2012) (taxpayer's signature on return is sufficient proof of knowledge of instructions contained in tax return form).
Moreover, Terrell had an obligation to provide his tax accountant with full and accurate tax-related information. In the absence of personal expenses paid by Terrell's business being booked to his draw account, Terrell's tax accountant would have no way of knowing whether a check to "UMB Oklahoma Bank" or "Bank One," without further notation, was a car payment for a vehicle driven by one of Terrell's family members and a personal expense. Any attempt by Terrell to shift the blame to his accountant requires Terrell to establish that: (1) he provided the preparer full disclosure of tax-related information; (2) he took no steps to mislead the preparer; and (3) he filed the return as prepared without having reason to believe it was incorrect. United States v. Bednarik, 828 F.2d 20, *3 (6th Circuit 1987) (citing United States v. Claiborne, 765 F.2d 784, 798 (9th Cir. 1985), cert. denied, 475 U.S. 1120, 106 S.Ct. 1636, 90 L.Ed.2d 182 (1986) ). Terrell proved none of the above. The bottom line is that Terrell signed and filed his 1998 and 1999 tax returns that reported no 1099 income for the personal expenses paid by his business knowing there should have been 1099 income. As so aptly summed up by the Seventh Circuit:
[P]eople who sign tax returns omitting income or overstating deductions often blame their accountant or tax preparer. But these arguments never go anywhere. People are free to sign legal documents without reading them, but the documents are binding whether read or not.
Novitsky v. American Consulting Engineers, L.L.C., 196 F.3d 699, 702 (7th Cir. 1999).
Based on Terrell's conduct prior to 1999, during 1999 and 2000, and after 2000, the Court finds there is more than sufficient evidence to conclude Terrell filed fraudulent *820income tax returns for tax years 1998 and 1999, and, therefore, those taxes were not discharged in his 2010 bankruptcy case.
II. TERRELL'S 1998 AND 1999 TAXES ARE NOT DISCHARGEABLE BECAUSE HE WILLFULLY EVADED AND DEFEATED PAYMENT OF THOSE TAXES.
In addition to contending Terrell filed fraudulent returns, the IRS argues Terrell's 1998 and 1999 taxes are not dischargeable because Terrell willfully evaded or attempted to defeat those taxes. As discussed below, the Court agrees.
A. Elements and Evidence for Establishing Willful Evasion or Defeat of Taxes.
Whether or not a debtor has willfully attempted to evade or defeat a tax for purposes of Section 523(a)(1)(C) is a question of fact. Vaughn v. United States (In re Vaughn ), 765 F.3d 1174, 1180 (10th Cir. 2014). A debtor's failure to pay a tax obligation, in and of itself, does not compel a finding of nondischargeability on the basis of evasion. Dalton, 77 F.3d at 1301 (citing Haas v. IRS (In re Haas ), 48 F.3d 1153, 1158 (11th Cir. 1995) ). "Rather, nonpayment is relevant evidence which a court should consider in the totality of conduct to determine whether or not the debtor willfully attempted to evade or defeat taxes." Dalton, 77 F.3d at 1301 (citing Commissioner v. Peterson (In re Peterson ), 152 B.R. 329, 335 (D. Wyo. 1993) ). A taxpayer's ability to pay is a factor to consider in determining if nonpayment of tax is willful, but it is not a requirement for willfulness. Grothues v. IRS (In re Grothues), 226 F.3d 334, 339 (5th Cir. 2000). Therefore, a taxpayer may be held to have willfully attempted to evade tax even if he lacked the financial resources to pay the tax. United States v. Doyle, 276 F.Supp.2d 415, 424 (W.D. Pa. 2003). A taxpayer's earlier willful evasion of taxes is not somehow nullified by later coming clean with the IRS. Meyers v. IRS (In re Meyers ), 196 F.3d 622, 625 (6th Cir. 1999).
In Vaughn v. United States, the Tenth Circuit Court of Appeals approved the Colorado bankruptcy court's use of a two-component test for establishing willful evasion of a tax obligation. Relying on the Sixth Circuit's opinion in United States v. Storey, 640 F.3d 739, 744 (6th Cir. 2011), the Vaughn bankruptcy court stated that there is both (1) a conduct requirement, and (2) a mental state requirement for willful evasion under Section 523(a)(1)(C), and then cited factual findings in support of the two elements separately. Vaughn, 765 F.3d at 1180.
Courts have considered many different types of conduct factors in assessing whether a debtor has willfully attempted to evade or defeat taxes. Those factors include, but are not limited to, the following acts of commission and culpable omission: (1) concealment of income and/or assets; (2) fraudulent transfers; (3) conducting business affairs in such a manner that is intended to make finding, tracking, or levying on income more difficult; (4) significant understatements of income; (5) repeated failure to file returns or habitually late filings in the wake of past compliance and governmental demands; (6) implausible or inconsistent behavior by the taxpayer; (7) failure to cooperate with the taxing authorities; and (8) frustrating tax collection efforts. See, e.g., United States v. Fegeley (In re Fegeley ), 118 F.3d 979, 983-84 (3rd Cir. 1997) ; In re Zuhone, 88 F.3d 469, 473 (7th Cir. 1996) ; In re Birkenstock, 87 F.3d 947, 952 (7th Cir. 1996) ; Bruner v. United States (In re Bruner ), 55 F.3d 195, 200 (5th Cir. 1995) ;
*821Toti v. United States (In re Toti ), 24 F.3d 806, 808 (6th Cir. 1994) ; May v. Missouri Dep't of Revenue (In re May ), 251 B.R. 714, 718 (8th Cir. BAP 2000) ; Laurin v. United States (In re Laurin ), 161 B.R. 73, 75 (Bankr. D. Wyo. 1993).
Additionally, courts have focused on a debtor's unreasonable or lavish spending in the face of outstanding tax obligations. "[C]aselaw applying section 523(a)(1)(C) has consistently held section 523(a)(1)(C)'s requirements to be satisfied in situations where the debtor - even without fraud or evil motive - has prioritized his or her spending by choosing to satisfy other obligations and/or pay for other things (at least for non-essentials) before the payment of taxes, and taxes knowingly are not paid." Lynch v. United States (In re Lynch ), 299 B.R. 62, 64 (Bankr. S.D. N.Y. 2003). See also United States v. Jacobs (In re Jacobs ), 490 F.3d 913, 921 (11th Cir. 2007) ("large discretionary expenditures, when a taxpayer knows of his or her tax liabilities, is capable of meeting them, but does not, are relevant to § 523(a)(1)(C)'s conduct element").
The majority of courts addressing nondischargeability on the basis of willful evasion or defeat of a tax, including this Court, have determined that the mental state requirement of Section 523(a)(1)(C) is met by showing that: "(1) the debtor has a duty under the law; (2) the debtor knew of that duty; and (3) the debtor voluntarily and intentionally violated that duty." Vaughn, 765 F.3d at 1181 (citing Jacobs, 490 F.3d at 921 ). See also United States v. Angel (In re Angel ), 1994 WL 69516 (Bankr. W.D. Okla. 1994) (unpub.) (citing United States v. Toti, 149 B.R. 829, 834 (E.D. Mich. 1993) ). "The willfulness required under § 523(a)(1)(C) is met if the actions are done voluntarily, consciously, or knowingly and intentionally." Mills v. United States ex rel. IRS (In re Mills ), 337 B.R. 691, 699 (Bankr. D. Kan. 2005) (citing Dalton, 77 F.3d at 1302 ) ).21
B. Terrell Willfully Attempted to Evade and Defeat His 1998 and 1999 Taxes .
1. Terrell Had a Duty Under the Law To Pay His 1998 and 1999 Taxes and Was Aware of That Duty.
There is no dispute that Terrell knew he originally had a duty to pay income taxes for tax years 1998 and 1999. He filed income tax returns in April 1999 and April 2000, respectively, signed them under penalty of perjury, and paid a minimal amount of tax. See ¶¶ 21-24 above. The issue here is whether Terrell knew he had a continuing duty to pay additional 1998 and 1999 taxes assessed by the IRS in 2006 after the conclusion of his 1997 criminal tax matter and following the discharge entered in his 2010 bankruptcy case.
Terrell disputes that "he knew he still had a duty" to pay the additional 1998 and 1999 taxes, arguing: (i) he thought that payment of the restitution ordered in his 1997 criminal case was payment in full of his taxes for 1997, 1998, and 1999; and (ii) he believed his 1998 and 1999 tax debts *822were discharged in his 2010 bankruptcy case. The Court finds that neither of Terrell's beliefs regarding possible extinguishment of his tax obligations is plausible and, further, that both of his rationales cannot be true at the same time. In other words, if complete payment of his restitution satisfied all tax obligations, there would have been no need for them to be discharged in his 2010 bankruptcy case.
a. Terrell's Asserted Belief That He No Longer Owed Taxes After Making Restitution is Not Credible.
In connection with his 2005 plea of guilty to filing a fraudulent 1997 tax return, Terrell was ordered to pay $16,422 in restitution. Terrell completed payment of the restitution in October 2008. See ¶¶ 60, 69 above. According to Terrell, he believed payment of the restitution was payment of all taxes for 1997, 1998, and 1999. However, Terrell's self-serving testimony in this regard is refuted by other evidence in the record. At trial, criminal tax attorney Calvert testified that Terrell's understanding was that the restitution ordered was the amount of his income taxes due for 1997 and that, when he made restitution, he would have paid his 1997 income taxes in full, not his 1998 and 1999 taxes, which are at issue here. Further, Calvert testified that he specifically advised Terrell that there would be a subsequent civil assessment of liabilities against him for tax years 1997, 1998, and 1999. See ¶¶ 60-61 above.
Terrell's own words and actions, both in the past and more recently, demonstrate the untruthfulness of Terrell's testimony that he believed restitution was payment in full of his outstanding tax liabilities. First, in October 2005, after Terrell had been sentenced and ordered to pay restitution, Terrell signed IRS Form 4549 consenting to assessment and collection of taxes for tax years 1997, 1998, and 1999. After addition of civil fraud penalties and interest, the amount owed by Terrell for 1998 and 1999 was nearly $400,000. The IRS then assessed the additional taxes due in January 2006 and issued notices of intent to levy with respect to those obligations. See ¶¶ 64-67 above. At trial, Terrell specifically admitted to repeatedly receiving notices from the IRS about the civil income tax assessments but chose to ignore them. Thus, both the IRS's and Terrell's actions subsequent to conclusion of the criminal matter belie Terrell's suggested belief that payment of restitution in the amount of $16,422 satisfied all of his outstanding tax obligations.
Next, Terrell's acts of submitting OICs to the IRS in 2007 and 2008 attempting to compromise his outstanding tax obligations are contrary to his asserted belief regarding the effect of making restitution. If Terrell truly believed that payment of restitution was payment in full of his taxes, there would have been no reason for him to submit OICs to the IRS in 2007 and 2008, during and after his payment of restitution. In fact, Terrell's 2008 OIC acknowledged outstanding tax liabilities of over $1,500,000 and purported to relate to the Trust Fund Recovery Penalties , as well as personal and/or corporate income taxes for the thirteen tax years 1996 through 2008. See ¶¶ 68-70 above.
Finally, in June 2017, only a year before trial of this matter, Terrell wrote a letter to Senator Jim Inhofe of Oklahoma complaining about the IRS's "targeting" of him as a "conservative Christian businessman." In the letter, Terrell specifically acknowledged that at the conclusion of the 1997 criminal tax matter, Calvert told him the IRS would now come after him on the civil side. See ¶ 115 above.
In sum, the Court does not accept as credible Terrell's argument that he believed the 1998 and 1999 tax obligations were discharged by completing payment of *823$16,422 in restitution in October 2008. To do so would be nonsensical.
b. Terrell's Asserted Belief That He No Longer Owed Taxes After His 2010 Bankruptcy Case Is Not Credible.
Terrell also testified that he thought his 1998 and 1999 tax obligations were discharged in his 2010 bankruptcy case. On the other hand, the IRS argues Terrell knew the taxes for 1998 and 1999 were not discharged because, in October 2011, after the conclusion of his bankruptcy case, he submitted the 2011 OIC covering his 1997, 1998, 1999, 2008, and 2009 outstanding tax obligations. The Court agrees that Terrell's submission of the 2011 OIC supports the IRS's contention that Terrell "knew he still had a duty" to pay these taxes subsequent to his 2010 discharge.
Additionally, the Court considers it telling that the only debt Terrell scheduled to the IRS in his 2010 bankruptcy case was a priority debt of $95,000 (with no additional information) on Schedule E. Such a tax debt is one within Section 507(a)(8)22 and, therefore, not one which is dischargeable. Because no additional information was provided on Schedule E, the Court has no way of knowing if all of the $95,000 scheduled tax debt in fact related to more recent taxable years and was properly characterized as a priority debt under Section 507(a)(8) or whether that $95,000 debt (or some part thereof) related to Terrell's 1998 and 1999 taxes. However, neither factual scenario lends any credence to Terrell's claim that he believed his 1998 and 1999 taxes were discharged because he either (i) admitted he still owed the taxes and misclassified them as priority nondischargeable taxes (requiring no action on the part of the IRS) or (ii) neglected to schedule the reputedly dischargeable 1998 and 1999 taxes on Schedule F (and the IRS would not have had notice of its need to challenge the alleged dischargeability of the taxes).
Under Section 523(a)(3)(A), a debt that is not scheduled in time to permit timely filing of a proof of claim is not discharged unless such creditor had notice or actual knowledge of the case in time for such timely filing. The Court is aware that, based on a plain meaning reading of Section 523(a)(3)(A), many courts, including the Tenth Circuit, hold that it has no impact on a no-asset chapter 7 case, and, therefore, a debt is discharged regardless of whether or not the debtor scheduled the claim. In re Parker, 313 F.3d 1267, 1268-69 (10th Cir. 2002). But the result is different if the bankruptcy proceeding is identified as a "no asset" case because the debtor fails to disclose assets. Waterson v. Hall, 515 F.3d 852, 856 (8th Cir. 2008) (authorities *824holding that Section 523(a)(3) does not apply in no-asset cases do not apply to an asset case and it does not apply in a situation where there is an undisclosed asset). Here, Terrell did not disclose ownership of David E. Terrell, Inc., the corporation under which he was conducting his home improvement business at the time of his 2010 bankruptcy filing. At the end of the day, Terrell's bankruptcy conduct did not rise to the level of fair dealing and put the IRS at a serious disadvantage without notice that he was ostensibly attempting to discharge his 1998 and 1999 taxes.
The Court has already detailed Terrell's long history of concealing assets and income and his failure to be honest and forthcoming with the IRS and the bankruptcy court. In light of that history, the Court highly doubts Terrell disclosed sufficient and proper information, if any information at all, regarding the IRS's investigation and his criminal tax matter to his 2010 bankruptcy attorney. Terrell did not testify that his bankruptcy attorney specifically advised him that his 1998 and 1999 taxes would be discharged in his 2010 bankruptcy case. Therefore, it is difficult to fathom on what legitimate basis Terrell could possibly claim to believe his 1998 and 1999 taxes were dischargeable and/or discharged.
Moreover, a discharge in bankruptcy is a privilege, not a right, and "[a] debtor who has not been honest and forthcoming - particularly in connection with the bankruptcy itself - does not deserve that privilege." Smith v. Drabik (In re Drabik ), 581 B.R. 554, 561 (Bankr. N.D. Ill. 2018) (citing In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996) ). A debtor who fails to disclose assets and neglects to schedule tax debts he claims are dischargeable not only frustrates the IRS's tax collection efforts - he unfairly manipulates the bankruptcy system beyond its intended purpose.
Based on the foregoing, the Court concludes Terrell knew he had a continuing duty to pay the additional 1998 and 1999 taxes assessed by the IRS beyond paying his restitution in full as well as beyond the discharge he received in his 2010 bankruptcy case.
2. Terrell Willfully Violated His Duty to Pay the 1998 and 1999 Taxes by Concealing Income and Assets, Conducting Business Affairs in a Manner Intended to Make Finding, Tracking, or Levying on Income Difficult, Failing to Cooperate with the IRS, and Frustrating Tax Collection Efforts.
Since nonpayment of a tax obligation only partially satisfies the conduct requirement of the test for willful evasion under Section 523(a)(1)(C), in order to obtain a nondischargeability determination, the IRS must also demonstrate additional acts of commission or culpable omission on Terrell's part and that he possessed the required mental state. In this case, much of the evidence discussed above in connection with Terrell's filing of fraudulent returns also supports a conclusion that Terrell willfully attempted to evade or defeat his 1998 and 1999 taxes. To briefly restate, Terrell: (i) dodged creditors, including the IRS, by continuously forming new corporations to carry on the same business; (ii) frustrated tax collection by repeatedly filing OICs with the IRS that were not in good faith (offering only trivial compromise amounts that did not represent his true ability to pay); and (iii) concealed assets and income when filing both OICs and bankruptcy schedules. Additionally, Terrell frustrated tax collection by resisting discovery in this adversary proceeding, which he filed, and the IRS was forced to obtain a Court order compelling Terrell's cooperation. See *825¶¶ 95 & 96 above. All of Terrell's commissions and culpable omissions in this regard fall squarely within the group of factors courts have determined support a conclusion of willful evasion or defeat of taxes.
Other courts have specifically found that inaccurate information submitted with an OIC is evidence of evading or defeating payment of taxes. In an analogous Louisiana nondischargeability adversary proceeding, a debtor submitted an OIC to the IRS with Forms 443-A that under reported his income. That bankruptcy court reasoned that the clear implication of concealing income on the OIC forms was the debtor's attempt to defeat the IRS from collecting taxes owed. Therefore, the court held the debtor's taxes nondischargeable because "frustrating collection efforts" is evidence of willful tax evasion. Sudderth v. United States (In re Sudderth ) 2002 WL 1058147, *4 (Bankr. E.D. La. 2002) (citing May v. Missouri Dep't of Revenue (In re May ), 251 B.R. 714 (8th Cir. BAP 2000) ). See also, Colish v. United States ex rel. IRS (In re Colish ), 289 B.R. 523, 533-34 (Bankr. E.D. N.Y. 2002) (repeated offers in compromise, very low in relation to tax obligations owed, to forestall collection constituted evasive behavior under § 523(a)(1)(C) ); Feshbach v. United States Dep't of Treasury (In re Feshbach ), 576 B.R. 660, 682 (Bankr. M.D. Fla. 2017) (multiple minimal OICs to the IRS while maintaining lavish spending and lifestyle was evidence of willful evasion).
Terrell may have testified that he did not intend to evade or defeat payment of his 1998 and 1999 taxes. But as the Court has already stated, Terrell simply was not a credible witness. As a result, Terrell's intent can be inferred from his conduct notwithstanding his contrary testimony. As other courts have pointed out, litigants in this type of case should heed the age-old adage that "actions speak louder than words." Zuhone, 88 F.3d at 472. In Zuhone, the bankruptcy court considered the government's proof that the debtors had conducted extremely dubious transactions during the time period the IRS was investigating and litigating against the debtors to pay their taxes. The bankruptcy court then considered the debtors' explanation for their conduct and simply found the testimony incredible. The bankruptcy court explained:
I found the testimony of the debtors was not credible. When they began this journey to deceive the IRS and avoid these taxes, they did what people often do. They became tangled in their own stories.
Zuhone, 88 F.3d at 472. On appeal, the Seventh Circuit affirmed the bankruptcy court's determination that the debtors had willfully sought to evade or defeat their taxes. The Seventh Circuit found some of debtors' explanations "laughable," concluding that once the debtors' proffered testimony was discredited, their actions spoke for themselves. Zuhone, 88 F.3d at 472.
The Court finds the inconsistency between Terrell's words and actions similar to that of the Zuhone debtors.
3. Terrell Neglected to Pay His Tax Debts While Making Substantial Expenditures on Nonessential Items.
The IRS contends the conduct requirement for willful evasion under Section 523(a)(1)(C) is also met because Terrell neglected to pay his outstanding tax debts while at the same time making substantial expenditures on various items that are not essential or necessary. As set forth above in the Findings of Fact, these nonessential expenditures include purchases of new luxury vehicles, a multitude of expensive vacations, a plethora of golfing expenses, charitable contributions, vitamins, health supplements and juices, and discretionary investments. See ¶¶ 105-114 above. When *826combined, Terrell's questionable discretionary expenditures in the face of unpaid taxes total over $279,000. Exhibits 128 and 129.
The Court finds that detailed analysis of the numerous expenditures is unnecessary - the bottom line is Terrell had resources with which he could have paid at least some of the outstanding taxes he owed and simply chose not to. Terrell's conduct in this regard is evidence that he willfully attempted to evade or defeat taxes. United States v. Mitchell (In re Mitchell ), 633 F.3d 1319, 1329 (11th Cir. 2011) (willful intent shown by debtor's discretionary spending, including purchasing vacation timeshares, purchasing stock, repaying a $30,000 personal loan, and donating approximately $81,000 to church); Volpe v. IRS (In re Volpe ), 377 B.R. 579, 589 (Bankr. N.D. Ohio 2007) (citing In re Gardner, 360 F.3d 551, 560-61 (6th Cir. 2004) (debtor who used disposable income for leisure activities and private school tuition, knowing he had a significant tax liability, made voluntary decision to spend the money on himself rather than to pay his taxes, which weighed in favor of finding he willfully evaded his tax liability); United States v. Angel (In re Angel ), 1994 WL 69516, at *4 (tax liabilities are nondischargeable when the debtor had "present ability to pay his taxes with cash in hand and instead bought these items for his own enjoyment").
In fact, viewing Terrell's history as a whole, the only logical inference is that Terrell never intended to pay his taxes but instead submitted insincere OICs and filed bankruptcy to keep IRS collection efforts at bay for as long as possible. These actions have allowed Terrell to continue his comfortable lifestyle that includes golf club memberships and traveling for almost twenty years now, a lifestyle, the Court notes, many more taxpayers might also be able to afford if they did not bother paying their taxes.
4. Terrell's Nonperformance of His 1997 Plea Agreement Supports Nondischargeability of His 1998 and 1999 Taxes.
The Court concludes it is also appropriate to take into consideration Terrell's previous guilty plea and sentencing with respect to filing a fraudulent tax return for 1997. In the Plea Agreement, Terrell acknowledged tax losses for 1998 and 1999 and promised to pay those taxes. In return for his promise, the District Court was quite lenient in sentencing Terrell, relative to the maximum penalties that could have been imposed. See ¶¶ 56, 59, 60 above. To allow Terrell to now avoid paying the 1998 and 1999 taxes he promised to pay would undercut enforcement of criminal plea arrangements.
In a similar Texas nondischargeability adversary, the debtor under IRS investigation for multiple tax periods had plead guilty to filing a fraudulent return for one taxable period and, in her plea agreement, stipulated to tax losses for other tax periods and promised to pay those taxes. When the debtor subsequently filed bankruptcy and attempted to discharge the taxes for those other periods, the Fifth Circuit Court of Appeals stated that debtor's promise to pay those taxes was an integral condition of her sentence. The Fifth Circuit concluded that
In the light of these unique circumstances, we hold ... these other taxes are also non-dischargeable. As a general matter, holding otherwise might - indeed, probably would - encourage unscrupulous debtors to use bankruptcy law as a shield against enforcement of criminal proceedings promises they had no intention of keeping, but nevertheless made, in order to gain a more favorable plea agreement/sentence.
*827Grothues v. IRS (In re Grothues ), 226 F.3d 334, 339 (5th Cir. 2000).
Here, Terrell's Plea Agreement with respect to his fraudulent 1997 return also stipulates to tax losses for years 1998 and 1999 and further provides that, "[i]f defendant enters a plea of guilty as described above and fully meets all obligations under this agreement, he will not be further prosecuted by the United States for any crimes related to his participation in making and subscribing false tax returns during the period from 1998 through 2000." The IRS has not prosecuted Terrell for filing fraudulent returns in 1998 and 1999, and Terrell received a light sentence for his fraudulent 1997 return, but Terrell has yet to make good on his promise to pay his 1998 and 1999 taxes. A determination that those taxes are dischargeable would render the Plea Agreement ineffective and give Terrell significantly more than the benefit of the bargain.
Based on the above discussion, the Court concludes that Terrell willfully evaded and defeated payment of his 1998 and 1999 taxes. Therefore, they are not dischargeable.
III. ANY TAX PENALTIES IMPOSED ON TERRELL ARE DISCHARGEABLE BUT INTEREST IMPOSED ON UNPAID, NONDISCHARGEABLE TAXES IS ALSO NONDISCHARGEABLE.
The Court has determined that, pursuant to Section 523(a)(1)(C), Terrell's 1998 and 1999 income taxes are not dischargeable because he filed fraudulent returns and willfully evaded payment of those taxes. The amount of the 1998 and 1999 taxes Terrell owes will be determined by the District Court. However, by signing a Form 4549, Terrell previously consented to assessment of interest and civil fraud penalties on the nondischargeable taxes owed by Terrell. As a result, the Court finds it appropriate to address the dischargeability of interest and penalties with respect to those taxes.23
Section 523(a)(7) concerns dischargeability of debts for certain fines, penalties, and forfeitures. It provides that the discharge does not apply to any debt-
to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty-
(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition[.]
11 U.S.C. § 523(a)(7). As recently explained by another Oklahoma bankruptcy court:
Under this section, the general rule is: If a debt (1) is a penalty, (2) is payable to a governmental unit, and (3) does not compensate for actual pecuniary loss (i.e., is punitive rather than compensatory), the debt is not discharged. But even if a debt meets these three criteria, if the debt is a tax penalty-as opposed to some other kind of fine, penalty or forfeiture-the penalty will be discharged if it falls within the terms of subsections (A) or (B). Subsection (A) refers to Section 523(a)(1), the category of nondischargeable taxes. If the penalty relates *828to some type of tax that is not excepted from discharge by Section 523(a)(1), then the penalty, along with the related tax, is discharged. Subsection (B) is a sort of statute of limitations that discharges tax penalties "imposed with respect to a transaction or event that occurred" more than three years prior to the petition date.
Moore v. Oklahoma Tax Comm'n (In re Moore ), 2017 WL 934641 (Bankr. N.D. Okla. 2017). In this case, the fraud penalties were assessed in 2006 and relate to Terrell's 1998 and 1999 income tax returns that were filed in 1999 and 2000. Thus, any applicable penalties likely fall into the Section 523(a)(7)(B) category and are dischargeable to the extent they relate to transactions or events occurring more than three years prior to the 2010 petition date. Roberts v. United States (In re Roberts ), 906 F.2d 1440 (10th Cir. 1990). See also Burns v. United States (In re Burns ), 887 F.2d 1541 (11th Cir. 1989).
On the other hand, any interest imposed and accrued on Terrell's unpaid nondischargeable taxes is also nondischargeable. Unlike tax penalties, no specific section of the Bankruptcy Code supplies the rule for dischargeability of interest on nondischargeable taxes. However, the United States Supreme Court provided an early pre-Bankruptcy Code answer to the question in Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964). In Bruning, the Supreme Court held that post-bankruptcy-petition interest on an unpaid tax debt, which was not discharged in a taxpayer's bankruptcy proceeding, remains, after bankruptcy, a personal liability of the taxpayer. Numerous circuit courts of appeal, including the Tenth Circuit, have determined that Bruning continues to apply under the 1978 Bankruptcy Code. Tuttle v. United States (In re Tuttle ), 291 F.3d 1238, 1244 (10th Cir. 2002) ; Fullmer v. United States (In re Fullmer ), 962 F.2d 1463, 1468 (10th Cir. 1992), abrogated on other grounds by Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) ; Burns v. United States (In re Burns ), 887 F.2d 1541, 1543 (11th Cir. 1989). According to the Eighth Circuit,
Under both the Act and the Code, Congress attempted to balance the interests of the debtor, creditors and the government, and in the instance of taxes and interest on such, Congress has determined that the problems of financing the government override granting debtors a wholly fresh start. H.R. Rep. No. 595, 95th Cong., 2d Sess. at 274 (1978), reprinted in 1978 U.S. Code Cong. and Admin. News 5963, 6231. Thus, post-petition interest is nondischargeable, and [the debtors] remain personally liable for that interest subsequent to bankruptcy proceedings.
Hanna v. United States (In re Hanna ), 872 F.2d 829, 831 (8th Cir. 1989).
CONCLUSION
Terrell filed fraudulent income tax returns for tax years 1998 and 1999. Additionally, Terrell willfully attempted to evade or defeat those taxes. Therefore, Terrell's 1998 and 1999 income taxes, the amount of which are to be determined by the District Court, together with any interest imposed and accrued on Terrell's unpaid non-dischargeable taxes, are nondischargeable. Any penalties imposed in connection with the 1998 and 1999 taxes are dischargeable to the extent they relate to transactions or events occurring more than three years prior to the 2010 bankruptcy petition date. However, interest on the nondischargeable taxes is also nondischargeable.
IT IS SO ORDERED.
Unless otherwise indicated, hereafter all references to sections are to the Bankruptcy Code, Title 11 of the United States Code.
Terrell only admitted one exhibit into evidence, Plaintiff's Exhibit 2, which was identical to IRS Exhibit 17. Therefore, all citations to exhibits are to the IRS's exhibits and identified simply as "Exhibit."
The Court would point out in advance that the following may seem a somewhat strange and random assemblage of facts and a less than complete and cohesive chronicle of the now 20-year-long history of the dealings between the parties. But this inevitably results from the passage of considerable time and the inability of Terrell to produce relevant documents. See ¶¶ 95-96 below for more information. In other words, as the party with the burden of proof, the IRS had quite the uphill battle.
Because the various services offered varied over time, the Court will refer to Terrell's business generally as a home improvement business.
Terrell's, Inc. was incorporated January 7, 1992, and dissolved December 8, 1999 (Exhibit 74); Terrell Siding, Inc. was incorporated March 31, 1988, and dissolved December 8, 1999 (Exhibit 71); Terrell Home Center, Inc. was incorporated June 1, 1998 (Exhibit 72); T-Square, L.L.C. was incorporated March 31, 2000 (Exhibit 73); David Terrell, Inc. was incorporated June 9, 2005 (Exhibit 70).
In response to the directive "Please identify all business of which you were an owner, partner, director, co-owner, manager, or held a position of similar authority during the relevant period." Terrell stated:
Plaintiff does not recall all of the businesses of which he was an owner, partner, director, co-owner, manager, or held a position of similar authority during the 1998 and 1999 period. To the best of his recollection, Plaintiff states that he recalls having an interest in or otherwise being involved in Terrell Roofing Corporation, Terrell's Siding, Inc., Terrell's Home Center, T-Squared, Terrell's, Inc., Terrell's Roofing and Siding and Info-Tel Solutions.
Exhibit 29 at p. 3, Interrogatories ¶ 4. Additionally, see ¶ 25 below.
A bankruptcy court may take judicial notice of the docket entries and orders entered in prior bankruptcy cases filed by the same debtor for the purpose of establishing the existence of those materials but not the truth of the facts asserted in them. In re Minor, 531 B.R. 564, 573 (Bankr. E.D. Pa. 2015), aff'd, 579 B.R. 333 (E.D. Pa. 2016). See also Sherman v. Rose (In re Sherman ), 18 F. App'x 718, 721 (10th Cir. 2001) (unpublished)(court may take notice of filings in prior bankruptcy cases).
Calculation of income tax does not include self-employment taxes.
See Filing Number 1900507654, available at: https://www.sos.ok.gov/corp/corpInquiryFind.aspx?Name=Terrell Roofing. This site also reveals another entity incorporated by Terrell that was perhaps an earlier iteration of his home improvement business: Terrell Industries Inc., Filing No. 1900432186, incorporated in May 1985, also apparently known as or associated with Terrell's Sleep World.
The Terrells were divorced in September 2003. Terrell testimony, Tr. 1, p. 103.
The Court modifies the dollar figure of income with "at least" because as noted in ¶¶ 95-96 above, the IRS had no actual books and records of Terrell's home improvement business during the relevant tax years.
Terrell attempted to claim that the Oak Tree Country Club expenses were a business expense, but the evidence did not support such claim. The only proven business-related use of the membership was to hold the 1997 company Christmas party there. Poindexter testimony.
The disparity in his demeanor was so flagrant that the Court was compelled to admonish Terrell during the trial.
This is consistent with treatment of fraudulent returns and evasion of taxes under the Internal Revenue Code. Title 26 U.S.C.A. § 6501(c) provides as follows:
(1) False return. - In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.
(2) Willful attempt to evade tax. - In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
26 U.S.C.A. § 7206 provides "Any person who - (1) Declaration under penalties of perjury. - Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter ... shall be guilty of a felony[.]"
26 U.S.C.A. § 6663 provides "(a) Imposition of penalty. - If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud."). Although the analytical framework is the same, civil fraud penalty cases require the IRS to prove fraud by clear and convincing evidence. See 26 U.S.C.A. § 7454(a) ; Tax Court Rule 142.
For the definition of responsible party, see 26 U.S.C. §§ 6671(b), 6672 ; Johnson v. United States (In re Johnson ), 283 B.R. 694, 701-02 (Bankr. N.D. Tex. 2000).
26 U.S.C. § 6672 provides in pertinent part: "(a) General rule. - Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over[.]"
Available at 2007 WL 2989267, 1 ; https://www.irs.gov/irm/part1/irm_01-002-014.
Since conventional wisdom is to retain business books and records and tax documentation for a period of seven years, at first blush, it may seem normal for Terrell to no longer have books and records from twenty years ago. However, the IRS first contacted Terrell in 1999 about unpaid employment trust fund taxes, and shortly thereafter, began investigating his personal income tax returns for tax years 1997 to 1999. Because Terrell has been under investigation since that time and has continuously sought to compromise the tax deficiencies with the IRS and/or discharge them in bankruptcy, Terrell cannot be absolved from neglecting to keep his books and records.
In Hawkins v. Franchise Tax Board, 769 F.3d 662 (9th Cir. 2014), the Ninth Circuit Court of Appeals held that for purposes of Section 523(a)(1)(C), willfully attempting to evade or defeat a tax debt "requires that the acts be taken with the specific intent to evade the tax." Hawkins, 769 F.3d at 670. But the Hawkins decision is not controlling in this jurisdiction, and the Court declines to adopt any such specific intent requirement. For more information, see Matthew Williams, Lavish Spending as Evidence of "Willful Tax Evasion:" How the Ninth Circuit's Requirement of "Specific Intent" in Hawkins Creates a Circuit Split and Facilitates Abuse of the Bankruptcy System, 68 Rutgers U.L. Rev. 517 (2015).
(a) The following expenses and claims have priority in the following order:
(8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for-
(A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition-
(i) for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition;
(ii) assessed within 240 days before the date of the filing of the petition, exclusive of-
(I) any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days; and
(II) any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240-day period, plus 90 days; or
(iii) other than a tax of a kind specified in section 523(a)(1)(B) or 523(a)(1)(C) of this title, not assessed before, but assessable, under applicable law or by agreement, after, the commencement of the case[.]
11 U.S.C. § 507(a)(8).
The Court notes that Exhibits 4 & 5, the IRS Certificates of Assessments, Payments, and Other Specified Matters for tax years 1998 and 1999, contain entries indicating the fraud penalties were abated, but nevertheless lays out the pertinent law regarding penalties should any penalties be applicable. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501830/ | Raymond B. Ray, Judge
THIS MATTER came before the Court for a hearing on October 31, 2018, upon Defendant Michael Brandt's Motion to Dismiss (the "Motion") [D.E. 7], Plaintiff Great American Insurance Company's ("Great American") Response [D.E. 16], and Defendant's Reply [D.E. 18] thereto. The Court - having reviewed and considered the Motion, Response, Reply, court file, arguments of the parties and being otherwise duly advised in the premises - denies Defendant's Motion.
Factual Allegations
Plaintiff initiated the above styled adversary proceeding on August 27, 2018 upon the filing of their Complaint. [D.E. 1]1 . Plaintiff's Complaint objects to the dischargeability of a debt under 11 U.S.C. § 523(a)(4). Great American is a surety and construction bond company. [D.E. 1, ¶ 11]. Structural Integrity Contractors, Inc. ("Structural") is a Florida corporation owned by the Defendant. [D.E. 1, ¶ 12]. To secure construction and surety bonds2 on behalf of Structural, Defendant entered into an indemnity agreement with Great American. [D.E. 1, ¶¶ 9, 16]. The indemnity agreement contained a trust provision. This provision states:
"Undersigned covenant and agree that all funds received by them, or due or to *831become due under any contract covered by any Bond are trust funds whether in the possession of the Undersigned or another, for the benefit of all parties to whom Undersigned incurs obligations in the performance of the contract covered by the Bond..."
[D.E. 1, Ex. A pg. 2].
As of the petition date, Great American had received claims on two bonds covered by the indemnity agreement. These bonds are the PK-14-053 Van Buren Parking Garage - Structural Defects Survey and Repairs ("Parking Garage Bond") and the Cricket Club Condominium Concrete Restoration and Waterproofing bond ("Cricket Club Bond"). [D.E. 1, ¶ 18-19]. As of the filing of the Complaint, Great American has incurred losses of $401,140.00 from claims against the Parking Garage Bond and Cricket Club Bond3 . [D.E. 1, ¶ 28]. Great American also loaned Structural $26,650.65 to assist Structural in making payroll relating to projects covered by Great American's bonds.
Structural received funds for work performed on projects covered by both the Parking Garage Bond and Cricket Club Bond. [D.E. 1, ¶ 37]. These funds were used, among other things, to pay for the personal expenses of the Defendant. [D.E. 1, ¶ 38].
Conclusions of Law
A. Standard of Review
Federal Rule of Civil Procedure 8(a)4 simply requires a plaintiff to plead "... a short and plain statement of the claim showing that the pleader is entitled to relief..." Fed. R. Civ. P. 8(a)(2). A defendant may move to dismiss a complaint under Rule 12(b)(6) for failure to state a claim. Fed. R. Civ. P. 12(b)(6)5 . To survive a motion to dismiss, a complaint must "state a plausible claim for relief." Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In the Eleventh Circuit, "a complaint is plausible on its face when it contains sufficient facts to support a reasonable inference that the defendant is liable for the misconduct alleged." Gates v. Khokar , 884 F.3d 1290, 1296 (11th Cir. 2018). In making this determination, the Court will "accept the facts alleged in the complaint as true, drawing all reasonable inferences in the plaintiff's favor." Id. (internal citations omitted). The Court's review of the pleadings is "limited to the four corners of the complaint and any documents referred to in the complaint which are central to the claim." Nationwide Advantage Mortg. Co. v. Federal Gaur. Mortg. Co. , 2010 WL 2652496 *2 (S.D. Fla. 2010).
B. Exception to Discharge Under 11 U.S.C. § 523(a)(4)
11 U.S.C. § 523(a)(4) exempts from discharge a debt which was incurred via "... fraud or defalcation while acting in a fiduciary capacity..." 11 U.S.C. § 523(a)(4). The existence of a fiduciary capacity under § 523(a)(4) is defined under federal law. McDowell v. Stein , 415 B.R. 584, 594 (S.D. Fla. 2009). The term is defined narrowly and only applies where there is an express or technical trust in existence prior to the act of defalcation. Hanft v. Church (In re Hanft ), 315 B.R. 617, 623 (S.D. Fla. 2002) (citing Quaif v. Johnson , 4 F.3d 950, 953 (11th Cir. 1993) ).
*832However, state law is relevant to this determination and a party will be considered to be acting in a fiduciary capacity "...if state law imposes the duties of a trustee on a party..." McDowell , 415 B.R. at 595.
a. Existence of a Fiduciary Duty
The crux of Defendant's argument is that a technical trust requires the segregation of trust assets. In support of this, Defendant relies heavily on the holdings of Quaif v. Johnson and Cooseman's Miami, Inc. v. Arthur (In re Arthur) , 589 B.R. 761 (Bankr. S.D. Fla. 2018). However, Defendant misinterprets the holdings of Quaif and Cooseman's .
Quaif v. Johnson involved a trust that arose pursuant to statute. Quaif v. Johnson , 4 F.3d 950, 953 (11th Cir. 1993). In analyzing whether the statutory trust fell within the exception to discharge contained in § 523(a)(4), the Eleventh Circuit specifically noted the difficulty associated with classifying the statutory trust which "...create fiduciary duties that are dependent upon the relationship between the parties but fit into neither of the traditional categories." Id. The Eleventh Circuit observed that the new, statutory trusts, fell somewhere between express trusts, which traditionally fell under the purview of § 523(a)(4), and a trust created by operation of law. Id. at 593-594. To determine if the trust created by the Georgia statute in issue was more akin to an express trust, and thus covered by § 523(a)(4) or a constructive or residual trust, the Eleventh Circuit looked to whether trust assets had been segregated prior to any defalcation. Id. at 954. Rather than standing for the proposition that segregation is required for any trust to fall within § 523(a)(4)'s exception to discharge Quaif stands for the proposition that segregation is needed before a statutory trust will fall within § 523(a)(4)'s exception to discharge6 . This interpretation is supported by the Eleventh Circuit's decision in Guerra v. Fernandez-Rocha , where the Eleventh Circuit further discussed § 523(a)(4)'s exception to discharge. In applying the holding of Quaif , the Eleventh Circuit stated "Quaif also discussed the trends in judicial interpretation of the § 523(a)(4) exception and noted that courts seemed to include the voluntary, express trust created by contract within the scope of "fiduciary capacity" as used in § 523(a)(4)." Guerra v. Fernandez-Rocha (In re Fernandez-Rocha) , 451 F.3d 813, 816 (11th Cir. 2006).
Cooseman's Miami Inc. v. Arthur (In re Arthur) , lends itself to a similar analysis. Cooseman 's also examined whether a statutory trust created fiduciary duties prior to defalcation. The Cooseman 's Court noted that "a technical trust is more akin to a trust created by voluntary agreement., i.e. an express trust." Cooseman's , 589 B.R. at 766. Just as in Quaif , the Court in Cooseman 's noted that "statutory trusts fall in the middle" and endeavored "[t]o determine whether a statutory trust is more analogous to an express trust than it is to a resulting or constructive trust..." Id. Thus, just as in Quaif , the holding of Cooseman 's is limited to statutory trusts.
The same can be said for the other cases cited by Defendant in his Reply. For example, Defendant cites to this Court's decision in Ershowsky v. Freedman (In re Freedman) , 431 B.R. 245 (Bankr. S.D. Fla. 2010) for the same proposition, that segregation is required to establish a fiduciary capacity. [D.E. 18, ¶ 5]. However, Ershowsky stands for the very conclusion reached *833by the Court in the present case, holding that § 523(a)(4)'s exception to discharge "require[s] the existence of an[ ] express or technical trust, and included statutorily created trusts if they were somehow segregated from other amounts." Ershowsky , 431 B.R. at 262. The Court's present conclusion, that a segregation requirement is limited to statutory trusts is entirely consistent with the holding of Ershowsky . Id.
The Court believes the allegations are more like the facts of Developers Sur. & Indem. Co. v. Bi-Tech Constr., Inc. , 979 F.Supp.2d 1307 (S.D. Fla. 2013). Developers involved an indemnity agreement that contained a trust provision7 substantially similar to the provision contained in the indemnity agreement executed between Plaintiff and Defendant. Developers , 979 F.Supp.2d at 1312. In holding that the indemnity agreement created an enforceable trust, the court held "in order for the language of the General Indemnity Agreement to create a fiduciary relationship, i.e., in this case a trust, the language must create a trust, establish a trust corpus and show an intent by the parties to create a fiduciary relationship." Id. at 1318 (internal citations and quotations omitted). The Court then specifically analyzed whether the actions of the defendant constituted a defalcation by analyzing defalcation in the context of 11 U.S.C. § 523(a)(4). Id. at 1318-1319.
Just as in Developer's , the indemnity agreement executed between the Plaintiff and Defendant contained a trust provision. The trust provision contained in the indemnity agreement is sufficient to establish an express trust. The provision provided for a trust corpus and an intent by the parties to create a fiduciary relationship. Therefore, there existed a fiduciary relationship between Plaintiff and Defendant, regardless of segregation. See : Developers , 979 F.Supp.2d at 1318 (holding that a trust provision contained in an indemnity agreement was sufficient to establish a fiduciary relationship.) Unlike the statutory trusts in Cooseman 's and Quaif , the relationship between the Plaintiff and Defendant fits within those relationships traditionally covered by § 523(a)(4)'s exception to discharge. See : Quaif , 4 F.3d at 954-954 ("In the early judicial interpretation of the predecessors to § 523(a)(4), the courts seemed to include the voluntary 'express' trust within the scope of fiduciary capacity.") and : Guerra , 451 F.3d at 816 ("Quaif also discussed the trends in judicial interpretation of the § 523(a)(4) exception and noted that courts seemed to include the voluntary, express trust created by contract within the scope of "fiduciary capacity" as used in § 523(a)(4).")
Therefore, because the trust provision contained in the indemnity agreement executed between Plaintiff and Defendant was sufficient to establish a trust, a fiduciary relationship existed between Plaintiff and Defendant.
b. Defalcation
The Supreme Court has defined defalcation in § 523(a)(4) to require an intentional wrong "...where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct..." Bullock v. BankChampaign, N.A. , 569 U.S. 267, 273, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013). Intentional conduct includes *834"...conduct that the fiduciary knows is improper, but also reckless conduct of the kind that the criminal law often treats as the equivalent." Id. at 274, 133 S.Ct. 1754. Such conduct must occur after the fiduciary relationship is established. Quaif , 4 F.3d at 954.
Here, Plaintiff has alleged sufficient facts to allege that an act of defalcation occurred after a fiduciary relationship had been established. Further, a factual issue exists as to whether the Defendant's conduct was intentional.
Conclusion
The Court finds that the Plaintiff has alleged sufficient facts to establish a prima facie claim under 11 U.S.C. § 523(a)(4). Therefore, it is:
ORDERED that:
1. The Motion [D.E. 7] is DENIED without prejudice .
2. Defendant shall file an answer within fourteen (14) days after entry of this Order.
ORDERED.
Docket entries refer to docket entries in the adversary proceeding 18-01351-RBR unless otherwise indicated.
Great American issued bonds on five (5) separate projects on behalf of Structural [D.E. 1, ¶ 16-17].
Great American alleges that these losses are continuing in nature. [D.E. 1, ¶ 28].
Made applicable through Federal Rule of Bankruptcy Procedure 7008. Fed. R. Bankr. P. 7008
Made applicable through Federal Rule of Bankruptcy Procedure 7012. Fed. R. Bankr. P. 7012
Segregation of trust assets is a hallmark of when the fiduciary relationship arose, not the existence of one.
The indemnitors in Developers agreed to:
"... hold all money and all other proceeds of the Obligation, however received, in trust for the benefit of Surety and to use such money and other proceeds for the purposes of performing the Obligation and for discharging the obligations under the Bond, and for no other purpose until the liability of the Surety under the Bond is completely exonerated." Developers , 979 F.Supp.2d at 1312 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501832/ | Austin E. Carter, United States Bankruptcy Judge
Before the Court is Microf, LLC's Motion for Allowance and Payment of Administrative Claim (Doc. 39), and the Debtor's opposition thereto (Doc. 40), which came on for hearing on August 8, 2018. Attending the hearing were counsel for Microf, LLC ("Microf"), counsel for the Debtor Paul L. Cumbess (the "Debtor"), and Camille Hope, the Chapter 13 trustee (the "Trustee"). After the hearing, the parties were given time to submit post-hearing briefs. Microf and the Trustee did so.
A proceeding to determine allowance of an administrative expense is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O). Having considered the parties' pleadings and arguments, the remainder of the record, and applicable legal authority, the Court states its findings of fact and conclusions of law in accordance *845with Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 7052, which is made applicable through Bankruptcy Rule 9014(c).
I. Findings of Fact
No witnesses testified at the hearing, but the following facts are undisputed. In 2015, prior to filing of this case, the Debtor entered into a rental lease agreement (the "Lease") with Microf for HVAC equipment for his residence.1
The Debtor filed his bankruptcy petition in August 2017 and his plan was confirmed a short while later (See Doc. 21). The confirmed plan provides for the Debtor's assumption of the Lease and states that the Debtor will be the disbursing agent to Microf (Doc. 21, ¶ 2(m), (l) ). The confirmed plan also provides for the curing of pre-petition arrearage due to Microf, to be disbursed by the Trustee (Doc. 21, ¶ 2(m) ).
As to estate property, the confirmed plan provides that:
Unless otherwise ordered by the court, all property of the estate, whether in the possession of the trustee or the debtor, remains property of the estate subject to the court's jurisdiction, notwithstanding § 1327(b), except as otherwise provided in paragraph (m) above. Property of the estate not paid to the trustee shall remain in the possession of the debtor.
(Doc. 21, ¶ 2(p) ).
Several months after plan confirmation, the Debtor defaulted on payments due under the Lease. As of July 6, 2018, the Debtor owes $1,763.95 in arrearages on the Lease.
At the hearing, the Debtor's attorney acknowledged that the Debtor has possession of the HVAC equipment, and that the Debtor "is benefiting from its use." No evidence or other information about the Debtor's use of the HVAC equipment or any other heating or cooling equipment was offered.
The question before the Court is whether the amounts due for post-confirmation missed Lease payments qualify as administrative expenses under § 503(b)(1)(A).2
II. Conclusions of Law
A. Summary
Microf asserts that the bankruptcy code and applicable case law provide that a debtor's post-confirmation default under a lease assumed in a chapter 13 plan gives rise to the lessor's administrative expense claim for damages. Microf seeks the allowance of an administrative expense for its claim and, if necessary, an order requiring a modified plan to provide for the payment of that claim.
The Trustee opposes this motion, arguing primarily that (1) the Debtor's use of the leased HVAC equipment does not meet the "actual, necessary costs and expenses of preserving the estate" standard of § 503(b)(1)(A), and (2) even if the Lease payments were actual and necessary to preserve the estate, Microf's claim is already classified in the plan and cannot now-post-confirmation-be reclassified as an administrative expense, as such reclassification would unfairly grant priority to *846Microf's claim ahead of other creditors' claims. The Trustee also recites several policy and practical concerns that she suggests should weigh against Microf's Motion.
The Debtor takes no position as to whether the missed Lease payments qualify as administrative expenses, but expresses concern about the mechanics, method, and payment schedule of both the current arrears and any future arrears. The Debtor opposes any order requiring plan modification.
After due consideration, the Court holds that Microf has not met its burden with respect to its Motion. Contrary to Microf's assertion, the Court finds that an administrative expense claim does not arise automatically from the default under a lease assumed by a debtor in a chapter 13 plan. Therefore, to establish an administrative expense claim, Microf must demonstrate that the subject of the assumed lease-here, the HVAC equipment-was an actual and necessary expense for the preservation of the estate. Microf has failed to do so.
B. Standard and Burden of Proof
Section 503 establishes the standard for allowance of administrative expenses. Under § 503(b)(1)(A), a party may move for allowance of administrative expenses for the "actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A). In assessing whether an expense falls within § 503(b)(1)(A), the Court must consider whether there has been "an actual, concrete benefit to the estate." Broadcast Corp. of Ga. v. Broadfoot (In re Subscription Television of Greater Atlanta) , 789 F.2d 1530, 1532 (11th Cir. 1986). A potential benefit is not sufficient. Id. The standard for allowance of an administrative claim should be narrowly construed. Varsity Carpet Servs., Inc. v. Richardson (In re Colortex Indus., Inc.) , 19 F.3d 1371, 1377 (11th Cir. 1994) ("[S]ection 503 priorities should be narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors." (citing Otte v. U.S. , 419 U.S. 43, 53, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974) ) ); Matter of Concrete Prod., Inc. , 208 B.R. 1000, 1006 (Bankr. S.D. Ga. 1996) ("The claim of priority should be founded on a strict statutory basis; if the claim does not derive from the language of Section 503, it must fail.").
The claimant bears the burden of proving both that the expense was actual and necessary, as well as the value provided. In re Bridgeport Plumbing Prod., Inc. , 178 B.R. 563, 569 (Bankr. M.D. Ga. 1994) (Laney, J.) ("The burden of proving entitlement to an administrative expense claim was on [the claimant], to prove not only that the expense was 'actual' and 'necessary,' but also the reasonable value of the expense.").
C. Analysis
a. Presumed Benefit to Estate
Administrative claims are governed by § 503(b)(1)(A). This section provides, in relevant part, that allowed administrative expenses shall include "the actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A).
Microf argues that an assumed lease is presumptively beneficial the estate. In support of this assertion, Microf cites two well-known bankruptcy treatises, W. Homer Drake, Jr., Paul W. Bonapfel & Adam M. Goodman, Chapter 13 Practice and Procedure , § 6:10 (2018) and Collier on Bankruptcy ¶ 503.06[6][b] (Richard Levin & Henry J. Sommer eds., 16th ed. 2018).
Chapter 13 Practice and Procedure indeed recognizes the "general principle ... that assumption itself creates the administrative *847expense obligation such that the nondebtor party need not show benefit to the estate as a result of the assumption," but the treaties also notes, and Microf concedes, that "adherence to this rule is not universal." Chapter 13 Practice and Procedure § 6:10. Two cases are cited for its stated general principle. Id. , § 6.10 n.5 (citing In re Michalek , 393 B.R. 642 (Bankr. E.D. Wis. 2008) and In re Wells , 378 B.R. 557 (Bankr. S.D. Ohio 2007) ). The Court does not consider In re Michalek to support the general principle for which it is cited. To the contrary, in that case, the court held that an administrative claim does not automatically arise from a post-petition breach of a lease assumed under a chapter 13 plan. In re Michalek , 393 B.R. 642, 644, 646 ("I do not find support in the code for the proposition that a post-assumption breach automatically obligates the estate, or the plan, for damages from that breach.... I do not believe the code supports automatic treatment of the lessor's claim as an administrative expense claim.... So to obligate the estate, there must be benefit to the estate as required by section 503(b)(1)(A)").3
The second case cited in Chapter 13 Practice and Procedure , In re Wells , does support the principle that an administrative claim should result automatically upon a default under an assumed lease. However, that case has been distinguished and criticized by more recent holdings. For its holding, the Wells court relied primarily upon an unpublished Sixth Circuit decision involving a chapter 11 debtor. See In re Wells , 378 B.R. at 560 (citing In re Revco D.S., Inc. , No. 93-3597, 1994 WL 376884 (6th Cir. July 18, 1994) ). A later Sixth Circuit case criticizes Wells based on the distinctions between a chapter 11 debtor-in-possession and a chapter 13 debtor. Ford Motor Credit Co. v. Bankr. Estate of Parmenter (In re Parmenter) , 527 F.3d 606, 610 (6th Cir. 2008) ("[T]here is a material difference between the two settings: Whereas a Chapter 11 debtor-in-possession acts on behalf of the estate, a Chapter 13 debtor who assumes and pays for a lease outside of the plan does not." (citations omitted) ). Other opinions similarly attach significance to the difference between chapter 11 and chapter 13 cases. See, e.g., In re Rosenhouse , 453 B.R. 50, 56 (Bankr. E.D.N.Y. 2011) ("Unlike in a chapter 11 case, the Bankruptcy Code and Rules do not establish any requirement that the court approve a chapter 13 debtor's assumption of a personal property lease as being in the best interests of creditors or the bankruptcy estate, or even as a proper exercise by the debtor of his or her business judgment"); In re Juvennelliano , 464 B.R. 651, 653-54 (Bankr. D. Del. 2011) (discussing difference between chapters). The Court considers the differences between Chapter 13 and Chapter 11 significant in the context of Microf's request for an administrative expense.
As for Collier , the section to which Microf cites does include the general statement that "any damages for breach of [an assumed] contract or lease will be entitled to administrative expense priority." Collier on Bankruptcy ¶ 503.06[6][b]. However, each of the three cases cited for this statement are chapter 11 cases that pre-date the 2005 enactment of § 365(p)(1).Id. at ¶ 503.06[6][b] n.86 (citing In re Frontier Props., Inc. , 979 F.2d 1358 (9th Cir. 1992) ; In re Norwegian Health Spa, Inc. , 79 B.R. 507 (Bankr. N.D. Ga. 1987) ; and Samore v. Boswell (In re Multech Corp.) , 47 B.R. 747 (Bankr. N.D. Iowa 1985) ). As explained *848below, the Court does not consider pre-2005 Chapter 11 cases helpful on the issue before the Court, due to the provisions of § 365(p)(1), enacted in 2005.4
With respect to the presumed benefit to the estate from an assumed lease, the Court is persuaded by a case to which no party cites. In re Ruiz , No. 09-38795-BKC-LMI, 2012 WL 5305741 (Bankr. S.D. Fla. Feb. 15, 2012). The facts of In re Ruiz are analogous to ours-a lessor sought an administrative expense claim for post-confirmation default under a lease assumed by the debtor in a chapter 13 plan. Id. at *2. The plan provided that the debtor rather than the trustee would make the lease payments. Id. at *4. Upon default, the lessor filed a motion seeking allowance of an administrative expense. Id. at *4. The court denied the lessor's motion. Id. at *11.
It its analysis, the court weighed the historical presumption of benefit to the estate by the assumption of a lease, against requiring a lease claimant to demonstrate an "actual, concrete benefit to the estate." Id. at *2. The court took issue with the historical practice of presuming benefit because the 2005 enactment of § 365(p) (as part of BAPCPA) gave rise to a meaningful distinction between the assumption of a lease by a debtor and the assumption of a lease by a Chapter 13 trustee. Id. at *3. The court focused on the interplay between §§ 365(d)(2), (p)(1), and 1322(b)(7) and concluded that when the debtor assumed the lease at plan confirmation under § 1322(b)(7), the lease was no longer property of the estate by operation of § 365(p)(1).5 Id. at *1-2. The court reasoned that because § 365(p)(1) had removed the leased property from the estate, the lessor must show "actual, concrete benefit to the estate" to prevail on its request for administrative claim. Id. The court concluded that the debtor, rather than the estate, was responsible for the default amounts owing under the lease. Id. at *2.
The logic of Ruiz applies to this case, as to this issue. Under § 365(d)(2), the Trustee could have assumed the Lease at any time before plan confirmation. Because the Trustee did not do so, however, § 365(p)(1) took effect, removing the HVAC equipment from the estate and terminating the automatic stay with respect thereto.6 Accordingly, *849when the Debtor's plan was confirmed and the Lease assumed under § 1322(b)(7), the HVAC equipment had already ceased to be property of the estate and was no longer protected by the automatic stay.7 The Court agrees with Ruiz, that the relevant code sections should preclude the finding of any presumed or automatic benefit to the estate by virtue of the Lease assumption. See also In re Michalek , 393 B.R. 642, 646 (Bankr. E.D. Wis. 2008) ("I do not believe the code supports automatic treatment of the lessor's claim as an administrative expense claim.") (emphasis in original).8
The analysis in Ruiz also undercuts three cases cited by Microf: In re Wright , 256 B.R. 858 (Bankr. W.D.N.C. 2001) ; In re Masek , 301 B.R. 336, 338 (Bankr. D. Neb. 2003) ; and In re Smith , 315 B.R. 77 (Bankr. W.D. Ark. 2004). Both Wright and Masek rely on In re Pearson , 90 B.R. 638 (Bankr. D. N.J. 1988), for their respective findings that the assumption of the lease creates the resulting administrative expense status. In re Pearson was decided in 1988, long before the 2005 enactment of § 365(p)(1). The Court agrees with the Ruiz court's observation that the enactment of § 365(p)(1) would preclude the Pearson court's conclusion today. Ruiz , 2012 WL 5305741, at *3 (holding that Pearson court's reliance on chapter 11 cases would not be appropriate after enactment of BAPCPA and § 365(p)(1) ).
Smith , on the other hand, is not expressly based on Pearson , but it can still be distinguished by the Ruiz rationale, because it pre-dates the 2005 enactment of § 362(p). 315 B.R. 77.
b. Actual and Necessary for Preservation of the Estate
In evaluating whether an expense meets the "actual and necessary" standard of § 503(b)(1)(A), "the inquiry focuses on whether the estate received 'actual benefit,' not whether the creditor experienced a loss due to debtor's possession of its property." In re Williamson , No. 96-41777, 1997 WL 33474939, at *3 (Bankr. S.D. Ga. June 27, 1997).
Microf argues that the "Debtor's use and possession of the HVAC equipment ... has benefited creditors by substantially increasing the habitability of his dwelling, and therefore aiding Debtor's performance of his plan." (Doc. 39, ¶ 5). In support of this argument, Microf cites to In re Espinosa . 542 B.R. 403, 412 (Bankr. S.D. Tex. 2015). In Espinosa , the court considered, among other things, whether a debtor's rent-free use of a residence benefited *850the estate such as to satisfy § 503(b)(1)(A). The court held that a benefit to the estate must be shown to qualify for an administrative expense priority, regardless of whether the property was subject to a lease, but found it "self-evident" that a debtor needs a home in which to live while prosecuting his bankruptcy case. Id. at 411.
The Trustee, on the other hand, argues that, to qualify as an administrative expense under § 503(b)(1), an expense must generate income and otherwise actually preserve the estate. She characterizes the HVAC equipment as a consumer good which, while perhaps useful to the Debtor's residence, does not generate income which helps with plan payments; therefore, the Trustee argues, the defaulted lease payments cannot qualify as an administrative expense.
The Trustee cites two cases in support of her argument, but only In re Scott is applicable.9 209 B.R. 777 (Bankr. S.D. Ga. 1997). There, the court applied Eleventh Circuit precedent to determine the standard for allowance of administrative expenses, explaining that the "debtor must have received a benefit which was actual and necessary to the preservation of the estate." Id. at 779-80, 782 (citing Varsity Carpet Servs., Inc. v. Richardson (In re Colortex Indus.) , 19 F.3d 1371, 1377 (11th Cir. 1994) ). The court then dissects Code and case law and distinguishes between residential housing leases and commercial leases, opining that it is unlikely that a residential housing lease could be shown as an actual and necessary cost of preserving the estate under § 503(b)(1)(A). Id. at 783.10
As noted previously, Eleventh Circuit precedent requires a bankruptcy court to narrowly construe a claim for administrative expenses. In re Colortex Indus. , 19 F.3d at 1377. Applying this standard, the Court finds that Microf has failed to meet its burden of proof to demonstrate that the Lease payments were an actual, necessary cost and expense of preserving the estate.
Microf offered no evidence of benefit to the estate, but instead requests that the Court recognize an inherent benefit of the HVAC equipment, due to its "substantially increasing the habitability" of the Debtor's residence. However, the only case to which Microf cites in support of this request, In re Espinosa , is distinguishable. 542 B.R. 403, 412. Aside from the fact that the position of the Espinosa is not unanimous11 (or binding on this Court), that *851case involved a debtor's residence, which is arguably easier to recognize as generating a "self-evident" benefit to the preservation of the estate than is HVAC equipment. HVAC equipment is surely common, and perhaps ubiquitous, but it does not rise to the same level of a necessity in the context of a chapter 13 debtor and estate as does a residence.
Moreover, unlike in this case, in Espinosa the court determined that, without the residence provided by the creditor, the debtors would have had to pay for housing elsewhere-thus, the money saved on rents and costs borne by the creditor benefited the bankruptcy estate. 542 B.R. at 411 ("Debtors were spared the need to move, representing an expense saved, and the need to spend money on an apartment rental or home purchase. In consequence, more money was available to satisfy Debtors' creditors in the chapter 13 plan"). Here, however, no evidence was offered to show that the Debtor would have had to seek alternate means of heating or cooling, and if so at what expense.
Although the Court recognizes that the majority of residences in our area and indeed country have HVAC systems and further recognizes the general concession at the hearing that the Debtor is benefitting from the HVAC system, the Court cannot inherently recognize without evidence that the Debtor's use of the HVAC equipment-which is not property of the bankruptcy estate under § 365(p)(1) ---provided an actual, concrete benefit to the preservation of the estate. Many factual possibilities have not been addressed and the Court cannot summarily assume unanswered questions fall in favor of Microf.12
Because the Court has found that Microf failed to meet its burden to show its entitlement to an administrative claim for the post-confirmation missed Lease payments, the Court need not address (in dicta) the other arguments raised by the Trustee against the requested administrative expense.
Accordingly, for these reasons, IT IS HEREBY ORDERED that Microf's Motion for Allowance and Payment of Administrative Claim is DENIED.
SO ORDERED.
In a pleading filed earlier in the case, Microf asserted that the Lease is a "true lease" under Georgia law. (See Objection to Confirmation , Doc. 11). Neither the Trustee nor the Debtor has disputed that assertion.
Unless otherwise indicated, all references herein to "section" or "§" refer to a corresponding section of the Bankruptcy Code, and all references to the "Bankruptcy Code" or the "Code" refer to Title 11 of the United States Code.
The Michalek court cites to In re Wells with disapproval for the automatic creation of estate or plan liability for breach of an assumed lease. Michalek , 393 B.R. at 644 (citing In re Wells , 378 B.R. 557 ).
Another section in Collier, in addressing § 365(g), suggests that it is an open question whether damages from a post-assumption lease or contract breach are entitled to administrative expense priority. Collier on Bankruptcy ¶ 365.10[5]. Although Collier suggests that the "better approach is to recognize that the estate receives a benefit of the assumed contract," that statement seems difficult to reconcile with § 365(p)(1), which, as explained later in this Order, results in the HVAC equipment's exclusion from the bankruptcy estate at the time the Lease was assumed. This Court sees no reason to presume a benefit to the estate by a debtor's assumption of a lease of property explicitly determined not to be property of the estate.
Section 365(p)(1) provides that "[i]f a lease of personal property is rejected or not timely assumed by the trustee under subsection (d), the leased property is no longer property of the estate and the stay under section 362(a) is automatically terminated." 11 U.S.C. § 365(p)(1).
Despite the broad wording of § 365(p)(1) that arguably provides for the termination of the stay as to all creditors, for a debtor and all property, the more reasonable reading of Congressional intent is that the stay termination under that section is intended to apply to both the leased property and the debtor, but only as to the subject lease. See Collier on Bankruptcy ¶ 365.10 ("Interestingly, the literal language of section 365(p)(1)... appears to effect a total termination of the automatic stay, for all creditors, for all property, for all actions, in any case in which 'a lease [any lease!] of personal property is rejected or not timely assumed by the trustee.' Such a result would be absurd and appear to be demonstrably at odds with clear congressional intent. A more charitable reading suggests that Congress intended only to terminate the stay as to the particular lessor, lease, and leased property that has been rejected."
The provision in the Debtor's plan that property of the estate will remain in the estate after confirmation does not save Microf, because when that provision became effective-at confirmation-the HVAC equipment had already been dropped from the estate under § 365(p)(1), which took effect when the trustee did not assume the HVAC Lease before confirmation per § 365(d)(2). So, the plan provision preserving property of the estate as such did not reach the non-estate-property HVAC equipment.
The logic of Ruiz is consistent with the line of cases holding that an administrative expense claim must "result[ ] from a transaction between the claimant and the trustee of the bankruptcy estate or a debtor in possession ...." See, e.g., In re New WEI, Inc. , No. 15-02741-TOM-7, 2018 WL 1115200, at *3 (Bankr. N.D. Ala. Feb. 26, 2018) (citations omitted). Here, of course, the transaction was between the Debtor and Microf, as the Lease was assumed by the Debtor under § 1322(b)(7) rather than by the Trustee or debtor in possession (which does not exist in this case).
In the other case cited, the Fourth Circuit (in an unpublished decision) mentions an evaluation of whether use of a certain property is in connection with a business operation or other profit generation; however, it does so in the context of a pre-petition secured creditor that is seeking an administrative expense, rather than a counterparty to a lease assumed post-petition. Smith v. Henson (In re Henson) , 57 Fed. Appx. 136 (4th Cir. 2003). The court sets forth the usual rule that pre-petition secured creditors (like the movant in that case) are not eligible for administrative expense claims, but instead must rely on the Code's provisions for adequate protection. Id. at 138. The court then recognizes that a "narrow exception" makes pre-petition secured creditors eligible for administrative expense claim status where post-petition use of their collateral helps generate a profit or operate a business. Id. Because Microf is not a pre-petition secured creditor entitled to adequate protection, the Court does not see any application of Henson to the case before it.
Microf asserts that Scott does not apply here due to that court's ruling in that case that there had been no assumption of the rental agreement at issue. See 209 B.R. at 781. However, the Court assigns little importance to this distinction, because it has held (above) that there is no administrative expense automatically resulting from the assumption of the Lease.
Other courts have refused to find that a Chapter 13 debtor's residence inherently benefits his bankruptcy estate. See, e.g., In re Scott , 209 B.R. 777, 781.
Examples of unaddressed factual possibilities include: How often has the Debtor used the HVAC equipment during the period in question? Has the Debtor had other sources of heating or air conditioning? Has the HVAC equipment been in good working order? Has the Debtor lived at any other residence? | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501835/ | GARY SPRAKER, United States Bankruptcy Judge
The chapter 7 trustee has filed a motion to sell the remaining assets in the debtor's chapter 7 estate, chief among them litigation claims against part owner Brad Giroux and his wife, Jessica. Competing purchase offers have been submitted by Brad Giroux's father, Robert Giroux, and Brad's former business partner in the debtor, Philip Johnston and his wife, Rebekah. The trustee has requested that this court approve the sale of the remaining assets to Robert Giroux. For the reasons stated below, this court will grant the trustee's request.
I. BACKGROUND
The lengthy history among the parties is well established in this case and will not be repeated in detail here. Only the following facts are relevant to this decision.
Brad Giroux and Philip Johnston were partners in the debtor that operated a fishing lodge in Portage Creek, Alaska. Giroux owned 60% of the business, while Johnston owned the remaining 40% interest.1 Their business relationship soured as Johnston came to believe Giroux was mismanaging the business.2 The Johnstons sued Brad and Jessica Giroux for various business-related infractions.3 The Johnstons obtained a state court judgment against them.4 Philip Johnston was awarded financial control over the debtor in the state court action,5 and opted to place the debtor into bankruptcy. The debtor commenced this chapter 7 case on October 27, 2016. The chapter 7 trustee promptly issued a notice of asset case and deadline to file proofs of claim.6
After the trustee issued his notice of asset case, the Johnstons filed three proofs of claim: Philip filed a claim for compensation ($42,550); Rebekah filed a claim for wages ($18,200) and money loaned ($62,720.13); and Philip filed a third claim of *886$190,000 representing his 40% interest in the debtor. The Johnstons withdrew all three of their proofs of claim on May 2, 2017, and are no longer creditors of the estate though Philip continues to hold his membership interest in the debtor.7
Brad's father, Robert Giroux, also filed a proof of claim for money loaned to the debtor in the unsecured amount of $227,437.82. Brad also filed multiple proofs of claim: $75,738 for "employment relationship and related rights," approximately $13,000 of which he asserted as a priority wage claim; $49,374.24 for "reimbursement of expenses and rights to repayment"; and a claim for 60% of any funds remaining in the estate after all creditors are paid.
On November 23, 2016, the chapter 7 trustee moved to sell certain assets of the debtor, including the fishing lodge and all lodge-related personal and intellectual property, to Peter von Jess (the Lodge Sale).8 In order to maintain the lodge as a going concern, the Lodge Sale provided for payment of select general unsecured creditors: (1) customers who had placed deposits for the 2017 season; (2) employees with outstanding wage claims; and (3) Branch Air Services, a supplier. No objections to the Lodge Sale were raised, and the court issued its order approving that sale on December 23, 2016.9 The Lodge Sale was followed by a separate notice of distribution to pay § 507(a)(7) priority claims of the debtor's customers.10 No objections were raised, and those distributions were made.
On June 20, 2017, the chapter 7 trustee filed a second motion to sell assets of the debtor, this time a note receivable and other miscellaneous property, to buyer Polar Services LLC.11 As with the Lodge Sale, no oppositions were filed, and the court entered its order approving the second sale on July 20, 2017.12
Finally, on May 15, 2018, the chapter 7 trustee filed his motion to sell the remaining assets of the debtor's estate (Motion) to Robert Giroux, the debtor's largest unsecured creditor.13 After payment of the claims related to the Lodge Sale, only a few unsecured claimants remained other than Robert and Brad Giroux. Excluding the Girouxes, the remaining unsecured debts total $13,445.14 Robert's purchase offer provides no money to the estate. Instead, he offers to subordinate his substantial unsecured claim to the remaining unsecured claimants, with Brad Giroux to withdraw his proofs of claim upon approval of the sale. Based on the funds remaining in the estate ($55,924), after payment of anticipated administrative and priority claims, all general unsecured creditors would receive 100% of their claims.15 Robert Giroux would receive any remaining funds.
The Johnstons objected to the proposed sale.16 They have since submitted a counter-offer to purchase the assets.17 They modified their offer, and filed a "notice of final offer" on October 24, 2018 (Final *887Offer).18 Pursuant to the Final Offer, the Johnstons would pay $18,445 to purchase the estate's remaining assets. The Johnstons propose to pay $5,000 to the estate, and $13,445 directly to the debtor's remaining unsecured creditors outside of bankruptcy, excluding Robert and Brad Giroux. They also condition their offer upon the chapter 7 trustee filing objections to Brad Giroux's proofs of claim. The Johnstons surmise that upon receipt of the direct payments from them, the paid unsecured creditors would withdraw their claims. The Johnstons argue that Robert Giroux would receive a higher monetary distribution under their proposal than under his own.
The court held a hearing on the Motion on October 15, 2018. The trustee gave testimony under oath, noting his concern that the Johnstons' offer could ultimately have a negative impact on the estate, by mandating objections to Brad Giroux's proofs of claim which would generate additional administrative expenses for the estate. He added that under the Johnstons' offer, there may be nothing filed with the court evidencing the Johnstons' direct payments to the remaining non-Giroux unsecured creditors, which could complicate the final accounting for the case. He also testified that he has served as a chapter 7 trustee for approximately 37 years. After hearing the chapter 7 trustee's testimony and the arguments of the parties, the court set deadlines for supplemental briefing, and took the matter under submission. Supplemental briefs were filed by Robert Giroux, the chapter 7 trustee, the Johnstons and Brad Giroux.19
II. ANALYSIS
The trustee seeks to sell property of the estate under § 363(b). Proposed sales are reviewed to determine whether they are within the best interests of the estate resulting from a fair and reasonable price, are supported by a valid business judgment and proposed in good faith.20 Sales to an insider are subject to heightened scrutiny.21 Here, both potential buyers are insiders that have ownership interests either directly or indirectly by virtue of a familial relationship with an owner.22 In this instance, there is an obvious business justification for the sale as the trustee must liquidate the remaining assets of the estate. There has been no challenge to the trustee's good faith in seeking to sell the litigation claims. It is the price that is at issue.
In this instance the proposed sale involves the estate's causes of action against Brad Giroux, the majority member and his wife, Jessica. In reality, a sale of the litigation claims to Robert Giroux will terminate those claims. For this reason, the court must consider the proposed sale offers not only under § 363(b), but also as a settlement of such claims under Fed. R. Bankr. P. 9019.23 To evaluate settlements, bankruptcy courts are to consider
*888(a) the probability of success in the litigation;
(b) the difficulties, if any to be encountered in the matter of collection;
(c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; [and]
(d) the paramount interest of the creditors and a proper deference to their reasonable views in the premise.24
The trustee advises that he will not pursue any claims against Brad "because the risks involved in any litigation and the difficulty in collecting any judgment that may be entered against him."25 The trustee's view of the claims is not meaningfully controverted, although the Johnstons are willing to pursue the estate's causes of action against Brad and Jessica Giroux for their own benefits and purposes. While the first three A & C factors focus upon the claims, they are not materially at issue here as there have been no objections to the sale of the litigation claims, only to whom the claims should be sold. Regardless of the ultimate purchaser, the claims will be removed from the estate. The trustee will not be concerned with pursuing or collecting upon the estate's causes of action against Brad and Jessica Giroux.
The court considers the possible delay resulting from the claims to potentially be an issue, though not in the traditional sense. Ordinarily, settlement of claims is favored as it permits a trustee to avoid the cost and delay of further litigation. The estate's sale will achieve this goal. But the Johnstons' offer requires additional litigation that would be unnecessary if the Giroux offer is approved: the pursuit of objections to Brad Giroux's proofs of claim. The estate is otherwise administered and ready for final distribution.
The offers, therefore, primarily implicate the best interests of the estate and the paramount interests of the creditors.26 Under either proposal, the non-Giroux general unsecured creditors will receive payment in full. Under the Johnstons' offer, the estate would receive an additional $5,000, and be able to distribute the balance of the proceeds from the sale of the lodge to the Girouxes' allowed claims. At the time he filed his supplement, the trustee's counsel estimated the funds net of administrative expenses and priority claims to be $55,924. Under the Giroux offer, Brad Giroux would withdraw his claims totaling $125,112.24, and Robert would receive the balance of the estate funds after payment of the remaining *889$13,445 of unsecured claims, which projects to be $42,479 based upon the trustee's calculations.
Under the Johnstons' offer, the non-Giroux creditors would be paid off by the Johnstons prior to distribution, leaving Robert and Brad as the only remaining unsecured creditors. The trustee would have approximately $60,924 to distribute to the Girouxes, based upon the additional $5,000 payment to the estate and the Johnstons' satisfaction of the $13,445 in other unsecured debts. In short, the estate would momentarily benefit in the amount of $18,445 from the Johnstons' offer. In a pro rata distribution, Robert Giroux would receive approximately 65% of the $60,924 ($39,600.60), and Brad would receive approximately 35% ($21,323.40).27 The Johnstons' offer would leave the estate, at least temporarily, with over $350,000 in remaining unsecured claims, whereas the Giroux offer would reduce that amount by approximately $125,000, with the withdrawal of Brad Giroux's claims upon approval of the sale.
The purchase offers in this instance differ from most as they do not appear to be driven by economic rationality. Robert Giroux is attempting to leverage his situation as the largest unsecured creditor to end contentious litigation against his son and daughter-in-law. He is willing to walk away from $18,445 (assuming Brad's proofs of claim are without merit). On the other hand, the Johnstons desire to continue to litigate against Brad and Jessica on behalf of the estate, although they personally already have a judgment against them individually, and are further requiring the trustee to hold the bankruptcy open to litigate Brad's proofs of claim. The trustee does not believe the underlying claims against Brad are valuable, and would prefer to make a final distribution and close the case.
"The overarching purpose of Chapter 7 [is] to ensure the orderly liquidation of the debtor's estate and equal treatment of creditors within each class."28 It is the trustee's responsibility to do so. "Under the oversight of the Office of the United States Trustee, the Chapter 7 trustee has the responsibility to properly administer and distribute property of the estate to the debtor and other parties entitled to receive such property."29 In the context of sales of estate property under § 363, a bankruptcy court "should determine only whether the trustee's judgment was reasonable and whether a sound business justification exists supporting the sale and its terms."30 "Normally sales will be for cash but in appropriate circumstances property may be sold for credit or may be exchanged if the transaction promotes the ultimate objective of liquidating...the estate in a manner most advantageous to creditors. Thus the matter will ultimately rest in the judgment and discretion of the trustee...."31 In short, "[t]he trustee's *890business judgment is to be given 'great judicial deference.' "32
The trustee seeks the court's approval of Robert Giroux's offer. Upon approval, Robert's offer would result in the reduction of claims against the estate by $125,112.24, with no need for potentially expensive and protracted claims litigation. This would permit the trustee to expeditiously move to a final distribution. After payment in full of the other non-subordinated general unsecured creditors, Robert would be the only remaining unsecured creditor of the estate. He would be guaranteed to receive nearly $3,000 more under his offer than under the Johnstons' offer, if Brad's claims were to be allowed. The Johnstons' analysis relies heavily on speculation that Brad's proofs of claim will be disallowed in full, but in light of the great deference this court must give the trustee's business judgment, mere speculation is insufficient to persuade this court that the trustee's judgment must be overruled. On the facts as they currently stand, the trustee has established that Robert Giroux's offer is in the best (and paramount) interests of the estate as he has articulated a reasonable basis to believe that it provides a better result for the estate and its creditors than does the Johnstons' offer.33
III. CONCLUSION
A chapter 7 trustee proposing a sale, or settlement, of estate property is entitled to great deference in exercising his or her business judgment in that context. In this instance, the trustee seeks authorization to sell the estate's remaining assets to Robert Giroux. Taking into consideration the facts of this case as they currently stand, the Johnstons' competing offer does not result in as great a benefit to the estate and its creditors as the offer the trustee seeks to accept. Accordingly, the trustee has established that the proposed sale of assets is in the estate's best interest, and that application of the A & C factors weighs in favor of approving the trustee's Motion to accept the proposal offered by Robert Giroux. This court will issue a separate order granting the chapter 7 trustee's motion to sell the debtor's remaining assets to Robert Giroux.
ECF No. 78 at p. 6, para. 10.
Id. , passim .
Id. at pp. 3-4.
See ECF No. 78.
Id. at p. 4.
ECF No. 11.
See ECF Nos. 37-39.
ECF No. 16.
ECF No. 22.
ECF No. 42.
ECF No. 43.
ECF No. 56.
ECF No. 73.
ECF No. 118, at p. 2.
See ECF No. 118 at p. 2.
ECF Nos. 76, 78.
ECF No. 120.
ECF No. 136.
See ECF Nos. 137-144.
240 North Brand Partners, Ltd. v. Colony GFP Partnes, LP (In re 240 N. Brand Partners, Ltd.) , 200 B.R. 653, 659 (9th Cir. BAP 1996) (citing In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 841 (Bankr. C.D. Cal.1991) ). See also Slates v. Reger (In re Slates) , 2012 WL 5359489, at *11 (9th Cir. BAP Oct. 31, 2012).
Mission Product Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC) , 558 B.R. 500, 516 (1st Cir. BAP 2016).
11 U.S.C. § 31(B) and (C).
Simantob v. Claims Prosecutor, LLC (In re Lahijani) , 325 B.R. 282, 290 (9th Cir. BAP 2005) ; Goodwin v. Mickey Thompson Entertainment Group, Inc. (In re Mickey Thompson Entertainment Group, Inc.) , 292 B.R. 415, 420 (9th Cir. BAP 2003)
Martin v. Kane (In re A & C Properties) , 784 F.2d 1377, 1381 (9th Cir. 1986).
ECF No. 118, at p. 2.
The court has previously expressed concerns that the Johnstons' proposed offer was an improper attempt to skew the statutory distribution required by § 726(a) by paying certain claims outside the estate. See Czyzewski v. Jevic, --- U.S. ----, 137 S.Ct. 973, 984, 197 L.Ed.2d 398 (2017). At least one post Jevic court has recognized that "[i]n light of the Supreme Court's recent ruling in Jevic , parties who seek approval of settlements that provide for a distribution in a manner contrary to the Code's priority scheme should be prepared to prove that the settlement is not only 'fair and equitable' ...but also that any deviation from the priority scheme for a portion of the assets is justified because it serves a significant Code-related objective." In re Fryar , 570 B.R. 602, 610 (Bankr. E.D. Tenn. 2017). Though these concerns persist as the Johnstons' offer appears to be motivated by self interest rather than any "Code-related objective" such as preservation of a business entity, the court has given the Johnstons considerable latitude in formulating their offer as they are appearing without counsel. Upon further consideration the court finds that it is not necessary to decide whether the Johnstons' offer violates Jevic .
If Brad's priority wage claim of $13,000 is allowed, then Brad would receive payment on that claim prior to any distribution on his and Robert's general unsecured claims.
In re Livecchi , 2014 WL 6655702, at *3 (Bankr. W.D.N.Y. Nov. 20, 2014), citing 6 Collier on Bankruptcy ¶ 700.01 (16th ed. rev.).
Zavala v. Wells Fargo Bank, N.A. (In re Zavala) , 444 B.R. 181, 191 (Bankr. E.D. Cal. 2011).
3 Collier on Bankruptcy ¶ 363.02[4] (Richard Levin & Henry J. Sommer eds., 16th ed.).
Id. at ¶ 363.02[2]. See also In re Moreno , 554 B.R. 504, 510 (Bankr. D.N.M. 2016) ("Before a sale of estate property outside the ordinary course of business may be approved, the Chapter 7 trustee must demonstrate 'sound business reasons' for the sale.").
In re Psychometric Systems, Inc. , 367 B.R. 670, 674 (Bankr. D. Colo. 2007), citing In re Bakalis , 220 B.R. 525, 531-32 (Bankr. E.D.N.Y. 1998).
The chapter 7 trustee and the Girouxes have also objected to the Johnstons' offer to pay the non-Giroux unsecured creditors directly, arguing that such payments are inconsistent with the statutory distribution requirements under § 726. Although this court is concerned about the potential conflict between the Johnstons' payment proposals and the requirements of the Bankruptcy Code, as stated in footnote 26 it has determined that issue is not dispositive for the reasons stated herein and therefore declines to address the issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501836/ | Mark S. Wallace, United States Bankruptcy Judge
FACTUAL BACKGROUND
Katherine L. Torres ("Ms. Torres") formed Le Pop Shop, LLC, a California limited liability company ("Le Pop Shop"), on March 8, 2013.1 Le Pop Shop was engaged in the business of owning and operating a bakery manufacturing and selling *892(both locally and across state lines) French-style cookies known as macarons.2 Ms. Torres was Le Pop Shop's sole member. In May 2015 a First Amended Operating Agreement of Le Pop Shop, LLC (the "Amended Operating Agreement") was drawn up, admitting new members Michael Roennau ("Mr. Roennau") and Sevilla Alexander. Mr. Roennau made a $125,000 capital contribution in exchange for a 25 percent interest in Le Pop Shop. Subsequently, he loaned an additional $103,784.93 to Le Pop Shop and obtained Ms. Torres's personal guaranty.3
Ms. Torres was primarily responsible for opening and operating Le Pop Shop, utilizing bakery designs and recipes that she contributed to Le Pop Shop. She was also responsible for maintaining Le Pop Shop's financial records.4
Le Pop Shop failed to open a retail location in San Clemente, leading to a dispute between Mr. Roennau and Ms. Torres.5 In addition, there was a dispute over Le Pop Shop's financial records. Mr. Roennau demanded that Ms. Torres turn over for inspection Le Pop Shop's general ledger and other financial records. Ms. Torres contends that she turned over these materials as requested. Mr. Roennau contends that she failed to do so.6
Litigation commenced in Orange County Superior Court (the "State Court Action") between Mr. Roennau as plaintiff and Ms. Torres and Le Pop Shop as defendants.7 The complaint (the "Complaint") filed by Mr. Roennau on May 20, 2016 in the State Court Action alleges in numbered paragraphs 7 through 10 that Ms. Torres is an alter ego of Le Pop Shop, that Le Pop Shop was a mere shell and in any event was inadequately capitalized. Causes of action one through five in numbered paragraphs 20 through 45 allege fraud and deceit, negligent misrepresentation, breach of fiduciary duties, breach of contract and an accounting. Numbered paragraphs 16 and 17 allege that Ms. Torres spent Le Pop Shop's money for nail salon visits, personal trips around the country, medical bills, grocery shopping and fancy dinners.
At the evidentiary hearing on this matter on November 8, 2018, Mr. Roennau testified that he had never been provided with a satisfactory accounting with respect to all the money he had contributed or loaned to Le Pop Shop. At one point he received a partial ledger, but there remained considerable uncertainty as to how and for what items his capital contribution and loans had been spent.8 Despite repeated requests for an accounting, no accounting *893was ever provided.9
The Complaint was served on Ms. Torres (both individually and in her capacity as person authorized to accept service of process for Le Pop Shop) either on June 2, 2016 or June 6, 2016.10
Eight days after the Complaint was filed in the State Court Action, on May 28, 2016, Ms. Torres and her husband, Albert Torres, Jr., filed a voluntary joint chapter 7 petition in this Court (jointly, "Debtors"). Debtors scheduled Mr. Roennau as a creditor holding a disputed claim in an unknown amount.
Mr. Roennau was unaware of Debtors' bankruptcy filing when he caused Ms. Torres to be served with process on June 2 or June 6 with the Summons and Complaint initiating the State Court Action. Ms. Torres was unaware of the pendency of the State Court Action when she and her husband filed their chapter 7 petition on May 28, 2016.
Debtors' attorney, Michael Jones, Esq. ("Mr. Jones"), sent a letter dated June 9, 2016 to Mr. Roennau's attorneys in the state court action, Steven Gourley, Esq. ("Mr. Gourley") and David C. Chang, Esq., advising them of the filing of the Debtors' bankruptcy petition and the effect of the automatic stay enjoining "all collection activity against the debtors." Mr. Gourley replied by letter dated July 15, 2016, informing Mr. Jones that the state court having jurisdiction over the parties in the Complaint would be notified of the pendency of the bankruptcy case in a case management conference scheduled for November 4, 2016. Further, Mr. Gourley stated "[i]f the bankruptcy filing should proceed to discharging the liability of the debtors, we intend to object to dischargeability of any of our client's claims for fraud against Katherine Lea Torres."
The section 341(a) meeting of creditors was set for July 11, 2016. The last day for commencing an adversary proceeding objecting to the Debtors' discharge in general or to the discharge of a specific debt was September 9, 2016. Fed. R. Bankr. P. 4004(a), 4007(c). The chapter 7 trustee, Thomas H. Casey, filed a no-asset report one day after the section 341(a) meeting, on July 12, 2016. The Debtors received their discharge on September 19, 2016, and the case was closed on September 20, 2016. Mr. Roennau was notified on or about September 19, 2016 of the entry of the discharge.11
Although Mr. Roennau could have commenced an adversary proceeding asking this Court to determine that Ms. Torres's obligation to him was excepted from discharge on the ground of fraud - and although his attorneys had specifically stated they intended to object on grounds of fraud to the discharge of Ms. Torres's debts to Mr. Roennau -- he did not do so.
Instead of proceeding with an adversary proceeding in this Court, Mr. Roennau continued with the State Court Action against Le Pop Shop - with the alter ego allegations of the Complaint still in place. Proof of Service of the Summons was filed in state court on October 20, 2016, approximately one month after the granting of the discharge.
Mr. Roennau filed a voluntary dismissal of Ms. Torres without prejudice in the State Court Action on November 18, 2016.
*894On December 20, 2016, Mr. Gourley signed a Notice to Defendant Le Pop Shop, LLC Regarding Punitive Damages in his capacity as Mr. Roennau's attorney, reserving the right to seek $200,000 in punitive damages in the State Court Action against Le Pop Shop. This pleading was served on Ms. Torres in her capacity as Le Pop Shop's agent for service of process on March 8, 2017.12
Neither Ms. Torres nor Le Pop Shop made any effort to defend the State Court Action.13 Importantly, the Court finds that there is no evidence that Mr. Roennau at any time amended the Complaint to eliminate the alter ego allegations made in the Complaint against Ms. Torres individually. All such allegations remained in the Complaint at the time Mr. Roennau applied for the entry of a default against Le Pop Shop in the State Court Action.
On May 10, 2017, Mr. Gourley filed on Mr. Roennau's behalf a Request for Entry of Default against Le Pop Shop.14
About two weeks later, on May 26, 2017, Ms. Torres filed in this Court a Motion for Sanctions and Damages Resulting From Discharge Violations, Docket No. 26 (the "Motion for Sanctions"). This Court filed and entered an Order to Show Cause Why Michael Roennau Should Not Be Held in Contempt of the Discharge Injunction, Docket No. 28, June 20, 2017 (the "OSC"). The OSC ordered Mr. Roennau to appear and show cause why he should not be held in contempt for violating the discharge injunction under 11 U.S.C. § 524(a)(2) by proceeding with the State Court Action with the alter ego allegations in the Complaint still intact following the entry of the Ms. Torres's discharge on September 19, 2016. Subsequently, the Court held hearings on the OSC, including an evidentiary hearing on November 7-8, 2018.
ANALYSIS
1. Did a Discharge Injunction Violation Occur?
A discharge in bankruptcy "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any ... debt as a personal liability of the debtor ...." 11 U.S.C. § 524(a)(2). But for the alter ego allegations of the Complaint in the State Court Action, it would have been clear that there was no violation of the discharge injunction: Ms. Torres had been dismissed from the State Court Action, and Mr. Roennau was proceeding only against Le Pop Shop.
Ms. Torres contends that because the Complaint alleges that she and Le Pop Shop are one and the same person, allegations against Le Pop Shop are allegations against her, and therefore Mr. Roennau's continuation of the State Court Action against Le Pop Shop after the discharge was granted on September 19, 2016 violates the discharge injunction by continuing an action and employing process to collect or recover a debt as Ms. Torres's personal liability.
Mr. Roennau disputes this analysis. He argues that even if he obtains a default judgment against Le Pop Shop, Ms. Torres has nothing to worry about because under California law she cannot be added *895to the default judgment as a judgment debtor, citing California Code of Civil Procedure § 187, Motores De Mexicali, S.A. v. Superior Court In and For Los Angeles County, 51 Cal. 2d 172, 331 P.2d 1 (1958) and NEC Elecs. Inc. v. Hurt , 208 Cal. App. 3d 772, 780-81, 256 Cal.Rptr. 441 (Ct. App. 1989). Additionally, in closing argument at the evidentiary hearing Mr. Roennau's counsel pledged not to expand a judgment against Le Pop Shop to include Ms. Torres or to make her liable for that judgment.15
The alter ego doctrine is intended to prevent the abuse of an entity's limited liability shield by the entity's owners. Where an entity is used by an individual to perpetrate a fraud or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate or LLC entity and treat the acts as if they were done by the individual. 9 SUMMARY OF CALIFORNIA LAW (11th Edition) Corporations § 11, B.E. Witkin; Shapoff v. Scull , 222 Cal. App. 3d 1457, 272 Cal.Rptr. 480 (1990). A sole owner of a corporation can be added to a California judgment under the alter ego doctrine even though such person was determined by the court not to be liable for fraud. Misik v. D'Arco, 197 Cal. App. 4th 1065, 1074, 130 Cal.Rptr.3d 123 (Ct. App. 2011) ("Therefore, amending a judgment to add an alter ego does not add a new defendant but instead inserts the correct name of the real defendant").
California Code of Civil Procedure § 187, entitled "Implied Powers to Effectuate Conferred Powers," has been held to authorize a trial court to amend a judgment to add a judgment debtor who is found to be an alter ego of a corporate defendant. Misik v. D'Arco, supra, 197 Cal. App. 4th at 1069, 130 Cal.Rptr.3d 123. Section 187 does not expressly limit the application of this doctrine where a default judgment is involved and a plaintiff seeks to add a person as a judgment debtor on an alter ego theory.
In Motores De Mexicali, S.A. v. Superior Court In and For Los Angeles County, 51 Cal. 2d 172, 331 P.2d 1 (1958), cited by Mr. Roennau, the Supreme Court of California refused on due process grounds to permit a plaintiff to add three individuals to a default judgment on an alter ego theory. Mr. Roennau argues this is a blanket rule applying to all default judgments, but this Court does not read Motores De Mexicali so broadly. The key fact in Motores De Mexicali is that the three individuals alleged to be alter egos of Erbel, Inc. were not named as parties or served in their individual capacities. Motores De Mexicali, S.A. v. Superior Court In and For Los Angeles County , supra, 51 Cal. 2d at 173, 331 P.2d 1. Additionally, it would appear from the California Supreme Court's decision that the alter ego allegations did not surface until after a default judgment had been rendered against Erbel, Inc. In summary, Motores De Mexicali addresses a fact situation where the individuals sought to be added to a default judgment on an alter ego theory were not named as defendants and had no duty to appear and defend personally because no claim had been made against them personally.
Here, Ms. Torres was named as a defendant, and she had a duty to appear and defend personally, at least until she was dismissed from the case. Moreover, in light of the alter ego allegations in the Complaint - which do not appear to have been present in Motores De Mexicali - she was on notice that ground work was being laid for a judgment against her personally. Finally, Ms. Torres had the right to participate *896in and control the defense of the action against Le Pop Shop in her capacity as Le Pop Shop's manager. The notice-and-opportunity-to-be-heard due process considerations that were found to be lacking in Motores De Mexicali are not lacking here.
NEC Elecs. Inc. v. Hurt , 208 Cal. App. 3d 772, 780-81, 256 Cal.Rptr. 441 (Ct. App. 1989), also cited by Mr. Roennau, is similarly distinguishable. Here again a California court refused to add an individual to a judgment against an entity on an alter ego theory. However, the key facts are that the individual was not named as a party, was not served in his individual capacity and did not control the entity nor have an opportunity to present a defense of the entity. These facts distinguish NEC Elecs. from this case, where Ms. Torres was named as a party, controlled Le Pop Shop and had full opportunity to direct Le Pop Shop's defense in her capacity as manager.
Although the matter is not entirely free from doubt, the Court concludes that the most likely outcome is that in the normal course of events, and without any intervention by this Court based upon the discharge injunction, Mr. Roennau would be successful in adding Ms. Torres to a default judgment obtained against Le Pop Shop under the authority of California Code of Civil Procedure § 187.
Mr. Roennau's second argument is that even if he obtains a default judgment against Le Pop Shop, he has no intention of adding Ms. Torres to the judgment. Hypothetically, if a plaintiff were to name as joint tortfeasors in a state court action involving a prepetition tort a debtor who had received a bankruptcy discharge and five other persons, continuation of the action against all six would violate the discharge injunction notwithstanding the plaintiff's protestation that he was really pursuing only the five persons and had no design to collect against the debtor. Here, similarly, Mr. Roennau's professed good intentions regarding Ms. Torres cannot prevail over alter ego allegations in the Complaint that any separateness between Ms. Torres and Le Pop Shop has ceased to exist. Moreover, there is no requirement that a debtor seeking to enforce a discharge injunction prove that the action against him in state court with respect to a discharged prepetition debt will actually succeed and result in collection - the mere continuation of such an action violates the discharge injunction.
While the dismissal of Ms. Torres from the State Court Action adds some strength to Mr. Roennau's argument, this strength is completely undercut by the alter ego allegations that remain in the complaint. Ms. Torres remains as a defendant for practical purposes because of those alter ego allegations, which contend that Le Pop Shop is Ms. Torres. This is shown by Yan v. Lombard Flats, LLC (In re Lombard Flats, LLC) , 2016 WL 1161593, 2016 U.S. Dist. LEXIS 38112, Case No. 15-cv-00870-PJH (N.D. Cal., March 26, 2016). In Yan , chapter 11 debtor Lombard Flats, LLC ("Lombard") received a chapter 11 discharge in connection with a confirmed plan of reorganization. Legal Recovery, LLC sued Martin Eng, Lombard's principal, on a reverse-piercing theory, alleging that Lombard was an alter ego of Eng and liable for Eng's debts (notwithstanding Lombard's discharge). After determining that the alter ego claim arose prepetition with respect to Lombard, the United States District Court for the Northern District of California determined that such claim was subject to the discharge injunction and therefore was barred. The district court therefore affirmed the bankruptcy court order finding a discharge injunction violation and holding Legal Recovery, LLC in contempt of court. Yan stands for *897the proposition that if A receives a bankruptcy discharge, an action against B alleging that A and B are alter egos violates the discharge injunction if it is shown that the alter ego claim is a prepetition claim. Thus, Yan indicates that not only is the continuation of the State Court Action against Ms. Torres (recipient of the discharge) a violation of the discharge injunction but also that the State Court Action's continuation against Le Pop Shop likewise violates the discharge injunction as long as the alter ego allegations remain in the Complaint. By alleging in numbered paragraph 9 of the Complaint in the State Court Action that Ms. Torres is an alter ego of Le Pop Shop "and that there exists, and at all times herein mentioned has existed, a unity of interest and ownership between such defendants, such that any separateness has ceased to exist," Mr. Roennau has made the continuation of the State Court Action against Le Pop Shop a continuation against Ms. Torres individually.
The Court concludes that each of the actions taken by Mr. Roennau in the State Court Action after the entry of Ms. Torres's discharge on September 19, 2016 (except her dismissal from that lawsuit and, possibly, the filing of a case management statement on or about October 20, 2016) violated the discharge injunction. This includes the service of notice of punitive damages on Ms. Torres and the filing of a request for entry of default.
2. Should the Court Award Damages to Ms. Torres?
Lorenzen v. Taggart (In re Taggart) , 888 F.3d 438 (9th Cir. 2017) holds that there is a two-part test for determining the propriety of a contempt sanction in the context of a discharge injunction violation: the movant must prove that the creditor (1) knew the discharge injunction was applicable; and (2) intended the actions that violated the injunction.
Mr. Roennau testified at the evidentiary hearing that no one told him continued prosecution of the State Court Action was in violation of the discharge injunction and that he had no inkling of this until the Motion for Sanctions was filed in May 2017.16 The Court regards this testimony as completely credible. The Court therefore concludes that Mr. Roennau did not know the discharge injunction was applicable to the actions he was taking in the State Court Action after September 19, 2016. Lorenzen v. Taggart (In re Taggart) prohibits the award of sanctions in this situation, and none are awarded.
3. Conclusion.
Mr. Roennau violated the discharge injunction by continuing the prosecution of the State Court Action after September 19, 2016 against Le Pop Shop and Ms. Torres. Even after the dismissal of Ms. Torres from the State Court Action, continued prosecution of the State Court Action against Le Pop Shop violated the discharge injunction because of the continuing presence in the Complaint of alter ego allegations. The effect of the alter ego allegations is to render prosecution against Le Pop Shop prosecution against Ms. Torres for purposes of 11 U.S.C. § 524(a)(2). Sanctions against Mr. Roennau are not awarded because Mr. Roennau did not know that the discharge injunction was applicable to the actions he was taking in the State Court Action.
IT IS SO ORDERED.
State of California, Secretary of State, Statement of Information (Limited Liability Company) of Le Pop Shop, LLC, filed March 8, 2013.
Reporter's Transcript for November 7, 2018 ("1 R.T.") at 108, lines 12-20.
The Complaint (as hereinafter defined) alleges in numbered paragraph 28 thereof that "Plaintiff was induced to and did pay a contribution of $237,500 to Le Pop Shop, LLC." This implies a contribution to capital. However, numbered paragraph 14 of the Complaint states that $117,500 went in as loans with interest rates ranging from 1 percent to 8 percent per annum. The Stipulation of Facts and Contentions Re Evidentiary Hearing on Order to Show Cause Why Michael Roennau Should Not Be Held in Civil Contempt, Docket No. 61, filed August 29, 2018 (the "Fact Stipulation") resolves this matter in favor of a split capital contribution of $125,000 and loans of $103,784.93.
Fact Stipulation at numbered paragraph 4.
Fact Stipulation at numbered paragraph 6.
Fact Stipulation at numbered paragraphs 6 and 7.
Roennau v. Torres et al. , Case No. 30-2016-00853829-CU-FR-CJC.
Reporter's Transcript for November 8, 2018 ("2 R.T.") at 3: "... we didn't have a true sense of what - I didn't have a sense of what had happened."
2 R.T. at 5, lines 2-9.
Proof of Service of Summons in Roennau v. Torres et al. , Case No. 30-2016-00853829-CU-FR-CJC, dated June 13, 2016 (the "Proof of Service of the Summons"). Ms. Torres's declaration states service occurred on June 6, 2016. The disparity in dates is not material.
Fact Stipulation at numbered paragraph 18.
Fact Stipulation at numbered paragraph 23. Ms. Torres contends she was served in her capacity as the alter ego of Le Pop Shop.
Fact Stipulation at numbered paragraph 21.
Fact Stipulation at numbered paragraph 25.
2 R.T. at 45, lines 16-23.
2 R.T. at 10-13. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501837/ | WILLIAM T. THURMAN, U.S. Bankruptcy Judge
I. Introduction
The matter before the Court is the Defendants/Third-Party Plaintiffs' Motion for Summary Judgment on Black Iron, LLC's Claims and Memorandum in Support (the "Motion") filed on October 15, 2018 at Dkt. No. 67. The Defendants and Third-Party Plaintiffs in this action will be collectively referred to as "Wells Fargo Rail" and the Defendants will be collectively referred to as "Black Iron." Wells Fargo Rail seeks summary judgment in its favor dismissing all claims brought against it by Black Iron for storage fees and trespass. Black Iron filed an objection to the Motion on November 12, 2018 at Dkt. No. 71. Wells Fargo Rail filed a reply on November 21, 2018 at Dkt. No. 74.
At the hearing on the Motion held on Nov. 29, 2018, Troy Aramburu and Bret Evans appeared on behalf of Wells Fargo Rail. Dana Farmer and Blake Hamilton appeared on behalf of Black Iron. The Court heard oral argument, read the briefs filed by the parties, conducted its own independent review of the law and makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
*902II. Jurisdiction, Venue and Notice
The jurisdiction of this Court is properly invoked under 28 U.S.C. § 1334, and has been expressly consented to by the parties. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), and this Court may enter a final order. Venue is proper under the provisions of 28 U.S.C. §§ 1408 and 1409. Notice of the hearing is found to be proper in all respects.
III. Standard for Summary Judgment
Under Federal Rule of Civil Procedure 56(a), which is made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, the Court shall grant a motion for summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).
Substantive law determines which facts are material and which are not. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Whether a dispute is genuine turns on whether the evidence is such that a reasonable fact finder could return a verdict for the nonmoving party. The court does not weigh evidence or make credibility determinations at this point, see id. at 249, 106 S.Ct. 2505, but is to decide whether there is a genuine issue for trial.
The moving party bears the burden to show that it is entitled to summary judgment. See Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). This burden includes properly supporting its summary judgment motion as required by Rule 56(c). See Murray v. City of Tahlequah, Okla. , 312 F.3d 1196, 1200 (10th Cir. 2002). Once the moving party meets this burden, "the burden shifts to the nonmoving party to demonstrate a genuine issue for trial on a material matter." Concrete Works of Colorado, Inc. v. City & County of Denver , 36 F.3d 1513, 1518 (10th Cir. 1994) (citations omitted).
It is under these parameters that the Court issues this decision.
IV. Factual Background
This dispute arose out of a lease transaction involving railcars and locomotives used in a mining venture near Cedar City, Utah. In general, the Court is called upon to make a determination of whether Wells Fargo Rail should be assessed storage fees for the railcars and locomotives that are on railroad tracks situated on Black Iron's land. Beginning in June 2010, Helm Financial Corporation, Wells Fargo Rail's predecessor-in-interest, and Helm-Pacific Leasing, as lessors, entered into four leases and related guaranties (the "Leases") with CML Metals Corporation ("CML Metals") and PIC Railroad, Inc. d/b/a CML Railroad, Inc. ("CML Railroad"), for 540 railcars and four locomotives (the "Equipment"). During the next four years, CML Metals used the Equipment in its mining operations and surrounding real property then-owned by CML Metals (the "Property"). In October 2014, CML Metals suspended operations and stopped paying Wells Fargo Rail the payments due under the Leases. By letter dated November 20, 2014,1 CML Metals asked Wells Fargo *903Rail to forbear from exercising available remedies in order to allow CML Metals an opportunity to be sold as a going concern. The Equipment remained on CML Metals' Property while CML Metals and Wells Fargo Rail began negotiating a forbearance agreement, and several drafts were exchanged up until March 2015.2 However, the forbearance agreement was never signed. It is noted that Wells Fargo Rail is not an operating railroad, but rather a vehicle for financing railcars only.
On April 2, 2015, CML Metals, through its chairman Michael Conboy, entered into an Asset Purchase Agreement ("APA") with Steve Gilbert, President of Gilbert Development Corporation ("GDC") to transfer substantially all of CML Metal's assets to GDC. On April 29, 2015, GDC assigned its rights to receive CML Metal's assets under the APA to Black Iron. GDC remained obligated for several assumed liabilities that were listed in the APA. This asset purchase transaction closed on or about May 5, 2015. Since that date, Black Iron has owned the Property upon which the Equipment is located. While the land was now owned by Black Iron, some of the railroad tracks were owned by Union Pacific Railroad Company or by CML Railroad.
Wells Fargo Rail did not know about the asset sale until after it had closed. On May 8, 2015, Steve Gilbert called Robert Bowers, an attorney representing First Union Rail Corporation (a predecessor of Wells Fargo Rail, which will be referred to simply as Wells Fargo Rail for ease of reference), and told Mr. Bowers that the railcars and locomotives would need to be removed or Black Iron would impose storage costs.3 According to Steve Gilbert's recollection, Mr. Bowers said that Wells Fargo Rail would remove the railcars. The parties have submitted numerous email messages beginning in May and continuing throughout the summer of 2015 evidencing Wells Fargo Rail's efforts to coordinate the repair teams, inspectors and other personnel necessary to remove the 540 railcars and 4 locomotives from the Property which now belonged to Black Iron. There were issues about the condition of the tracks and the railcars, and the necessity for inspections and repairs. Wells Fargo Rail had communications about finding locations to store the railcars once they were moved off Black Iron's property.4
In mid-August, Steve Gilbert discovered that Wells Fargo Rail intended to file a lawsuit against Black Iron. On August 20, 2015, the individual at Black Iron who had been communicating with Wells Fargo Rail about moving the railcars sent an email telling the Wells Fargo Rail personnel to "cease and desist the plan to start interaction on the cars next week" due to "legal issues pertaining to storage and security of the railcars."5 While there is evidence that Steve Gilbert told representatives of Wells Fargo Rail that he would charge it $100 per day per railcar for storage, there is no *904evidence that Wells Fargo Rail ever agreed to pay this amount. In fact, Wells Fargo Rail repeatedly stated it intended to move the railcars, not pay storage.6
After the "cease and desist" email, no one traveled to the Property to physically work on the railcars to implement their removal although emails dated throughout the fall of 2015 sent by and between individuals at Black Iron, Wells Fargo Rail, and Union Pacific (which owned some of the railroad tracks) contain discussion about the preparations necessary to move the railcars. This included inspecting the tracks, inspecting the railcars and locomotives, making necessary repairs to the railcars and locomotives, and arranging for personnel to travel to the property to conduct these activities. On March 15, 2016, an attorney for Black Iron sent a letter to an attorney representing Wells Fargo Rail authorizing Wells Fargo Rail to enter the Property to repair and extract the railcars and locomotives.7 Storage costs for the railcars were demanded in writing by letters dated April 4, 20168 and July 12, 2016.9
Wells Fargo Rail had hired a contractor in late spring 2016 to repair and move the railcars, and while there are email communications discussing the work necessary to move the railcars, no railcars were ever actually removed from Black Iron's Property because the repair vendor hired by Wells Fargo Rail stated that repairs were necessary before the railcars could be moved.10 In July, 2016, a repair crew traveled from Missouri to Utah with the vehicles and equipment to repair and extract the railcars.11 However, on August 22, 2016, Black Iron sent a letter stating that the Equipment may not be removed without payment to Black Iron in the amount of $23,058,000 for storage costs.12 Wells Fargo Rail has not paid that amount, and Black Iron has not allowed Wells Fargo Rail to access the Property and remove the Equipment. However, in June 2018, Wells Fargo Rail posted a bond in the amount of $10,000,000 so it could remove the Equipment.13 Shortly thereafter, fire restrictions prevented activity, and so Wells Fargo Rail did not have permission to enter Black Iron's Property until November 2018. The current status of removal efforts is uncertain.
V. Legal Discussion
Black Iron asserts that it is entitled to an award of storage fees against Wells Fargo Rail on five grounds. They are: (1) breach of contract; (2) breach of contract implied in fact; (3) unjust enrichment; (4) warehouse lien; and (5) trespass. The first *905four causes of action are based on the argument that Wells Fargo Rail should pay Black Iron for storing the Equipment for at least three years now, while the trespass cause of action is based on the argument that Wells Fargo Rail has failed to remove the Equipment after the Property was transferred from CML Metals to Black Iron. The Court will discuss each theory in turn.
A. Breach of Contract Claim
To prevail on its breach of contract claim, Black Iron would need to prove the following elements: "(1) a contract, (2) performance by the party seeking recovery [Black Iron], (3) breach of the contract by the other party [Wells Fargo Rail], and (4) damages." America West Bank Members, L.C. v. State , 342 P.3d 224, 230-31 (Utah 2014). "In order to properly state a claim for a breach of contract, a party [Black Iron] must allege sufficient facts, which, when viewed as true, satisfy each element." Id. (internal quotation marks and footnote omitted).
"Under the principles of basic contract law, 'a contract is not formed unless there is a meeting of the minds.' " Lebrecht v. Deep Blue Pools & Spas Inc. , 374 P.3d 1064, 1069 (Ct. App. Utah 2016) (quoting Sackler v. Savin , 897 P.2d 1217, 1220 (Utah 1995) ). "Two elements, among others, are necessary to form an enforceable contract: (1) an offer and (2) an acceptance." Id. (quoting 1-800 Contacts, Inc. v. Weigner , 127 P.3d 1241 (Ct. App. Utah 2005) ).
Steve Gilbert informed a representative of Wells Fargo Rail that the railcars and locomotives had to be removed or Black Iron would impose storage fees.14 Wells Fargo Rail's representatives stated that the Equipment would be removed, and that it would not pay storage fees. "An acceptance must unconditionally assent to all material terms presented in the offer, including price and method of performance, or it is a rejection of the offer." Lebrecht v. Deep Blue Pools & Spas Inc. , 374 P.3d 1064, 1069 (Ct. App. Utah 2016) (quoting Cal Wadsworth Constr. v. City of St. George , 898 P.2d 1372, 1376 (Utah 1995) ). The evidence submitted to the Court in the form of emails, depositions and affidavits show that Wells Fargo Rail did not want Black Iron to store the Equipment, but was taking steps to remove the Equipment from Black Iron's property. While an ultimatum is not an offer in any event, to the extent that Black Iron stated that Wells Fargo Rail should pay storage costs, Wells Fargo Rail rejected that proposition.
Black Iron initially gave Wells Fargo Rail permission to enter Black Iron's Property and remove the Equipment, and then permission was withdrawn on Aug. 20, 2015.15 Permission was extended again in March 2016 but then in August 2016, that permission was made conditional upon payment of about $23,058,000. These back and forth negotiations and/or conditional statements do not demonstrate a "meeting of the minds" that would lead to contract formation.
*906The uncontroverted evidence submitted to the Court shows that the demanded rate of the storage fees changed occasionally and unilaterally, without discussion or agreement with Wells Fargo Rail. "For an offer to be one that would create a valid and binding contract, its terms must be definite and unambiguous." Id. (quoting DCM Inv. Corp. v. Pinecrest Inv. Co. , 34 P.3d 785 (Utah 2001) ). One of the terms of a storage agreement would be the payment rate, and yet Black Iron changed the rate without negotiation or notice to Wells Fargo Rail. The fluctuating rate terms also negate the existence of a contract. Wells Fargo Rail has submitted substantial facts showing that no contract was formed.
Black Iron's argument in opposition does not present evidence of offer and acceptance, or other contract elements. Instead, Black Iron argues that if Wells Fargo Rail did not want to pay storage fees, it should have removed its Equipment within a reasonable time period. Allegations of delay do not create a contract. While the measure of a reasonable time period is a factual question, Black Iron failed to support its argument with evidence that 540 railcars and 4 locomotives could be inspected, repaired and moved in the summer of 2015, or that Wells Fargo Rail unduly delayed. Based on the emails and declarations and other evidence submitted, it appears that the effort Wells Fargo Rail made to remove its Equipment began immediately upon being informed the Equipment needed to be removed, and continued steadily throughout the summer of 2015. The Court does not see any evidence of unreasonable delay in these efforts. The contemporaneous emails are cooperative, and do not demonstrate impatience with the progress. In June 2015, Wells Fargo Rail had scheduled repair vendors to arrive on the Property on August 24, 2015 and stated that Black Iron's representative was aware of this timeline.16 Four days before the repair vendors were scheduled to arrive, Black Iron withdrew its permission for Wells Fargo Rail to enter the Property. The uncontroverted evidence points to the conclusion that Black Iron ended Wells Fargo Rail's permission to be on the Property without prior notice. Wells Fargo Rail did not have a chance to comply with a deadline because it was apparently unaware there was a deadline. Black Iron's argument that Wells Fargo Rail should have removed its Equipment before Aug. 20, 2015 is thus unavailing.
In the absence of a bilateral contract, Black Iron argues that there is a unilateral contract. For evidence, it relies on an email dated Sept. 2, 2015 from attorney Robert Bowers, representing Wells Fargo Rail's predecessor, to Cyndi Gilbert, an attorney representing Black Iron. Black Iron quotes the email thus: "Recall that it was Black Iron/GDC that asked that the equipment be removed if [Wells Fargo Rail] wasn't willing to pay to store them in place." From this sentence, Black Iron asserts that Wells Fargo Rail acknowledged a storage agreement. However, the sentence is taken out of context. The pertinent section of the email is as follows:
I'm sure you know about the "cease & desist" email [Wells Fargo Rail] received about its equipment extraction efforts. I understand that [Wells Fargo Rail] and UP [Union Pacific Railroad] had an on-site visit scheduled for last week that had to be cancelled due to Black Iron/Gilbert Development's "cease & desist." Given the relative timing, I suspect that halting [Wells Fargo Rail's] efforts to retrieve its equipment was in response to the claims that [Wells Fargo *907Rail] filed against Black Iron/Gilbert Development over the CML asset purchase. I don't see how delaying extraction of [Wells Fargo Rail's] equipment serves anyone's interests. Recall that it was Black Iron/GDC that asked that the equipment be removed if [Wells Fargo Rail] wasn't willing to pay to store them in place. You know that [Wells Fargo Rail] had been taking the steps necessary to retrieve its equipment. That was taking time given the condition that CML left the cars and locomotives in.... When we speak, please let me know if Black Iron/GDC will allow [Wells Fargo Rail], [Union Pacific] and their vendors on-site to complete the extraction process....17
The full email makes it clear that Wells Fargo Rail did not want Black Iron to keep Wells Fargo Rail's Equipment. This is further supported by the Declaration of Robert C. Bowers, in which he states that he did not make any sort of storage agreement with Steve Gilbert or anyone else at Black Iron.18 The Court finds that this email does not support Black Iron's assertion of a unilateral contract.
The Court further finds that there was no meeting of the minds, offer, or acceptance that would create a contract between the parties. Wells Fargo Rail has carried its burden to show that there is no genuine issue of material fact on this issue, and Black Iron has not submitted sufficient evidence that would raise a question of fact. Because there was no contract, there is no need to consider evidence about breach or damages. Summary judgment should be granted in favor of Wells Fargo Rail on this issue.
B. Breach of Implied Contract
A breach of an implied contract is better analyzed as a legal action in restitution. "The elements of ... a contract implied in law, are: (1) the defendant received a benefit; (2) an appreciation or knowledge by the defendant of the benefit; (3) under circumstances that would make it unjust for the defendant to retain the benefit without paying for it." Davies v. Olson , 746 P.2d 264, 269 (Ct. App. Utah 1987). "Contracts implied in fact are established by conduct." Outsource Receivables Mgmt., Inc. v. Bishop , 344 P.3d 1167, 1171 (Ct. App. Utah 2015) (quoting Knight v. Post , 748 P.2d 1097, 1100 (Ct. App. Utah 1988) ). Like an express contract, an implied contract requires a meeting of the minds. Such a contract will be enforced by the court only if the agreement was intended by the parties. See Johnson v. Morton Thiokol, Inc. , 818 P.2d 997, 1001 (Utah 1991).
Black Iron's argument regarding an implied contract fails for the same reason its argument about an oral contract fails - it has not presented evidence that demonstrates a meeting of the minds. Wells Fargo Rail stated that it did not want Black Iron to store the Equipment. Wells Fargo Rail took steps, hired contractors and otherwise made arrangements to retrieve the Equipment. By both statements and conduct, Wells Fargo Rail has demonstrated that it did not want to store its Equipment on Black Iron's Property. Wells Fargo Rail has submitted evidence that Black Iron refused it access to the Property while Wells Fargo Rail was working with contractors to retrieve the Equipment. An involuntary situation does not create a benefit for the one protesting *908the arrangement. Summary judgment in favor of Wells Fargo Rail should be granted on this issue.
C. Unjust Enrichment
The elements required to prevail on an unjust enrichment claim are similar to the elements of a contract implied in fact. In order to prevail on this theory, Black Iron would need to show that "(1) a benefit was conferred, (2) the conferee appreciated or had knowledge of the benefit, and (3) the conferee accepted or retained the benefit under circumstances making it inequitable to retain the benefit without making payment of its value." Thorpe v. Washington City , 243 P.3d 500, 507 (Ct. App. Utah 2010).
These elements all turn on the presence of a benefit to a party. Black Iron argues that Wells Fargo Rail has received a benefit from storing its Equipment on Black Iron's Property without paying storage fees. However, as discussed in section V.A., the uncontroverted evidence submitted demonstrates that Wells Fargo Rail wanted to extract its Equipment from the Property, not have it stored, and particularly not at the storage rates stated by Black Iron. Wells Fargo Rail did not receive a benefit from Black Iron's actions; instead, it was prevented from retrieving its Equipment. Summary judgment should be granted in favor of Wells Fargo Rail on this theory of recovery.
D. Warehouse Lien
Black Iron asserts that it is entitled to a statutory warehouse lien over the Equipment. Under Utah law, a "warehouse" may have a lien against a bailor "on the goods covered by a warehouse receipt or storage agreement." Utah Code Ann. § 70A-7a-209(1).
1. Warehouse
The statute defines a "warehouse" as "a person engaged in the business of storing goods for hire." Utah Code Ann. § 70A-7a-102(m). Black Iron asserts that nothing in the statute requires that the person be solely engaged in the business of storing goods for hire. To support this assertion, Black Iron relies on Enerco, Inc. v. SOS Staffing Services, Inc. , 52 P.3d 1272 (Utah 2002). The court in Enerco considered whether a lease agreement conferred the status of warehouseman on the landlord. The tenant asserted that the landlord was liable as a warehouseman for the tenant's property losses. This is factually distinguishable from the present case, as there was no warehouse lien being asserted in Enerco . The court did allow for a broader definition of "warehouse" and stated that "the question of whether or not someone is a warehouseman depends upon whether he has accepted 'the responsibility of safekeeping the property of others entrusted to him.' " Id. at 1275 (quoting Barlow Upholstery & Furniture Co. v. Emmel , 533 P.2d 900, 901 (Utah 1975) ). From this statement, Black Iron concludes that if a person expects to be paid to accept responsibility for storage and safekeeping of another's property, then that person is a warehouseman.
The Court is persuaded that with the right set of facts, an entity may be considered a warehouseman even if it is not primarily in the business of storing goods. However, Black Iron does not submit sufficient evidence that it accepted the responsibility for storage and safekeeping of the Equipment. Black Iron purchased the Property where the Equipment was located, and immediately asked Wells Fargo Rail to remove its Equipment. Wells Fargo Rail did not ask Black Iron to accept responsibility for storage and safekeeping of the Equipment, but began *909working to remove the Equipment. Black Iron then threatened to impose storage costs, and then denied Wells Fargo Rail access to the Property. The language in the Enerco case presupposes a party that wishes its chattel to be kept, i.e., the warehouseman accepts property entrusted to him by the owner. In this situation, from the evidence presented, Wells Fargo Rail had no desire to entrust its Equipment to Black Iron, and did not ask Black Iron to accept it. Black Iron retained the Equipment on its Property despite Wells Fargo Rail's desire to remove it. This conduct does not make Black Iron a warehouseman. See, e.g. , Mesa Development, Inc. v. Railroad Storage and Drayage, Inc. , 2011 WL 8184136 (Utah Dist. Ct. 2011) (finding that no warehouse lien existed in the absence of a storage agreement, among other factors).
2. Storage receipt or storage agreement
While the Court does not believe Black Iron would be considered a warehouseman under either the terms of the statute itself or by case law, the lack of a storage receipt or agreement further diminishes Black Iron's assertion of a warehouse lien. The Utah statute that allows a lien specifically references a "warehouse agreement or storage receipt." Utah Code Ann. § 70A-7a-209(1). As discussed in sections V.A. and B addressing the contract argument, Wells Fargo Rail did not agree to store its Equipment on Black Iron's property. There was no oral agreement for storage, and Black Iron's refusal to allow Wells Fargo Rail access to the Property did not create a storage agreement.
Black Iron asserts that it has a storage receipt, after a fashion. The evidence that Black Iron submits is the quote from the Sept. 2, 2015 email from Robert Bowers to Cyndi Gilbert, which was discussed in preceding section V.A. discussing the breach of contract claim. The sentence Black Iron relies upon is taken out of context, and the preceding discussion is applicable here. This email was reiterating Wells Fargo Rail's desire to remove the Equipment from Black Iron's property; it was not agreeing to a storage arrangement.
The Court finds that Wells Fargo Rail has carried its burden to demonstrate that there was no "warehouse receipt or storage agreement." Black Iron has not presented sufficient evidence that raises a genuine issue of material fact on this issue, as the Sept. 2, 2015 email does not support the proposition for which it is cited. Summary judgment should be granted in Wells Fargo Rail's favor on this issue.
E. Trespass
"A person is liable for trespass when, without permission, he intentionally enters land in the possession of another, or causes a thing or a third person to do so.... The phrase 'enters land' includes the presence upon the land of a thing which the actor has caused to be or to remain there." Purkey v. Roberts , 285 P.3d 1242, 1247 (Ct. App. Utah 2012) (international citations omitted). A trespass occurs "when a person intentionally 'enters land in the possession of [another], or causes a thing or a third person to do so.' ... 'Enters land' is then defined as follows: ... the phrase 'enters land' [includes] not only coming upon the land, but also remaining on it." Carter v. Done , 276 P.3d 1127, 1132-33 (Ct. App. Utah 2012) (quoting Restatement (Second) of Torts § 158(a) (1965) ).
Black Iron has alleged that the continuing presence of the Equipment on its Property is a trespass committed by Wells Fargo Rail. CML Metals was using the Equipment in its mining operation prior to selling its assets to Black Iron. Mining *910operations ceased in November 2014 and CML Metals defaulted under the leases. Wells Fargo Rail submitted correspondence19 and a supporting declaration20 showing that CML Metals requested Wells Fargo Rail forbear on exercising its options upon default while CML Metals sought to sell its assets. A forbearance agreement was drafted, but never signed. This uncontroverted evidence established Wells Fargo Rail's motivation for leaving the Equipment on the Property rather than retrieving it immediately upon default, and establishes that Wells Fargo Rail had the prior owner's permission for its Equipment to be on the Property. When Black Iron purchased CML Metals' assets, the Equipment was still on the Property.
Wells Fargo Rail asserts that Black Iron does not own the railroad tracks, or at least not all of them. Several hundred railcars may be on railroad tracks owned by Union Pacific, which are on Black Iron's Property. Black Iron has not submitted evidence showing its ownership of the railroad tracks, although the parties do not dispute that Black Iron purchased the underlying land. This question of railroad track ownership muddies the issue of trespass, but does not appear to be relevant to the issue of trespass.
It is undisputed that Wells Fargo Rail did not trespass initially, but had permission for its Equipment to be on the Property. A trespass also occurs if permission to be on property is withdrawn, and the trespasser or things remains.
If the possessor consents to the presence on the land of a thing which is to be removed at some time thereafter, and if such consent is terminated or suspended, one entitled to the immediate possession of the thing is privileged, as against such possessor and his transferee, to be on the land at a reasonable time for the purpose of removing the thing in a reasonable manner and with reasonable promptness, unless he knows or has reason to know the time of such termination or suspension a reasonable period in advance.
Restatement (Second) of Torts § 177 (1965). Adopting this standard, Wells Fargo Rail had the right to retrieve its Equipment within a reasonable manner and with reasonable promptness. Thus, the question of trespass turns on whether or not it was reasonable for Black Iron to assert that the Equipment should have been removed on or before Aug. 20, 2015, and for Wells Fargo Rail to have not yet removed the Equipment by that time.
To determine whether there is a genuine issue of material fact about the reasonableness of Wells Fargo Rail's efforts and timing, the Court relies on the evidence provided. Wells Fargo Rail submitted declarations, depositions and emails regarding the effort necessary to move the Equipment. The Declaration of Andrew Sutherland, the Vice-President for Fleet Maintenance at Wells Fargo Rail states:
5. From June 1-4, 2015, WFRC's inspection team inspected each of the 540 railcars and four locomotives (the "Equipment") and determined that the Equipment needed to be tested, and needed significant repairs, before it could be extracted. WFRC does not have the internal capabilities to perform tests and repairs on, or to operate, its *911railroad equipment and instead hires third-party vendors for those services.
6. Extracting the Equipment from the Property was going to be a substantial project given the number of railcars, their state of disrepair, the need for a qualified repair vendor willing to mobilize long distance to a remote location, the configuration of the tracks on the Property, and the various areas at which the Equipment was located across the Property. Of the 540 railcars, approximately 350 were located on tracks miles away from Union Pacific Railroad's main line interchange.
7. By June 18, 2015, I identified a repair vendor, Holland/M Bar D ("Holland"), that was willing to mobilize to the Property. I coordinated with Toni Cornforth of Black Iron/Gilbert Development Corporation to have Holland begin its work during the week of August 24, 2015 . Assuming we had Black Iron/Gilbert Development Corporation's cooperation, I anticipated that the necessary testing and repairs for 184 railcars at Union Pacific Railroad's main line interchange would be completed around December 2015. Arrangements to access the Equipment located away from Union Pacific's main line interchange were not determined with sufficient certainty to estimate a schedule for their removal.
8. WFRC also arranged for transportation and storage of its Equipment at Progress Rail Services' facility in Parsons, Kansas.
9. WFRC had multiple telephone conferences, including one on August 11, 2015, with Union Pacific regarding transportation and logistics for the extraction of the 184 railcars at Union Pacific's main line interchange as well as the remaining Equipment located elsewhere on the Property.21
Accordingly, Wells Fargo Rail had contracted with a repair vendor by June 18, 2015. It was apparently the repair vendor's schedule that determined the Aug. 24, 2015 start date, and Toni Cornforth at Black Iron was aware of this. There is no evidence that Black Iron communicated to Wells Fargo Rail that this start date was unreasonable.
In its briefing and at the hearing, Black Iron cited to the emails and efforts made by Wells Fargo Rail during the summer of 2015 to inspect, repair and prepare its Equipment for removal. Black Iron asserts that Wells Fargo Rail moved slowly and unduly delayed. However, any hints of impatience are missing from the contemporaneous emails themselves. In an email dated June 18, 2015, Cyndi Gilbert, an attorney for Black Iron, stated that "We appreciate [Wells Fargo Rail's] professionalism in inspecting the cars, etc.... in making this transition as painless as possible."22 An email string between Cyndi Gilbert at Black Iron and Robert Bowers of Wells Fargo Rail with dates ranging from July 30, 2015 through August 5, 2015 was submitted to support the assertion that Wells Fargo Rail was actively working on moving the Equipment, and there is no indication in those emails that Black Iron wanted Wells Fargo Rail to move faster or was getting impatient.23 Also missing is any indication *912that Black Iron informed Wells Fargo Rail that the deadline to get the Equipment moved was approaching.
Wells Fargo Rail received the news that it needed to move its Equipment on or about May 8, 2015. After a summer of working to do so, permission to be on Black Iron's Property was revoked on Aug. 20, 2015. That was a span of 104 days, or about three and a half months. Black Iron asserts that this was a reasonable time period to move the Equipment, but does not support this assertion with facts. See Fed. R. Civ. Pro. 56(c)(1)(A) ; Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (stating that when a properly supported motion for summary judgment is made, the adverse party must set forth specific facts showing that there is a genuine issue for trial). Within six weeks of being informed that the Equipment needed to be moved, Wells Fargo Rail had hired a repair vendor. The repair vendor was to start work Aug. 24, 2015. Black Iron has not shown facts that would demonstrate that it was an unreasonable delay to hire a repair vendor who needed about eight weeks to mobilize a repair team to central Utah. After most of those eight weeks had elapsed, Black Iron withdrew permission for the repair vendor to enter its Property on only four days notice.
The contemporaneous communications and Steve Gilbert's deposition support the conclusion that the withdrawal of permission to enter the Property was not based on the lapse of a reasonable period of time to extract the Equipment, but was instead done in retaliation for the filing of a lawsuit against Black Iron. In support of this, Wells Fargo Rail has submitted a transcript of telephone calls in which Steve Gilbert described his decision to tell Wells Fargo Rail it could no longer come on Black Iron's property to remove the railcars by stating that "I'm going to hold the cars hostage"24 and "I shut the railroad cars. They were moving them; I stopped it. I said, no, no, no. If we're going to be in a fight, we're going to fight, but the cars has got a lien on them for storage. And they didn't think that was very funny.... I'm fixing to raise some serious hell."25 In his deposition taken March 30, 2018, Steve Gilbert stated that the "cease & desist" email on Aug. 20, 2015 was "triggered" by the filing of the lawsuit.26
Black Iron has not asserted facts that would support a finding that the decision to withdraw permission to remove the Equipment was based on the reasonable amount of time necessary to accomplish the project. Instead, the evidence points to the conclusion that Wells Fargo Rail was working with Black Iron's cooperation to remove the Equipment and had hired a repair vendor which could start work on Aug. 24, 2015. The evidence also supports the conclusion that Black Iron did not inform Wells Fargo Rail that the deadline would be Aug. 20, 2015, but that it caught Wells Fargo Rail by surprise when Black Iron withdrew permission to come on the Property. Black Iron has not submitted sufficient facts that would support a different conclusion.
The evidence shows, and is sufficient for the Court to find, that the Aug. 20, 2015 *913deadline to remove the Equipment from the Property was determined by the filing of a lawsuit, and not by the passage of a "reasonable" period of time to extract the Equipment. The evidence further shows, and is additionally sufficient for the Court to find, that Wells Fargo Rail was taking reasonable steps to extract its Equipment. Black Iron's claim for trespass fails because it did not adequately support its assertions with specific facts. Summary judgment may be granted to Wells Fargo Rail under Fed. R. Civ. Pro. 56(e)(3).
VI. Conclusion
The factual record in this case is lengthy and complex but fairly clear. Wells Fargo Rail has properly supported its motion for summary judgment. Black Iron has stated that several elements of this case require factual findings, but it did not assert sufficient facts that would raise a genuine dispute about any material facts or that could support factual findings in its favor or defeat the motion of Wells Fargo Rail.
The claims that Black Iron asserts against Wells Fargo Rail under theories of breach of contract, contract implied in fact, unjust enrichment or a warehouse lien are premised on the assumption that Wells Fargo Rail wanted to leave its Equipment on Black Iron's Property. However, the evidence submitted shows that Wells Fargo Rail did not want to leave its Equipment on the Property. Wells Fargo Rail spent considerable effort and money to coordinate the retrieval effort, hire the personnel, perform inspections and repair, and otherwise work towards removing its Equipment. Black Iron did not raise a genuine issue of material fact that would support its assertion that Wells Fargo Rail agreed with Black Iron for storage services.
While the claim of trespass requires a determination of reasonableness, the record is clear enough that the Court is able to and does determine that Wells Fargo Rail's efforts were reasonable; Black Iron's deadline to remove the Equipment was influenced more by the filing of a lawsuit than by a judicious consideration of how much time would reasonably be necessary to remove the Equipment.
Therefore, Wells Fargo Rail's motion for summary judgment should be GRANTED.
The Court will enter the order.
See Letter from Chris Bradley, VP of Finance at CML Metals Corporation to First Union Rail, Dkt. No. 68, Exh. B. The letter states that as of Oct. 16, 2014, CML has shut down its mining operations. CML acknowledged its lease obligation, but stated that it was negotiating financial terms with potential purchasers, and asked that First Union Rail not bring a legal claim at this time. First Union Rail proposed a deferred payment schedule while it worked to complete an asset sale, and suggested that a buyer would "invest in the project and again utilize First Union's services."
See Letter from Robert Bowers, Dkt. No. 68, Exh.T. Mr. Bowers, attorney for First Union Rail Corporation, stated that First Union would file a complaint against CML Metals if the attached forbearance agreement was not signed.
Deposition of Steve Gilbert, Dkt. No. 68, Exh. A at 226 et seq.
See Dkt. No. 71, Exh 6, p.6.
See email from Toni Cornforth at Black Iron to Andrew Sutherland at First Union Rail, Dkt. No. 68, Exh. L.
See Deposition of Steve Gilbert, Dkt. No. 68, Exh. A at 226-57; Declaration of Robert T. Bowers, Dkt. No. 68, Exh. T.
See Letter dated March 15, 2016 from Erik Olsen to Douglas Farr, Dkt. No. 68, Exh. M.
See Letter dated April 4, 2016 from Erik Olsen to Douglas Farr, Dkt. No. 68, Exh. Q.
See Letter dated July 12, 2016 from Dana Farmer to Douglas Farr, Dkt. No. 68, Exh. M.
See Declaration of Andrew J. Sutherland, Dkt. No. 68, Exh I. Wells Fargo Rail stated that it spent about $480,000 on this extraction effort and this amount is undisputed.
See Declaration of Douglas P. Farr in Support of Motion for Prejudgment Writ of Replevin and Substitution of Collateral, Dkt. No. 68, Exh. K.
See Letter dated Aug. 22, 2016 from Dana Farmer representing Black Iron to Douglas Farr representing Wells Fargo Rail, Dkt. No. 68, Exh. M, pp. 5-21.
See Order Granting in Part Motion for Prejudgment Writ of Replevin and Substitution of Collateral, Case No. 17-2094, Dkt. No. 251, entered on June 11, 2018.
Deposition of Steve Gilbert, Dkt. No. 68, Exh. A at 226-57.
See Email dated Aug. 20, 2015 from Toni Cornforth at Black Iron to Andrew Sutherland at First Union Rail, which reads in full: "Please be advised due to legal issue pertaining to storage and security of the rail cars sitting on the Black Iron, LLC property these car cannot be moved until these issues are resolved. This is a notification to cease and desist the plan to start interaction on the cars next week." Dkt. No. 68, Exh. L (errors in original).
See Declaration of Andrew J. Sutherland, Dkt. No. 68, Exh. I.
Email dated Sept. 2, 2015 from Robert T. Bowers to Cyndi Gilbert, Dkt. No, 68, Exh. T, pp. 78-79.
See Declaration of Robert C. Bowers, Dkt. No. 68, Exh. T.
See Letter dated Nov. 20, 2014 from CML Metals to Wells Fargo Rail, Dkt. No. 68, Exh. B.
See Declaration of Greg R. Johnson in Support of Motion for Prejudgment Writ of Replevin and Substitution of Collateral, Dkt. No. 68, Exh. H.
Declaration of Andrew J. Sutherland dated Oct. 15, 2018, Dkt. No, 68, Exh I (emphasis added).
Email from Cyndi Gilbert to Robert Bowers dated June 18, 2018, Dkt. No. 68, Exh T, p.20.
See emails between Cyndi Gilbert and Robert Bowers dated July 30, 2015 through Aug. 5, 2015, Dkt. No. 68, Exh. T, pp. 73-76.
Transcript of a telephone call held Aug. 20, 2015 between Steve Gilbert and Brian Rothschild, Dkt. No. 68, Exh. C, pp. 7-15.
Transcript of a telephone call held Aug. 21, 2015 between Steve Gilbert and Brian Rothschild, Dkt. No. 68, Exh. C., pp. 1-6.
Steve Gilbert Deposition, Dkt. No. 68, Exh. A, 272:23 - 273:3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501838/ | Wendy L. Hagenau, U.S. Bankruptcy Court Judge
THIS MATTER is before the Court on Defendant's Renewed Motion to Dismiss (the "Motion") (Doc. No. 8). This matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(I) and (J), and the Court has jurisdiction over the proceeding pursuant to 28 U.S.C. §§ 1334 and 157.
I. FACTS
Plaintiff, a transportation company, hired Defendant as a contract dispatcher. Plaintiff contacted Defendant when it needed a truck to deliver freight in and around Georgia. Defendant would then find a driver to complete the route. Plaintiff would invoice the customer for payment. Plaintiff alleges Defendant collected and kept payments from customers.
More specifically, Plaintiff alleges Defendant represented to customers that they were to pay her, rather than Plaintiff, and she would remit the payments to Plaintiff. Plaintiff alleges Defendant represented to a customer, Swift Logistics, that it was to pay her rather than Plaintiff, and Swift Logistics paid Defendant $551.82 on June 17, 2015 under false pretenses that she was accepting the payment on Plaintiff's behalf. Plaintiff alleges Defendant never submitted the funds to it. Plaintiff alleges Defendant received several other payments, in the amounts of $409.50, $409.50, $409.50, $461.10, $409.50, and $409.50, under similar pretenses and never submitted the payments to Plaintiff. Plaintiff states Defendant also intercepted a payment on February 23, 2015 for $343.00.
Plaintiff filed a complaint in the Court of Common Pleas of Allegheny County, Pennsylvania and obtained a judgment against Defendant in the amount of $78,488.62. Plaintiff domesticated the judgment in Georgia. Plaintiff filed a second action in the Court of Common Pleas of Allegheny County, Pennsylvania and obtained a judgment against Defendant for $26,732.91; it was also domesticated in Georgia.
Defendant filed a petition under chapter 7 of the Bankruptcy Code on March 20, 2018. Defendant stated on Schedule A/B she held checking and savings accounts with Navy Federal Credit Union and Delta Community Credit Union. On Schedule D, Defendant listed three vehicles subject to *919secured claims: a 2016 BMW 740i, a 2008 Harley Davidson motorcycle, and a 2013 BMW X5; on Schedule G she listed a Harley Davidson Sportster subject to an auto lease. On her Statement of Financial Affairs, Official Form 107, Defendant stated she was not married. On Schedule I, Defendant stated she was employed by Gilco Trucking as a dispatcher for approximately six years.
Plaintiff filed a complaint on June 25, 2018 seeking a determination a debt owed to it by Defendant is nondischargeable pursuant to sections 523(a)(2) and 523(a)(4) of the Bankruptcy Code and to deny Defendant a discharge pursuant to section 727(a)(2) and 727(a)(4) of the Bankruptcy Code. Defendant answered and moved to dismiss the complaint. Plaintiff then filed an Amended Complaint. Thereafter, Defendant filed the Motion. For the reasons stated below, the Court grants the Motion in part and denies the Motion in part.
II. MOTION TO DISMISS STANDARD
Defendant seeks dismissal of the Amended Complaint pursuant to Federal Rule of Bankruptcy Procedure 12(b)(6), made applicable by Federal Rule of Bankruptcy Procedure 7012, for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A complaint is plausible on its face when the plaintiff pleads factual content necessary for the court to draw the reasonable inference the defendant is liable for the conduct alleged. Id.
While the plausibility standard "asks for more than a sheer possibility that a defendant has acted unlawfully," Iqbal, 556 U.S. at 678, 129 S.Ct. 1937, the purpose of a motion to dismiss is not to resolve disputed facts or decide the merits of a case. Rather, the purpose of a motion to dismiss is to ensure the plaintiff has provided notice of the grounds which entitle him to relief. Twombly, 550 U.S. at 561, 127 S.Ct. 1955. The facts alleged must be taken as true, and dismissal is inappropriate merely because it appears unlikely the plaintiff can prove those facts or will ultimately prevail on the merits. Official Comm. of Unsecured Creditors of Tousa, Inc. v. Technical Olympic, S.A. (In re Tousa), 437 B.R. 447, 452 (Bankr. S.D. Fla. 2010) (citing Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) ).
III. DISCUSSION
a. Plaintiff has alleged facts to support a plausible claim under § 523(a)(2)(A)
Plaintiff contends Defendant's debt should be deemed nondischargeable pursuant to section 523(a)(2)(A) because it was incurred under false pretenses.
A presumption exists all debts owed by the debtor are dischargeable unless the party contending otherwise proves nondischargeability. 11 U.S.C. § 727(b). The purpose of this "fresh start" is to protect the "honest but unfortunate" debtors. U.S. v. Fretz (In re Fretz), 244 F.3d 1323, 1326 (11th Cir. 2001). The burden is on the creditor to prove an exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 680 (11th Cir. 1993). Courts should narrowly construe exceptions to discharge against the creditor and in favor of the debtor.
*920Equitable Bank v. Miller (In re Miller), 39 F.3d 301 (11th Cir. 1994) ; St. Laurent, 991 F.2d at 680.
Section 523(a)(2)(A) excludes from discharge debts obtained through "false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). False pretenses is defined as "[A] series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, or false and misleading understanding of a transaction, in which a creditor is wrongfully induced by the debtor to transfer property or extend credit to the debtor.... A false pretense is usually, but not always, the product of multiple events, acts or representations undertaken by a debtor which purposely create a contrived and misleading understanding of a transaction that, in turn, wrongfully induces the creditor to extend credit to the debtor. A 'false pretense' is established or fostered willfully, knowingly and by design; it is not the result of inadvertence." ColeMichael Invs., L.L.C. v. Burke (In re Burke), 405 B.R. 626, 645 (Bankr. N.D. Ill. 2009), aff'd sub nom , ColeMichael Invs., L.L.C. v. Burke, 436 B.R. 53 (N.D. Ill. 2010).
"What constitutes 'false pretenses' in the context of § 523(a)(2)(A) has been defined as 'implied misrepresentations or conduct intended to create and foster a false impression.' " Haeske v. Arlington (In re Arlington), 192 B.R. 494, 498 (Bankr. N.D. Ill. 1996). False pretenses do not necessarily require overt misrepresentations. Instead, omissions or a failure to disclose on the part of the debtor can constitute misrepresentations where the circumstances are such that omissions or failure to disclose create a false impression which is known by the debtor. Id."As distinguished from false representation, which is an express misrepresentation[,] false pretense involves an implied misrepresentation or conduct intended to create and foster a false impression, .... and ... [i]t is well recognized that silence, or the concealment of a material fact, can be the basis of a false impression which creates a misrepresentation actionable under § 523(a)(2)(A) [.]" Suntrust Bank v. Brandon (In re Brandon), 297 B.R. 308, 313 (Bankr. S.D. Ga. 2002) (quoting Minority Equity Capital Corp. v. Weinstein (In re Weinstein ), 31 B.R. 804, 809 (Bankr. E.D.N.Y. 1983) ).
In order to establish that a debt is nondischargeable under § 523(a)(2)(A) as a false pretense, a plaintiff must prove by a preponderance of the evidence that: "(1) the [defendant] made an omission or implied misrepresentation; (2) promoted knowingly and willingly by the defendant[ ]; (3) creating a contrived and misleading understanding of the transaction on the part of the plaintiff [ ]; (4) which wrongfully induced the plaintiff[ ] to advance money, property, or credit to the defendant." Tropicana Casino & Resort v. August (In re August), 448 B.R. 331, 350 (Bankr. E.D. Pa. 2011) (internal quote omitted).
Plaintiff alleges Defendant's debt should be deemed nondischargeable pursuant to section 523(a)(2)(A) because Defendant knowingly made statements that wrongfully induced Plaintiff's customers to advance money to Defendant. More specifically, Plaintiff alleges Defendant represented to customers that they were to pay her, and she would remit the payments to Plaintiff. Plaintiff contends Defendant never remitted the payments to Plaintiff. Plaintiff has alleged Defendant's conduct created and fostered a false impression that customers should direct payments to her, rather than Plaintiff. For example, Plaintiff alleges Defendant represented to a customer, Swift Logistics, that it was to pay her rather than Plaintiff, that the misrepresentation *921created a misleading understanding of the transaction, and Swift Logistics paid Defendant $551.82 on June 17, 2015 under false pretenses that she was accepting the payment on Plaintiff's behalf. Plaintiff alleges Defendant never submitted the funds to it. Plaintiff alleges Defendant received several other payments, in the amounts of $409.50, $409.50, $409.50, $461.10, $409.50, and $409.50, under false pretenses.
The allegations, taken as true, give rise to a claim for false pretenses under section 523(a)(2)(A). Because the Amended Complaint contains facts sufficient to allege actions by the Defendant that would constitutes false pretenses, the Court concludes Plaintiff has stated a claim pursuant to section 523(a)(2)(A).
b. Plaintiff has alleged facts to support a plausible claim under § 523(a)(4)
Plaintiff contends its debt is nondischargeable pursuant to section 523(a)(4) because Defendant was acting in a fiduciary capacity as an agent of Plaintiff and failed to remit payments she received to Plaintiff and Defendant wrongfully and with fraudulent intent took property from Plaintiff.
Section 523(a)(4) excludes from discharge debts obtained by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. 11 U.S.C. § 523(a)(4). Fiduciary is narrowly construed under section 523(a)(4). "The Supreme Court has consistently held that the term 'fiduciary' is not to be construed expansively, but instead is intended to refer to 'technical' trusts.' " Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993) (citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934) ); see also Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386, 391 (6th Cir. 2005) (noting the term "fiduciary capacity" is construed more narrowly in the context of section 523(a)(4) than in other circumstances). A technical trust has been defined by the Eleventh Circuit as "an express trust created by statute or contract that imposes trust-like duties on the defendant and that pre-exists the alleged defalcation." Lewis v. Lowery (In re Lowery), 440 B.R. 914, 926 (Bankr. N.D. Ga. 2010). "Mere friendship does not meet this standard, nor does an ordinary business relationship." In re Ferland, Adv. No. 09-5101, 2010 WL 2600588, *3, 2010 Bankr. LEXIS 1892 *7 (Bankr. M.D. Ga. June 21, 2010) (citations omitted).
Section 523(a)(4) requires the debtor, acting as a fiduciary in accordance with an express or technical trust that existed prior to the wrongful act, commit an act of fraud or defalcation. Thus, under section 523(a)(4), the debtor must owe a fiduciary duty to his or her creditors that pre-existed the act creating the debt. Quaif, 4 F.3d at 954. Additionally, the fiduciary duties must be specifically set forth so a trust relationship is expressly and clearly imposed. Some cases have also found a separately identifiable res is essential to a trust. Eavenson v. Ramey (In re Eavenson), 243 B.R. 160, 165 (N.D. Ga. 1999).
Plaintiff has not alleged facts to establish a fiduciary relationship with Defendant within the meaning of section 523(a)(4). Plaintiff contends Defendant, a contract dispatcher, acted on Plaintiff's behalf as an agent of Plaintiff. While the law does not require formal words to create a trust, there must be a clear intention to create a trust. An ordinary business relationship does not qualify as a technical trust. Plaintiff has not alleged Defendant was acting in a fiduciary capacity in accordance with an express or technical trust; it has failed to allege the agreement between *922it and Defendant established anything other than an ordinary business relationship.
While fraud or defalcation must occur in a fiduciary capacity, larceny and embezzlement do not have to occur while the debtor is acting in a fiduciary capacity to provide a basis for nondischargeability under 11 U.S.C. § 523(a)(4). Embezzlement and larceny are not defined in the Bankruptcy Code itself. For the elements of both, this Court must look to federal common law. Bryant v. Lynch (In re Lynch), 315 B.R. 173, 179 (Bankr. D. Colo. 2004) (citations omitted).
Larceny is proved under section 523(a)(4) if the debtor has wrongfully and with fraudulent intent taken property from its owner. Kaye v. Rose (In re Rose), 934 F.2d 901, 903 (7th Cir. 1991). First, larceny requires that the original taking of property be unlawful. See Wilson Family Foods, Inc. v. Brown (In re Brown), 457 B.R. 919, 926 (Bankr. M.D. Ga. 2011) (citing 4 Collier on Bankruptcy ¶ 523.10[2] (16th ed. 2009) ). Second, larceny within the meaning of section 523(a)(4) requires intent. A plaintiff must show that the defendant took property "with the intent to convert it or to permanently deprive the owner of it." Burke v. Riddle (In re Riddle), No. 10-42735-PWB, 2011 Bankr. LEXIS 2226, 2011 WL 2461896, at *4 (Bankr. N.D. Ga. Apr. 6, 2011) (citing Bennett v. Wright (In re Wright), 282 B.R. 510, 516 (Bankr. M.D. Ga.2002) ). Embezzlement is the fraudulent conversion of property by a person to whom such property has been entrusted or into whose hands it has lawfully come. See id. It differs from larceny in that the original taking of the property was lawful or with the consent of the owner. Embezzlement, like larceny, requires fraudulent intent. Id.
Plaintiff has alleged Defendant unlawfully and intentionally took sums owed to it. Plaintiff has also alleged Defendant was entrusted with funds owed to it but failed to remit them to it. Plaintiff alleges Defendant took payments from Plaintiff's customers after representing to the customers that it was to pay her, rather than Plaintiff. For example, Plaintiff alleges Defendant intentionally intercepted a payment on February 23, 2015 for $343.00 when she represented to the customer that it was to pay her, rather than Plaintiff, and she would remit the payment to Plaintiff.
The Amended Complaint includes facts sufficient to allege Defendant committed larceny or embezzlement when she wrongfully and with fraudulent intent took property from Plaintiff. Accordingly, Plaintiff has stated a claim for relief pursuant to section 523(a)(4).
c. Plaintiff has not alleged facts to support a plausible claim under § 727(a)(2)(A)
Plaintiff contends Defendant should be denied a discharge pursuant to section 727(a)(2)(A) because she transferred assets with intent to hinder, delay, or defraud creditors.
Section 727(a)(2)(A) provides the court shall grant the debtor a discharge unless "the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed property of the debtor within one year before the date of the filing of the petition." 11 U.S.C. § 727(a)(2)(A).
To deny the debtor a discharge under this section, the plaintiff must allege the defendant acted with actual intent to hinder, defraud or delay. "Constructive fraud is insufficient to support a denial of *923discharge under this section." See Segell v. Letlow (In re Letlow), 385 B.R. 782, 795-6 (Bankr. N.D. Ga. 2007). However, because a debtor will rarely admit he actually intended to defraud a creditor, fraudulent intent may be established by circumstantial evidence or by inferences drawn from a course of conduct. Id.; see also In re Freudmann, 495 F.2d 816 (2d Cir.) (per curiam), cert. denied , 419 U.S. 841, 95 S.Ct. 72, 42 L.Ed.2d 69 (1974) ; Future Time, Inc. v. Yates, 26 B.R. 1006 (M.D. Ga.), aff'd , 712 F.2d 1417 (11th Cir. 1983) (mem.). The act must consist of transferring, removing, destroying or concealing any of the debtor's property, or permitting any of these acts to be done. Withdrawals from bank accounts meet the definition of transfer. See Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279 (9th Cir. 1996).
According to the Amended Complaint, Defendant transferred assets to her husband with the intent to hinder, delay, or defraud creditors. Plaintiff has not identified any assets Defendant allegedly transferred and Plaintiff has not stated when such transfers occurred. Thus, Plaintiff has not identified a specific act Defendant did within a year of filing that would qualify under this section. Plaintiff has not alleged facts setting forth a basis to deny Defendant's discharge pursuant to section 727(a)(2)(A). Accordingly, the Amended Complaint will be dismissed to the extent Plaintiff seeks to deny Defendant a discharge pursuant to section 727(a)(2)(A).
d. Plaintiff has alleged facts to support a plausible claim under § 727(a)(4)
Finally, Plaintiff contends Defendant should be denied a discharge because she knowingly and fraudulently made false oaths and accounts regarding her assets and liabilities and financial affairs.
Section 727(a)(4)(A) provides the court shall grant the debtor a discharge unless "the debtor knowingly and fraudulently, in or in connection with the case made a false oath or account." 11 U.S.C. § 727(a)(4)(A). Because a debtor signs the petition and schedules under penalty of perjury, a false statement or omission of information from the debtor's petition is a false oath within the meaning of 11 U.S.C. § 727(a)(4)(A). Chalik v. Moorefield (In re Chalik), 748 F.2d 616 (11th Cir. 1984). The Eleventh Circuit has found in order to "justify denial of discharge under section 727(a)(4)(A), the false oath must be fraudulent and material." Swicegood v. Ginn, 924 F.2d 230, 232 (11th Cir. 1991). The subject matter of a false oath is material and warrants a denial of discharge if it is related to the debtor's business transactions, or if it concerns the discovery of assets, business dealings, or the existence or disposition of the debtor's property. Chalik, 748 F.2d at 618. Detriment to creditors need not be shown. Id. Furthermore, the debtor may not defend himself by claiming the assets omitted were worthless. Id. The materiality requirement can be met if the omission and misstatement affected the administration of the debtor's estate. Olympic Coast Inv. v. Wright (In re Wright), 364 B.R. 51, 74 (Bankr. D. Mont. 2007).
Mere failure to disclose, without more, is insufficient to deny a debtor's discharge. See In re Garcia, 88 B.R. 695, 705 (Bankr. E.D. Pa. 1988). In order to warrant denial of discharge, the plaintiff must also establish the debtor made the false oath both knowingly and fraudulently. "A false oath or account is 'knowingly' false if the debtor knew the information omitted from the schedules should have been included but, for whatever reason, was not." Segell v. Letlow (In re Letlow), 385 B.R. 782, 796 (Bankr. N.D. Ga. 2007)
*924(citing Am. Express Travel Related Servs. v. Scott (In re Scott), Adv. No. 01-6117, 2004 WL 3623508, *4, 2004 Bankr. LEXIS 1830, *13 (Bankr. N.D. Ga. 2004) ). "Accordingly, '[a]n inadvertent omission or an omission resulting from an honest but erroneous belief that the information need not be disclosed' does not constitute a knowingly false omission." Id. To show a debtor's omission was fraudulent, the plaintiff must prove actual rather than constructive fraud. Id. at 795. Actual fraud may, however, be inferred from circumstantial evidence, course of conduct, or a series or pattern of errors or omissions. Parnes v. Parnes (In re Parnes), 200 B.R. 710, 713-14 (Bankr. N.D. Ga. 1996). A debtor coming forward of his or her own accord to correct an omission is strong evidence there was no fraudulent intent in the omission. Id. at 714.
Plaintiff alleges Defendant falsely represented her assets, liabilities, and financial affairs under oath when she failed to disclose information on her bankruptcy petition. More specifically, Plaintiff alleges Defendant failed to disclose a Regions Bank account on Schedule A/B, incorrectly stated she was not married on her Statement of Financial Affairs, failed to list motor vehicles including two Harley Davidsons on her schedules, and misstated her employment status on Schedule I. The Amended Complaint alleges Defendant intentionally omitted and misstated this information from her schedules. These statements were made on Debtor's petition and schedules, which were signed under penalty of perjury. Further, the subject matter of these statements concerns the potential discovery of assets, the existence or disposition of the Debtor's property, and the administration of the debtor's estate. Accordingly, the Court finds Plaintiff has alleged facts to support a plausible claim pursuant to section 727(a)(4).
IV. Conclusion
For the reasons stated above, the Court finds Plaintiff has alleged facts to support a plausible claim for nondischargeability pursuant to sections 523(a)(2)(A) and 523(a)(4) and has alleged facts setting forth a basis to deny Defendant's discharge pursuant to section 727(a)(4). The Court finds, however, Plaintiff has not alleged facts sufficient to deny Defendant's discharge pursuant to section 727(a)(2)(A) or sufficient to find the debt nondischargeable arising from fraud or defalcation as a fiduciary. Accordingly,
IT IS ORDERED that the Motion is GRANTED IN PART .
IT IS FURTHER ORDERED Plaintiff's claims pursuant to section 727(a)(2)(A) and pursuant to section 523(a)(4) as to a fiduciary are DISMISSED.
The Clerk's Office is directed to serve a copy of this Order upon the Plaintiff, Plaintiff's counsel, and Defendant. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501841/ | RICHARD E. FEHLING, United States Bankruptcy Judge
I. INTRODUCTION
Debtor/Defendant, Richard Gilbert Dietrich ("Dietrich") needed brain surgery. The medical facility that he chose for his procedure was Plaintiff, Lehigh Valley Hospital (the "Hospital"). His health insurance carrier, however, identified the Hospital as non-participating. This meant that his health insurance carrier would not pay the Hospital directly; it would pay Dietrich the amount of the Hospital bills. Dietrich was then personally responsible to pay the insurance proceeds to the Hospital. Dietrich signed consent forms that establish his liability for services that the Hospital provided to him and through which he assigned all of his interest in insurance benefits to the Hospital. Dietrich, however, says that he neither read nor understood the consents and therefore was not bound by their terms. When he received three checks totaling $95,674.36 from his health insurance carrier for his brain surgery, he kept them, deposited them into his own account, and spent them, failing to pay the insurance proceeds to the Hospital.
In this case, I am called upon to determine whether the $95,674.36 debt admittedly owed by Dietrich to the Hospital should not be dischargeable. I find and conclude that Dietrich's conduct amounted to fraudulent misrepresentation and willful and malicious conduct. The debt owed to the Hospital by Dietrich is therefore nondischargeable under both section 523(a)(2)(A) and section 523(a)(6) of the Bankruptcy Code. I will rule in favor of *63the Hospital, concluding that the full amount of the debt is not dischargeable.
II. FACTUAL BACKGROUND
Dietrich received treatment for a brain tumor at the Hospital in the first half of 2016. On January 15, 2016, the Hospital contacted Dietrich and notified him that the Hospital was a non-participating provider with Dietrich's insurance company, Capital BlueCross. That meant that Capitol BlueCross would not pay the Hospital's fees directly, but would pay Dietrich who would then pay the Hospital. But Dietrich claims to be unaware how the anticipated payment to the Hospital would be made by Capital BlueCross. He failed to question both the Hospital and Capital BlueCross about what effect the Hospital's status as a non-participating provider would have on his ability and obligation to pay the Hospital for medical services. Dietrich also decided not to read his insurance policy to determine how payment would be made to a non-participating provider such as the Hospital. Dietrich acknowledged, however, that had he read his policy, he would have learned that Capital BlueCross would remit payment for medical services directly to him and not to the Hospital as a non-participating provider. Prior to receiving treatment from the Hospital, Dietrich executed three Consents for Treatment, in which he agreed to pay for services rendered to him by the Hospital. More directly on point in this dispute, Dietrich assigned to the Hospital any insurance proceeds he would receive as payment for the services provided by the Hospital.
After receiving medical services from the Hospital, Dietrich received bills from the Hospital for these medical services. He also received three checks totaling $95,674.36 from Capital BlueCross as payment for the services he received from the Hospital. Dietrich does not dispute that he endorsed these checks, deposited the proceeds into his personal bank account, and spent the money. When he endorsed the checks, deposited the proceeds into his personal account, and spent the funds, Dietrich was aware that the Hospital was a non-participating provider with Capital BlueCross.
The Hospital initiated this litigation, maintaining that Dietrich's conduct was fraudulent and willful and malicious and that the debt he owes to the Hospital should not be dischargeable under section 523(a)(2)(A) and (6). Dietrich's sole defense is that he was not aware that the checks he received from Capital BlueCross were intended as payment for the services provided by the Hospital. He further claims that the Hospital failed to prove that his conduct was fraudulent, willful, and malicious. Fundamentally, this case hangs upon Dietrich having no reasonable belief that the $95,674.36 he received was his to keep and spend.
III. PROCEDURAL HISTORY
The Hospital initiated this adversary proceeding by filing and serving its complaint against Dietrich on August 24, 2017 claiming that the $95,674.36 debt owed to it by Dietrich is not dischargeable under 11 U.S.C. § 523(a)(2)(A) and (6). Dietrich filed his answer to the complaint on September 19, 2017. On April 20, 2018, the Hospital filed a motion for summary judgment, which I denied in my Order entered on May 16, 2018, because some critical facts were in dispute. Trial was thereafter held on August 13, 2018 and the parties filed post-trial briefs. This matter is now ready for my disposition. As noted above, I will rule in favor of the Hospital, concluding that the full amount of the debt of $95,674.36 is not dischargeable.
*64IV. DISCUSSION
A. Dietrich is bound by the terms of the Consents for Treatment he signed and therefore is obliged to pay the Hospital for the services he received and to have remitted the proceeds of the insurance to the Hospital.
Prior to receiving treatment from the Hospital, Dietrich signed three identical Consents for Treatment. The Consents obligate Dietrich to pay the Hospital for the services it renders to Dietrich. They also require that Dietrich assign to the Hospital all insurance benefits he receives for services rendered by the Hospital to Dietrich. See the Hospital's Exhibits A, B, & C. Dietrich does not dispute that he signed these documents, but he suggests he is not bound by their terms because he neither read nor understood their contents. That is just plain wrong.
Pennsylvania law, as applied both in state courts and in federal courts, is crystal clear that neither the failure to read a document nor the lack of understanding of its terms is a defense to the enforceability of the document. Schillachi v. Flying Dutchman Motorcycle Club, 751 F.Supp. 1169, 1174-75 (E.D. Pa. 1990) ; see also Wells Fargo Bank, N.A. v. Yung, 317 F.Supp.3d 879, 887 (E.D. Pa. 2018). As the District Court stated in Yung:
Under Pennsylvania law, a party who signs a contract is responsible for reading the contract. See Schillachi v. Flying Dutchman Motorcycle Club, 751 F.Supp. 1169, 1174-75 (E.D. Pa. 1990) (citing Bessen Bros., Inc. v. Brooks, 176 Pa. Super. 430, 107 A.2d 623 (1954) ). In the absence of fraud, ignorance of the contract's contents does not excuse the signing party from performing the obligations of the contract. See id. at 1175.
Yung, 317 F.Supp.3d at 887. Furthermore, a party who seeks to have another party sign a contract has no duty to insure that the other party reads the contract or fully understands its terms. Arce v. U-Pull-It Auto Parts, Inc., Civil Action No. 06-5593, 2008 WL 375159, at *5-9 (E.D. Pa. Feb. 11, 2008) ; see also Wroblewski v. Ohiopyle Trading Post, Inc., Civil Action No. 12-0780, 2013 WL 4504448, at *7 (W.D. Pa. Aug. 22, 2013).
Dietrich has neither proven, nor even alleged, fraud by the Hospital in inducing him to sign the Consents for Treatment. Dietrich is therefore bound by the terms of these documents despite his claims to have never read them. Yung, 317 F.Supp.3d at 887 ; Schillachi, 751 F.Supp. at 1174-75. See also PHC-Martinsville, Inc. v. Dennis, Record No. 161019, 2017 WL 4053898, at *2 (Va. September 14, 2017), in which the Virginia Supreme Court ruled that a patient was bound by the terms of a Consent for Services and Financial Responsibility document even though he signed it without first reading it. The patient was in the hospital emergency room experiencing what he thought was a heart attack. The Virginia Supreme Court concluded that patient's signature on the document was a manifestation of his intent to agree to its terms. The court further found that the Hospital's use of a standard-form contract and the disparity in bargaining power between the parties did not affect the patient's ability to assent to its terms.
Dietrich argues that he is not bound by the terms of the Consents for Treatment because he did not understand their terms. Under Pennsylvania law, however, a party is responsible for not only reading a contract, but also for understanding its contents as well. Therefore, a party's lack of either knowledge or understanding of the terms of a contract does not void or otherwise affect the enforceability of the contract. Yung, 317 F.Supp.3d at 887. Dietrich is therefore *65bound by the terms of the Consents for Treatment even though he professes not to have read them and not to have understood their terms.
B. Burden of proof in nondischargeability action under 11 U.S.C. § 523(a).
"One of the chief purposes of the Bankruptcy Code is to provide honest debtors with a 'fresh start,' free from the 'weight of oppressive indebtedness.' " Oppenheimer & Co. v. Ricker (In re Ricker), 475 B.R. 445, 455 (Bankr. E.D. Pa. 2012), citing Ins. Co. of North America v. Cohn (In re Cohn), 54 F.3d 1108, 1113 (3d Cir. 1995). Exceptions to discharge are therefore narrowly construed against creditors and liberally construed in favor of debtors. Cohn, 54 F.3d at 1113 ; Ricker, 475 B.R. at 455. In keeping with this philosophy, the burden of proof in an adversary proceeding challenging the dischargeability of a debt under section 523(a) is on the creditor, who must prove his case by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; Ricker, 475 B.R. at 455.
C. The Hospital met its burden of proving that the debt is not dischargeable under 11 U.S.C. § 523(a)(6).
Section 523(a)(6) excepts from discharge any debt for "willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). To have a debt found nondischargeable under section 523(a)(6), the Hospital must prove by a preponderance of the evidence that (1) Dietrich's conduct was both "willful and malicious," and (2) injury resulted to the Hospital from Dietrich's conduct. Nakonetschny v. Rezykowski (In re Rezykowski), 493 B.R. 713, 721 (Bankr. E.D. Pa. 2013).
A willful injury is one that is done deliberately or intentionally. Rezykowski, 493 B.R. at 721 ; GMAC Inc v. Coley (In re Coley), 433 B.R. 476, 497 (Bankr. E.D. Pa. 2010). While section 523(a)(6) does not encompass reckless acts that lead to injury, see Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), deliberate actions that are substantially certain to produce injury are willful within the meaning of § 523(a)(6). Coley, 433 B.R. at 497, citing Conte v. Gautam (In re Conte), 33 F.3d 303, 307-09 (3d Cir 1994). See also Rezykowski, 493 B.R. at 721-22.
In addition to being willful, section 523(a)(6) also requires that the injury be malicious. Rezykowski, 493 B.R. at 722. As Judge Frank explained through his reliance on previous decisions on the issue of maliciousness:
"Malice" is distinct from willfulness. The commonly-accepted definition of malice encompasses an injury that is "wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will." In re Jacobs, 381 B.R. 128, 138-39 (Bankr. E.D. Pa. 2008) ; 4 Collier on Bankruptcy ¶ 523.12[2] (Alan N. Resnick and Henry J. Sommer eds., 16th ed. 2013). A plaintiff is not required to prove that the debtor acted with "specific malice." Conte, 33 F.3d at 308 (quoting St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1009 (4th Cir. 1985) ). In a § 523(a)(6) proceeding, a debtor may act with malice without bearing any subjective ill will toward the Hospital/creditor or any specific intent to injure the same. In re Wooten, 423 B.R. 108, 130 (Bankr. E.D. Va. 2010) ; In re Davis, 262 B.R. 663, 670-71 (Bankr. E.D. Va. 2001).
Rezykowski, 493 B.R. at 722. I agree with Judge Frank's adoption of the above decisions and his conclusion relating to malicious injury derived from them.
*66Finally, willful and malicious injury under section 523(a)(6) includes a willful and malicious conversion. Wilmington Trust Co. v. Behr (In re Behr), 42 B.R. 922, 925 (Bankr. E.D. Pa. 1984) ; R.T. Vagley, M.D. v. Lavitsky (In re Lavitsky), 11 B.R. 570, 571 (Bankr. W.D. Pa. 1981), citing 95 Cong. R.H. 11096 (September 28, 1978). Conversion is defined as "... any unauthorized act which deprives an owner of his property permanently or for an indefinite time." First Valley Bank v. Ramonat (In re Ramonat), 82 B.R. 714, 721 (Bankr. E.D. Pa. 1988), citing Behr, 42 B.R. at 925.
To show that the $95,674.36 debt is nondischargeable under section 523(a)(6), therefore, the Hospital must establish by a preponderance of the evidence: (1) Dietrich's conduct was deliberate and substantially certain to cause injury to the Hospital (the willfulness); and (2) Dietrich acted wrongfully and without just cause or excuse when he spent the proceeds of the insurance checks and never paid the Hospital for the services it rendered to him (the malice); and (3) the Hospital suffered an injury as a result of Dietrich's conduct (the damages).
It is undisputed that the Hospital provided medical services to Dietrich on three occasions in the first half of 2016. Dietrich visited the Hospital's facility on January 8, 2016, for an MRI. He was later admitted to the Hospital's facility for a period of four days1 on February 1, 2016 for in-patient surgery. After the surgery, Dietrich received a follow-up MRI in June of 2016 at the Hospital's facility. It is also undisputed that prior to receiving each of these three services, Dietrich signed the three separate Consents for Treatment. In the Consents for Treatment, Dietrich agreed to pay for the services rendered to him by the Hospital and he assigned to the Hospital any insurance proceeds he would receive as payment for those services. See the Hospital's Exhibits A, B, C.
Some time before January 15, 2016, Heather Klemped ("Ms. Klemped"), a medical assistant employed by the Hospital, discovered, as part of her ordinary duties, that the Hospital was a non-participating provider with Dietrich's insurance carrier, Capital BlueCross. On January 15, 2016, as part of her ordinary duties with the Hospital, Ms. Klemped contacted Dietrich by telephone and notified him that the Hospital was not a participating provider with Capital BlueCross. See the Hospital's Exhibit N. Although he could not recall the exact date, Dietrich testified that a hospital employee contacted him at some point to advise him that his insurance was not honored at the Hospital's facility. Notes of Testimony August 13, 2018 trial ("N.T."), at p. 38.
In addition, the Hospital presented the testimony of Melanie Hartzell ("Ms. Hartzell"), a call center manager with Capital BlueCross, who verified the authenticity of a Capital BlueCross call log admitted into evidence as the Hospital's Exhibit O. This call log reflects that Dietrich telephoned Capital BlueCross on January 13, 2016 to inquire which hospitals participated with his insurance carrier. The log further reflects that Dietrich was informed that another medical provider, St. Luke's University Health Network, was a participating *67provider and that Dietrich was not happy that the Hospital's facility was not a participating provider. See N.T. at p. 39; and the Hospital's Exhibit O. Dietrich did not recall making this phone call, although he testified that he had no reason to dispute that he had in fact made the call. N.T. at p. 39.
I find and conclude that Dietrich knew, on January 13, 2016 at the very latest, that the Hospital was a non-participating provider with his insurance carrier. Despite this knowledge, Dietrich never questioned what effect the Hospital's status as a non-participating provider would have on the its being paid by Capital BlueCross for the services it rendered to Dietrich. See March 6, 2016 Deposition of Dietrich ("Dietrich Deposition"), at p. 12.2 In addition, Dietrich testified that he never took any steps to inquire of either the Hospital or Capital BlueCross how the services the Hospital provided would be paid. N.T. at pp. 41-2. Finally, at this time, Dietrich failed to read his insurance policy to determine how payment would be made to the Hospital, a non-participating provider. Dietrich acknowledged, however, that had he read his policy, he would have learned that Capital BlueCross would remit payment for medical services directly to him and not to the non-participating provider. Dietrich Deposition, at pp. 70-71.
The evidence established that Dietrich received the first check from Capital BlueCross for services rendered by the Hospital, which check was dated January 26, 2016, in the amount of $4,029.26, and made payable to Dietrich. The check was attached to an Explanation of Benefits form. The Explanation of Benefits form that accompanied this check states that the check was sent as payment for the MRI and radiology services received by Dietrich on January 8, 2016. The Hospital is clearly listed as the provider of the services at the top of the Explanation of Benefits form. See the Hospital's Exhibit R. Dietrich acknowledged receiving and endorsing the check, depositing the $4,029.26 into his personal bank account on February 1, 2018, and spending the proceeds. See N.T. at pp. 46-47, 50, 58; Hospital's Exhibit R. Dietrich admitted that made no attempt to read the Explanation of Benefits form to try to understand why he received the $4,029.26 check. N.T. at p. 48. He further testified that he had never previously received an insurance check. He assumed that the check constituted an overpayment and that Capital BlueCross would not send him a check made payable to him without good reason. N.T. at p. 49.
Dietrich also testified that after he received this check, he and a friend made an anonymous phone call to Capital BlueCross using his friend's phone to determine why he received the check. Dietrich maintains that the woman who answered the phone never asked him for identifying information, N.T. at pp. 49-57. Ms. Hartzell, a Capital BlueCross call center manager, however, credibly testified that Capital BlueCross is required by law to obtain identifying information from all callers and there are no instances in which a representative would provide specific information to a caller without first obtaining such information. N.T. at p. 26. Dietrich further maintains that he asked the woman who answered the phone the general question why he received the check but did not provide her with any identifying information *68so she could advise him why he received the check.
Dietrich further testified that the woman provided him with several reasons why he may have received the check; that it could be for an overpayment of some kind, it could have something to do with deductibles, or it could be for payment of a doctor's bill. N.T. at pp. 53-55. He further testified that the woman advised him that since the check was made payable to him, he should deposit it, N.T. at 53-54, but that she never told him to spend the proceeds of the check. N.T. at p. 58.3
Why did Dietrich use this convoluted, confidential communication about the money he received? Because he wanted to keep it and did not want to give specific facts that might lead to a statement that he had to pay the money to the Hospital. This is the only explanation for his clandestine call to BlueCross.
Dietrich received the second check from Capital BlueCross for services rendered by the Hospital, which check was dated February 25, 2016, in the amount of $83,707.92, and made payable to Dietrich. Once again, the check was attached to an Explanation of Benefits form. The Explanation of Benefits form states that the check was for payment of an itemized list of seventeen different services, including room and board for a semi-private room and for intensive care, radiology, pharmacy and lab services, medical and surgical supplies, occupational therapy services, and an MRI, all provided to Dietrich by the Hospital from February 1, 2016 through February 4, 2016. Again, the Hospital is clearly identified as the provider of the services at the top of the Explanation of Benefits form. See the Hospital's Exhibit S. And again, Dietrich acknowledged receiving and endorsing this check, depositing it into his personal bank account, and spending the proceeds. See N.T. at pp. 68-69, 70-71; Hospital's Exhibit S. Dietrich did not contact Capital BlueCross to inquire why he received this check, N.T. at p. 70, and he never looked at the Explanation of Benefits that accompanied this check. N.T. at pp.71-72.
Dietrich received the third check from Capital BlueCross for services rendered by the Hospital, which check was dated June 21, 2016, in the amount of $7937.18, and made payable to Dietrich. Once again, this check was attached to an Explanation of Benefits form. The Explanation of Benefits form that accompanied this check states that the check was being sent as payment for an MRI and radiology services provided to Dietrich by the Hospital on June 2, 2016. Again, the Hospital is clearly listed as the provider of the services on the Explanation of Benefits form. See the Hospital's Exhibit T. And again, Dietrich acknowledged receiving and endorsing this check, depositing it into his personal bank account, and spending the proceeds. See N.T. at pp. 75-76; Hospital's Exhibit T. Dietrich did not contact Capital BlueCross to inquire why he received this check, N.T. at pp. 76-77.
Dietrich admits that he received numerous bills from the Hospital, but that he *69never looked at or paid attention to them, choosing instead to simply place them on a pile with other bills. N.T. at pp. 58-60, 71, 79. Dietrich also admits that he never paid any of the bills he received from the Hospital. N.T. at pp. 72, 79.
Based upon these facts, as recited above and discussed below, I find and conclude that the Hospital met its burden of proving that Dietrich engaged in willful and malicious conduct that resulted in injury to the Hospital.
First, I find and conclude that Dietrich's conduct was willful under section 523(a)(6) because it was deliberate and was substantially certain to produce injury to the Hospital. Coley, 433 B.R. at 497, citing Conte, 33 F.3d at 307-09 ; see also Rezykowski, 493 B.R. at 721-22. Dietrich signed the Consents for Treatment before he received treatment from the Hospital, before he received and deposited the checks from Capital BlueCross, and before he spent the proceeds. He was obligated to pay the Hospital for the services he received and to turn over to the Hospital the proceeds from the insurance checks when he received them. To the contrary, with his head buried deep in the sand, Dietrich deposited the checks into his personal bank account, spent the proceeds, and never paid the Hospital for the services it rendered to him. Dietrich's conduct was deliberate and substantially certain to cause injury to the Hospital because Dietrich had no alternative way to pay the Hospital for its services after he spent the insurance proceeds. For these reasons, I find and conclude that Dietrich acted willfully when he spent the insurance proceeds without paying the Hospital for the services it rendered to him.
I also find and conclude that Dietrich's conduct was malicious as that term is used in section 523(a)(6) because it was wrongful and without just cause or excuse. Rezykowski, 493 B.R. at 722 ; Viener v. Jacobs (In re Jacobs ), 381 B.R. 128, 138-39 (Bankr. E.D. Pa. 2008). It is not necessary that I find that Dietrich acted with "specific malice" towards the Hospital, Conte, 33 F.3d at 307-09, or that he had a specific intent to injure the Hospital when he spent the insurance proceeds and never paid the Hospital for the services it rendered to him. For me to find malice under section 523(a)(6), I must find that Dietrich's conduct was wrongful and without just cause or excuse. Conte, 33 F.3d at 307-09 ; Ocean Equity Group, Inc. v. Wooten (In re Wooten), 423 B.R. 108, 130 (Bankr. E.D. Va. 2010) ; Jacobs, 381 B.R. at 138-39 ; Johnson v. Davis (In re Davis), 262 B.R. 663, 670-71 (Bankr. E.D. Va. 2001).
Dietrich acted wrongfully and maliciously when he spent the insurance proceeds without paying the Hospital's bills. Dietrich had no interest in the insurance proceeds when he engaged in this conduct because he had assigned his interest in the insurance proceeds to the Hospital under the Consents for Treatment. Furthermore, Dietrich offered no plausible or credible explanation for his conduct that would justify my finding that it might be excused for just cause or any other valid reason. Dietrich argues that his conduct should be excused because he was dealing with having a brain tumor and later recovering from brain tumor surgery and taking pain medication, all of which allegedly impacted his mental faculties. I find this testimony is not credible. Dietrich failed to introduce any evidence from a medical professional to corroborate his testimony. Furthermore, at least twice, Dietrich made clandestine attempts to determine his obligations relating to the insurance proceeds. Now, when confronted by his actual knowledge or the possibility that he could have obtained critical information through a legitimate call to Capitol BlueCross, Dietrich *70proverbially rolls his eyes and declares, "I know nothing. NOTHING."4 Dietrich's conduct was malicious as that term is used in section 523(a)(6).
Finally, as stated earlier, Dietrich had no interest in the insurance proceeds when he engaged in this conduct because he had assigned all of his interest in the insurance proceeds to the Hospital under the Consents for Treatment. Therefore, Dietrich's conduct also qualifies as willful and malicious under section 523(a)(6) because it constitutes a willful and malicious conversion of property that rightfully belonged to the Hospital. Behr, 42 B.R. at 925 ; Lavitsky, 11 B.R. at 571.
Dietrich's spending the insurance proceeds without paying the Hospital for the services it rendered to him constitutes conversion because it was unauthorized conduct which permanently deprived the Hospital of its property. Ramonat, 82 B.R. at 721 ; Behr, 42 B.R. at 925. As discussed above, the conversion was willful because it was deliberate and substantially certain to cause injury to the Hospital. Coley, 433 B.R. at 497, citing Conte, 33 F.3d at 307-09 ; see also Rezykowski, 493 B.R. at 721-2. It was also malicious because it was a wrongful act taken without just cause or excuse. Conte, 33 F.3d at 307-09 : Rezykowski, 493 B.R. at 722 ; Wooten, 423 B.R. at 130 ; Jacobs, 381 B.R. at 138-39 ; Davis, 262 B.R. at 670-71. Finally, Dietrich's conduct caused injury to the Hospital because it deprived the Hospital of the insurance proceeds and left the Hospital with no prospect of being paid for the services it rendered to Dietrich.
Dietrich's aversion to learning about the financial aspects of his insurance payments and his responsibilities relating to his pending operation at the Hospital was manifested by the following efforts to avoid learning what he would owe and how he would pay for it:
Dietrich knew the Hospital was a non-participating provider with Capitol BlueCross, but he chose to receive the treatment from the Hospital rather than changing to another hospital.
Dietrich did not read the Consents for Treatment, which contained his assignment of benefits.
Dietrich made no inquiry about how the Hospital would be paid if he kept the insurance proceeds.
Dietrich did not read the Explanations of Benefits.
Dietrich did not ask for specific advice or explanations from representatives of Capitol BlueCross about whether the checks he received were his or the Hospital's.
Dietrich did not ask for specific advice or explanations from representatives of the Hospital about whether the checks he received were his or the Hospital's.
Dietrich attempted surreptitiously (and failed) to get advice that would allow his keeping and spending the insurance proceeds.
Dietrich did not compare his bills from the Hospital with his checks and the Explanation of Benefits, which showed that the precise amount of the checks he received should have been paid to the Hospital.
Dietrich spent the $95,674.36, knowing of no alternative source from which he could pay the Hospital.
For all these reasons, I find and conclude that the Hospital met its burden of proving that Dietrich acted willfully and maliciously as those terms are used in *71section 523(a)(6) when he spent the insurance proceeds and failed to pay the Hospital for the services it rendered to him. The $93,674.36 debt Dietrich owes to the Hospital is therefore nondischargeable under section 523(a)(6).
D. The Hospital met its burden of proving that the debt is not dischargeable under 11 U.S.C. § 523(a)(2)(A).
For the $95,674.36 debt to be found nondischargeable under section 523(a)(2)(A), the Hospital must establish that: (1) Dietrich expressly or impliedly made a false representation; (2) Dietrich knew, or believed, the representation was false at the time it was made; (3) the representation was made with the intent and purpose of deceiving the Hospital; (4) the Hospital justifiably relied upon the representation; and (5) the Hospital sustained damage as a proximate result of the representation having been made. Ricker, 475 B.R. at 457.
Intent is a required element of section 523(a)(2)(A). The question of whether a debtor had the requisite fraudulent intent to warrant a finding that a debt is nondischargeable under section 523(a)(2)(A) is largely a subjective inquiry. Strominger v. Giquinto (In re Giquinto), 388 B.R. 152, 165 (Bankr. E.D. Pa. 2008). Because a debtor will rarely, if ever, admit that he intended deception, his knowledge and intent to deceive may be inferred from the totality of the surrounding facts and circumstances. Martin v. Melendez (In re Melendez), 589 B.R. 260, 265-66 (Bankr. E.D. Pa. 2018) ; Giquinto, 388 B.R. at 166. In addition, courts may infer knowledge and intent to deceive from a debtor's reckless disregard for the truth. Melendez, 589 B.R. at 266 ; Giansante & Cobb, LLC v. Singh (In re Singh), 433 B.R. 139, 161 (Bankr. E.D. Pa. 2010). Finally, a creditor's reliance on a debtor's representation need not be reasonable. Rather, it need only be justifiable. Field v. Mans, 516 U.S. 59, 66-76, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
Dietrich made false representations when he signed the Consents for Treatment, thereby representing that he would pay for the services rendered to him by the Hospital and that he assigned his interests in insurance proceeds to the Hospital. Furthermore, both Dietrich's knowledge of the falsity of these representations and his intent to deceive the Hospital may be inferred from the facts and circumstances of this case and Dietrich's reckless disregard for the truth. Dietrich knew, at the time he spent the proceeds of the insurance checks, that the Hospital was a non-participating provider with his insurance carrier, yet he admitted that he never took any steps to ask his insurance carrier or the Hospital how the Hospital would be paid. Each of the three insurance checks that were mailed to Dietrich had attached as the front sheets Explanation of Benefits forms that clearly identified that the checks were intended as payment for services rendered to Dietrich by the Hospital. In fact, these Explanation of Benefits forms specifically itemized the services with a description of the services and the date they were performed. In addition, Dietrich received from the Hospital invoices that matched the Explanation of Benefits forms and the insurance checks. Nonetheless, Dietrich recklessly, and with reckless regard for the truth, ignored the bills and Explanation of Benefits forms, deposited the insurance checks into his personal bank account, spent the proceeds, and never paid the Hospital for the services it rendered to him.
Among the three checks he received was a check in the amount of $83,707.92. No evidence was presented that Dietrich was expecting to receive this substantial amount or the cumulative amount including the other two checks. Dietrich knew or absolutely should have known that he was *72not entitled to the insurance funds. From what source did he believe that the checks came to him as his money? None. Yet Dietrich recklessly disregarded the truth, ignored the Explanation of Benefits forms that accompanied the checks, ignored the bills he received from the Hospital that corresponded to the amounts of the checks, deposited the checks into his personal bank account, and spent the proceeds. Despite having converted the full amount of the insurance proceeds, Dietrich never paid the Hospital for the services it rendered to him.
From these facts and circumstances, I find and conclude quite easily that Dietrich acted recklessly, and with reckless disregard for the truth and intent to deceive the Hospital. I also find and conclude that the Hospital justifiably relied on Dietrich's promises, contained in the Consents for Treatment. Dietrich promised to pay for the services the Hospital rendered to him and he assigned all insurance proceeds to the Hospital. I further find that the Hospital suffered damage as a result of Dietrich's false representation. The Hospital rendered medical services to Dietrich justifiably relying on the representations contained in the Consents for Treatment, but has never been paid for these services. For these reasons, I find and conclude that the Hospital met its burden of proving that the $93,674.36 debt Dietrich owes to the Hospital is also nondischargeable under section 523(a)(6).
V. CONCLUSION
Upon the discussion above, I find and conclude that Dietrich acted willfully and maliciously when he spent the insurance proceeds of $95,674.36 and did not pay the Hospital for the services it rendered to him. The debt Dietrich owes to the Hospital is therefore nondischargeable under section 523(a)(6). I also find and conclude that Dietrich made false representations to the Hospital with intent to deceive the Hospital, that the Hospital justifiably relied on the false statements, and that the Hospital suffered injury as a result. The $95,674.36 debt is therefore also nondischargeable under section 523(a)(2)(A). An appropriate Order follows.
ORDER
AND NOW, this 13 day of December, 2018, for the reasons stated in the accompanying Memorandum Opinion entered in this adversary proceeding of even date herewith, IT IS HEREBY ORDERED that JUDGMENT ON THE COMPLAINT IS ENTERED IN FAVOR OF PLAINTIFF AND AGAINST DEFENDANT.
IT IS FURTHER ORDERED that I HEREBY FIND AND CONCLUDE that the debt owed by Defendant to Plaintiff in the amount of $95,674.36 is NONDISCHARGEABLE under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6).
During the trial, counsel for the Hospital asked Dietrich if he was admitted to the Hospital for in-patient surgery for approximately three days, to which Dietrich responded, "yes." Notes of Testimony, August 13, 2018 trial at p.37. A review of the bill provided by the Hospital to Dietrich for this in-patient surgery, however, reveals that Dietrich was admitted to the Hospital's facility for a period of four days, from February 1, 2018 through February 4, 2018. Plaintiff's Exhibit E.
Although the Hospital did not offer the Dietrich Deposition into evidence, it did attach it to its Motion for Summary Judgment as Exhibit C. Dietrich has not objected to the Hospital's references to the Dietrich Deposition in its brief. I therefore consider those portions of the Dietrich Deposition cited in the Hospital's brief as evidence in this adversary proceeding.
In an attempt to confirm that this anonymous call was in fact made, Dietrich made another, identical call to Capital BlueCross in June 2018. The Capital BlueCross representative who call, however, refused to provide any information to Dietrich without first obtaining identifying information from him. Because the insurance policy was no longer in effect, Dietrich could not provide an insurance identification card number, but he did provide the call center representative with his social security number. Although the representative advised Dietrich to deposit a check made payable to him, once again, Dietrich did not ask why he received the check, and the representative did not advise Dietrich that the proceeds of the check belonged to him. N.T. at pp. 62-64.
Without overly demeaning this case or its parties, I refer to John Banner (Sergeant Hans Schultz) in the long running television sit-com Hogan's Heroes, who, when confronted by knowledge or obtaining information that he did not like, responded as set forth above. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501842/ | Thomas P. Agresti, Judge, United States Bankruptcy Court
On November 27, 2018, the Court heard argument on the Respondent District Attorney of Allegheny County's Motion for Leave to File Supplemental Response to Debtor/Movant's Motion to Enforce Automatic Stay , Doc. No. 74, ("Motion to Supplement") followed by an evidentiary hearing on the Debtor's Motion to Enforce the Automatic Stay , filed at Doc. No. 27, ("Jenereski Motion") as well as the Debtor's additional Motion to Enforce the Automatic Stay, filed at Doc. 31 ("Ikonomovic Motion"), (the Jenereski Motion and Ikonomovic Motion referenced together as the "Stay Motions"). Having heard argument from the Parties and after considering the evidence presented, for the reasons stated below the Court will grant the Motion to Supplement in part and deny the Stay Motions .1
PROCEDURAL BACKGROUND
On October 5, 2017, Debtor Christian J. Sheasley filed a Chapter 7 bankruptcy petition. The petition indicated that the Debtor had been self-employed as the owner, operator, managing member and alter ego of a business known as Linx Creative Kitchen & Bath, LLC ("Linx"). Among the unsecured creditors listed in the petition were Stan Jenereski ("Jenereski") and Milos Ikonomovic, with both shown as a "business debt" claim of unknown amount.
On January 12, 2018, the Chapter 7 Trustee filed a Report of No Distribution indicating that there would be no assets available to distribute to creditors of the Debtor. That same date Milos Ikonomovic and his wife Snezana Ikonomovic ("Ikonomovics") filed an adversary proceeding *76against the Debtor at Adv. No. 18-01005-TPA asserting that they had a claim against the Debtor arising out of a kitchen installation contract for their home and that under 11 U.S.C. §§ 523(a)(2), (4) , and (6) their claim against the Debtor was non-dischargeable. On March 1, 2018, the Ikonomovics filed a motion seeking to discontinue the adversary proceeding because they said they had reached a "resolution" of the matter, without explaining what that resolution entailed. On March 21, 2018 the Court granted the Ikonomovics' motion and the adversary was closed on April 6, 2018. Jenereski never sought to have his debt declared non-dischargeable during the bankruptcy case. On May 10, 2018, an order was entered at Doc. No. 20 discharging the Debtor. The case was closed on July 30, 2018.
On August 21, 2018, the Debtor filed a Motion to Reopen his case, along with the Jenereski Motion and the Ikonomovic Motion , both of which seek to have the Respondent in both matters, Stephen A. Zappala, Jr., District Attorney of Allegheny County ("the DA"), enjoined from continuing to proceed with pending criminal actions against the Debtor in the Allegheny County Court of Common Pleas because they are allegedly in violation of the discharge order.2 The only Responses to the various motions were filed by the DA. See Doc. Nos. 40, 41, 43, 45. An initial hearing was held on September 27, 2018, and the Motion to Reopen was granted on October 4, 2018. See Doc. No. 68. On that same date, and based on the representations of Counsel made at the September 27th hearing that no additional evidence beyond what had already been presented in the Stay Motions and the Responses was needed, the Court also issued an order stating that a final hearing on the Stay Motions , limited only to argument, would be held on October 29, 2018. See Doc. No. 69.
On October 10, 2018, the DA filed the Motion to Supplement pursuant to which he seeks to supplement his Response to the Stay Motions by adding documents that reference three other criminal prosecutions pending against the Debtor in Butler County, PA. On October 23, 2018, the Debtor filed a motion seeking a continuance of the October 29th hearing on the grounds that he wanted to conduct discovery to further support the Stay Motions . The Court issued an order on October 23, 2018, stating that, while it was troubled by the Debtor seeming to raise new factual matters at the last minute, out of an abundance of caution it would grant the continuance and allow evidence to be presented at the hearing. See Doc. No. 82. The continued hearing was originally scheduled for November 15, 2018 but subsequently moved to November 27, 2018. Both the Debtor and the DA were represented by counsel and were given the opportunity to be fully heard at the November 29th hearing. No live testimony was presented by either side at the hearing, just documentary exhibits.
FACTUAL BACKGROUND
(A) Jenereski Motion
The criminal prosecution involved in the Jenereski Motion stems from a February 28, 2017 contract between Linx and Stanley Jenereski pursuant to which Linx was to remodel the kitchen in Jenereski's home *77on Gibsonia Road in Richland Township, Allegheny County, for a total price of $30,746. Jenereski paid Linx an initial deposit of $18,448 that date (60% of contract price), which he understood was to be used to buy materials. Thereafter, Jenereski paid an additional $9,224 (30% of contract price) on July 31, 2017, the date work started. Work on the project was performed through subcontractors retained by the Debtor, but never completed. Jenereski began questioning the subcontractors about the slow pace of work and asking when it would be completed. He was eventually told by one subcontractor that the Debtor was preparing to file bankruptcy and he (the subcontractor) would not be returning to complete the work.
Jenereski went to his local police department and related the situation to the police. The police officer to whom he had spoken informed him that he should pursue it as a civil matter and Jenereski did so by filing a complaint in Magisterial District Court. A hearing on that complaint was scheduled, but prior thereto the Debtor filed his bankruptcy petition and that matter was halted by the automatic stay. Jenereski then contacted the DA's office and inquired about the possibility of criminal charges being brought against the Debtor.
On January 17, 2018, Timothy Cross, a detective from the DA's office, filed a criminal complaint against the Debtor alleging a number of charges against him arising out of the Jenereski contract. That criminal complaint was the subject of a preliminary hearing held before District Magistrate Judge Swan on February 28, 2018. At the hearing the DA was represented by Bjorn Dakin and the Debtor was represented by Sean Logue, who is also his attorney in the bankruptcy. District Magistrate Judge Swan found sufficient evidence for the case to proceed and it was filed in the Allegheny County Court of Common Pleas on March 5, 2018, at Docket No. CP-02-CR-0002699-2018, and captioned "Commonwealth of Pennsylvania v. Christian J. Sheasley."
The four counts charged in the criminal complaint included: (1) home improvement fraud pursuant to 73 P.S. § 517.8 ; (2) deceptive or fraudulent business practices pursuant to 18 Pa. C.S.A. § 4107 ; (3) theft by failure to make required disposition of funds pursuant to 18 Pa. C.S. § 3927 ; and, (4) receiving stolen property pursuant to 18 Pa. C.S. § 3925 - all of which are indicated as felonies of the second or third class. In the complaint, the DA indicates that if convicted of any of these counts the Debtor could face a sentence of up to 7 years in prison, a fine of up to $15,000, and an order of criminal restitution.
(B) Ikonomovic Motion
The criminal prosecution involved in the Ikonomovic Motion arose out of a kitchen remodeling contract dated May 3, 2017, in the total amount of $39,131. The Ikonomovics paid the Debtor $23,478 that date (60% of contract price). No work was ever done on the contract. On September 28, 2017, the Ikonomovics contacted the Mt. Lebanon Police Department to complain about the situation. The Debtor filed his bankruptcy on October 5, 2017, and on October 18, 2017, Officer Ty Kegarise of the Mt. Lebanon Police Department filed a criminal complaint against the debtor in the office of District Magistrate Judge Laratonda, charging the Debtor under 73 P.S. § 517.8 with receiving advance payment for services and failing to perform, a felony of the third class. On January 3, 2018, the matter was waived to the Allegheny County Court of Common Pleas where it was docketed on January 8, 2018, at No. CP-02-CR-0000102-2018.
As was indicated above, on January 12, 2018, the Ikonomovics also filed an adversary *78proceeding in the pending bankruptcy case objecting to the discharge of their claim. They reached a settlement with the Debtor on or about February 12, 2018 pursuant to which the Debtor was to pay the Ikonomovics $25,000 in full satisfaction of their claim. It is the Court's understanding that this payment has been made and that the source of the funds for the payment was the Debtor's father.3
DISCUSSION
(A) Motion to Supplement
As an initial matter, the Court must decide the Motion to Supplement . In it, the DA seeks to add to the evidentiary record documentation concerning three other pending criminal prosecutions against the Debtor from Butler County. The DA states in the Motion to Supplement that, following the entry of the Court's October 4, 2018 Order , Doc. No. 69, he discovered that the Debtor is a defendant in three Butler County criminal cases.4
The DA seeks permission to amend his Responses to the Stay Motions by adding copies of the docket sheets and criminal complaints filed in the Butler County cases. He also seeks to add a copy of an "Application for Continuance" that the Debtor filed in those cases on or about September 6, 2018 in which he indicates that a continuance was needed due to "continuing negotiations and defendant attempting to gather restitution."
The DA argues that the Butler county materials are relevant here with respect to a number of legal questions that are involved in this case, including whether Debtor has an adequate remedy at law, whether he will suffer irreparable harm to a federally protected right if the Stay Motions are denied, whether the Debtor is attempting to use the bankruptcy stay in a strategic or arbitrary manner to pick and choose between criminal prosecutions, and whether all the various criminal prosecutions provide evidence of a pattern of misconduct by the Debtor that should not be shielded by the automatic stay. The Debtor does not dispute the authenticity of any of the Butler County materials that are at issue in the Motion to Supplement , but he argues that the Butler County cases are irrelevant for any purposes here.
The Court finds that evidence of the Butler County cases cannot be admitted for the purpose of bolstering the contention that the DA filed the criminal cases involved in the Stay Motions in good faith. That is so because uncontroverted evidence is that the DA was not even aware of the Butler County cases until sometime after October 4, 2018, well after the Allegheny County criminal cases were initiated. Therefore, the Butler County cases could have played no role in the DA's decision to pursue the Allegheny County criminal charges against the Debtor.
The Court also finds that evidence of the Butler County cases cannot be admitted to support the claim that the Debtor is likely to be found guilty of the charges in the Jenereski and Ikonomovic matters. The Court reaches this conclusion because (a) it appears the Butler County *79cases have not been completed and no finding of guilt has been made in them, and (b) even if there have been any finding of guilt in those cases F.R.E. 404(b)(1) would preclude the Court from using that as evidence that the Debtor acted in the same way here.
That having been said, the Court does believe that evidence of the Butler County cases can be admitted here for the very limited purpose of showing that the Debtor is facing other criminal prosecutions in addition to those involved in the Stay Motions yet he is not seeking to have those other prosecutions enjoined. That is relevant on the question of whether the Debtor would suffer irreparable harm if the Stay Motions are denied. Therefore, the Court will grant the Motion to Supplement and allow the evidence in for that very limited purpose, although frankly it adds little weight to the DA's case since the point is already supported by the Ripple and Fritz criminal prosecutions in Allegheny County, which remain pending and which the Debtor is no longer seeking to enjoin. See n. 2, supra .
(B) Stay Motions
Before turning to a discussion of the merits of the Stay Motions , the Court notes that the prayer for relief in both is for "an order directing Respondents ... to dismiss the criminal complaint and barring them from participating in said criminal prosecution of the Debtor." In substance this is a request for injunctive relief, though that term does not appear in the Stay Motions.5 As such, this matter should have been brought as an adversary proceeding. See Fed.R.Bankr.P. 7001(7) . The Court could dismiss the Stay Motions for that technical reason, but it will not do so since the point was not raised by the Respondents and because it is satisfied that sufficient notice and due process protections have been afforded despite the formal irregularity of the proceeding. The Court also notes that in the Stay Motions the Debtor is not seeking monetary damages against any of the Respondents - for example, based on an alleged violation of the discharge injunction pursuant to 11 U.S.C. § 524(a)(2) - so that aspect of potential relief plays no role in the Court's determination, which is limited solely to the request for injunctive relief.
As originally stated in its October 4thOrder , Doc. No. 69, the Court believes that a decision on the Stay Motions is primarily governed by the Third Circuit case of In re Davis , 691 F.2d 176 (3d Cir. 1982). In that case, the Davises had purchased goods from four different vendors and paid for them with checks that were dishonored by their bank. One of the vendors instituted a "bad check" criminal complaint against Mr. Davis, and the next day the Davises filed a Chapter 7 bankruptcy petition. After the bankruptcy filing, three other vendors, who had not been listed as creditors in the petition, also instituted criminal complaints against Mr. Davis. The criminal cases were brought pursuant to a Delaware statute that, in addition to other possible sanctions, required a convicted defendant to make restitution to the victim of the bad check. The Davises sought and obtained a TRO from the bankruptcy court enjoining the criminal proceedings. None of the vendors objected to the discharge of their respective debts in the bankruptcy case, and in due course the Davises were granted a discharge.
Following the discharge, the bankruptcy court held a hearing to determine whether the criminal cases should be permanently *80enjoined because the potential of a restitution order in such cases could subvert the discharge. The bankruptcy court ultimately decided not to issue a permanent injunction, which decision on appeal the district court affirmed. Thereafter, the Davises appealed to the Third Circuit, which also affirmed the bankruptcy court's original decision.
The Davis court opinion began by pointing out that in most instances, a federal court does not have the power to enjoin state court proceedings, citing the Anti-Injunction Act , which provides:
A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments
28 U.S.C. § 2283. The Bankruptcy Code is an "expressly authorized" exception to the general prohibition, however, so in the right circumstances a bankruptcy court can enjoin a state criminal prosecution. Davis , 691 F.2d at 177-78. The grant of such authority, however, in no way diminishes the principles of equity and comity that require considerations of restraint by a federal court when asked to enjoin a state court proceeding. 691 F.2d at 178 (citing Mitchum v. Foster , 407 U.S. 225, 243, 92 S.Ct. 2151, 32 L.Ed.2d 705 (1972) ).
Relying primarily upon Younger v. Harris , 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), the Davis court enunciated the following principles of equity and comity that must be applied when a bankruptcy court is asked to enjoin a state court criminal proceeding:
• the court should not act to restrain a criminal prosecution when the moving party has an adequate remedy at law and will not suffer irreparable injury if denied equitable relief.
• absent some evidence that the Debtor will not be able to raise a Supremacy Clause challenge in the state court, the possible imposition of a mandatory restitution penalty in the criminal case, while of concern under the Supremacy Clause of the U.S. Constitution, is of itself an insufficient reason to enjoin the criminal case.
• the cost, anxiety and expense of defending oneself in a good faith criminal prosecution does not constitute irreparable injury.
• if the state prosecution is brought in bad faith or for purposes of harassment the bankruptcy court can enjoin it.
• a state has an independent interest in prosecuting a crime going to the integrity of commercial transactions within its borders, over and above the financial interest of the complaining witness.
• absent evidence that the state had any reason to doubt the validity of the charges made by the complaining witness, or that the state failed to exercise independent judgment in pursuing the prosecution, the intentions of the complaining witness in pursuing the criminal charge is not controlling in judging the good faith of the state in prosecuting the action
• with respect to comity, the court should be especially cautious in enjoining state criminal proceedings because of the state's paramount interest in protecting its citizens through its police power.
See, generally , 691 F.2d at 178-79. Although Davis was decided more than 35 years ago, it remains good law and was applied as recently as last year in a bankruptcy case rejecting an effort to enjoin a state court criminal prosecution. See *81In re Perry Petroleum Equipment Ltd., Inc. , 564 B.R. 821 (Bankr. M.D. Pa. 2017).
When the Davis principles are applied as to the Jenereski Motion the Court has little difficulty in concluding that it must be denied. First, the Debtor provided no evidence to show that he lacks an adequate remedy at law or will suffer irreparable injury if that criminal prosecution is not enjoined. Nor is there anything to indicate that the Debtor will not have a full opportunity to defend himself in the criminal case at the trial court level, to argue against the imposition of a restitution order on the basis of the Supremacy Clause in the event he is convicted, or to take an appeal in the event of any adverse ruling.
The Court also finds it significant that the Debtor is facing five other pending criminal prosecutions, in addition to the two involved in the Stay Motions, and is not attempting to have those cases enjoined.6 As argued by the DA, it is difficult to see how the Debtor can be said to have no adequate remedy at law or to be facing irreparable injury with respect to these two prosecutions, but not as to the other five.
The timing of the Jenereski Motion also detracts from any possible finding of irreparable harm. The Court notes that the Debtor did not attempt to have the Jenereski prosecution stayed until August 21, 2018, approximately 7 months after the criminal complaint in the case was filed. The bankruptcy case was open when the criminal complaint was filed, open when the preliminary hearing was held before District Magistrate Judge Swan, and open when the case was sent to the Common Pleas Court. If the Debtor thought the criminal proceeding was an improper attempt to use the criminal process to collect a debt it would have been easy for him to file a motion or adversary proceeding to that effect in response to any of these events, nevertheless he waited for months to do so, and even then, after the case had been closed. Perhaps the Debtor thought any such effort during the initial phase of the bankruptcy would be doomed to failure given that 11 U.S.C. § 362(b)(1) recognizes the commencement or continuation of a criminal proceeding as an exception to the automatic stay. But even assuming if that was the case, other than actual receipt of his general discharge, the Debtor has not explained what has changed in the interim that would lead to a different result now.
Second, the Debtor provided no persuasive evidence that the DA is pursuing the prosecution in bad faith or for purposes of harassment - certainly not enough to overcome the presumption of good faith that he is entitled to enjoy under the principle of comity. See Perry Petroleum , 564 B.R. at 826 ("principles of comity dictate that I presume that the Commonwealth is prosecuting the criminal actions on behalf of the public to protect the integrity of commercial transactions and is not serving as the handmaiden of the complaining witness"). The only thing that the Debtor pointed to as allegedly showing bad faith is some testimony given by Jenereski at the preliminary hearing in the criminal case held on February 28, 2018 before Magisterial District Judge Swan. Jenereski testified on cross examination under questioning by the Debtor's attorney that prior to the bankruptcy filing he had contacted the Northern Tier Police Department to complain about the failure to perform by Linx and they told him that he should pursue the matter civilly. He further testified that he did file a civil suit, but it was then stayed by the bankruptcy filing. See Debtor's Exhibit A at 19-20. The following exchange *82then occurred on re-direct examination by the DA's attorney:
Asst. DA. Did they [i.e., Northern Tier Police Department] give you any further instructions depending the outcome of the civil case?
Jenereski. Yes. They said if the civil case doesn't work out for you, you should wait anywhere from three to six months to file criminal charges because they believed it was a criminal case.
Debtor Ex. A at 22-23.
The Debtor argues that both the police and the DA are agents of the Commonwealth, and that the above testimony shows that the DA really believes that the matter should only be civil in nature, and that the DA must therefore be pursuing the criminal case only on behalf of the private interest of Jenereski and not in the public interest. According to the Debtor this demonstrates bad faith sufficient to enjoin the criminal proceeding.
The DA responds by arguing that whatever the police may have thought or told Jenereski is irrelevant because the DA exercised independent judgment, and decided that the Debtor should be prosecuted criminally. The DA points out that the criminal complaint in this matter was filed by a detective from his office and not anyone from the local police force.
The Court begins with an observation that the purported statement made by the Northern Tier Police Department officer to Jenereski is not particularly compelling support for the position advanced by the Debtor, even if it were found to be binding on the DA. The police officer himself indicated that criminal charges would be appropriate if the civil matter was not successful. His recommendation to give the civil remedy a try first before resorting to a criminal charge could just as easily reflect a common sense, practical approach by the officer toward resolution of a problem, instead of some thought-out reflection on the suitability of criminal treatment. Be that as it may, the Court will for present purposes and "argument only" assume that the officer's statement is capable of being relevant evidence demonstrating a bad faith prosecution and proceed to consider whether it binds the DA.
In Pennsylvania, district attorneys "have the power and the duty to represent the Commonwealth's interests in the enforcement of its criminal laws." Comm. ex rel. Specter v. Bauer , 437 Pa. 37, 261 A.2d 573, 575 (1970). Moreover, this power is an exclusive one that may not be interfered with by other public officials. For instance, in Bauer the issue was whether the Philadelphia Home Rule Charter required the City Solicitor for Philadelphia to represent the Philadelphia District Attorney in a federal lawsuit attacking the constitutionality of a state criminal statute. In rejecting that contention, the court stated:
The City Solicitor, a locally appointed official, may not be permitted to infringe upon the District Attorney's powers or functions in the prosecution of the criminal law. The District Attorney of Philadelphia County, no less than district attorneys in any other county of this Commonwealth, is the sole public official charged with the legal responsibility of conducting 'in court all criminal and other prosecutions, in the name of the Commonwealth.' Act of July 5, 1957, supra. The District Attorney must be allowed to carry out this important function without hindrance or interference from any source
Bauer , 261 A.2d at 576 (emphasis added). See also, e.g., Williams v. Fedor , 69 F.Supp.2d 649, 660 (M.D. Pa. 1999) (in Pennsylvania, only the state's Attorney General may supersede a district attorney *83in connection with prosecutorial decisions); Miller v. County of Centre , 173 A.3d 1162, 1174 (Pa. 2017) (district attorneys are the chief law enforcement officers at the county level, citing 71 P.S. 732-206(a) ).
A district attorney's prosecutorial powers and discretion may not be impinged by the actions of local police officers. Commonwealth v. Stipetich , 539 Pa. 428, 652 A.2d 1294 (1995) involved a criminal prosecution for possession of controlled substances. The lead police officer who conducted the investigation leading to the charges had informed the defendants' attorney that if the defendants would answer questions about the source of the drugs they would not be criminally charged. The defendants did answer the questions of the police, but were subsequently charged anyway by the district attorney of Allegheny County. They moved to dismiss the charges on the basis of the "nonprosecution" agreement they had made with the police. The Pennsylvania Supreme Court rejected the defendants' argument, stating:
The district attorney's power to prosecute cannot be restricted by the actions of municipal police officers who might, in any given case, deem it worthless or ill-advised to prosecute. While the police exercise, as a practical matter, a certain discretion in deciding whether to make an arrest, issue a citation, or seek a warrant, the ultimate discretion to file criminal charges lies in the district attorney. Police officers have no authority to enter agreements limiting the power of the district attorney in this regard.
... The legislature could not have intended that duties of the district attorney would be stripped away by actions of any of the thousands of municipal police officers in the Commonwealth. Affording police officers authority to enter agreements that prevent the district attorney from carrying out his duties would present a clear infringement of powers which the constitution and the legislature, as well as our case law, have reposed in the district attorney.
Stipetich , 652 A.2d at 1295.
If an actual agreement not to prosecute made by local police concerning a potential criminal matter is not binding on a district attorney because it would improperly interfere with his prosecutorial discretion, than a fortiori a stray comment or expression of opinion made by a police officer during the course of an investigation can in no way be used against the district attorney in an attempt to show that a criminal prosecution was brought in bad faith or for purposes of harassment. Since the "excluded" police officer's statement was the only evidence presented by the Debtor to show the Jenereski prosecution to be in bad faith or for purposes of harassment, the Debtor has failed to meet his burden of proof as to the Jenereski Motion .
The same conclusion must be reached with respect to the Ikonomovic Motion . First, for the same reasons as discussed above with respect to the Jenereski Motion , again Debtor fails to show he lacks an adequate remedy at law in the court hearing the criminal case, or that he will suffer irreparable harm if relief is not granted. Second, again the only evidence he puts forward to show bad faith and/or harassment in the prosecution are the settlement agreement that was reached between the Debtor and the Ikonomovics to resolve the adversary proceeding filed by the Ikonomovics in the bankruptcy case,7 and an e-mail message from a local police officer who was involved in investigating *84the matter. For the reasons already discussed above, the Court does not believe either of these can be imputed to the DA so as to circumscribe his prosecutorial discretion.
The Ikonomovic Motion does differ from the Jenereski Motion in one respect in that the charges were initiated by a local police officer from the Mt. Lebanon Police Department rather than by a detective from the DA's office. That, however, is of no moment in the Court's view. Regardless of how the criminal case was initiated, the significant fact is that DA has confirmed that he, in the exercise of his own judgment, has decided the case should continue to be pursued and the Debtor has shown no evidence to indicate that judgment was tainted in any way by bad faith.
Perhaps most problematic for the Debtor's contention however is the settlement agreement reached between he and the Ikonomovics. Debtor Ex. B. By its terms, the matter of restitution has been resolved between the Parties taking the issue of restitution in the proceeding completely off the table if the Debtor ultimately is convicted of the crimes alleged in that particular criminal proceeding. Since the "restitution issue" has already been resolved, the Debtor's argument that the DA is proceeding in bad faith in that matter, since he is seeking restitution as an "end run" to the bankruptcy discharge, completely falls apart.
In conclusion, the Court finds that the Debtor has an adequate remedy at law, that he has not shown he could be irreparably harmed and that he has not shown that the DA is pursuing the criminal actions in bad faith or for purposes of harassment. The Debtor has therefore failed to meet his burden of proof under the standard announced in Davis and his requests for relief must be denied.
AND NOW , this 18th day of December, 2018 , for the reasons stated above, it is hereby ORDERED, ADJUDGED and DECREED that:
(1) The Motion to Supplement is GRANTED in part, in that the records of the Butler County criminal case are admitted as a supplement to the DA's Response to the Stay Motions but only for its limited purpose of showing that the Debtor is facing criminal prosecution in these other matters but is not seeking to have them stayed.
(2) The Motion to Enforce Automatic Stay filed at Doc. No. 27 is DENIED , with prejudice.
(3) The Motion to Enforce Automatic Stay filed at Doc. No. 30 is DENIED , with prejudice.
(4) This bankruptcy case shall be reclosed effective January 3, 2019 , unless on or before January 2, 2019, the Debtor either files a motion for reconsideration or a notice of appeal.
The Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 157(a) and 1334 . The Stay Motions are themselves core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A) and (G) . The Motion to Supplement raises an evidentiary issue within the course of the core proceedings of the Stay Motions . This Memorandum Opinion represents the Court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052 and 9014(c) .
That same day the Debtor also filed two other motions very similar to the Stay Motions, involving two other pending criminal prosecutions in Allegheny County. See , Doc. Nos. 33 ("Ripple Motion") and 36 ("Fritz Motion"). Those two motions were subsequently withdrawn by the Debtor with leave of Court and are no longer at issue. See Order of November 13, 2018, Doc. No. 91.
See Audio Transcript of Proceeding dated Nov. 27, 2018, 10:40:40, et seq.
The three cases are Butler County Court of Common Pleas Docket Nos. CP-10-CR-0000288-2018, CP-10-CR-0000289-2018, and CP-10-CR-0000290-2018. All three of the cases involve charges for conduct similar to that involved in the Stay Motions , i.e., allegations that the Debtor received funds pursuant to a home improvement contract and then did not complete the work. The alleged victims in all three of the cases were listed as unsecured creditors in the Debtor's bankruptcy petition.
The proposed orders filed by the Debtor accompanying the Stay Motions do include the word "enjoined" in describing the relief to be granted.
See n. 2 and 3, above.
The Court notes that the DA was not a party to the settlement agreement. The settlement agreement merely provides that upon receipt of the settlement amount the Ikonomovics, through their attorney, would write a letter to the DA "requesting" that the criminal case be withdrawn and discontinued. Debtor Ex. B at ¶ 16. There was no evidence presented at the hearing as to whether such letter was ever sent. Assuming it was sent, it is clear that there was no assurance in the settlement agreement that the DA would accede to such request,. Despite the settlement agreement being completely ineffectual to demonstrate bad faith in the criminal prosecution, the Court assumes the Debtor will be free to raise it in that case for purposes of defense or mitigation. | 01-04-2023 | 11-22-2022 |
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