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https://www.courtlistener.com/api/rest/v3/opinions/1551369/ | 86 B.R. 254 (1988)
In re CARLTON FRUIT COMPANY, Debtor.
CARLTON FRUIT COMPANY, Plaintiff,
v.
STATE of FLORIDA DEPARTMENT OF CITRUS, Defendant.
Bankruptcy No. 87-843-8P1, Adv. No. 87-502.
United States Bankruptcy Court, M.D. Florida, Tampa Division.
April 8, 1988.
*255 Cindy L. Turner, Tampa, Fla., for plaintiff.
J. Hardin Peterson, Jr., Lakeland, Fla., for defendant.
Kristen C. Chadwell, State of Florida Dept. of Citrus, Joan B. Simons, Lakeland, Fla., for State of Fla., Dept. of Citrus.
ORDER ON MOTION TO DISMISS AND MOTION FOR SUMMARY JUDGMENT
ALEXANDER L. PASKAY, Chief Judge.
This is a Chapter 11 case and the matters under consideration are two Motions filed by the Defendant named in the above-captioned adversary proceeding, the State of Florida Department of Citrus (Department). The Department filed a Motion which seeks a dismissal of Counts I and II of the Complaint and a Motion which seeks a summary judgment on all counts of the Complaint. The Complaint initiating this adversary proceeding was filed by Carlton Fruit Company (Carlton), the Chapter 11 Debtor, and is entitled "Complaint for Preliminary and Permanent Injunction, to Enforce the Automatic Stay, and for Sanctions". In Count I of the Complaint, Carlton seeks a declaration by this Court that the automatic stay imposed by § 362 of the Bankruptcy Code is in full force and effect and seeks an order prohibiting the Department from imposing any additional conditions to the issuance of a citrus fruit dealer's license to Carlton. In Count II Carlton seeks an imposition of sanctions against the Department for allegedly violating the automatic stay. Carlton also contends in Count II that the Department willfully and knowingly violated Section 525(a) of the Bankruptcy Code which prohibits discriminatory treatment of debtors. In Count III of the Complaint, Carlton seeks a preliminary and permanent injunction pursuant to § 105 of the Bankruptcy Code on the basis *256 that the action of the Department would cause grave and irreparable damage to Carlton unless the Department is prohibited from requiring Carlton to meet certain conditions before it can obtain a dealer's license to deal in citrus products.
It is the contention of the Department that the claims set forth in Count I and Count II of the Complaint are legally defective and are not the type of claims for which relief can be granted based on the automatic stay provisions of § 362(a) of the Bankruptcy Code. Therefore, so contends the Department, it is appropriate to dismiss the claims set forth in those two counts. In addition, the Department also urges in its Motion for Summary Judgment that the underlying and controlling facts are without dispute thus there are no genuine issues of material facts and that the Department is entitled to a judgment in its favor as a matter of law on the claims set forth in all counts of its Complaint. The relevant portion of the record reveals the following undisputed facts:
Carlton has been a licensed citrus dealer since 1972. The business of Carlton included buying unprocessed, unpacked citrus fruit from growers in addition to providing harvesting and hauling services and selling harvested citrus to juice processing plants. It appears, and it is without dispute, that Carlton is a citrus fruit dealer within the meaning of Fla.Stat. § 601.55 which requires every person who acts as a citrus fruit dealer to apply for and obtain a current license from the Department for each shipping season. Fla.Stat. § 601.61 also provides that the dealer applying for the license must post a bond with the Department of Agriculture and Consumer Services in an amount fixed by the Citrus Commission, which bond cannot exceed $100,000. The purpose of the bond is, of course, to protect growers of citrus fruit and to assure that the citrus products purchased by dealers will be paid. Obviously, this statute was not designed generally for the protection of the public welfare, health or safety but clearly to regulate the trading of citrus products and, indirectly, the citrus production industry in this state. It appears from the verified Complaint, and it is admitted, that on September 25, 1987, Carlton applied for a citrus dealer's license for the 1987-88 season. On October 20, 1987, the application of Carlton was considered by the Florida Citrus Commission (Commission), the agency of the State of Florida authorized by law to act on such applications. At this meeting, the Commission voted to defer action on Carlton's application until the December meeting in order to allow the Commission to review Carlton's Plan of Reorganization which was to be filed by December 1, 1987. The Commission reconvened on December 16, 1987 at which time the Commission approved the granting of a dealer's license to Carlton provided, however, that as condition precedent, Carlton post a cash bond with the Department of Agriculture and Consumer Services in the sum of $100,000, which, as noted earlier, is the maximum bond permitted by Fla.Stat. § 601.61. While it does not appear from the Complaint, it is without dispute that Carlton was also required, as an additional condition to the license, to purchase citrus fruit only for cash and not on credit. According to the Affidavit submitted by James P. Carlton, President of Carlton Fruit Company, in support of a request for preliminary and permanent injunction, his license has been routinely approved every year since 1976 and the range of the bonds during the same period was between $32,000 and $80,000 but never in the past eleven years was Carlton ever required to post the maximum bond allowable by law nor was it ever required to purchase citrus fruit only for cash. The record also contains the Minutes of the Commission meeting held on December 16, 1987. According to the minutes, Carlton was represented by counsel who stated, inter alia, that Carlton was doing business in the usual way; that the level of its operation was essentially the same as the previous year; and there was no change in the circumstances in the operations of Carlton. The minutes fail to reflect any discussion by the Commission concerning the impact of the pendency of the Chapter 11 case and fails to indicate the reason why the Commission imposed such harsh requirements *257 on Carlton as a condition precedent to obtain a dealer's license. While it does not appear from the record, counsel for the Commission indicates that the Commission had the benefit of the financial statement submitted by Carlton, together with the application concerning the past and current operation of Carlton, the manner and nature Carlton was doing business, the management of Carlton's business and the potential liabilities which Carlton might incur in the future if authorized to function as a citrus fruit dealer. Counsel for the Commission points out that never did the Commission require a reaffirmance of pre-Petition debts by Carlton and its decision to require Carlton to post a bond in the maximum amount allowable by law and requiring cash transactions only was based fully considering the factors noted and the fact that Carlton is in Chapter 11 did not play any role in its decision-making process. It appears from the Affidavit of Mr. Carlton that Carlton, during the season of 1986-87 handled 453,445 boxes of citrus fruit and it is evident that the number of boxes which Carlton intends to handle during the current season is 73,000, representing a decrease in excess of 380,000 boxes. It appears that the bond required by the Commission during the previous season when Carlton handled six times more boxes than they propose to handle during the current season was $37,000. Counsel for Carlton intimates that there had been numerous claims filed against Carlton in excess of $500,000.
Basically these are the controlling facts which appear from the record on which Carlton bases its claims for relief set forth in the three counts of the Complaint.
Considering first the claims set forth in Counts I and II, both of which involve an alleged violation of the automatic stay, it is clear and this Court is satisfied that there is nothing in this record which warrants the finding that the Commission did anything whatsoever which violated the automatic stay even assuming that the stay is applicable. The proceeding before the Commission was not a revocation of the license but involved a proceeding voluntarily instituted by Carlton who applied for a dealer's license and the Commission did in fact grant the license, albeit under the conditions outlined earlier. One would be hard pressed to accept the proposition that imposition of conditions for the issuance of a dealer's license, conditions which are clearly authorized by law, could possibly be construed to be a violation of the automatic stay. Moreover, this Court seriously doubts that the automatic stay applies to these proceedings before the Commission at all, because whatever acts were performed by the Commission were performed pursuant to the regulatory power of the State designed to control and regulate the citrus industry, therefore within the exceptive provisions of § 362(b)(4) of the Bankruptcy Code. In support of its contention that the automatic stay applies, Carlton cites In re Corporacion de Servicios Medicos Hosp., 60 B.R. 920 (D.Puerto Rico 1986); In re Hoffman, 53 B.R. 874 (Bkrtcy. D.R.I.1985). Even a cursory reading of these cases clearly indicates that the holdings in these cases are totally inapposite to the contention advanced by Carlton and furnish scant, if any, support for same. In re Corporacion de Servicios Medicos Hosp., supra, involved an action by the Department of Health to terminate a contract with the Debtor and to revoke the Debtor's license to operate the hospital. The District Court, on appeal, held that the policy/regulatory exemption to the automatic stay did not apply to the Department's action to terminate the contract. The case involved a commercial transaction that is a contract which obviously had nothing to do with the police or regulatory power of a state. While the case also involved a revocation of a license, this case, unlike the case sub judice does not involve a revocation of a license at all but, on the contrary, involves imposition of conditions to the issuance of a license, application for which has been granted. The case of Hoffman dealt only with the trustee's power to sell a liquor license even though a state law prohibits a sale unless all taxes have been paid. The Court in Hoffman classified the state law's purpose as pecuniary rather than regulating and hence not within the *258 exception to the automatic stay. In In re Beker Industries, 57 B.R. 611 (Bankruptcy S.D.N.Y.1986), the Court held that action by the Florida Land and Water Adjudicatory Commission proceeding on the impact of phosphate mining operation on local roads was an exercise of regulatory power exempt from the automatic stay. In sum, this Court is satisfied that both claims in Counts I and II are, as a matter of law, insufficient as a basis to grant the relief sought.
This leaves for consideration the claim of Carlton that the action of the Commission by requiring, as condition for the license, a bond in the amount of $100,000 and prohibiting against credit transactions are in clear violation of § 525 of the Bankruptcy Code which prohibits discriminatory treatment of debtors by a government unit. § 525(a). This record is woefully inadequate to resolve the question in favor of the Commission as a matter of law. First, it is intimated by counsel for the Department that the action of the Commission was not based on Carlton's failure to meet its pre-Petition obligations and is unlike the case which was involved in Perez v. Campbell, 402 U.S. 637, 91 S. Ct. 1704, 29 L. Ed. 2d 233 (1971), which involved a direct or indirect coercion to repay pre-petition debts. Carlton urges that the action of the Commission was based on other factors and like the case involved in Duffey v. Dollison, 734 F.2d 265 (6th Cir.1984), the minutes of the Commission meeting in December really is not very enlightening on this point. While the Department facially considered only proper factors when it decided to impose the conditions involved, i.e. the financial condition of the Debtor, its previous method of operation, its ability to meet its future obligations, as well as its ability to function as a citrus dealer, the record also indicates that the Commission was seriously concerned about the plan of reorganization which was to be submitted by Carlton. It is without dispute that the initial meeting of the Commission was adjourned for the very purpose to enable the Commission to have the benefit of Carlton's plan of reorganization. Based on this fact it is not difficult to infer that the Commission was also intimately concerned with the treatment which Carlton intended to accord to its pre-petition creditors. Moreover, while it is true that the schedule filed by Carlton indicates unsecured obligations in excess of $500,000, it is equally without dispute that during the previous season there were also claims filed against Carlton, albeit not in that amount, yet the Department did not impose similar conditions on Carlton before it was authorized to function as a dealer in citrus fruit.
Be as it may, however, this Court is satisfied that while the claims in Count I and Count II are without merit and should be dismissed, the claim based on the violation of § 525 cannot be disposed of in any summary fashion and requires an evidentiary hearing to establish whether or not the basis for the imposition of conditions by the Department as a condition precedent to the issuance of a dealer's license was based on the fact that Carlton is a debtor seeking relief under Chapter 11.
Based on the foregoing, it is
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss Count I and Count II filed by State of Florida Department of Citrus be, and the same is hereby, granted and the claims set forth in the request to enforce the automatic stay and to impose sanctions for alleged violation of the automatic stay be, and the same is hereby, denied with prejudice. It is further
ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by State of Florida Department of Citrus concerning the claim of the alleged violation of § 525 be, and the same is hereby, denied. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551379/ | 908 A.2d 771 (2006)
THE STATE OF NEW HAMPSHIRE
v.
CLYDE GAUNTT.
No. 2004-275
Supreme Court of New Hampshire.
Argued February 8, 2006
Opinion Issued September 28, 2006
Kelly A. Ayotte, attorney general (Nicholas Cort, assistant attorney general, on the brief and orally), for the State.
Theodore Lothstein, assistant appellate defender, of Concord, on the brief and orally, for the defendant.
BRODERICK, C.J.
The defendant, Clyde Gauntt, was convicted following a jury trial in Superior Court (McGuire, J.) of operating a motor vehicle while certified as a habitual offender. See RSA 262:23 (2004). He appeals his conviction, arguing that the trial court erred in denying his request for a jury instruction on the lesser-included offense of operating after revocation. We reverse and remand.
On September 14, 2000, the defendant attended a hearing at which he was adjudicated a habitual offender. Upon certification, his driver's license was revoked. He was given an order prepared by the hearings examiner informing him that he would continue to be certified as a habitual offender until a further hearing resulted in decertification and he was so notified of such decertification in writing by the department of safety. The order was read to him by the hearings examiner and the defendant was also provided with a copy of the order. The order certified the defendant indefinitely, for a "minimum" period of four years, but also provided that he could petition to be decertified after twelve months.
Later in the fall of 2000, the defendant was arrested, pled guilty, and was imprisoned for driving while certified as a habitual offender. He served one year in jail and was released around October 2001. On November 23, 2002, Officer Syrek of the Hooksett Police was patrolling on Hooksett Road when the car in front of her, which was traveling at a very slow speed, pulled over and stopped. Officer Syrek pulled over behind the car to make sure the driver was not lost or incapacitated. The officer asked the defendant for his driver's license and he provided a nondriver identification card. Through dispatch, the officer determined that the defendant was a habitual offender.
At trial, the defendant testified that after serving his sentence in 2001, although he knew his license was still suspended, he "thought that the habitual offender had been wiped out because [he] had paid [his] debt to society." The defendant further testified that he went to the division of motor vehicles and inquired what he had to do to get his license back. He testified that a motor vehicle employee "gave [him] a list of what [he] had to have done before [he] could have [his] license back." The defendant testified that he was told his license was suspended but the issue of his status as a habitual offender "was never brought up, never mentioned." The defendant also testified that he had experienced memory problems since 1994, for which he had sought help from a neurologist. According to the defendant, he had little recollection of his certification hearing and did not understand the requirement that his habitual offender status would continue until removed in writing by the department of safety.
At the close of evidence at trial, the defendant requested a jury instruction on the lesser-included offense of operating after revocation. The court denied the request stating: "As to the lesser included offense, this is similar to the Watkins case. . . . The only . . . evidence of why he didn't have a license was the habitual offender certification, although he mentioned that . . . he was told his license was suspended. Even if that could be construed as enough evidence of a different order, which it can't, that didn't come in substantively in any event. It came in just as to his state of mind so he's not entitled to a lesser included offense."
On appeal, the defendant argues that the evidence presented at trial could support an instruction on the lesser-included offense of driving after revocation because the defendant testified and explained the basis for his mistaken belief that he was no longer a habitual offender. The defendant argues that "[b]ecause actual knowledge of legal status is an essential element of the offense of operating after [certification as a] habitual offender, and because evidence of [his] mistaken belief that his status changed over time would, if believed, negate that element, his theory of defense is not barred by mistake of law principles." The State argues that because the defendant did not rely upon a general claim of lack of knowledge, but upon the specific claim that he misunderstood the effect of certain events on his legal status as a habitual offender, his defense asserted a mistake of law that was not supported by the evidence.
It is within the sound discretion of the trial court to determine whether or not a particular jury instruction is necessary. State v. Littlefield, 152 N.H. 331, 334 (2005). We review the trial court's decision not to give the lesser-included offense instruction in this case for an unsustainable exercise of discretion. Id.
A defendant is entitled to have the jury consider a lesser-included offense when "the lesser offense [is] embraced within the legal definition of the greater offense" and "the evidence adduced at trial . . . provide[s] a rational basis for a finding of guilt on the lesser offense rather than the greater offense." State v. Watkins, 148 N.H. 760, 765 (2002). Because driving after suspension or revocation is embraced within the legal definition of driving after certification as a habitual offender, State v. Moses, 128 N.H. 617, 621 (1986), the only issue in this case is whether the evidence presented at trial could "provide[ ] a rational basis for a finding of guilt on the offense of driving after suspension or revocation rather than on the offense of driving after certification as a habitual offender." Watkins, 148 N.H. at 765.
RSA 626:3, I (1996) provides in part that "[a] person is not relieved of criminal liability because he acts under a mistaken belief of fact unless: (a) The mistake negatives the culpable mental state required for commission of the offense. . . ." "[I]gnorance or mistake of fact . . . is a defense when it negatives the existence of a mental state essential to the crime charged." 1 W. LaFave, Substantive Criminal Law § 5.6(a), at 395 (2d ed. 2003). "One merely identifies the mental state or states required for the crime, and then inquires whether that mental state can exist in light of the defendant's ignorance or mistake of fact. . . ." Id. § 5.6(b), at 397.
"A conviction on the charge of operation after certification as an habitual offender requires proof of three elements: (1) that an habitual offender order barring the defendant from driving a motor vehicle was in force; (2) that the defendant drove a motor vehicle on the ways of this State while that order remained in effect; and (3) that the defendant did so with knowledge of his status as an habitual offender." State v. Crotty, 134 N.H. 706, 710 (1991) (citations omitted). "A mens rea of knowingly means that the defendant subjectively knew that he had been, and continued to be, certified as an habitual offender at the time he drove his [vehicle]." State v. Vincent, 139 N.H. 45, 48 (1994); see State v. Baker, 135 N.H. 447, 449 (1992); Watkins, 148 N.H. at 766. In order to convict the defendant, "the jury must be satisfied beyond a reasonable doubt that the defendant actually knew he was certified as an habitual offender at the time he drove [a vehicle]." Vincent, 139 N.H. at 49.
The defendant claims he was entitled to a lesser-included instruction based upon all of his testimony including: his memory problems; his limited memory of his certification hearing; his lack of understanding that habitual offender status continues until removed in writing; the significance of his prior conviction for operating after certification as a habitual offender and the ensuing jail sentence; and his meeting with the department of motor vehicles employee which reinforced his belief that although his license was suspended, he was no longer certified as a habitual offender. Unlike Watkins, wherein the defendant offered no evidence or testimony regarding his state of mind, in the present case, the defendant's testimony, if believed, could support a finding that he did not subjectively know that he was still certified in 2002 when he was arrested.
Accordingly, we hold that because the evidence presented at trial could provide a rational basis for a finding of not guilty on the offense of driving while certified as a habitual offender but guilty on the offense of driving after revocation, the defendant was entitled to have the jury consider the lesser-included offense. The trial court's denial of his request for such a jury instruction was an unsustainable exercise of discretion.
Reversed and remanded.
DALIANIS, DUGGAN, GALWAY and HICKS, JJ., concurred. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551368/ | 142 F.2d 904 (1944)
McNABB et al.
v.
UNITED STATES.
No. 9663.
Circuit Court of Appeals, Sixth Circuit.
June 2, 1944.
E. B. Baker, of Chattanooga, Tenn. (E. B. Baker and Wilkes T. Thrasher, both of Chattanooga, Tenn., on the brief), for appellants.
O. T. Ault, of Chattanooga, Tenn. (James B. Frazier and O. T. Ault, both of Chattanooga, Tenn., on the brief), for appellee.
Before HICKS, SIMONS, and McALLISTER, Circuit Judges.
HICKS, Circuit Judge.
This is the second appearance of this case here. On the first appeal we sustained convictions of murder in the second degree. McNabb et al. v. United States, 6 Cir., 123 F.2d 848, 849. The Supreme Court reversed *905 on the ground that confessions, upon which the convictions rested, were obtained by persistent questioning of the accused while they were in the custody of arresting officers and before any order of commitment had been made. McNabb et al. v. United States, 318 U.S. 332, 345, 63 S. Ct. 608, 87 L. Ed. 819.
The Supreme Court said:
"Congress has explicitly commanded that `It shall be the duty of the marshal, his deputy, or other officer, who may arrest a person charged with any crime or offense, to take the defendant before the nearest United States commissioner or the nearest judicial officer having jurisdiction under existing laws for a hearing, commitment, or taking bail for trial * * *.' 18 U. S.C. § 595, 18 U.S.C.A. § 595. * * * The purpose of this * * * requirement of criminal procedure is plain. * * * Legislation such as this, requiring that police must with reasonable promptness show legal cause for detaining arrested persons, constitutes an important safeguard not only in assuring protection for the innocent but also in securing conviction of the guilty by methods that commend themselves to a progressive and self-confident society. For this procedural requirement checks resort to those reprehensible practices known as the `third degree' * * *. It aims to avoid all the evil implications of secret interrogation of persons accused of crime." [318 U.S. 332, 63 S. Ct. 613, 87 L. Ed. 819.]
The court denied a petition to rehear and said that on a retrial it would "be open to all parties to adduce all evidence relevant to the admissibility of the confessions, whether adduced in the previous trial or not." 319 U.S. 784, 63 S. Ct. 1322, 87 L. Ed. 1727.
It is conceded that the facts on the present appeal are substantially the same as in the first case and since the facts were fully stated both in our previous opinion and in the opinion of the Supreme Court, they will not be restated in detail.
The new evidence relates primarily to the arraignment of appellants before, and their commitment by, a United States commissioner. There was also corroborative testimony tending to link Benjamin McNabb with the firing of the fatal shot. At the second trial appellants were convicted of voluntary manslaughter and sentenced to imprisonment for nine years and three months.
Samuel Leeper, an Investigator of the Federal Alcohol Tax Unit, was fatally shot on the night of July 31, 1940, while emptying two cans of whiskey in a family cemetery near the McNabb settlement and after he and other Investigators had interrupted the loading of an automobile with untaxed liquor. Freeman and Raymond McNabb were arrested at their home around one or two o'clock on the morning of August 1st and Benjamin surrendered himself at the offices of the Alcohol Tax Unit in the Federal Building at Chattanooga around 8 or 9 o'clock on the morning of August 2nd.
Freeman and Raymond were questioned on the night of August 1st and all three appellants were together and separately questioned at the Federal Building by Alcohol Tax Unit Agents at intervals during August 2nd and into the early morning of August 3rd. There was evidence by appellants that they, in the course of these questionings, were cursed and threatened and called liars. These matters were particularly narrated in both former opinions.
In the opinion of the Supreme Court, it was categorically stated that none of the appellants was taken before the United States Commissioner before the questioning took place [318 U.S., supra, pages 334, 337, 63 S.Ct. pages 610, 611, 87 L. Ed. 819] and as indicated, this failure, coupled with the examination by the officers, was deemed such a flagrant disregard of statutory procedure as to require reversal.
On the question whether appellants were legally detained at the time of the questionings, the Government introduced evidence upon the second trial that Freeman and Raymond McNabb, as well as two other members of the McNabb family who were acquitted on the first trial, were brought before the Commissioner in Chattanooga on the morning of August 1st on charges of having violated provisions of the Internal Revenue Code; that they pleaded "not guilty" and in default of bail were committed to jail; that on the next morning, August 2nd, the appellants, including Benjamin McNabb, who surrendered that morning, were brought before the Commissioner on a warrant charging them with the murder of Leeper; that they pleaded "guilty" and were committed to jail without bond and preliminary hearing was postponed to August 8th.
These facts were proven by the testimony of J. H. Anderson, the Commissioner. He *906 testified that his records showed that on the morning of August 1st a complaint was sworn out by J. D. Jones, Inspector of the Alcohol Tax Unit, charging Barney, Raymond, Freeman and Emuil McNabb with violating several sections of the Internal Revenue Code, and that his recollection was that these defendants were arraigned in the office of the Alcohol Tax Unit in the basement of "this building" (the Federal Building) and that bond was fixed at $500, following which they were committed to jail. He remembered "distinctly that it came up that morning because it was the morning following the killing in this case."
He further testified that another warrant was sworn out on August 2nd by R. S. Abrams of the Alcohol Tax Unit against Raymond, Barney, Emuil and Benjamin (sic) charging them with the murder of Leeper but later in his testimony he stated that the names of all five appeared on the warrant and affidavit that he signed. This was evidently so, since appellants make no point of the omission of Freeman's name in the first part of Anderson's testimony. It was Anderson's recollection that they were arraigned in the office of the Alcohol Tax Unit in the basement of the Federal Building at about 9 or 10 o'clock on the morning of August 2nd.
Referring to his records, Anderson testified: "They were arraigned that morning and the preliminary hearing was set for August 8th and they were committed to jail without bond, until the hearing of August 8th." He stated that his records showed that a mittimus was issued both on the first and second days of August. He further testified (the jury having retired) that when the defendants were arraigned on the liquor case they pleaded "not guilty" and "On August 2nd after the complaint and warrant was read to them they pleaded guilty to the murder case." The Government did not rely upon this plea of "Guilty" as evidence of guilt and the Judge excluded it from the record, although he construed the plea as a waiver of a preliminary hearing. On this phase of the case the following took place out of the presence of the jury:
"Q. 39. (Dist. Atty. Frazier) On August 2nd, 1940, when the defendants were arraigned before you as United States Commissioner, and charged with the murder of Mr. Leeper, were they advised of their constitutional rights? A. I don't remember doing any thing except read the complaint and warrant to the defendants and ask them for their pleas. I don't think I gave them any warning as to their constitutional rights.
* * * * *
"Q. 40. * * * At that time they did enter a plea in the murder case, before you? A. Yes, sir; after reading the complaint and warrant, that is, stating the substance of it, I asked them for their plea.
"Q. 41. Each and every one entered a plea of guilty at that time? A. Yes, sir.
"Q. 42. Did you hear any proof? A. No, I postponed the case until the 8th of August. On the 8th of August, at the preliminary trial, the record does not show and I don't remember whether they said or what they said as to guilty (sic) or innocence. * * *"
J. G. Jones, Agent of the Alcohol Tax Unit, testified that the complaint for violation of the Revenue Laws was sworn out on the morning of August 1st before Commissioner Anderson at the office of the Alcohol Tax Unit. He was under the impression that when the complaint was sworn out, Emuil, Raymond and Freeman were in the custody of the Marshal in the Federal detention room. On cross examination he testified that he did not actually see the arraignment, but that Commissioner Anderson and the defendants were there and he took it that they were arraigned.
Coyle Ricketts, a Deputy Marshal, testified that he received a warrant for Benjamin (sic), Barney, Freeman and Emuil McNabb in the liquor case about 10:30 or 11 o'clock on the morning of August 1st and that arraignment took place on August 1st. He also testified that he served the complaint in the murder case in the neighborhood of 9 o'clock on the morning of August 2nd and that Benjamin McNabb was present at the time.
The District Attorney testified that to the best of his recollection the complaint in the murder case against Benjamin, Freeman and Raymond was issued on the morning of August 2nd, although he did not remember the hour. He recalled that at the first trial he heard Abrams testify that he took out the complaint in the murder case on the afternoon of August 2nd. Abrams himself testified that he took out the complaint in the murder case on August 2nd and that he thought this was early in the afternoon. On the other hand, Rex Kitts, of the Alcohol Tax Unit, testified positively that all five defendants were arraigned in the murder *907 case between 8 and 9 o'clock on the morning of August 2nd. He testified that Commissioner Anderson read the complaint to them and that the arraignment lasted a "very few minutes."
Several of the agents candidly stated that they did not see Anderson around the offices on August 2nd and did not witness any arraignment.
On the other hand, there is a suspicious sameness in the language used by the three appellants in their testimony that August 8th was the first time they saw Commissioner Anderson.
Whether appellants were taken before the Commissioner on August 1st and 2nd were questions of fact which were submitted to the jury and were determined in the affirmative; otherwise a verdict of not guilty should have resulted, because the jury was told that if it should find that they were not taken before the Commissioner, the evidence of their admissions or confessions of guilt, the only substantial evidence against them, was not competent and should not be considered. This instruction was based upon the previous opinion of the Supreme Court, which stated, "Concededly the admissions by Freeman, Raymond and Benjamin constituted the crux of the Government's case against them, and the convictions cannot stand if such evidence be excluded. * * *"
The verdict is a clear indication that the jury concluded that the arraignments before the Commissioner took place and we think that the evidence, particularly that of Commissioner Anderson, clearly supports such conclusion.
In this connection, and referring to Section 591 of Title 18 U.S.C.A., appellants assert that, assuming that proceedings were had against them before Commissioner Anderson, they were illegal under the language of that Section, because appellants were not proceeded against "agreeably to the usual mode of process against offenders" in Tennessee. Appellants claim that the hearings which were reputed to have taken place before the Commissioner violated at least three sections of the Tennessee Code. We deem it unnecessary either to cite or discuss these sections. In Roth v. United States, 6 Cir., 294 F. 475, 478, we held that R.S. Sec. 1014, now incorporated in Sec. 591, Title 18 U.S.C.A., did not apply "to procedure in the federal courts, and that defendant obtained no vested right to a preliminary examination before a commissioner." See also United States v. Kelly, 2 Cir., 55 F.2d 67, 70, 83 A.L.R. 122.
Another principal question is, whether the admissions or confessions of appellants were voluntary. This question was passed upon by the court and was likewise submitted to the jury by instructions unexcepted to and we must assume from the verdict that the jury found that they were voluntary. But this does not altogether dispose of this issue. Whether a confession is voluntary is a mixed question of law and fact.
One of the circumstances which led the Supreme Court to reverse our judgment was that appellants were not taken before a United States commissioner for hearing, commitment or taking bail as the law requires [18 U.S.C.A. §§ 591, 595] but that, instead thereof, the confessions were procured by questionings from the officers while appellants were still in their custody and before any order of commitment was issued. Compare United States v. Grote, 2 Cir., 140 F.2d 413. As indicated above, this circumstance is now out of the case and there is no substantial evidence that the confessions were elicted by means of illegal procedure. As pointed out in the McNabb case, supra, 318 U.S. page 346, 63 S.Ct. page 615, 87 L. Ed. 819, "The mere fact that a confession was made while in the custody of the police does not render it inadmissible." This quotation was repeated in United States v. Mitchell, 64 S. Ct. 896, 899. The Mitchell opinion embodies a clarification of its McNabb opinion.
We think that the circumstances in the present setting do not compel the exclusion of confessions upon the ground that they were involuntary. These circumstances were detailed in the previous opinions. The juristic difference between a voluntary or admissible, and an involuntary or inadmissible, confession is well stated in the dissenting opinion of Mr. Justice Reed in the Mitchell case, where he said:
"If the confession is freely made without inducement or menace, it is admissible. If otherwise made, it is not, for if brought about by false promises or real threats, it has no weight as proper proof of guilt. Ziang Sung Wan v. United States, 266 U.S. 1, 14, 45 S. Ct. 1, 69 L. Ed. 131; Wilson *908 v. United States, 162 U.S. 613, 622, 16 S. Ct. 895, 899, 40 L. Ed. 1090; 3 Wigmore Evidence, 1940 Ed., § 882."
Appellants Freeman and Raymond were questioned off and on on the evening of August 1st after they were told by the Alcohol Tax Unit Agents that they need not fear force and that they need not make any statements unless they desired to do so, for any statements they did make would be used against them. They were questioned on the nights of August 1st and 2nd but they were not kept awake for an inordinate length of time as in Lisenba v. California, 314 U.S. 219, 62 S. Ct. 280, 86 L. Ed. 166; nor were they kept in the Alcohol Tax Unit offices continuously for any excessive period, although there is some evidence that Benjamin was kept in the offices for five or six hours on August 2nd and that all the appellants were kept in the offices for about four hours on that night. There is no evidence that they were harassed by strong lights or were examined by relays of questioners. Appellants testified that they were called liars, and the officers admitted that on occasions they told the accused that they were lying, but at those times the officers already had data from other witnesses and from their own observations and discoveries against which they checked appellants' statements.
Appellants testified that they were threatened and cursed and that one of them was struck by an officer with a rolled piece of paper. The officers denied these charges, but, even if true, they do not reflect the harsh treatment, which, in the Lisenba case was not considered a denial of due process.
Benjamin McNabb, accompanied by his parents, voluntarily surrendered between 8 and 9 o'clock on the morning of August 2nd. He was asked to remove his clothes (to observe whether he had been wounded) and he testified that he was frightened. He re-dressed almost immediately. He was not subjected to any blows or indignities. He was questioned by the officers and after two or three hours he agreed to make a statement which was taken down by a stenographer. Her testimony was that she started to take the statement at 12:15 P. M., August 2nd. This was after appellants had been taken before Commissioner Anderson. The stenographer was disinterested and certain portions of her testimony are of special interest on the question of coercion, to-wit:
"X 17. During the time of this statement, would the officer step out at various times and tell you not to put down anything and then start their questions over again? A. I do recall that Captain Beeman . . . reformed a question or two, and he might have gotten a little ahead of me and I stopped him, outside of that, I don't remember anything else.
"X 18. Would they ask him questions and ask you to not put them down? A. I don't recall that they did.
"X 19. Was it a slow examination, or fast? A. They took their time, didn't seem to be in any hurry.
"X 20. What sort of condition did Benjamin McNabb appear to be in? A. He seemed to be that he wanted to tell the truth, he was calm as far as I could see.
"X 21. Was he perfectly calm? A. Yes, sir.
"X 22. He answered the questions without hesitation? A. Yes sir, he did."
On re-direct she was asked:
"RD 1. You were asked on Cross-examination if you knew of any promises or threats made before you were down there, were there any promises made to Benjamin McNabb, or threats made to him while you were down there, by these Alcohol Tax men? A. No, sir.
"RD 2. Did anybody offer to hit him? A. No, sir, nobody touched him."
The final statement in the "confession" of Benjamin McNabb was as follows:
"Q. You understand of course, that we are making an investigation of a murder; that we wish to obtain the facts. You were in possession of certain facts which you have related to us, and that now you have given us these facts you have given them voluntarily and that we can use them for such purpose as" (we) "wish. Do you understand that? Is that agreeable to you? A. Yes, sir.
"Q. You want the truth to be know (sic) and this is agreeable? A. Yes, sir, and what I told is the truth."
We find nothing in the record to justify a conclusion that the atmosphere surrounding the examination of appellants indicated coercion or violence, either mental or physical, such as would constitute a denial of due process.
Appellants complain that after their commitment they were removed from jail *909 for the questionings, in violation of Sec. 605 of Title 18 U.S.C.A. The point is without merit. Assuming that their removal was without authority, it does not follow that it changes the circumstances under which the confessions were made. See United States v. Mitchell, supra.
On the question of whether the evidence supports the verdict, the facts are concededly the same as at the former trial, with the exception of the testimony of one Pryor Hester, who was for a time in the same cell block with Benjamin and Freeman and who testified that Benjamin stated that he fired the first shot and that Freeman said that he fired one shot but didn't know if it was the fatal one. Aside from this, the evidence was fully discussed in our first opinion and was found to support the verdict. We have reached the same conclusion and the judgment below is affirmed. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551378/ | 908 A.2d 1214 (2006)
2006 ME 123
Shirley A. PASSALAQUA
v.
Kelly PASSALAQUA et al.
Supreme Judicial Court of Maine.
Submitted on Briefs: July 18, 2006.
Decided: October 27, 2006.
*1215 Donna L. Martin, Oxford Hills Law, South Paris, for plaintiff.
Cumberland Legal Aid Clinic, Portland, Student attorneys: Judith Lewis, Caroline Wilshusen, and Marcy Muller, Faculty Advisors: Deirdre Smith, E. James Burke, and D. Jill Green, for defendants.
Panel: SAUFLEY, C.J., and DANA, ALEXANDER, CALKINS, LEVY, and SILVER, JJ.
DANA, J.
[¶1] Kelly Passalaqua appeals from an order entered in the District Court (Lewiston, Beliveau, J.), denying her motion to dismiss, for lack of standing, the petition for grandparent visitation rights brought by her former mother-in-law, Shirley A. Passalaqua. Kelly contends that this appeal, though interlocutory, fits within an exception to the final judgment rule. We also address the validity of an interim order entered by a family law magistrate (Carlson, M.) that granted visitation to Shirley pending a final hearing. We vacate the interim order and dismiss the appeal as interlocutory.
I. BACKGROUND
[¶2] Kelly and Michael Passalaqua were married in 1994 and divorced in 1997. They have two minor children together. Kelly and Michael share parental rights and responsibilities, but the children primarily reside with Kelly. Michael has visitation every weekend and on holidays. After the divorce, Kelly and Michael communicated through Shirley, Michael's mother. Shirley had contact with the children almost every weekend during Michael's visitation.
[¶3] In January 2005, Kelly stopped allowing the children to go to Shirley's house. On June 24, 2005, Shirley filed a petition for grandparent visitation rights. She also filed an affidavit asserting a sufficient existing relationship with the children to establish her standing to seek visitation pursuant to 19-A M.R.S. § 1803(1)(B) (2005). By order dated July 14, 2005, the trial court determined that Shirley had established a sufficient existing relationship with the grandchildren such that the case could proceed to a final hearing. See 19-A M.R.S. § 1803(2)(C), (D) (2005).
[¶4] Thereafter, following a case management hearing at which neither Kelly nor Michael appeared,[1] the family law magistrate determined that both parents *1216 had defaulted, and granted Shirley visitation rights "every weekend from Friday after school until Sunday at 4:00 p.m." Subsequently, Kelly, acting pro se, filed her first responsive pleading. On October 27, 2005, counsel entered an appearance on Kelly's behalf, and filed a motion to amend the answer and an affidavit in response to Shirley's claim of standing. Kelly asserts in her affidavit that the children exhibited signs of sexual abuse after being in Shirley's care. Shortly thereafter, Kelly filed a motion to dismiss for lack of standing and a motion for reconsideration of the July 14 order establishing standing.
[¶5] The trial court considered and denied the motions, and ordered the case to proceed to a hearing. Kelly filed a notice of appeal within twenty-one days of those orders.
II. DISCUSSION
A. The Grandparents Visitation Act
[¶6] The Grandparents Visitation Act[2] allows the grandparent of a minor child to petition the court for reasonable rights of visitation or access if it is first established that the grandparent has standing. 19-A M.R.S. § 1803(1). Pursuant to section 1803(1)(B), a grandparent has standing if "there is a sufficient existing relationship between the grandparent and the child." The grandparent must first file an affidavit containing facts that establish a sufficient *1217 existing relationship, and the parent may file an affidavit in response. 19-A M.R.S. § 1803(2)(A), (B). If the court determines based on the petition and affidavits that "it is more likely than not that there is a sufficient existing relationship" to confer standing, the case proceeds to a hearing. 19-A M.R.S. § 1803(2)(C), (D). The court may grant the petition if it finds that visitation is in the best interest of the child and will not significantly interfere with any parent-child relationship or with the parent's rightful authority over the child. 19-A M.R.S. § 1803(3).
B. The Final Judgment Rule
[¶7] The appeal in this case, from the denial of the motions to dismiss and for reconsideration of the order conferring standing, is in essence an appeal from the trial court's determination that Shirley has standing to pursue visitation rights. An order establishing that a party has standing is not a final order and ordinarily, pursuant to the final judgment rule, is not immediately appealable. See IHT Corp. v. Paragon Cutlery Co., Inc., 2002 ME 68, ¶ 5, 794 A.2d 651, 652 (holding denial of motion to dismiss for lack of personal jurisdiction not immediately appealable).
[¶8] Kelly concedes that the orders appealed from are interlocutory and are eligible for immediate review only if they fall within a judicially created exception to the final judgment rule, including one of the three, well-established exceptions: the "death knell" exception, the judicial economy exception, or the collateral order exception.
[¶9] The "death knell" exception allows an immediate appeal from an interlocutory order when "substantial rights of a party will be irreparably lost if review is delayed until final judgment." Webb v. Haas, 1999 ME 74, ¶ 5, 728 A.2d 1261, 1264 (quotation marks omitted). A right is irreparably lost "if the appellant would not have an effective remedy if the interlocutory determination were to be vacated after a final disposition of the entire litigation." U.S. Dep't of Agric. v. Carter, 2002 ME 103, ¶ 12, 799 A.2d 1232, 1235. Kelly contends that her substantial rights, recognized in our recent decision in Conlogue v. Conlogue, 2006 ME 12, 890 A.2d 691, will be lost absent immediate appellate review.
[¶10] In Conlogue, we addressed the validity of section 1803(1)(A), which provided that grandparents had standing to seek visitation rights if one of the child's parents or legal guardians had died. We recognized that forcing parents to litigate grandparent visitation rights against their will infringes on the parents' fundamental liberty interest in making decisions concerning the care, custody, and control of their children. Id. ¶ 13, 890 A.2d at 696. Subjecting section 1803(1)(A) to strict judicial scrutiny, we concluded that the death of a parent does not constitute a compelling interest that would justify State interference with the surviving parent's right to refuse access to the child. Id. ¶ 22, 890 A.2d at 699.
[¶11] We noted in Conlogue that no preliminary procedure existed under section 1803(1)(A) for testing whether a compelling interest could be shown to justify imposing the burden of litigation on the parent. Pursuant to that provision, the grandparent was granted standing automatically when one parent had died. Id. ¶ 18, 890 A.2d at 698. In contrast, when standing is sought on the ground of a sufficient existing relationship, the Act provides a summary procedure for testing whether imposing the burden of litigation on the parent is justified by a compelling state interest. Id.
[¶12] In Rideout v. Riendeau, 2000 ME 198, ¶¶ 24-26, 30, 761 A.2d 291, 301-02, a plurality of this Court determined that a *1218 compelling State interest exists when a grandparent establishes "urgent reasons," in the form of a sufficient existing relationship, that justify court intrusion into family life. The plurality further concluded when a grandparent proceeds pursuant to section 1803(1)(B), the Act is narrowly tailored to achieve that compelling interest because, among other things, it provides additional safeguards at the hearing stage that protect the parents' rights. Rideout, 2000 ME 198, ¶¶ 29-32, 761 A.2d at 302-03. For example, the Act requires that the court consider the parents' objections, 19-A M.R.S. § 1803(2)(D), and determine whether visitation will significantly interfere with any parent-child relationship or with the parents' rightful authority over the child, 19-A M.R.S. § 1803(3).
[¶13] Although we recognize that the standing determination is an important prerequisite to forcing parents to litigate grandparent visitation, we are nevertheless satisfied that vigilant application of all the safeguards provided in the Act will adequately protect parents' substantial rights. In addition, permitting an exception to the final judgment rule in these cases would result in interrupted proceedings and undue delay, and would not constitute the best use of limited judicial resources. We therefore conclude that a decision that a grandparent has standing pursuant to section 1803(1)(B) is not immediately appealable.[3]
C. Case Management Order
[¶14] While we do not reach the merits of Kelly's appeal, we nevertheless address, sua sponte, a procedural issue that has arisen in this case. After the court determined that Shirley had standing, a case management conference with a magistrate was held. At the conference, after neither parent appeared, the magistrate determined that the parents were in default, and entered an order granting Shirley visitation rights.
[¶15] Awarding visitation rights to a grandparent at a case management conference, even one at which the parents fail to appear, is not contemplated by the Act, and would thwart the protections that are provided in the Act against unlawful infringement of the parents' fundamental rights. As we said in Conlogue, no grandparent should be awarded visitation with a minor child against a parent's wishes prior to the hearing prescribed in section 1803(2)(D). 2006 ME 12, ¶ 13 n. 7, 890 A.2d at 696. There must first be a judicial determination that rights of visitation or *1219 access are in the best interest of the child and would not significantly interfere with any parent-child relationship or with the parent's rightful authority over the child. 19-A M.R.S.A. § 1803(3).
The entry is:
The case management order awarding visitation to Shirley Passalaqua is vacated. The appeal is otherwise dismissed.
NOTES
[1] Service was achieved on Kelly on June 24, 2005, and on Michael on June 26, 2005. Michael has not filed an answer or otherwise appeared in this action.
[2] The Grandparents Visitation Act, 19-A M.R.S. §§ 1801-1805 (2005) provides, in relevant part:
§ 1803. Petition
1. Standing to petition for visitation rights. A grandparent of a minor child may petition the court for reasonable rights of visitation or access if:
A. At least one of the child's parents or legal guardians has died;
B. There is a sufficient existing relationship between the grandparent and the child; or
C. When a sufficient existing relationship between the grandparent and the child does not exist, a sufficient effort to establish one has been made.
2. Procedure. The following procedures apply to petitions for rights of visitation or access under subsection 1, paragraph B or C.
A. The grandparent must file with the petition for rights of visitation or access an affidavit alleging a sufficient existing relationship with the child, or that sufficient efforts have been made to establish a relationship with the child. When the petition and accompanying affidavit are filed with the court, the grandparent shall serve a copy of both on at least one of the parents or legal guardians of the child.
B. The parent or legal guardian of the child may file an affidavit in response to the grandparent's petition and accompanying affidavit. When the affidavit in response is filed with the court, the parent or legal guardian shall deliver a copy to the grandparent.
C. The court shall determine on the basis of the petition and the affidavit whether it is more likely than not that there is a sufficient existing relationship or, if a sufficient relationship does not exist, that a sufficient effort to establish one has been made.
D. If the court's determination under paragraph C is in the affirmative, the court may appoint a guardian ad litem as provided in section 1507. The court shall hold a hearing on the grandparent's petition for reasonable rights of visitation or access and shall consider any objections the parents or legal guardians may have concerning the award of rights of visitation or access to the grandparent. If the court has appointed a guardian ad litem, the court shall also consider the report of the guardian ad litem. The standard for the award of reasonable rights of visitation or access is provided in subsection 3.
3. Best interest of the child. The court may grant a grandparent reasonable rights of visitation or access to a minor child upon finding that rights of visitation or access are in the best interest of the child and would not significantly interfere with any parent-child relationship or with the parent's rightful authority over the child. In applying this standard, the court shall consider [factors A through K].
[3] Neither of the other two exceptions to the final judgment rule apply in this case. The judicial economy exception is available only in those rare cases in which appellate "review of a non-final order can establish a final, or practically final disposition of the entire litigation, and the interests of justice require that immediate review be undertaken." Dep't of Human Servs. v. Lowatchie, 569 A.2d 197, 199 (Me.1990) (quotation marks omitted); accord U.S. Dep't of Agric. v. Carter, 2002 ME 103, ¶ 13, 799 A.2d 1232, 1236. Kelly contends that this exception should apply because reversal of the order granting standing would effectively end the entire litigation. This reasoning is faulty, however, because if we were to affirm, the case would proceed to a hearing in the trial court. "The [judicial economy] exception applies only when the decision on appeal before us, regardless of what it is, would effectively dispose of the entire case." Id. (emphasis added). In addition, as stated above, our repeated hearing of matters that may ultimately be mooted by subsequent action in the trial court would not serve judicial economy.
Application of the collateral order exception requires that: "(1) the decision is a final determination of a claim separable from the gravamen of the litigation; (2) it presents a major unsettled question of law; and (3) it would result in irreparable loss of the rights claimed, absent immediate review." Id. ¶ 8, 799 A.2d at 1234. For the reasons relevant to the death knell exception, the collateral order exception does not apply. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551441/ | 6 F.2d 809 (1925)
MORRISON
v.
UNITED STATES.
No. 6079.
Circuit Court of Appeals, Eighth Circuit.
May 9, 1925.
*810 William Pfeiffer, of Oklahoma City, Okl., for plaintiff in error.
W. A. Maurer, U. S. Atty., and James A. Ingraham, Asst. U. S. Atty., both of Oklahoma City, Okl.
Before SANBORN and KENYON, Circuit Judges, and BOOTH, District Judge.
BOOTH, District Judge.
Kelsie Morrison, hereafter called defendant, brings this writ of error to reverse a judgment convicting him of unlawfully having in his possession intoxicating liquor in and upon Indian country, to wit, Osage county, Okl.
The indictment was based upon the Act of Congress of May 25, 1918, c. 86, § 1 (40 Stat. 563 [Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 4137aa]), which provides as follows:
"That on and after September first, nineteen hundred and eighteen, possession by a person of intoxicating liquors in the Indian country where the introduction is or was prohibited by treaty or federal statute shall be an offense and punished in accordance with the provisions of the Acts of July Twenty-Third, Eighteen Hundred and Ninety-Two (Twenty-Seventh Statutes at Large, page two hundred and sixty), and January Thirtieth, Eighteen Hundred and Ninety-Seven (Twenty-Ninth Statutes at Large, page five hundred and six)."
The assignments of error which are relied on raise three main questions:
1. Were the Act of July 23, 1892, c. 234 (27 Stat. 260 [Comp. St. §§ 4136a, 4140]), the Act of January 30, 1897, c. 109 (29 Stat. 506 [Comp. St. § 4137]), and the Act of May 25, 1918, c. 86 (40 Stat. 563 [Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 4137aa]), repealed by the National Prohibition Act (41 Stat. 305 [Comp. St. Ann. Supp. 1923, § 10138 ¼ et seq.])?
This question has been answered in the negative by this court in the case of McClintic v. United States, 283 F. 781, and later by the Supreme Court in the case of Kennedy v. United States, 265 U.S. 344, 44 S. Ct. 501, 68 L. Ed. 1045.
2. Was the verdict supported by substantial evidence?
Parker, a witness called on behalf of the government, testified that he was city marshal of Fairfax, Okl., and deputy sheriff; that on the day in question, August 2, 1921, about 4 o'clock in the afternoon, he and J. W. Hutchinson were driving in an automobile along a road north and east of Fairfax; that he saw defendant and another man sitting in an automobile by the side of the road; that, as he and Hutchinson were driving past, the automobile in which defendant was sitting backed out and hit their car, and thereupon he stopped and got out to see who was in the other car; that he saw defendant reach down in his car and pick up a bottle and break it over the side of the car door; that the bottom part of the bottle fell upon the running board, but still contained a small quantity of liquor; that he poured this out into his hand and tasted it; that it was corn whisky; that, although he was not a drinking man, he knew corn whisky when he tasted it; that at the time of the occurrence defendant and his companion in the car were drunk.
Another witness, Hutchinson, also a deputy sheriff, corroborated the testimony of Parker, and further testified that the liquid in the broken part of the bottle was corn whisky; that he tasted it; that he knew corn whisky by the taste. These two witnesses were the only ones on behalf of the government, and there was no testimony offered on behalf of defendant.
It is contended on behalf of defendant that the foregoing testimony could at most raise merely a suspicion in the minds of the jury that defendant was guilty of the offense charged. We are unable to acquiesce in this contention. To our minds the evidence constituted a very substantial basis for the verdict.
*811 3. Did the court in its charge to the jury fail to respect the provisions of the Act of March 16, 1878, c. 37 (20 Stat. 30 [Comp. St. § 1465])? This act provides that a person on trial in a federal court charged with a criminal offense "shall, at his own request, but not otherwise, be a competent witness. And his failure to make such request shall not create any presumption against him."
This statute restrains both court and counsel from comment upon the failure of accused to testify. Wilson v. United States, 149 U.S. 60, 13 S. Ct. 765, 37 L. Ed. 650; Reagan v. United States, 157 U.S. 301, 15 S. Ct. 610, 39 L. Ed. 709; Stout v. United States, 227 F. 799, 142 Cow. C. A. 323; Shea v. United States, 251 F. 440, 163 Cow. C. A. 458; Robilio v. United States, 259 F. 101, 170 Cow. C. A. 169; Nobile v. United States (C. C. A.) 284 F. 253. The portion of the charge of the court which it is claimed violated this statute is as follows:
"While you are the sole judges of the facts in the case, you would not be at liberty, of course, to arbitrarily disregard or reject testimony in the case, and especially where it is not contradicted, unless in the consideration of that testimony in some way you find it necessary in the performance of your duty to discredit or reject it. Then, of course, you should give it the weight and consideration you think it should receive at your hands."
It is clear that this language contained no direct comment on the failure of accused to testify. In our opinion, it cannot be fairly said that there was indirect comment on the prohibited subject-matter.
The test is: Was the language used manifestly intended to be, or was it of such character that the jury would naturally and necessarily take it to be a comment on the failure of the accused to testify? We do not think the language used was manifestly intended as such a comment, nor do we think the jury would naturally and necessarily understand it to be such. Testimony by the defendant was not the only method of contradicting the story told by the government's witnesses, if untrue.
Comment by court and counsel that certain testimony is uncontradicted is common, oftentimes helpful, and very generally held to be without error. Shea v. United States, supra; Carlisle v. United States, 194 F. 827, 114 Cow. C. A. 531; Rose v. United States, 227 F. 357, 363, 142 Cow. C. A. 53; Lefkowitz v. United States (C. C. A.) 273 F. 664; Robilio v. United States (C. C. A.) 291 F. 975, 985; Bradley v. United States, 254 F. 289, 165 Cow. C. A. 577.
The case of Linden v. United States (C. C. A.) 296 F. 104, is, we think, not inconsistent with the foregoing. In that case the three defendants had been tried and convicted on a count, amongst others, for illegally transporting intoxicating liquor. The trial court, in its charge to the jury, had referred to the evidence as being uncontradicted and without explanation. This was held to be error in view of the Act of March 16, 1878. The appellate court, however, in reversing the lower court, based its decision on the peculiar facts disclosed. It said:
"The apprehension and arrest occurred at night, out in a stream. The only persons present were the three defendants and the two customs officers. The latter were witnesses for the prosecution. It follows, therefore, that the only persons who could possibly contradict their testimony were the defendants themselves. Obviously, then, the only persons to whom the learned trial judge could have alluded as not having contradicted the government's testimony, and as not having given an `explanation of the transaction,' were the defendants. This is so clear that it does not require discussion. We are of opinion that this part of the court's charge involved error, and that the conviction thereunder was not valid."
In the case at bar the transaction in question took place in the daytime on a public highway. It does not appear that the government's witnesses and the parties charged with the offense were the only ones present. Only one of the parties charged was on trial, and, as stated above, it is not clear to our minds that the story of the government's witnesses could have been contradicted, if untrue, only by testimony by the defendant himself.
Under the circumstances, the charge given did not constitute error.
Judgment affirmed. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551468/ | 6 F.2d 326 (1925)
THE PANAMA.
No. 1233.
District Court, S. D. Texas, at Galveston.
May 23, 1925.
Edwin R. Warnken, Asst. U. S. Atty., of Houston, Tex.
McDonald & Wayman, of Galveston, Tex., for respondent.
HUTCHESON, District Judge.
This is a libel brought by the United States to forfeit the schooner Panama and her cargo of intoxicating liquor; the schooner having been seized while anchored 12.1 miles from the nearest point of shore off Galveston, and having a cargo of intoxicating liquor only. Upon reasonable ground for suspicion that she was violating the liquor laws of the United States, the Coast Guard cutter Comanche caused her to be boarded and searched the commander of the Comanche at that time believing that she was within the terms of the treaty; that is, that under her equipment she could reach shore within one hour's time.
No evidence exists of any violation of the law off Galveston which would entitle the government to forfeiture. It was abundantly proven, however, that the Panama was then and had been for many months regularly engaged in bringing cargoes of intoxicating liquor from Havana and other points to New Orleans; that this was done under prearrangement with persons on shore, and that off Breton Island on other trips, and on this particular trip on or about May 19, 1924, just five days before her seizure, she had by prearrangement been met by shore boats, and had through them delivered about 400 cases of liquor into the port of New Orleans, and had proceeded thence, in accordance with her master's and supercargo's instructions, to the point off Galveston where she was expecting contact with shore boats.
There was an affidavit of Alvarez claiming the cargo, and one of W. T. Aldham claiming ownership of the vessel. No evidence was offered by the claimants in support of these affidavits, while the evidence tends to show, and I find, that both the vessel and her cargo were really owned and controlled by New Orleans rum smugglers, who had been directing the movements of the ship and disposing of the cargo for her. The evidence is overwhelming that the Panama, at the time of her seizure, was without the 12-mile limit, and also was a greater distance from shore than she could cover in one hour.
On these facts the government contends, upon the authority of U. S. v. Bengochea (C. C. A. 5th) 279 F. 537; The Grace and Ruby (D. C.) 283 F. 475; The Henry L. Marshall (D. C.) 286 F. 260; The Henry L. Marshall (C. C. A.) 292 F. 486; The Henry L. Marshall, 263 U.S. 712, 44 S. Ct. 38, 68 L. Ed. 519, 520; Latham et al. v. U. S. (C. C. A.) 2 F.(2d) 210; U. S. v. 2,180 Cases of Champagne (Schooner Zeehond) 4 F.(2d) 735, Eastern District of New York, decided March 4, 1925; The Island Home, unreported decision of this court that, though the Panama had not come within either the territorial waters or the search limits mentioned in the examination limits fixed in the 12-mile statute (Comp. St. Ann. Supp. 1923, § 5841h), or *327 described in the treaty (43 Stat. 141), she had made actual contact and had effected an unlading in violation of the statutes off the coast of New Orleans, and that, this being the first port into which she had been brought after seizure, she was subject to forfeiture here.
The defendant, relying upon The Frances Louise (D. C.) 1 F.(2d) 1004, The Over the Top (D. C.) 5 F.(2d) 838, Thomas, J., and The Bockman, Morton, J., unreported, asserts, first, that the seizure was unlawful and could confer no right, because outside of the statutory limit, and also the limits fixed by the treaty, and further that, even if the seizure was justified, there was no evidence of violation by the schooner and the owner of the cargo off New Orleans, which would justify forfeiture.
I have, in The Island Home and The Rosalie M., both decided without reference to the treaty, declared my view that the right of the executive to seize and search for violations of our laws is not limited by any particular distance from the shore. Nor do I think the treaty changes this right. It merely expresses a diplomatic agreement in advance to the doing of those things which the United States already had authority to do, subject only to political accountability to foreign nations whose bottoms were searched, and I therefore overrule the contention of the defendant that the terms of the treaty have made search and seizure unlawful.
Since I have found that the Panama was outside of the treaty limits when seized, it is not necessary for me to dispose of the government's invocation of the decision of Judge Campbell, in United States v. The Pictonian, that the criminal laws of this country have by the treaty been extended in their application to the limits of the treaty, except to say that I thoroughly agree with Judge Thomas, in The Over the Top, that this has not occurred, and that, while Congress may pass laws extending the point of unlading beyond 12 miles, and to the limits fixed in the treaty, until Congress has enacted some municipal law governing the matter, nothing in the treaty changes or affects our laws; the treaty expressly providing merely that His Brittanic Majesty will make no objection to the seizure of British ships within the treaty limits, and a disposition of these seizures in accordance with the laws of the United States.
This brings me then to the question of whether the evidence shows a violation in New Orleans of the applicable statutes, so as to subject the Panama and her cargo to forfeiture, and, believing as I do that the evidence not only indicates, but overwhelmingly establishes, this fact, I have no hesitation in finding for the government for forfeiture against both the ship and her cargo | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551464/ | 6 F.2d 812 (1925)
HERTZ et al.
v.
KNUDSON, Deputy and Acting Secretary of Trade and Commerce of Nebraska.
No. 6811.
Circuit Court of Appeals, Eighth Circuit.
May 30, 1925.
Hubert Harvey, of St. Paul, Minn. (Myron L. Learned, of Omaha, Neb., on the brief), for appellants.
Before LEWIS, Circuit Judge, and VAN VALKENBURGH and FARIS, District Judges.
VAN VALKENBURGH, District Judge.
The Lion Bonding & Surety Company is a corporation organized and existing under and by virtue of the laws of the state of Nebraska. For some years prior to 1921 it had been conducting a business of insurance in the state of Nebraska, and was doing business and had property also in eighteen other states, including the state of Minnesota. The Nebraska Laws of 1919, c. 190 (Comp. Stat. 1922, §§ 7742-7748), contained the following provisions:
"Sec. 4. Delinquent Companies Proceedings Liquidation.
"(1) Whenever any domestic company is insolvent, or has refused to submit its books, papers, accounts, or affairs to the reasonable inspection and examination of the department of trade and commerce, or has neglected or refused to observe an order of the department of trade and commerce, to make good within the time prescribed by law, any deficiency, whenever the capital of a stock company, or the reserve of a mutual company, shall have become impaired, or it has by contract of reinsurance, or otherwise, transferred or attempted to transfer substantially its entire property or business, or entered into any transaction the effect of which is to merge substantially its entire property or business in the property or business of any other company without first having obtained the written approval of the department of trade and commerce, or is found, after an examination, to be in such condition that its further transaction of business would be hazardous to its policy holders, or to its creditors, or to its stockholders, or to the public; or has willfully violated its articles of incorporation or association or any law of this state, or whenever any trustee, director, manager or officer thereof has refused to be examined under oath touching its affairs, the *813 department of trade and commerce may apply to the district court, or any judge thereof, in the county or judicial district in which the principal office of such company is located, for an order directing such company to show cause why the department of trade and commerce should not take possession of its property, records and effects and conduct or close its business, and for such other relief as the nature of the case and the interest of its policy holders, creditors, stockholders or the public may require.
"(2) On such application, or at any time thereafter, such court or judge may, in his discretion, issue an order restraining such company from the transaction of its business, or disposition of its property, records and effects until the further order of the court. On the return of such order to show cause, and after a full hearing, the court shall either deny the application or direct the department of trade and commerce forthwith to take possession of the property, records and effects, and conduct the business of such company * * * until on the application of the department of trade and commerce, or of such company, it shall, after a like hearing, appear to the court that the cause of such order directing the department of trade and commerce to take possession has been removed, and that the company can properly resume possession of its property, records and effects, and the conduct of the business.
"(3) If, on a like application and order to show cause, and after a full hearing, the court shall order the liquidation of the business of such company, such liquidation shall be made by and under the direction of the department of trade and commerce, which may deal with the property, records, effects and business of such company in the name of the department of trade and commerce or in the name of the company, as the court may direct and it shall be vested by operation of law with title to all the property, effects, contracts and rights of action of such company as of the date of the order so directing it to liquidate. The filing or recording of such order in the office of the register of deeds in any county where property is located in the state shall impart the same notice that a deed, bill of sale, or other evidence of title, duly filed or recorded by such company would have imparted."
Pursuant to the provisions of the statutes aforesaid, the department of trade and commerce of the state of Nebraska applied to the district court of Douglas county, Neb., for an order directing it to take possession of the property and to conduct the business of the Lion Bonding & Surety Company, upon the ground that said company was found to be in such condition that its further transaction of business would be hazardous to its policy holders, its creditors, its stockholders, and the public, and alleging other violations of law committed by defendant company. On April 12, 1921, the district court of Douglas county made an order directing the department of trade and commerce to take possession forthwith of the property, records, and effects and to conduct the business of the defendant company, as in said statutes provided. Later, on May 28, 1921, the same court, upon supplemental petition, made an order that the business of the Lion Bonding & Surety Company be liquidated under the direction of the department of trade and commerce, and that department was directed to deal with the property, records, effects, and business of the defendant as in such cases provided.
On May 2, 1921, while the decree of the Nebraska court was in full force, and the department of trade and commerce was in actual possession thereunder of the property of the defendant, Lion Bonding & Surety Company, in that state, one Karatz, a citizen of Minnesota, filed a bill in equity against the Lion Bonding & Surety Company in the District Court of the United States for the District of Minnesota, and by that court appellants herein were appointed receivers to collect all assets, wherever situated, and to realize upon and distribute the same. These receivers duly qualified and entered upon their duties. Thereafter intermediate suits were filed to determine the respective rights of the Minnesota receivers and the department of trade and commerce of the state of Nebraska to administer this estate. On the 23d day of April, 1923, the Supreme Court of the United States (262 U.S. 77, 43 S. Ct. 480, 67 L. Ed. 871) held upon appeal that the federal court of Minnesota had no jurisdiction over the Karatz suit, for the reasons, among others, that the amount claimed in the complaint was less than the sum of $3,000, and that there was want of equity in that the suit was brought by an unsecured simple contract creditor. It followed that the appointment of appellants as receivers was without authority.
Thereafter this suit in equity was filed in the District Court of the United States for the District of Minnesota, in which the department of trade and commerce for the state of Nebraska was named as plaintiff, and appellants A. J. Hertz and John L. Levin, *814 receivers as aforesaid, were named as defendants. The complaint contained the following allegation: "That the grounds upon which this court's jurisdiction depends are the fact that the plaintiff is the state of Nebraska, and the defendants are citizens of another state, and that the amount involved in the suit is in excess of the sum of three thousand dollars ($3,000)."
It was alleged upon information and belief that the defendants had reduced to their possession assets amounting in cash to approximately $3,000, and had in their possession and in their names, as receivers, real estate of the value of $14,000 formerly belonging to the Lion Bonding & Surety Company, and now the property of the plaintiff. The bill prayed an accounting and for recovery accordingly. To this bill the defendants filed a joint answer, and the defendant Levin also filed a separate answer. In these answers it was alleged that the receivers had acted in good faith and had rendered valuable services and incurred large expense in collecting and preserving the property and effects of the Lion Bonding & Surety Company. It was also alleged in the answers that, while the litigation was pending and the issues undetermined, a number of conferences were held between one Amos Thomas, alleged to be the duly qualified and acting agent of the department of trade and commerce of the state of Nebraska, and defendants and their counsel, at which it was agreed, for the sake of economy and for the benefit of the estate, that, pending the determination by the courts of the issues then before them, defendants should act as receivers in the state of Minnesota, all districts in the Eighth Circuit in which they had attempted to qualify by filing a certificate under section 56 of the Judicial Code, and in all other federal districts where they had applied for and obtained appointment as receivers in ancillary proceedings except in the District of Nebraska, and that the department of trade and commerce should act as receiver in the state of Nebraska, where the home office of the company was located; that, in the event of the ultimate establishment of the department as liquidator of said estate, the defendants should be reimbursed for their necessary disbursements and expenditures, and should be paid the reasonable value of their services; and, on the other hand, in the event of the ultimate establishment of defendants as receivers, that said estate should recognize and accept the work of the department as receiver in the territory aforesaid, and should pay its necessary disbursements and expenditures and the reasonable value of its services. It was further alleged that the plaintiff and defendants then and there agreed that such expenditures and compensation for services should be deducted from assets marshaled in said respective territories. Thereafter, the following stipulation amending the bill of complaint was made:
"It is hereby stipulated by and between the parties hereto:
"I. That the title of said cause in the bill, on the records and elsewhere herein be amended as to the designation of the plaintiff so as to read as follows: K. C. Knudson, Deputy and Acting Secretary of Trade & Commerce for the Department of Trade and Commerce of the State of Nebraska.
"II. That the bill of the plaintiff herein may be considered to have been amended as of the date of the filing thereof by the addition thereto of the following, to wit: That during all the times herein mentioned, plaintiff, K. C. Knudson, was and still is the deputy and acting secretary of Trade & Commerce for the department of trade and commerce of the state of Nebraska, with full authority to execute the powers and discharge the duties vested by law in the said department, and was and is a citizen and resident of the state of Nebraska."
Immediately after the filing of this stipulation, appellee herein moved to strike all portions of the answers of the defendants except that part admitting certain allegations of the bill. The stricken portion included the alleged agreement pendente lite above stated. This motion was sustained, and the court entered a decree in favor of complainant in the sum of $14,896.10, with interest. The decree also directed the conveyance, by defendants to complainant, of certain real estate therein described. Upon motion to vacate this decree, and upon hearing, a modifying order was later entered whereby the money judgment was reduced to $2,943.99, with interest from January 31, 1924, at 6 per cent. per annum. It is from this decree, as modified, that this appeal is prosecuted.
The substance of appellants' complaint, as disclosed by their assignments of error, is as follows: First, that this suit cannot be maintained because the plaintiff is the state of Nebraska. Second, that no jurisdictional amount was involved, because the facts disclosed that plaintiff's maximum recovery could not exceed $2,343. Third, that if the suit be maintained defendants are entitled to compensation for expenditures made and services rendered in the course of their receivership *815 which benefited the estate. Because of the unusual circumstances involved, these specifications will be considered in the inverse order.
Ordinarily speaking, the court below, being without jurisdiction, had no property with which to pay any one, and in such case the defendants were not entitled to compensation out of property seized without jurisdiction. Hawes et al. v. First Nat. Bank of Madison et al., 229 F. 51, 59, 143 Cow. C. A. 645; Brictson Mfg. Co. v. Woodrough (C. C. A. 8) 284 F. 484; Finneran v. Burton (C. C. A. 8) 291 F. 37, 34 A. L. R. 1351. But in this case the defendants, by their answer, set up an agreement with the department of trade and commerce through one Amos Thomas, alleged to be the duly qualified and acting agent of that department, whereby it was agreed, in the interest of economy in administration and to meet the necessities of the situation while the litigation was pending, services should be performed and expenses incurred by the defendants for which they should be paid and reimbursed in event of a final decision adverse to them. In the record we find the following certificate of a record of the district court of Douglas county, Neb., which had jurisdiction over the department of trade and commerce in the matter of its liquidation of this estate:
"I, Robert Smith, clerk of the district court, Fourth judicial district of the state of Nebraska, within and for said county, do hereby certify that the appointment of Amos Thomas, as special agent of the department of trade and commerce of the state of Nebraska in charge of and as liquidator of the Lion Bonding & Surety Company, was approved by said court on the 16th day of May, 1921, that he is the duly appointed, qualified, and acting special agent in charge of the Lion Bonding & Surety Co., for the purpose of liquidation, and that said appointment and order of approval has not been vacated, modified, or set aside, and is now in full force and effect as the same appears fully upon the records and files of said court, now in my charge remaining as clerk aforesaid."
From this it would appear that Thomas had authority to make this alleged agreement. If the allegations of the answer in this particular are sustained by the proofs, then it would appear that the estate in the hands of the department of trade and commerce should be charged with whatever may be found to be justly and reasonably due for services performed and moneys expended by defendants under this agreement. By virtue thereof they were acting as and for the department of trade and commerce, and were doing what that department otherwise would have been compelled to do. For this reason, this tendered defense should not have been stricken from the answer, and a hearing should have been accorded upon the issue thus made, if the court below had jurisdiction to render any decree in the case.
The contention of appellants that the court below was without jurisdiction because the amount in controversy was below the jurisdictional amount cannot be sustained; that amount depends upon the statement of complainants' case, and is not conditioned by allegations in defense. The complaint in this particular was sufficient. A stipulation was filed showing an amount involved of approximately $14,000, besides real estate, the value of which was not stated. The case went to hearing in that situation, and a decree was rendered granting pecuniary relief in excess of $14,000. Subsequently, upon rehearing, the amount was reduced below $3,000; but on the record presented it cannot be said that the case fails because of the amount in controversy.
We come now to the question of whether the court below was without jurisdiction because of the parties to the suit.
"A state is not a citizen. And, under the Judiciary Acts of the United States, it is well settled that a suit between a state and a citizen or a corporation of another state is not between citizens of different states; and that the Circuit Court of the United States has no jurisdiction of it, unless it arises under the Constitution, laws, or treaties of the United States. Ames v. Kansas, 111 U.S. 449 [4 S. Ct. 437, 28 L. Ed. 482]; Stone v. South Carolina, 117 U.S. 430 [6 S. Ct. 799, 29 L. Ed. 962]; Germania Ins. Co. v. Wisconsin, 119 U.S. 473 [7 S. Ct. 260, 30 L. Ed. 461]." Postal Telegraph Cable Co. v. Alabama, 155 U.S. 482, 487, 15 S. Ct. 192, 194, 39 L. Ed. 231.
Since the foregoing decision was rendered, the Circuit Court has been abolished, and by the Judicial Code the jurisdiction of the District Court has been specifically defined. Therein, that court is given no jurisdiction of controversies between a state and citizens of different states upon the ground of diversity of citizenship. In this case diversity of citizenship is the only ground assigned as conferring jurisdiction. Chicago, R. I. & P. R. Co. v. State of Nebraska (C. C. A. 8) 251 F. 279, 163 Cow. C. A. 435; Robertson v. Jordan River Lumber Co. (C. C. A. 5) 269 F. 606.
*816 The Eleventh Amendment to the Constitution which provides that "the judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state, or by citizens or subjects of any foreign state," is not here involved. By this amendment a privilege is granted for the benefit of the state, which applies specifically to suits prosecuted against the state. It has been uniformly held under this amendment that a state cannot be made a defendant in a federal court against its consent, but that the privilege may be waived if the state sees fit voluntarily to submit itself to the jurisdiction. That principle, however, cannot operate to confer jurisdiction where none exists. The Supreme Court in Gunter v. Atlantic Coast Line, 200 U.S. 273, loc. cit. 292, 26 S. Ct. 252, 259, 50 L. Ed. 477, points out "the distinction which exists between the power of a court to deal with a subject over which it has jurisdiction and its want of authority to entertain a controversy as to which jurisdiction is not possessed."
It remains to consider then whether the state of Nebraska is an actual party to this suit. If it is, the court below was without jurisdiction, and the proceeding must be dismissed for that reason. The principle involved is well established, but its application in a special case is not free from difficulty. In determining whether a state is the actual or real party in interest, the general statement is that the state is such real party when the relief sought is that which inures to it alone, and in its favor the judgment or decree, if for the plaintiff, will effectively operate. Missouri, etc., Ry. Co. v. Missouri Rd., etc., Commissioners, 183 U.S. 53, 58, 22 S. Ct. 18, 46 L. Ed. 78.
The Supreme Court, in Reagan v. Farmers' Loan & Trust Co., 154 U.S. 362, 389, 14 S. Ct. 1047, 1051, 38 L. Ed. 1014, has drawn a line of distinction between a class of cases which hold that a state is the real party in interest and another class in which the contrary is held. It is there said: "Two classes of cases have appeared in the decisions of this court, and it is in determining to which class a particular case belongs that differing views have been presented. The first class is where the suit is brought against the officers of the state, as representing the state's action and liability, and thus making it, though not a party to the record, the real party against which the judgment will so operate as to compel it to specifically perform its contracts. * * * The other class is where a suit is brought against defendants who, claiming to act as officers of the state, and under the color of an unconstitutional statute, commit acts of wrong and injury to the rights and property of the plaintiff acquired under a contract with the state. Such suit, whether brought to recover money or property in the hands of such defendants, unlawfully taken by them in behalf of the state, or for compensation in damages, or, in a proper case where the remedy at law is inadequate, for an injunction to prevent such wrong and injury, or for a mandamus, in a like case, to enforce upon the defendant the performance of a plain legal duty, purely ministerial is not, within the meaning of the Eleventh Amendment, an action against the state."
In other cases, owing to the peculiar issues involved, in ruling that the state was not the real party in interest, apparent emphasis has been placed upon the fact that the action did not seek to recover any money for a state. Within this class of cases falls Missouri, etc., Railway Co. v. Missouri Rd., etc., Commissioners, 183 U.S. 53, 22 S. Ct. 18, 46 L. Ed. 78.
The case of Relfe v. Rundle, 103 U.S. 222, 26 L. Ed. 337, presents still a different situation. A statute of Missouri provided that: "Upon the rendition of a final judgment dissolving a company, or declaring it insolvent, all the assets of such company shall vest in fee-simple and absolutely in the superintendent of the insurance department of this state, and his successor or successors in office, who shall hold and dispose of the same for the use and benefit of the creditors and policy holders of such company and such other persons as may be interested in such assets." Rev. St. 1879, § 6043.
A life insurance company of the state of Missouri was dissolved by a decree of the Missouri court, and its property vested in Relfe, superintendent of the insurance department, as provided by statute. He was thereupon, on his own motion, made a party to a suit affecting the property of the insurance company pending in Louisiana. The standing of Relfe as a party to the suit was attacked principally "because Relfe had no standing in court; he being a creature of the state of Missouri, without capacity to sue or remove causes in Louisiana." The Supreme Court of the United States, holding that Relfe was a proper party, said: "Relfe is not an officer of the Missouri state court, but the person designated by law to take the property of any dissolved life insurance corporation of that state, and hold and dispose *817 of it in trust for the use and benefit of creditors, and other parties interested. The law which clothed him with this trust was, in legal effect, part of the charter of the corporation. He was the statutory successor of the corporation for the purpose of winding up its affairs. As such he represents the corporation at all times and places in all matters connected with his trust. He is the trustee of an express trust, with all the rights which properly belong to such a position. He is an officer of the state, and as such represents the state in its sovereignty while performing its public duties connected with the winding up of the affairs of one of its insolvent and dissolved corporations. His authority does not come from the decree of the court, but from the statute. He appeared in Louisiana not by virtue of any appointment from the court, but as the statutory successor of a corporation which the court had in a legitimate way dissolved and put out of existence. He was, in fact, the corporation itself for all the purposes of winding up its affairs."
While it is stated in the opinion that Relfe is an officer of the state, and as such represents the state in its sovereignty while performing its public duties connected with the winding up of the affairs of one of its insolvent and dissolved corporations, nevertheless it is to be noted that the status of Relfe was assailed upon the ground that he was an officer of the Missouri court, and as such without capacity to sue in a foreign jurisdiction. It is this issue which the Supreme Court obviously had in mind in its discussion. The case differs from the one before us in a very important particular. The Missouri law devolves the succession to the corporation upon an individual selected, it is true, because of his official position, but nevertheless an individual as distinguished from a department of the state, as in the instant case. As the court says, Relfe was, in fact, the corporation itself for all the purposes of winding up its affairs. The statutes of Nebraska lodge this power and duty in a department of the state itself; while that department must act through individuals, no individual is given title to the assets of the defunct corporation, nor is substituted successor to the corporation for the purpose of liquidation.
In our judgment this distinction is a substantial one; but, be that as it may, we think the Supreme Court in later cases has inferentially distinguished the Relfe Case, and has departed from it if it is to be interpreted as holding that a state may be made a party to a proceeding such as this through one of its officers or departments.
In Lankford v. Platte Iron Works, 235 U.S. 461, 35 S. Ct. 173, 59 L. Ed. 316, it was held that "a suit by a depositor in a bank in Oklahoma against members of the state banking board and the bank commissioner of Oklahoma to compel payments from, distribution of, and assessments for, the depositors' guaranty fund, is a suit against the state." It was further held that "the fact that the fund is to be used to satisfy claims of beneficiaries does not take its administration from the officers of the state or subject them to judicial control." This fund was created by leavying against the capital stock of every bank, organized and existing under the laws of the state, an annual assessment, during its continuance as a banking corporation, to be used for the purpose of liquidating deposits of failed banks and retiring warrants provided for in the act. In this respect it differs from the fund represented by the assets of the defunct Lion Bonding & Surety Company, but the manner in which the fund was created is not important. The controlling fact is that in each case there was a fund which was taken over by the state, through a department, for the same essential purpose of providing ultimate payment to all legitimate claimants. To effect this result, the state has made itself an active agent. It has taken over the title thereto, and has assumed all responsibilities concerning it. The suit of the appellee, if sustained, will add to this fund. The defense of appellants, if indulged, would deplete that fund. It is true that the rights of the parties are to be determined by a court of competent jurisdiction, but that court must be one to which the state may be properly admitted as a party. Neither the department of trade and commerce nor any of its officers has any interest in the controversy apart from that of the state. The department and the state are one and the same. The court adhered to the doctrine announced in Lankford v. Platte Iron Works in two other cases decided at the same term. American Water Softener Co. v. Lankford et al., composing the State Banking Board of the State of Oklahoma, 235 U.S. 496, 35 S. Ct. 184, 59 L. Ed. 329; Farish v. State Banking Board of the State of Oklahoma, 235 U.S. 498, 35 S. Ct. 185, 59 L. Ed. 330.
In Johnson v. Lankford, 245 U.S. 541, 38 S. Ct. 203, 62 L. Ed. 460, the Supreme Court reaffirmed the principle announced in Lankford v. Platte Iron Works. The case there before them differed in one of the distinctive *818 features to which reference has heretofore been made. Concerning this, the Supreme Court said: "The case is not like Lankford v. Platte Iron Works Co., 235 U.S. 461, 496 [35 S. Ct. 184, 59 L. Ed. 329]. There the effort was to compel the payment of a claim (certificates of deposit issued by a bank) out of the fund to which the state had a title and which it administered through its officers. Any demand upon it was a demand upon the state and a suit to enforce the demand was a suit against the state, necessarily precluded by the purpose of the law. The case at bar is not of such character. Its basis is Lankford's dereliction of duty, a duty enjoined by the laws of the state. * * * And hence Lankford is charged with personal liability. But no relief, as we have said, is prayed against the fund. If it were, Lankford v. Platte Iron Works Co., supra, might apply."
In Title Guaranty & Surety Co. of Scranton, Pa., v. State of Idaho for the Use of Allen, 240 U.S. 136, 36 S. Ct. 345, 60 L. Ed. 566, it is said: "Where the state, suing on behalf of depositors of a bank, is an actual party plaintiff, the case cannot be removed to the federal court."
In the original petition, as we have seen, the plaintiff was stated to be the state of Nebraska, and the jurisdiction of the court below was invoked upon the ground of diversity of citizenship. The plaintiff named in the petition was the department of trade and commerce. Later Knudson, the deputy and acting secretary for the department of trade and commerce, was sought to be substituted by stipulation. No doubt both parties at that time intended this stipulation to cure the jurisdictional defect apparent on the face of the petition; but the consent of parties could not confer jurisdiction. Chicago, Burlington & Quincy Railway Co. v. Willard, 220 U.S. 413, 31 S. Ct. 460, 55 L. Ed. 521. And, although the case was tried without objection on this ground, nevertheless "this question the court is bound to ask and answer for itself, even when not otherwise suggested, and without respect to the relation of the parties to it." Mansfield, Coldwater & Lake Michigan Railway Co. et al. v. Swan et al., 111 U.S. 379, 382, 4 S. Ct. 510, 511, 28 L. Ed. 462. Whether a state is the actual party defendant in a suit is to be determined by consideration of the nature of the case as presented by the whole record, and not, in every case, by a reference to the nominal parties of the record. In re Ayers, 123 U.S. 443, 8 S. Ct. 164, 31 L. Ed. 216. Furthermore, the allegations of the petition respecting the parties in interest remain unchanged. The stipulation declares that Knudson has "full authority to execute the powers and discharge the duties vested by law in the said department." Of course, the department, as the state, must act through individuals authorized to discharge the duties vested in it, but the status of the parties, their title and interest, remain unchanged; besides, an appearance on behalf of a member or officer of the department could not amount to a waiver of the state's exemption from suit, even though such waiver were possible. Farish v. State Banking Board, 235 U.S. 498, 35 S. Ct. 185, 59 L. Ed. 330.
We reach the conclusion, therefore, that the state of Nebraska was a real and actual party to this action, and that the court below was without jurisdiction. As already indicated, it is our judgment that the appellants have substantial rights if the agreement set up in their answer is sustained by the proofs, but their relief, if any they have, must come from the Nebraska court in which the jurisdiction to hear and determine is lodged.
The judgment is reversed, and the case remanded to the court below, with directions to dismiss in accordance with the views herein expressed. It is so ordered.
FARIS, District Judge, dissents. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551334/ | 142 F.2d 900 (1944)
REIS
v.
COMMISSIONER OF INTERNAL REVENUE.
No. 9671.
Circuit Court of Appeals, Sixth Circuit.
June 2, 1944.
*901 Thomas E. Sandidge, of Owensboro, Ky., for petitioner.
Ray Brown, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Helen R. Carloss, and Harry Baum, all of Washington, D. C., on the brief), for respondent.
Before HICKS, SIMONS, and McALLISTER, Circuit Judges.
HICKS, Circuit Judge.
Petitioner, Reis, seeks a review of a decision of the Tax Court finding deficiencies in his income tax for the years 1935 and 1936 in the amounts of $639.93 and $5,933.41, respectively, with interest.
E. D. Evans, E. C. Barrett and J. R. Barrett were the stockholders in Green River Collieries Company, which operated a coal mine at Mogg, Kentucky, and they had approximately $400,000 invested in the property.
On February 28, 1920, petitioner entered into a written contract with these stockholders for employment with the Collieries Company. The contract provided that in addition to receiving his salary, petitioner could purchase stock of the Company to the extent of $10,000, which might, with interest, be paid out of dividends.
In March 1920, petitioner, in furtherance of the contract, moved to Mogg and engaged in the business of the Company. During the latter part of 1920, the Collieries Company went into the hands of a state court Receiver.
In 1922, petitioner and Evans, Barrett and Barrett organized the Green River Fuel Company, a corporation having capital stock of $20,000, divided into 750 shares, for the purpose of selling coal produced from the Collieries Company's mine and other mines. In 1922 and 1923, petitioner bought for $5,000 cash 50 shares of the stock of the Fuel Company. Before December 1927, he became the owner, by gift, of 15 additional shares. T. J. Naughton owned 10 shares and the remaining shares were owned by Evans and the Barretts. Petitioner as General Manager was in active control and supervision of the Fuel Company.
On December 17, 1927, petitioner and one R. J. Fox entered into a contract with Evans and the Barretts whereby they agreed to act as General Manager and Sales Manager respectively of the Fuel Company for ten years, at salaries to be fixed from time to time by the Board of Directors of the Fuel Company. Petitioner's salary was to be not less than $4,500 per year and that of Fox not less than $2,700 per year. Evans, Barrett and Barrett agreed to sell to petitioner and Fox the 675 shares of stock which they then owned in the Fuel Company, for $338,060.09, with interest at 5% from January 1, 1927. The purchase price was to be paid from net earnings or dividends realized each year by the Fuel Company after it had set aside specified amounts for capital and improvements. The stock was reissued, 440 shares to petitioner, 220 shares to Fox, and 5 shares each to Evans and the Barretts. The stock issued to petitioner and Fox was placed in escrow for delivery to them as their indebtedness was reduced. The contract gave petitioner and Fox the right at any time during the ten year period to pay for any part of the stock in cash at the price of $500.90 per share.
In 1928 and 1929, petitioner received a total of $36,650 in dividends which he applied on the purchase price of the stock and received from the escrow agent 28.31 shares of stock. On May 16, 1931, by mutual agreement, the contract was cancelled *902 and there was an oral agreement that another similar contract might be drawn. The contract was never renewed; but between May 22, 1930 and February 10, 1932, the Barretts and Evans advanced to the Fuel Company $133,800 in varying amounts which were used in the improvement and operation of the Fuel Company. These amounts were evidenced by the Fuel Company's notes, and on October 31, 1933, they aggregated $143,743.37, principal and interest. Petitioner bought these notes for $1,338.00 cash. At that time he owned 94½ shares of the stock of the Fuel Company and was its largest creditor.
On August 4, 1932, the Stephens-Adamson Manufacturing Company brought suit against the Fuel Company to recover an indebtedness of $9,036.92 and to foreclose a mechanics' lien on all its properties to secure the indebtedness. On January 8, 1934, the properties were sold at auction pursuant to a court order to the judgment creditor, the sole bidder, for $5,510.
The Fuel Company had one year from the date of the sale to redeem by the payment of the bid price plus interest and a statutory penalty, but did not exercise its right of redemption; and petitioner purchased the bid of the judgment creditor for $5,000 in cash and assumed the payment of the court costs, and on January 14, 1935, the Commissioner of the court conveyed to petitioner all the assets of the Fuel Company.
Petitioner filed his income tax return for the years involved with the proper collector on or before March 15, 1936 and March 15, 1937, respectively. The Commissioner determined a deficiency for 1935 of $632.17 and for 1936 of $5,892.25. The petitioner sought a redetermination by the Tax Court. The primary question before that court was, whether the assessment of the deficiencies was barred by the limitations of the Revenue Act of 1936. The applicable statute is printed in the margin.[1]
The Court held that the three year period of limitation found in Sec. 275(a) had run; and this is true, because the deficiency notice was not mailed to petitioner until February 7, 1941. However, the Court held that the Commissioner, seeking to bring the deficiency assessment within the five year limitation, Sec. 275(c), had the burden of showing that petitioner had omitted from his returns properly includible gross income to the extent of 25% of the gross income stated in the returns; that the Commissioner had not carried this burden because petitioner's returns had not been introduced in evidence and there was, therefore, no proof of "the amount of gross income stated in the return. * * *" The resultant decision was that there was no deficiency. See Reis, Petitioner, v. Commissioner of Internal Revenue, Respondent, 1 T.C. 9.
The decision was entered on November 17, 1942, and on December 11th following, the Commissioner moved for a reconsideration, or, in the alternative, to reopen the record to receive the tax returns in evidence. On December 29, 1942, the Court granted the motion to the extent of allowing the Commissioner to introduce evidence to show the amount of gross income stated in the returns and leave was given to petitioner to offer proof to meet it, and on February 5, 1943, the Board vacated its prior decision, pending further hearing. On April 5, 1943, the Commissioner placed copies of the returns in evidence and argument was heard.
On June 4, 1943, the Tax Court filed its "Memorandum Findings of Fact and Opinion" and on July 29th following it entered its decision that deficiencies existed as hereinabove indicated.
We think that the determinative question here is, whether the five years' limitation found in Sec. 275(c) supra bars the collection of the adjusted deficiencies. It does not if petitioner omitted from his gross income for the years involved an amount properly includible therein in excess of *903 25% of the amount of the gross income stated in the returns. The Tax Court found that he had omitted such amounts and there is substantial evidence to support the finding.
Petitioner advertised and sold by piecemeal the properties of the Fuel Company conveyed to him by the court commissioner. He realized from these sales $43,366.75 in 1935 and $35,366.75 in 1936 and reported the sales in his tax returns but deducted the same amounts as his cost of the properties. He proceeded upon the theory that his total cost basis was $200,972.34.
The cost basis is fixed by statute. Sec. 111(a) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Code, § 111 (a), provides that the gain from the sale of property shall be the excess of the amount realized therefrom over the basis provided in Sec. 113, and Sec. 113(a) provides that "the basis of property shall be the cost of such property." It is obvious that petitioner adopted an incorrect basis. This means cost to the petitioner, which may be entirely different from the "cost history" of the property bought. Detroit Edison Co. v. Com'r, 319 U.S. 98, 102, 63 S.Ct. 902, 87 L.Ed. 1286. We do not undertake to resolve the alleged cost basis of $200,972.34 into the component parts contended for by petitioner. It is enough to say that in the main his claimed basis is the accrued cost of his ill-starred connection with the Fuel Company. This claim is without merit because it disregards the controlling statute.
The Court allowed petitioner as a basis the $5,000 which he paid in cash for the property, certain items of taxes and indebtedness which he had assumed, and $35 representing the cost of a locomotive reel which he had purchased and sold in 1935. He added to these amounts an item of $6,463.57. These allowances, so far as they go, are uncontroverted and we find no reason for disturbing them. They aggregate $15,613.95 instead of $78,796.74, the basis allocated by petitioner against the sale of assets. When we ascribe to the word "omits" the meaning given to it in Ewald v. Commissioner, 6 Cir., 141 F.2d 750, it follows that petitioner failed to include in his returns gross income properly includible in excess of 25% of the amount stated therein, and that the five year limitation period, Sec. 275(c) of the Revenue Act of 1936, was not a bar.
Petitioner contends that the Tax Court was without authority to reopen the case after it had entered its decision on November 17, 1942. This contention is without merit. The decision did not become final until the expiration of the three months' period for filing a petition for review. Sec. 1140 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 1140. It was not final on December 29, 1942, when the court granted the motion to reopen the record and receive the tax returns in evidence, etc.
The court was authorized to adopt rules of practice and procedure [O'Rear v. Commissioner, 6 Cir., 80 F.2d 473, 475] and under its Rule 19 respondent's motion filed within thirty days after the court's decision on November 17, 1942, was timely, and whether the motion should be granted rested within the sound discretion of the court. We find no merit in the contention that its action in granting the motion was arbitrary.
Petitioner asserts that the properties sold by him in 1935 and 1936 were nontaxable capital assets and that the Tax Court erred in holding to the contrary. This matter is determinable by application of Sec. 117(b) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Acts, pages 707, 874, to the facts found by the Court. The Court based its findings upon a stipulation to the effect that after the petitioner had acquired all of the properties of the Fuel Company in the manner hereinabove indicated, he began selling certain itemized portions of the equipment; that he prepared a list of the same for circulation to prospective customers and sold various and sundry items thereof as hereinbefore pointed out. This was sufficient and substantial evidence that the properties so sold were held by petitioner primarily for sale to customers in the ordinary course of petitioner's business and were properly excluded from the statutory definition of capital assets. There is no evidence that the sales were made for the purpose of investing the proceeds in new or other equipment to be used by petitioner in the mining business.
Petitioner claims that the Commissioner's allocation of cost of the properties sold by him in 1935 and 1936 (approved by the Tax Court) was purely arbitrary. If we understand his contention, it is, that cost should be determined upon the whole *904 of the property purchased when he ultimately disposes of it all, regardless of the time element. Such is not the law.
In Heiner v. Mellon, 304 U.S. 271, 275, 58 S.Ct. 926, 928, 82 L.Ed. 1337, the Court said:
"The federal income tax system is based on an annual accounting.[2] Under that law the question whether taxable profits have been made is determined annually by the result of the operations of the year."
We find no error in the record and the decision of the Tax Court is affirmed.
NOTES
[1] Sec. 275. Period of Limitation upon Assessment and Collection.
"Except as provided in Section 276:
"(a) General Rule. The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
* * * * * *
"(c) Omission From Gross Income. If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed." 26 U.S.C.A. Int.Rev.Code, § 275(a, c).
[2] "Burnet v. Sanford & Brooks Co., 282 U.S. 359, 365, 51 S.Ct. 150, 152, 75 L.Ed. 383; Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 306, 51 S.Ct. 418, 420, 75 L.Ed. 1049; Woolford Realty Co. v. Rose, 286 U.S. 319, 326, 52 S.Ct. 568, 569, 76 L. Ed. 1128; Brown v. Helvering, 291 U.S. 193, 198, 199, 54 S.Ct. 356, 358, 359, 78 L.Ed. 725; Helvering v. Morgan's, Inc., 293 U.S. 121, 126, 127, 55 S.Ct. 60, 61, 62, 79 L.Ed. 232; Guaranty Trust Co. v. Commissioner, 303 U.S. 493, 497, 498, 58 S.Ct. 673, 82 L.Ed. 975." | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551335/ | 142 F.2d 707 (1944)
SELCHOW & RIGHTER CO.
v.
WESTERN PRINTING & LITHOGRAPHING CO. et al.
No. 8277.
Circuit Court of Appeals, Seventh Circuit.
May 25, 1944.
Rehearing Denied June 20, 1944.
Lynn A. Williams, of Chicago, Ill., John W. Michael, of Milwaukee, Wis., Ross O. Hinkle, of Chicago, Ill., and Axel V. Beeken, and Valdemar Beeken, both of New York City (Leon F. Shackell, of Chicago, Ill., of counsel), for appellant.
Jerome J. Foley, of Racine, Wis., Caspar W. Ooms, of Chicago, Ill., and Benjamin H. Stern and Harry Buchman, both of New York City, for appellees.
Before EVANS, SPARKS, and KERNER, Circuit Judges.
SPARKS, Circuit Judge.
By this action plaintiff charged defendant with infringement of its trademark and with unfair competition with respect thereto. The complaint alleged that since 1869 plaintiff and its predecessors have continuously used the name "Parcheesi" as a trademark on board and counter games manufactured and sold in interstate commerce. On October 8, 1918, plaintiff registered that name for games and renewed the same on September 6, 1938.
Defendant, Western Printing & Lithographing Company, is the manufacturer and owns all of the capital stock of the defendant, Whitman Publishing Company. The latter acts as sales agency for the former, and for convenience they are here referred to as the defendant. The complaint alleged that since 1910 plaintiff *708 had engaged in selling various games and had expended an average of about $4,500 in advertising, in which advertisements it had laid principal emphasis on "Parcheesi." Issues being joined, evidence was heard and the court made a special finding of the facts and rendered its conclusions of law thereon favorable to the defendant, upon which the court rendered judgment dismissing the complaint and the supplemental complaint upon the merits.
The following facts are supported by substantial evidence, concerning which there is but little disagreement, if any.
As early as 1869, a game similar to the plaintiff's "Parcheesi" was played in India. It was then referred to as the national game of India, and was designated by a word of the language of that country which sounded very similar to "Parcheesi," or "Patcheesi," or "Pachisi." "Pachisi" is the correct spelling of the Indian name.
For some years past, the defendant, as well as other toy manufacturers, has produced and sold to the trade the same game under the name "India." Prior to the commencement of this action plaintiff had been producing a popular edition of the game "Parcheesi." The outer cover of the box was black, and in the center of the cover the following appeared in gold letters on a dark blue background:
A Royal Game of India Parcheesi Popular Edition
On April 1, 1939, the defendant brought out the same game placed under the name of "India" and designated it "Parchesi, A Game of India." Its box was dressed differently from that of plaintiff's article and in somewhat different type, but about the same size as that used by plaintiff.
On plaintiff's motion, defendant was preliminarily enjoined from selling its product. Before the hearing, and in its answer, defendant claimed to have ceased the manufacture of its game as hereinbefore described. However, it asserted its right to manufacture, sell and distribute the game under the name "Pachisi," but dressed in a red or orange color with the words appearing in white letters:
Whitman's Pachisi A Game of India
Thereupon, plaintiff filed its amended complaint asking that the defendant be restrained from such manufacture and sale, and the preliminary injunction was extended to cover the proposed use.
At the hearing it appeared that the defendant was threatening to sell its game, which would retail at twenty-five cents, in competition with plaintiff's game which retailed at one dollar. There was a deceptive likeness between the appearance of the game which defendant originally manufactured and distributed to the trade and the plaintiff's dollar game. However, at the trial it was satisfactorily established that defendant had withdrawn from the trade the game which was similar in appearance to plaintiff's dollar game. The evidence further showed that plaintiff had distributed to the trade a twenty-five cent game of "Parcheesi" as early as February 1939, and that this game had an entirely different outside dress and appearance from either plaintiff's dollar game or defendant's twenty-five cent game. Further evidence disclosed that plaintiff had been selling games which retailed at two dollars and five dollars respectively, and each had a different appearance from either of the games presented at the hearing for the injunction.
Defendant first contended that the trademark was invalid because of the manner of its registration, in that it was fraudulently obtained through misrepresentation. It further contended that plaintiff had abandoned its trademark by operation of law. Both of these contentions were decided adversely to the defendant, and we think the court, under the evidence and findings, did not err in either of these rulings.
Prior to the passage of the 1905 Act, trademark registration under the federal statutes had been denied to words which consisted of a name of a party, or which were generic or descriptive of goods with which they were used, or which were merely geographical names, or which indicated the place of origin. Under section 5 of the 1905 Act, 15 U.S.C.A. § 85, which included what is referred to as the "ten year clause," that disability was removed with respect to trademarks such as had been used by appellant or its predecessors, in foreign or interstate commerce, and which had been in actual and exclusive use as trademarks for ten years next preceding the passage of the Act.
In Thaddeus Davids Co. v. Davids Mfg. Co., 233 U.S. 461, 34 S.Ct. 648, 58 *709 L.Ed. 1046, it was held that the Act of 1905 was not intended to change the common law principles of trademarks. The courts have held that the only rights given to the owner of a mark registered under the ten year clause which he did not have at common law are the right to institute suits for infringement in the federal courts irrespective of diversity of citizenship, and without the necessity of showing wrongful intent on the part of the defendant. The District Court therefore concluded that the applicable tests in this case were the old common law rules of unfair competition with the exception of the requirement of proof of an attempt to defraud. See Armstrong Paint & Varnish Works v. Nu-Enamel Corp., 305 U.S. 315, 59 S.Ct. 191, 83 L.Ed. 195. The ruling of the District Court in this respect, we think, was proper, and the only question left for determination is whether the plaintiff is entitled under the common law to exclude the defendant from the use of the word "Pachisi."
Under the ruling of Selchow v. Chaffee & Selchow Co., C.C., 132 F. 996, the defendant had the right to use the name "Pachisi," which was the correct name for a game in the Hindu language, unless by so doing it worked fraud upon the purchasing public by palming off on them something which they believed to be the product of plaintiff. There is no substantial evidence in this case to prove that there was any fraud or palming off with respect to the defendant's product unless it can be said that the word "Parcheesi" has acquired a secondary meaning, that is to say that in the minds of the purchasing public, it means the producer rather than the product. See Kellogg Co. v. National Biscuit Co., 305 U.S. 111, 59 S.Ct. 109, 83 L.Ed. 73; Steem-Electric Corp. v. Herzfeld-Phillipson Co., 7 Cir., 118 F.2d 122. The District Court was of the opinion that that word had not acquired a secondary meaning. That court very properly said: "Not one purchaser in a thousand would know or care whether Selchow and Righter Company was the manufacturer. The fact is that the public in general knows `Parcheesi' as a game and not as an article made by the plaintiff." 47 F.Supp. 322, 326. The court further stated, "As defendant discontinued the use of the name `Parchesi' prior to the time of the trial and has indicated that it had no intention of using that name in the future, the temporary injunction heretofore entered may be vacated, and judgment in this action will go for the defendant."
We find no error in the court's rulings.
Affirmed. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551339/ | 142 F.2d 91 (1944)
WILLIAMS
v.
HUFF, General Superintendent, D. C. Reformatory.
No. 8669.
United States Court of Appeals District of Columbia.
Argued March 10, 1944.
Decided April 7, 1944.
Mr. J. H. Bilbrey, of Washington, D. C., assigned by the court, for appellant.
Mr. John P. Burke, Assistant United States Attorney, of Washington, D. C., with whom Messrs. Edward M. Curran, United States Attorney, and Charles B. Murray, Assistant United States Attorney, both of Washington, D. C., were on the brief, for appellee.
Before GRONER, Chief Justice, and EDGERTON and ARNOLD, Associate Justices.
EDGERTON, Associate Justice.
This appeal is from an order discharging a writ of habeas corpus upon consideration of the petition and the answer. In 1941 petitioner pleaded guilty to an indictment which charged assault with a dangerous weapon. According to the record of the trial court he was advised of his constitutional right to counsel, was asked whether he desired counsel, and replied that he did not. He was sentenced to imprisonment for two to six years. He says that he was then seventeen years old.[1]
Appellant's petition for habeas corpus, prepared without the aid of counsel, states: "I am filing petition for Writ of Habeas Corpus on the grounds that I was not represented by counsel during my trial; no one asked me if I wished counsel to represent me; taking advice from layman that: If I pleaded guilty I would receive probation, *92 and being ignorant of law I pleaded guilty, without the assistance of counsel and received my present term * * *."
Facts of record with regard to what occurred at a trial cannot be attacked on habeas corpus.[2] The record shows that appellant was informed of his right to counsel and undertook to waive the right. But the record does not show that the waiver was competent and intelligent. Appellant says in effect that it was not. This issue must be decided, for if a person charged with crime "is not represented by counsel and has not competently and intelligently waived his constitutional right, the Sixth Amendment stands as a jurisdictional bar to a valid conviction and sentence depriving him of his life or his liberty. * * *"[3] A plea of guilty creates no exception to this rule.[4]
"In deference to common experience, there is general recognition of the fact that many persons by reason of their youth are incapable of intelligent decision, as the result of which public policy demands legal protection of their personal as well as their property rights. The universal law, therefore, is that a minor cannot be held liable on his personal contracts or contracts for the disposition of his property."[5] In the case just quoted we held that a boy of fifteen cannot give valid consent to a surgical operation. The marriage of a boy of seventeen may be annulled.[6] A boy under twenty-one cannot make a valid will.[7] When a minor is a defendant in a mere civil suit, the court must appoint a guardian ad litem for him and also, if in the court's opinion his interests require that he have counsel, must assign him counsel regardless of his own opinion on that point.[8] Because the interests of society must be protected boys of seventeen are held competent, with certain limitations, to commit crimes and torts. But they are held incompetent, with few or no limitations, to protect their own interests in assuming legal obligations or defending legal rights.
It seems to me to follow as a matter of law that a boy of seventeen cannot competently waive his right to counsel in a criminal case. In saying this I do not speak for the court.
In the view of the majority of the court appellant's competence was a question of fact, in the determination of which his youth was entitled to serious consideration but was not necessarily conclusive. It follows that the District Court should take evidence and determine whether, in the light of his age, education, and information, and all other pertinent facts, he has sustained the burden of proving that his waiver was not competent and intelligent.
Reversed.
NOTES
[1] He says that he was fifteen at the time of the alleged offense. The Juvenile Court could not waive jurisdiction until he was sixteen. D.C.Code 1940, § 11-914. In our opinion proceedings against a child should not be delayed in order that it may become possible to try him as adults are tried. We do not assume that any delay in this case was for this purpose.
[2] Riddle v. Dyche, 262 U.S. 333, 43 S. Ct. 555, 67 L.Ed. 1009; Walker v. Johnston, 312 U.S. 275, 284, 61 S.Ct. 574, 85 L.Ed. 830; Clawans v. Rives, 70 App. D.C. 107, 109, 104 F.2d 240, 122 A.L.R. 1436. We do not understand these cases to be overruled by Centers v. Sanford, 315 U.S. 784, 62 S.Ct. 802, 86 L.Ed. 1190.
[3] Johnson v. Zerbst, 304 U.S. 458, 468, 58 S.Ct. 1019, 1024, 82 L.Ed. 1461, 146 A.L.R. 357; United States ex rel. McCann v. Adams, 320 U.S. 220, 64 S.Ct. 14.
[4] Walker v. Johnston, 312 U.S. 275, 61 S.Ct. 574, 85 L.Ed. 830; Evans v. Rives, 75 U.S.App.D.C. 242, 126 F.2d 633; Wood v. United States, 75 U.S.App.D.C. 274, 128 F.2d 265. Cf. McJordan v. Huff, 77 U.S.App.D.C. 171, 133 F.2d 408.
[5] Bonner v. Moran, 75 U.S.App.D.C. 156, 157, 126 F.2d 121, 122.
[6] D.C.Code 1940, § 30-103.
[7] D.C.Code 1940, § 19-101.
[8] D.C.Code 1940, § 13-105. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551511/ | 170 B.R. 331 (1994)
In the Matter of FEDERATED DEPARTMENT STORES, INC., et al., Debtors.
UNITED STATES of America, Appellant,
v.
FEDERATED DEPARTMENT STORES, INC., et al., Appellees.
No. C-1-93-175. Bankruptcy No. 1-90-130.
United States District Court, S.D. Ohio, Eastern Division.
July 18, 1994.
*332 *333 *334 Gerald C. Miller, Washington, DC, for appellant.
Jeffrey Alan Lipps, Columbus, OH, for appellees.
OPINION AND ORDER
GEORGE C. SMITH, District Judge.
The government appeals the bankruptcy court's decision allowing Federated Department Stores, Inc. ("Federated") to deduct certain tax attributes.[1] This action arises out of Federated's acquisition of Twin Fair Distributors Corporation's ("TFDC") stock in May 1982. Following this stock purchase, the seven TFDC stores Federated acquired were operated as Gold Circle stores, a retailing division of Federated. TFDC operated as a separate subsidiary of Federated. In April 1985, Federated liquidated and dissolved TFDC. Consequently, Federated acquired all of TFDC's assets and liabilities, including certain net operating losses ("NOLs") of TFDC. The stores continued to operate as part of Federated's Gold Circle *335 division until Federated sold all of its Gold Circle stores in 1988.
This dispute centers around Federated's use of the NOLs. In its 1986 tax return, Federated deducted the NOLs acquired from TFDC. The Internal Revenue Service ("IRS") disallowed Federated's use of these tax attributes and filed proofs of claim against Federated. Federated filed an objection to the proofs of claim. The government appeals the bankruptcy court's decision sustaining Federated's objection to the government's claim for unpaid taxes. In re Federated Dep't Stores, 135 B.R. 962 (Bankr. S.D.Ohio 1992).
This Court has jurisdiction to review on appeal the bankruptcy court's decision pursuant to 28 U.S.C. § 158(a).
For the reasons that follow, the bankruptcy court's decision is AFFIRMED.
I.
A.
In its appellate brief, the government incorporates by reference the findings of fact contained in the bankruptcy court's decision. (Doc. 5, p. 4). The government then sets forth "additional facts from the record." The government represents that these additional facts are consistent with the bankruptcy court's findings. Federated argues that the government's statement of facts either grossly distorts or simply misstates the factual record.
Given that the bankruptcy court's factual findings are undisputed, the relevant facts from the bankruptcy court's decision are set forth below. The government's "additional facts" and Federated's response to these additional facts will be noted when necessary.
B.
Federated formed its Gold Circle division in the early 1970's. Gold Circle was Federated's entry into the mass merchandising business, which included stores offering moderately priced lines of hard and soft goods with a high degree of customer self-service.
Federated operated Gold Circle as one of its retailing divisions. Federated's divisions operate separately from Federated but are not separate subsidiaries or separate taxable entities. As of June 1981, Gold Circle operated 41 stores in the Midwest and Northeast. In 1981, Gold Circle continued to have a significant gap in its operating territory, particularly in the Northeast.
On July 8, 1981, Gold Circle issued a Long Range Plan (1981-1986). Gold Circle established plans to expand in the Northeast market. Buffalo, New York was determined to be an ideal location for Gold Circle under the criteria of the Long Range Plan. The Plan also stated that the acquisition of an established business would allow expansion at approximately one half the investment required for a new store.[2]
TFDC was a subsidiary of Twin Fair, Inc. ("Twin Fair"), a publicly traded corporation. TFDC, like Gold Circle, was a discount retailer offering a broad range of national brand name merchandise at promotional prices.[3] In 1980, after eighteen profitable years, TFDC was the leading discount retailer in western New York, holding nearly a 50% market share.
TFDC began to experience a financial downturn in 1980.[4] TFDC experienced increased *336 erosion of its profit margins. To reduce its increasing bank debt, TFDC sold its Ohio stores in the second quarter of 1981.
From 1980 to 1982, TFDC generated net operating losses. For the year ending December 31, 1981, Twin Fair's tax return showed NOLs of $18,900,000, the majority attributable to TFDC. In 1982, Twin Fair incurred an additional $10 million in NOLs. For the year ending December 31, 1982, Twin Fair's tax return showed NOLs of $25,755,657. TFDC had an investment tax credit carry forward of $934,061.
In September 1981, Twin Fair decided to sell the remaining operations of TFDC.[5] Twin Fair retained Merrill Lynch to sell TFDC. In late 1981, Federated and a variety of other retailers received an unsolicited inquiry from Merrill Lynch concerning the possible acquisition of TFDC. Merrill Lynch prepared a prospectus, favorably describing TFDC's current business and portraying TFDC as an excellent candidate for acquisition. Merrill Lynch acknowledged that TFDC had suffered some economic setbacks in 1980, but projected that TFDC could be made profitable through the significant overhead savings that could be achieved if TFDC was integrated with an existing retail mass merchandise organization. Merrill Lynch emphasized TFDC's favorable position in the Buffalo market, its cost effective advertising campaign, and that TFDC owned its own real estate.[6]
Gold Circle began an investigation of TFDC after receiving the prospectus. After visiting the Buffalo stores, Gold Circle's Chairman concluded that the TFDC acquisition fit squarely within Gold Circle's expansion program for the following reasons: (1) TFDC was in the appropriate geographical region, (2) TFDC was in a relatively low competitive market, (3) TFDC was a broadly based mass merchandiser, and (4) the TFDC stores were already established store locations.[7]
A number of Federated and Gold Circle departments then analyzed TFDC. Their research recommended that Federated acquire only the most profitable locations.
Based on the analyses, Gold Circle and Federated began negotiations in fall 1981.[8] Federated and Gold Circle expressed a desire to purchase only the assets of TFDC. It was not the practice of Federated or Gold Circle to acquire the stock of a company. Twin Fair was not willing to sell only assets because it desired to divest TFDC in its entirety.[9]
Another topic of negotiations was the number of stores Federated would acquire. In the end, Federated acquired seven of the fifteen available stores. These stores were demographically acceptable and had been, and were projected to be, the most profitable.
In January 1982, TFDC's net operating losses became an issue in negotiations. According to the bankruptcy court, the NOLs were an important aspect of the transaction for Twin Fair because they were a vehicle for Twin Fair to obtain value. The bankruptcy court also concluded that the NOLs were never the principal or even a significant subject *337 of the negotiations for Federated or Gold Circle. Even though the NOLs were considered part of the analysis of the acquisition for Federated, according to the bankruptcy court, the deal was structured so Federated would receive no economic benefit if the NOLs were realized. The bankruptcy court concluded that the NOLs did not weigh heavily in Federated's decision to approve the acquisition of TFDC.[10]
In March 1982, a Capital Expenditure Request ("CER") was submitted for the TFDC acquisition.[11] The CER indicated a return on investment of 46.1%, which was higher than Gold Circle's standard of 21%. The CER also indicated a discounted cash flow return of 25.5%, which was also higher than Gold Circle's benchmark of 15%. Further, the CER indicated that if the benefit of the NOLs was not realized, the impact on the discounted cash flow was only 0.5%.[12]
The government submits that the CER also showed that TFDC had a pre-tax NOL of $20 million and that in the event of acquisition, Gold Circle intended to write off $6.4 million in unusable assets (fixtures and equipment). The CER discussed Gold Circle leasing some of the locations, and showed that liabilities exceeded assets by $2,916,000.
According to the government, the CER projected that Gold Circle would save $13.2 million in taxes during the first three years by using the $20 million in NOLs and $6.4 million in write-offs from fixtures.
On March 25, 1982, Federated's Board of Directors approved the acquisition of TFDC stock. The government submits that the Board members discussed the tax attributes before approving the deal.
Moreover, the government states that the April 28, 1982 minutes from the Twin Fair Board of Directors' meeting reveal that difficulties were experienced in the negotiations regarding the tax loss credits and the legal ramifications. The minutes also reveal that if the contract was not executed by May 4, the appropriate action was to file for bankruptcy.
On May 5, 1982, Federated and Twin Fair entered into an Agreement of the Purchase and Sale of TFDC. Under the Agreement, Federated acquired the stock of TFDC in exchange for $550,000 cash; a non-interest bearing promissory note with a principal amount of $8.1 million due on August 3, 1988; a non-interest bearing contingent note with a principal amount of $5.4 million;[13] a $2 million loan to Twin Fair with a 12% annual interest rate to be repaid in 36 monthly installments beginning July 1, 1984; and a $500,000 loan to Twin Fair with a 12% annual interest rate to be repaid on February 3, 1983.
The government contends that Federated and Twin Fair had an unwritten agreement regarding the disposition of TFDC's fixtures. The government asserts that Federated planned on obtaining a $6.4 million write-off *338 from the abandonment of fixtures; thus, for tax reasons, Federated wanted to obtain title to all fixtures at closing.[14]
Also, Federated entered into a five-year lease with Twin Fair for each of the seven stores. The leases provided for a minimum annual payment of $1.54 million to Twin Fair and contained four five-year options to renew which would extend the leases through 2008. Federated exercised the initial options to renew the seven leases in 1988.[15]
In acquiring the stock of TFDC, Federated obtained all of the assets and liabilities of TFDC, acquired the goodwill of TFDC valued in excess of $4 million, and received the surplus from TFDC's pension plan.
Originally, the transaction was to be closed on June 1, 1982. However, discrepancies in TFDC's accounting records and problems with TFDC's banks delayed closing until August 3, 1982. During this delay, TFDC's financial situation deteriorated. TFDC closed the Buffalo stores not to be leased by Federated and consolidated the inventory in the stores remaining open.
After the August closing, Federated began renovating and remodeling the stores into the Gold Circle prototype.[16] Gold Circle was not involved in the grocery business and decided not to re-open the TFDC grocery departments which had been closed early 1982. During renovations, all seven Buffalo TFDC stores remained open under the Twin Fair name. Because of reductions in inventory, however, only three of the Buffalo stores remained open by late October 1982.
The re-opening, which took place in November 1982, was successful, attaining a sales volume of $1.5 million. For a period after the re-opening, the Buffalo stores had the best sales performance within the Gold Circle division. Over the life of the stores, however, sales performance fell to slightly below the Gold Circle average. Nevertheless, the Buffalo stores consistently averaged sales in excess of $10 million per year.
Following the acquisition, Federated continued operating TFDC as a separate corporate entity. TFDC maintained separate books and records.[17]
Gold Circle and TFDC executed a management agreement to ensure that the stores would be operated in a manner similar to the other Gold Circle stores. Gold Circle agreed to operate the seven TFDC stores. Under the agreement, Gold Circle conducted the day-to-day operations of the stores on behalf of TFDC, and TFDC incurred the costs of these operations.[18]
In April 1985, Federated liquidated TFDC and merged it into Federated. After liquidation, Federated acquired all of TFDC's assets and liabilities. The bankruptcy court concluded that on the date of its liquidation, TFDC's assets exceeded its debts.[19]
*339 Following the liquidation of TFDC, Federated used NOLs amounting to $26,963,028 as a deduction on its tax return for the taxable year ending January 31, 1986.
The seven Buffalo stores remained in operation as Gold Circle stores until 1988 when the entire Gold Circle division was liquidated.
II.
Bankr.R. 8013 provides in part that "findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard must be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Under this standard, a bankruptcy court's findings will not be overturned as long as the judge's inferences are reasonable and supported by the evidence. In re Southern Industrial Banking Corp., 809 F.2d 329, 331 (6th Cir.1987).
If a bankruptcy court's account of the evidence is plausible in light of the record viewed in its entirety, a district court may not reverse it even though convinced that had it been sitting as a trier of fact, it would have weighed the evidence differently. See Anderson v. Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985). In somewhat more colorful terms:
"To be clearly erroneous, . . . a decision must strike us as more than just maybe or probably wrong; it must . . . strike us as wrong with the force of a five-week-old, unrefrigerated dead fish."
United States v. Perry, 908 F.2d 56, 58 (6th Cir.), cert. denied, 498 U.S. 1002, 111 S.Ct. 565, 112 L.Ed.2d 571 (1990) (quoting Parts and Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228, 233 (7th Cir.1988), cert. denied, 493 U.S. 847, 110 S.Ct. 141, 107 L.Ed.2d 100 (1989)).
A bankruptcy court's conclusions of law, however, are reviewed de novo. Stephens Industries, Inc. v. McClung, 789 F.2d 386, 389 (6th Cir.1986).
III.
To determine whether Federated may deduct the NOLs acquired from TFDC, the Court must address two issues:
I. Whether a corporation continued to carry on substantially the same business as that conducted before acquisition, pursuant to 26 U.S.C. § 382(a); and
II. Whether the principal purpose behind the acquisition was evasion or avoidance of federal income tax, pursuant to 26 U.S.C. § 269(a).
IV.
In order for Federated to carryover and deduct the NOLs acquired from TFDC, a business substantially the same as that conducted before the acquisition must have continued to be carried on.
Under 26 U.S.C. § 172, net operating losses incurred in business can be carried back three years before the loss year, and then carried forward fifteen years after the loss year. These carryovers reduce the taxpayer's taxable income each year the deduction is taken.
In Libson Shops, Inc. v. Koehler, 353 U.S. 382, 386, 77 S.Ct. 990, 993, 1 L.Ed.2d 924 (1957), the U.S. Supreme Court stated that the carryover provisions
were enacted to ameliorate the unduly drastic consequences of taxing income strictly on an annual basis. They were designed to permit a taxpayer to set off its lean years against its lush years, and to strike something like an average taxable income computed over a period longer than one year.
The Supreme Court imposed a limitation on net operating loss carryovers based on the "continuity of business" theory. Id. The taxpayer in Libson Shops was a corporation into which sixteen other corporations, all retail *340 stores, were merged. The successor corporation sought to carryover the NOLs of three of the absorbed corporations. The Court disallowed the carryovers because "the income against which the offset is claimed was not produced by substantially the same businesses which incurred the losses." Id. at 390, 77 S.Ct. at 994.
Libson Shops was decided under the 1939 Code. In 1954, Congress enacted 26 U.S.C. § 382, codifying a limitation on NOLs. Section 382 disallows net operating loss carryovers if (1) there was a 50% change in ownership of the corporation ("Change in Ownership"), and (2) the corporation did not continue to carry on a trade or business substantially the same as that conducted before any change in stock ownership ("Change in Business"). 26 U.S.C. § 382(a) (1954).[20]
The government and Federated disagree as to the purpose behind the limitations on NOL deductions. The government argues that although some of the principles of Libson Shops were superseded by § 382, the legislative intent in enacting the carry forward provisions was not.[21] The government maintains that the continuity of business tests under both Libson Shops and § 382 were designed to prevent the trafficking of NOLs by persons other than those who incurred the loss.
Federated submits that Libson Shops was decided under the 1939 Code, which provided that "the taxpayer" who incurred the loss was the only party entitled to a NOL carryover. Libson Shops, 353 U.S. at 385, 77 S.Ct. at 992. Federated contends that the continuity of business test under Libson Shops was based on the limiting language in the statute ("the taxpayer"). According to Federated, § 382 expressly permits the use of operating losses unless specifically prohibited, and that in enacting § 382, Congress provided an objective test under which a "successor corporation [may] step into the `tax shoes' of its predecessor corporation without necessarily conforming to artificial legal requirements which now exist under court-made law." (Doc. 7, p. 18) (quoting H.Rep. No. 1337, 83rd Cong., 2d Sess. (1954), reprinted in 1954 U.S.Code Cong. & Ad. News 4025, 4066-67; S.Rep. No. 1622, 83rd Cong., 2d Sess. (1954), reprinted in 1954 U.S.Code Cong. & Ad.News 4629, 4683).
The United States Court of Appeals for the Sixth Circuit has explained the purpose behind § 382. In Frederick Steel Co. v. Comm'r, 375 F.2d 351, 352-53 (6th Cir.), cert. denied, 389 U.S. 901, 88 S.Ct. 219, 19 L.Ed.2d 217 (1967), the Sixth Circuit stated that
Congress . . . sought, in 1954, a new fully integrated revenue code. Both House and Senate Committees . . . reported . . . that `Present practice rests on courtmade law which is uncertain and frequently contradictory. Moreover, whether or not the carry-over is allowed should be based on economic realities rather than upon such artificialities as the legal form of reorganization.' U.S.Cong. and Adm.News, 1954, Vol. 3, p. 4066 (House Report), p. 4683 (Senate Report). Accordingly, after years of research, Congress adopted such a code in the Internal Revenue Code of 1954.
Also in Frederick Steel, the Sixth Circuit observed
it was the clearly expressed intention of Congress to attempt to bring some order out of chaos, and, in effect, to countenance "trafficking" in operating loss carry-overs except as affected by the special limitations of Section 382. . . . *341 Id. at 354 (quoting Maxwell Hardware Co. v. Comm'r, 343 F.2d 713, 718 (9th Cir.1965)). Examining the statute, the Sixth Circuit stated that "the 1954 Code provides that a net operating loss shall be net operating loss carry-over without mention of the taxpayer's having sustained such a loss." Id.
Finally, in Euclid-Tennessee, Inc. v. Comm'r, 352 F.2d 991 (6th Cir.1965), cert. denied, 384 U.S. 940, 86 S.Ct. 1456, 16 L.Ed.2d 538 (1966), the Sixth Circuit stated:
we cannot and do not read Libson into the 1954 Code, but its broad principles may be relevant except as the 1954 Code, under limited conditions, permits what the 1939 Code, construed by Libson, forbade.
In light of the above, the Court does not interpret the limitations on NOL carryovers as narrowly as the government or the Libson Shops decision. NOLs carryovers are not limited to the taxpayer that incurred them. NOLs may be carried over unless the conditions set forth in § 382 exist. The Court shall apply § 382 based on the limitations of the statute's language as provided in the 1954 Code.
V.
The issue before the Court is whether Federated was entitled to carryover the NOLs TFDC incurred after it acquired TFDC. Applying § 382, both the government and Federated agree that there was a change in ownership. Therefore, the Court must decide whether the corporation continued to carry on a trade or business substantially the same as that conducted before the change of ownership. 26 U.S.C. § 382(a)(1)(C). The bankruptcy court found that TFDC carried on substantially the same business following the acquisition. Federated, 135 B.R. at 972.[22]
In its pertinent part, 26 U.S.C. § 382(a)(1)(C) states:
If, at the end of a taxable year of a corporation
* * * * * *
(C) such corporation has not continued to carry on a trade or business substantially the same as that conducted before any change in the percentage ownership of the fair market value of such stock,
the net operating loss carryovers, if any, from prior taxable years of such corporation to such taxable year and subsequent taxable years shall not be included in the net operating loss deduction for such taxable year and subsequent taxable years.
This means that a corporation may deduct NOLs if it continued to carry on a trade or business substantially the same as was conducted before the change in ownership.
When interpreting a statute, the Court must carry out the intent of Congress. United States v. American Trucking Ass'n, Inc., 310 U.S. 534, 542, 60 S.Ct. 1059, 1063, 84 L.Ed. 1345 (1940); United States v. Underhill, 813 F.2d 105, 111 (6th Cir.), cert. denied, 482 U.S. 906, 107 S.Ct. 2484, 96 L.Ed.2d 376, 483 U.S. 1022, 107 S.Ct. 3268, 97 L.Ed.2d 766, 484 U.S. 821, 108 S.Ct. 81, 98 L.Ed.2d 43, 484 U.S. 846, 108 S.Ct. 141, 98 L.Ed.2d 98 (1987). The normal rule of statutory interpretation is that a court first looks to the language of the statute. United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981). "If the statutory language is unambiguous, in the absence of `a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive.'" Id. (quoting Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980)). If the statutory language is ambiguous, the Court may refer to other sources for guidance. Florida Power & Light Co. v. Lorion, 470 U.S. 729, 737, 105 S.Ct. 1598, 1603, 84 L.Ed.2d 643 (1985); Blum v. Stenson, 465 *342 U.S. 886, 896, 104 S.Ct. 1541, 1547-48, 79 L.Ed.2d 891 (1984).
The terms "continued to carry on" and "substantially the same" are not defined in the statute and are subject to interpretation. The Court will therefore refer to case law, legislative history, and tax regulations to interpret § 382.
In order to determine whether Federated may deduct the NOLs, the Court must decide: (a) whether a business "substantially the same" was carried on, and (b) whether TFDC "continued to carry on" that business.
A.
The Court will first address whether a business "substantially the same" was carried on.
Applying § 382(a)(1)(C) and interpreting its language, the Sixth Circuit, in Comm'r v. Goodwyn Crockery Co., 315 F.2d 110, 112-13 (6th Cir.1963), stated:
We do not obtain much help from the legislative history of Section 382. Congress used the word "substantially," but did not define it. We do not think that the business had to be conducted exactly the same after as before the change or the word substantially would not have been used. There may be some difference.
The Court concludes that some changes in the conduct of the business are permissible as long as the same type of business continues. Coast Quality Constr. Corp. v. United States, 325 F.Supp. 500, 505 (E.D.La.1971), aff'd, 463 F.2d 503 (5th Cir.1972).
The Code of Federal Regulations § 1.382(a)-1(h)(5) (1982) interprets § 382(a)(1)(C) and states
[All] the facts and circumstances of the particular case shall be taken into account. Among the relevant factors to be taken into account are changes in the corporation's employees, plant, equipment, product, location, customers, and other items which are significant in determining whether there is, or is not, a continuity of the same business enterprise.
Consideration of the above listed factors shows that TFDC's post-acquisition business was substantially the same as the pre-acquisition business. The Court will examine each factor separately.
1. Employees. About 50% of the new work force, including management, consisted of TFDC employees. Because Federated retained half of TFDC's employees after the acquisition, this factor supports the conclusion that there was continuity of the same business enterprise.
2. Plant. TFDC did not have a plant, therefore the Court will instead consider the stores. Although the stores were remodeled, they still functioned as they had before acquisition as mass merchandising stores. This factor supports the conclusion that there was continuity of the same business enterprise.
3. Equipment. The bankruptcy court determined that the basic equipment in the stores did not change. 135 B.R. at 972. Since the parties do not dispute this, this factor supports the conclusion that there was continuity of the same business enterprise.
4. Product. The same type of products were sold pre-acquisition and post-acquisition.[23] This factor supports the conclusion that there was continuity of the same business enterprise.
5. Location. The locations of the stores remained the same. This factor supports the conclusion that there was continuity of the same business enterprise.
6. Customers. The stores catered to the same type of customer. The bankruptcy court stated, "the customers of TFDC remained the same, as this was one of the primary objectives of Federated in acquiring TFDC." 135 B.R. at 972. This factor supports the conclusion that there was continuity of the same business enterprise.
Based on these factors, the objective facts and circumstances of this case demonstrate *343 that a business "substantially the same" was carried on post-acquisition.
The Court must also consider these factors in light of the general objective of § 382(a):
to disallow net operating loss carryovers where there is a purchase of the stock of a corporation and its loss carryovers are used to offset gains of a business unrelated to that which produced the losses.
26 C.F.R. § 1.382(a)-1(h)(5) (emphasis added). The Court concludes that the post-acquisition mass merchandising retail store business is related to the pre-acquisition mass merchandising retail store business.[24] The mass merchandising retail business conducted in the Buffalo area did not change enough after acquisition for the Court to conclude it is not "substantially the same" as it was before acquisition. Thus, the Court concludes that a trade or business "substantially the same" was carried on after the change in ownership.
B.
The Court's inquiry, however, does not end here. The government argues that the Court must inquire whether the loss corporation (TFDC) carried on an active trade or business after the change in stock ownership. (Doc. 5 p. 22). The government states that the bankruptcy court erred in its continuity analysis by focusing on the operations of Federated's Gold Circle division, instead of the post-acquisition operations of TFDC. According to the government, Federated's Gold Circle division rather than TFDC carried on the business after the acquisition. The government contends that the post-acquisition operations of Federated's Gold Circle division and TFDC must be analyzed separately.
If the operations of TFDC and Federated's Gold Circle division are analyzed separately, then, according to the government, TFDC did not carry on an active trade or business because TFDC did not directly operate the stores; rather, Gold Circle operated the stores under the management agreement. The government maintains that if TFDC did not directly operate the stores then it cannot be concluded that TFDC continued to carry on a trade or business substantially the same as before acquisition.
The government cites King v. Comm'r, 458 F.2d 245 (6th Cir.1972), for the proposition that the operations of a subsidiary corporation must be separated from the operations of the parent corporation when determining whether the subsidiary was conducting a trade or business.[25] In King the Sixth Circuit states, "especially for tax purposes, separate corporations, even parent and wholly owned subsidiary, must be treated as separate entities, no matter how closely they may be affiliated. The separate corporate entity may not be disregarded." Id. at 247; Freedman v. United States, 266 F.2d 291, 294 (6th Cir.1959).
The Court agrees with the general rule set forth in King. Nevertheless, this rule does not apply to the facts of the instant case. The rule in King was applied for purposes of taxation; the court inquired into separateness to determine the taxability of dividend distributions between parent and subsidiary. For purposes of business continuity, however, the Court need not inquire into separateness.[26] The Court instead should inquire whether TFDC's mass merchandising business continued to be carried on substantially the same as it had been before acquisition.
*344 The language of the statute supports the Court's reasoning. Section 382(a)(1)(C) provides that a corporation may deduct NOLs if it continued to carry on a trade or business substantially the same as that conducted before the acquisition. 26 U.S.C. § 382(a)(1)(C). Earlier, this Court determined that TFDC's mass merchandising business continued to be carried on substantially the same as it had before acquisition. Supra at V, A. Therefore, it follows that the NOLs may be deducted.
This case is unique when compared to, for example, Euclid-Tennessee, Inc. v. Comm'r, 352 F.2d 991 (6th Cir.1965), cert. denied, 384 U.S. 940, 86 S.Ct. 1456, 16 L.Ed.2d 538 (1966), because (1) the acquiring corporation, Federated, seeks to deduct the NOLs, and (2) who actually operated the stores is an issue.
In Euclid, the loss corporation, a brewery, was the corporation seeking to deduct the NOLs. In the instant case, the acquiring corporation, Federated, is the corporation seeking to deduct the NOLs. Neither the government nor Federated contends that § 382 permits only the loss corporation to deduct the NOLs, therefore this is not an issue. Naeter Brothers Publishing Co. v. Comm'r, 42 T.C. 1, 1964 WL 1179 (1975) (acquiring corporation permitted to deduct losses incurred by acquired loss corporation); Baton Rouge Supply Co. v. Comm'r, 36 T.C. 1, 13, 1961 WL 1103 (1961).
The government argues, however, that § 382 permits only the loss corporation, TFDC, to continue to carry on the trade or business.[27] Examining the language of the statute, the Court concludes that § 382 does not require that the loss corporation continue to carry on the trade or business. Section 382 does not focus on who continues to carry on the trade or business. Rather, § 382 requires only that the trade or business of the loss corporation continue to operate.[28] Continuity refers to the acquired corporation's trade or business. Hence, the inquiry focuses on what, if anything, is being continued, not who continues it.[29]
Here, TFDC's mass merchandising business continued to be carried on substantially the same as before acquisition, thus fulfilling the requirements of § 382.[30] The Court determined that there was continuity of the same business enterprise when it considered whether there was continuity of the following factors: employees, plant, equipment, product, location, and customers. See supra at V, A; 26 C.F.R. § 1.382(a)-1(h)(5). Thus, the bankruptcy court did not err in holding that substantially the same mass merchandising business was carried on.
C.
The government cited Euclid to support its argument that TFDC and Federated should be treated as separate entities, and that there was no continuity of business. However, the government's interpretation of Euclid is flawed.[31]
According to the government, the Court in Euclid prohibited the carryover because before acquisition the taxpayer operated a brewery and after acquisition the taxpayer only leased its real estate. The government *345 argues that, similarly, the Court should prohibit the carryover because before acquisition TFDC operated a mass merchandising business and after acquisition TFDC only rented out its stores.
The Court disagrees with the government's interpretation of Euclid because, in Euclid, the court stated that the former brewer "attempted to carry over the losses suffered in the brewery business and deduct them from the substantial profits of the machinery business." Id. at 993 (emphasis added). Thus, the Sixth Circuit found that the post-acquisition heavy machinery business was unrelated or not substantially similar to the brewery business. See also Coast Quality, 463 F.2d at 511 n. 7.
Euclid may be further distinguished because, in Euclid, the brewery became dormant before acquisition and, even after acquisition, never resumed operations. In the instant case, in contrast, the mass merchandising stores never became dormant, and, after acquisition, they continued to operate.
Moreover, in Euclid, a dormant brewery business was acquired. It then became a completely different business a heavy machinery business. In the instant case, TFDC, an active mass merchandising business, was acquired. The mass merchandising business then continued to operate. The mass merchandising stores operated before acquisition and after acquisition without interruption. Because the mass merchandising stores continued to operate, and operated in much the same manner as they had before acquisition, this factor supports the conclusion that there was business continuity.
VI.
The government next argues that even if the Gold Circle division's activities are attributed to TFDC, the bankruptcy court erred in finding that Federated did not discontinue more than a minor portion of TFDC's trade or business. (Doc. 5 at 29). The government contends that a corporation does not continue to carry on substantially the same trade or business if it discontinues more than a minor portion of its operations. (Doc. 5 at 30).
The Treasury Regulations state:
A corporation has not continued to carry on a trade or business substantially the same as that conducted before an increase in the ownership of its stock if the corporation discontinues more than a minor portion of its business carried on before such increase.
26 C.F.R. § 1.382(a)-1(h)(7).
According to the government, Federated discontinued more than a minor portion of the business carried on before the change in ownership because Federated operated stores at only seven of the thirty-one former Twin Fair locations and discontinued the supermarket operations which represented approximately 40% of each store's sales.[32]
The sale of the Ohio stores and the discontinuance of the supermarket operations took place before acquisition. However, the Treasury Regulations state:
A change in the trade or business of a corporation made in contemplation of a change of stock ownership will be treated as if such change occurred after such change in stock ownership. For example, if a loss corporation changes its business as part of a plan initiated by, or on behalf of, prospective buyers of the loss corporation's stock who wish to avoid the provisions of section 382(a), a subsequent sale of stock to such buyers will cause the change in business to be treated as if it had occurred after the sale.
26 C.F.R. § 1.382(a)-1(h)(3).
The government and Federated disagree as to whether the sale of the Ohio stores and *346 the discontinuance of the supermarket operations were made "in contemplation of" the acquisition.
The Court, however, declines to reach this issue, however, because the ultimate issue, whether a reduction in the original size of a trade or business amounts to a discontinuance of more than a minor portion of that trade or business, is dispositive. The Court will separately treat the issue whether the discontinuance of the supermarket operations constitutes a discontinuance of more than a minor portion of the business.
A.
The Treasury Regulations offer some insight as to what constitutes a discontinuance of more than a minor portion of a business. They state:
In determining whether the discontinued activities are more than "minor" for purposes of the preceding sentence, consideration shall be given to whether the discontinuance of the activities has the effect of utilizing loss carryovers to offset gains of a business unrelated to that which produced the losses.
26 C.F.R. § 1.382(a)-1(h)(7) (emphasis added).
The government argues that the income sought to be offset does not relate to the pre-acquisition losses and credits, or even the operations of the seven former Twin Fair stores. Except for the first year, Federated never generated any income from these stores.
Federated contends, however, that § 1.382(a)-1(h)(7) was intended to apply when a corporation purchases a loss corporation involved in a number of unrelated businesses and then disposes of the business that generated the operating losses.[33] According to Federated, it is the use of the losses generated by the business that was disposed of against the income of the unrelated businesses that is improper. Since the pre-acquisition mass merchandising business is related to or substantially similar to the post-acquisition mass merchandising business, Federated argues that § 382 does not apply.
Because the Treasury Regulations set forth the consideration that the gains of the post-acquisition business be related to the losses of the pre-acquisition business, the Court considers the language "more than a minor portion" as qualitative rather than quantitative. Accordingly, a reduction in the size of a corporation does not necessarily amount to a discontinuance of more than a minor portion of the total business activity carried on before the acquisition.
The statute itself supports a qualitative rather than quantitative interpretation. 26 U.S.C. § 382(a)(1)(C). The language "continue to carry on a trade or business substantially the same" connotes that the substance of the trade or business continues to be carried on, not the size of the business.[34]
*347 The key consideration is not what portion of the total business activities the discontinued business represents, but whether the business that generated the NOLs continues to be carried on and whether the losses that it generated are related to the post-acquisition business that generated the income. See 26 C.F.R. § 1.382(a)-1(h)(5).
In enacting § 382(a), Congress wanted to prevent corporations from making a business out of acquiring loss corporations for no other purpose than to deduct their NOLs. Six Seam Co., Inc. v. United States, 524 F.2d 347, 352 (6th Cir.1975). Congress could have eliminated NOL trafficking by flatly prohibiting the carryover of NOLs after a change in ownership.[35] However, Congress included the language "continued to carry on a trade or business substantially the same." 26 U.S.C. § 382(a)(1)(C). The Court interprets this language to mean that if there is a valid purpose behind acquiring a loss corporation, namely, to continue the business (or a business substantially similar to the business) operated by the loss corporation previously, then the loss corporation's NOLs may be carried over. The language of the statute demonstrates that Congress intended to eliminate the practice of acquiring a loss corporation without carrying on the loss corporation's business. Congress wanted to ensure that the original trade or business survives and is carried on.[36]
Although TFDC's mass merchandising business was reduced to seven stores, the mass merchandising business survived the acquisition and was carried on. The mass merchandising business merely changed in size, but was not discontinued. The reduction in size did not change the substance of the business. Because a business substantially the same was carried on, the NOLs generated pre-acquisition were related to the post-acquisition gains.[37]
To determine whether the loss carryovers were related to the business which produced the losses, the Fifth Circuit, in Coast Quality, 463 F.2d at 511-12, asked whether the business that generated the gain was the "same economic endeavor" as the business that generated the loss. The court emphasized that at all times, before and after acquisition, the taxpayer carried on the residential real estate development business. Id. Because the taxpayer was involved in the same economic endeavor, the court concluded that the taxpayer continued to carry on a trade or business substantially the same as before. Id.
In Coast Quality, the government alleged that the disposal of a division constituting 44 percent of the taxpayer's assets amounted to the discontinuance of more than a minor portion of its business. The court stated:
We are thus asked to hold that losses follow an asset and may not be carried over in an economic endeavor that has not altered materially and in which that type asset is an integral part. We are unpersuaded that under the circumstances found here either a literal reading of § 382(a) or the motivating rationale that we discern from the scanty legislative history requires our acceptance of the loss-follows-asset theory.
Id. at 512.[38]
Significantly, as in Coast Quality, Federated carried on the same economic endeavor *348 the mass merchandising business. Moreover, this Court does not accept a loss-follows-assets theory. Federated is not prohibited from carrying over the NOLs generated by the stores simply because some of the stores that generated NOLs are no longer part of the post-acquisition business. This is because the business that generated the losses is related to and is the same economic endeavor as the business that seeks to deduct them.[39] Although some of the NOLs were generated by mass merchandising stores that no longer operate, the same overall business which generated the lossesthe mass merchandising businesscontinues to be carried on.
B.
The government also argues that the discontinuance of the supermarket operations, representing 40 percent of the revenue-producing operations in each of the New York stores, constituted a discontinuance of more than a minor portion of TFDC's operations. According to the government, the discontinuance of the supermarket operations cannot be dismissed as a mere change in a brand or product line because changes in products must be considered under the continuity of business test. See 26 C.F.R. § 1.382(a)-1(h)(5).
In response, Federated contends that the supermarket operations were only a minor portion of TFDC's profitable business and that the basic character of the business was not altered. Federated argues that the discontinuance of the supermarket operations amounted to the elimination of a product or line, and did not constitute a substantial change since the overall character of the business remained constant.
The bankruptcy court referred to the supermarket operations as a product line and held that the "elimination of the perishable grocery section in the Buffalo stores . . . did not alter the basic character of TFDC's business, which was mass merchandise retailing." Federated, 135 B.R. at 973.
Example (1) of the Treasury Regulations, 26 C.F.R. § 1.382(a)-1(h)(7), refers to three "separate businesses" when it interprets what constitutes a discontinuance of more than a minor portion. The supermarket operations did not constitute a separate business in the sense of a distinct economic endeavor identifiable by objective characteristics like employees, location, customers, and product. See 26 C.F.R. § 1.382(a)-1(h)(5).[40] The supermarket operations were instead a product line or a separate department within the mass merchandising stores. See Glen Raven Mills, Inc. v. Comm'r, 59 T.C. 1, 12-13, 1972 WL 2518 (1972).
This Court concludes that the supermarket operations were not a "separate business" that TFDC operated and then discontinued. Instead, by discontinuing the supermarket operations TFDC merely stopped selling a line of products once sold by the mass merchandising retailer. As a product line or department, the supermarket operations were part of the same economic endeavor that was carried on post-acquisitionthe mass merchandising business. The discontinuance of the supermarket operations did not constitute more than a minor portion of the business carried on before acquisition.
For the above reasons, the bankruptcy court did not err in finding that Federated did not discontinue more than a minor portion of TFDC's trade or business.
VII.
The Court will next address the issue whether the principal purpose behind the acquisition is the evasion or avoidance of federal income tax. 26 U.S.C. § 269 provides for the disallowance of deductions and other tax benefits when the principal purpose behind the acquisition of control of a corporation is evasion or avoidance of federal income *349 tax.[41] This section is "operative only if the evasion or avoidance purpose outranks, or exceeds in importance, any other one purpose." S.Rep. No. 627, 78th Cong., 1st Sess. 59 (1943); 26 C.F.R. 1.269-3(a); U.S. Shelter Corp. v. United States, 13 Cl.Ct. 606, 620, 87-2 U.S. Tax Cas. (CCH) P 9588 (1987) (for evasion or avoidance of federal income taxes to be the principal purpose of acquiring control of a corporation it must exceed all other purposes in importance). The determination of the purpose of the acquisition presents a question of fact which must be resolved by considering all the facts and circumstances surrounding the transaction. 26 C.F.R. 1.269-3(c); D'Arcy-MacManus & Masius, Inc. v. Comm'r, 63 T.C. 440, 449, 1975 WL 3195 (1975). Upon review, the bankruptcy court's findings of fact shall not be set aside unless clearly erroneous. Bankr.R. 8013.
The bankruptcy court found that Federated's Gold Circle division wanted to acquire TFDC because it was an excellent opportunity to establish a Gold Circle business presence in the Buffalo area, and that the TFDC acquisition complied with the expansion objectives embodied in the Gold Circle Long Range Plan. Thus, the bankruptcy court held that the principal purpose of the transaction was business expansion and not the avoidance of federal income tax. 135 B.R. at 972.
A.
The government alleges that Federated acquired TFDC for the principal purpose of obtaining tax benefits. According to the government, to determine the principal purpose behind the transaction the Court must ask why it was structured as a stock purchase. The government maintains that while Federated may have had valid business reasons for wanting to enter the Buffalo market, the principal purpose for acquiring stock rather than acquiring TFDC's leases was tax avoidance. The government contends that if nontax business goals could have been satisfied by another form of transaction and there is evidence of substantial consideration of the tax benefits, the deduction should be disallowed.[42]
Federated acquired TFDC for both business-motivated and tax-motivated purposes.[43] The question before the Court however is not why the transaction was structured as a stock purchase. Rather, the question is did Federated's tax-motivated purpose behind acquiring TFDC exceed in importance its business-motivated purpose. See 26 U.S.C. § 269; 26 C.F.R. 1.269-3(a). In other words, was Federated's tax-motivated purpose the principal purpose behind acquiring TFDC. The method of acquisition is but one factor to consider in determining the principal purpose of the acquisition, but it is not the threshold inquiry. Arwood Corp. v. Comm'r, 30 T.C.M. (CCH) 6, 23, 1971 WL 2427 (1971).
In Arwood Corp. v. Comm'r, 30 T.C.M. (CCH) 6, the government similarly argued that because the method chosen to accomplish the merger was one which permitted a carryover of the operating losses, the taxpayer's primary motivation for the merger was the reduction of its taxes. The court rejected this argument, stating:
We do not believe that, whenever the method chosen in a given case to effect an acquisition is one which assures favorable tax results, we must necessarily conclude that the principal purpose of the transaction is tax avoidance. . . . We think that *350 arranging the merger in a manner that produces the most favorable tax results is simply intelligent business planning. . . . [S]ection 269 addresses itself to a situation where the principal purpose of the acquisition is tax avoidance; in the present case only the method selected for effecting the acquisition was motivated to some extent by tax considerations.
Arwood, 30 T.C.M. at 22-23; Shelter, 13 Cl.Ct. at 625; D'Arcy, 63 T.C. at 451-52.
Similarly, in Glen Raven, 59 T.C. 1, the government argued that the taxpayer could have accomplished its business purposes without purchasing stock, and that the stock purchase reveals a tax-motivated purpose.[44] The court determined, however, that the taxpayer needed a new source of fabric for its operations and that the acquisition was in response to that need. The court stated that although the taxpayer "knew before the purchase of the possible tax benefits flowing from [the acquired corporation's] prior period operating losses, . . . business necessity rather than tax avoidance was the principal purpose for its purchase. . . ." Id. at 15.[45]
Two cases, Canaveral Internat'l Corp. v. Comm'r, 61 T.C. 520, 1974 WL 2718 (1974), and VGS Corp. v. Comm'r, 68 T.C. 563, 1977 WL 3758 (1977), arguably support the government's assertion that § 269 requires a showing that the chosen method of acquisition was principally motivated by business reasons.
In Canaveral, the taxpayer desired to acquire a yacht, a certain corporation's principal tangible asset, but after discovering the potential tax benefits involved, the taxpayer acquired the stock of the corporation instead. The court in D'Arcy, 63 T.C. at 452-53, distinguishes Canaveral from a situation similar to the instant case. In D'Arcy, the court stated:
While there is a great deal of difference between acquiring one asset, the yacht in Canaveral . . ., and acquiring a corporation, we do not see so great a difference between acquiring a corporation's entire operation (i.e. acquisition of assets) as here, and acquiring the corporation itself [(i.e. acquisition of stock)]. We do not think a change in form of acquisition from the acquisition of a corporation to the acquisition of a corporation's entire operation is so drastic to warrant a mandatory denial of the carryover of tax attributes.
Id. at 452-53. Similarly, this Court does not believe that the difference between acquiring the assets of TFDC and acquiring the stock of TFDC is drastic enough to warrant mandatory denial of the carryover of NOLs. So long as the principal purpose behind acquiring TFDC was for business reasons, the NOL carryover should not be denied.[46]
Contrary to Canaveral and VGS, the Court concludes that the method of acquisition is but one of many factors to consider when determining the principal purpose. "[C]onsideration of the tax aspects of a transaction does not mandatorily require application of section 269 and . . . such consideration is only prudent business planning." D'Arcy, 63 T.C. at 451. The taxpayer may consider tax attributes when structuring its transactions so long as the principal purpose behind the acquisition is business motivated. Arwood, 30 T.C.M. at 22-23.
B.
The government argues that Federated could have met its stated business goal without gaining control of TFDC, and that the bankruptcy court failed to admit and consider *351 relevant evidence concerning alternative transactions.
The Court need not speculate as to the other ways Federated could have met its stated business goal of expanding Gold Circle's mass merchandising operations into the Buffalo area. The Court need only inquire whether Federated's principal purpose in acquiring TFDC was business motivated. The government's argument has no merit.
C.
The Court must decide whether the bankruptcy court erred in concluding that the principal purpose behind the acquisition of TFDC was business expansion and not the evasion or avoidance of federal income tax.
Federated argues that the acquisition was driven by its interest in expanding the market of its Gold Circle division. To support its argument, Federated states that the return on investment and the cash flow return from the acquisition were above the percentages targeted, and even if the NOLs were not realized, the cash flow return was reduced by a mere one-half percent.[47]
U.S. Shelter, 13 Cl.Ct. 606, sets out factors to consider in determining principal purpose motivation.[48] The four factors to consider in determining principal purpose motivation are:[49]
(1) Whether Federated had a policy of tax avoidance;
(2) Whether going public was a significant purpose for acquisition;
(3) Whether obtaining assets was a significant purpose for acquisition; and
(4) Whether factors exist which corroborate a business purpose.
U.S. Shelter, 13 Cl.Ct. at 623-36.
1.
In determining whether Federated had a policy of tax avoidance, the Court may consider whether Federated was predisposed to tax avoidance practices. Regarding Federated's acquisition pattern, the bankruptcy court concluded that Federated had never been involved in a transaction with NOLs. 135 B.R. at 966. Having found no information to the contrary, this weighs against the conclusion that Federated had a policy of tax avoidance.
Moreover, "a formally documented policy of expansion or diversification through acquisition rather than through internal growth tends to establish a non-tax avoidance motive." U.S. Shelter, 13 Cl.Ct. at 624. The bankruptcy court concluded that Federated had such a policy in Gold Circle's Long Range Plan. 135 B.R. at 970. The government argues that Federated and the bankruptcy court misapplied this prong. According to the government, Federated did not have a formally documented policy of expansion through acquisition. The government refers to the bankruptcy court's finding of fact No. 15 which states that "[p]rior to [the fall of 1981], it had not been the practice of either Federated or Gold Circle to acquire the stock of a company." 135 B.R. at 966.
Even though it had not been the practice of Federated or Gold Circle to acquire the stock of a company, the Long Range Plan did provide that the acquisition of an established business would allow expansion at approximately one half the investment. This is a formally documented policy of expansion through acquisition. In any event, there is no evidence in the record that Federated had a policy of tax avoidance through the use of NOLs because it had not been involved in transactions involving NOLs.
The Court may also consider contemporaneous statements and actions to determine whether Federated had a policy of *352 tax avoidance. Statements and actions supporting a tax avoidance policy include that the NOLs were discussed during negotiations and were factored into the promissory note amounts. However, considering the tax ramifications is not fatal. U.S. Shelter, 13 Cl.Ct. at 624-25 (intelligent business planning).
Statements and actions negating the existence of a tax avoidance policy include the Long Range Plan, Merrill Lynch's unsolicited proposal, Twin Fair's desire for a stock sale, and that Federated remodeled the stores, invested money in them, and continued to operate them. Consideration of the contemporaneous statements and actions do not show that Federated had a tax avoidance policy. Overall, this factor supports a business purpose.
2.
Regarding whether going public was a significant purpose for acquisition, the government argues that in U.S. Shelter, the principal business purpose was going public, whereas in this case, there was no business purpose behind the stock sale.
The Court agrees that in U.S. Shelter the court stated that going public was a significant purpose of the transaction and far outweighed the tax considerations. 13 Cl.Ct. at 631. In the instant case, going public was not a significant purpose. This factor consequently does not support a business purpose behind the stock purchase.
3.
The third factor for consideration is whether obtaining assets was a significant purpose for acquisition. According to the government, in U.S. Shelter, the acquisition of business assets was an important element, whereas in this case, TFDC's assets were of little value to Federated because it only wanted store locations.
The government's reasoning is flawed. Store locations are business assets. Therefore, obtaining assets, i.e., the store locations, was a significant purpose behind the acquisition. Accordingly, this supports a business purpose.
4.
The fourth factor to consider is whether factors exist that corroborate a business purpose. The Court must first consider whether, upon acquisition, Federated acquired a going corporation rather than a shell corporation. The Court concludes that, upon acquisition, TFDC was more than a mere shell. TFDC operated fifteen mass merchandising stores, and TFDC continued to operate the remaining stores during the renovations. This sub-factor supports a business purpose.
The second consideration is whether the acquired business continued to operate. This Court determined that the mass merchandising business operated by TFDC pre-acquisition continued to operate post-acquisition. See supra at V. The Buffalo stores continued to operate for more than two years after acquisition. This sub-factor supports a business purpose.
Third, the Court must consider whether there were any efforts to make TFDC profitable. Federated spent approximately $1 million per store to renovate the seven stores. Also, Federated budgeted $250,000 per store for pre-opening expenses. This sub-factor supports a business purpose.
Finally, the Court must compare the value of the acquired corporation to the magnitude of NOLs. Because this sub-factor calls for an evaluation of the magnitude of NOLs, the Court will now consider the government's argument regarding economic benefits. The government argues that the bankruptcy court failed to consider the economic benefits obtained by Federated. According to the government, the court erroneously believed that the benefits provided by the NOLs were of no value to Federated because all of that value would be transferred to Twin Fair under the promissory notes. The government contends that Federated obtained significant value from the NOLs because of the actual tax savings and the time value of money. Moreover, the government argues that the court failed to consider other tax benefits, such as the fixtures write-off and an imputed interest deduction.[50]
*353 The bankruptcy court addressed this sub-factor in light of § 269(c). The bankruptcy court stated that
[u]nder § 269(c), even if the magnitude of NOLs are large as compared to book value, it remains only one of many factors and is not, by itself, dispositive. . . . There is even some authority for the proposition that the comparison of these values is only marginally related to the consideration of valid business purpose.
135 B.R. at 971 (cites omitted).[51]
Even if the bankruptcy court determined that Federated would obtain a tax savings of $13.5 million from the NOLs, $3.2 million from the fixtures write-off, and $3 million from the imputed interest deduction, it can still be concluded that the acquisition was principally business motivated. This is again but one factor to consider when determining the principal purpose.
That the tax benefits were of potential economic value supports a tax motivated purpose. Nevertheless, the Court is not persuaded that the ratio of tax benefits to the value of TFDC calls for a finding that tax avoidance was the principal purpose. When this factor is considered together with the previously discussed factors, it must be concluded that the principal purpose motivating the acquisition was business related.
These four sub-factors, taken together, corroborate a business purpose.
5.
Federated presents another factor, beyond the four set forth in U.S. Shelter, for the Court's consideration the seller's insistence on a stock purchase. Federated contends that Twin Fair's demand for stock is further evidence of a legitimate business purpose. Princeton Aviation Corp. v. Comm'r, 47 T.C.M. (CCH) 575, 585 n. 28, 1983 WL 14724 (1983) (a seller's insistence to purchase the stock as a prerequisite to a deal constitutes sufficient business purpose to render § 269 inapplicable); Superior Garment Co. v. Comm'r, 24 T.C.M. (CCH) 1571, 1577, 1965 WL 1053 (1965); Baton Rouge Supply Co. v. Comm'r, 36 T.C. 1, 1961 WL 1103 (1961). According to Federated, Twin Fair was not willing to sell its assets and desired to divest TFDC in its entirety.
The government responds that the bankruptcy court misread Baton Rouge and Princeton Aviation to mean that any time the seller insists that the transaction be structured as a sale of control, even if the insistence is to assure that top dollar is received for the sale of the tax benefits, § 269 is automatically inapplicable. According to the government, the bankruptcy court's holding sanctions trafficking so long as it is the seller's idea. The government submits that Twin Fair's insistence on a stock acquisition for the purpose of getting value for TFDC's tax losses and other tax attributes is prima facie evidence that the principal purpose of the transaction was to avoid taxes.
The Court agrees that a seller's insistence on a stock sale does not automatically exempt the buyer from § 269. Whether the seller insisted on a stock sale is but one factor to consider when determining the primary purpose behind acquisition. This factor that Twin Fair insisted on a stock sale shows that Federated did not initiate the stock sale. Therefore, this factor does not support a taxmotivated purpose.
An additional factor to consider, however, is the underlying reason behind structuring it as a stock sale. See supra at VII, A.[52] According to the government, Twin Fair insisted on a stock purchase to get *354 value for the NOLs it could no longer use. According to Federated and the bankruptcy court, Twin Fair insisted on a stock sale to divest TFDC in its entirety. These motivations are both tax and business related. Nevertheless, these are the seller's motivations rather than the buyer's. In order to determine the principal purpose behind the acquisition in this case the Court should principally focus on the buyer's motivations. See Glen Raven, 59 T.C. at 14 (Section 269(a) requires the fact finder to make a subjective evaluation of the taxpayer's motives).
The Court concludes that this factor is negligible and supports neither purpose.
6.
The government raises an evidentiary issue on appeal that has some bearing on the issue of determining Federated's purpose. The government argues that the bankruptcy court's evidentiary ruling disabled it from proving that the principal purpose was tax motivated.
During the trial between the government and Federated, the bankruptcy court sustained several objections by Federated on the basis of attorney-client privilege. The principal objection sustained was in response to a question posed to Boris Auerbach, an attorney and Federated's secretary and vicepresident. The government asked Auerbach if Paul Thiemann, an attorney and the head of Federated's tax department, recommended going ahead with the acquisition on the basis of the favorable NOLs. Later in the trial, the government again tried to adduce this information by asking Thiemann about the tax department's recommendation regarding the transaction. The government argues that the bankruptcy court's ruling sustaining Federated's objections based on the attorney-client privilege was erroneous and requires reversal.
Rule 103(a) of the Federal Rules of Evidence provides that evidentiary errors at trial are not grounds for setting aside the verdict or reversing the judgment on appeal "unless a substantial right of the party is affected." Fed.R.Evid. 103(a).
"[C]onfidential communications between an attorney and his client, made because of the professional relationship and concerning the subject matter of the attorney's employment, are privileged from disclosure, even for the purposes of the administration of justice." United States v. Goldfarb, 328 F.2d 280, 281 (6th Cir.), cert. denied, 377 U.S. 976, 84 S.Ct. 1883, 12 L.Ed.2d 746 (1964). The basic components of the attorney-client privilege are as follows:
(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived.
Id. (quoting 8 Wigmore, Evidence § 2292, at 554 (McNaughton rev. 1961)).
The government argues that Thiemann was rendering business advice to Auerbach and therefore not acting in the capacity of lawyer. The government contends that the bankruptcy court should therefore not have disallowed the government's questions on attorney-client privilege grounds.
Communications between an attorney and a client which relate to business, rather than legal matters, do not fall within the protection of the attorney-client privilege. Coleman v. American Broadcasting Co., Inc., 106 F.R.D. 201, 205 (D.D.C.1985). The attorney providing privileged communication must be acting as an attorney and not as a business adviser. Atlantis Group, Inc. v. Rospatch Corp., No. 1:90-CV-805, 1991 WL 574963 at *8 (W.D.Mich. March 14, 1991).
However, the mere fact that business considerations are weighed in the rendering of legal advice does not vitiate the attorney-client privilege. Coleman, 106 F.R.D. at 206. The following test helps distinguish legal from nonlegal advice: "[A] matter committed to a professional legal adviser is prima facie so committed for the sake of the legal advice . . . and is therefore within the privilege unless it clearly appears to be lacking in aspects requiring legal advice." Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 610 (8th Cir.1977) (en banc) (quoting 8 Wigmore, Evidence § 2296 *355 (McNaughton rev. 1961) (emphasis in original)).
Applying this test to the communication between Auerbach and Thiemann, the government's argument must fail. The communication between Auerbach and Thiemann regarded whether Thiemann recommended the acquisition on the basis of the potential NOLs. Thiemann was acting as a professional legal adviser for Federated and Auerbach. The communication related to his role as head legal adviser of Federated's tax department. Accordingly, this communication is entitled to the prima facie assumption that it was sought for the sake of legal advice.
Furthermore, the government cannot show that this communication clearly appeared to be lacking in aspects requiring legal advice. Thiemann was providing Federated and Auerbach with advice regarding the tax consequences of the potential acquisition of Twin Fair. Tax planning advice rendered by an attorney is legal advice and communications relating to this advice fall within the attorney-client privilege. In re Grand Jury Subpoena Duces Tecum, 731 F.2d 1032, 1037-38 (2d Cir.1984); United States v. Willis, 565 F.Supp. 1186, 1190 (S.D.Iowa 1983); United States v. Mobil Corp., 149 F.R.D. 533, 538 (N.D.Tex.1993) (letter relating to tax consequences of certain actions was protected from disclosure by attorney-client privilege).
In any event, if the bankruptcy court had erred in disallowing this evidence, such error would have been harmless because it could not have affected a substantial right of the government. Fed.R.Evid. 103(a). The government was able to adduce evidence from other decisionmakers of Federated regarding the purpose and intent behind the acquisition of TFDC. The government's case would not have turned on either Auerbach's or Thiemann's answers. Therefore, the government was not harmed as a result.
The bankruptcy court properly sustained, on the basis of attorney-client privilege, Federated's objections to the government's questions to Auerbach and Thiemann.
D.
After consideration of the foregoing factors, the Court concludes that the factors supporting a business purpose outweigh the factors supporting a tax purpose, and that the principal purpose behind the acquisition was business expansion. Even though tax ramifications were considered when choosing the method of acquisition, the bankruptcy court did not err in concluding that the evasion or avoidance of income tax was not the principal purpose behind the acquisition.
VIII.
For the foregoing reasons, the Court AFFIRMS the bankruptcy court's decision.
IT IS SO ORDERED.
NOTES
[1] On January 15, 1990, Federated Department Stores, Inc. filed voluntary petitions for relief under chapter 11 of the bankruptcy code.
[2] The Plan listed six criteria for expansion: (1) location in the Northeast quadrant of the United States, exclusive of New England and New York City; (2) markets with projected population growth from 1980 to 1990 or with combined population, demographic, and competitive factors which would produce a satisfactory return on investment; (3) emphasis on markets where upscale mass merchandisers were not presently in place or where mass merchandiser square footage per capita was low; (4) capability of identifying and controlling a sufficient number of store sites in a new market so that expenses necessary in the market would satisfy return on investment and discounted cash flow requirements; (5) a 21% incremental return on investment in the fifth full year of operation; and (6) a 15% discounted cash flow return in the first five years.
[3] The government adds that most of TFDC's stores in New York had supermarket departments and that supermarket sales represented approximately 40% of each store's sales.
[4] According to the bankruptcy court, this downturn was attributable to double digit inflation, record interest rates, and increases in minimum wage.
[5] The bankruptcy court found that at that time TFDC still had a strong franchise, the goodwill of loyal customers, and some of the best store locations in western New York.
[6] The government states that the prospectus informed readers that TFDC had millions of dollars in investment tax credits (ITCs) and NOLs available to shelter future income, and that "retention of these tax shields . . . is contingent on the form of transaction undertaken by a purchaser."
[7] The bankruptcy court determined that acquiring the TFDC stores satisfied all the criteria of Gold Circle's Long Range Plan.
[8] The government states that Federated acknowledged the presence of ITCs and NOLs in a September 16, 1981 letter.
[9] The government states that Federated's tax attorney advised, in January 1982 at an internal meeting, that "if you wanted the NOLs, you are going to have to make this a stock transaction." Moreover, the government contends that in November 1981 and January 1982 Federated asked TFDC to stay out of bankruptcy in order to save tax losses. In response, Federated states that their chief financial officer testified that no such direction was given.
[10] The NOLs were discussed by members of Federated's negotiating team and examined internally at Federated. The bankruptcy court determined there were several reasons for this. First, Federated had never been involved in a transaction where NOLs were an issue. Second, Federated was constantly under IRS audit, therefore, Federated wanted to ensure that the NOLs would pass IRS scrutiny. Third, Federated bore all the risk relating to the NOLs and wanted to ensure that its risk was minimized. In its brief, Federated concedes that "[t]here is no dispute that Federated analyzed and discussed the NOLs; good tax and business practice demanded as much."
[11] A CER is used for all capital expenditures in excess of $1 million. The CER projected capital expenditures of nearly $7.5 million with total expenditures in excess of $15 million. Federated states that it expected the TFDC acquisition would result in substantial capital expenditures well in excess of the initial purchase price, and that this is not the attitude of a buyer whose principal objective was the acquisition of NOLs.
[12] The government contends that this calculation is incorrect.
[13] The $5.4 million promissory note was contingent on two factors. First, the note would become null and void if TFDC did not renew the seven store leases with Twin Fair in 1988. Second, the note provided that $3.5 million of the principal would be payable "at a rate of one dollar ($1.00) for every two dollars ($2.00) of Twin Fair NOL carryover realized in excess of Twenty Million Dollars ($20,000,000.00)."
The government notes that the value of the two promissory notes were increased to $8.1 million and $5.4 million respectively from the original proposed amounts because the value of the tax attributes had increased.
[14] The government also states that Federated planned to obtain a $3 million tax benefit from the imputed interest deduction relating to the two promissory notes used to purchase the stock. In response, Federated states that this is the first time the government has raised the imputed interest deduction and that the government admitted that the disallowance of the NOLs are the only benefits directly at issue.
[15] The leases stated that Federated would be responsible for maintaining and repairing the buildings, mechanical facilities, and adjacent property. The leases had an override provision paying Twin Fair a bonus if TFDC's sales exceeded their projected amounts. $65,000 was paid to Twin Fair the first year of operation.
[16] Gold Circle budgeted and spent approximately $1 million per store to renovate the seven stores. Also, Gold Circle budgeted $250,000 per store for pre-opening expenses, including the hiring of 1,800 employees. About 50% of the new work force, including management, consisted of former TFDC employees.
[17] According to the bankruptcy court, because TFDC was a separate corporation, it was anticipated that the NOLs would be used to offset TFDC's income, not Federated's.
[18] The agreement provided that Gold Circle would perform the following activities on behalf of TFDC: (1) order all merchandise and non-merchandise for the stores and charge TFDC for the purchases, (2) process all payroll for the TFDC stores, (3) procure all advertising for the TFDC stores, (4) provide all central office and data processing functions, (5) permit TFDC to use Gold Circle's distribution centers at a reasonable charge, and (6) prepare and maintain monthly income statements and balance sheets for TFDC.
[19] Although TFDC's balance sheet on February 2, 1985 indicated that TFDC's debt exceeded its assets, the bankruptcy court stated that it was incomplete and inaccurate on three counts: (1) nearly $5 million in goodwill was excluded from TFDC's balance sheet and recorded on Federated's; (2) more than $25 million was classified as a liability when it was an equity contribution; and (3) Twin Fair's prepaid pension expenses were erroneously recorded on Gold Circle's financial statement.
[20] Because of interpretative uncertainties, Congress abolished the "change in business" provision (requiring the corporation to carry on a business "substantially the same") and enacted a less demanding alternative in the Tax Reform Act of 1986. Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and Shareholders § 16.22, at 16-49, 16-50-51 n. 125. (5th ed. 1987).
The Tax Reform Act of 1986 was enacted on October 22, 1986, but became effective back to January 1, 1986. Federated deducted the NOLs on its tax return for the taxable year ending January 31, 1986.
The government states that the 1986 amendments do not directly affect the issues in this case. (Doc. 5, p. 21 n. 15). The government and Federated both use the 1954 version of § 382 in this case. Accordingly, the Court will decide this case using the 1954 Code.
[21] Congress was concerned with the fluctuating income of a single business.
[22] The bankruptcy court stated:
At the time of the acquisition, TFDC was a mass merchandiser offering a combination of hard and soft goods in a self-service environment. After the acquisition, under its management agreement with TFDC, Gold Circle not only continued these operations but expanded the mass merchandising efforts of TFDC.
Id.
[23] The Court acknowledges that Gold Circle did not continue the grocery department but agrees with the bankruptcy court that this does not alter the basic character of TFDC's business mass merchandise retailing. See infra at VI, B.
[24] The term "unrelated" does not mean that a loss carryover is not allowed to be taken by a corporation that is "not the exact same corporation as" the loss corporation. If Congress had intended such a strict interpretation, it would have flatly prohibited the carryover of NOLs after a change in ownership. Congress did not flatly prohibit NOL carryovers after a change in ownership, and instead enacted § 382. Consequently, the Court concludes that "unrelated" is akin to the requirement that a trade or business "substantially the same" continues to be carried on.
[25] In King, the Sixth Circuit analyzed the "trade or business" requirement under 26 U.S.C. § 355. Federated contends that § 355 has no application to the operating loss carryover limitations in § 355.
[26] This is true even though, ultimately, taxes will be affected by the determination whether there was business continuity.
[27] In other words, TFDC must conduct the day-to-day operations of the mass merchandising stores.
[28] Section 382 further requires relatedness between the losses generated and the gains generated.
[29] In Frederick Steel, the Sixth Circuit stated that "whether or not the carry-over is allowed should be based on economic realities rather than upon such artificialities as the legal form of reorganization." 375 F.2d at 352-53 (citations and quotations omitted).
[30] Even if the Court concluded that Federated operated the mass merchandising stores, a delegation of the day-to-day operations in this case is not a substantive change compelling the conclusion that substantially the same mass merchandising business was not carried on.
[31] In Euclid, a brewery business sold all of its equipment but continued its corporate life for the purpose of liquidating its real estate. A machinery business bought the corporate shares of the brewery. The former brewery then operated as a heavy machinery business.
The tax court held that § 382(a)(1) prohibited the carryover of losses sustained in the brewing business to offset profits later made in the machinery business. Id. at 992. The Sixth Circuit affirmed the tax court's decision.
[32] Previously, TFDC operated sixteen stores in the Ohio division and fifteen stores in the New York division.
Most of the stores in the New York division had supermarket operations in addition to mass merchandising operations.
According to the government, there was a discontinuance of more than 70 percent of the New York operations. The government also maintains that TFDC's books reflect that TFDC's Ohio division generated at least $10 million of the NOLs at issue, and therefore, approximately $16 million of the NOLs were generated by the New York division.
[33] 26 C.F.R. § 1.382(a)-1(h)(7) provides two examples to illustrate what constitutes a discontinuance of more than a minor portion of business.
Example (1). X Corporation, a calendar year taxpayer, is engaged in three separate businesses, A, B, and C. Approximately one half of X Corporation's total business activities (measured in terms of capital invested, gross income, size of payroll, and similar factors) relates to business A, 30 percent to business B, and the remaining 20 percent to business C. On December 1957, X Corporation has substantial net operating loss carryovers all of which are attributable to the operation of business C. On June 1, 1958, Y corporation purchases at least 50 percent in value of X Corporation's outstanding stock and during 1959 X Corporation discontinues business C. As of December 31, 1959, X Corporation has not continued to carry on substantially the same trade or business as that conducted prior to the increase in ownership.
Example (2). Assume the same facts as in example (1), except that all of X Corporation's net operating loss carryovers are attributable to business A and that the capital released by the discontinuance of business C is used to revitalize business A. Since the discontinuance of business C does not result in the utilization of net operating losses attributable to one business to offset gains of a business unrelated to that which produced the losses, the discontinuance of such business does not of itself constitute the failure to carry on substantially the same trade or business as that conducted prior to the increase in ownership.
[34] Depending on the nature of the trade or business, it is possible that a change in the size of the corporation may result in a change so significant that it alters the substance of the corporation so that it is no longer substantially the same trade or business. In this case, however, a reduction in size does not alter the substance of the mass merchandising retail business which continues to be carried on.
[35] This, in effect would chill the acquisition of loss corporations.
[36] Moreover, by requiring "relatedness" Congress limits the use of NOLs to acquisitions that presumably have a legitimate business purpose beyond the use of the NOLs.
The "relatedness" requirement is used to explain the general objective of § 382(a), see 26 C.F.R. § 1.382(a)-1(h)(5), and to determine whether the discontinued activities are more than "minor," see 26 C.F.R. § 1.382(a)-1(h)(7).
[37] The Court again notes that the language "substantially the same" allows some flexibility. Goodwyn Crockery, 315 F.2d at 113; Coast Quality, 463 F.2d at 510 ("The statute clearly contemplates . . . a permissible range of contraction of business activities without the loss of the deduction.").
[38] The taxpayer in Coast Quality had accrued NOL carryovers totaling $288,178, and $258,876 of that was attributable to the division that was discontinued. Nevertheless, the court allowed the taxpayer to carryover the NOLs.
[39] If Federated did not continue the business that generated the NOLsthe mass merchandising businessthen Federated could not carry over the NOLs. See 26 C.F.R. § 1.382(a)-a(h)(7) Ex. (1).
[40] The discontinuance of the supermarket operations are better considered as an elimination of a product which is but one of the factors in the objective test set forth in 26 C.F.R. § 1.382(a)-1(h)(5). In applying the objective test, supra at V, A, the Court concluded that a business substantially the same was carried on.
[41] Section 269(a) provides that if
any person or persons acquire . . . directly or indirectly, control of a corporation . . . and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such corporation would not otherwise enjoy, then the Secretary or his delegate may disallow such deduction, credit, or other allowance.
All section references refer to the Internal Revenue Code of 1954 unless otherwise specified.
[42] Federated never directly addresses the government's argument that the Court must inquire why the transaction was structured as a stock purchase. Instead, Federated argues that the principal purpose behind the acquisition was business-related.
[43] The Court concludes that because Federated was aware of TFDC's existing NOLs before acquisition and considered the value of the NOLs in setting the amounts of the promissory notes, Federated had a tax-motivated purpose behind the acquisition.
[44] In Glen Raven, the acquiring business manufactured yarns, hosiery, and knit products. The acquired business manufactured hosiery. After acquisition, the business that was acquired was converted for use in making flat fabric rather than hosiery.
[45] The Court notes that the owner wanted to disassociate himself entirely from the acquired business by selling the stock. Id. at 15. Similarly, in this case Twin Fair wanted to divest TFDC in its entirety.
[46] In VGS, the court quotes Canaveral for the proposition that the method of acquisition must be principally business motivated. Nevertheless, the court held that the principal purpose of the acquisition was not the avoidance or evasion of income tax. The court concluded that business reasons motivated the stock purchaseVGS needed the cash flow to finance future capital requirements.
[47] According to the government, this finding is errant.
[48] The government argues that the bankruptcy court and Federated erroneously relied on U.S. Shelter. The government distinguishes U.S. Shelter from the instant case in that in U.S. Shelter, no value was placed on the NOLs whereas here, there is a direct link between the NOLs and the two promissory notes. To the Court, this means that the government disagrees with the decision in U.S. Shelter but does not object to the test set forth in U.S. Shelter.
[49] Both the bankruptcy court and Federated omitted two of the four factors (factors 2 and 3). This Court will consider all four factors.
[50] With respect to fixtures, the bankruptcy court concluded that this part of the case amounted to an insubstantial digression from the main issues in the case because much of the informal arrangements over unwanted fixtures was dependent on the speculative liquidation value of those fixtures. 135 B.R. at 973.
[51] The government notes that § 269(c) was repealed in 1976 and has no application whatsoever to the Federated acquisition of control. Federated recognizes this and states that the bankruptcy court did not rely upon the value-to-losses ratio or § 269(c) in its analysis. (Doc. 11 at 39 n. 16).
In any event, the Court is not applying § 269(c). Instead, the Court is considering the effect of tax benefits on the principal purpose analysis.
[52] This inquiry focuses on the motivation behind the method of acquisition. Contrary to the government's assertion, this is not the threshold inquiry. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551487/ | 6 F.2d 288 (1925)
NATIONAL BOND & INVESTMENT CO.
v.
GIBSON, Sheriff.
No. 2701.
District Court, D. Kansas, First Division.
February, 1925.
Mosman, Rogers & Buzard, of Kansas City, Mo., for plaintiff.
Charles B. Griffith, Atty. Gen., J. G. Egan, Asst. Atty. Gen., and Roland Boynton, Co. Atty., of Emporia, Kan., for defendant.
POLLOCK, District Judge.
This is an action in replevin of an automobile, brought by plaintiff, a chattel mortgagee, against defendant, sheriff of Lyon county. The facts are stipulated by the parties, and briefly stated, in so far as material to decision here, are as follows:
One Grace Miller purchased this car in question from the agency of the Studebaker people in the city of Topeka, the agents of the motor company taking back a valid chattel mortgage to secure a series of installment *289 notes given as evidencing a part of the purchase price of the car. These notes were duly indorsed, sold, and delivered to plaintiff, an Illinois corporation. The chattel mortgage was also duly assigned to plaintiff, which assignment was timely recorded. Unknown to plaintiff, in some manner not shown by the record, the car came into the hands of one Switzer, who employed it in the transportation of some intoxicating liquors within the state and Lyon county. For this violation of the state laws he was arrested, the car was seized under a warrant, and was about to be sold by the sheriff of the county under the provisions of chapter 217, Laws of Kansas 1919. However, before the car had been seized by defendant, default in payment of a portion of the installment notes secured by the chattel mortgage had occurred, and plaintiff had been endeavoring to find the car in order to enforce its mortgage lien thereon. That plaintiff was in entire ignorance of the fact that Switzer had the car, or was using or intending to use the same for the purpose of violating any law of the state or nation, is admitted; and it is freely conceded plaintiff, its agents, servants, and employés are entirely blameless of any violation of a law of the state, either directly or indirectly, and are also innocent of the fact the laws of the state had been, were, or would be in any manner violated by the use of the car.
In this condition of the record, plaintiff contends the confiscation and sale of the car under the terms of chapter 217, Laws of Kansas 1919, is unwarranted, unlawful, and void, because violative of its right secured by the national Constitution and laws of the United States. He therefore contends it has the right to recover its car, title to which was transferred to it by virtue of the chattel mortgage. This contention is based on two propositions, as follows: (1) That the provisions of chapter 217, Laws of Kansas 1919, under the terms of which the property of a citizen entirely guiltless of any wrongdoing may be confiscated by the state, is not a reasonable exercise of the police power of the state, but is violative of the Constitution of the United States; (2) because said act in providing for the seizure and confiscation of a car in which intoxicating liquors are being transported is opposed to the National Prohibition Act (Comp. St. Ann. Supp. 1923, § 10138¼ et seq.) as to the power of the state and nation, acting under the Eighteenth Amendment to the National Constitution, and, being in conflict with the national law, that law, and not the state law, must control.
Of these questions in their order. The act of the state involved reads (Rev. St. 1923) as follows:
"Sec. 21 2162. All automobiles, vehicles and other property used in the transportation or carrying of intoxicating liquors into this state or in carrying and transporting intoxicating liquors from one place to another within this state are hereby declared to be common nuisances.
"Sec. 21 2163. Upon the filing of a complaint or information charging a common nuisance as above defined, a warrant shall be issued, authorizing and directing the officer to whom it is directed to arrest the person or persons described in said complaint or information or the person or persons using the automobiles, vehicles and other property for the transportation of intoxicating liquors into this state, or for the transportation or carrying of intoxicating liquors from one place to another within this state, and to seize and take into his custody all such automobiles, vehicles and other property so used which he may find, and safely keep the same subject to the order of the court. In said complaint or information it shall not be necessary to accurately describe the automobile, vehicle or other property so used, but only such description shall be necessary as will enable the officer executing the warrant to identify it properly."
Section 21 2165, following, provides for the destruction of all intoxicating liquors seized, but any property used in their transportation and defined to be a common nuisance under section 21 2162 above quoted, it shall adjudge forfeited so much thereof as the court shall find was such common nuisance, and shall order the officer in whose custody it is to sell the same publicly, and shall pay the proceeds into court to await the further order of the court; and the proceeds, after the paying of expenses of the action shall be turned over to the school fund of the state.
There can be no question, but that this statute in express terms, as construed by the Supreme Court of the state, does authorize the doing of the precise thing of which plaintiff complains in this case. The Supreme Court of the state has directly upheld the same. State v. Peterson, 107 Kan. 641, 193 P. 342; State v. Stephens, 109 Kan. 254, 198 P. 1087. That these decisions are conclusive, in so far as any claimed violation of the Constitution of the state is concerned, there can be no question. The only question that may be considered is: Does the act, as construed by the Supreme Court of the state, *290 render it obnoxious to any provision of the federal Constitution? If so, the decision of the Supreme Court of the state is merely persuasive, but not conclusive, of this question.
Of course, the reliance of counsel for the defendant is in the exercise of the police power of the state, a power properly reserved to the states in the beginning, but in these latter years a reservation which the government appears to have but little reluctance in trespassing upon. If there are limitations upon the exercise of the reserved police power of the states of this nation, and of necessity there should be some limitation some place, such limits are declared by the authorities only in the most general terms, and the difficulty, if not the utter impossibility, of establishing any specific and fixed boundary to the exercise of this most uncertain of all governmental powers has given rise to unending litigation, and ever will so long as our present form of government lives?
It is true, as contended by defendant, the national government, in the enforcement of its revenue laws, has been sustained by the courts in the exercise of a confiscatory statutory provision similar to that of the state involved in this case. See Goldsmith-Grant Co. v. United States, 254 U.S. 505, 41 S. Ct. 189, 65 L. Ed. 376. However, Mr. Justice McKenna, delivering the opinion in that case, at least intimates, if the question were one of first impression, untrammeled by precedent, the view of the case taken by the court might be to the contrary. "If the case were the first of its kind, it and its apparent paradoxes might compel a lengthy discussion to harmonize the section with the accepted tests of human conduct. Its words, taken literally, forfeit property illicitly used, though the owner of it did not participate in or have knowledge of the illicit use. There is strength, therefore, in the contention that, if such be the inevitable meaning of the section, it seems to violate that justice which should be the foundation of the due process of law required by the Constitution. It is, hence, plausibly urged that such could not have been the intention of Congress, that Congress necessarily had in mind the facts and practices of the world, and that, in the conveniences of business and of life, property is often and sometimes necessarily put into the possession of another than its owner; and it follows, is the contention, that Congress only intended to condemn the interest the possessor of the property might have to punish his guilt, and not to forfeit the title of the owner who was without guilt."
What, if any, difference in principle lies between the government proceeding under its broad, general, and absolutely essential powers to levy and collect its revenues, upon which its very continued national existence depends, and the power of the state to so enact, proceeding under its reserve police powers, is a question of much concern. In this respect, it may be noted, the statute of the state relied upon to justify the seizure and forfeiture of the car in question, inclusive of the interest of plaintiff as an innocent mortgagee, is a part of the criminal laws of the state, and the seizure and forfeiture of the car is employed as a means of prohibiting the commission of the crime. That being true, it is the punishment and prevention of crime against which the police power of the state is directed. In all such cases defendant is looked upon as the wrongdoer, the party to be punished, and all such actions are actions in personam, whereas, under the revenue laws of the country, or under the libel laws of the government, and admiralty and other cases, the proceeding is regarded as one in rem; that is, the impersonal thing itself is regarded as the offender. Thus, in Goldsmith-Grant Co. v. United States, supra, Mr. Justice McKenna says:
"But whether the reason for section 3450 be artificial or real, it is too firmly fixed in the punitive and remedial jurisprudence of the country to be now displaced. Dobbins' Distillery v. United States, 96 U.S. 395, is an example of the rulings we have before made. It cites and reviews prior cases, applying their doctrine and sustaining the constitutionality of such laws. It militates, therefore, against the view that section 3450 is not applicable to a property whose owner is without guilt. In other words, it is the ruling of that case, based on prior cases, that the thing is primarily considered the offender. And the principle and practice have examples in admiralty. The Palmyra, 12 Wheat. 1. The same principle was declared in United States v. Stowell, 133 U.S. 1. The following cases at circuit may also be referred to: United States v. Mincey, 254 F. 287 (1918); Logan v. United States, 260 F. 746 (1919); United States v. One Saxon Automobile, 257 F. 251; United States v. 246½ Pounds of Tobacco, 103 F. 791; United States v. 220 Patented Machines, 99 F. 559."
And for this reason any citizen of the country can make seizure of an article or any property condemned under the revenue laws of the nation used to defraud the government of its dues, and if the government adopts the seizure and proceeds to the condemnation *291 of the property, the act of the seizure by a private citizen is thereby justified, for that no injury is done any one in his person or personal rights. In Taylor et al. v. United States, 3 How. 197, 11 L. Ed. 559, Mr. Justice Story, delivering the opinion for the court says:
"In the course of the argument in this court, an objection was insisted on, that the seizure itself, upon which the information is founded, was irregularly and improperly made; it having been made by the collector of the customs of the port of Philadelphia, when it should have been made by the collector of the customs of the port of New York. * * * But the objection itself has no just foundation in law. At the common law any person may, at his peril, seize for a forfeiture to the government, and, if the government adopts his seizure, and institutes proceedings to enforce the forfeiture, and the property is condemned, he will be completely justified. So that it is wholly immaterial in such a case who makes the seizure, or whether it is irregularly made or not, or whether the cause assigned originally for the seizure be that for which the condemnation takes place, provided the adjudication is for a sufficient cause. This doctrine was fully recognized by this court in Hoyt v. Gelston, 3 Wheat. 247, *310, and in Wood v. United States, 16 Pet. 342, 358, 359."
Of the proceedings in the seizures made by the general government in revenue cases and under its admiralty laws, etc., the same being in rem, and not in personam, is in all the authorities kept to the foreground, and forms the very foundation for the steps taken under the laws which are by the court upheld and justified. In no federal case I have examined do I find any intimation such a proceeding could or would be justified in a criminal prosecution or other action in personam. True, the state statute in question declares the car employed by the offending user in the transportation of intoxicating liquors to be a common nuisance, and a common nuisance may be abated; but it is beyond the constitutional power of the Legislature to make anything not in its nature such a nuisance a nuisance by a mere declaration it is so.
Now, in all cases in which the owner, part owner, lienor, or other person interested in a car knows it is being used, or who has reasonable cause to believe the same is being used, or will be used, in the commission of crime, such person may justly be said to be an actor, or an aider or abettor of the violation of the law, and for his conscious guilt in so doing may be punished by a forfeiture of his property or interest therein; but in such case the lawmaking power is not put to the doubtful expedient of declaring that not in any sense a nuisance in fact to be a nuisance in law.
Is, therefore, that portion of chapter 217, Laws of Kansas 1919, same being section 21 2162, Revised Statutes Kansas 1923, a reasonable exercise of the reserved police power of the state, when employed to confiscate and forfeit the interest of one entirely innocent of any wrongdoing in lawful property, not in its natural use adapted to the commission of crime, as are gambling devices and machines, but in ordinary use and purpose are innocent, and only become a nuisance when being actually employed in the commission of crime, or, does it violate the provisions of the Fourteenth Amendment to the federal Constitution?
In Lawton v. Steele, 152 U.S. 133, 14 S. Ct. 499, 38 L. Ed. 385, Mr. Justice Brown dealt with the power of a state to condemn and destroy summarily nets being used illegally in the taking of fish, in violation of the law of the state of New York. In defining what acts fall within the police power of the state it is said: "The extent and limits of what is known as the `police power' have been a fruitful subject of discussion in the appellate courts of nearly every state in the Union. It is universally conceded to include everything essential to the public safety, health, and morals, and to justify the destruction or abatement, by summary proceedings, of whatever may be regarded as a public nuisance. * * * To justify the state in thus interposing its authority in behalf of the public, it must appear First, that the interests of the public generally, as distinguished from those of a particular class, require such interference; and, second, that the means are reasonably necessary for the accomplishment of the purpose, and not unduly oppressive upon individuals. The Legislature may not, under the guise of protecting the public interests, arbitrarily interfere with private business, or impose unusual and unnecessary restrictions upon lawful occupations; in other words, its determination as to what is a proper exercise of its police powers is not final or conclusive, but is subject to the supervision of the courts."
The final determination of the court in that case seems to be bottomed upon two facts: First, that the nets were taken in the actual work of doing the prohibited thing; second, they were of a comparatively *292 small value. Many cases of the attempted exercise of the police power by states in matters of larger concern were declared an abuse of the power and void. Railroad Co. v. Husen, 95 U.S. 465, 24 L. Ed. 527; Chy Lung v. Freeman, 92 U.S. 275, 23 L. Ed. 550; Henderson v. New York, 92 U.S. 259, 23 L. Ed. 543; Rockwell v. Nearing, 35 N.Y. 302; Ieck v. Anderson, 57 Cal. 251, 40 Am. Rep. 115; Dunn v. Burleigh, 62 Me. 24; King v. Hayes, 80 Me. 206, 13 A. 882; Lowry v. Rainwater, 70 Mo. 152, 35 Am. Rep. 420; State v. Robbins, 124 Ind. 308, 24 N.E. 978, 8 L. R. A. 438; Ridgeway v. West, 60 Ind. 371.
To whatever extent a state may go in dealing with, confiscating, and destroying articles such as may be generally or necessarily employed in the commission of crime, for the better enforcement of the laws or protection of the public, a glance at the act here in question will disclose no such purpose on the part of the state, for that the agency here denominated a nuisance is not under the act destroyed or abated, as is the custom with property condemned as a common nuisance, but the same is forfeited, sold, and the proceeds employed in paying the expenses of the litigation, and the balance turned over into the school fund of the state, leaving the agency declared a nuisance still in existence, to be again so used if it shall fall into the hands of a law violator.
The case of Shawnee Nat. Bank v. United States, 249 F. 583, 161 Cow. C. A. 509, from the Circuit Court of Appeals of this circuit, considers the true construction and effect of an act of Congress made "for the suppression of the traffic in intoxicating liquors among Indians" (39 Stat. 970), which provides as follows:
"That automobiles or any other vehicles or conveyances used in introducing, or attempting to introduce, intoxicants into the Indian country, or where the introduction is prohibited by treaty or federal statute, whether used by the owner thereof or other person, shall be subject to the seizure, libel, and forfeiture provided in section 2140 of the Revised Statutes of the United States." Section 1 (Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 4141a).
While it will be seen this congressional act, like that of the state involved here, makes no exception of the rights of an innocent chattel mortgagee, yet that court held such an interest was protected by the law from seizure and forfeiture by the government. Carland, C. J., delivering the opinion for the court, said:
"Counsel for the bank claim that the statute above quoted simply forfeits the interest of the introducer of the spirituous liquor in the automobile; therefore, it not appearing that the bank had anything to do with the introduction of the liquor, its interest could not be forfeited. The United States District Court for the District of Montana, in the case of United States v. Two Gallons of Whisky et al., 213 F. 986, decided that the above statute could not be held to forfeit property which had been borrowed by the person who introduced the liquor into the Indian country; the owner of the property not having any knowledge or information as to the use to which the property was to be put. United States v. 246 Pounds of Tobacco (D. C.) 103 F. 791.
"In cases under revenue statutes, a mortgagee is regarded with greater favor than the owner. United States v. Two Barrels Whisky, 96 F. 497, 37 Cow. C. A. 518. Where a smuggling statute authorized the forfeiture of any vessel `whose master should knowingly violate the act,' it was held that a master of a vessel, who was appointed by less than a majority of the ownership of the vessel, could not, by violating the law, subject the majority interest to forfeiture. The Calypso, 230 F. 962, 145 Cow. C. A. 156. In United States v. 372 Pipes of Spirits, 5 Sawyer, 421, Fed. Cas. No. 16,505, under a statute which authorized the forfeiture of `spirits owned by such person,' it was decided that a mortgagee would be protected to the extent of his debt. In United States v. Stowell, 133 U.S. 1, 10 S. Ct. 244, 33 L. Ed. 555, it was decided that the interest of the mortgagee on realty upon which an illicit still had been established would not be forfeited, where the mortgage was taken prior to the establishment of the still. It is also a principle of law and natural justice that statutes will not be held to forfeit property, except for the fault of the owner or his agents, unless such a construction is unavoidable. Peisch v. Ware, 4 Cranch, 347, 2 L. Ed. 643; United States v. 33 Barrels of Spirits, 1 Abb. U. S. 311, Fed. Cas. No. 16,470; Clinkenbeard v. United States, 21 Wall. 65, 22 L. Ed. 477.
"There are cases cited upon other statutes which seem to support the contention of counsel of the United States, but we think justice requires us to adopt the view presented by counsel for the bank. An examination of the decisions under different statutes of the United States providing for the forfeiture of property shows that there are two classes of statutes; one authorizing forfeiture *293 irrespective of ownership, and the other making ownership of the wrongdoer a necessary element. Heidritter v. Elizabeth Oil Cloth Company (C. C.) 6 F. 138, affirmed 112 U.S. 294, 5 S. Ct. 135, 28 L. Ed. 729."
Section 2140, Revised Statutes (Comp. St. § 4141), under which the forfeiture was attempted in that case, reads:
"If any * * * has reason to suspect or is informed that any white person or Indian is about to introduce or has introduced any spirituous liquor or wine into the Indian country in violation of law * * * may cause the boats, stores, packages, wagons, sleds, and places of deposit of such person to be searched; and if any such liquor is found therein, the same, together with the boats, teams, wagons, and sleds used in conveying the same, and also the goods, packages, and peltries of such person shall be seized and delivered to the proper officer and shall be proceeded against by libel in the proper court, and forfeited, one-half to the informer and the other half to the use of the United States."
Again Judge Carland said in the opinion:
"It is claimed by counsel for the United States that the above statute treats the automobile in this case as the offender without any regard whatsoever to the personal misconduct or responsibility of the owner thereof, and therefore, as the automobile was found guilty, forfeiture followed as a matter of course, regardless of the rights of the bank under its mortgage, and that, if this position is not correct, still, as the trial court forfeited the automobile and the evidence is not in the record, we must presume that there was evidence that the bank knew, or had good reason to know, the use to which the automobile was being put. This last contention, of course, is inadmissible, for the reason that the court found that the bank had a valid lien upon the automobile, and, if we indulge in any presumption as to the connection of the bank with the introduction of the liquor into the Indian country, we must presume, in the absence of any evidence or finding to the contrary, that the bank had nothing to do with it."
Subsequent section 21 2164 to 21 2166 provide for notice to all parties in interest in the automobile to appear on a day certain and defend such interest before the judgment of forfeiture is entered or enforced. If the true intent of the entire act is that a party in interest, such as an innocent chattel mortgagee, as is the plaintiff in this case, may have his rights protected to the extent of his claim against the car under the mortgage, and only the interest of the wrongdoer or wrong user of the car therein is to be forfeited to the state, no valid objection to such an enactment appears, and the power of the state to so enact in the prosecution of a defendant for the commission of a criminal offense is apparent, and well within the police power of the state, and to such extent goes the national law enacted under the provisions of the Eighteenth Amendment to our national Constitution. But when property, such as an automobile, in and of itself innocent and lawful, and in no sense whatever specially adapted to the commission of crime, more than any other species of conveyance, and when such property is employed only for a wrongful purpose in carrying out the criminal intent of the wrongdoer, is incumbered by a valid chattel mortgage in the hands of an entirely innocent holder as security for an indebtedness due, is by the law of the state stricken down without power or right to impose the defense of an innocent holder for value, and such property is forfeited by the state, and in a sale of the car the proceeds are confiscated by being turned over into the school fund of the state, such a proceeding is so utterly repugnant to the natural justice of the case, and to our ideas of the protection by the law afforded to the innocent owner of lawful property rights, that in my judgment the exercise of such power by the state does not fall within the reasonable exercise of the reserve police power of the state, but, on the contrary, is the taking of private property without just compensation to the owner, in violation of our rights as guaranteed by the Fourteenth Amendment to the national Constitution.
It follows judgment will go for the plaintiff for the car in question, or to the extent of the recovery of its interest therein.
It is so ordered. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551530/ | 170 B.R. 503 (1994)
In re WINDSOR PLUMBING SUPPLY CO., INC., Debtor.
In re WINDSOR SHOWROOM, INC., Debtor.
In re WINDSOR WORLD, INC. a/k/a ABC Distribution Associates, Debtor.
Bankruptcy Nos. 190-10224-352, 190-11082-352 and 190-11123-352.
United States Bankruptcy Court, E.D. New York.
July 7, 1994.
*504 *505 *506 *507 *508 *509 *510 *511 Leo Fox, New York City, for debtors.
*512 Chadbourne & Parke, New York City, for Cofacredit, S.A.
Platzer, Fineberg & Swergold, New York City, for Creditors Committee.
DECISION ON APPLICATION TO ESTIMATE CLAIM
MARVIN A. HOLLAND, Bankruptcy Judge:
This is a claims estimation proceeding brought on by the creditor, Cofacredit, S.A. [hereinafter "Cofacredit", "Creditor", "Plaintiff", or "Claimant"] to establish the value of its claim against the debtors, Windsor Plumbing Supply Co., Inc., Windsor Showroom, Inc., and Windsor World, Inc. [hereinafter "Debtors" or "Defendants"], a wholesale dealer of plumbing fixtures and supplies and two retail plumbing supply operations respectively.
I. JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. งง 157 and 1334 and the Standing Order of Referral of Cases to Bankruptcy Judges for the Eastern District of New York dated August 28, 1986, found in Appendix 3 of Acolyte Electric Corp. v. New York, 69 B.R. 155, 186 (Bankr. E.D.N.Y.1986). This is a core proceeding pursuant to ง 157(b)(2)(B).
II. PROCEDURAL HISTORY
On August 27, 1990, Cofacredit filed a separate Proof of Claim against each of the Debtors in the amount of $3,502,860.[1] Each Proof of Claim was based upon the facts alleged in an Amended Complaint [hereinafter "Am.Compl. at ถ โ"] filed by Cofacredit in 1989 in the United States District Court for the Eastern District of New York against the Debtors and others. Each Proof of Claim has two components. The first is for $1,167,620, representing the amount claimed due from Windsor Plumbing Supply Co., Inc. [hereinafter "Windsor Plumbing"] under certain invoices factored by Cofacredit for merchandise allegedly shipped to Windsor Plumbing from France. The second component of each Proof of Claim is based upon treble damages under the Racketeer Influenced and Corrupt Organizations Act [hereinafter "RICO"].
Since the amount of the claim was unliquidated, the Creditor had the option of liquidating its claim either by vacating the stay as to its district court action and proceeding to a verdict, or by having this Court estimate the value of its claim. On February 2, 1992, Cofacredit made a motion to have this Court estimate the value of its claim pursuant to 11 U.S.C. ง 502(c)(1). The Court granted the motion. Both the Debtors and Cofacredit waived a hearing and elected to have the Court make its estimate based upon submitted papers.
III. BACKGROUND
This case arises out of an international invoice factoring agreement [hereinafter "Factoring Agreement"] between Holleville et Duverger [hereinafter "HED-France"] a French plumbing fixture concern and Cofacredit, a French financial services company. Sholam Weiss, the sole shareholder of Windsor Plumbing, entered into an agreement [hereinafter "Distribution Agreement"] with HED-France and formed Holleville et Duverger U.S.A., Inc. [hereinafter "HED-USA"], to market French plumbing fixtures in the United States. Meanwhile, HED-France factored Cofacredit's invoices representing claimed sales of plumbing fixtures to Windsor Plumbing. Windsor Plumbing denied liability for payment on the invoices, claiming that there were no sales of inventory to it since the inventory had been received on consignment to HED-USA. Cofacredit thereafter filed an action against Windsor Plumbing and others, which is presently *513 pending in the United States District Court for the Eastern District of New York.
A. THE PARTIES
The Plaintiff in the action out of which this estimation proceeding arose, Cofacredit, is a Paris, France-based financial services company. (July 9, 1992 "Statement of Facts, Both Disputed and Undisputed Being Asserted by Each of the Parties" (Plaintiff's statement) ถ 56 [hereinafter "Pl.['s] SOF" at ถ โ or "Debtors' SOF" at ถ โ].)[2] During 1987 and 1988, Alain Jarry [hereinafter "Jarry"], and in 1988 Philippe Berthelier [hereinafter "Berthelier"], were executives of Cofacredit. (Pl.['s] SOF at ถ 63.)
The Defendants in the district court action are the Debtors, Windsor Plumbing, a Brooklyn-based plumbing wholesaler; Windsor World, Inc. [hereinafter "Windsor World"], a plumbing retailer with a showroom in Manhattan; (Debtors' SOF at ถถ 4-5), HED-USA, the Brooklyn-based company set up to market HED-France products in the United States; and Sholam Weiss, the controlling shareholder, officer, and director of HED-USA in 1988. (Debtors' SOF at ถ 3.) Sholam Weiss was also the sole stockholder and officer of Windsor Plumbing in 1987 and 1988, and both a controlling stockholder and officer of Windsor World. The parties differ slightly as to Mr. Weiss' various positions. During 1988, Moses Weiss and Hersch Lipszyc [hereinafter "Lipszyc"] were employees of HED-USA. Moses Weiss was also an officer of Windsor Plumbing. However Cofacredit, who named them as parties to the action, claims that Lipszyc and Moses Weiss held additional titles in Windsor World and Windsor Plumbing. (Debtors' SOF at ถถ 8-9.)
Also named as a Defendant is HED-France, a French company with a place of business in Bethencourt-sur-mer, France. HED-France was in the business of designing, manufacturing, and selling deluxe kitchen and bathroom brass faucets and hardware. In 1987 and 1988, Erich Brandli [hereinafter "Brandli"] was a key executive of HED-France and represented himself as its president, according to the Debtors, (Debtors' SOF at ถ 10.) Although Cofacredit acknowledged only that Brandli was a key executive and no more. (Pl.['s] SOF at ถ 64.)
B. THE EXCLUSIVE DISTRIBUTION AGREEMENT
The relationship between HED-France and the Weiss brothers began in January, 1988 when Moses Weiss met Brandli in a Paris trade show where HED-France was an exhibitor. (Debtors' SOF at ถ 11.) Brandli told Moses Weiss that HED-France had some inventory in a St. Louis warehouse which it was unable to sell. (Debtors' SOF at ถ 12.) He asked Moses Weiss whether Windsor Plumbing would evaluate the products for the United States market. (Debtors' SOF at ถ 13.) Windsor Plumbing agreed, and in January 1988, HED-France shipped the products from St. Louis to Windsor Plumbing's warehouse in Brooklyn. (Debtors' SOF at ถ 14.) Windsor Plumbing evaluated the products and advised HED-France that the products in their present state were unsuitable for the United States market, but that they could be successfully modified. (Debtors' SOF at ถ 15.)
Later in January 1988, Sholam Weiss agreed to redesign the products for use in this country, but only if HED-France would grant him an exclusive right to distribute the products of HED-France in the United States. (Debtors' SOF at ถ 16.) In order to accomplish the distribution, Sholam Weiss set up a separate company. This was done to enable the HED-France products to be distributed to competitors of Debtors who might be reluctant to purchase from Windsor (Debtors' SOF at ถ 18). Moreover, he believed that a new entity could raise the substantial capital necessary to cover the costs of packaging, storage space, and a marketing campaign. (Debtors' SOF at ถ 17.)
*514 C. THE DISTRIBUTION AGREEMENT
According to the Debtors, Sholam Weiss arranged for the redesign of the HED-France line and negotiated a Distribution Agreement ultimately signed on March 17, 1988. (Debtors' SOF at ถ 19.) The Debtors claim that Brandli travelled to the United States from France to sign this agreement on behalf of HED-France. Id. The Debtors further claim that the Distribution Agreement provided for HED-France to furnish HED-USA with a revolving inventory having a minimum value of two million dollars. (Debtors' SOF at ถ 23.) The Debtors contend that HED-USA needed such a large inventory to enable it to make deliveries promptly without encountering the difficulties normally encountered when goods are imported only in response to orders. Id. The Debtors further contend that the warehouse of HED-USA was filled with HED-France products sent on consignment so that any obligation of payment by HED-USA would arise only if and when the consigned products were sold. Id.
The Debtors assert that HED-USA guaranteed to HED-France, minimum sales of $400,000 in 1988, $1,000,000 in 1989, $1,500,000 in 1990, $1,800,000 in 1991, and $2,000,000 in 1992. (Debtors' SOF at ถ 24.) The Debtors also contend that HED-France agreed to replace all consignment inventory sold. Id. The Plaintiff makes no mention of the terms of the Distribution Agreement.
According to the Debtors, from January though March 1988 while the Distribution Agreement was being negotiated, HED-France shipped merchandise to the United States in closed 4-foot by 4-foot crates which were to be stored unopened in Windsor Plumbing's warehouse until the HED-USA warehouse was established. (Debtors' SOF at ถ 25.)
The Debtors maintain that in early March 1988, Brandli telephoned Sholam Weiss from France requesting an advance of funds against the minimum sales guaranteed under the Distribution Agreement. (Debtors' SOF at ถ 31.) The Debtors assert that Brandli requested these funds be used to help offset costs incurred in the modification of the plumbing fixtures for the United States market. Id. The Debtors claim that the funds were to be paid to Societe Generale, the bank to whom HED-France allegedly owed money under a direct loan. (Debtors' SOF at ถ 32.) The Debtors further claim Brandli also asked Sholam Weiss to advise Societe Generale that funds would be forthcoming once a Distributorship Agreement was signed. (Debtors' SOF at ถ 33.) The Debtors assert that neither Brandli nor anyone at HED-France mentioned the factoring of invoices to Cofacredit. (Debtors' SOF at ถ 32.) The Debtors also contend that on March 9, 1988, Sholam Weiss advised Societe Generale of the advance of funds upon consummation of the consignment Distribution Agreement. (Debtors' SOF at ถ 33.) The Debtors assert that the Distribution Agreement was signed on March 17, 1988 and that HED-USA wired $131,023.00 to HED-France's account at Societe Generale. The Debtors claim that the Societe Generale account was not a special factoring account, which would have been the case had such a Factoring Agreement been in existence and properly maintained. (Debtors' SOF at ถ 36.) Cofacredit, however, declares that Brandli never confirmed the existence or validity of the Consignment Agreement and referred to it as merely a draft. (Pl.['s] SOF at ถ 83.)
D. THE FACTORING AGREEMENT
Cofacredit states that on February 17, 1988, it entered into a Factoring Agreement with HED-France pursuant to which HED-France was permitted to assign invoices for various customers to Cofacredit in return for payments from Cofacredit based upon the amount of the invoices. (Pl.['s] SOF at ถ 65.) The Debtors allege that without their knowledge, prior to the signing of the Factoring Agreement, HED-France had obtained insurance to cover Windsor Plumbing invoices, with Coface, a separate French corporation insuring French export sales. (Debtors' SOF at ถ 27.) Windsor Plumbing also contends that Cofacredit did not review Windsor Plumbing financial statements before entering into the Factoring Agreement, nor did it confirm the existence of the invoices allegedly now owed by the Debtors. (Debtors' SOF at ถ 28.)
*515 Cofacredit claims that as part of the Factoring Agreement, HED-France executed quittances subrogatives (assignment receipts) whereby all of HED-France's rights to receive payment were assigned to Cofacredit, and in addition, HED-France was obligated to send letters to the customers informing them of the assignment. (Pl.['s] SOF at ถ 66.) Cofacredit further claims that it not only had in place extensive procedures for notifying those companies whose invoices had been factored, but also that Jarry, an employee of Cofacredit, met with an employee of HED-France and explained his part in those procedures. (Pl.['s] SOF at ถ 67.) The Debtors deny having received such letters, and point out that Cofacredit is unable to produce any confirmation of such notice. (Debtors' SOF at ถ 30.)
On April 8, 1988 HED-France began assigning to Cofacredit a series of invoices purporting to represent sales of plumbing products from HED-France to Windsor Plumbing. These invoices supposedly covered shipments made from HED-France from April 5, 1988 through September 23, 1988. These invoices aggregate $1,167,620.00. (Pl.['s] SOF at ถ 68; Resp. Ex. 5.)
On April 15, 1988, Cofacredit sent a written "verification of account" to Windsor Plumbing informing it of the Factoring Agreement and listing the invoices that had been factored up to that point. Cofacredit claims that Windsor Plumbing raised no objection to this letter. Windsor Plumbing does not mention the April 15, 1988 letter at all. (Pl.['s] SOF at ถ 69.)
Cofacredit further claims that its representative, Beatrice Courtemanche, telephoned Lipszyc at Windsor Plumbing on July 12, 1988 to inquire when payment would be made on the invoice due July 15, 1988, and followed up with a confirming letter. Again, Windsor Plumbing is silent as to Ms. Courtemanche's July 12, 1988 letter and telephone call. (Pl.['s] SOF at ถ 70.)
E. THE PARIS MEETINGS
Both Cofacredit and the Debtors assert that several meetings were held in Paris. However, their accounts of what transpired at those meetings differ. One such meeting occurred on July 26, 1988 in Paris at Cofacredit's offices. Cofacredit contends that Lipszyc attended on behalf of Windsor Plumbing, Brandli appeared for HED-France, and Jarry represented Cofacredit. (Pl.['s] SOF at ถ 71.) Cofacredit asserts that the purpose of the meeting was to discuss the terms of payment for the invoices, and that during the meeting various terms for payment were negotiated. Cofacredit also contends that payment negotiations continued after the meeting, and that Cofacredit factored an additional $320,000 of invoices from July 26, 1988 through September 23, 1988. (Response of Cofacredit to the Debtors' Renewed Motion, Ex. 5 [hereinafter "Resp."].)
Windsor Plumbing asserts that Lipszyc was in Paris to discuss advertising brochures with Brandli, and that during this visit Brandli asked Lipszyc to accompany him to Cofacredit. However, Windsor Plumbing contends that Cofacredit's identity was unknown to Lipszyc at the time. (Debtors' SOF at ถ 38.)
The next Paris meeting occurred on August 4, 1988. Cofacredit contends that the Windsor Plumbing representatives never raised any objection to the Factoring Agreements and never told Cofacredit that the sales were on consignment. (Pl.['s] SOF at ถ 77.) Cofacredit claims that it telecopied letters confirming the discussions to Windsor Plumbing on August 12, 17, and 31, 1988. Those discussions allegedly concerned the Debtor's promise to furnish letters of credit to cover the balance owed on the invoices. (Pl.['s] SOF at ถ 78.)
Windsor Plumbing again denies knowing the nature of the meetings, claiming that the entire meeting was conducted in French, and that Moses Weiss, who merely accompanied Brandli to this meeting, did not speak French. (Debtors' SOF at ถ 39.)
F. HED-USA WIRING OF FUNDS TO FRANCE
After the August meeting, Sholam Weiss agreed to send HED-France additional funds it needed to finance the manufacture of additional molds for the product line. *516 Brandli again asked Sholam Weiss to inform Societe Generale that funds were forthcoming, which Sholam Weiss did. The Debtors contend that Brandli still had not told them of the Factoring Agreement with Cofacredit, and that they remained unaware of it. (Debtors' SOF at ถ 40.)
On August 21, 1988, HED-USA wired $232,292.00 to HED-France bringing the total advance to $363,317.00 against the $400,000 minimum sales guarantee. The funds came from a Bank Leumi line of credit issued to HED-USA and were wired directly into HED-France's account. (Debtors' SOF at ถ 41.)
Windsor Plumbing claims that it was not until September 1988 that Sholam Weiss learned about the Factoring Agreement in a telephone call with Brandli. (Debtors' SOF at ถ 42.) Brandli also told Weiss that Cofacredit refused to purchase any additional invoices and that HED-France had no funds for further production. The Debtors contend that HED-USA had a considerable investment in the Distribution Agreement; it had leased and renovated a warehouse of 20,000 feet; developed special packing materials, cartons, and brochures; prepared lists and schedules of prices; and a computer program to facilitate the sale of HED-France products in the United States and Canada. (Debtors' SOF at ถ 43.)
G. THE NOVEMBER 1988 NEW YORK MEETING
In the wake of discovering HED-France's imminent financial demise, the Debtors declare that Sholam Weiss suggested that Cofacredit, HED-USA, and HED-France meet in New York to try and save the investment. (Debtors' SOF at ถ 43.) However, Cofacredit asserts that the purpose of the November meeting was to obtain payment on the invoices, which it had been trying to do without success throughout October, 1988. (Pl.['s] SOF at ถ 82.)
On November 6, 1988, Sholam Weiss, Moses Weiss, Lipszyc, Brandli, and Berthelier met in Manhattan at Windsor World's showroom. Cofacredit maintains that at the New York meeting it learned for the first time about the existence of HED-USA. This realization came about only because Berthelier noticed a sign in the showroom with the name "Holleville et Duverger U.S.A., Inc." Cofacredit also claims that it first learned of the Distribution Agreement at this point. It concedes, however, that Brandli had admitted that the agreement was only in draft form. The Debtors claim, however, that Sholam Weiss had given Berthelier a copy of the Distribution Agreement. (Debtors' SOF at ถ 44.)
The Debtors claim that at this meeting, it first learned of the terms of the Factoring Agreement and received a list of invoices. Sholam Weiss also claims that negotiations to keep HED-France alive continued, and that HED-USA offered to give ten promissory notes each in the amount of $100,000 to HED-France as an accommodation to Cofacredit. Sholam Weiss thereafter delivered those notes, even though Cofacredit found them unacceptable at the November 1988 meeting. (Cofacredit does not mention the content of any such negotiations.) (Pl.['s] SOF at ถ 83.)
A few weeks after the New York meeting, on November 23, 1988, Cofacredit filed a complaint against The Debtors and others in the United States District Court for the Eastern District of New York. (Debtors' SOF at ถ 49.)
H. THE WINDSOR WORLD PUBLIC OFFERING
At the time of the negotiations with Cofacredit, Windsor World was initiating a public offering. On December 30, 1988 the Securities and Exchange Commission approved the final prospectus of Windsor World. (Debtors' SOF at ถ 51.)
Two weeks later, on January 11, 1989, Cofacredit amended its complaint to add Windsor World as a defendant. The basis for adding Windsor World, was the claim that Windsor World had participated in a scheme to defraud Cofacredit by showing the goods shipped to HED-USA as its inventory. It is claimed that they did this to obtain a cost-free inventory which would artificially inflate its assets and thereby enhance the prospects of a successful public offering. *517 The Debtors claim that Cofacredit's attorneys had been advised that these goods had not been listed anywhere as an asset of Windsor World. (Debtors' SOF at ถ 52.)
On January 12, 1989, five days before the scheduled due diligence meeting with Windsor World's underwriter, Cofacredit delivered copies of the Amended Complaint to the underwriter, Levco Securities Corp., and to the Securities and Exchange Commission. The public offering was thereafter aborted. (Debtors' SOF at ถ 55.)
I. COFACREDIT'S CLAIMS
Cofacredit's claim is comprised of two components. The first component of the claim is stated in the alternative for $1,167,620, and consists of the amount Cofacredit alleges Debtors owed it as a result of Cofacredit's having factored invoices generated from sales of plumbing supplies from HED-France to Debtors. Cofacredit claims the invoices were properly factored, monies were paid to HED-France, goods were shipped to Debtors, and thus Debtors are liable to Cofacredit for the face amount of those invoices. Cofacredit makes several arguments in the alternative to support its right to claim the $1,167,620. First, Cofacredit denies the validity of a consignment contract between HED-France and HED-USA. Cofacredit seems to argue that, absent a consignment contract, a direct sale had occurred and it should be able to collect the $1,167,620 on a simple "demand for payment" (Am.Compl. at ถถ 36-39) or on a theory of "account stated" (Am.Compl. at ถถ 40-43).
In the alternative, assuming the validity of the consignment contract, Cofacredit seeks recovery on a theory of common law fraud, alleging that Debtors made a variety of false representations to induce Cofacredit to purchase and accept the assignment of valueless invoices arising from the apparent sale of plumbing supplies from HED-France to Debtors. (Am.Compl. at ถถ 22-31.) In addition, Cofacredit also argues that Debtors were part of a conspiracy to defraud it. (Am.Compl. at ถถ 32-33.) Furthermore, Cofacredit asserts as an alternative to common law fraud, that Debtors are equitably estopped from denying liability for the value of the factored invoices. Cofacredit contends that Debtors had a duty to notify it as soon as Debtors became aware that Cofacredit was accepting the assignment of invoices for merchandise that HED-France had consigned rather than sold to Debtors. (Resp. at 33-41.)
The second component of Cofacredit's claim is based upon $3,502,860 of treble damages under RICO, 18 U.S.C. งง 1961-1968. Cofacredit asserts that Debtors and others, through two or more acts of mail and wire fraud constituting a pattern of racketeering activity, directly maintained an interest in an enterprise, the activities of which affect interstate commerce. (Am.Compl. at ถถ 15-21.)
IV. DECISION
For the reasons stated below, this Court estimates that the claim of Cofacredit has a value of $145,000.
V. PROCEDURE ADOPTED
Ordinarily, courts make findings of fact after hearing evidence on contested issues of fact. However, in this case, the parties waived their rights to a hearing, and instead, requested that the Court make its decision based upon their written submissions summarized above. Therefore, what follows are not traditional findings of fact. Rather, we have attempted to sort out the facts asserted by each side. We have then taken those facts agreed upon by each side and used them to evaluate the likelihood of the validity of those assertions for which there is no agreement, giving greater credence to facts asserted by one side and not addressed by the other, than to facts which are specifically disputed. Where versions conflict, we have attempted to resolve such conflict by adopting that version which is more consistent with the facts not in dispute, and which seems to us to be more likely in view thereof.[3] We have then attempted to determine the probability of each side's success before a *518 traditional trier of fact. Without having taken testimony, we can make no findings of fact to support conclusions of law. What follows, therefore, are what we call illations or inferences [hereinafter "INF" at ถ โ], facts which we believe that a trier of fact would find and rely upon to reach its ultimate conclusions after having made an analysis similar to ours. We then statistically analyze the probability of various possible outcomes in order to assign an estimated dollar value to the claim. In doing so we have considered the possibility that some of the causes of action might not survive a motion to dismiss made either before trial or after the close of plaintiff's case.
VI. INFERENCES
1. Windsor Plumbing Supply Co., Inc., a wholesale dealer of plumbing supplies, is a New York corporation located at 886 Dahill Road, Brooklyn, New York. (Debtors' SOF at ถ 4.)
2. Windsor World, Inc., is a New York corporation located at 250 East 59 Street, New York, New York. (Debtors' SOF at ถ 5.)
3. HED-USA is a New York corporation located at 1450 37th Street, Brooklyn, New York. (Debtors' SOF at ถ 3.)
4. Cofacredit, S.A. is a French corporation having its place of business in Paris, France. Cofacredit provides financial services, including the factoring of invoices for French manufacturing concerns. (Pl.['s] SOF at ถ 56.)
5. Coface is a French corporation, distinct from Cofacredit, that insures French export sales. (Debtors' SOF at ถ 2.)
6. Societe Industrielle et Commerciale Holleville et Duverger is a French Corporation with its place of business at Bethencourt-sur-Mer, France. This company is in the business of designing, manufacturing, and selling deluxe kitchen and bathroom hardware. (Debtors' SOF at ถ 6.)
7. Societe General is a major French bank with branch offices throughout that country. The bank has a branch office in Abeville, where HED-USA had its corporate bank account. (April 10, 1989 Affidavit of Sholam Weiss at 11.)
8. Mr. Girr is an employee of Societe General. (Debtors' Pre-trial Submission Ex. C.)
9. During 1988, Sholam Weiss was an officer, director, and controlling shareholder of HED-USA. During the period 1987-88, he was both an officer and sole stockholder of Windsor Plumbing. He was also an officer and controlling stockholder of Windsor World. (Debtors' SOF at ถ 8.)
10. During 1988, Lipszyc was an employee of HED-USA. (Debtors' SOF at ถ 9.) He was also the Administrative Vice President of Windsor World and an employee of Windsor Plumbing. (Lipszyc Deposition of April 4, 1989 at 4-5.)
11. During 1988, Moses Weiss was an officer of Windsor Plumbing and also an employee of HED-USA. (Debtors' SOF at ถ 9.)
12. During 1987-88, Brandli was a key executive of HED-France and an officer of the company. (Debtors' SOF at ถ 10; Am. Compl. at ถ 9; Resp.Ex. 19 โ November 13, 1989 affidavit of Philippe Berthelier at ถ 2.)
13. HED-France began to ship merchandise to Windsor Plumbing in October 1987. (Resp.Ex. 9, April 10, 1989 Affidavit of Sholam Weiss at 2.)
14. HED-France obtained export insurance covering the unpaid balance factored in an amount of FrF 8,000,000 (approximately $1,200,000) from Coface by February 1, 1988. (Resp.Ex. 7, November 13, 1988 Affidavit of Jarry ถ 6.)
15. HED-France entered into a Factoring Agreement with Cofacredit on February 17, 1988. Id. at ถ 7. This was an exclusive Factoring Agreement and prohibited HED-France from factoring invoices to Windsor Plumbing/HED-USA with any other financial institution. (Resp.Ex. 6, at ถ 1 in Factoring Agreement.)
16. HED-France did not begin factoring invoices from Windsor Plumbing with Cofacredit until April 5, 1988 and no further factoring occurred after September 23, 1988. *519 (Resp.Ex. 7, November 13, 1988 Affidavit of Jarry at ถ 9.)
17. Cofacredit received Windsor's financial statements from the French embassy rather than from Windsor directly. This fact is uncontested. (May 12, 1989 Deposition of Sholam Weiss at 28-30.)
18. Cofacredit did not review the financial statements of Windsor Plumbing. (Debtors' SOF at ถ 28.) Cofacredit says the financial statements were delivered to it, but not that it reviewed them. (Am.Compl. at ถ 27.)
19. Debtors received goods from HED-France. (Debtors' SOF at ถ 25.) This is an uncontested fact.
20. The goods that the Debtors received from HED-France were not readily marketable in the United States. (Debtors' SOF at ถ 15.)
21. The total value of all Windsor Plumbing invoices that HED-France factored with Cofacredit is $1,167,620. (Am.Compl. at ถ 27.)
22. Between October 1987 and the end of March 1987, HED-France factored, or otherwise pledged, $659,509 worth of Windsor Plumbing invoices to Societe Generale. (Resp. at ถ 23; Ex. 16.) This figure contains Invoice Nos. 122219 and 19008. (Resp. at ถ 24; Ex. 17.) None of the numbers on the invoices referred to here are found in the comprehensive list of invoices comprising the claim of Cofacredit. (Resp. Ex. 5.)
23. On or about March 17, 1988, Brandli, an officer of HED-France, signed a document purported to be a consignment agreement between HED-USA and HED-France. Brandli's signature is clearly visible within the corporate stamp of HED-France. (Debtors' Pre-trial Submission Ex. B; Resp. Ex. 11, April 4, 1989 Deposition of Lipszyc at 35; Resp.Ex. 19, November 13, 1989 Affidavit of Berthelier at ถ 5.)
24. Debtors paid $363,317 to HED-France in accordance with the Consignment Agreement. (Debtors' SOF at ถ 41.) This is an uncontested fact.
25. Debtors never acknowledged the validity of the invoices on which Cofacredit bases its claims. (Debtors' SOF at ถ 30.) Cofacredit neither produced nor offered to produce any documents showing that the Debtors accepted liability on the invoices from HED-France.
26. A Cofacredit computer printout showing invoices HED-France submitted to Cofacredit, indicates that no payment on any of the factored invoices was due before September 15, 1988. (Resp.Ex. 5.) Cofacredit also submitted two documents that instead show payments first due in July. (Resp.Ex. 8, 10.) Payment terms were generally 150 days. (Pl.['s] SOF at ถ 68.) The invoices allegedly due in July were issued in April and thus properly due in September, absent further explanation. Cofacredit supplied no explanation for the earlier payment dates; we therefore conclude that the September date is correct.
27. On or about August 1, 1988 the Defendants knew that HED-France was factoring Windsor Plumbing invoices with Cofacredit. (Resp.Ex. 9, April 10, 1988 Affidavit of Sholam Weiss ถ 17. But see Debtors' SOF at ถถ 42, 44.)
28. Until at least August 12, 1988, the Defendants were not aware that Societe Generale and Cofacredit were indeed distinct institutions. The August 12, 1988 letter addressed to Mr. Girr[], an employee of Societe Generale but directed to Cofacredit, is evidence of this confusion. (Resp.Ex. 14.) Clearly, Lipszyc was confused on this point as well. (April 4, 1989 Deposition of Lipszyc at 59-60.) Undoubtedly, Cofacredit added to this confusion when it sent a telex to the Defendants asking for payment of Invoice No. 122219, which was in fact a receivable of Societe Generale. (Resp.Ex. 12, 17; INF at ถ 22.)
29. Debtors claim that during the meetings of July and August 1988, having just been informed of the HED-France factoring, they offered to have HED-USA advance funds to HED-France against its minimum sales obligation as an accommodation and in order to relieve the financial pressure on HED-France. Between July 26, 1988 and August 21, 1988, correspondence passed between the Plaintiff, Defendants, and Societe Generale in an attempt to effect this accommodation. *520 (Resp. Ex['s] 12-17.) Claimant contends that Lipszyc merely pressed for an extension of time for Windsor Plumbing to pay the factored invoices and that such a request constituted a tacit admission of liability. (Pl.['s] SOF at ถ 71-73, 76.) The Debtors' version of these events is by far the more credible. If the Debtors were involved in an elaborate scheme to defraud Cofacredit, they certainly would not have admitted liability on the invoices; they had nothing to gain by doing so. If the Debtors simply denied owing the money represented by the factored invoices, at worst Cofacredit would have ceased further invoice factoring. Having the alleged scheme halted in this way would surely have been less detrimental than acknowledging a liability in excess of one million dollars. Moreover, such an admission by the Debtors would have been totally at odds with their consistently voiced position that HED-USA had been receiving merchandise only on consignment.
30. Debtors offered to issue letters of credit as a result of the discussions in July and August 1988. (Pltf.['s] SOF at ถ 78.) This is an uncontested fact.
31. Sholam Weiss made a contribution of inventory to Windsor World in the amount of $2,499,840. Claimant's action in the district court alleges that a substantial portion of this inventory consisted of merchandise from HED-France, invoices for which had been factored by it. Nothing has been offered in this proceeding to buttress such a position. On the other hand, Sholam Weiss specifically denied that his contribution to Windsor World contained any inventory manufactured by HED-France. (Resp.Ex. 23) In addition, Mayer Rispler, the accountant to Windsor World, supports Mr. Weiss' statement.[4]
VI. DISCUSSION
A. ESTIMATION
11 U.S.C. ง 502(c)(1) provides in relevant part:
There shall be estimated for purpose of allowance under this section โ
(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be would unduly delay the administration of the case . . .
Neither the Code nor the Federal Rules of Bankruptcy Procedure provide any procedures or guidelines for estimation. However, courts addressing the issue have held that bankruptcy judges may use "whatever method is best suited to the particular contingencies at issue." Bittner v. Borne Chemical Co., 691 F.2d 134, 135 (3d Cir. 1982); See In re Baldwin-United Corp., 55 B.R. 885, 899 (Bankr.S.D.Ohio 1985). Judges must therefore fashion their own procedures. In re MacDonald, 128 B.R. 161 (Bankr. W.D.Tex.1991). In doing so, the Court is bound only by "the legal rules which may govern the ultimate value of the claim . . . [and] those general principles which should inform all decisions made pursuant to the Code." Bittner, 691 F.2d at 135-36.
Bankruptcy courts have wide discretion in choosing the process for estimating a claim. The methods used by courts have run the gamut from summary trials (Baldwin, 55 B.R. at 899) to full-blown evidentiary hearings (In re Nova Real Estate Inv. Trust, 23 B.R. 62, 65 (Bankr.E.D.Va.1982)) to a mere review of pleadings, briefs, and a one-day hearing involving oral argument of counsel. In re Lane, 68 B.R. 609, 613 (Bankr.D.Hawai`i 1986). Whatever the procedure the court chooses to estimate a claim, it must be consistent with the policy underlying Chapter 11, that a "reorganization must be accomplished quickly and efficiently." Bittner, 691 F.2d at 137 citing 124 Cong. Rec. H 11101-H 11102 (daily ed. Sept. 28, 1978). It may be sometimes be inappropriate to hold time-consuming proceedings which would defeat the very purpose of 11 U.S.C. ง 502(c)(1) to avoid undue delay.
In this case, a review of the submitted documents is the procedural method selected. Both parties have requested that this Court estimate the Cofacredit claim upon submission, and the parties have submitted a joint statement upon which they have agreed that *521 this Court is to rely. Further, ample documentation has been submitted to enable this Court to make a reasonably informed determination. The parties have filed memoranda and affidavits, as well as statements of position and exhibits.
In determining exactly how to estimate the value of a claim, the bankruptcy court has broad discretion. The Court of Appeals for the Second Circuit has stated that courts should make a "speedy and rough estimation of [the] claims for purposes of determining [claimant's] voice in the Chapter 11 proceedings . . ." In re Chateaugay Corp., 944 F.2d 997, 1006 (2d Cir.1991). The Second Circuit's requirement for a "rough estimation" of the claim is in accordance with the view of other jurisdictions that:
[a]n estimate necessarily implies no certainty; it is not a finding or a fixing of an exact amount. It is merely the court's best estimate for the purpose of permitting the case to go forward and thus not unduly delaying the matter. In re Nova, 23 B.R. at 66.
In actually estimating the value of a claim, many courts have taken a binary approach; all or nothing. The party that carries its argument by a preponderance generally receives either a claim value of zero if the debtor prevails, or the full value of the claim if the claimant prevails. Bittner, 691 F.2d at 136. While such approach may be appropriate for a finder of fact, we do not believe that it is appropriate for a claim estimation proceeding. A trier of fact first determines which version is most probable and proceeds from there to determine an award in a fixed amount. An estimator of claims must take into account the likelihood that each party's version might or might not be accepted by a trier of fact. The estimated value of a claim is then the amount of the claim diminished by probability that it may be sustainable only in part or not at all.
The number of possible outcomes in this case ranges from a claim value of zero to the full amount demanded. The reason for the existence of such a variation in the possible outcomes is straight forward. While the magnitude of the plaintiff's loss may be fixed, liquidated and undisputed, the extent, if any, to which The Debtors caused such loss or otherwise may be liable therefore clearly is not. Where the extent of the liability is in question "[t]he jury enjoys substantial discretion in awarding damages within the range shown by the evidence." Neiman-Marcus Group, Inc. v. Dworkin, 919 F.2d 368, 372 (5th Cir.1990).
An almost infinite number of different juries could be selected from the pool of available jurors. Each of these hypothetical juries would perceive the evidence in a different light and would evaluate it from a point of view arising out of different experience. Recognizing that the magnitude of recovery is to a large extent dependent upon the individual backgrounds of the triers of the facts, what we are given to deal with is a range of possible awards which we must first turn into a range of probable awards running from zero to the full amount of the claim. An expected value can then be found by multiplying a number of possible recovery values by the probability of their occurrence and taking the sum of these products.
For example, if a plaintiff claims it was defrauded out of $1,000, after a trial ten randomly-selected juries might award a range of recoveries. The court might estimate the probabilities of these various jury awards as follows:
Amount of
Possible Award Probability Expected Value
$1000 .2 $200
750 .6 450
250 .1 25
0 .1 0
TOTAL EXPECTED VALUE $675
In this example, if the court believed that two out of ten randomly-selected juries might grant the maximum award, six of the ten might award just $750, one of the ten might award $250, one of the ten might award nothing, then $675 is the statistically estimated value of the plaintiff's claim. The use of probabilities in estimating claims, rather than the more simplistic all-or-nothing approach, has been used by several courts. In re Farley, Inc., 146 B.R. 748, 753-55 (Bankr. N.D.Ill.1992); In re Federal Press Company, 116 B.R. 650, 653-54 (Bankr.N.D.Ind.1989); In re Lane, 68 B.R. at 612-13. It is the *522 procedure we believe to be the most appropriate herein.
B. DEMAND FOR PAYMENT/ACCOUNT STATED
Cofacredit seems to argue that, absent a consignment contract, the claimed shipment of goods to Debtors constitutes nothing more than sales in the ordinary course of business, and that therefore the Debtors owe it the face amount of the factored invoices. Cofacredit makes several arguments against the validity of the consignment contract. First, Cofacredit says the contract is so indefinite in its terms that it is nothing more than a mere non-binding draft. Second, it asserts that even if the draft were indeed a proper contract in form, it still would not be a proper contract in law since Brandli did not have authority under French law to sign a document binding HED-France. (Resp. at ถถ 12-13, 27.)
Apparently, assuming the invalidity of the alleged consignment contract, Cofacredit claims that the Defendants owe it $1,167,620 either on a theory of rightful "demand for payment" or on a theory of "account stated". For the reasons recited below, we are persuaded that the consignment contract between HED-France and HED-USA is in fact valid. Since we believe that a consignment contract existed, both the claim based upon rightful "demand for payment" and the one based upon "account stated" must fail.
1. THE CONTRACT
Cofacredit asserts that there was no manifestation of mutual assent between HED-France and HED-USA sufficient to constitute a contract. It urges that the consignment agreement had no legal force or effect since it was a mere draft or that even if the document were more than a draft, it was too indefinite and incomplete to constitute a valid, enforceable contract. Lastly, Cofacredit declares that even if the document were not too indefinite to be enforceable, it either lacks the signature of a representative of HED-France or if the signature is present, it is the signature of a party who cannot bind HED-France.
In support of its contentions, Cofacredit points to the following: (1) the document was labeled a draft, (2) a typed date on the document precedes the date of the incorporation of HED-USA although later corrected by a handwritten date coinciding with the date of incorporation of HED-USA, (3) some material in the document was enclosed in handwritten brackets, (4) addresses to which notices were to be directed were omitted, (5) Exhibit A (detailing all products HED-France manufactured) and Exhibit B (trademarks, trade names, and patents included in the agreement) were not annexed as stated in the document of agreement, (6) Brandli had not signed the document and, (7) even if he had, he was not empowered to bind HED-France. (Resp. at ถถ 12-13.)
The Defendants assert that a valid and binding consignment agreement existed between HED-USA and HED-France (Debtors' SOF at ถถ 19-25.) and that the merchandise was actually shipped to HED-USA on consignment as contemplated in the agreement. (Debtors' SOF at ถ 25.) Nothing in the submission of either side indicates that the parties to the agreement ever questioned its validity.
The Plaintiff has not cited any law supporting the proposition that a stranger to a contract has standing to contest the validity of a contract unquestioned by the contracting parties, nor has this Court found any. We, therefore conclude that the contract is valid and the Plaintiff's "demand for payment" claim and its "account stated" claim probably will fail. The Plaintiff might have successfully argued that the contract was a part of a scheme to defraud and thus both a sham and a nullity, but it did not. Instead, Cofacredit seeks to defeat the contract on grounds normally raised by a party to a contract. Even if we were to assume, arguendo, that Cofacredit had standing to object to the validity of the contract, it still has not demonstrated its invalidity.
a. IS THE "DRAFT" A CONTRACT?
Labels and extraneous markings on a contract are not controlling. Rather, the contents of the document and the intent of the parties determine whether, in fact, a *523 contract has been formed. Teachers Ins. and Annuity Assoc. of America v. Tribune Co., 670 F.Supp. 491, 497 (Bankr.S.D.N.Y. 1987). See also V'Soske v. Barwick, 404 F.2d 495, 499 (2d Cir.1968), cert. denied, 394 U.S. 921, 89 S.Ct. 1197, 22 L.Ed.2d 454 (1969).
In addition, it is well established that handwritten entries on a printed document take precedence over those in typeface. This proposition is based upon the belief that a handwritten entry expresses the latest intention of the parties to the contract. Kratzenstein v. Western Assurance Co., 116 N.Y. 54, 22 N.E. 221, 222 (N.Y.1889). This is especially so when neither party to the contract contests the validity of the handwritten entries.
Furthermore, while a corporation is not bound by a contract entered into prior to its incorporation, the corporation will become bound if it ratifies by word or deed such a contract subsequent to its proper incorporation. Reif v. Williams Sportswear, Inc., 9 N.Y.2d 387, 214 N.Y.S.2d 395, 174 N.E.2d 492 (1961).
Moreover, even if the agreement had merely been a draft, the parties may, by their later behavior, assent to the terms contained in the draft as a final expression of the terms in their contract. E. Allan Farnsworth, Contracts, 453 (1982). See also Restatement, Contracts ง 209, Comment b.
The label "DRAFT" on the agreement clearly does not by itself serve to prevent its binding effect. The length and complexity of the document indicates that more than a proposal was intended. The brackets around four sentences in a fourteen page contract were undoubtedly intended to highlight a small number of potential problems, and thus are no more than extraneous markings.
The handwritten date of March 17 is clearly subsequent to the typed date of March 15, and is an indication of a later intent of the parties. For this reason, the March 17 date should control. This date coincides with the incorporation of HED-USA. (Resp.Ex. 11 โ April 4, 1989 deposition of Lipszyc at 35.) Even if the agreement had been concluded prior to the incorporation of HED-USA, the actions of the corporation in receiving merchandise allegedly consigned and making payments to HED-France, supposedly against monetary quotas established in the agreement, served to ratify the agreement. (INF at ถถ 19, 20, 24.) We conclude, therefore, that what may have been merely a draft became an enforceable contract.
b. THE CONTRACT WAS NOT VOID FOR INDEFINITENESS
A contract may be void for indefiniteness even though the parties to the contract believe they are bound. Candid Productions, Inc. v. International Skating Union, 530 F.Supp. 1330, 1333 (Bankr.S.D.N.Y. 1982). For a contract not to be void for indefiniteness, the performances required of the parties must be reasonably certain. Such certainty can not be obtained unless the contract is definite with respect to essential terms.[5]Hong Kong Export Credit Ins. Corp. v. Dun & Bradstreet, 414 F.Supp. 153, 156-57 (Bankr.S.D.N.Y.1975). Essential terms are usually limited to price, quantity, and time. Restatement of Contracts ง 33. Even when such essential terms are absent, however, the court may fill the gaps and supply the necessary terms. Indeed, the court in American Cyanamid Co. v. Elizabeth Arden Sales Corp., 331 F.Supp. 597 (Bankr.S.D.N.Y.1971), did not hold a contract void for indefiniteness when a multimillion dollar contract for the sale of a "far flung business", negotiated by sophisticated parties, failed to include representations and warranties; left for further negotiation the disposition of interest earned on an escrowed purchase-money deposit; failed to establish accounting practices to determine the net worth of the company to be sold; and omitted a closing date. Id. at 604-05.
*524 In the present case, the omitted items โ Exhibits A and B, and the places to send notice โ are clearly not essential to the creation of a contractual relationship, therefore, the contract is not void for indefiniteness. Although these items may be material, the court could easily have filled in the gaps. Exhibit A covers all products currently manufactured by HED-France or ever to be manufactured by it. Exhibit B covers all trademarks, trade names, and patents of HED-France. This information, while not set forth, is readily available. Furthermore, despite the absence of names and addresses of those to whom notice was to be sent, notice could properly have been directed to any corporate officer. Thus, the omitted particulars were not essential.
c. WAS THE BRANDLI SIGNATURE ENFORCEABLE?
Cofacredit maintains that even if the agreement were a contract, Brandli did not sign it; further, that even if Brandli had signed it, his signature was a nullity since he had no authority under French law to sign such a document. Cofacredit, therefore asserts, that no binding contract was formed. We disagree.
Assuming that the agreement was not the mere formalization of a valid oral contract, then Brandli's signature, as an agent of HED-France, was required to form a contract and bind his principal. Restatement of Agency ง 156. Brandli, an officer of HED-France (INF at ถ 12.), signed the contract. (INF at ถ 23.) It is possible that under French law not even an officer by himself could bind the company. In this case, however, the niceties of French jurisprudence are not at issue. The United States has a "paramount interest" in the outcome of this case. The contract was drafted and signed here. Moreover, the choice of laws clause in the contract (Debtor's Submission Ex. B at ถ 13(f)) subjects the parties to the agreement to New York law and the jurisdiction of any federal or state court sitting in New York City. It was clearly the intent of the contracting parties that the laws of this country should control the transaction. From this we may conclude that the parties to the agreement also intended U.S. law to govern the formation of the contract as well. United States law then, rather than foreign law, should govern the formation of this contract. Hunter v. Greene, 734 F.2d 896, 899-900 (2nd Cir. 1984).[6] The contract, therefore, is binding, since under the law of the forum, a principal or agent can obligate the company to a contract, and the chief executive of a corporation, whose primary business is the sales of products it manufactures, has apparent authority to enter into a contract for the sale of such product.
2. ESTIMATION OF CONTRACT CLAIMS โ DEMAND FOR PAYMENT/ACCOUNT STATED
While this Court believes that there was a valid consignment contract and thus Cofacredit's "demand for payment" claim and its "account stated" claim will fail, we recognize that in at least some courts the issue may get to a trier of fact where there is at least some possibility of recovery. Under this set of facts, however, there is a small likelihood that there will a full recovery and a much larger likelihood that there will be none. We therefore value the portion of the claim based upon this theory as follows:
Amount of
Possible Award Probability Expected Value
$1,167,620 .05 $58,381
750,000 0 0
500,000 0 0
250,000 0 0
0 .95 0
TOTAL EXPECTED VALUE $58,000
C. THE ESTOPPEL CLAIM
Cofacredit alleges that HED-USA, Windsor Plumbing, and Windsor World concealed the existence of the consignment agreement between HED-USA and HED-France. (Resp. at ถ 12.) The Plaintiff asserts that, due to the concealment of this fact, the doctrine of equitable estoppel now bars the Debtors from denying their liability to Cofacredit on invoices for goods shipped from *525 HED-France to Windsor Plumbing. Id. at 34.
The doctrine of equitable estoppel should be applied cautiously and used only when grounds for its application are clearly established. Thompson v. Simpson, 128 N.Y. 270, 292, 28 N.E. 627 (1891). It is true, as the Plaintiff argues, that concealment of a material fact can give rise to equitable estoppel. Stutelberg v. Farrell Lines, Inc., 529 F.Supp. 566, 569 (Bankr. S.D.N.Y.1982) aff'd without opinion, 697 F.2d 297 (2d Cir.1982); Kurt H. Volk, Inc. v. Foundation for Christian Living, 534 F.Supp. 1059, 1084-85 (Bankr.S.D.N.Y.1982); In re Howard's Appliance, 69 B.R. 1015, 1021 (Bankr.E.D.N.Y.1987), aff'd in part and rev'd in part, 91 B.R. 204 (Bankr.E.D.N.Y. 1988), and rev'd, 874 F.2d 88 (2d Cir.1989); In re Ellison Associates, 13 B.R. 661, 675 (Bankr.S.D.N.Y.1981), aff'd, 63 B.R. 756, 764 (Bankr.S.D.N.Y.1983); BWA Corp. v. Alltrans Express U.S.A., Inc., 112 A.D.2d 850, 493 N.Y.S.2d 1, 3 (1985). However, the Plaintiff overlooks the fact that there must first be a duty to speak. United States v. Georgia-Pacific Co., 421 F.2d 92, 97 (9th Cir.1970); Blinn Wholesale Drug v. Eli Lilly & Co., 648 F.Supp. 1433, 1438-39 (Bankr. E.D.N.Y.1986) (construing Indiana common law); Kurt H. Volk, Inc., 534 F.Supp. at 1084; Howard's Appliance, 69 B.R. at 1021; In re Smith, 51 B.R. 904, 912 (Bankr. M.D.Ga.1985); In re Ellison Associates, 13 B.R. at 675; Thompson v. Simpson, 128 N.Y. at 289, 291, 28 N.E. at 632-33; 57 N.Y.Jur.2d ง 26.
A duty to speak has been found when there is a fiduciary or confidential relationship, superior knowledge in a transaction, or unjust enrichment. Brass v. American Film Technologies, Inc., 987 F.2d 142, 150-51 (2d Cir.1993); Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, Nat'l Assoc., 731 F.2d 112, 123 (2d Cir.1984); Grumman Allied Industries, Inc. v. Rohr Industries, Inc., 748 F.2d 729, 738-39 (2d Cir.1984); Congress Financial Corp. v. John Morrell & Co., 790 F.Supp. 459, 472 (Bankr.S.D.N.Y.1992); Beneficial Commercial Corp. v. Murray Glick Datsun, Inc., 601 F.Supp. 770, 773 (Bankr. S.D.N.Y.1985); Kiamesha Development Corp. v. Guild Properties, Inc., 4 A.D.2d 334, 164 N.Y.S.2d 958, 961-62 (1957); rev'd on other grounds, 4 N.Y.2d 378, 175 N.Y.S.2d 63, 151 N.E.2d 214 (1958). We will consider each of these prerequisites.
1. FIDUCIARY OR CONFIDENTIAL RELATIONSHIP
The New York common law approach to a fiduciary relationship has been explained as follows:
A fiduciary relationship is one founded on trust or confidence reposed by one person in the integrity and fidelity of another. The term is a very broad one . . . [R]elief is granted in all cases in which influence has been acquired and abused, in which confidence has been reposed and betrayed.
Fisher v. Bishop, 108 N.Y. 25, 28, 15 N.E. 331 (1888); United States v. Reed, 601 F.Supp. 685, 707 (Bankr.S.D.N.Y.1985), rev'd on other grounds, 773 F.2d 477 (2d Cir.1985); Mobil Oil Corp. v. Rubenfeld, 72 Misc.2d 392, 339 N.Y.S.2d 623 (1972), aff'd, 77 Misc.2d 962, 357 N.Y.S.2d 589 (1974), rev'd on other grounds, 48 A.D.2d 428, 370 N.Y.S.2d 943 (App.Div.1975), aff'd, 40 N.Y.2d 936, 390 N.Y.S.2d 57, 358 N.E.2d 882 (1976). However, the trust reposed must be justified. Geis, P.C. v. Landau, 117 Misc.2d 396, 458 N.Y.S.2d 1000 (1983); Putnam Resources v. Frenkel & Co., Inc., 1992 WL 394386, *2 (Conn.Super.Ct.1992); cf. Mendel v. Hewitt, 161 A.D.2d 849, 555 N.Y.S.2d 899 (App.Div. 1990) (noting the Defendants' argument that reposal of confidence must be justified and indicating that the issue of whether or not the confidence was justified is a factual issue), appeal after remand, 185 A.D.2d 387, 585 N.Y.S.2d 832 (1992). Courts do not accept the argument that a relationship of trust is justified between parties to a business transaction. Grumman Allied Industries, 748 F.2d at 739; Beneficial Commercial Corp., 601 F.Supp. at 772. Courts have explicitly rejected the proposition that a fiduciary relationship is created between a creditor and a third party merely by reason of a contract between that third party and the creditor's debtor. Beneficial Commercial Corp., 601 F.Supp. at 772; Du Pont v. Perot, 59 F.R.D. 404, 409 (Bankr.S.D.N.Y.1973).
*526 The Debtors and Cofacredit were never in privity, nor did they negotiate any business transactions. There was no business relationship between the two parties, much less a relationship of trust. The relationship alleged by the Plaintiff was one of a creditor โ third party, a relationship which by itself cannot give rise to a fiduciary duty. Therefore, any reliance on the part of Cofacredit was not justified.
A confidential relationship arises when one party places confidence in the other with a resulting superiority and influence on the other side. Francois v. Francois, 599 F.2d 1286, 1292 (3d Cir.1979), cert. denied, 444 U.S. 1021, 100 S.Ct. 679, 62 L.Ed.2d 653 (1980). New York fiduciary law embraces not only the traditional trustee and beneficiary relationship, but also more informal relationships, where it is clearly evident that one party reasonably trusted another. Brass, 987 F.2d at 150-51. Examples include priest/parishioner, bank/depositor, majority/minority shareholders, subsidiary executives/parental corporate entity, close friends, and family members. Id.
Although the focus of the inquiry is shifting away from the parties' formal legal relationship to their reasonable expectations, the rule of caveat emptor remains valid in New York. Brass, 987 F.2d at 150; Banque Arabe Et Internationale D'Investissement v. Maryland Nat'l Bank, 819 F.Supp. 1282, 1292 (Bankr.S.D.N.Y.1993), later proceeding, 850 F.Supp. 1199 (Bankr.S.D.N.Y.1994); Brown v. Stinson, 821 F.Supp. 910, 914-15 (Bankr.S.D.N.Y.1993). In order for the expectations to be reasonable, the relationship must first develop a high degree of trust between the parties from which a duty may arise. Brown, at 914-15. "Frequently, it is said that their relationship must inspire the disclosure, and that the relationship cannot merely emerge from the revelation's wake." Reed, 601 F.Supp. at 715; see also Litton Industries, Inc. v. Lehman Bros. Kuhn Loeb, Inc., 767 F.Supp. 1220, 1231-32 (Bankr. S.D.N.Y.1991), rev'd on other grounds, 967 F.2d 742 (2d Cir.1992). Unilateral investment of confidence by one party is insufficient to encumber the other with the obligations and duties of a confidential relationship. Litton Industries, Inc., 767 F.Supp. at 1232; Reed, 601 F.Supp. at 715. Courts must look to the facts and circumstances in each case to determine if the confidence reposed is justified. Reed, 601 F.Supp. at 715. Prior business dealings may create confidential relationships, but arm's length commercial discussions between two business entities do not do so. National Westminster Bank, USA v. Ross, 130 B.R. 656, 679 (Bankr. S.D.N.Y.1991), aff'd without opinion, Yaeger v. National Westminster Bank, USA, 962 F.2d 1 (2d Cir.1992); Beneficial Commercial Corp., 601 F.Supp. at 772; Citytrust v. Atlas Capital Corp., 173 A.D.2d 300, 570 N.Y.S.2d 275 (App.Div.1991).
We are unable to find any cases in New York or other jurisdictions that justify such reliance and trust in a relationship as tenuous as Cofacredit's with the Debtors. The Debtors did not have prior business dealings with Cofacredit. Cofacredit negotiated its contract with HED-France without any contact with the Debtors. Later, the Debtors had, at most, a few meetings to discuss the agreement between HED-France and Cofacredit. One meeting was conducted in French. The limited correspondence between the firms was solely concerned with unpaid invoices. This does not create a relationship of trust. Cofacredit placed its trust in its customer, not its customer's customer.
2. SUPERIOR KNOWLEDGE
Under New York law, a duty to speak arises in a business transaction where one party possesses superior knowledge not readily available to the other and knows that the other is acting on the basis of mistaken knowledge. Aaron Ferer & Sons, Ltd., 731 F.2d at 123. Estoppel by concealing superior knowledge often occurs in cases involving sales transactions where a seller has adverse knowledge about a product that he fails to disclose to the buyer. See, e.g., Donovan v. Aeolian Co., 270 N.Y. 267, 271, 200 N.E. 815, 104 A.L.R. 546 (NY.1936).
There is an increasing tendency in New York courts to apply the rule of "superior knowledge" in contexts which at one time would have been subject to criticism. Chiarella *527 v. United States, 445 U.S. 222, 247-48, 100 S.Ct. 1108, 1124, 63 L.Ed.2d 348 (1980) (Blackmun, J., dissenting); Congress Financial Corp., 790 F.Supp. at 472; Beneficial Commercial Corp., 601 F.Supp. at 773; Minpeco, S.A. at 337; Gaines Service Leasing Corp. v. Carmel Plastic Corp., 105 Misc.2d 694, 432 N.Y.S.2d 760, 763 (Civ.Ct. Kings Co.1980), aff'd, 113 Misc.2d 752, 453 N.Y.S.2d 391 (App.Div.1981). Consistent with other jurisdictions, New York now limits the ability to take advantage of ignorance. Brass, 987 F.2d at 151-52; Banque Arabe, 819 F.Supp. at 1292. This, of course, broadens the duty to speak, but even in those cases where the duty has been enlarged, courts have not extended such a duty to one who is not a party to the transaction. Chiarella, 445 U.S. at 247-48, 100 S.Ct. at 1124 (Blackmun, J., dissenting); Congress Financial Corp., 790 F.Supp. at 472; Beneficial Commercial Corp., 601 F.Supp. at 773; Minpeco, S.A. at 337; Gaines Service Leasing Corp., 432 N.Y.S.2d at 763. Moreover, the Plaintiff has not alleged that it relied on any inaction or conduct of the Debtors before entering into the financing agreement with HED-France.
Again, Cofacredit transacted no business with the Debtors. These parties had no contractual relationship, nor were they negotiating one. Cofacredit's business relationship and contract were with HED-France. New York courts have not found a duty to speak on the part of third parties to such a transaction even where superior knowledge existed.
3. UNJUST ENRICHMENT
Estoppel often arises in real estate disputes, where a plaintiff knowingly permits a defendant to mistakenly spend a large sum of money to improve a plaintiff's land. Georgia Pacific Co., 421 F.2d at 97; In re Ellison Associates, 13 B.R. at 676; Thompson, 128 N.Y. at 291, 28 N.E. at 633; Kiamesha Development Corp., 164 N.Y.S.2d at 961-62. New York courts have held that "the duty to speak is not necessarily a legal obligation to do so but it is founded upon a sense of justice and fair play invoked by the courts to compel a man to act when in all good conscience an honest man would have acted." Columbia Broadcasting System, Inc. v. Stokely-Van Camp, Inc., 522 F.2d 369, 378 (2d Cir.1975); Podolsky v. Narnoc Corp., 149 Misc.2d 839, 572 N.Y.S.2d 618, 620 (1991), rev'd on other grounds, application granted, 196 A.D.2d 593, 601 N.Y.S.2d 320 (App.Div.1993); Ryder Truck Rental, Inc. v. Williamstown Wire & Cable Co., 62 Misc.2d 848, 309 N.Y.S.2d 508, 510 (1970); Simmons v. Westwood Apartments Co., 46 Misc.2d 1093, 261 N.Y.S.2d 736, 740 (1965), aff'd, 26 A.D.2d 764, 271 N.Y.S.2d 731 (App.Div.1966). However, this Court can find no application of this doctrine absent privity between the parties or an unjust enrichment. Moreover, the doctrine is applied to restore to a plaintiff, the benefit wrongfully obtained. Here the Debtors obtained no benefit. See infra Part IV.E.3.b.
The Plaintiff's reliance on In re Ellison Associates is misplaced. Ellison specifically states, in the sentence after the one cited in the Plaintiff's Response, that a relationship must exist between the parties for equitable estoppel to apply. In re Ellison Associates, 63 B.R. at 765. In Ellison, there was a relationship between a mortgagor and mortgagee of real estate. Id. at 758. Cofacredit and the Debtors were not involved in a real estate transaction, nor any transaction. The Plaintiff also erroneously relies on Ryder Truck Rental, Inc., 309 N.Y.S.2d at 509 (where there was a relationship between a lessor and lessee) and Simmons, 261 N.Y.S.2d at 738-39 (where there was privity of estate between the parties). Again, there simply was no relationship between Cofacredit and the Debtors. Cofacredit's agreement was with HED-France, an entity entirely unrelated to the Debtors.
Nor does the Debtors' silence offend our sense of justice, as they were not enriched by this transaction in the real estate cases cited above. The goods in dispute were not readily marketable in the American market. (Resp.Ex. 11, Lipszyc Dep. at 60; INF at ถ 20.) They were only prototypes for examination, so that style and technology recommendations could be to HED-France with the expectation that a changed product could be mass-marketed in the United States. It is not implausible for the Debtors to expect *528 that they would not have to pay for such goods.
This Court will not impose a duty to speak where none has been imposed before. Absent a duty to speak, this Court will not invoke the doctrine of estoppel against the Debtors. While it is true that a party should not base a claim on its own inequity, Imperator Realty Co. v. Tull, 228 N.Y. 447, 127 N.E. 263, 266 (1920), we do not believe the Debtors engaged in inequitable conduct. The Debtors can deny liability for invoices representing goods shipped from HED-France to the Debtors on consignment.
D. ESTIMATE OF THE ESTOPPEL CLAIM
While we conclude that Cofacredit's estoppel claim has no merit, we recognize that reasonable courts may differ and we acknowledge a one in five chance that this portion of the claim may get to a trier of fact and a one in four chance that the claim might succeed there. Again, since the magnitude of Claimant's loss is not in issue and there is no rational basis for allowing other than all or nothing under this theory, we value this portion of the claim at one twentieth of the total loss of $1,167,620 and estimate its value at $58,381.
E. THE FRAUD CLAIM
In its Amended Complaint, Cofacredit states as its second claim, that the Debtors made false representations to the Plaintiff. (Am.Compl. at ถ 23.) The Plaintiff contends that the Debtors knew the representations were false when made. Id. at ถ 24. The Plaintiff specifically alleges five representations that it claims the Debtors made. These are that:
1. The Debtors withheld from the Plaintiff, the fact that the goods covered in the HED-France invoices were sold not directly to Windsor Plumbing but to HED-USA, an entity whose existence the Plaintiff maintains the Debtors concealed from them. (Am. Compl. at ถ 25.)
2. The Debtors concealed from the Plaintiff, that the invoices it ultimately factored were not in some sense "genuine", since they misrepresented the true parties to the transaction. (Am.Compl. at ถ 26.)
3. The Debtors concealed from the Plaintiff, the fact that the consignment agreement, whereby HED-USA would market the merchandise of HED-France in the United States, required HED-France to make sales in excess of existing export insurance coverage. (Am.Compl. at ถ 28.)
4. The Debtors delivered to the Plaintiff, financial statements of Windsor Plumbing and "[f]alsely represented them as evidence of the creditworthiness of the purchaser. . . ." (Am.Compl. at ถถ 17, 27.)
5. The Debtors represented to the Plaintiff, that it would open letters of credit to pay for invoices when, in fact, the Debtors never intended to open such letters of credit. (Am. Compl. at ถ 29.)
In addition, the Plaintiff alleges that it relied on the representations of the Debtors, although it does not claim such reliance was reasonable. The Plaintiff further alleges that its reliance caused it injury by allowing the Debtors to factor $1,167,620 worth of invoices which would not have been factored absent such representation. (Am.Compl. at ถ 30.)
Cofacredit's claim is evidently for fraud. It is well-settled that a cause of action sounding in common law fraud must plead and prove by clear and convincing evidence each of the five following elements:
1. Misrepresentation of an existing material fact,
2. The Defendant knew his statement was false, or he made it with reckless indifference to its truth,
3. Intent to deceive, i.e. scienter,
4. The Plaintiff's justifiable reliance on the misrepresentation, and
5. Damages proximately caused by the reliance.
Young v. Keith, 112 A.D.2d 625, 492 N.Y.S.2d 489, 490 (1985) (listing the five elements); Channel Master Corp. v. Aluminum Ltd. Sales, Inc., 4 N.Y.2d 403, 176 N.Y.S.2d 259, 151 N.E.2d 833, 835 (1958); Calspan Corp. v. Fingermatrix, Inc., 104 A.D.2d 1016, 480 N.Y.S.2d 942, 943 (App.Div.1984) (explaining *529 that the Plaintiff's reliance on a misrepresentation must have been justified); Kuelling v. Roderick Lean Mfg. Co., 183 N.Y. 78, 75 N.E. 1098, 1100 (1905) (stating that an action for fraud will fail if any of the five elements is not proved); Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966 (2d Cir.1987) (enunciating the New York standard of proof in cases of common law fraud as clear and convincing); See also In re Steven Hanna, 163 B.R. 918, 925 (Bankr.E.D.N.Y.); Peerless Ins. Co. v. Nedelka, 155 B.R. 813, 816 (Bankr.D.Conn.1993).
1. MISREPRESENTATION OF AN EXISTING FACT
a. Concealment
The Plaintiff fails to indicate its ability to prove by clear and convincing evidence that the Debtors made a misrepresentation in any of the first three allegations. For this reason, those allegations will not support a claim for fraud. The first element of fraud is the misrepresentation of an existing fact made by the Defendants. The Plaintiff in allegations 1-3 does not assert that the Debtors made a misrepresentation but merely that they concealed the existence of certain information by their silence. An active concealment is substantively the same as an affirmative misrepresentation. 60 N.Y.Jur. 2d, Fraud and Deceit ง 88. Active concealment, however, implies purposeful misrepresentation, i.e., the Defendant's affirmative attempt to hide something. London v. Courduff, 141 A.D.2d 803, 529 N.Y.S.2d 874, 875 (App.Div.1988). Mere silence is not active concealment, 60 N.Y.Jur.2d, Fraud and Deceit ง 89, and the Plaintiff does not claim more than silence on the part of the Debtors.
Assuming that the Plaintiff meant passive nondisclosure rather than active concealment, it should be noted that liability for nondisclosure is narrower than for active concealment. United States v. Dial, 757 F.2d 163, 168 (7th Cir.1985), cert. denied, 474 U.S. 838, 106 S.Ct. 116, 88 L.Ed.2d 95 (1985). Mere nondisclosure is not actionable unless there is a duty to speak. Brass, 987 F.2d at 150-51. We have already concluded that with regard to the Plaintiff's estoppel claim the Debtors had no duty to speak; for the same reasons they have none here. Having no duty to speak and not having spoken, there was neither active nor passive concealment and, hence, no liability. The Debtors made no misrepresentation of an existing fact, and thus, the Plaintiff cannot prevail on a fraud claim based upon these allegations.
b. Presenting Financial Statements
In its fourth allegation, the Plaintiff claims that it relied to its detriment on financial statements supplied to it by the Debtors, and that the Debtors, as purchasers of goods from HED-France, represented these statements as evidence of their creditworthiness. However, these financial statements did not constitute a knowing misrepresentation intended to deceive.
French Embassy officials obtained financial statements from Windsor Plumbing for purposes essentially left unexplained to the Debtors. (May 18, 1989 Deposition of Sholam Weiss at 28-30; INF at ถถ 17, 18.) These officials apparently turned the statements over to Cofacredit. Thus, it appears that Windsor Plumbing's financial statements surfaced in the hands of an unintended third party.
The law in this jurisdiction with regard to third-party reliance for misrepresentations by a defendant is clear. A plaintiff to whom the representations are not made directly may not recover for fraud unless the defendant intended or expected the misrepresentation to reach that particular plaintiff, or a class of persons including the plaintiff. Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441, 444 (1931), not followed by, Credit Alliance Corp. v. Arthur Anderson & Co., 101 A.D.2d 231, 476 N.Y.S.2d 539 (App.Div.1984), rev'd, certified question answered, Credit Alliance Corp. v. Arthur Anderson & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985); Kuelling, 75 N.E. at 1100. The measure of liability is intention or expectation, and thus something stronger than mere foreseeability. See Rosen v. Spanierman, 894 F.2d 28 (2d Cir. 1990) (stating that a buyer of a painting cannot maintain an action for fraud absent *530 evidence that the seller intended or expected representations that the seller made to donees to be repeated to buyer); Chase Manhattan Bank, N.A. v. Fidata Corp., 700 F.Supp. 1252 (Bankr.S.D.N.Y.1988) (explaining that a misrepresentation can support a claim for fraud by a third party if the maker of the misrepresentation intended or had reason to expect the misrepresentation would be repeated to that third party). Since the Defendants did not appear to have intended that Cofacredit receive the financial statements, they are not liable to Cofacredit for having made an actionable misrepresentation.
2. INTENT TO DEFRAUD
a. The First Four Allegations
Even if the first four allegations were in fact misrepresentations of an existing fact, the Plaintiff would still have to allege and prove an intent to defraud to sustain its fraud claim, and it does not. The Plaintiff offers no direct evidence whatsoever that the Defendants had an intent to defraud. However, direct evidence is not necessarily required, since courts will often infer such intent from the totality of the pertinent circumstances. In re Hutchinson, 27 B.R. 247, 251 (Bankr.E.D.N.Y.1983); In re Newmark, 20 B.R. 842, 858 (Bankr.E.D.N.Y.1982); In re Lacey, 85 B.R. 908, 910 (Bankr.S.D.Fla.1988). In fact, intent to defraud is often established from circumstantial evidence and the inferences that may be deduced from such evidence. Goshen Litho, Inc. v. Kohls, 582 F.Supp. 1561, 1564 (Bankr.S.D.N.Y.1983).
In this case, the Plaintiff does not even claim the existence of circumstantial evidence from which the Court might conclude that an intent to defraud existed. A motive for undertaking a fraud can act as a surrogate for intent, but the only motive the Plaintiff alleged, inflating the value of the Windsor World inventory, is factually unsustainable. See infra Part IV.E.3.b. Thus, the fraud claim, based upon allegations 1-4 would fail, because the Plaintiff does not offer proof of an intent to defraud.
b. Promise to Issue Letters of Credit
In the fifth allegation, the Plaintiff claims that the Defendants had an intent to defraud when they promised to open letters of credit to pay certain invoices. In a facsimile sent August 12, 1988, from Lipszyc to Cofacredit, the Debtors promised to open letters of credit to ". . . pay for the balance of the invoices due until the end of the year." (Resp.Ex. 14; Pl.['s] SOF at ถ 78; INF at ถ 30.) Jarry, in a facsimile to Lipszyc dated August 17, 1988, confirmed receipt of this message, saying "Cofacredit agrees with L.C." (Resp.Ex. 15; Pl.['s] SOF at ถ 79.) The Plaintiff further alleges that the Debtors ". . . never did furnish letters of credit . . ." (Pl.['s] SOF at ถ 82.) The Debtors never denied these allegations. Following this exchange and between August 26, 1988 and September 23, 1988, the Plaintiff, in alleged reliance upon the promise to open letters of credit, accepted assignment of fifteen more invoices under its Factoring Agreement with HED-France.
The Plaintiff claims that the Debtors never intended to open the letters of credit. However, Cofacredit has proffered nothing to substantiate this contention and relies only upon the bare fact that no letters of credit were ever opened. As the court noted in Brown v. Lockwood, 76 A.D.2d 721, 432 N.Y.S.2d 186, 195 (1980), "Fraudulent intent not to perform a promise cannot be inferred merely from the fact of non-performance." In order to establish scienter, a plaintiff must establish that the defendant had no intention of keeping his promise at the time the promise was made. Id. at 194. Therefore, an offer of proof in addition to the non-performance is required to sustain a claim for fraud. Id. at 195; Songbird Jet, Ltd. v. Amax, Inc., 581 F.Supp. 912, 925 (Bankr.S.D.N.Y.1984), supplemental opinion, 605 F.Supp. 1097 (Bankr.S.D.N.Y.1985), aff'd without opinion, 779 F.2d 39 (2d Cir.1985), aff'd without opinion, 812 F.2d 713 (2d Cir. 1987). Having offered to produce no additional proof to show that the Debtors lacked the intention to honor their promise when made, the Plaintiff's allegation five would not support a finding of fraud.
*531 3. RELIANCE
Even had the Plaintiff indicated that it could prove the first three elements of fraud by clear and convincing evidence, it would still have had to show not only that it had relied on the misrepresentation of the Debtors, but also that such reliance was reasonable. In re Tesmetges, 74 B.R. 911, 916 (Bankr.E.D.N.Y.1987), aff'd, 86 B.R. 21 (Bankr.E.D.N.Y.1988), aff'd, 862 F.2d 304 (2d Cir.1988). A creditor may show actual reliance by demonstrating that the creditor extended credit only in response to the representation. In re Mitchell, 70 B.R. 524, 527 (Bankr.N.D.Ill.1987). A court may measure the reasonableness of a creditor's reliance upon a false representation by employing an objective standard to determine the degree to which it exercised ordinary care. Tesmetges, 74 B.R. at 916. The degree to which a creditor follows its own policies and procedures in more than a perfunctory manner is one such objective standard. Mitchell, 70 B.R. at 527; In re Jacox, 115 B.R. 218, 221 (Bankr.D.Neb.1988).
a. The First Four Allegations
Cofacredit did not reasonably rely on the alleged misrepresentations claimed in the first four allegations. The Plaintiff had seemingly sophisticated procedures to insure that it would not be defrauded when factoring invoices. In its standard agreement with customers, Cofacredit arrogated to itself the right to contact the buyer and verify the accuracy of the account. (Resp. Ex. 6 at ถ 4.) Furthermore, Cofacredit had a complicated procedure to alert buyers that the invoices of their supplier were being factored. Jarry apparently explained these procedures in great detail to the employees of HED-France. (Resp. Ex. 7, at ถถ 5-6.)
Cofacredit simply did not follow its own procedures, and thus, even if the Defendants had made misrepresentations with the requisite intent, the Plaintiff cannot now be heard to say that its reliance was reasonable. Cofacredit did not follow its own procedures as far as account verification is concerned. It sent the Defendants a first account verification on April 15, 1988. (Resp. Ex. 8; Pl.['s] SOF at ถ 69.) That document instructed the recipient to ". . . kindly send the letter back to us with your signature in agreement . . ." The Debtors never did this, and the Plaintiff makes no claim of having received such a letter. (INF at ถ 25) Yet, Cofacredit continued to factor invoices for approximately five more months. In July, Cofacredit apparently attempted another account verification. (Pl.['s] SOF at ถ 70.) Again, Cofacredit continued to factor invoices into September without any written confirmation that the account debtor actually owed the amounts claimed. This lack of verification should have raised a red flag. Exercise of ordinary care by a sophisticated lender would require that it cease factoring invoices until the situation clarifies itself.
Finally, even if the Defendants had made a misrepresentation of existing fact by issuing the financial statements, it cannot be said that Cofacredit reasonably relied on such misrepresentation when entering into the Factoring Agreement with HED-France. Cofacredit offers nothing to indicate that any of its employees evaluated the financial statements before it made the decision to extend credit. (INF at ถ 18) Absent such indication, it is impossible to conclude reasonable reliance.
4. ESTIMATE
Each and every element of common law fraud must be proved by clear and convincing evidence. In the present case, the Plaintiff has not offered to prove: (1) misrepresentation of an existing fact, (2) scienter, and (3) reasonable reliance. Thus, this claim for relief should fail. However, here again we recognize that perhaps one court in ten might permit this cause of action to go to a finder of fact, and once having gotten there, we believe that the range of possible recoveries would probably be as follows:
Amount of
Possible Award Probability Expected Value
$1,167,620 0 $ 0
750,000 .05 40,875
500,000 .10 50,000
250,000 .30 75,000
0 .55 0
TOTAL EXPECTED VALUE $165,875
Allowing as we did above only a one out of ten chance that the sum calculated above *532 might be awarded on this cause of action, we value the claim therefore at the sum of $16,587.50.
F. THE RICO CLAIMS
1. THE PLAINTIFF'S ALLEGATIONS
Cofacredit alleges that the Defendants with others violated 18 U.S.C. 1962(c) by conducting the affairs of an enterprise, an association in fact, through a pattern of racketeering activity. (Am.Compl. at ถ 16.) More specifically, Cofacredit alleges that the Defendants engaged in a pattern of racketeering activity that included violations of 18 U.S.C. งง 1341 (mail fraud) and 1343 (wire fraud). These acts, among others, constitute predicate RICO acts. The Plaintiff further claims that such racketeering activity commenced at least as early as April 1988 and continued through the time the Amended Complaint was filed in January of 1989. (Am.Compl. at ถ 16.) In addition, the Plaintiff claims that the Defendants and others conspired to commit predicate RICO acts and thus violated 18 U.S.C. ง 1962(d). Id. A more nuanced, although not necessarily more enlightening, RICO claim is included in the Plaintiff's post-pleading submission. (Resp. at ถถ 47-52.)
2. THE LAW
RICO in pertinent part makes it unlawful:
. . . for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . .
18 U.S.C. ง 1962(c). In addition, the statute also makes it unlawful:
. . . for any person to conspire to violate any of the provisions of section (a), (b), or (c) of this section.
18 U.S.C. ง 1962(d).
The terms "racketeering activity", "person", "enterprise", and "pattern of racketeering activity" are defined in pertinent part as follows:
(1) "racketeering activity" means . . .
B) any act which is indictable under any of the following provisions of Title 18 United States Code . . . section 1341 (relating to mail fraud), section 1343 (relating to wire fraud) . . .
(3) "person" includes any individual or entity capable of holding a legal or beneficial interest in property;
(4) "enterprise" includes any individual, partnership, corporation, association or other legal entity, and any union or individuals associated in fact although not a legal entity;
(5) "Pattern of racketeering activity" requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity; . . .
Id. งง 1961(1)(3)(4)(5).
Any private party injured in his business or property as a result of any RICO predicate acts may sue and recover threefold damages and reasonable attorney's fees. Id. ง 1964(c).
Courts have further defined the concepts of "enterprise" and "pattern of racketeering" in the RICO context. In United States v. Turkette, 452 U.S. 576, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981), the Supreme Court stated that: "The enterprise is an entity, for present purposes[,] a group of persons associated together for a common purpose of engaging in a course of conduct . . . [an enterprise] is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." Id. at 581-85, 101 S.Ct. at 2528-29. Thus, for an enterprise to constitute a "group of individuals associated in fact," it must exhibit a "community of interest" and have a "continuing core of personnel." United States v. Errico, 635 F.2d 152, 156 (2d Cir.1980); See also United States v. Minicone, 960 F.2d 1099, 1106 (2d Cir.1992), cert. denied, ___ U.S. ___, 112 S.Ct. 1511, 117 L.Ed.2d 648 (1992). Even though proof of various racketeering acts may possibly be used to establish the existence *533 of an enterprise, the enterprise as defined in Turkette and Errico must still be alleged and proved. United States v. Coonan, 938 F.2d 1553, 1559-60 (2d Cir.1991). It is important to remember that: "The `enterprise' is not the `pattern of racketeering activity'; it is an entity separate and apart from the pattern of activity in which it engages." Turkette, 452 U.S. at 583, 101 S.Ct. at 2529.
The Supreme Court amplified the meaning of the "pattern of racketeering activity" when it held that:
RICO's legislative history reveals Congress' intent that to prove a pattern of racketeering activity a plaintiff or prosecutor must show that the racketeering predicates are related and that they amount to or pose a threat of continued criminal activity.
H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 2900, 106 L.Ed.2d 195 (1989) (emphasis in original).
A number of means are available by which the inter-relationship between acts may establish the existence of a pattern. Some such means are proof of the temporal proximity of the acts, their common goals, or a similarity in method among the acts. Of course, the degree of proximity, similarity in methods or goals, and repetitions directly determines the extent to which the acts establish a pattern. United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir.), cert. denied, 493 U.S. 811, 110 S.Ct. 56, 107 L.Ed.2d 24 (1989). The Supreme Court has further defined the meaning of continuity as it relates to the conduct of criminal activity within a "pattern of racketeering." It held that:
Continuity is both a closed and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition (citations omitted). . . . A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates over a substantial period of time. Predicate acts extending over a few weeks or months and threatening future criminal conduct do not satisfy this requirement . . .
H.J. Inc., 492 U.S. at 241-43, 109 S.Ct. at 2902. See Qantel Corp. v. Niemuller, 771 F.Supp. 1361, 1370-71 (Bankr.S.D.N.Y.1991) (stating that predicate acts taking place within at most a few months of each other are not sufficient to establish continuity); Azurite Corp. v. Amster & Co., 730 F.Supp. 571, 581 (Bankr.S.D.N.Y.1990) (maintaining that a series of predicate acts occurring over seven months do not constitute continuity for purposes of a pattern of racketeering activity). But see Polycast Technology Corp. v. Uniroyal Inc., 728 F.Supp. 926, 947-48 (Bankr. S.D.N.Y.1989) (declaring that predicate acts occurring within eight and one-half months sufficient to establish continuity). A pattern, then, is not continuous over a closed period if it takes place during fewer than eight months.
The courts have also dealt with the issue of the threat of future criminal conduct as a component of continuity within the meaning of a "pattern of racketeering activity." The Second Circuit has held that an act performed in the furtherance of a racketeering enterprise ". . . automatically carries with it the threat of continued racketeering activity." Indelicato, 865 F.2d at 1383-84. The same court went on to say, however, that:
When . . . there is no indication that the enterprise whose affairs are said to be conducted through racketeering acts is associated with organized crime, the nature of the enterprise does not of itself suggest that racketeering acts will continue, and proof of continuity of racketeering activity must thus be found in some factor other than the enterprise itself.
Beauford v. Helmsley, 865 F.2d 1386, 1391 (2d Cir.1989) (en banc), vacated, remanded, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584, original decision adhered to, 893 F.2d 1433 (2d Cir.), cert. denied, 493 U.S. 992, 110 S.Ct. 539, 107 L.Ed.2d 537 (1989). Thus, unless organized criminal elements are involved, proof of the enterprise must be adduced separately from proof of the alleged racketeering activity to prove the open-ended continuity suggested by a "threat of continued criminal activity."
*534 In addition to the "enterprise" and the "pattern", the plaintiff in a civil RICO action must also allege and prove the predicate acts by a preponderance of the evidence. Cullen v. Margiotta, 811 F.2d 698, 731 (2d Cir.), cert. denied, 483 U.S. 1021, 107 S.Ct. 3266, 97 L.Ed.2d 764 (1987); Liquid Air Corp. v. Rogers, 834 F.2d 1297 (7th Cir. 1987), cert. denied, 492 U.S. 917, 109 S.Ct. 3241, 106 L.Ed.2d 588 (1989). The predicate acts in these cases are violations of the federal mail and wire fraud statutes.[7] To show such violations, the Plaintiff must establish that the Defendants engaged in a scheme to defraud, with the specific intent to defraud (scienter), and used either the United States mail or interstate wires or both in furtherance of the scheme. McEvoy Travel Bureau, Inc. v. Heritage Travel, Inc., 904 F.2d 786, 790 (1st Cir.1990), cert. denied, 498 U.S. 992, 111 S.Ct. 536, 112 L.Ed.2d 546 (1990); See also United States v. Von Barta, 635 F.2d 999, 1005 n. 14 (2d Cir.1980), cert. denied, 450 U.S. 998, 101 S.Ct. 1703, 68 L.Ed.2d 199 (1981).
Scienter is often difficult to prove directly but it may be established by circumstantial evidence. United States v. Panza, 750 F.2d 1141, 1149 (2d Cir.1984). Some courts have held that:
[a] common method for establishing a strong inference of scienter is to allege facts showing a motive for committing fraud and a clear opportunity for doing so. Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater. . . .
Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.1987) (citations omitted). See also United States v. Green, 745 F.2d 1205, 1207 (9th Cir.1985) (stating that the plaintiff satisfies the requirement of proof of specific intent if ". . . it proves the existence of a scheme which was `reasonably calculated to deceive persons of ordinary prudence and comprehension,' and this intention is shown by examining the scheme itself.").
However, the requirement of demonstrating scienter is not met if a motive is alleged which makes no economic sense. Drexel Burnham Lambert Inc. v. Saxony Heights Realty Associates, 777 F.Supp. 228, 238-39. (Bankr.S.D.N.Y.1991)
Pursuant to 18 U.S.C. ง 1962(d), it is also actionable for an individual to conspire to violate the RICO statute. Agreement to commit the predicate acts that violate the RICO statute is the essence of ง 1962(d). Section 1964(c) creates a civil cause of action for any violation of ง 1962 provided that some injury has occurred. However, since an agreement by itself cannot cause an injury, Congress presumably intended that defendants must have completed some predicate acts to be liable under the statute.[8] Without completion of such acts in furtherance, it would not be possible for an injury to have occurred. Medallion TV Enters. v. SelectTV of California, Inc., 627 F.Supp. 1290, 1297-98 (C.D.Cal.1986), aff'd, 833 F.2d 1360 (9th Cir.1987), cert. denied, 492 U.S. 917, 109 S.Ct. 3241, 106 L.Ed.2d 588 (1989). In New York at common law, a civil conspiracy claim must also be founded on an injury resulting from an unlawful overt act. See infra, Section G. Thus, a plaintiff seeking treble damages for a RICO conspiracy must plead and prove by a preponderance of the evidence that: 1) the defendant personally agreed to violate at least two predicate acts 2) the defendant willfully became a member of such conspiracy 3) plaintiff suffered an injury and 4) defendant proximately caused that injury. United States v. Ruggiero, 726 F.2d 913, 921 (2d Cir.), cert. denied sub nom, Rabito v. United States, 469 U.S. 831, 105 S.Ct. 118, 83 L.Ed.2d 60 (1984); *535 Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23-25 (2d Cir.1990); United States v. Carter, 721 F.2d 1514, 1528-29 (11th Cir.1984).
Finally, "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity . . ." Fed.R.Civ.P. 9(b). The Second Circuit has interpreted this to mean that charges of fraud involving federal statutes must specifically identify the time, place, originator, and content of any alleged misrepresentation. In addition, misrepresentation may not be alleged generally against a group of defendants. The Plaintiff must specify the role that each defendant played in the scheme to defraud. DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir.1987); See also McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992); Dileo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990) (". . . `circumstances' must be pleaded in detail. This means the who, what, when, where, and how: the first paragraph of any newspaper story."); Bennett v. Genoa AG Center, Inc., 142 B.R. 616, 622 (Bankr.N.D.N.Y.1992).
While fraud usually must be pleaded with particularity, it may be pleaded upon information and belief when the information necessary to complete the plaintiff's complaint lies almost exclusively within the control of the opposing party. DiVittorio, 822 F.2d at 1248. Nevertheless, the plaintiff continues to carry the burden of alleging the facts on which his beliefs are based. Id. Furthermore, when considering a motion to dismiss, the plaintiff's allegations of fact are assumed true. Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986).
3. APPLICATION OF THE RICO STATUTE TO COFACREDIT'S CLAIMS
a. Particularity of Pleading
Cofacredit's RICO claim as stated in the Amended Complaint would be subject to a motion to dismiss for failure to plead mail and wire fraud with particularity. To the extent that this Court can decipher Cofacredit's pleadings, all the RICO pleadings are made only on "information and belief." (Am. Compl. at ถถ 15-21.) Such pleading would still be insufficient even if one could assume that Cofacredit was not in a position to know the relevant facts concerning the scheme to defraud, since virtually no facts at all were alleged to support its beliefs. Moreover, Cofacredit did not specify the precise role that each of the Defendants played in the alleged scheme to defraud.
It is clear, however, that Cofacredit has knowledge of invoice dates, dates when misrepresentations as to the genuineness of HED-France invoices were made and by whom, who concealed the existence of the Distribution Agreement, who delivered the financial statements, and who allegedly authorized the issuance of the letters of credit. (Pl.['s] Resp. at ถถ 56-83.) Thus, a better-crafted, second amended complaint, if permitted, could conceivably overcome the infirmities of the first two.
b. Mail and Wire Fraud
Even if Cofacredit's RICO claim were not dismissed for failure to plead fraud with particularity, it would still fail, because the Plaintiff's submission was devoid of any indication of the scienter that it alleged in the Amended Complaint and that it is required to prove in order to sustain a claim for mail and wire fraud. Recognizing that motive is probative of scienter, to meet its burden of proof on this issue, the Plaintiff alleged that the Debtors concocted a complex scheme to defraud. According to Cofacredit, the motive that drove the scheme was the desire to increase the capital base of Windsor World.
The Plaintiff asserts that the Defendants accomplished this goal by adding to the inventory of Windsor World the value of the so-called "consigned merchandise" of HED-USA, thereby artificially inflating its capital base. The Plaintiff contends that this enhanced the ability of Windsor World to sell its securities to the public. (Am.Compl. at ถถ 15, 18.) Such a scheme on the part of Windsor World is unsubstantiated. As we have already discussed (INF at ถ 31.), the Debtors have submitted documents tending to negate this allegation while the Claimant *536 has offered nothing to bolster its theory. The conclusion of scienter therefore falls with the negation of the premise of inventory manipulation.
c. The RICO Enterprise
Assuming, arguendo, that the Plaintiff were able to establish the predicate acts of mail and wire fraud, its RICO claim would still fail, because there is no indication that it can establish the existence of an enterprise. Cofacredit claims, but offered nothing to substantiate, that the Defendants constituted an "enterprise" within the meaning of the RICO statute. A "group of individuals in fact" may be an "enterprise", but to be so designated it must exhibit a community of interest. Cofacredit proffered nothing to indicate that such a community of interest ever existed. For this reason alone, it is not likely to prevail on its RICO cause of action.
What appears to have existed, is two groups with quite different interests. The French defendants apparently made off with Cofacredit's money. The Plaintiff never claimed that the American group, including Windsor Plumbing, ever received or in any way benefitted from these funds. Furthermore, the Plaintiff has not proffered anything whatsoever to suggest that the American Defendants had any interest in the purported scheme.
Even if Cofacredit had linked the French Defendants and Debtors through a "community of interest", no RICO enterprise could be established unless the Plaintiff alleged and proved a continuing core of personnel. Cofacredit neither claimed a continuing core of personnel nor offered anything to substantiate its existence.
d. The Pattern of Racketeering Activity
For a "pattern of racketeering activity" to exist, the racketeering predicate acts must "amount to or pose a threat of continued criminal activity". H.J. v. Northwestern Bell, 492 U.S. at 237-39, 109 S.Ct. at 2900. Cofacredit neither claims that Debtors are involved in organized crime, nor does it attempt to show that the predicate acts are likely to continue. To meet its burden on the element of contunuance, Cofacredit dates the beginning of the scheme as April 1988. (Am. Compl. at ถถ 16-17.) The end of the scheme was signaled by Cofacredit's refusal to factor further HED-France invoices after the end of September 1988. (Pl.['s] SOF at ถ 82.) Such a closed period must comprise a "substantial period of time." H.J. v. Northwestern Bell, 492 U.S. at 242, 109 S.Ct. at 2902. Based upon other cases in this circuit, the six months the Plaintiff apparently claims the scheme operated, is too short a period to constitute a "substantial period of time." Thus, the facts that Cofacredit has presented do not support a conclusion that a sufficient pattern of racketeering activity ever existed.
e. The RICO Conspiracy
The facts submitted to support Plaintiff's cause of action for the Debtors conspiracy to violate the RICO statute are insufficient. The claimants must allege that each member of the conspiracy personally agreed to participate in activities prohibited under the RICO statute; the Plaintiff makes no such allegations. In addition no such agreement could even be remotely inferred from the Plaintiff's submission. Moreover, the Plaintiff must show that it suffered an injury from predicate acts prohibited under the RICO statute. We concluded earlier, with respect to the substantive RICO claims that the Plaintiff's chance of proving the predicate acts of wire and mail fraud against the Debtors was small. Accordingly, with the problems of proof highlighted above, the probability of success on this claim is appreciably smaller than on the substantive RICO claim.
f. Estimation
The opportunity for Cofacredit to prevail on its RICO claims is remote. The Plaintiff did not plead its claim with particularity and did not adequately plead the predicate acts of mail and wire fraud. Furthermore, Cofacredit did not demonstrate nor indicate a probability of demonstrating the existence of a RICO enterprise or a pattern of racketeering, nor did it sufficiently plead or offer to prove a civil RICO conspiracy.
The Court calculates the expected recovery based upon the Plaintiff prevailing on its *537 RICO claim as an amount approaching zero, yet the Court recognizes that randomly-selected juries might have reached the following results yielding an expected recovery value on these claims of $145,000:
Amount of
Possible Award Probability Expected Value
$3,502,860 0 $ 0
700,000 .1 70,000
250,000 .2 50,000
100,000 .25 25,000
0 .45 0
TOTAL EXPECTED VALUE $145,000
G. THE COMMON LAW CONSPIRACY CLAIM
1. DISCUSSION
Cofacredit alleges a common law conspiracy to defraud. (Am.Compl. at ถถ 32-34.) This is a civil conspiracy claim defined in New York as:
an agreement or confederation between two or more persons intentionally participating in the furtherance of a preconceived common plan or purpose to defraud. To constitute an actionable conspiracy, plaintiffs must establish not only the corrupt agreement between two or more persons, but their intentional participation in the furtherance of the plan or purpose, and resulting damage. Kashi v. Gratsos, 790 F.2d 1050, 1055 (2d Cir.1986) (quoting Von [Vom] Lehn v. Astor Art Galleries, Ltd. [86 Misc.2d 1], 426 [380] N.Y.S.2d 208, 210 [532, 538] (Sup.Ct.1980 [1976])); See also Arlilnghaus v. Ritenour, 622 F.2d 629, 639 (2d Cir.1980), cert. denied, 449 U.S. 1013, 101 S.Ct. 570, 66 L.Ed.2d 471 (1980).
To prove a civil conspiracy, a plaintiff must demonstrate: (1) a corrupt agreement, (2) an overt act in furtherance, and (3) resulting damage. Kashi, 790 F.2d at 1055. "Proof of a civil conspiracy under New York Law `connect[s] a defendant with the transaction and . . . charge[s] him with the acts and declarations of his co-conspirators'." Kashi, 790 F.2d at 1054 (quoting Green v. Davies, 182 N.Y. 499 75 N.E. 536 (1905)).
The Plaintiff's claim, however, probably will fail because civil conspiracy is not an independent tort in New York State. Valdan Sportswear v. Montgomery Ward & Co., 591 F.Supp. 1188, 1191 (Bankr.S.D.N.Y. 1984). Thus, liability for a civil conspiracy rests on whether the "overt acts alleged" create an action under traditional tort law. United States v. Rivieccio, 846 F.Supp. 1079, 1083-84 (Bankr.E.D.N.Y.). We have already concluded that the Plaintiff's fraud claim is weak. Since fraud is the tort that forms the basis for the Plaintiff's conspiracy claim, the probability of its prevailing on the conspiracy claim is even less likely than the probability of its prevailing on the underlying tort claim. Moreover, the Plaintiff offered nothing from which the Court could conclude that a "corrupt agreement" existed among the Defendants.
2. ESTIMATE OF THE CONSPIRACY CLAIM
While this Court concludes that the Plaintiff has a very small chance of prevailing on the conspiracy claim, a randomly-selected jury might have reached the following results yielding an expected recovery value on the claim of $102,000:
Amount of
Possible Award Probability Expected Value
$1,167,620 0 $ 0
900,000 .02 18,000
600,000 .13 78,000
300,000 .20 16,000
0 .75 0
TOTAL EXPECTED VALUE $102,000
Adjusting this for only a one out of five chance that this cause of action would get to a jury gives us a value of $20,400.
VII. THE ESTIMATE OF COFACREDIT'S CLAIM IN BANKRUPTCY
Cofacredit has advanced five causes of action to support its claim in bankruptcy. The Court has estimated the value of each of these claims as follows:
Claim Amount
1. Contract $ 58,000
2. Estoppel 58,381
3. Fraud 16,587.50
4. RICO 145,000
5. Conspiracy 20,400
When damages are sought under several legal theories for the same injury, the verdicts should be identical, but only a single recovery permitted. Wickham Contracting Co. v. Board of Education, 715 F.2d 21, 28 *538 (2d Cir.1983); See also Ostano Commerzanstalt v. Telewide Systems, Inc., 880 F.2d 642, 649 (2d Cir.1989); Clark v. Taylor, 710 F.2d 4, 8 (1st Cir.1983). The Plaintiff, especially when the value of a claim is based upon an estimate, is entitled to recover damages under the theory resulting in the largest recovery. Compare Rita v. Carella, 394 Mass. 822, 477 N.E.2d 1016, 1018 (1985). Thus, the value of Cofacredit's claim is estimated at $145,000.
Settle order within fifteen days on ten days' notice.
NOTES
[1] Although the creditor filed a separate identical claim against each of the three debtors, in their submissions herein neither side discussed the extent to which any of the causes of action which are the subject of the claims may have a different impact upon each of the separate debtors. Plaintiff's submission in response to Pretrial Order at 2-3 asserts joint and several liability on the basis of debtor's Fifth Amended Plan of Reorganization. Debtor's submission does not address this issue. Therefore, for purposes of this estimation proceeding, we have treated the three claims as a single claim against a consolidated debtor. Since the parties have sought merely a number without an apportionment analysis, that is all that we have sought to provide.
[2] Despite the pre-trial order in which the Court instructed the parties to submit a statement of undisputed facts, the parties were unable to agree on such a statement, and each side separately submitted its version of all facts. The Debtors' version of facts are numbered from 1 to 55 and the Plaintiff's are numbered 56 to 85.
[3] "It is truth very certain that when it is not in our power to determine what is true, we ought to follow what is most probable." Rene Descartes, as quoted in The World of Mathematics, p. 1360, James R. Newman, Editor, Simon & Schuster, 1956.
[4] The February 15, 1989 letter to Frank Cohen, then counsel to Cofacredit, from Mayer Rispler, CPA, accountant to Windsor World during the preparation of the prospectus in connection with its initial public offering. (Debtors' Unnumbered Submission)
[5] While the Hong Kong case refers to "material", we believe it meant "essential." A material term is any term properly bearing upon the subject matter of the contract. Essential terms are those items whose agreement is prerequisite to the formation of a contract. This distinction will be followed herein notwithstanding less precise language in some of the cases cited.
[6] While the issue in the Hunter case was an interstate choice of laws problem, the approach and conclusions should apply as well to an international choice of laws problem.
[7] Since the relevant language in the mail and wire fraud statutes is essentially the same, it is appropriate to apply the same analysis to the allegations under both statutes. Carpenter v. United States, 484 U.S. 19, 20-26, 108 S.Ct. 316, 320 n. 6, 98 L.Ed.2d 275 (1987).
[8] Surprisingly, less proof is required to sustain a charge of criminal RICO conspiracy than for a claim of civil RICO conspiracy. The government does not have to prove any act in furtherance to prevail in a criminal RICO conspiracy case. United States v. Teitler, 802 F.2d 606, 613 (2d Cir.1986). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551563/ | 170 B.R. 999 (1994)
In re Charles Robert SIMON and Judith Ann Simon, Debtors.
Bankruptcy No. BK 93-50945.
United States Bankruptcy Court, S.D. Illinois.
August 15, 1994.
*1000 Barry R. Bruhn, Reed, Bruhn and Wangler, P.C., Belleville, IL, for debtors.
Steven N. Mottaz, Chapter 7 Trustee, Thomas, Mottaz, Eastman & Sherwood, Alton, IL.
OPINION
KENNETH J. MEYERS, Bankruptcy Judge.
Debtor, Charles Simon, was injured on the job on February 28, 1984, while working for Missouri Pacific Railroad Company (hereafter "Missouri Pacific" or "railroad"). Subsequently, on January 6, 1987, Mr. Simon and Missouri Pacific entered into a Release and Settlement Agreement (hereafter "Agreement") pursuant to which the railroad agreed to pay Mr. Simon, or his estate upon his death, certain periodic payments,[1] as follows:
1. $1,320 per month commencing January 15, 1987, and continuing each month thereafter for a period of twenty years, or the remainder of Mr. Simon's life, whichever period is longer, with an increase each year at the compounded rate of two percent per annum;
2. $25,000 on December 15, 1991;
3. $25,000 on December 15, 1996;
4. $50,000 on December 15, 2006.
The Agreement expressly provides that the payments "constitute damages on account of personal injury or sickness . . ." and that Mr. Simon "accepts such payments in full settlement of all injuries and damages arising out of the subject matter of this Agreement. . . ."
Under the terms of the Agreement, the parties also agreed that Missouri Pacific would assign its obligation to make the periodic payments to Beneficial Insurance Group Holding Company (hereafter "Beneficial"), which would, in turn, purchase an annuity from Western National Life Insurance Company to fund the payments to Mr. Simon. The terms of the assignment are set forth in an Assignment Agreement (hereafter "Assignment") entered into by Missouri Pacific, Beneficial and Mr. Simon on January 6, 1987.
Certain terms of the Agreement and the Assignment are relevant to the issues before the Court. The Agreement provides that Beneficial is the sole owner and beneficiary of the annuity, and both the Agreement and the Assignment provide that Mr. Simon has no legal or equitable interest in the annuity. Additionally, the Agreement contains an antialienation provision which states that "[t]he amounts paid and to be paid to Simon are his sole and separate property and no other person has any right or interest therein. No amount payable under this Agreement shall be subject to anticipation or assignment by any payee thereof, nor to attachment, seizure or legal or equitable process by any creditor of any payee prior to its actual receipt by such payee, nor may any payee accelerate, defer, increase or decrease any payment."
On December 29, 1993, Mr. Simon and his wife filed a joint petition for relief under chapter 7 of the Bankruptcy Code, prompting the trustee to seek turnover of the monthly payments.[2] On their bankruptcy schedules, debtors' only reference to the payments appears as income of $1486 monthly on schedule I.[3] Debtors do not list the payments as personal property on schedule B. In fact, they expressly state on schedule B that they have no interests in annuities, ERISA plans, other liquidated debts owing debtors, trusts, or any other personal property of any kind. Debtors do not claim an *1001 exemption for the payments on schedule C. In response to the trustee's motion for turnover of the monthly payments, debtors contend that the payments are not subject to turnover because they are periodic, are necessary to meet debtors' basic living expenses, and are in the nature of income rather than a lump sum settlement.
Section 541 of the Bankruptcy Code defines the parameters of the bankruptcy estate. 11 U.S.C. section 541. With certain exceptions delineated in subsections (b), (c)(2) and (d), section 541 provides that the bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. section 541(a)(1).
Here, debtors contend that the payments should be characterized as income. Presumably, by this they mean that Mr. Simon, on the petition date, had no legal or equitable interest in payments which were to be paid post-petition. However, debtors provide no evidence or authority to support this notion and it is contrary to the evidence contained in the record. The Agreement in settlement of Mr. Simon's claim against the railroad pre-dates the bankruptcy petition and it plainly states that the payments constitute damages for personal injury. Mr. Simon's right to receive payments pursuant to the Agreement is a contractual right which vested upon execution. The fact that Mr. Simon and the railroad agreed that a portion of the damages would be paid through periodic payments does not alter the nature of his interest as a "present right to receive future payments." Walro v. Striegel, 131 B.R. 697, 702-03 (S.D.Ind.1991). It is of no consequence that the Agreement and the Assignment provide that Mr. Simon has no legal or equitable interest in the annuity because the annuity is merely a mechanism for Beneficial, the owner and beneficiary of the annuity, to fund the payments which it is contractually bound to make to Mr. Simon. See, e.g., In re Pizzi, 153 B.R. 357, 360-61 (Bankr.S.D.Fla.1993).
Having determined that Mr. Simon had an interest in the payments as of the commencement of the bankruptcy case, the Court will turn next to the question of whether the payments are excluded from the estate under subsections 541(b), (c)(2) or (d). The Court notes that the debtors have not argued that the payments at issue fall within these exceptions, and even the most cursory review of subsections 541(b)[4] and (d)[5] reveals that they are inapplicable in this case. A more compelling argument for exclusion from the estate can be made under subsection 541(c)(2).[6] However, the debtor has presented *1002 nothing to this Court to indicate that the payments are, in fact, benefits under an ERISA[7] qualified employee benefit plan, Patterson v. Shumate, ___ U.S. ___, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992); In re Hall, 151 B.R. 412, 417-421 (Bankr. W.D.Mich.1993) (defining "ERISA qualified" employee benefit plan), or a spendthrift trust which is enforceable under state law. E.g., Morter v. Farm Credit Services, 937 F.2d 354 (7th Cir.1991), cert. denied, ___ U.S. ___, 112 S. Ct. 2991, 120 L. Ed. 2d 868 (1992); Matter of Perkins, 902 F.2d 1254, 1256 n. 1 (7th Cir.1990); Walro v. Striegel, 131 B.R. at 700. There is nothing in the record, in the first instance, to suggest the existence of an employee benefit plan. And, notwithstanding the anti-alienation provisions in the Agreement, there is no evidence that the Agreement and Assignment were intended to establish a trust for Mr. Simon taking the form of the annuity.[8] "The courts will not simply assume that an annuity is a trust in the absence of evidence that the parties had the specific intent to create a trust. . . ." Walro v. Striegel, 131 B.R. at 701.
Here, all indicia of trust are absent. The word trust never appears in the documents, and no one is given duties or powers common to trustees (including discretion to determine the amount or frequency of payments which provide for Mr. Simon's support and maintenance). There is no identifiable trust res since, by the terms of the originating documents, Beneficial is the owner and beneficiary of the annuity and Mr. Simon has neither a legal nor equitable interest in it. See id.; In re Riley, 91 B.R. 389, 390-91 (Bankr. E.D.Va.1988). Rather, Mr. Simon has a purely contractual interest in the periodic payments arising from the Agreement and the Assignment. Walro v. Striegel, 131 B.R. at 701 & n. 1; In re Riley, 91 B.R. at 391; In re Johnson, 108 B.R. 240, 242 (Bankr.D.N.D. 1989). "[T]he annuity payments . . . are nothing more than interval payments made on an underlying debt, which represents payments on account of personal bodily injury." In re Johnson, 108 B.R. at 243.
Moreover, even if the Court assumes, arguendo, that a trust exists, such trust is self-settled and is, therefore, invalid as a spendthrift trust under Illinois law. See, e.g., In re Morris, 144 B.R. 401, 404 (Bankr. C.D.Ill.1992), aff'd, 151 B.R. 900 (C.D.Ill. 1993) (Illinois law does not permit one to create a spendthrift trust with his own property for his own benefit); Matter of Perkins, 902 F.2d at 1257 n. 2; In re Silldorff, 96 B.R. 859, 864 (C.D.Ill.1989). See also In re Ziegler, 156 B.R. 151, 154 (Bankr.W.D.Pa.1993) (debtor, in effect, placed his own assets in purported trust when he agreed to the creation of an annuity contract to fund a personal injury settlement, and a settlor may not be the beneficiary of his own spendthrift trust); In re Jordan, 914 F.2d 197, 198-200 (9th Cir.1990) (same); Walro v. Striegel, 131 B.R. at 701-02 (same); In re Riley, 91 B.R. at 391 n. 1 (same). Thus, in the absence of evidence excepting the payments from the estate under subsection 541(c)(2), the Court finds that Mr. Simon's interest in the payments is an asset of the estate.
Since the property in question belongs to the estate, the debtors' only recourse is to find an exemption statute under Illinois law to shelter the payments.[9] As noted earlier, debtors have not claimed the payments as exempt under any statutory provision. However, at the hearing of this matter, debtors seemed to argue that the payments are exempt because an annuity is funding the payments.
The Illinois legislature has seen fit to exempt certain personal property owned by *1003 debtors from judgment, attachment, or distress for rent. 735 ILCS 5/12-1001. Subsection 12-1001(f) contains the sole reference to annuity contracts under this section. It exempts:
(f) All proceeds payable because of the death of the insured and the aggregate net cash value of any or all life insurance and endowment policies and annuity contracts payable to a wife or husband of the insured, or to a child, parent, or other person dependent upon the insured, whether the power to change the beneficiary is reserved to the insured or not and whether the insured or the insured's estate is a contingent beneficiary or not[.]
735 ILCS 5/12-1001(f) (emphasis added).
When interpreting Illinois statutes, the Court need look no further than the statutory language itself when that language is clear and unambiguous. E.g., In re Bateman, 157 B.R. 635, 638 (Bankr.N.D.Ill.1993) (citing Matter of Barker, 768 F.2d 191, 194-95 (7th Cir.1985); In re Marriage of Logston, 469 N.E.2d 167, 171 (Ill.1984)). That is the case here. It is clear that the provision in question exempts, first, all insurance proceeds payable to a delineated dependent of the deceased insured by reason of the insured's death, id. at 638, and, second, the cash surrender value of life insurance policies, endowment policies and annuity contracts if that cash value is payable to a debtor who is either a delineated dependent of the insured under the policy or contract, or the owner of the policy or contract. Id. at 638-39.
Here, the periodic payments to Mr. Simon are not proceeds payable by reason of death. Additionally, the record does not reflect, in the first instance, that the annuity contract provides cash surrender value.[10] And, even if the Court assumes, arguendo, that cash value is provided for in the annuity contract, there is no evidence before the Court suggesting that the cash surrender value belongs to either Mr. Simon or his wife, who have no legal or equitable interests in the annuity.
Another reference to annuity contracts appears in 735 ILCS 5/12-1006[11] which governs exemptions for retirement plans. When considered in context, it is clear that the provision in question is concerned with annuities used in retirement planning and is not intended to encompass an annuity established to fund a structured tort settlement. See, e.g., In re Johnson, 108 B.R. at 242; In re Simon, 71 B.R. 65, 65-66 (Bankr.N.D.Ohio 1987). Debtors have made no showing whatsoever that the annuity at issue is a retirement plan within the meaning *1004 of section 5/12-1006 or anything but a fund for the payment of personal injury damages.
Other than the "wild card" exemption provision, 735 ILCS 5/12-1001(b), subsection 12-1001(h)(4) appears to be the only exemption provision which offers relief for the debtors. It provides that a debtor may exempt "[t]he debtor's right to receive, or property that is traceable to . . . a payment, not to exceed $7,500 in value, on account of personal bodily injury of the debtor or an individual of whom the debtor was a dependent[.]" 735 ILCS 5/12-1001(h)(4). The fact that an annuity was purchased by Beneficial to fund the payments to Mr. Simon does not alter their character as payments on account of personal bodily injury within the specific meaning of subsection 12-1001(h)(4). See, e.g., In re Johnson, 108 B.R. at 242-44; In re Simon, 71 B.R. at 66-67. The Court finds, therefore, that the periodic payments are property of the bankruptcy estate and must be turned over to the trustee subject to debtors' rights of exemption under subsection 12-1001(h)(4) and the "wild card" exemption provision. 735 ILCS 5/12-1001(b).
NOTES
[1] These periodic payments were in addition to a lump sum payment of $250,000, less certain adjustments, paid to Mr. Simon at the time of execution of the Release and Settlement Agreement.
[2] The Court notes that the trustee's motion for turnover does not address the payments of $25,000 and $50,000 which Mr. Simon is to receive on December 15, 1996, and December 15, 2006, respectively.
[3] On their statement of financial affairs, debtors also indicate that they had income of slightly more than $17,000 in each of 1991, 1992 and 1993 stemming from the annuity.
[4] Subsection 541(b) states:
(b) Property of the estate does not include
(1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor;
(2) any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case;
(3) any eligibility of the debtor to participate in programs authorized under the Higher Education Act of 1965 . . . or any accreditation status or State licensure of the debtor as an educational institution [sic] or
(4) any interest of the debtor in liquid or gaseous hydrocarbons. . . .
[5] Subsection 541(d) states:
(d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
[6] Subsection 541(c) states:
(c)(1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law
(A) that restricts or conditions transfer of such interest by the debtor; or
(B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor's interest in property.
(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
[7] ERISA is the acronym for the Employee Retirement Income Security Act of 1974.
[8] On schedule B, debtors expressly state that they have no interests in ERISA plans or in trusts.
[9] Illinois has opted out of the exemptions set forth in 11 U.S.C. section 522(d). 735 ILCS 5/12-1201.
[10] In fact, the annuity contract is not a part of the record.
[11] This section provides in its entirety:
Exemption for retirement plans. (a) A debtor's interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment, attachment, execution, distress for rent, and seizure for the satisfaction of debts if the plan (i) is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended, or (ii) is a public employee pension plan created under the Illinois Pension Code, as now or hereafter amended.
(b) "Retirement plan" includes the following:
(1) a stock bonus, pension, profit sharing, annuity, or similar plan or arrangement, including a retirement plan for self-employed individuals or a simplified employee pension plan:
(2) a government or church retirement plan or contract;
(3) an individual retirement annuity or individual retirement account; and
(4) a public employee pension plan created under the Illinois Pension Code, as now or hereafter amended.
(c) A retirement plan that is (i) intended in good faith to qualify as a retirement plan under the applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended, or (ii) a public employee pension plan created under the Illinois Pension Code, as now or hereafter amended, is conclusively presumed to be a spendthrift trust under the law of Illinois.
(d) This Section applies to interests in retirement plans held by debtors subject to bankruptcy, judicial, administrative or other proceedings pending on or filed after August 30, 1989.
735 ILCS 5/12-1006 (footnotes omitted and emphasis added). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551574/ | 170 B.R. 565 (1994)
NORTH PENN TRANSFER, INC., debtor-in-possession, Plaintiff,
v.
POLYKOTE CORP., Defendant.
Civ. A. No. 94-869.
United States District Court, E.D. Pennsylvania.
July 15, 1994.
Ronald Amato, Schattenstein and Amato, Allentown, PA, for plaintiff.
Charles L. Howard, Gollatz, Griffin, Ewing & McCarthy, Philadelphia, PA, for defendant.
MEMORANDUM
GILES, District Judge.
The parties have filed cross-motions for summary judgment. For the reasons stated below, plaintiff's motion will be denied and defendant's motion will be granted.
I. INTRODUCTION
The facts of this case
follow a pattern that has been replicated many times in the era of "deregulation" following enactment of the Motor Carrier Act of 1980, 94 Stat. 793: A motor carrier negotiates with a shipper rates less than the tariff rates that the Interstate Commerce Act (ICA), 49 U.S.C. § 10701 et seq., requires the carrier to "publish and file" with the ICC, 49 U.S.C. § 10762. After the shipments are delivered and paid for (sometimes years after), the carrier goes bankrupt and its trustee in bankruptcy sues the shipper to recover the difference between the negotiated rates and the tariff rates.
Reiter v. Cooper, ___ U.S. ___, ___, 113 S. Ct. 1213, 1216, 122 L. Ed. 2d 604 (1993).
In the instant case, a bankrupt carrier, North Penn Transfer, Incorporated ("North Penn") asserts a claim as debtor-in-possession for freight "undercharges" against a shipper, Polykote Corporation ("Polykote"), based upon fifty-three shipments transported by North Penn between August, 1990 and January, 1992. Polykote, in its answer, raises various defenses and counterclaims. However, its motion for summary judgment is based solely on the contention that it, as a "small-business concern," is exempt from liability for freight undercharge claims by virtue of the Negotiated Rates Act of 1993 ("NRA"), Pub.L. No. 103-180, 107 Stat. 2044.
*566 II. DISCUSSION
A. NRA's Small-Business Exemption
NRA provides that a defendant qualifying as a "small-business concern" under the Small Business Act, 15 U.S.C. § 631 et seq., is exempt from liability for freight undercharge claims brought by a motor carrier. 49 U.S.C. § 10701(f)(9) (codifying NRA § 2(a));[1]Lewis v. H.E. Wisdom & Sons, Inc., No. 93-C-0985, 1994 WL 110659 (N.D.Ill., March 30, 1994); Jones Truck Lines v. AFCO Steel, 849 F. Supp. 1296, 1301-02 (E.D.Ark.1994); Allen v. ITM, Ltd., 167 B.R. 63 (M.D.N.C.1994); Jones Truck Lines v. Asco Hardware, Inc., No. LR-C-93-459, 1994 WL 261005 (E.D.Ark., March 8, 1994); Adrian Waldera Trucking v. Quality Liquid Feeds, 848 F. Supp. 853, 855 (W.D.Wis.1994); De'Medici v. FDSI Management Group, Nos. 90 B 21673, 92 A 00841, ___ B.R. ___, 1994 WL 322606 (Bankr. N.D.Ill., July 1, 1994); Hoarty v. Bennett Transportation, Inc., 170 B.R. 158 (Bankr. D.Neb.1994); Hoarty v. Midwest Carriers Corp., 168 B.R. 978 (Bankr.D.Neb.1994). It is undisputed that Polykote is a "small-business concern" as defined by NRA. See Affidavit of Small Business Status, attached as Exhibit "C" to Polykote's Motion for Summary Judgment. It follows as a matter of law that Polykote is not liable for any alleged undercharges, and the Complaint must be dismissed.
B. The Effect of North Penn's Bankruptcy Status
North Penn is a chapter 11 debtor-in-possession under the jurisdiction of the United States Bankruptcy Court for the Eastern District of Pennsylvania, Case No. 92-10776F. It argues that NRA's small-business exemption does not apply to cases, such as the instant one, where the undercharge claim is brought by the estate of a bankrupt carrier.
The Bankruptcy Code provides, in pertinent part:
[A]n interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an . . . applicable nonbankruptcy law
. . . . .
(B) that is conditioned on the insolvency or financial condition of the debtor . . ., and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor's interest in property.
11 U.S.C. § 541(c)(1). North Penn argues that this provision invalidates NRA's small-business exemption insofar as it applies to an action brought by the estate of a bankrupt carrier.[2] The court disagrees. We find, as have the vast majority of federal courts that have considered the matter, that the small business exemption applies to freight undercharge claims brought by the estate of a bankrupt carrier. Lewis v. H.E. Wisdom, supra; Jones Truck Lines v. AFCO Steel, supra, 849 F.Supp. at 1304-05; Allen v. ITM, supra; Jones Truck Lines v. Asco Hardware, Inc., supra; De'Medici, supra; Hoarty v. Bennett Transportation, supra; *567 Hoarty v. Midwest Carriers, supra; but see, In re Bulldog Trucking, Inc., Nos. C-B-90-31936, 92-3100, 1994 WL 197420 (Bankr. W.D.N.C., Feb. 18, 1994) (holding that 11 U.S.C. §§ 541(c)(1), 363(l) preclude enforcement of 49 U.S.C. §§ 10701(a)-(c) & (e)-(f) against a carrier's trustee in bankruptcy), aff'd by Order and Judgment dated June 21, 1994 (W.D.N.C.) (attached as Exhibit to Plaintiff's Supplement to its Response to Defendant's Statement of Material Facts).
By its plain language, 11 U.S.C. § 541(c)(1) only invalidates a law that meets three conditions: (1) the law is a provision of "applicable nonbankruptcy law" that (2) "is conditioned on the insolvency or financial condition of the debtor" and that (3) "effects or gives an option to effect a forfeiture, modification, or termination of the debtor's interest in property." It is beyond question that the NRA, as a federal statute amending the Interstate Commerce Act, is an "applicable nonbankruptcy law." Thus, the first of these three criteria is met. We will assume without deciding that the NRA's small business exemption, insofar as it acts to reduce the money potentially available to the estate, "effects . . . a forfeiture, modification, or termination of the debtor's interest in property," and thus satisfies the third criterion. We find, however, that NRA's small-business exemption is not "conditioned on the insolvency or financial condition of the debtor."
By its plain language, NRA's small-business exemption is conditioned solely on the "small-business" status of the defendant in a freight undercharge claim. It applies without regard to the "insolvency or financial condition" of the plaintiff carrier. Accordingly, 11 U.S.C. § 541(c)(1)'s second criterion is not satisfied, and the small-business exemption may be applied even in a case, such as this one, where a freight undercharge claim is brought by the estate of a bankrupt carrier.
North Penn argues, however, that NRA is applicable only to motor carriers that are "no longer transporting property." See Plaintiff's Response to Defendant's Statement of Material Facts as to which Defendant Contends there is no Genuine Issue to be Tried and Defendant's Motion for Summary Judgment at 3-4 (citing NRA § 2, codified at 49 U.S.C. § 10701(f)(1)(A)). North Penn contends that this is tantamount to conditioning application of NRA on the "insolvency or financial condition of the debtor," and concludes that NRA cannot be applied in the instant case.
The court disagrees. Although NRA does limit application of some of its provisions to carriers that are "no longer transporting property," this limitation does not apply to NRA's small-business exemption. Even if the "no longer transporting" provision did apply to NRA's small-business exemption, it does not make that exemption conditional on "the insolvency or financial condition of the debtor."
1. NRA's small-business exemption applies regardless of whether the carrier is "no longer transporting"
North Penn correctly asserts that certain provisions of NRA apply only when the plaintiff carrier is "no longer transporting." 49 U.S.C. § 10701(f)(1) provides in pertinent part:
When a claim is made by a motor carrier . . ., regarding the collection of rates or charges for such transportation in addition to those originally billed and collected by the carrier . . ., the person against whom the claim is made may elect to satisfy the claim under the provisions of paragraph (2), (3), or (4) of this subsection, upon showing that
(A) the carrier . . . is no longer transporting property . . .; and
(B) [several other conditions are met].
The above-referenced paragraphs (2), (3) and (4), 49 U.S.C. § 10701(f)(2), (3), (4), establish specific ways by which a defendant may satisfy an undercharge claim when the claim involves shipments of 10,000 pounds or less, § 10701(f)(2), when the claim involves shipments of more than 10,000 pounds, § 10701(f)(3), and when the defendant is a "public warehouseman," § 10701(f)(4).
Thus, the plain language of NRA's relevant sections shows that "no longer transporting" condition applies only to the claim satisfaction mechanisms of §§ 10701(f)(2)-(4). The small-business exemption, § 10701(f)(9), *568 applies without regard to whether or not the carrier is still transporting property at the time suit is brought. Accord, Adrian Waldera Trucking, 848 F.Supp. at 855; Hoarty v. Midwest Carriers, supra, 168 B.R. at 984-85 (small-business exemption "stands on its own, without reference to the operating or non-operating status of the carrier"); De'Medici, supra, ___ B.R. at ___, 1994 WL 322606 at *4.
2. NRA's "no longer transporting" provision is not "conditioned on the insolvency or financial condition of the debtor"
Even if we were to conclude that NRA's small-business exemption applies only when the carrier is "no longer transporting," the Bankruptcy Code would not bar application of the small-business exemption in a suit brought by the estate of a bankrupt carrier. "[O]peration of [NRA's "no longer transporting" restriction] turns on whether the carrier is still transporting property whereas the operation of Section 541(c)(1) [of the Bankruptcy Code] depends on the financial status of the debtor. These two criteria are not the same." Jones Truck Lines v. AFCO Steel, 849 F.Supp. at 1305.
A carrier that is "no longer transporting property" has stopped operating as a carrier. It is logical to assume that some, perhaps most, of these former carriers are no longer operating because they are insolvent or at least because their "financial condition" did not justify continued operation. However, this is not necessarily the case. "There is a meaningful distinction between a debtor's financial condition and its operating status: . . . the forces of the marketplace and the incentive to maintain good business relations will restrain operating carriers from making unfounded or tenuous undercharge claims, but there is no such check on nonoperating carriers." Jones Truck Lines v. AFCO Steel, 849 F.Supp. at 1305. Thus, the restriction of certain provisions of NRA to situations where the carrier is no longer transporting property serves a purpose quite distinct from a restriction based upon the financial status of the carrier. We conclude that even those parts of NRA which are conditioned on the "no longer transporting" status of the carrier are not barred by § 541(c)(1) of the Bankruptcy Code. Accord, Jones Truck Lines v. AFCO Steel, supra; Allen v. ITM, supra; Hoarty v. Midwest Carriers, supra, 168 B.R. at 984-85.
An appropriate Order follows.
FINAL ORDER
AND NOW, this 14th day of July, 1994, upon consideration of the parties' cross-motions for summary judgment, it is hereby ORDERED that:
1. Plaintiff's motion is DENIED.
2. Defendant's motion is GRANTED.
3. Judgment is entered in favor of defendant and against plaintiff.
NOTES
[1] The NRA's small-business exemption provides in pertinent part:
. . . a person from whom the additional legally applicable and effective tariff rate or charges are sought shall not be liable for the difference between the carrier's applicable and effective tariff rate and the rate originally billed and paid
(A) if such person qualifies as a small-business concern under the Small Business Act (15 U.S.C. 631 et seq.)
49 U.S.C. § 10701(f)(9).
NRA § 2(c) provides that the above-quoted small-business exemption applies to "all claims pending as of the date of the enactment of [NRA] and to all claims arising from transportation shipments tendered on or before the last day of the 24-month period beginning on such date of enactment." Because NRA was enacted on December 3, 1993, and the instant case was filed on February 8, 1994, the provisions of NRA apply.
[2] NRA § 9 provides:
Nothing in this Act . . . shall be construed as limiting or otherwise affecting application of title 11, United States Code, relating to bankruptcy; title 28, United States Code, relating to the jurisdiction of the courts of the United States (including bankruptcy courts); or the Employee Retirement Income Security Act of 1974.
We will assume, without deciding, that NRA § 9 insures that, to the extent that the bankruptcy code protects North Penn's interests, those interests will not be modified by NRA. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551572/ | 170 B.R. 480 (1994)
In re Thomas J. POWERS, Debtor.
Bankruptcy No. 94-10995-WCH.
United States Bankruptcy Court, D. Massachusetts.
August 12, 1994.
*481 Michael B. Feinman, Andover, MA, for Thomas J. Powers.
Liam J. Vesely, Aloisi & Aloisi, Boston, MA, for Haymarket Co-op. Bank.
PRELIMINARY DECISION ON MOTION FOR RELIEF FROM STAY
WILLIAM C. HILLMAN, Bankruptcy Judge.
Haymarket Cooperative Bank ("Haymarket") seeks relief from the automatic stay so that it may foreclose on property mortgaged to it by Debtor. At the preliminary hearing it was agreed that I would first determine the efficacy of the waiver granted by Debtor to Haymarket pre-petition, as that issue may be determinative. If it should prove to be otherwise, a further hearing will be held. Haymarket has waived the 30-day deadline of 11 U.S.C. § 362(e).
*482 Findings of Fact
Debtor granted Haymarket a mortgage on property at 108 Dorchester Street, South Boston, Massachusetts, in 1990. He also had other indebtedness to Haymarket, secured by other properties. In 1992 the debt secured by the Dorchester Street mortgage was consolidated with the other indebtedness by means of a settlement agreement (the "Agreement") executed on or about April 29, 1992.
At the time the Agreement was executed, Debtor was the subject of a pending Chapter 11 case in this Court. In re Powers, No. 91-19764-CJK ("Powers I")
Paragraphs 1 and 8 of the Agreement, as relevant here, provide:
"1. Bankruptcy Court Approval. This Agreement shall not become effective unless and until either (a) the Bankruptcy Case is dismissed without prejudice by order of the Bankruptcy Court or (b) this Agreement is approved by order of the Bankruptcy Court (any such order, under either clause (a) or clause (b) above, is hereinafter referred to as the `Approval'. . . . "
"8. Relief from Automatic Stay. The issuance of the Approval shall constitute relief to Haymarket from the automatic stay pursuant to Section 362 . . . without the requirement of any further relief from the Bankruptcy Court, for all actions by Haymarket in carrying out the provisions of this Settlement Agreement or otherwise exercising its rights as mortgagee. . . . "
On May 14, 1992 Debtor moved to dismiss Powers I. Docket No. 23. There was no opposition to the motion and dismissal was allowed by an order entered June 18, 1992. Docket No. 25.
Debtor subsequently defaulted in his undertakings under the Agreement. Haymarket began foreclosure proceedings in accordance with the terms of the Agreement, which specified the order in which the various properties would be sold. One parcel was sold and thereafter Debtor brought the current proceeding. Haymarket moved for relief from the automatic stay. Debtor objects.
Discussion
As an initial matter, Debtor contends that the relief from stay provision of the Agreement applied only in Powers I and not in the present case. I ruled to the contrary from the bench. One of the triggers for approval of the relief from stay provision was dismissal. The language of the Agreement must contemplate that it would be effective in any further proceedings in which the automatic stay arose.
There remains the issue of the enforceability of the waiver, which I have taken under advisement.
The pre-petition waiver
In recent years large numbers of loans have gone into default. The result of the default is often, as in the case at bar, a "workout agreement" in which the parties restructure the transactions between them.
It has been said that "practically every loan modification or business workout agreement drafted today" contains bankruptcy waiver provisions, including the type presently before me. Jeffrey W. Warren and Wendy V.E. England, Pre-Petition Waiver of the Automatic Stay is Not Per Se Enforceable, Am.Bankr.Inst.J. 22 (March 1994). The cases determining the validity of such provisions are not in complete accord.
Waiver clauses are not per se invalid
The waiver is contained in a document executed before the commencement of proceedings under the Bankruptcy Code. The initial concern is whether it is a provision which is per se unenforceable in bankruptcy. Certain other common contractual and statutory clauses have been so held. See, e.g., Summit Investment & Development Corp. v. LeRoux (In re Leroux), 167 B.R. 318, 322 (Bankr.D.Mass.1993) (provision in limited partnership agreement depriving general partner of his office upon filing of a petition is an invalid ipso facto clause). The Second Circuit Court of Appeals has stated that "the debtor may not waive the automatic stay", Commerzanstalt v. Telewide Systems, Inc., 790 F.2d 206, 207 (2d Cir.1986), but that *483 case did not involve the issue before me and I believe that the case is inapplicable in the present context. The courts which have directly considered the issue with regard to pre-petition waivers have uniformly assumed that the clause remains valid.
In In re Cheeks, 167 B.R. 817 (Bankr. D.S.C.1994), Judge Bishop explained the reason that such clauses are generally enforceable against a debtor:
"Perhaps the most compelling reason for enforcement of the forbearance agreement is to further the public policy in favor of encouraging out of court restructuring and settlements. Bankruptcy courts may be an appropriate forum for resolving many of society's problems, but some disputes are best decided through other means. In the instant case the Debtor received relief under the forbearance agreement approximating that which would have been available in a bankruptcy proceeding. The Pending foreclosure sale was canceled, the foreclosure action was dismissed, and the Debtor gained an opportunity to start a new payment schedule. . . . To allow her now to receive the full benefits resulting from reimposition of the automatic stay as to RTC would be inconsistent with the Court's oft-stated skepticism regarding serial bankruptcy filings."
167 B.R. at 818 (citations omitted). See also In re Club Tower L.P., 138 B.R. 307, 311 (Bankr.N.D.Ga.1991), and cases cited.
I agree that pre-petition agreements waiving opposition to relief from the automatic stay may be enforceable in appropriate cases.
The waiver is not self-executing
Haymarket did not take literally the language of the Agreement that its approval "shall constitute relief . . . from the automatic stay pursuant to Section 362" but instead sought to obtain that relief from the Court. It is well that it did so, for I agree with Judge Markovitz that "the contention that this `waiver' is enforceable and self-executing is without merit." In re Sky Group International, Inc., 108 B.R. 86, 88 (Bankr.W.D.Pa. 1989). A motion for relief under § 362 is required for enforcement.
Validity against the third parties
A waiver by the debtor cannot bind third parties. As Judge Bishop held in Cheeks, supra:
"Enforcement of a forbearance agreement does not in itself mean that in all bankruptcy cases where one exists, the automatic stay will be lifted. These agreements do not oust this Court's Jurisdiction to hear objections to stay relief filed by other parties in interest. It simply means that this Court will give no weight to a Debtor's objection as this conflicts with and is in derogation of the previous agreement."
". . . [W]hen creditors and parties in interest entitled to notice on a motion to lift the stay do not object, the stay becomes lifted as though the motion is in default as the `objection' of the debtor is meaningless and of no effect because of the forbearance agreement."
Id. at 819-820.
Effect of waiver on debtor's conduct
Some courts have held that the debtor is not barred from contesting the relief from stay notwithstanding the pre-petition waiver. Farm Credit v. Polk, 160 B.R. 870 (M.D.Fla.1993), affirms a dual finding of the bankruptcy judge that (1) such agreements are not self-executing and (2) not sufficient grounds to lift the automatic stay in the absence of bad faith. Id. at 873. Since relief from stay for cause, or dismissal of the proceeding, would normally follow a finding that the filing of the original petition was in bad faith, under this view the "drop dead" agreement has no real value in and of itself.
In Farm Credit, Judge Kovachevich distinguished a number of Florida bankruptcy court decisions involving single asset debtors (which the debtor before him was not): In re International Supply Corp., 72 B.R. 510 (Bankr.M.D.Fla.1987); In re Gulf Beach Development Corp., 48 B.R. 40 (Bankr.M.D.Fla. 1985); In re Citadel Properties, 86 B.R. 275 (Bankr.M.D.Fla.1988); In re McBride Estates, Ltd., 154 B.R. 339 (Bankr.N.D.Fla. 1993); B.O.S.S. Partners I v. Tucker (In re B.O.S.S. Partners I), 37 B.R. 348 (Bankr. *484 M.D.Fla.1984). He held that, in each of those decisions, "the Bankruptcy Court, expressly or impliedly, determined that the debtor could not effectively reorganize." Id. at 872. If that were true, then the waiver clause has no effectiveness even in the single asset cases. My reading is otherwise.
Judge Paskay's holding in Gulf Beach Development is that, although the debtor "cannot be precluded from exercising its right to file Bankruptcy," 48 B.R. at 43, waivers of the right to object to relief from stay will be enforced. Judge Proctor agreed with both points in Citadel Properties, supra, as did Judge Robinson in In re Club Tower L.P., supra. Judge Paskay has, however, stated that he might decline to enforce the waiver in special circumstances, as he indicated in B.O.S.S. Partners, supra:
"[T]his Court is in agreement with the principle that a stipulation freely entered into by the parties is binding on the parties. In the context of a stay litigation, such a stipulation operates as a waiver by the debtor of any right to obtain protection from the Court against proceedings instituted by a secured party for the purposes of enforcing its security interest. This proposition, however, is not etched in cement and should not be applied in an inflexible and pragmatic manner and under proper circumstances, the Court may use its equitable powers under § 105 of the Code. For instance, if there is a radical and new development which drastically changes the economic picture and the value of the collateral . . . it is clear that this Court may grant additional relief to the debtor by way of injunctive relief."
37 B.R. at 351.
In the Northern District of Florida, it has been held that the actions of a debtor in opposing a motion for relief from stay where it has executed a pre-petition waiver are sanctionable. In re McBride Estates, 154 B.R. 339 (Bankr.N.D.Fla.1993).
International Supply is simply inapposite to the issue now before the court.
My view is that the waiver is a primary element to be considered in determining if cause exists for relief from the automatic stay under § 362(d)(1). However, the existence of the waiver does not preclude third parties, or the debtor, from contesting the motion. I disagree with McBride, supra.
Once the pre-petition waiver has been established, the burden is upon the opposing parties to demonstrate that it should not be enforced. In addition to the extraordinary matters which Judge Paskay listed in B.O.S.S. Partners, supra, the Court will consider other factors, such as the benefit which the debtor received from the workout agreement as a whole; the extent to which the creditor waived rights or would be otherwise prejudiced if the waiver is not enforced; the effect of enforcement on other creditors; and, of course, whether there appears to be a likelihood of a successful reorganization. While the last is generally considered an element of proof under § 362(d)(2)(B), an analysis in accordance with the discussion in In re Building 62 Ltd. Partnership, 132 B.R. 219, 222 (Bankr. D.Mass.1991) is certainly relevant in the present context.
Conclusion
In view of the above discussion, it will be necessary for an evidentiary hearing to be held on Haymarket's motion. It will be noticed by the Clerk. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551560/ | 170 B.R. 602 (1994)
In re CITI-TOLEDO PARTNERS, a California Limited Partnership, Debtor.
Bankruptcy No. 93-33474.
United States Bankruptcy Court, N.D. Ohio, Western Division.
June 23, 1994.
*603 Kenneth Baker, Toledo, OH, for Comm. Const. Corp.
H. Buswell Roberts, Jr., Toledo, OH, for Active Bldg. Systems, Guardian Insulation, Inc. and Carrier Michigan Co.
Dean Wyman, Derrick Rippy, Office of the U.S. Trustee, Cleveland, OH.
John Czarnecki, Toledo, OH, for Merit Plumbing, Inc.
James Sulewski, Toledo, OH, for Maumee Valley Drywall.
Michael Kennedy, Gen. Counsel, Citi-Equity Group, Inc., Culver City, CA.
Gary Cunningham, David Hart, Southfield, MI, for debtor.
David Leta, Salt Lake City, UT, for Weybridge, Inc.
Richard Malone, Toledo, OH, for Transtar Elec. Inc.
Amy Borman, Toledo, OH, for Country Const., Inc.
OPINION AND ORDER GRANTING MOTION OF COMMONWEALTH CONSTRUCTION CORPORATION, ET AL TO CONVERT CHAPTER 11 CASE TO CHAPTER 7 CASE AND DISMISSING UNITED STATES TRUSTEE'S MOTION TO APPOINT CHAPTER 11 TRUSTEE AS MOOT
WALTER J. KRASNIEWSKI, Bankruptcy Judge.
This matter is before the Court on the motion of Commonwealth Construction Corporation, Merit Plumbing, Inc., Country Construction, Inc., Transtar Electric, Inc., Active Building Systems, Guardian Insulation, Inc., and Carrier Michigan Co. (collectively the "Moving Creditors") to convert the chapter 11 bankruptcy case of Citi-Toledo Partners ("Toledo I") to a case under chapter 7 pursuant to 11 U.S.C. § 1112(b). The United States Trustee ("UST") has moved for the appointment of a chapter 11 trustee under § 1104. Toledo I has filed objections to the aforementioned motions. Upon consideration of the evidence adduced on the parties' respective motions, the Court finds that the Moving Creditors' motion is well taken and should be granted. The Court further finds that the UST's motion should be dismissed as moot.
FACTS
Toledo I and Citi-Toledo Partners II (collectively the "Toledo Partnerships") are limited partnerships which were formed in 1990 in order to construct and operate multi-family low income housing units in Maumee, Ohio. The Court shall hereinafter refer to the properties owned by the Toledo Partnerships collectively as the "Project".
The Project consists of a 160 unit multi-family apartment complex which is approximately 90% complete. The general partners of Toledo I and Citi-Toledo Partners II ("Toledo II") are Gary Lefkowitz ("Lefkowitz") and City Equity Group, Inc. ("CEG"). Lefkowitz formerly served as the president of CEG.
The Moving Creditors' claims arose from the construction of the Project. Construction on the Project began in June 1993. Thereafter, in November of 1993, construction was discontinued when the Toledo Partnerships failed to make payments on the debts incurred on the Project.
Prior Proceedings in This Court
A number of the Moving Creditors filed involuntary chapter 7 petitions against the Toledo Partnerships on December 9, 1993.
The Toledo Partnerships moved to transfer venue of their bankruptcy cases to the *604 United States Bankruptcy Court for the Central District of California on January 14, 1994 which motion was denied by the Court.
On April 12, 1994 the Court entered a consent order which constituted an order for relief pursuant to § 303 (the "Consent Order"). The Consent Order converted the Toledo Partnerships' involuntary chapter 7 cases to voluntary bankruptcy cases under chapter 11.
The Consent Order directed the Toledo Partnerships to file statements of financial affairs and schedules of assets and liabilities within 30 days of the entry of the Consent Order. The Consent Order further directed the Toledo Partnerships to appear at a meeting of creditors conducted by the UST pursuant to § 341 and § 521.
Toledo I also sought an additional ex parte extension of time until May 19, 1994 to file its bankruptcy schedules.
Proceedings in Other Jurisdictions Involving the Toledo Partnerships' General Partners
Lefkowitz was indicted in May of 1994 for his alleged fraudulent activities in marketing and managing partnerships in which Lefkowitz and CEG were general partners during Lefkowitz's tenure as president of CEG (the "Indictment").
Certain of the creditors of CEG (the "Minnesota Creditors") filed an involuntary bankruptcy petition under chapter 11 in the United States Bankruptcy Court for the District of Minnesota on May 18, 1994 (the "Minnesota Court"). On the same day, the Minnesota Court ordered that a trustee be appointed in CEG's bankruptcy case (the "Trustee Order").
However, the Minnesota Court stayed the Trustee Order on May 26, 1994 (the "Stay Order") in light of a stipulated agreement (the "Management Stipulation") entered into between the Minnesota Creditors, CEG and Weybridge, Inc. ("Manager"). The Stay Order incorporates both the Management Stipulation and a management agreement entered into between CEG and Manager (the "Management Agreement").
The Stay Order provides that the Trustee Order will "become fully effective" upon the expiration of the Management Stipulation which expires upon the earlier of 60 days from the date of the Stay Order, termination of the Management Agreement, or a default by the parties to the Management Stipulation.
The Management Agreement expressly provides that "[t]he actions of Manager . . . shall be solely as agent for [CEG], and Manager does not assume any fiduciary relationship with or for [CEG]". See Management Contract, at p. 1, para. 1.2. Further, the Stay Order states that the Manager is not "deemed to be a custodian, trustee, marshall, or other officer of the court within the meaning of 18 U.S.C. § 154".
Notwithstanding the fact that the Manager is not liable as a fiduciary of CEG's estate, the Management Stipulation provides that the Manager "[will] have, consistent with the Management Contract, the right to make all decisions with respect to the operations of [CEG and certain entities controlled by CEG]". See Management Stipulation, at p. 7, para 4. The Management Agreement delegates substantially all of the CEG's fiduciary duties to the Manager. See Management Agreement, p. 4-5, para. 4.4. Included within the Manager's duties is the task of "direct[ing] and instruct[ing] counsel for [CEG] and other professionals employed by [CEG]". See Management Agreement, at p. 3, para. 4.1(e).
Testimony at the Hearing on the Instant Motions
At the hearing, Kenneth Minnichiello ("Minnichiello"), president of Commonwealth Construction Corporation, testified that his company managed the construction work performed on the Project in accordance with a contract between the parties.
Minnichiello testified that, although the Toledo Partnerships experienced cash flow difficulties in July of 1993, his company continued to construct approximately 40% of the Project in reliance upon misrepresentations by CEG that CEG had sufficient funds to complete construction on the Project.
Minnichiello testified that Commonwealth has been required to furnish a security guard *605 at the Project twenty-four hours per day. Minnichiello further testified that Commonwealth has furnished "builder's risk" insurance on the Project. According to Minnichiello, builder's risk insurance generally covers occurrences such as fire, theft, property damage and "acts of God". However, Minnichiello testified that builder's risk insurance generally does not cover liability for personal injuries.
The Moving Creditors also presented the testimony of Michael Jacobson ("Jacobson") who is employed with CED Construction, Inc. ("CCI"), a company which specializes in developing and constructing multi-family housing projects ranging in size from 100 units to 500 units. A number of CCI's properties have been allocated low income housing tax credits. Although Jacobson testified that he has only recently been employed by CCI, Jacobson has been a member of the Michigan Bar for approximately 30 years and has specialized in the area of real estate transactions.
According to Jacobson, the low income housing tax credit is an income tax credit awarded by state agencies for multi-family low income housing properties based upon an allocation formula determined by such state agencies. The amount of the low income housing tax credit ("Credits") awarded represents a function of several factors including the cost of constructing such low income housing. Jacobson testified that the amount of financing available for low income housing tax credit properties is typically lower than that available for conventional properties because the rents which may be charged for low income housing tax credit properties are generally lower than for conventional properties.
Jacobson testified that, preliminarily, he estimated the value of the Project's real estate would be "at least" equal to the aggregate book value of the real estate listed in Toledo I and Toledo II's bankruptcy schedules if the Project could obtain Credits.
Although Jacobson testified that a developer in Ohio is by no means guaranteed an allocation of Credits, he stated that the Project could potentially generate $500,000-$600,000 in Credits. Jacobson testified that the Project's market value could be substantially lower if the Project could not obtain an allocation of Credits. Indeed, Jacobson testified that if Credits should not be available for the Project, the value of the Project could be less than the total costs of construction for the Project.
Jacobson testified that the Credits which had been allocated to the Toledo Partnerships expired on December 31, 1993. The parties do not dispute this fact.
Jacobson also testified that in order to obtain an allocation of Credits for 1994, an application must be filed by a developer with the State of Ohio on or before September 1, 1994. Jacobson testified that if an allocation of Credits was not obtained for the Project in 1994, the next available opportunity for a developer to obtain Credits for the Project would be in May, 1995.
Jacobson testified that, generally, the value of a real estate property is impaired the longer it remains idle. In Jacobson's view, such properties typically require a period of "rehabilitation".
CEG provided the testimony of Bruce Mallory ("Mallory") a principal of Business Consultants, Inc. which has been appointed to represent CEG's creditors in the Minnesota Court. Mallory testified that, in light of the fact that he has only recently been retained to represent the creditors in CEG's bankruptcy case, he has no knowledge as to whether CEG is paying real estate taxes for the Toledo Partnerships or as to the location of the Toledo Partnerships' bank accounts.
DISCUSSION
WHETHER THE CREDITORS HAVE ESTABLISHED "CAUSE" TO CONVERT OR DISMISS TOLEDO I'S CHAPTER 11 CASE
Applicable Statute
Section 1112(b) provides, in pertinent part, that:
on request of a party in interest or the United States trustee, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under *606 this chapter, whichever is in the best interest of creditors and the estate, for cause, including
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation[.]
Burden of Proof
The Moving Creditors bear the burden of proof on their motion by the preponderance of the evidence. In re A-K Enterprises, Inc., 111 B.R. 149 (Bankr.N.D.Ohio 1990); c.f. Grogan v. Garner, 498 U.S. 279, 286, 111 S. Ct. 654, 659, 112 L. Ed. 2d 755 (1991) (stating that "[b]ecause the preponderance-of-the-evidence standard results in a roughly equal allocation of the risk of error between litigants, [the Supreme Court] presume[s] that this standard is applicable in civil actions between private litigants unless `particularly important individual interests or rights are at stake.'") (quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 389-90, 103 S. Ct. 683, 691, 74 L. Ed. 2d 548 (1983)) (other citations omitted).
The Timing of the Creditors' Motion
Preliminarily, Toledo I argues that a court may not convert or dismiss a bankruptcy case prior to the expiration of the period during which the debtor has the exclusive right to file a plan. The Court disagrees. See In re Woodbrook Assoc., 19 F.3d 312, 316 (7th Cir.1994) ("[c]reditors need not wait until the debtor's exclusive right to file a plan has expired") (citing In re Park Ave. Partners Ltd. Partnership, 95 B.R. 605, 609 (Bankr.E.D.Wisc.1988)); In re Southern Int'l Co. L.P., 126 B.R. 223, 226 (Bankr.E.D.Va. 1991) (proper for United States Trustee to pursue motion for conversion during exclusivity period); c.f. Johnston v. Gem Dev. Co. (In re Johnston), 149 B.R. 158 (Bankr. 9th Cir.1992) (conversion warranted after less than 4 months subsequent to filing of petition).
Continuing Loss to or Diminution of the Estate and Absence of a Reasonable Likelihood of Rehabilitation
The Court finds that the continuing diminution of the estate and the absence of a reasonable likelihood of rehabilitation of Toledo I represents "cause" for conversion or dismissal under § 1112(b). See In re Johnston, 149 B.R. at 162 (finding cause under § 1112(b)(1) where debtor failed to maintain sufficient insurance on premises, failed to file annual report concerning common carrier certificate, lacked income which would indicate a reasonable likelihood of rehabilitation and the positions of creditors continued to erode).
Section 1112(b)(1) contemplates a "two-fold" inquiry into whether there has been a "continuing diminution of the estate and absence of a reasonable likelihood of rehabilitation." In re Photo Promotion Associates, Inc., 47 B.R. 454, 458 (Bankr.S.D.N.Y.1985) (citations omitted); see Clarkson v. Cooke Sales And Service Co. (In re Clarkson), 767 F.2d 417, 420 (8th Cir.1985) (bankruptcy court properly dismissed case under § 1112(b)(1) upon finding of an absence of sufficient financial data and "certain sources of income" coupled with an erosion in creditors' positions); A. Illum Hansen, Inc. v. Tiana Queen Motel, Inc. (In re Tiana Queen Motel, Inc.), 749 F.2d 146, 151-52 (2nd Cir. 1984) (debtor's failure to "devise a reorganization plan grounded in reality" within 15 months of petition warranted conversion under § 1112(b)(1), (2) and (3)), cert. denied, 471 U.S. 1138, 105 S. Ct. 2681, 86 L. Ed. 2d 699 (1985).
First, the Court finds that there has been a diminution of the estate. "All that need be found is that the estate is suffering some diminution in value". In re Kanterman, 88 B.R. 26, 29 (S.D.N.Y.1988). The fact that Commonwealth has been required to hire a security guard, thus adding another layer of administrative expense to this bankruptcy case and further eroding the position of the estate's creditors, has diminished the value of the estate. The accumulation of real estate taxes has also impaired the value of the estate. The fact that the Project has remained idle since November of 1993 has further impaired its value.
Second, the Court finds that Toledo I does not have a "reasonable likelihood of rehabilitation". See Clarkson, 767 F.2d at 420 (dismissal warranted where "the absence of financial *607 data and certain sources of income for the [debtors] indicate[d] the absence of a reasonable likelihood of rehabilitation"); Tianna Queen Motel, Inc., 749 F.2d at 146 (conversion under § 1112(b)(1), (2) and (3) warranted in light of debtors' "failure . . . to demonstrate that their prospects for prompt rehabilitation were based upon anything more substantial than [their] boundless confidence" in the 15 months after the filing of a chapter 11 petition); see also In re Wright Air Lines, Inc., 51 B.R. 96, 99 (Bankr. N.D.Ohio 1985) (stating that "[r]ehabilitation as used in 11 U.S.C. Section 1112(b)(1) means `to put back in good condition; re-establish on a firm, sound basis'") (citation omitted).
Toledo I does not have any employees. Nor does Toledo I have any operating income which could be utilized to pay expenses such as real estate taxes. In addition, Toledo I has not demonstrated an ability to fund completion of the Project.
Furthermore, Toledo I has allowed the Project's Credits to expire. Toledo I did not provide any evidence at the hearing indicating that it would be able to obtain Credits in the future.
Lastly, although the Bankruptcy Code contemplates liquidating plans of reorganization in certain circumstances, the Court cannot equate the determination of whether Toledo I possesses a reasonable likelihood of rehabilitation with Toledo I's ability to effectuate a liquidating plan. C.f. § 1141(d)(3)(A) (stating that a debtor does not receive a discharge where "[a] plan provides for the liquidation of all or substantially all of the property of the estate").
Conversion or Dismissal for Bad Faith
"It is well-settled that even though Chapter 11 does not expressly so state, bad faith may serve as a ground for dismissal of a petition." Michigan Nat'l Bank v. Charfoos (In re Charfoos), 979 F.2d 390, 392 (6th Cir.1992) (citations omitted).
At the hearing, Toledo I argued that its prepetition conduct is irrelevant to this Court's analysis of whether "cause" exists to convert or dismiss Toledo I's chapter 11 case. Similarly, Toledo I argued that its postpetition conduct during the time that Lefkowitz was in control of CEG is irrelevant to this Court's analysis under § 1112(b). On the contrary, however, the Sixth Circuit stated in Charfoos that "`no list is exhaustive of all the conceivable factors that could be relevant in analyzing a particular debtor's good faith'". Charfoos, 979 F.2d at 393 (quoting In re Caldwell, 851 F.2d 852, 860 (6th Cir.1988)). More specifically, the Charfoos court examined both the debtor's prepetition and postpetition conduct in determining whether to dismiss the debtor's chapter 11 case.
The Court finds Minnichiello's testimony that CEG misrepresented its ability to obtain funds to complete the Project to be probative as to Toledo I's lack of good faith.
Moreover, Toledo I's unexcused failure to file its bankruptcy schedules until June 7, 1994, two days before the hearing on this matter, evinces bad faith. See Finstrom v. Huisinga, 101 B.R. 997, 999 (D.Minn.1989) (affirming sua sponte dismissal by bankruptcy court based on debtor's failure to file proper statements and schedules in a case where debtor had received 30 day extension to file schedules); c.f. 11 U.S.C. § 1112(e) (providing for conversion or dismissal upon the request of the United States Trustee where "the debtor in a voluntary case fails to file, within fifteen days after the filing of the petition commencing such case or such additional time as the court may allow, the information required by paragraph (1) of section 521"). The Consent Order required Toledo I to file its bankruptcy schedules and statements of affairs within 30 days of April 12, 1994. Subsequently, Toledo I requested an extension of time until May 19, 1994 to file its bankruptcy schedules. Nevertheless, Toledo I failed to timely file its bankruptcy schedules and statement of affairs, further frustrating creditors' efforts to determine Toledo I's financial condition.
Significantly, as the Moving Creditors noted at the hearing, the Toledo Partnerships caused to be recorded a deed from Toledo I to Toledo II on January 21, 1994. This deed conveyed substantially all of the real estate securing Toledo II's mortgage debt. The fact that this deed was recorded is not indicated on Toledo I's statement of affairs. Nor have the Toledo Partnerships provided any *608 evidence indicating a legitimate business purpose for the recordation of the deed. See In re Hartford Run Apartments of Buford, Ltd., 102 B.R. 130 (Bankr.S.D.Ohio 1989) (dismissal of chapter 11 case warranted where debtor failed to disclose transfers and "retransfers" of substantially all of its assets during one year period prior to filing petition in its statement of financial affairs).
Further, the Court cannot condone Toledo I's failure to file an operating statement with the UST. As the court noted in In re Berryhill,
[t]imely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it to do something. They are the means by which creditors can monitor a debtor's post-petition operations. In re Chesmid Park Corp., 45 B.R. 153, 159 (Bankr.E.D.Va.1984). As such, their filing is very high on the list of fiduciary obligations imposed upon a debtor in possession. In re McClure, 69 B.R. 282, 290 (Bankr.N.D.Ind.1987).
In re Berryhill, 127 B.R. 427, 433 (Bankr. N.D.Ind.1991); see Roma Group, Inc. v. United States Trustee (In re Roma Group, Inc.), 165 B.R. 779, 780 (S.D.N.Y.1994) (stating that failure to file operating reports constitutes cause for dismissal) (citations omitted); Finstrom, 101 B.R. at 999 (dismissal appropriate for failure to file proper statements and schedules) (citations omitted); In re Great American Pyramid Joint Venture, 144 B.R. 780, 790 (Bankr.W.D.Tenn.1992) (stating that failure to file operating reports may represent "cause") (citation omitted).
In addition, Toledo I has failed to provide the UST with proof of liability insurance. Toledo I's failure to provide the UST with such information hampers efforts by the UST in monitoring the estate. More importantly, if Toledo I has, in fact, failed to obtain insurance, such failure subjects the estate to potential liability for personal injuries incurred at the Project.
Despite the fact that Toledo I agreed to appear at a § 341 meeting conducted by the UST under the terms of the Consent Order, Toledo I has failed to submit to such an examination during the period subsequent to entry of an order for relief. See In re Chandler, 89 B.R. 1002, 1004-5 (N.D.Ga.1988) (although finding that debtor's failure to attend § 341 meeting because of a coronary heart condition did not warrant dismissal of debtor's case, the court stated that "[w]here a bankruptcy debtor's failure to attend a § 341 meeting is found to be part of an evidentiary tapestry illustrating that the debtor is enjoying the benefits and protections of the bankruptcy laws while not reorganizing or providing creditors with needed information, dismissal may be appropriate"); In re Cannon, 143 B.R. 805 (Bankr.W.D.N.Y.1992) (dismissal for "cause" warranted where debtor failed to appear for three § 341 meetings and failed to provide United States Trustee with information relating to debtor's financial affairs).
The Court shares the UST's concerns with Toledo I's delegation of substantially all of its fiduciary duties to the Manager in light of the fact that the Manager does not bear the responsibilities of a fiduciary to this estate. C.f. In re William A. Smith Constr. Co., 77 B.R. 124, 127 (Bankr.N.D.Ohio 1987) (finding that having a consultant serve "at the helm" of debtor corporation did not comport with the managerial requirements set forth in § 1107 and § 1108 in appointing a trustee).
Toledo I's citation of In re Cardinal Industries, Inc. is unavailing. In In re Cardinal Indus., Inc., the bankruptcy court appointed an operating trustee which trustee served as general partner in a number of limited partnerships. See In re Cardinal Indus., Inc., 109 B.R. 755 (Bankr.S.D.Ohio 1990) (appointing trustee). In contrast to the facts presented in In re Cardinal Indus., Inc., the parties in the Minnesota Court specifically sought to avoid the appointment of a trustee in CEG's bankruptcy proceeding. Notwithstanding the arguments of the Manager at the hearing, the Stay Order and the documents that it incorporates indicate that the Manager does not bear the fiduciary responsibilities of a trustee in the Toledo Partnerships' bankruptcy cases.
WHETHER TO CONVERT OR DISMISS TOLEDO I'S BANKRUPTCY CASE
The Court finds that conversion of Toledo I's bankruptcy case is warranted.
*609 In the instant case, as in In re Staff Inv. Co., "where there is not continuing revenue-generating activity" the best interests of creditors and the estate favor conversion. In re Staff Inv. Co., 146 B.R. 256, 261 (Bankr. E.D.Cal.1993) (footnote omitted).
Moreover, the fact that creditors will likely enjoy greater rights in bankruptcy court than they would enjoy in state court militates in favor of conversion. As the court stated in In re Staff Inv. Co.,
[a] chapter 7 trustee has a veritable arsenal of bankruptcy and nonbankruptcy rights. The trustee's basic bankruptcy avoiding powers may bear fruit. [Additionally,] [t]he trustee has a claim, based on federal law, against each of the general partners for any insufficiency of assets to pay liabilities."
In re Staff Inv. Co., 146 B.R. at 261 (citing 11 U.S.C. § 723). The fact that a bankruptcy trustee may be able to pursue claims against CEG and Lefkowitz under § 723 strongly favors conversion of Toledo I's bankruptcy case.
Furthermore, in circumstances where a debtor has failed in performing its fiduciary duties, conversion rather than dismissal is warranted. See In re Sal Caruso Cheese, Inc., 107 B.R. 808, 818 (Bankr.N.D.N.Y.1989) (conversion warranted where debtor's pre and postpetition misconduct convinced court that the appointment of an independent trustee was warranted to objectively determine the "affairs of the estate" and to "begin to maximize its value for the benefit of [the debtor's creditors]") (citation omitted); In re W.J. Rewoldt Co., 22 B.R. 459, 462 (Bankr. E.D.Mich.1982) (conversion warranted where debtor had failed to properly perform fiduciary duties) (citation omitted).
Most importantly, the Court finds that conversion to chapter 7 will maximize the value of the estate available to creditors. Even if the Moving Creditors had favored dismissal, the above considerations mandate conversion of Toledo I's case.
In light of the foregoing, it is therefore
ORDERED that the Moving Creditors' motion to convert Toledo I's chapter 11 bankruptcy case to a case under chapter 7 be, and it hereby is, granted. It is further
ORDERED that the United States Trustee's motion to appoint a trustee be, and it hereby is, dismissed as moot. It is further
ORDERED that, pursuant to 11 U.S.C. § 348(a), the conversion of this bankruptcy case to a bankruptcy case under chapter 7 constitutes an Order for Relief under Chapter 7 in the bankruptcy case of Toledo I. It is further,
ORDERED that pursuant to § 348(c) and 11 U.S.C. § 342, the Clerk of this Court shall give "such notice as is appropriate of an Order for Relief in a case under this Title." It is further
ORDERED that, pursuant to Bankruptcy Rules 1019(2) and 2002(f)(4), the Clerk of this Court shall give notice of the entry of this Order of conversion. It is further,
ORDERED that, pursuant to Bankruptcy Rule 1019(5), CEG shall forthwith turn over to the Interim Chapter 7 Trustee, all records and property of the estate in its possession or control. It is further,
ORDERED that Toledo I, by its general partners CEG and Lefkowitz, prepare and file in this Court, within 30 days of the date of this Order, a separate schedule listing unpaid obligations incurred after the filing of the petition under Chapter 11, including the amounts owing, the creditors' names and their addresses or places of business, including matrix, and a statement of all contracts, executory in whole or in part, assumed or entered into after the filing of the petition, together with a final report and account showing all receipts and disbursements of funds, in accordance with Rule 1019(5), Rules of Bankruptcy Procedure. It is further
ORDERED that CEG and Lefkowitz shall each file with the Court statements of their individual assets and liabilities within 30 days from the date of this Order pursuant to Bankruptcy Rule 1007(g). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551573/ | 170 B.R. 69 (1994)
In re R.H. MACY & CO., INC. et al., Debtors.
Bankruptcy No. 92 B 40477 (BRL).
United States Bankruptcy Court, S.D. New York.
July 7, 1994.
*70 *71 Weil, Gotshal & Manges by Richard Krasnow, Beth Rosen, New York City, for debtors.
Winston & Strawn by Cory Friedman, New York City, for Grossmont Shopping Center Co.
Otterbourg, Steindler, Houston & Rosen, P.C. by Debra Sudock, New York City, for Official Committee of Unsecured Creditors.
Memorandum Decision on Debtor's Motion to Dismiss Lessor's Motion for Payment of Administrative Expenses
BURTON R. LIFLAND, Chief Judge.
I. INTRODUCTION
Grossmont Shopping Center Company, ("Grossmont"), alleges that Bullock's Properties Corporation, a subsidiary of R.H. Macy & Co., Inc., ("Debtor"), breached a lease for nonresidential real property (the "Lease") located at the Grossmont Shopping Center in La Mesa, California (the "La Mesa Store"). Grossmont asserts that approximately $970,000 in damages arose as a consequence of the Debtor's failure to operate the La Mesa Store under the trade name "Bullock's" from April 19 through December 17, 1993, during which period the Debtor conducted a court-approved store closing sale and engaged in an unsuccessful effort to sell its leasehold interest. Grossmont contends that such damages must be timely paid under § 365(d)(3) of the Bankruptcy Code, 11 U.S.C. §§ 101-1330 (1988), (the "Code"), or, in the alternative, qualify as administrative expenses pursuant to § 503(b) of the Code.[1]
The Debtor has responded by moving to dismiss Grossmont's motion under Federal Rules of Bankruptcy Procedure 9014 and 7012 on the ground that Grossmont's motion fails to state a claim upon which relief can be granted. It is well settled that Grossmont's motion will not be dismissed, "`unless it appears beyond doubt that the [movant] can prove no set of facts in support of his claim which would entitle him to relief.'" Cohen v. Koenig, 25 F.3d 1168, 1171-72 (2d Cir.1994) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957)). For the purpose of this motion, Grossmont's well plead factual allegations are accepted as true. Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991) (citations omitted).
Section 6-A of the Lease provides that the Debtor must continuously operate, subject to certain exceptions, a store under the trade name "Bullock's" during the first 15 years of the Lease (the "Covenant to Stay Open" or "Covenant"). Grossmont asserts that the Debtor paid a relatively low rent because it operated an anchor store which drew customers to the shopping center. In January 1992, four years after assuming the Lease and ten years after the Lease was originally executed by Grossmont and the Debtor's predecessor-in-interest, the Debtor filed its Chapter 11 petition.
In March 1992, the Debtor's time to assume or reject certain leases for nonresidential real property, including the Lease for the La Mesa Store, was extended until the confirmation *72 of a plan or plans of reorganization. In March 1993, the Debtor sought authorization to conduct a store closing sale at the La Mesa Store in connection with its decision to cease operations and maximize the value of estate assets at this location. Grossmont objected. The Court approved the store closing sale, and addressing Grossmont's concern that its shopping center would be burdened by an anchor store which had "gone dark," directed that the Lease be deemed rejected on November 1, 1993 unless there was a prior assumption and assignment of such Lease. Grossmont alleges that the Debtor ceased operating the La Mesa Store under the name "Bullock's" on April 19, 1993, and conducted the store closing sale under the trade name "Grand Finale" until July 6, 1993.
In October 1993, the Debtor, asserting that a potential purchaser of the Lease required additional time to conduct its due diligence review, sought to extend its time to assume or reject the Lease to March 31, 1994. Grossmont opposed this motion. The Court denied the Debtor's request and set a December 16, 1993 deadline for the assumption or rejection of the Lease. The Debtor's marketing efforts to sell the Lease were unsuccessful, and the Lease, by Order dated December 17, 1993, was deemed rejected on December 15, 1993.
There is no dispute that at all times pending the December 1993 rejection of the Lease the Debtor paid all rent due under the Lease. Grossmont alleges that the Debtor ceased operating the La Mesa Store on April 19, thereby breaching the Covenant to Stay Open and requiring timely payment of damages under § 365(d)(3) of the Code. Grossmont argues in the alternative that such damages qualify as an administrative expense pursuant to § 503(b)(1)(A). While the Debtor disputes that it breached the lease and that approximately $970,000 in damages resulted from this breach, it moves to dismiss Grossmont's motion on the grounds that any damages awarded would not be timely paid under § 365(d)(3) and do not qualify as an expense of administering the Debtor's estate. It is assumed for the purpose of the § 365(d)(3) discussion that the Covenant is enforceable. In ruling on the § 503(b) request for relief it is necessary to review whether the Covenant to Stay Open is enforceable against the Debtor.
II. SECTION 365(d)(3)
Section 365(d)(3) of the Bankruptcy Code provides, in pertinent part, that "[t]he trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from . . . any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title." As it appears that damages for a breach of a covenant which qualify as a contractual obligation under § 365(d)(3) must be timely paid, In re Atlantic Container Corp. 133 B.R. 980, 991 (Bankr.N.D.Ill.1991), Grossmont argues that the Covenant to Stay Open qualifies as an obligation under § 365(d)(3).[2]
*73 Yet the issue is not simply whether the Covenant to Stay Open is an obligation under the Lease, nor whether it is an obligation which is theoretically susceptible to mandatory timely performance. See 11 U.S.C. § 365(d)(3) ("[t]he trustee shall timely perform all the obligations of the debtor") (emphasis added). The Court must determine whether the Covenant to Stay Open is an obligation which must be timely performed in concert with the Debtor's obligation to maximize estate assets for the benefit of all parties in interest. Cf. BFP v. RTC, ___ U.S. ___, ___ - ___, 114 S. Ct. 1757, 1769-70, 128 L. Ed. 2d 556 (1994) (meaning of § 548(a)(2)(A)'s "reasonably equivalent value" determined in light of mortgage foreclosure proceeding's effect on real property's value). For even within the fluctuating walls of the "plain meaning" fortress, see 680 Fifth Ave. Assocs. v. Mutual Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.), 156 B.R. 726, 734 n. 12 (Bankr.S.D.N.Y.1993) (noting "that the Supreme Court has redefined its support of the plain meaning rule in recent cases involving bankruptcy issues") (citation omitted), aff'd, 169 B.R. 22 (S.D.N.Y.1993); Walter A. Effross, Grammarians at the Gate: The Rehnquist Court's Evolving "Plain Meaning" Approach to Bankruptcy Jurisprudence, 23 Seton Hall L.Rev. 1636 (1993) (setting forth "internal ambiguities of the `plain meaning' approach"), a court should not resolve questions of statutory interpretation so that a particular Bankruptcy Code section conflicts and disturbs the overall purpose and function of the Code. See Crandon v. United States, 494 U.S. 152, 158, 110 S. Ct. 997, 1001, 108 L. Ed. 2d 132 (1990) ("In determining the meaning of the statute, we look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy.") (citations omitted); cf. Rake v. Wade, ___ U.S. ___, ___, 113 S. Ct. 2187, 2192, 124 L. Ed. 2d 424 (1993) (construing §§ 506(b) & 1322(b)(5) together, and stating that "[w]e generally avoid construing one provision in a statute so as to suspend or supersede another provision.") While "[t]he starting point in any case involving construction of a statute is the language itself[,]" St. Paul Fire and Marine Ins. Co. v. Barry, 438 U.S. 531, 541, 98 S. Ct. 2923, 2929, 57 L. Ed. 2d 932 (1978) (citation omitted), and "where . . . 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 Enters., 489 U.S. 235, 241-42, 109 S. Ct. 1026, 1030-31, 103 L. Ed. 2d 290 (1989) (citation omitted), courts must be wary not to examine one section of a statute in isolation because "[s]tatutory construction . . . is a holistic endeavor." United Sav. Ass'n v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 371, 108 S. Ct. 626, 630, 98 L. Ed. 2d 740 (1988); cf. Railway Labor Executives Ass'n v. I.C.C., 735 F.2d 691, 700 (2d Cir.1984) ("When aid to construction of the meaning of words, as used in the statute, is available, there certainly can be no `rule of law' which forbids its use, however clear the words may appear on `superficial examination'.") (Friendly, J.) (quoting United States v. American Trucking Ass'ns, 310 U.S. 534, 543-44, 60 S. Ct. 1059, 1064, 84 L. Ed. 1345 (1940) (Reed, J.)); 680 Fifth Ave., 156 B.R. at 734 n. 12 (noting that "in Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S. Ct. 2150, 2153-54, 115 L. Ed. 2d 66 (1991), the Supreme Court unanimously construed a `claim' in bankruptcy according to the `text, history, and purpose of the Bankruptcy Code' without an initial determination that the Code's definition of a claim was ambiguous.")
As noted by Grossmont, this Court had the opportunity to consider the meaning of the term "obligation" in In re R.H. Macy & Co., 152 B.R. 869, 873 (Bankr.S.D.N.Y.1993), aff'd, No. 93 Civ. 4414, 1994 WL 482948 (S.D.N.Y. Feb. 24, 1994) ("Macy's I"). In Macy's I, the lease in question provided that the debtor was responsible for the payment of certain property taxes. After the taxing authority conducted a post-petition reassessment which solely related to taxes that accrued during the prepetition period, the lessor forwarded the tax bill to the debtor. This Court concluded, with respect to facts then before it, that the term "obligation" was *74 clear and unambiguous and encompassed the lease's covenant requiring the debtor to pay the property taxes. In this fashion, Macy's I is consonant with those decisions which require timely payment of rent, common area maintenance and other charges under an unrejected lease for nonresidential real property.
The bankruptcy cases cited by Grossmont belong to this line of authority as they address these types of lessee obligations. See Atlantic Container, 133 B.R. at 991 (failure to maintain and repair leased premises); In re Dieckhaus Stationers, Inc., 73 B.R. 969, 971 (Bankr.E.D.Pa.1987) (failure to make post-petition payments for the use and occupancy of the premises); In re Rare Coin Galleries, Inc., 72 B.R. 415, 416 (D.Mass. 1987) (rent and trash pickup); In re Borbidge, 66 B.R. 998, 1004 (Bankr.E.D.Pa.1986) (rent); International Coins & Currency, Inc. v. Barmar Corp. (In re International Coins & Currency, Inc.), 18 B.R. 335, 338 (Bankr. D.Vt.1982) (administrative priority for damages in excess of normal wear and tear). In each of these cases, a debtor used the premises but did not timely satisfy its rental obligations or repair and maintain the physical property in accordance with the lease. In this instance it is not disputed that the Debtor timely paid rent and properly maintained the physical premises pending rejection of the Lease.
Although Grossmont places its faith in selected excerpts from Macy's I and the District Court's affirmance, it fails to note that the issue in that case was the distinction between the term "claim," which is defined in § 101 of the Code and is not found in § 365(d)(3), and the term "obligation" which is not defined by the Code. This Court looked to Black's Law Dictionary for a definition of the term "obligation" because "[c]ourts properly assume, absent sufficient indication to the contrary, that Congress intends the words in its enactments to carry `their ordinary, contemporary, common meaning.'" Pioneer Inv. Servs. v. Brunswick Assoc. Ltd., ___ U.S. ___, ___, 113 S. Ct. 1489, 1495, 123 L. Ed. 2d 74 (1993) (quoting Perrin v. United States, 444 U.S. 37, 42, 100 S. Ct. 311, 314, 62 L. Ed. 2d 199 (1979)); see Macy's I, 152 B.R. at 873. While Black's defines the term "obligation," in part, as "[t]hat which a person is bound to do or forbear[,]" this phrase is expressly prefaced by the statement that the word "obligation" is "[a] generic word . . . having many, wide, and varied meanings, according to the context in which it is used." Black's Law Dictionary 1074 (6th ed. 1990). Thus, Macy's I does not stand for the proposition that each and every lease covenant which could conceivably be pigeon-holed into the term "obligation" qualifies as a § 365(d)(3) obligation which must be timely performed pending assumption or rejection. Cf. Cabell v. Markham, 148 F.2d 737, 739 (2d Cir.), aff'd, 326 U.S. 404, 66 S. Ct. 193, 90 L. Ed. 165 (1945) (Hand, J.) ("[I]t is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.")
It is patently unclear how the Covenant to Stay Open, as opposed to a requirement to pay rent each month, could be an obligation which must be timely performed by a debtor in possession which has an affirmative, overarching duty to reorganize and maximize estate assets for the benefit of all creditors. Cf. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527, 104 S. Ct. 1188, 1196, 79 L. Ed. 2d 482 (1984) ("the policy of Chapter 11 is to permit successful rehabilitation of debtors"). The debtor's duty to maximize estate assets may require, as it did here, the cessation of operations at one location. Cf. United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S. Ct. 2309, 2313, 76 L. Ed. 2d 515 (1983) ("Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if `sold for scrap.'") (citation omitted). Section 363(b) of the Code provides the authority to conduct a store closing sale as a debtor may, after notice and a hearing, use property of the estate "other than in the ordinary course of business." See In re Ames Dep't Stores, Inc., 136 B.R. 357, 359 (Bankr.S.D.N.Y.1992). After operations cease, a debtor's estate may continue to hold a valuable leasehold interest, *75 and it is a debtor's duty to attempt to monetize this asset. The lessor, as in this case, receives timely rent payments pending the debtor's decision to assume or reject. 11 U.S.C. § 365(d)(3). This scenario is entirely consistent with the aforementioned Bankruptcy Code policies which would be contravened and frustrated if the Debtor were required to timely perform the Covenant to Stay Open, regardless of its effect on the Debtor's ability to successfully reorganize for the benefit of all of its creditors. Cf. Young v. Higbee Co., 324 U.S. 204, 210, 65 S. Ct. 594, 597, 89 L. Ed. 890 (1945) ("historically one of the prime purposes of the bankruptcy law has been to bring about a ratable distribution among creditors of a bankrupt's assets").
To accept Grossmont's argument would be to conclude that § 365(d)(3), in conjunction with a covenant to continue operations, penalizes a debtor for ceasing business at unprofitable locations because this section would mandate the timely payment of damages which allegedly flow from this business decision. See In re Food City, Inc., 95 B.R. 451, 456 n. 10 (Bankr.W.D.Tex.1988) ("[t]he obligation to continue operations does not fit well within the statutory framework of Section 365(d)(3)"). In accordance with Grossmont's reasoning, a debtor would be unable to receive the full value of its leasehold interest in the context of its assumption and assignment to a third party, pursuant to § 365(b), because the debtor would be required to continuously operate the property, presumably at a loss, pending the closing of this transaction.
Reading § 365(b) in concert with § 365(d)(3) also reveals that § 365(d)(3) does not require the Debtor to timely pay damages for breaches of all lease covenants. Cf. Rake, ___ U.S. at ___, 113 S.Ct. at 2187 (construing § 506(b) in light of section § 1322(b)(5)); United States Brass & Copper Co. v. Caplan (In re Century Brass Prods., Inc.), 22 F.3d 37, 39 (2d Cir.1994) (holding that § 546(a)'s two year statute of limitations, in view of a debtor in possession's rights and obligations under § 1107(a), applies to a debtor in possession). In the context of an assumption of a lease, § 365(b)(1) requires a debtor to compensate, or provide adequate assurance of compensation, "for any actual pecuniary loss" to the lessor which results from a default under the lease. If § 365(d)(3) required timely payment of all damages for breaches of all covenants under a lease, § 365(b)(1) would be superfluous because there would be little need to remedy "actual pecuniary loss" as the landlord would already have received current damage payments under § 365(d)(3).
Application of the method of statutory analysis adopted by the Supreme Court in Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992), further indicates that § 365(d)(3) does not require timely payment of damages for a breach of a covenant to continue operations. In Dewsnup, the Supreme Court explained that it "has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history." Id. at ___, 112 S.Ct. at 779 (citations omitted). Here the question is whether the addition of § 365(d)(3) to the Code through the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, 98 Stat. 333 (July 10, 1984) ("BAFJA"), caused a "major change" with respect to pre-Code and pre-BAFJA practice with respect to the treatment of a lessor's post-petition claims under its lease.
Prior to BAFJA's amendment of § 365, under both the former Bankruptcy Act and the Bankruptcy Code, lessors of real property were not entitled to the timely payment of rent reserved under a lease, but "the estate was liable for the reasonable value of the use and occupancy of the premises." In re By-Rite Distrib., Inc., 47 B.R. 660, 664 (Bankr. D.Utah 1985); see also Crocker v. Chakos (In re Chakos), 24 F.2d 482, 486 (7th Cir.1928) (landlord submitted claim for post-petition value of trustee's use and occupancy of premises). The lessor's claim for use and occupancy was accorded priority status under § 64(a)(1) of the Bankruptcy Act, 11 U.S.C. § 104(a) (repealed); S & W Holding Co. v. Kuriansky, 317 F.2d 666, 668 (2d Cir.1963); City of Fort Lauderdale v. Freeman, 217 *76 F.2d 600, 602 (5th Cir.1954), and pursuant to § 503(b)(1) of the Code. Food City, 95 B.R. at 454. A difficulty for lessors in chapter 11 cases was that their administrative claims were often only paid upon confirmation of a plan of reorganization. Food City, 95 B.R. at 454. A significant problem during the period in which the trustee was marketing the debtor's leasehold interest after the premises had been vacated was that "the trustee stopped paying rent while the landlord was forced to provide current services." In re Wingspread Corp., 116 B.R. 915, 926 (Bankr.S.D.N.Y. 1990).
In 1984, § 365(d)(3) was added to the Code, as the remarks of Senator Hatch indicate, to "requir[e] the trustee to perform all the obligations of the debtor under a lease of nonresidential real property at the time required in the lease. This timely performance requirement will insure that debtor-tenants pay their rent, common area, and other charges on time pending the trustee's assumption or rejection of the lease." 130 Cong.Rec. S8894, S8895 (daily ed. June 29, 1984); see also Liona Corp. v. PCH Assocs. (In re PCH Assocs.), 804 F.2d 193, 199 (2d Cir.1986). In this fashion, § 365(d)(3) dramatically altered the treatment of a lessor of nonresidential real property's post-petition claim and thus effected a "major change" from pre-Code and prior Code practice. See By-Rite, 47 B.R. at 663 ("Section 365 of the Bankruptcy Code was substantially rewritten by the Bankruptcy Amendments and Federal Judgeship Act of 1984.") (citations omitted). As there is no indication in § 365(d)(3)'s legislative history that a damage claim which arises as a result of a breach of a covenant to continue operations must be timely paid, application of the foregoing Dewsnup methodology indicates that § 365(d)(3) does not mandate timely payment of such claim. Therefore, because the Covenant does not qualify as an obligation under § 365(d)(3), the Debtor's motion to dismiss is granted with respect to Grossmont's motion for damages under section 365(d)(3) of the Code.
III. SECTION 503(b)
Grossmont asserts that the consequential damages which stem from the Debtor's alleged breach of the Lease's Covenant to Stay Open qualify as expenses of the Debtor's estate pursuant to § 503(b)(1)(A) of the Code. This section provides, in pertinent part, that administrative expense status is granted to "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case[.]" Viewing Grossmont's motion and supporting papers in a light most favorable to it, the Debtor has demonstrated that Grossmont will be unable to present a set of facts at trial which would allow Grossmont to demonstrate that its damage claim would be entitled to administrative priority.
It is well settled that claims for "administrative expense priority should be narrowly construed to include only those creditors that perform services that are actual and necessary to preserve the bankrupt estate or that enable it to maintain its business." In re CIS Corp., 142 B.R. 640, 642 (S.D.N.Y.1992) (citations omitted); see also Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir.1986) ("[i]f one claimant is to be preferred over others, the purpose should be clear from the statute.") (internal quotation omitted); In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 160 B.R. 882, 889 (Bankr.S.D.N.Y.1993) ("A claim is not entitled to priority simply because the right to payment arose after the commencement of the reorganization proceeding.") (citation omitted).
The First Circuit, in In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir.1976), established the following seminal two prong test to determine whether a claim merits treatment as an administrative expense: (1) the obligation must arise from a transaction with the debtor in possession, and (2) must result in a direct benefit to the estate. Id. at 954. Although Mammoth Mart applied § 64 of the former Bankruptcy Act, "numerous courts, including the Court of Appeals for the Second Circuit, have continued to follow Mammoth Mart's treatment of administrative expense claims in cases under the Code." In re Chateaugay Corp., 102 B.R. 335, 354 (Bankr.S.D.N.Y.1989) (citations omitted).
*77 Grossmont would be able to satisfy the first prong of the Mammoth Mart test at trial. Although the Lease was entered into prepetition, the Debtor had possession of the La Mesa Store during the post-petition period. Grossmont, however, would not be able to carry its burden with respect to the second part of this test because it would not be able to prove that the Debtor breached the Lease while it received a direct benefit under the Lease.
For the purpose of this discussion, the periods in which the Debtor conducted the court-approved store closing sale and the subsequent unsuccessful attempt to sell the leasehold interest are separately addressed. With respect to the period in which the Debtor conducted its store closing sale, it is assumed that the Debtor received a benefit by operating the La Mesa Store under the Lease. It is also assumed that the Debtor failed to comply with the Covenant to Stay Open while it conducted the store closing sale because Grossmont alleges that the Debtor did not conduct this sale under the trade name "Bullock's."
Under any set of facts, however, Grossmont could not demonstrate that the Debtor breached the Covenant to Stay Open because this Covenant is unenforceable against the Debtor because it conflicts with this Court's April 19, 1993 Order authorizing the Debtor to conduct the store closing sale as well as the Debtor's obligation to maximize estate assets for the benefit of all creditors. As previously noted, Grossmont objected to the Debtor's motion to conduct a store closing sale. After a hearing on notice, Grossmont's objection was overruled and the Debtor's motion was granted. The April 19, 1993 Order expressly provides that "no person or entity shall take any action to prevent, interfere with, or otherwise enjoin consummation of the Store Closing Sale, and any provision in the Lease which would otherwise prohibit or restrict the Store Closing Sale is unenforceable[.]" April 19, 1993 Order at 6 (emphasis supplied). Grossmont did not appeal this Court's ruling. The April 19, 1993 Order precludes enforcement of the Covenant because application of the Covenant to the store closing sale would vitiate the sale's purpose and function; namely, the maximization of estate assets for the benefit of all creditors. Assuming that the store closing sale caused a breach of the Covenant which, in turn, gave rise to damages which might very well exceed the benefits of holding such a sale, it can be easily said that the Covenant effectively prohibits and restricts the Store Closing Sale.
In similar fashion, the Covenant is unenforceable because it conflicts with the Debtor's fiduciary duty to maximize estate assets. This result is consistent with the Supreme Court's pronouncement in Butner v. United States, 440 U.S. 48, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979), that "[p]roperty 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." Id. at 55, 99 S.Ct. at 918. In this instance, the federal policy of maximizing estate assets for all creditors precludes enforcement of the Covenant to Stay Open because enforcement of this Covenant would prevent all creditors of the estate from receiving the benefit of the Debtor's discharge of its fiduciary duty. See Ames, 136 B.R. at 359 ("to enforce the anti-[going out of business] sale clause of the Lease would contravene overriding federal policy requiring Debtor to maximize estate assets by imposing additional constraints never envisioned by Congress.") Therefore, in view of the foregoing, the Covenant to Stay Open is unenforceable against the Debtor because it conflicts with this Court's April 19, 1993 Order and with the Debtor's duty to maximize estate assets.
With respect to the period in which the Debtor attempted to sell its leasehold interest after ceasing operations at the La Mesa Store, any damages which would flow from any breach of the Lease do not qualify as an administrative expense because Grossmont can not demonstrate that the Debtor's estate received any benefit under the Lease during this period. The Second Circuit has consistently held that the debtor must derive a benefit under a contract in order for the creditor's claim to be accorded administrative *78 expense priority, Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 955 (2d Cir.1993); Amalgamated Ins. Fund, 789 F.2d at 101; Zelin v. Unishops, Inc. (In re Unishops, Inc.), 553 F.2d 305, 308 (2d Cir.1977); In re Freedomland, Inc., 480 F.2d 184, 189 (2d Cir.1973), aff'd, 419 U.S. 43, 95 S. Ct. 247, 42 L. Ed. 2d 212 (1974), and has explained that "the purpose of according priority in these cases is fulfillment of the equitable principal of preventing unjust enrichment of the debtor's estate, rather than the compensation of the creditor for the loss to him." American A. & B. Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119, 126 (2d Cir.1960) (citations omitted). There is no dispute that after the store closing sale was concluded the Debtor was only engaged in an unsuccessful marketing effort to sell the leasehold. In other words, the Debtor enjoyed an option to assume and assign its leasehold interest during this period. An option or the potential to use or benefit from property does not amount to a benefit to the estate. General Am. Transp. Corp. v. Martin (In re Mid Region Petroleum Inc.), 1 F.3d 1130, 1133 (10th Cir.1993) ("a benefit to the estate results only from the use of the leased property"); CIS, 142 B.R. at 644 ("a mere potential benefit does not qualify as a benefit for the purposes of determining administrative expense status."); In re Mainstream Access, Inc., 134 B.R. 743, 750 (Bankr.S.D.N.Y.1991); In re ICS Cybernetics, Inc., 111 B.R. 32, 36-37 (Bankr.N.D.N.Y. 1989); Broadcast Corp. v. Broadfoot, 54 B.R. 606, 611 (N.D.Ga.1985), aff'd, 789 F.2d 1530 (11th Cir.1986); In re Kessler, 23 B.R. 722, 724 (Bankr.S.D.N.Y.1982), aff'd, 55 B.R. 735 (S.D.N.Y.1985) ("a claim which merely has the potential for value upon the happening of other events may not be allowed as an administrative expense.") (citation omitted); see also American A. & B. Coal, 280 F.2d at 119.
This case is factually distinguishable from United Trucking Serv., Inc. v. Trailer Rental Co. (In re United Trucking Serv., Inc.), 851 F.2d 159 (6th Cir.1988) and the cases cited by Grossmont because in those cases the Debtors used the property in question, and their estates received benefits from such use. See, e.g., Id. at 162 ("this case involves a claim arising from United's post-petition continued use of leased equipment."); Atlantic Container, 133 B.R. at 980 (debtor in possession and subsequently, chapter 7 trustee, occupied non-residential real property). As Grossmont will be unable to demonstrate that the Debtor's estate received any benefit under the Lease after the store closing sale, the Debtor's Motion to Dismiss is granted with respect to Grossmont's request for § 503(b) administration expense priority.
IV. CONCLUSION
In view of the foregoing, the Debtor's motion to Dismiss Grossmont's Motion is granted. Submit an order in accordance with the foregoing.
NOTES
[1] Although Grossmont has filed a proof of claim which appears to include certain sums sought in the instant motion, the motion does not raise any issues with respect to the allowance of a lessor's claim under § 502(b)(6) of the Code.
[2] In light of the following discussion, the Court need not address the Debtor's argument that the Covenant cannot be considered an obligation under § 365(d)(3) because Grossmont, under applicable California law, could not obtain an injunction requiring the Debtor to continue operations under the Lease. See Cal.Civ.Proc.Code § 526(b)(5) (West 1994) ("An injunction cannot be granted . . . [t]o prevent the breach of a contract the performance of which would not be specifically enforced."); Long Beach Drug Co. v. United Drug Co., 13 Cal. 2d 158, 171, 88 P.2d 698, 705 (Cal.1939) ("Courts . . . only decree specific performance where the subject-matter . . . is capable of being embraced in one order and is immediately enforceable[,] . . . not . . . when the duty to be performed is a continuous one, extending possibly over a long period of time and . . . will necessarily require constant . . . oversight . . . by the court.") (citations omitted); Whipple Road Quarry Co. v. L.C. Smith Co., 114 Cal. App. 2d 214, 216, 249 P.2d 854, 855 (Cal.Dist.Ct.App.1952) (Court would not grant an injunction requiring lessee to operate property as a commercial quarry, as required by lease, because "courts of equity will not decree the specific performance of contracts which by their terms . . . require protracted supervision.") (internal quotations omitted). However, a lessor is entitled to recover damages as a remedy for breach of contract under California law. See Long Beach Drug Co. v. United Drug Co., 13 Cal. 2d 158, 173, 89 P.2d 386, 387 (Cal.1939) ("Although the equitable remedy is not available to plaintiff, nevertheless the contract sued upon is valid and sufficiently certain to warrant . . . a plea for the recovery of damages."); Lippman v. Sears, Roebuck & Co., 44 Cal. 2d 136, 146, 280 P.2d 775, 781 (Cal.1955) (lessor entitled to damages for lessee's breach of implied covenant to remain in business). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551585/ | 170 B.R. 143 (1994)
In re CENTRAL ARKANSAS BROADCASTING COMPANY, INC., Debtor.
Bankruptcy No. 88-42189M.
United States Bankruptcy Court, E.D. Arkansas, Western Division.
March 30, 1994.
*144 Dale W. Finley, Russellville, AR, for First State Bank and Ward Ramsey.
James F. Dowden, Trustee, Little Rock, AR.
David A. Grace, Little Rock, AR, for Debtor.
ORDER
JAMES G. MIXON, Chief Judge.
On October 31, 1988, Central Arkansas Broadcasting Company, Inc. (debtor) filed a voluntary petition for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. The case was converted to Chapter 7 and James F. Dowden was appointed trustee. On December 11, 1991, the trustee filed a motion for authority to sell assets of the estate at public auction. Among the assets the trustee intended to sell were "all inventory, fixtures, equipment and all other tangible and intangible assets of Central Arkansas Broadcasting Company, Inc." and "the call letters KWKK and KCAB and the goodwill of Central Arkansas Broadcasting, Inc."
On January 3, 1992, the assets were sold at a public auction to Ward Ramsey for a purchase price of $100,000.00, and on January 28, 1992, an order was entered approving the sale of the assets. As part of the sale to Ramsey, the operating license for the radio station was transferred to Ramsey with the approval of the Federal Communications Commission (FCC).
First Bank of Arkansas (the "Bank") claims a security interest in the $95,000.00 of the sale proceeds. On August 28, 1992, the trustee objected to the Bank's claim. Neither party disputes that First Bank of Arkansas (Bank) holds a perfected security interest in all the tangible assets sold by the trustee, with the exception of the realty. The parties stipulate that the realty has a fair market value of $5,000.00. In addition, the parties stipulate and case law supports the proposition that a broadcasting license is not a property right that may be encumbered with a security interest. See In re Tak Communications, Inc., 985 F.2d 916, 918 (7th Cir.1993); Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th Cir.1986). The Bank does not claim a security interest in any other intangible property.
The trustee argues that the fair market value of the tangible assets sold is $30,000.00 and the balance of the purchase price represents the value of the intangible property sold, including the broadcasting license and goodwill of the radio station. The Bank argues that the broadcasting license is not property of the estate and that $95,000.00 of the sale proceeds should be allocated to the equipment in which the Bank holds a perfected security interest.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K) (1988), and the Court has jurisdiction to enter a final judgment in the case.
*145 I
Is the Broadcasting License Property of the Estate?
Section 541(a)(1) defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1) (1988). The bankruptcy estate consists of all property of the debtor including not only tangible property, but also intangible property. See United States v. Whiting Pools, Inc., 462 U.S. 198, 205, 103 S. Ct. 2309, 2313-14, 76 L. Ed. 2d 515 (1983).
Section 541(c)(1)(A) provides that property of the estate includes the debtor's interest in property:
notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law
(A) that restricts or conditions transfer of such interest by the debtor.
11 U.S.C. § 541(c)(1)(A) (1988). Property of the estate includes intangible property such as licenses and business goodwill. See Shimer v. Fugazy (In re Fugazy), 114 B.R. 865, 871 (Bankr.S.D.N.Y.1990), aff'd, 124 B.R. 426 (S.D.N.Y.1991); In re Smith, 94 B.R. 220, 221 (Bankr.M.D.Ga.1988); 4 Collier on Bankruptcy ¶ 541.09[5] (Lawrence P. King ed., 15th ed. 1993).
The Bank relies on the cases of D.H. Overmyer Telecasting Co., Inc. v. Lake Erie Communications, Inc. (In re D.H. Overmyer Telecasting Co., Inc.), 35 B.R. 400 (Bankr. N.D.Ohio 1983) and American Cent. Airlines, Inc. v. O'Hare Regional Carrier Scheduling Comm. (In re American Cent. Airlines, Inc.), 52 B.R. 567 (Bankr.N.D.Iowa 1985) to support its argument that the broadcasting license is not property of the estate.
The Bank cites Overmyer for the proposition that a broadcasting license is not property of the estate because it is not a property right. The court in Overmyer stated that a broadcasting "license is not `property of the estate,' as commonly defined," but then added that a "broadcasting license is a property right only in a limited sense." Overmyer, 35 B.R. at 401. The court held that a broadcasting license is not property of the estate for purposes of granting injunctive relief to the debtor to prohibit the FCC from revoking the debtor's license and issuing a new license to a third party. Overmyer, 35 B.R. at 403.
In Beker Indus. Corp. v. Florida Land & Water Adjudicatory Comm. (In re Beker Indus. Corp.), 57 B.R. 611, 622 (Bankr. S.D.N.Y.1986), the court rejected the rationale of Overmyer, stating:
[Overmyer] fail[s] to consider either the legislative history to § 541 of the Code which defines property of the estate or United States v. Whiting Pools, Inc., 462 U.S. 198, 204, 103 S. Ct. 2309, 2313, 76 L. Ed. 2d 515 (1983), where the Supreme Court, upon examination of that history, observed that "Congress intended a broad range of property to be included in the estate." Following Whiting Pools and relying on it, the district court in Bernstein v. R.C. Williams, Inc. (In re Rocky Mountain Trucking Co.), 47 B.R. 1020 (D.Colo. 1985) held that a state agency issued certificate of public convenience and necessity enabling a trucking firm to serve as a common carrier throughout the state is property of the estate, even though dormant pursuant to agency rules, and therefore consideration by the commission of post-petition failure to utilize the license was within the automatic stay provided by § 362(3) of the Code. Other courts are in accord in holding similar permits to be property of an estate. See e.g., In re Golden Plan of California, Inc., 37 B.R. 167 (Bankr.E.D.Cal.1983); In re Hodges, 33 B.R. 51 (Bankr.E.D.Pa.1984); In re R.S. Pinellas Motel Partnership, 2 B.R. 113, 5 B.C.D. 1292, 1 C.B.C.2d 349 (Bankr. M.D.Fla.1979).
Beker, 57 B.R. at 622.
The second case the Bank relies upon, American Cent. Airlines, Inc. v. O'Hare Regional Carrier Scheduling Comm. (In re American Cent. Airlines, Inc.), 52 B.R. at 567, does not support the Bank's argument. American Cent. Airlines involved the issue of whether landing slots at Chicago O'Hare airport constitute property of the estate. Judge Stageman expressly held that:
*146 Although the FAA may remove a slot at any time, until such action is taken, the holder has a possessory interest in a slot at the given airport. Such a possessory interest must constitute property of the estate. The mere fact that an interest exists by the grace of government no longer precludes the interest from being treated as a property right.
American Cent. Airlines, 52 B.R. at 571 (citations omitted).
The rationale of the cases supporting a finding that broadcasting licenses are property of the estate is more persuasive. Although federal regulations do not allow the debtor to own the broadcasting license,[1] it still has considerable value to the debtor because the license can be transferred to a third party, subject to the FCC's approval. This is best illustrated by the fact that the debtor in this case, with the FCC's approval, has transferred its broadcasting license to Ramsey. In fact, the debtor's own expert implied that the broadcasting license had some value, although he stated that he could not determine the value of the right to broadcast on a particular frequency in a particular market. Therefore, the Court finds that the broadcasting license is valuable intangible property of the debtor's estate.
II
Proper Allocation of Property Value
The parties have submitted the depositions of three experts on the issue of the proper allocation of the purchase price between the tangible and intangible property. Although the Bank contends that the property sold contained no intangible property, its own expert, Dewey Johnson, valued the tangible property sold at approximately $77,000.00. Johnson testified that his valuations were based on the price a willing purchaser would pay for the equipment in an arm's length transaction.
Johnson is familiar with the property due to an agreement he entered with Ramsey that involves "a monthly fee to Ramsey Communications [and] an option to purchase or gain assignment of the licenses." Johnson's Dep. at 36. When asked if he could assign a value to the alleged goodwill sold by the trustee or to the right to broadcast, Johnson replied, "That's very tough to answer. I don't know that I have an answer for that." Johnson's Dep. at 34.
Ralph Walsh, one of the trustee's expert witnesses, valued the equipment at $30,000.00, based on "an equivalent value or a current day price," which he discounted by a rate of thirty to fifty percent for depreciation. Walsh's Dep. at 13. He also testified that, "The true value of a broadcast station is the license, not the equipment." Walsh's Dep. at 10. Walsh testified further as follows:
Q: Going back to our hypothetical this $100,000 price for the assets and the opportunity to operate the license of these two radio stations. Based on your experience, do you believe that it's safe to assume that the $100,000 price was primarily paid for the opportunity to operate those stations under the existing authority with the FCC, except perhaps for this $30,000 or so that you
A: That's the only rational reason that there is for paying over asset value of anything, is a license to operate.
Walsh's Dep. at 22-23.
David Morrison, another expert witness who testified on behalf of the trustee, valued the equipment at $25,000.00. Morrison testified that he is very familiar with the equipment sold by the trustee because he worked as operations manager at KCAB for a period of eight months, shortly before the debtor filed bankruptcy. Morrison testified that, at the time he left KCAB in 1988, the general condition of the equipment was poor. Morrison gave the following testimony regarding the fair market value the equipment:
A: Well, from the time that I was first contacted by this law office regarding this, it's given me an ample amount of time to think about the equipment that was there and go over it in my mind. The one piece of equipment *147 that I can think of that really had any value would be the AM tower. The rest of that equipment, as far as I'm concerned, is salvage or darn close to it. There are isolated instances where it wouldn't be, because there is value to some of it, market value. But the majority there is not. To pin me down to an exact penny figure, I can't do that. If I were going to make an offer on that equipment today, I would not give an offer of over $25,000 for the whole total lump sum of all the broadcast equipment that was there.
Q: I want you to assume for a moment that a person paid $100,000 for this equipment, and for the right to broadcast on that frequency and for the license of the station. How would you allocate what he paid, what a person in that position paid for each of those items that he bought?
A: . . . The potential of a market determines more the value of a radio station than any broadcast equipment that you can put in there. Any time you buy a radio station you're buying blue sky, a great deal of it is blue sky, and what you feel like the potential of that market is, and how you can develop that market from advertising sales. Russellville has historically been a pretty good radio advertising market. Knowing the value of that equipment and so forth, if I were breaking it out, the value of that license, if I were just going to buy that license, the license would be worth $100,000 to me, and the equipment would be worth virtually nothing, because I could go to a leasing company and put in all new equipment and generate a much better sound than I could by starting off trying to use the old equipment. I virtually would give you nothing for that equipment. I wouldn't want it.
Morrison's Dep. at 10-12.
After considering all of the evidence submitted by the parties, the evidence is more convincing that the value of the equipment sold by the trustee is $35,000.00. Since the realty was stipulated by the parties to have a value of $5,000.00, the balance of the sale proceeds, $60,000.00, is determined to be the value of the intangible assets sold by the trustee. Therefore, the trustee's objection to the Bank's claim is sustained, and the trustee is ordered to disburse to First Bank of Arkansas the sum of $35,000.00. The balance of the sale proceeds shall be retained by the trustee to be distributed to creditors upon further orders of the Court.
IT IS SO ORDERED.
NOTES
[1] See 47 U.S.C. § 301 (Supp. III 1991). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551588/ | 170 B.R. 202 (1994)
In re Nicholas E. PURPURA, Debtor.
Bankruptcy No. 193-15927-353.
United States Bankruptcy Court, E.D. New York.
August 10, 1994.
*203 Monasch & Strauss by Jeffrey T. Strauss, New York City, for Barbara Maida.
James O. Guy, Garden City, for debtor.
DECISION DISMISSING CHAPTER 11 CASE
JEROME FELLER, Bankruptcy Judge.
The protagonists in this matter are not strangers to legal fray. Nicholas E. Purpura ("Purpura" or "Debtor") and Barbara Maida ("Maida"), the Debtor's former spouse, slugged it out for eight (8) years in a divorce action at various levels of the New York State court system. After exhausting his appellate remedies and still unable to make peace with the equitable distribution awards made in the divorce action, Purpura commenced this Chapter 11 case. Once again, Maida was frustrated in her efforts to realize the cash, stock and real estate sale proceeds awarded to her approximately three years prior to the inception of the Chapter 11 case.
Before the Court is a multi-tiered motion of Maida seeking duplicative and redundant relief in her seemingly interminable efforts to collect her due from a former spouse who refuses to pay. Stripped of its surplusage, Maida seeks, essentially, to lift the automatic stay or, in the alternative, requests a dismissal of Purpura's Chapter 11 case on the ground that it was not filed in good faith.
This Chapter 11 case is a classic two party conflict properly resolved in the non-bankruptcy forum. It was strategically initiated in a futile attempt to forestall Maida's collection efforts. Purpura's cognizable debts are not significant, and his assets are more than sufficient to pay such debts. Moreover, the assets awarded Maida under a pre-petition divorce decree are her sole and separate property and do not constitute property of the Debtor's estate. Nor does an obligation to turnover these assets to Maida represent "debts" of Purpura dischargeable in bankruptcy.
The Chapter 11 reorganization process is properly employed to restructure debts, not to rewrite history. However, the only reorganization purpose of this Chapter 11 case is the Debtor's desire to "reorganize" the prepetition equitable distribution awards granted his former wife by a state court. This cannot be done. In sum, since no legitimate purpose is served by this Chapter 11 case, *204 cause exists to dismiss under 11 U.S.C. § 1112(b).
I. THE MATRIMONIAL ACTION
Purpura and Maida were married in July 1967. The marriage produced two children, a daughter born in 1970 and a son born in 1973. Subsequent to the birth of the second child, the marriage began to unravel, and, ultimately, the couple, in October 1983, separated. On or about July 2, 1985, Maida commenced an action for divorce and ancillary relief in the Supreme Court of the State of New York, Richmond County, entitled Purpura v. Purpura, Index No. 5769/85 (hereinafter "Matrimonial Action"). By order, dated March 25, 1988, signed by the Honorable Norman J. Felig, New York State Supreme Court Justice, the Matrimonial Action was referred to a judicial hearing officer. Justice Felig's order stated that the referral to a judicial hearing officer was "upon the consent of the parties and their respective attorneys." Accordingly, the Matrimonial Action was tried and decided by a judicial hearing officer, the Honorable Lester Sacks (hereinafter "J.H.O. Sacks").
The parties and their witnesses in the Matrimonial Action were heard in early September 1988 on the issue of divorce, and the state court issued a decision later that month granting absolute divorce in favor of defendant Purpura on his counterclaim. The issues of equitable distribution of the marital assets were thereafter the subject of a hotly contested, bitterly fought and protracted 10 day trial, commencing on September 7, 1988 and ending on September 12, 1989.[1] By memorandum decision, dated March 14, 1990, the state court resolved the issues of equitable distribution ("Memorandum Decision"). Among other things, J.H.O. Sacks allocated property accumulated while Purpura was associated with Bear Stearns and Company ("Bear Stearns") between the former spouses 35% to Maida and 65% to Purpura. In that connection, paragraph "Third" at pages 5-6 of the legal conclusions portion of the Memorandum Decision provided, in pertinent part, as follows:
It has been agreed that certain bonus monies received by [Purpura] from Bear Stearns in the sum of $166,756 is the separate property of [Purpura]. All other assets, bonus, dividends, income and stock of whatever nature received by [Purpura] from Bear Stearns due to his position as trader and/or general partner shall be shared by the parties, 35% to [Maida] and 65% to [Purpura].
In or about 1971, Purpura and Maida purchased a home at 5 Longfellow Avenue, Staten Island, New York, which became the marital home of the parties and their children during the marriage. In or about June 1983, Purpura purchased a house at 50 West Entry Road, Staten Island, New York, and he took up residence at this location when the couple separated. The Memorandum Decision also required that these two houses were to be sold and the net proceeds shared equally by Purpura and Maida.
J.H.O. Sacks signed a judgment on September 13, 1990, entered the following day, which judgment granted the divorce and implemented the equitable distribution rulings contained in the Memorandum Decision. Thus, the judgment included decretal paragraphs requiring, among other things, that Purpura pay and deliver to Maida her share of the Bear Stearns assets, and directing the sale of the two Staten Island houses and the equal distribution of the net sales proceeds therefrom (hereinafter "Divorce Judgment").
On January 31, 1991, J.H.O. Sacks issued an order supplementing and amending the Divorce Judgment ("January 1991 Order"). Among other things, the January 1991 Order quantified the 35% share of Bears Stearns assets awarded to Maida into finite dollar amounts and into a finite quantity of Bear Stearns stock. The January 1991 Order specifically directed Purpura to, i) pay the aggregate sum of $571,556.66 to Maida (the "Money Judgement") and ii) transfer 31,733 shares of his common stock in Bear Stearns to Maida (the "Stock Award"). The January 1991 Order also provided that payment of the Money Judgment and delivery of the Stock Award were to be made within 45 days from the date of entry of the order.
*205 Purpura moved in the state court to stay enforcement of the Divorce Judgment, as supplemented and amended by the January 1991 Order, pending an appeal. In that connection, Purpura delivered in March 1991, a certified check in the amount of $571,556.66 to the Clerk of the Court, Richmond County ("Escrow Funds"), and sent a letter to Bear Stearns directing that it transfer 31,733 shares of Bear Stearns stock from his account into a separate escrow account ("Escrow Stock").[2] By order entered in April 1991, J.H.O. Sacks held that the Escrow Funds and the Escrow Stock "adequately secure [Maida] should she prevail on appeal." Accordingly, J.H.O. Sacks determined that the establishment and maintenance of these escrow deposits satisfied the requirements of state law for a stay of enforcement, pending appeal. Pursuant to a stipulation "So ordered" by J.H.O. Sacks, enforcement of the Divorce Judgment in respect of the direction to sell the two Staten Island houses and to divide the net proceeds therefrom was also stayed pending appeal.
Purpura moved in the state court to reduce the amount of Escrow Funds deposited with the New York City Department of Finance to secure, pending appeal, the Money Judgment awarded Maida. By order dated August 13, 1991, J.H.O. Sacks granted a credit in favor of Purpura and in reduction of the Money Judgment in the (corrected) amount of $140,292. By agreement of the parties, certain sums were withdrawn by Purpura from the Escrow Funds, leaving Purpura with a net credit or reduction of the Money Judgment totalling approximately $120,000.
Purpura's efforts to overturn the rulings of J.H.O. Sacks were unsuccessful. By its decision and order, dated May 24, 1993, the Appellate Division of the Supreme Court of the State of New York, Second Department, affirmed both the Divorce Judgment and January 1991 Order. On or about May 28, 1993, Purpura moved for leave to appeal the Appellate Division's decision and order to the Court of Appeals of the State of New York. By order dated July 9, 1993, Purpura's motion for leave to appeal was denied by the state's highest court.
II. THE CHAPTER 11 FILING
On July 14, 1993, Purpura filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. The timing was not fortuitous. Only five days earlier, the Court of Appeals of the State of New York had denied his motion for leave to appeal the equitable distributions granted by the trial court and affirmed by the Appellate Division.
Purpura's schedules list assets in excess of $3 million. Included in the Debtor's scheduled assets are the Escrow Funds, Escrow Stock and Maida's property interest in the two Staten Island houses that were ordered to be sold, with the net proceeds thereof divided equally between Purpura and Maida. These two houses, both of which are unencumbered by mortgages and other liens, are reflected by Purpura on Schedule A as having a current aggregate market value of $1,875,000.[3]
Deeming his former wife's entitlements under the pre-petition equitable distribution awards as debt, Purpura lists Maida in Schedule F as a creditor holding a disputed, unsecured nonpriority claim in the sum of $2,165,234. Apart from Maida, the Debtor's schedules reflect modest debt relative to his assets. Purpura's schedules identify five creditors holding general unsecured claims totalling $50,524.[4] In addition, the Debtor's schedules list unsecured priority tax claims *206 totalling $25,680. Excluding Maida, but including a claim of his deceased father and claims subject to potential offset or dispute, Purpura schedules claims aggregating approximately $76,000.
III. DISCUSSION
Chapter 11 of the Bankruptcy Code is a powerful tool (i.e., automatic stay, marshalling and turnover of assets and discharge of debts) which can be initiated with virtual impunity. Any person who meets the minimal eligibility requirements contained in 11 U.S.C. § 109(d) may file a Chapter 11 petition.[5] These minimal eligibility requirements render Chapter 11 amenable to abuse. The good faith standard for the filing and maintenance of Chapter 11 cases protects the jurisdictional integrity of the bankruptcy courts and prohibits a debtor's misuse of its processes. It is well established that a lack of good faith constitutes cause for dismissal of a Chapter 11 case under 11 U.S.C. § 1112(b). First Nat'l Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404 (8th Cir.1990); Carolin Corp. v. Miller (In re Carolin Corp.), 886 F.2d 693, 698-99 (4th Cir.1989); Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Virginia (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir.1988); Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir.1986); In re Winshall Settlor's Trust, 758 F.2d 1136, 1137 (6th Cir.1985). As this Court has observed:
The good faith requirement provides parties in interest and the bankruptcy courts with an important and useful policing tool for preserving the reorganization process for those Chapter 11 cases for which it was actually intended. Its proper application makes certain that debtors who seek bankruptcy reorganization protection do so for no purpose other than to accomplish the legitimate aims and objectives of the statute.
In re HBA East, Inc., 87 B.R. 248, 258 (Bankr.E.D.N.Y.1988).
A. LITIGATION TACTIC IN TWO PARTY DISPUTE
The facts here reek of Chapter 11 misuse, if not more. In September 1990, after more than five (5) years of litigation in the Matrimonial Action, including a ten (10) day trial, a Divorce Judgment was entered in which Maida was awarded 35% of the Bear Stearns assets and 50% of the net proceeds from the sale of two Staten Island houses. In January 1991, and after further litigation, Maida's portion of the Bear Stearns assets was quantified by separate state court order, i.e., a Money Judgment $571,556.66 in cash; and a Stock Award 31,733 shares of Bear Stearns stock. Purpura sought and obtained state court stays delaying, pending appeal, enforcement of the Divorce Judgment. In order to obtain a stay of enforcement, the sum of $571,556.66 and 31,733 shares of Bear Stearns stock were deposited, pending appeal, in separate escrow accounts. More than two years of appellate litigation ensued, resulting in an affirmance of the trial court's equitable distribution awards. Nonetheless, the Escrow Funds, Escrow Stock and 50% interest in the two Staten Island houses were not received by Maida. Instead, less than one (1) week after exhaustion of his state court appellate remedies, Purpura initiated the instant Chapter 11 case on July 14, 1993. After eight (8) years of litigation, including trial, judgment, stays and appeals, Maida was again stymied.
Purpura commenced his Chapter 11 case to avoid the consequences of adverse state court equitable distribution of marital asset decisions, while he continues to attack those determinations. The filing was strategic in objective and calibrated in timing to block his ex-spouse's realization of her equitable distribution awards. Convinced to a certainty that he received a "bad deal" in the Matrimonial Action, Purpura filed this Chapter 11 case to provide himself with another chance at litigating equitable distribution, during which time he would bask in the protection of the automatic stay. In fact, this is precisely what Purpura has done. Subsequent to his *207 Chapter 11 filing, Purpura launched a two front attack in his continuing attempts to eliminate the pre-petition equitable distribution awards. First, he moved before the state court in the Matrimonial Action to have the Divorce Judgment vacated for jurisdictional reasons.[6] Second, Purpura commenced an adversary proceeding in this Court requesting a turnover under 11 U.S.C. § 543 of the Escrow Funds awarded Maida in the Matrimonial Action and being held in escrow by the New York City Department of Finance.[7]
This Chapter 11 case reduces itself to a two party dispute between Purpura and Maida. Purpura's incantations sound in bankruptcy, but fundamentally he continues to dispute the fate of valuable property awarded Maida in the Matrimonial Action. Absent the pre-petition equitable distribution awards, Purpura would have never filed a Chapter 11 petition. He filed not to reorganize, but rather, as indicated, as a litigation tactic to relitigate and at the same time to further thwart Maida's collection efforts.
Moreover, Purpura's financial posture negates any legitimate reorganization purpose. According to his bankruptcy schedules, he is solvent and, apart from Maida, reports insubstantial debt in relation to his assets held by a handful of creditors. Purpura presented no evidence that those creditors were pressing for payment when he filed. He does not need Chapter 11 protection to conduct his business affairs and pay his creditors. Purpura is fully capable of paying every penny of his not more than $76,000 of non-Maida scheduled debt without resort to a Chapter 11 reorganization. Purpura's assets include entitlement to approximately $120,000 from the Escrow Fund being held by the New York City Department of Finance, and a 50% interest in two unencumbered houses having a combined value of approximately $1.5 million. Plainly, Purpura is employing Chapter 11 as an offensive weapon in this two party fracas, contrary to the principle that our "bankruptcy laws are intended as a shield, not as a sword." In re Penn Central Trans. Co., 458 F. Supp. 1346, 1356 (E.D.Pa.1978).
Where, as here, a debtor's Chapter 11 effort involves essentially a two party dispute based on state law, and the filing for relief represented a litigation tactic to stall and impede the enforcement of legal rights against the debtor, dismissal for "cause", i.e., a bad faith filing, is warranted. In re Moog, 159 B.R. 357 (Bankr.S.D.Fla.1993) (facts similar to this case Chapter 11 case filed by debtor as a litigation tactic to circumvent exspouse's efforts to enforce New York divorce decree was dismissed as bad faith filing); In re HBA East, Inc., 87 B.R. 248 (Bankr. E.D.N.Y.1988); In re Schlangen, 91 B.R. 834 (Bankr.N.D.Ill.1988); In re Van Owen Car Wash, Inc., 82 B.R. 671 (Bankr.C.D.Cal. 1988); In re Noco, Inc., 76 B.R. 839, 844 (Bankr.N.D.Fla.1987); In re Cardi Ventures, Inc., 59 B.R. 18 (Bankr.S.D.N.Y.1985); In re Wally Findlay Galleries (New York), Inc., 36 B.R. 849 (Bankr.S.D.N.Y.1984). Furthermore, bankruptcy rehabilitation provisions are intended to benefit only those in genuine financial distress and are not to be used strategically as an avoidance mechanism to get out of particular obligations viewed by a debtor as having undesirable consequences. Barclays-American/Business Credit, Inc. v. Radio WBHP, Inc. (In re Dixie Broadcasting Inc.), 871 F.2d 1023, 1026-28 (11th Cir.), cert. denied, 493 U.S. 853, 110 S. Ct. 154, 107 L. Ed. 2d 112 (1989) (Chapter 11 case); Shell Oil Co. v. Waldron (In re Waldron), 785 F.2d 936 (11th Cir.), cert. dismissed, 478 U.S. 1028, 106 S. Ct. 3343, 92 L. Ed. 2d 763 (1986) (Chapter 13 case).
B. PROPERTY OF ESTATE AND DISCHARGEABILITY OF DEBTS
Purpura's dominant objective in commencing the instant Chapter 11 case was to wipe out the pre-petition equitable distribution awards obtained by Maida in the Matrimonial *208 Action and toward that end, as shown above, improperly employed his bankruptcy filing as a strategic ploy. Utilization of Chapter 11 for such an impermissible purpose is not the only trick in Purpura's arsenal of Chapter 11 abuse. If unsuccessful in his chief objective, he intends to erode Maida's pre-petition entitlements through a plan of reorganization. Purpura would propose a reorganization plan providing for reduced, if not de minimis, payment to Maida, and then seek to discharge the remainder of her entitlements by way of confirmation of the plan. See 11 U.S.C. § 1141(d).[8]
The Bankruptcy Code defines property of an estate in bankruptcy to include "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). While the scope of this definition is broad, it is not a bottomless pit. Property of the estate is limited to, among other things, property interests in existence at the time the bankruptcy petition was filed. The rights of a debtor in property are not expanded or enlarged upon the filing of a bankruptcy petition. Old Stone Bank v. Tycon I Building Ltd. Partnership, 946 F.2d 271, 276 (4th Cir.1991) ("It is well established that a debtor . . . cannot use the cover of bankruptcy to acquire greater property rights than it was entitled to prior to bankruptcy."); Brown v. Dellinger (In re Brown), 734 F.2d 119, 124 (2nd Cir. 1984) ("It is true of course that upon the filing of a petition in bankruptcy, the bankruptcy estate can have no greater interest in property included in it than the debtor had when the petition was filed."); Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.), cert. denied, 469 U.S. 982, 105 S. Ct. 386, 83 L. Ed. 2d 321 (1984) ("[W]hatever rights a debtor has in property at the commencement of the case continue in bankruptcy no more, no less."); H.R.Rep. No. 595, 95th Cong., 1st Sess. 367 (1977) U.S.Code Cong. & Admin.News 1978, pp. 5787, 6323 (11 U.S.C. § 541 ". . . is not intended to expand the debtor's rights against others more than they existed at the commencement of the case."). Whether or not a debtor has an interest in property sufficient to bring it within the ambit of "property of the estate" is determined by state law or other applicable nonbankruptcy law. Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918, 59 L. Ed. 2d 136 (1979); Crysen/Montenay Energy Co. v. Esselen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1101 (2d Cir.1990); Sanyo Electric, Inc. v. Howard's Appliance Corp. (In re Howard's Appliance Corp.), 874 F.2d 88, 93 (2d Cir. 1989).
Purpura's Chapter 11 petition schedules the property awarded by the state court to Maida as her equitable distribution of the marital assets and lists her as an unsecured creditor, albeit one whose claim is disputed. Driven by a desire to circumvent and avoid the Divorce Judgment, as supplemented and amended by the January 1991 Order, he considers the property awarded Maida under the pre-petition divorce decree to be property of the estate and that Maida's rights thereto represent debt owing by him, which debt can be discharged under a Chapter 11 reorganization plan. He is wrong on both counts; i.e., the property awarded Maida under the pre-petition divorce decree is her property and not the property of the estate, and Purpura owes no "debt" to Maida dischargeable in bankruptcy.
It is widely recognized that property awarded to a non-debtor spouse pursuant to a divorce decree finalized prior to the debtor spouse's bankruptcy is not part of the debtor's estate. See, e.g., Wilson v. Wilson (In re Wilson), 158 B.R. 709 (Bankr.S.D.Ohio 1993) (portion of debtor's retirement fund awarded pre-petition to non-debtor spouse under state court divorce decree is not property of the estate); Adamo v. Ledvinka (In re Ledvinka), 144 B.R. 188 (Bankr.M.D.Ga.1992) (non-debtor spouse's entitlement to portion of debtor's retirement funds under pre-petition marital settlement agreement is her sole and separate property); In re Greenwald, 134 B.R. 729 (Bankr.S.D.N.Y.1991) (rights in various items of property, including cash, granted *209 under pre-petition equitable distribution award upon divorce, vested in non-debtor spouse prior to filing under New York Law, and thus such property was not property of the debtor's estate); Boyer v. Boyer (In re Boyer), 104 B.R. 497 (Bankr.S.D.Fla.1989) (funds awarded non-debtor spouse under prior divorce decree are not property of the estate of the debtor spouse). The applicable legal precept has been articulated by a respected treatise as follows:
It is generally recognized that once the divorce decree becomes final, the property interests awarded are vested pursuant to the decree. As long as the property awarded existed at the time of the decree, even if it was cash, a prebankruptcy court order divesting the debtor spouse of an interest in the property will normally keep that property out of the debtor spouse's bankruptcy estate.
Henry J. Sommer et al., Collier Family Law And The Bankruptcy Code § 2.01[5] at 2-11 (1994 ed.)
Long before Purpura's Chapter 11 filing, the state court in the Matrimonial Action, construing New York law and after extensive litigation, entered a divorce decree awarding equitable distribution of the marital assets.[9] The appeals process, affirming the trial court's determinations, were concluded prior to the bankruptcy filing. The pre-petition finality of all these events divested Purpura of all legal and equitable interest in the property awarded Maida under the Divorce Judgment, as amended and supplemented by the January 1991 Order.[10] Those property interests vested in Maida pre-petition and constituted her sole and separate property. Purpura could not, by improperly withholding property belonging to Maida, make them property of the estate under 11 U.S.C. § 541(a)(1).
The Divorce Judgment, as supplemented and amended by the January 1991 Order, by its terms, awarded Maida 35% of the Bear Stearns assets, quantified that 35% interest into specific sums of cash and stock and further granted Maida a specific 50% interest in the two Staten Island houses. The Divorce Judgment, awarding Purpura 65% of the Bear Stearns assets and 50% of the net proceeds from the two Staten Island houses, further divested him of any interest in the property awarded his former wife. Accordingly, when the Chapter 11 case was filed on July 14, 1993, Purpura owned nothing more than 65% of the Bear Stearns assets and 50% of the two houses.
Because Purpura, at the time of his Chapter 11 filing, had no interest in the property awarded Maida, his obligation to deliver such property to her was not a "debt" or obligation to pay that could be discharged in bankruptcy. A "debt" is defined by the Bankruptcy Code as "liability on a claim" and requires that there be a "right to payment" from the debtor. See 11 U.S.C. § 101(12) and § 101(5)(A). This Debtor, however, has no obligation pay Maida from his own property, but was merely to act, in effect, as an agent for the transfer of property to its rightful owner, i.e., his former wife. Thus, while the Divorce Judgment may well have effected a division of property, it did not create a debt or obligation dischargeable in bankruptcy. Succinctly stated, the Divorce Judgment created property interests and not debt.
C. THE DIVORCE JUDGMENT, AS SUPPLEMENTED AND AMENDED BY THE JANUARY 1991 ORDER, IS RES JUDICATA
Under the res judicata doctrine, a final judgment on the merits of an action *210 precludes the parties or their privies from relitigating issues that were or could have been raised in that action. Cromwell v. County of Sac, 94 U.S. (4 Otto) 351, 352, 24 L. Ed. 195 (1877). A federal court must give a state court judgment the same preclusive effect as would be given that judgment under the law of the state in which the judgment was rendered. Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 81, 104 S. Ct. 892, 896, 79 L. Ed. 2d 56 (1984); Allen v. McCurry, 449 U.S. 90, 96, 101 S. Ct. 411, 415-16, 66 L. Ed. 2d 308 (1980) (citing 28 U.S.C. § 1738); Kelleran v. Andrijevic, 825 F.2d 692, 694 (2d Cir.1987), cert. denied, 484 U.S. 1007, 108 S. Ct. 701, 98 L. Ed. 2d 652 (1988). In New York, a final judgment in a marital action rendered by a court of competent jurisdiction determines the rights of the parties. In re Greenwald, 134 B.R. at 731. As the Court of Appeals for the State of New York stated:
In general, a final judgment of divorce issued by a court having both subject matter and personal jurisdiction has the effect of determining the rights of the parties with respect to every material issue that was actually litigated or might have been litigated.
Rainbow v. Swisher, 72 N.Y.2d 106, 110, 531 N.Y.S.2d 775, 777, 527 N.E.2d 258, 260 (1988). The Divorce Judgment, as supplemented and amended by the 1991 Order, is a final judgment enforceable in the New York state courts. Accordingly, the equitable distribution of marital assets granted by that final judgment, affirmed on appeal, is res judicata as to the property rights of Maida and Purpura in this Court.
Purpura asserts that the entire Divorce Judgment is void, arguing that the judicial hearing officer who tried and decided the Matrimonial Action, J.H.O. Sacks, lacked subject matter jurisdiction because of an alleged invalid reference under state law. The trial of the Matrimonial Action started in 1988, and the appeals process concluded in 1993. Over this five year period, a claim that the judicial hearing officer lacked subject matter jurisdiction was never once raised. It is a claim that was never made by way of an objection at the time of trial; it is a claim that was never raised in any of the notices of appeal or pre-argument statements filed by Purpura; it is a claim that was never made in any of the four appellate briefs submitted to the Appellate Division, Second Department, by Purpura; and it is a claim that was not made in the motion filed with the Court of Appeals in support of Purpura's request for leave to appeal to that Court. As indicated above, the state court has already denied a post-petition motion by Purpura to vacate the Divorce Judgment for jurisdictional reasons. Not surprisingly, Purpura has appealed that ruling. Having filed his Chapter 11 petition in bad faith, Purpura is surely not entitled to bankruptcy protection pending determination of this latest appeal.
Purpura further asserts that the Divorce Judgment is void because it was allegedly procured by fraud. He charges misrepresentations and falsifications, including perjury, by Maida and/or her attorney, particularly that Maida understated her assets and misrepresented the absence of assets. These claims of fraud were presented and rejected at every level of the New York state court system (trial court, appellate division and court of appeals) in the Matrimonial Action.[11]*211 Accordingly, the principle of res judicata precludes revival of this litigation in the bankruptcy court to collaterally attack the Divorce Judgment as a fraudulent judgment. See Heiser v. Woodruff, 327 U.S. 726, 66 S. Ct. 853, 90 L. Ed. 970 (1946), reh'g denied, 328 U.S. 879, 66 S. Ct. 1335, 90 L. Ed. 1647 (1946). As the Supreme Court in Heiser v. Woodruff has taught:
It is true that a bankruptcy court is a also a court of equity . . . and may exercise equity powers in bankruptcy proceedings to set aside fraudulent claims, including a fraudulent judgment where the issue of fraud has not been previously adjudicated. . . . But we are aware of no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata, which is founded upon the generally recognized public policy that there must be some end to litigation and that when one appears in court to present his case, is fully heard, and the contested issue is decided against him, he may not later renew the litigation in another court.
327 U.S. at 732-33, 66 S.Ct. at 856. [Citations Omitted].
Courts obviously retain inherent power to ascertain whether their judgments were obtained by fraud. See Universal Oil Products Co. v. Root Refining Co., 328 U.S. 575, 580, 66 S. Ct. 1176, 1779, 90 L. Ed. 1447 (1946), reh'g denied, 329 U.S. 823, 67 S. Ct. 24, 91 L. Ed. 700 (1946); Alberta Gas Chems., Ltd. v. Celanese Corp., 650 F.2d 9, 12-13 (2d Cir.1981); In re Holden, et al., 271 N.Y. 212, 218, 2 N.E.2d 631 (1936). If Purpura believes that the Divorce Judgment can be set aside as having been obtained by fraud, he is free to seek such relief from the state court and request stays from that court. He is not at liberty to either relitigate the Divorce Judgment or to obtain stays of its enforcement in the bankruptcy court.
IV. CONCLUSION
A Chapter 11 petition must be filed with the honest intent and genuine desire to utilize the provisions of Chapter 11 for its intended purpose. Chapter 11 was not intended to insulate a disappointed spouse from the effect of a pre-petition divorce decree. This case is essentially a two party dispute animated by an effort to continue a pre-petition, state court adjudicated equitable distribution of marital assets controversy and have that adjudication changed to the satisfaction of a disgruntled former spouse. To permit the use of Chapter 11 for such purpose would condone abuse of the bankruptcy process.
For all of the above reasons, this Chapter 11 case serves no legitimate reorganization purpose, and it is accordingly dismissed "for cause" under 11 U.S.C. § 1112(b).
AN ORDER CONSISTENT WITH THIS DECISION IS BEING ENTERED SIMULTANEOUSLY HEREWITH.
NOTES
[1] Post-trial evidentiary hearings continued into December 1990.
[2] The Richmond County Clerk subsequently transferred the Escrow Funds to the New York City Department of Finance where they are being held in Account No. R117546, and Bear Stearns deposited the Escrow Stock into Account No. XXX-XXXXX.
[3] The house located at 50 West Entry Road, Staten Island, New York is valued at $1,300,000, and the house at 5 Longfellow Avenue, Staten Island, New York is valued at $575,000.
[4] Included among these five creditors are the following, i) Purpura's deceased father a $20,000 claim; ii) an accounting firm against whom Purpura asserts a malpractice cause of action a $23,550 claim; and iii) New York State Department of Taxation and Finance a disputed $5,288 claim.
[5] Under 11 U.S.C. § 109(d), stockbrokers, commodity brokers and railroads are precluded from filing Chapter 11 cases; otherwise, any person who may be a debtor under Chapter 7 of the Bankruptcy Code can file a Chapter 11 case.
[6] This motion to vacate was filed in December 1993 and was denied by the Honorable Louis J. Marrero, New York State Supreme Court Justice, in May 1994. Purpura has appealed.
[7] Purpura v. Commissioner of the Department of Finance of the City of New York, Adv.Proc. No. 194-1140. This lawsuit was commenced in April 1994 and has been held in abeyance pending this Court's decision on Maida's motion to, among other things, dismiss Purpura's Chapter 11 case.
[8] 11 U.S.C. § 1141(d)(1)(A) provides, in pertinent part, that, except as provided in the plan of reorganization, "confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation."
[9] New York State Law requires that in a marital action, the court "shall determine the respective rights of the parties in their separate or marital property, and shall provide for the disposition thereof in the final judgment." N.Y. Domestic Relations Law § 236, Part B, subd. 5, par. a. (Mckinney 1988).
[10] The Debtor cites In re Palmer, 78 B.R. 402 (Bankr.E.D.N.Y.1987) as authority for the proposition that the property awarded his ex-spouse is property of the estate. The Palmer case is entirely inapposite. Unlike this case, in Palmer, the equitable distribution awards were not obtained prior to bankruptcy. Under those circumstances, Judge Holland held that where a non-debtor spouse's equitable distribution rights vest after commencement of the bankruptcy case, the non-debtor spouse's rights are subject to the Bankruptcy Code's scheme of distribution as any other creditor.
[11] The Matrimonial Action is not the only place that Purpura has lodged fraud claims against Maida and/or her attorney. In or about February 1987, a lawsuit was instituted by Purpura in the United States District Court for the Eastern District of New York against the law firm with which Maida's attorney was formerly associated. Purpura v. Buskin, Gaims, Gaines, Jonas and Stream, Esqs., cv-87-0453(RJD). The complaint in this action included several charges of fraud, perjury and suborning of perjury. This lawsuit was voluntarily discontinued soon after it was commenced. In 1992, Purpura filed a lengthy complaint against Maida's attorney with the Disciplinary Committee of the Supreme Court, Appellate Division, First Judicial Department. In this disciplinary complaint, Purpura charges Maida's attorney with having perpetrated fraud both upon him and the Courts of the State of New York. In March 1993, after considering the response of Maida's attorney, the Disciplinary Committee closed the file, and it has remained closed. Finally, in October 1993, Purpura filed a RICO action against Maida and her attorney in the United States District Court for the Eastern District of New York, charging fraud and racketeering in connection with the Matrimonial Action and seeking damages of more than $6 million. Purpura v. Maida et al., cv-93-4696(RJD). This action is pending, apparently in its early stages. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551532/ | 170 B.R. 793 (1994)
Gurdeep Singh JOLLY, Plaintiff,
v.
Jesse A. PITTORE, Richard J. Westin, Stanley L. Seaman, Preferred Income Fund II Ltd. Partnership, and Westor Financial Group, Inc., Defendants.
Jyothi SRIRAM, and Varsha Tevar, as Custodian for Seema Tevar, Ami Tevar and Neel Tevar, Plaintiffs,
v.
Jesse A. PITTORE, Richard J. Westin, Stanley L. Seaman, Preferred Income Fund III Ltd. Partnership, and Westor Financial Group, Inc., Defendants.
Nos. 92 Civ. 3593 (JSM), 92 Civ. 5244 (JSM).
United States District Court, S.D. New York.
July 22, 1994.
*794 *795 Henry A. Brachtl, Goodkind Labaton Rudoff & Sucharow, New York City, for plaintiffs.
Charles S. Bronitsky, Rubinstein & Perry, San Francisco, CA, for defendants.
MEMORANDUM ORDER
OPINION
MARTIN, District Judge.
On July 14, 1993, this Court entered an Order granting plaintiffs' application for dissolution of Preferred Income Fund II and Preferred Income Fund III, and granting the parties time to submit names of a person to be appointed liquidating trustee. Thereafter, counsel for defendants asked the Court for a certification pursuant to Rule 54(b) and a stay of the Court's order pending appeal. During the course of a telephone conference relating to that application, the Court indicated that it would deny the application for a stay and was prepared to appoint a liquidating trustee. Defendant's counsel, Mr. Bronitsky, asked for additional time to submit names to be considered for appointment as the trustee. In response, plaintiffs raised concerns that the defendants might attempt to file a bankruptcy proceeding during the period before the liquidating trustee might be named. The Court then required Mr. Bronitsky to represent that the defendants would not file petitions in bankruptcy during the period of time between that date and the naming of the liquidating trustee. By order dated August 18, 1993, the United States Court of Appeals for the Second Circuit granted a temporary stay of this Court's order until the matter could be heard by that court on Tuesday, August 31, 1993. By order filed on August 29, 1993, this Court ordered that Sheldon L. Solow be appointed liquidating trustee of both funds, but recognized that order would be stayed during the period of the stay granted by the Second Circuit.
By order dated August 31, 1993, the Second Circuit vacated the stay previously granted and denied defendants' application for a further stay pending appeal.
On September 2, 1993, the two Funds filed petitions in bankruptcy pursuant to petitions signed by defendant Pittore on August 31, 1993.
By letter dated September 2, 1993, counsel for plaintiffs requested a pre-motion conference in order to obtain permission of the Court to file a motion to hold defendants and their counsel in contempt of the Court's prior orders appointing the liquidating trustee. That matter was set down for a conference on October 14, 1993. At the outset of the proceeding on October 14, plaintiffs' counsel stated that he believed that there were grounds for criminal contempt. At that time, the Court noted that if criminal contempt proceedings were to be instituted it might be appropriate to appoint special counsel rather than have criminal contempt proceedings prosecuted by the attorney for the plaintiffs.
The Court then took the matter under advisement.
By order dated December 7, 1993, the Court ordered a hearing on whether the defendants should be held in civil contempt. A hearing was held on January 28, 1994, and an additional hearing was held on June 23, 1994.
*796 The record before the Court clearly establishes that on September 2, 1993, when the funds filed petitions in bankruptcy, Westor and the individual defendants were aware of this Court's order appointing Sheldon Solow as liquidating trustee. Indeed, Westor, in a letter to investors in the two funds stated that they "were forced to act immediately in order to forestall the installation of a `liquidating trustee called for by the judge's ruling. . . . '"
The Court can think of no clearer evidence that the defendants acted with a deliberate purpose to disobey and frustrate the order of this Court appointing the liquidating trustee. The participation in this contempt by the individual defendants Pittore and Westin is established beyond any possible doubt. Pittore is Chairman of the Board of Directors and Chief Financial Officer of Westor, and he personally signed the bankruptcy petitions. Seaman is a Vice-President and director of Westor and he personally signed the September 2, 1993 letter to the investors advising them of Westor's contemptuous actions.
While the evidence of Westin's participation is not as strong it is clearly sufficient to establish by a preponderance of the evidence that Westin was also personally involved in the contempt of this Court's order. Westin was President and Principal Executive Officer of Westor as well as a substantial shareholder. In addition, like the other individual defendants, when directed to provide the Court with an affidavit setting forth his participation in the decision to make the bankruptcy filings, Westin filed an affidavit in which he asserted the Fifth Amendment privilege. In the context of a civil proceeding such as this, it is entirely appropriate for the Court to draw from that assertion an inference that Westin was a willing and knowledgeable participant in the decision to violate this Court's order. Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 1558, 47 L.Ed.2d 810 (1976).
With respect to the role of defendants' counsel in this action, Charles S. Bronitsky, the Court finds by a preponderance of the evidence that he, too, was a knowing and wilful participant in the scheme to attempt to frustrate this Court's order by filing a bankruptcy petition. Bronitsky was clearly on notice that this Court would view the filing of a bankruptcy petition as being inconsistent with the appointment of a liquidating trustee. Indeed, Bronitsky acknowledges that, in the telephone conference in which he sought additional time to submit the names of persons to be considered for the position of liquidating trustee, the Court indicated that it would be willing to grant such an extension only if he represented on behalf of the defendants that no attempt would be made to place the Funds into bankruptcy between that time and the time a liquidating trustee was appointed. While Bronitsky argues that he was not told at that time that the filing of a bankruptcy petition would be a contempt of the order appointing a liquidating trustee, it is difficult to imagine that he failed to recognize that the reason the Court asked for a representation that no bankruptcy filing would be made until the order designating the particular individual to serve as liquidating trustee was signed was because the Court was of the view that once an order appointing a specific person as the liquidating trustee was signed, any attempt to file a bankruptcy petition would be a direct violation of that order punishable by contempt.
Mr. Bronitsky's close involvement with the bankruptcy filing designed to frustrate this Court's order appointing the liquidating trustee is demonstrated by the fact within 32 minutes of the time the bankruptcy petitions were filed, Mr. Bronitsky's firm telecopied the notice of filing the petitions to his co-counsel here in New York. Finally, like the individual defendants, when directed by the Court to explain his involvement in the bankruptcy filings, Mr. Bronitsky did not do so, but rather asserted his Fifth Amendment privilege.
There can be no question that filing of the bankruptcy proceedings caused substantial expense to the Funds and, therefore, injury to their limited partners, the plaintiffs herein. It is appropriate, therefore, that Westor, the individual defendants, and Mr. Bronitsky be held jointly and severally liable in civil contempt for all expenses incurred by *797 the Trustee in connection with the bankruptcy proceedings.
The respondents argue that they acted in good faith on the belief that general partners could file bankruptcy proceedings after a liquidating trustee had been appointed. This argument is insufficient to deny the right to recover the fees and expenses caused by the bankruptcy for several reasons.
First, the evidence before the Court is overwhelming that the bankruptcy filings were not occasioned by any legitimate need to provide the partnerships with protection from their creditors, but rather were done solely to frustrate this Court's order appointing a liquidating trustee. Indeed, in denying a stay of the dismissal of the bankruptcy proceedings, Chief Judge Henderson of the Northern District of California noted:
It is also extremely clear that PIF II fails to demonstrate a probability of success on the merits or the existence of a substantial legal question . . . PIF II appears to have no real debt to reorganize.
In a footnote, the Court added:
Indeed, based on our review we are inclined to agree with Judge Jellen's skepticism as to whether reorganization under the bankruptcy code was a legitimate action to begin with given the balance of assets and liabilities.
Second, the authority on which defendants rely in support of their claim that they had a right to file the bankruptcy proceedings is far from persuasive. Nowhere in the cases cited by defendants is there authority for the proposition that general partners may petition for bankruptcy on behalf of the partnership after a liquidating trustee has been appointed. Cases such as In re Donald Verona & Bernard Green, 126 B.R. 113 (Bankr. M.D.Fla.1991) (surviving partner of two person partnership may file Chapter 7 petition following death of partner); In re B C & K Cattle Co., 84 B.R. 69 (Bankr.N.D.Tex.1988) (partner may file involuntary petition against partnership) are inapposite since they do not involve a situation where there is a court order transferring the authority to act on behalf of the partnership from the general partners to a liquidating trustee.
Nor are the respondents helped by cases such as In re Prudence Co., Inc., 79 F.2d 77 (1935), which indicate that general partners or directors of corporations have the authority to institute bankruptcy proceedings following the appointment of an equity receiver. An equity receiver is appointed upon the application of creditors to take control of the debtor's assets for the benefit of the creditors. The receiver does not have the power, at least without special order of the court, to institute bankruptcy proceedings. See Manhattan Rubber Manufacturing Company v. Lucey Manufacturing Company, 5 F.2d 39, 42 (2d Cir.1925) (Learned Hand concurring). See also In re Prudence Co., Inc., 79 F.2d 77 (2d Cir.1935); Esbitt v. Dutch-American Mercantile Corp., 335 F.2d 141 (2d Cir.1964).
A person filing a voluntary bankruptcy petition on a partnership's behalf must be authorized to do so, and authorization must derive from state law. See Price v. Gurney, 324 U.S. 100, 106, 65 S.Ct. 513, 516, 89 L.Ed. 776 (1945). See also Keenihan v. Heritage Press, Inc., 19 F.3d 1255 (8th Cir. 1994). Under Delaware Law it is the liquidating trustee who is to conclude the unfinished business of the corporation so as to finally terminate its existence. Delaware Code Annotated title 6 § 17-803. See National Medical Properties, Inc., No. 6036, 5 Del J.Corp.L. 537, 1980 wl 3034, *2 (Del.Ch. 1980) citing DEL.CODE ANN. tit. 8, s 279. Indeed, the Second Circuit, in affirming this Court's appointment of a liquidating trustee, recognized that it was the liquidating trustee and not the general partners who had the power to determine how the dissolution of the partnership should be accomplished. Sriram v. PIF III, Ltd., 22 F.3d 498, 502 (1994). Thus, the general partners had no authority to commence bankruptcy proceedings after the liquidating trustee was appointed.
Finally, this is a civil contempt proceeding. The Court therefore need not find such wilful conduct as would justify the imposition of criminal sanctions. All that is necessary for the Court to find is that the actions of the defendants and Mr. Bronitsky were in violation of this Court's order and that their actions caused the damage which is to be remedied by the order to be entered herein. Canterbury Belts, Ltd. v. Lane Walker Rudkin, Ltd., 869 F.2d 34, 39 (2d *798 Cir.1989) (citing McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 69 S.Ct. 497, 499, 93 L.Ed. 599 (1949)). Thus, even if each of the defendants and Mr. Bronitsky believed in good faith that they had the right to file the bankruptcy proceedings, the Court finds that their actions were, in fact, a violation of this Court's order which caused damage to the partnerships. Each of them is thus jointly and severally liable for the full amount of the costs and expenses incurred by the partnerships as a result of the bankruptcy proceedings. See New York State N.O.W. v. Terry, 886 F.2d 1339, 1352 (2d Cir.1989).
SO ORDERED. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551537/ | 170 B.R. 137 (1994)
In the Matter of William Galen SHERBAHN & Diane Elizabeth Sherbahn, Debtors.
Bankruptcy No. 89-11032.
United States Bankruptcy Court, N.D. Indiana, Fort Wayne Division.
March 11, 1994.
*138 David Peebles, Fort Wayne, IN, for debtors.
Donald Aikman, Fort Wayne, IN, for trustee.
DECISION
ROBERT E. GRANT, Bankruptcy Judge.
On July 14, 1989, debtors filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. Their scheduled assets included "growing crops" which were given a value, as of the date of the petition, of $14,496.00. On Schedule B-4, they claimed an exemption in "41% of growing crops." The "value claimed exempt" was placed at $5,950.00, approximately 41% of the scheduled value of this particular asset. The crops were raised to maturity, harvested, and sold on behalf of the estate for $56,438.56 a price much greater than the value they had in their immature state.
As a result of the claimed exemption, a dispute has arisen between the debtors and the trustee with regard to the distribution of the crop proceeds between the debtors and the estate. Because they claimed an exemption in 41% of the growing crop, debtors contend they are entitled to 41% of the value of the crop when it was eventually sold $23,139.81. The trustee argues that they are not entitled to any exemption or, in the alternative, that they are only entitled to the value they claimed as exempt $5,950.00.
The matter is presently before the court on the parties' cross motions for summary judgment. Pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, summary judgment is proper if "there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
The essential facts, as set forth above, are undisputed.[1] Given these undisputed facts, the matter before the court presents a question of law: As between the debtors and the trustee, who is entitled to the post-petition appreciation in the value of property of the estate in which an exemption has been claimed?
Neither party directed the court's attention to any dispositive authority from either the Seventh Circuit or the Northern District of Indiana with regard to the issue before the court. The court notes, however, that both the Ninth Circuit Court of Appeals and the Ninth Circuit's Bankruptcy Appellate Panel have directly confronted the question. See In re Hyman, 967 F.2d 1316 (9th Cir.1992); In re Alsberg, 161 B.R. 680 (9th Cir. BAP 1993). The holdings of these cases can be succinctly summarized as follows:
1) a debtor's right to claim an exemption in particular property is determined as of the date of the petition;
*139 2) the value of property in which an exemption has been claimed is determined upon the sale or other disposition of the asset; and,
3) if, due to post-petition appreciation, the property sells for more than the amounts due on account of liens against it and debtor's claimed exemption, the estate, rather than the debtor, is entitled to the benefit of that appreciation.
Applying these principles to the case before the court is a simple task. On the date the petition was filed, pursuant to Indiana law, each debtor was entitled to exempt up to $4,000.00 in "other real estate or tangible personal property." I.C. XX-X-XX-X(a)(2). Growing crops certainly fall within this category and the claimed exemption of $5,950.00 fits comfortably within the combined statutory limit.
The court rejects the trustee's argument that, because the property was fully encumbered on the date of the petition, debtors were not entitled to any exemption whatsoever. The statutory authority upon which the trustee relies, I.C. XX-X-XX-X(d), by its plain language applies only as to a claim of exemption against a lienholder on account of the lien in question. See In re Hatcher, 131 B.R. 430 (Bankr.S.D.Ind.1990). It has no application as to any other claim. The case law upon which the trustee relies is easily distinguishable because it almost exclusively involves objections to a debtor's attempt to avoid a judicial lien pursuant to 11 U.S.C. § 522(f)(1). Here, the court is confronted with the question of how to allocate the unencumbered portions of an asset, rather than with the issue of whether or not a particular lien against it should be avoided.
Nothing in either the Bankruptcy Code or Indiana law requires the debtor to have equity, i.e. value remaining in an asset over and above all liens and encumbrances, in order to claim an exemption.[2] Indeed, 11 U.S.C. § 522(g) & (h) clearly indicate that there are circumstances under which a debtor can claim an exemption out of "equity" in property that has been created through the use of the various avoiding powers in the Bankruptcy Code. The court would also note that, except in a lien avoidance scenario, a debtor would have little interest in claiming an exemption in fully encumbered property, unless there is a substantial likelihood that the exempt property will appreciate in value after the date of the petition, because it is unlikely the debtor would derive any benefit from such a claim.
The value of the crop in which debtors claimed an exemption is determined by its sale price after harvest $56,438.56. Cf. 11 U.S.C. § 506(a) (value of a lien upon property determined in light of proposed disposition or use of property and in conjunction with any hearing on such disposition or use). This price is apparently more than sufficient to fully pay the estate's post-petition costs of production, the amounts due the lienholder, debtors' $5,950.00 exemption, and leave money to spare. The fact that the crop appreciated in value after the date of the petition does not operate to increase debtors' exemption beyond that which was originally claimed. Cf. Dewsnup v. Timm, 502 U.S. 410, ___, 112 S.Ct. 773, 778, 116 L.Ed.2d 903 (1993) (increase in value accrues to the benefit of the creditor, not the debtor).
The court rejects debtors' argument that they are entitled to 41% of the value of the entire crop because that is the way they described the property in which the exemption was claimed. Since debtors control the information placed on their bankruptcy schedules, any ambiguities must be construed against them. Hyman, 967 F.2d at 1319-20 n. 6; Addison v. Reavis, 158 B.R. 53, 59-60 (D.E.D.Va.1993). See also In re Zimmer, 154 B.R. 705 (Bankr.S.D.Ohio 1993). By focusing on the description of the property in which the exemption was claimed, without any consideration for the value of the claimed exemption, debtors attempt to create an ambiguity with regard to just what it was they claimed as exempt 41% of the crop or $5,950.00. They then proceed to resolve this ambiguity in their *140 favor, rather than against them as the law requires.
A claimed exemption must be read in its entirety. This includes not only the description of the property in which the exemption was claimed but also the value the debtor placed upon the claimed exemption. The description of the property serves only to identify the asset in which an exemption has been claimed. The extent of that exemption is determined by the value claimed exempt which the debtor placed in its schedule of exemptions. Thus, the Ninth Circuit did not allow the debtor in Hyman to exempt the entire value of its residence, by describing the exempt property as "homestead" when the value placed upon that exemption was only $45,000.00. Hyman, 967 F.2d at 1319. Similarly, the debtors in Addison were not allowed to enlarge their claimed exemption, beyond the dollar value placed upon it in their schedule of exemptions, based upon the way they had described and valued the asset in their schedules. Addison, 158 B.R. at 59-60.
The court concludes that the amount of a claimed exemption is controlled by the value the debtor ascribes to it in the schedule of exemptions, which in this instance was $5,950.00. That value is not enlarged because of the way in which the debtor happens to describe the property in which the exemption has been claimed.
For all of the foregoing reasons, debtors are entitled to an exemption in the proceeds of the 1989 crops in the amount $5,950.00. An appropriate order will be entered.
NOTES
[1] In making this observation, the court is fully aware that the trustee's affidavit contains a number of allegations accusing the debtors of misconduct with regard to the crop proceeds. The consequences of any such misconduct are more properly the subject of a separate proceeding. As a result, the court considers these facts to be irrelevant and, thus, not material.
[2] Since exemptions can only be paid out of the unencumbered portions of an asset, whether or not there is equity in the property will have a decided impact upon whether a debtor will receive anything on account of the claimed exemption. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551716/ | 409 B.R. 873 (2009)
In re TOM NEBEL, P.C., Debtor.
Eva M. Lemeh, Trustee for the Estate of Tom Nebel, P.C., Plaintiff,
v.
Cristi Scott, solely as Clerk and Master of the Chancery Court for Davidson County, Tennessee, et al., Defendants.
Eva M. Lemeh, Trustee for the Estate of Tom Nebel, P.C., Plaintiff,
v.
Kristin Terry Coode, et al., Defendants.
Bankruptcy No. 307-02848. Adversary Nos. 307-00204A, 307-00237A.
United States Bankruptcy Court, M.D. Tennessee, Nashville Division.
March 13, 2009.
*876 Madison L. Martin, Robert Charles Goodrich, Jr., Stites & Harbison PLLC, Nashville, TN, for Plaintiff.
Andrew David McClanahan, Metropolitan Gov't Dept. of Law, Nashville, TN, for Cristi Scott.
G. Rhea Bucy, Gullett, Sanford, Robinson & Martin, PLLC, Nashville, TN, Suzette B. Peyton, Suzette Peyton Law Office, Nashville, TN, for Kristin Terry Goode, et al.
MEMORANDUM OPINION
MARIAN F. HARRISON, Bankruptcy Judge.
I. INTRODUCTION
This matter is before the Court upon cross motions for summary judgment filed by the Chapter 7 Trustee for the law firm of Tom Nebel, P.C. (hereinafter "Trustee") and the defendants collectively referred to as the "McRedmond Parties."[1] The dispute herein involves certain funds held by the Chancery Clerk and Master of Davidson County in which both the McRedmond Parties and the Trustee claim an interest. The disputed funds held by the Chancery Clerk and Master were deposited pursuant to an order of the Chancery Court in a shareholder derivative action tried by Tom Nebel, P.C., on behalf of the McRedmond Parties.
The issue before the Court is whether all or part of the funds held by the Chancery Court are property of the bankruptcy estate of Tom Nebel, P.C. The issue is presented in the form of two adversary proceedings. The first adversary complaint seeks, among other things, turnover of the funds held by the Chancery Clerk *877 and Master to the estate, in part, because a Chancery Court order "finally" determined that Tom Nebel, P.C., was entitled to certain attorneys' fees. The second adversary complaint seeks a determination by this Court that: (1) a 1998 Retainer Agreement (defined herein) required payment of fees to Tom Nebel, P.C., for money received by the McRedmond Parties outside the Derivative Suit through a Kentucky Short-Form Merger (defined herein); and/or (2) that a 2003 Agreement (defined herein) between Tom Nebel, P.C., and the McRedmond Parties was void for lack of consideration and also should be avoided as a fraudulent transfer.
The proceedings in state court together with the dispute in this case span more than ten years. Accordingly, it is important first to examine the chain of events and proceedings which are relevant to this dispute and which are either stipulated or uncontested in the motions for summary judgment. These facts are listed in chronological order.
II. STIPULATED AND/OR UNCONTESTED FACTS
The debtor (hereinafter "Tom Nebel, P.C."), is a Tennessee professional corporation that was chartered in 1997 to incorporate the law practice of Tom Nebel (hereinafter "Mr. Nebel"), an individual licensed to practice law in Tennessee since 1976. Mr. Nebel is the sole shareholder of Tom Nebel, P.C.
In 1993, certain minority shareholders of Elk Brand Manufacturing Company, a Kentucky corporation engaged in apparel manufacturing (hereinafter "Elk Brand"), retained the Nashville law firm of Sherrard & Roe, PLC (hereinafter "Sherrard") on an hourly-rate basis to commence the case styled Patrick J. McRedmond, et al. v. Milano Corporation, et al., Case No. 93-2368-III (hereinafter "Chancery Action" or "Derivative Suit") in the Chancery Court for Davidson County, Tennessee, Twentieth Judicial District (hereinafter "Chancery Court"), a shareholder derivative action commenced on behalf of Elk Brand on August 16, 1993. The defendants named in the Chancery Action included Milano Corporation, which owned a controlling interest in Elk Brand, Walter Marianelli, the president and a director of Elk Brand and the controlling shareholder of Milano Corporation; Andrew Marianelli, formerly the controlling shareholder of Elk Brand, the father of Walter Marianelli, and a director of Elk Brand; and David Manning and Edwin Pyle, both directors of Elk Brand (hereinafter "Chancery Defendants"). Patrick J. McRedmond, Jr., Monica McRedmond Terry, and Louis McRedmond, three of the minority shareholders of Elk Brand, were named as the plaintiffs on the complaint (hereinafter "Chancery Plaintiffs").[2]
The Chancery Court dismissed the Chancery Action on August 10, 1994. However, the Tennessee Court of Appeals reversed the dismissal on December 6, 1996, and remanded the case to the Chancery Court for further proceedings. The Chancery Plaintiffs changed their retention terms with Sherrard to a contingency fee basis to appeal the dismissal. Until January 1998, Kenneth R. Jones, Jr. (hereinafter "Mr. Jones") was the attorney principally in charge of the Chancery Action litigation for the Chancery Plaintiffs. In April 1997, Mr. Jones left Sherrard and opened his own law firm. Thereafter, Mr. Jones and his new firm continued to represent *878 the Chancery Plaintiffs in the Derivative Suit until January 1998.
On October 1, 1997, Mr. Jones filed in the Chancery Action a motion for interim award of attorneys' fees and costs and a supporting affidavit. Thereafter, in January 1998, after Mr. Jones declined to continue to represent the Chancery Plaintiffs on a contingency basis, certain of the McRedmond Parties entered into a contingent fee agreement with Tom Nebel, P.C., which listed the "claim" for which Tom Nebel, P.C., was being retained as the "Shareholder Derivative Action," and set forth the terms for Tom Nebel, P.C., to represent them in the Derivative Suit on behalf of Elk Brand. A copy of the 1998 Contingent Fee Retainer Agreement (hereinafter "1998 Retainer Agreement") is attached to this Memorandum Opinion as Appendix A.
In late 1998 and early 1999, the Chancery Court granted two motions for summary judgment in favor of the Chancery Defendants. The Chancery Plaintiffs appealed, and in a published opinion, McRedmond, et al. v. Estate of Marianelli, et al., 46 S.W.3d 730 (Tenn.Ct.App.2001), the Tennessee Court of Appeals affirmed in part, reversed in part, and remanded the case back to the Chancery Court a second time for further proceedings.
On December 6, 2002, Tom Nebel, P.C., filed a second amended complaint on behalf of the Chancery Plaintiffs. The Chancery Action, tried before a jury in July 2003, resulted in a judgment for Elk Brand against Chancery Defendant Walter Marianelli, who was found liable for breach of fiduciary duty, in the amount of $6,918,252, and against Chancery Defendant David Manning, who was found liable for breach of fiduciary duty, in the amount of $23,138. Post-judgment interest at a rate of 10% per annum from July 14, 2003, was awarded until paid in full. The jury found in favor of Chancery Defendants Milano Corporation, Edwin Pyle, and Andrew Marianelli.
After the jury verdict, numerous post-trial motions were filed in the Chancery Court. The Chancery Defendants filed motions for entry of final judgment, for a stay of execution, and for an order dispensing with an appeal bond so that the Chancery Defendants could pursue an immediate appeal. The Chancery Plaintiffs filed motions for attorneys' fees and costs under the common fund doctrine and for an order directing the individual Chancery Defendants to repay to Elk Brand the amount of any attorneys' fees advanced to them by Elk Brand for defense of the Derivative Suit. By Memorandum and Order dated October 10, 2003, the Chancery Court found the jury verdict to be interlocutory pending a final ruling on the attorneys' fees motions.
Specifically, as to attorneys' fees, on August 27, 2003, Tom Nebel, P.C., filed four separate motions in the Chancery Action seeking awards of costs and expenses and attorneys' fees, all on behalf of the Chancery Plaintiffs, as well as supporting affidavits and briefs (hereinafter "Attorneys' Fees and Expenses Motions"):
1. Renewal of Plaintiffs' Motion for Interim Award of Attorneys' Fees and Costs filed October 1, 1997, which dealt with certain attorneys' fees and expenses incurred and paid to or through Sherrard, Mr. Jones, or his firm;
2. Plaintiffs' Motion for Additional Costs Pursuant to Tennessee Code Annotated, § 48-56-401, which dealt with expenses paid by Tom Nebel, P.C., totaling $6,988.15, for which Tom Nebel, P.C., had not been reimbursed;
3. Plaintiffs' Motion for Costs Pursuant to Tennessee Rules of Civil Procedure, Rule 54.04, which recapped all of the fees, costs, and expenses detailed in the two previously-described motions, and *879 detailed almost $80,000 in additional costs and expenses that had been incurred and paid by certain of the McRedmond Parties since the engagement of Tom Nebel P.C., in January 1998; and
4. Plaintiffs' Motion for Award of Trial Attorneys' Fees, which sought an award of attorneys' fees in favor of Tom Nebel, P.C., equal to one-third of "the entire common fund resulting from this litigation...," and that said amount "be increased to 40% of the common fund, in the event that defendant(s) appeal this matter."
On August 29, 2003, Sherrard filed its motion for an award of fees for legal services that had not been paid at the time its engagement ended (hereinafter "Sherrard Motion"), and Mr. Jones filed his separate motion for attorneys' fees and costs (hereinafter "Jones Motion").
Between August 2003 and May 2004, extensive discovery and discovery litigation were conducted with respect to the facts and supporting documentation underlying and supporting the attorneys' fees, costs, and expenses requested in the Attorneys' Fees and Expenses Motions and the Sherrard Motion. Commencing on May 6, 2004, the Chancery Court conducted hearings (hereinafter "Attorneys' Fees and Expenses Trial") for three days with respect to the Attorneys' Fees and Expenses Motions and the Sherrard Motion.[3]
On September 2, 2003, after the jury verdict was entered and the Attorneys' Fees and Expenses Motions were filed in the Chancery Action, Tom Nebel, P.C., filed an action to dissolve Elk Brand in Kentucky on behalf of certain of the individual McRedmond Parties (hereinafter "Kentucky Dissolution Suit"). The Kentucky Dissolution Suit was not a shareholder derivative action and was voluntarily dismissed prior to December 9, 2003.[4]
On October 31, 2003, the controlling shareholder of Elk Brand gave notice, pursuant to an automatic short-form process authorized under Kentucky law (hereinafter "Kentucky Short-Form Merger"), of his intention to merge Elk Brand into a newly-formed corporation known as Elk Brand Manufacturing Corporation of Kentucky (hereinafter "New Elk Brand"). Walter Marianelli was to be the sole shareholder of New Elk Brand. At that time, the McRedmond Parties owned in the aggregate 1676 shares of the common stock of Elk Brand. The controlling shareholder and all other shareholders then owned 19,165 shares of common stock. In connection with the anticipated merger, the controlling shareholder employed Mercer Capital to perform a valuation of the minority shareholders' stock in Elk Brand.
On November 25, 2003, on behalf of the Chancery Plaintiffs, Tom Nebel, P.C., filed in the Chancery Action a request for an ex parte order restraining the majority shareholder from consummating the Kentucky Short-Form Merger. The Chancery Court denied the request due to inadequate notice on November 26, 2003. Tom Nebel, P.C., filed a motion to alter or amend but this was denied by Memorandum and Order entered on December 2, 2003. Tom Nebel, P.C., then filed a request for a temporary injunction to stay consummation of the Kentucky Short-Form Merger. The Chancery Court denied this request by Memorandum and *880 Order entered on December 9, 2003. Shortly before the entry of the Memorandum and Order denying the request for a temporary injunction, the merger of Elk Brand into New Elk Brand was consummated. Incident to the Kentucky Short-Form Merger, New Elk Brand tendered to the minority shareholders $609 per share, or approximately $1.020 million in the aggregate (hereinafter "Merger Money"), as determined by Mercer Capital to be the fair value of their shares.
About the time that the McRedmond Parties received the payments for their shares in Elk Brand, Mr. Nebel advised them via Robert Nadler, an attorney (who had served as an intermediary in the lawsuit, not as attorney) and the husband of Carol McRedmond Nadler, that Tom Nebel, P.C., believed that the receipt of the Merger Money triggered an obligation under the 1998 Retainer Agreement to pay attorneys' fees equal to one-third of the amounts received. Tom Nebel, P.C., never tendered an invoice or statement for these attorneys' fees. Mr. Nadler did not believe an obligation to pay under the 1998 Retainer Agreement had been triggered by the receipt of the Merger Money. In December of 2003, Mr. Nadler met with a number of the McRedmond Parties to discuss Tom Nebel, P.C.'s contention. During this discussion, the McRedmond Parties acknowledged that Mr. Nebel had worked long and hard on the Derivative Suit, that the fate of the Derivative Suit was not at all certain on appeal, and that, consequently, Tom Nebel, P.C., might not receive anything if the Chancery Defendants filed and won their appeal.
Accordingly, three of the McRedmond Parties signed a new agreement with Tom Nebel, P.C., on December 17, 2003 (hereinafter "2003 Agreement") to pay one-third of the Merger Money. In return, the 2003 Agreement provided:
4. Mr. Nebel agrees that he will refund the total attorney fees paid by the plaintiffs to him or his firm if he is awarded any amounts by the courts. He agrees to the following method:
a. The first $340,328.56 (or such greater amount paid by the plaintiffs) of attorneys fees awarded to Mr. Nebel will be returned to the plaintiffs.
b. Amounts in excess of $340,328.56 (or such greater amount paid by the plaintiffs) belong solely to Mr. Nebel.
The above rules can be illustrated by example: If the Chancery Court or another court awards Mr. Nebel $650,000 he will upon receipt of the funds from Elk Brand or others refund $340,328.56 to the plaintiffs. The excess, $309,367.14, will belong to Mr. Nebel. If the Chancery Court or another court awards Mr. Nebel less than $340,328.56, for example $250,000, the entire $250,000 will be refunded to the plaintiffs.
The 2003 Agreement is attached hereto as Appendix B. After the 2003 Agreement was signed, the McRedmond Parties paid a total of $340,330.11 to Tom Nebel, P.C. The 1998 Retainer Agreement and the 2003 Agreement are the only written agreements between Tom Nebel, P.C., and the McRedmond Parties.
In accordance with applicable Kentucky statutes, some of the McRedmond Parties timely dissented from the controlling shareholder's determination of the value of their Elk Brand stock. Thereafter, New Elk Brand filed its Petition for Declaratory Judgment and Determination of Fair Value of Shares in the Circuit Court of Jefferson County, Kentucky (hereinafter "Kentucky Valuation Suit"). Named as defendants were certain of the McRedmond Parties. This action was brought for the purpose of determining the merits of the McRedmond Parties' dissent from *881 the valuation placed by the controlling shareholder on their shares of Elk Brand. Tom Nebel, P.C., represented the McRedmond Parties in the early stages of the Kentucky Valuation Suit, but by order entered August 20, 2004, New Elk Brand's motion to disqualify Tom Nebel, P.C., was granted. After Tom Nebel, P.C.'s disqualification, the defendants in the Kentucky Valuation Suit, which is presently pending, have been represented by other Tennessee and Kentucky attorneys.
Following the consummation of the Kentucky Short-Form Merger, the Chancery Defendants moved to dismiss all the claims of the Chancery Plaintiffs, including their claims for attorneys' fees and costs, on the ground (among others) that the merger mooted such claims. By Memorandum and Order entered January 16, 2004, the Chancery Court granted the motion as to the $6.9 million, but denied the motion as to the requests for attorneys' fees and costs.
By Memorandum and Order entered March 8, 2004, the Chancery Court ruled on disputes that had arisen in the course of discovery preparatory to an evidentiary hearing on the requests for awards of attorneys' fees and expenses. Among other things, the Chancery Court ruled that despite the failure of Tom Nebel, P.C., to keep contemporaneous time records during the course of the litigation, the claim for fees and expenses would not be forfeited because to do so would unjustly enrich New Elk Brand and the majority shareholder.
On April 30, 2004, the Chancery Court entered a Memorandum and Order specifying the procedure for the evidentiary hearing on the requests for awards of attorneys' fees and expenses.
About the time of the filing of Mr. Nebel's Affidavit on May 3, 2004, on behalf of the McRedmond Parties, Bill Terry, who is the husband of Monica McRedmond Terry (one of the McRedmond Parties and Chancery Plaintiffs), paid some of the Derivative Suit expenses included in the total of $32,372.97. During early June 2004, Mr. Terry conferred with Tom Nebel, P.C., concerning these direct payments. This resulted in an agreement that the actual un-reimbursed amount due Tom Nebel, P.C., at that time was $19,700. The McRedmond Parties thereupon paid Tom Nebel, P.C., by two separate checks dated June 4, 2004, and June 10, 2004, totaling $19,700. Since June 2004, Tom Nebel, P.C., has incurred no material cost or expense incident to its representation of the McRedmond Parties.
Beginning May 6, 2004, the Chancery Court conducted hearings for three days on the above-described Attorneys' Fees and Expenses Motions and the Sherrard Motion. After the Attorneys' Fees and Expenses Trial, the Chancery Court entered a Memorandum and Order, dated June 1, 2004, which awarded attorneys' fees and costs utilizing the common fund doctrine (hereinafter "June 1, 2004, Memorandum and Order"). In the order, the Chancery Court awarded "$1,967,078.33 to the Law Offices of Tom Nebel as recovery on its attorneys fee application in this case."
The Chancery Defendants sought to appeal the award of attorneys' fees. On June 30, 2004, the Chancery Court required that, to stay execution of the June 1, 2004, Memorandum and Order, New Elk Brand must post a bond equal to all attorneys' fees and costs awarded ($335,810.00 + $1,764,190.00 + $202,888.33 = $2,302,888.33), plus interest thereon at the statutory judgment rate of 10% per annum for a period of three years. On July 28, 2004, to stay the execution of the June 1, 2004, Memorandum and Order, certain of the Chancery Defendants and New Elk Brand posted with the Chancery Clerk and *882 Master a cash appeal bond in the original amount of $2,993,754.82 which named as beneficiaries: "the appellees Patrick J. McRedmond, Jr.; Monica McRedmond Terry; Sherrard & Roe, PLC; the Law Offices Of Tom Nebel, P.C." The cash appeal bond was approved by the Chancellor.
During the appeal process, two additional attorneys, John I. Harris, III, (hereinafter "Mr. Harris") and Suzette Peyton (hereinafter "Ms. Peyton"), filed motions to have their attorney liens recognized and enforced by the Chancery Court. On June 15, 2004, Mr. Harris, a licensed attorney formerly affiliated with Tom Nebel, P.C., filed a motion to have his lien recognized and to be paid for services he rendered the Chancery Plaintiffs while he was in the Nebel Office. On February 1, 2006, Ms. Peyton filed a notice of her lien for work on behalf of the Chancery Plaintiffs' Derivative Suit, and on March 24, 2006, filed a motion to enforce her lien.
By order entered December 7, 2004, the Chancery Court awarded Mr. Harris the sum of $90,000 as compensation for his work on the Derivative Suit, and further ordered that said sum "be deducted from and to come out of the $1,764,190 fee awarded to the Law Firm of Tom Nebel." (Emphasis added.) After a hearing that was conducted while the main case was on appeal, the Chancery Court entered an order, dated April 18, 2006, declaring an attorney's charging lien for Ms. Peyton in the amount of $184,958.90 plus interest, again "to be deducted from the fee awarded to The Law Offices of Tom Nebel P.C." (Emphasis added.)
The Chancery Defendants' appeals of the June 1, 2004, Memorandum and Order and their appeals from the jury verdict were consolidated in the Tennessee Court of Appeals. By its opinion of September 29, 2006, the Tennessee Court of Appeals affirmed the June 1, 2004, Memorandum and Order and the jury verdict. See McRedmond v. Estate of Marianelli, No. M2004-01496-COA-R3-CV, 2006 WL 2805158 (Tenn.Ct.App. Sept. 29, 2006). Thereafter, the Chancery Defendants filed a petition for rehearing, which was denied on November 21, 2006. On January 18, 2007, the Chancery Defendants filed applications for permission to appeal in the Tennessee Supreme Court. By order entered March 12, 2007, the Tennessee Supreme Court denied the Chancery Defendants' applications for permission to appeal.
Following the appeal process but before Tom Nebel, P.C., filed its petition in bankruptcy (April 25, 2007), a variety of matters were filed in the Chancery Court relating to the Chancellor's June 1, 2004, Memorandum and Order. The Chancery Defendants filed a notice of their intent to enter into two separate settlement agreements, to wit: one involving the Chancery Defendants and Sherrard, the other involving the Chancery Defendants, Tom Nebel, P.C., and Sherrard. On March 28, 2007, the Chancery Court indicated a willingness to approve the first agreement with Sherrard but gave Mr. Harris an opportunity to object. As to the second agreement, the Chancery Court ordered further work to be done by the parties. Specifically, the Chancery Court stated: (1) "[t]he settlement agreement with the law firm of Sherrard and Roe has implications for no person or entity beyond those involved in the settlement agreement;" (2) "[t]he settlement agreement with the Nebel Firm has implications for persons and entities not parties to the lawsuit," including Mr. Harris' and Ms. Peyton's attorneys' fees liens; and (3) "[a]dditionally, the individual plaintiffs who filed the lawsuit on behalf of the corporation contend that they are owed from the Nebel Firm $600,000 they advanced in expenses during the litigation."
*883 On April 2, 2007, the Chancellor entered an Agreed Order providing that money from the appeal bond should be immediately disbursed to Ms. Peyton, Mr. Harris, and Elk Brand. As to the remaining funds, the Chancellor ordered that they continue to be held by the Chancery Clerk and Master pending further orders of the court concerning reimbursement to the remaining fund beneficiaries, the Chancery Plaintiffs, and Tom Nebel, P.C.
On April 4, 2007, the Chancery Plaintiffs filed a motion in Chancery Court requesting the entry of an order:
(i) modifying the Fee Order to increase the award of costs and expenses to $238,037.80; (ii) specifying that the award of costs and expenses, as modified, and the award of attorneys fees to the extent of $340,328.56, plus interest attributable to said sums, equitably belong to the [Chancery Plaintiffs]; (iii) directing the Clerk and Master to disburse to the [Chancery Plaintiffs] the aforesaid sum of $578,366.36, plus interest thereon from July 14, 2003, from the funds now remaining on deposit with the Clerk & Master in this cause; and (iv) granting Movants such other and further relief to which they may show themselves to be entitled.
Prior to this motion being heard, Tom Nebel, P.C., filed its petition for bankruptcy protection on April 25, 2007. On that same date, the Chancery Clerk and Master was holding over $2,196,376.23 of the appeal bond.
On May 11, 2007, the Trustee filed with the Chancery Court a Motion for an Order Directing Disbursement of Funds Held by the Chancery Clerk and Master (hereinafter "Disbursement Motion"). Some of the McRedmond Parties had actual notice of the filing of Tom Nebel, P.C.'s bankruptcy within a few days after the filing of the Disbursement Motion. On May 21, 2007, the Chancery Plaintiffs filed their response to the Disbursement Motion. The Disbursement Motion was originally set by the Trustee to be heard on May 25, 2007, in the Chancery Court. Shortly before the hearing date, the Trustee removed the Disbursement Motion from the docket to afford time for the parties to try to reach an agreed order.
On June 13, 2007, counsel for certain of the McRedmond Parties forwarded a proposed conditional agreed order for submission to the Chancery Court that provided for disbursement, upon certain conditions, of proceeds above $930,000. The parties failed to reach an agreement concerning disposition of the Disbursement Motion.
Thereafter, on June 19, 2007, the Trustee filed her first complaint seeking the turnover of the funds held by the Chancery Clerk and Master as property of the estate, in part, because the June 1, 2004, Memorandum and Order awarded attorneys' fees to Tom Nebel, P.C.
On June 26, 2007, this Court directed the Chancery Clerk and Master to remit to the Trustee all funds then held from the appeal bond in excess of $930,000. In compliance with this order, the Chancery Clerk and Master remitted the sum of $1,301,010.44 to the Trustee on July 13, 2007. The Chancery Clerk and Master continues to hold at least $930,000.00 of the appeal bond.
On July 18, 2007, the Trustee filed her second complaint seeking a determination that the 1998 Retainer Agreement required the payment of fees to Tom Nebel, P.C., for the Kentucy Short-Form Merger and the avoidance of the 2003 Agreement between Tom Nebel, P.C., and the Chancery Plaintiffs as fraudulent pursuant to 11 U.S.C. § 544 and T.C.A. §§ 66-3-305 and -306.
On June 27, 2007, the McRedmond Parties filed an abstention motion, which was *884 denied by this Court on December 26, 2007. The parties then filed cross motions for summary judgment which are presently before this Court.
III. STANDARD OF REVIEW
Federal Rule of Civil Procedure 56(c), as incorporated by Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment is proper 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 that the movant is entitled to a judgment as a matter of law."
IV. ARGUMENTS
The Trustee contends that Tom Nebel, P.C., and thus its estate has the sole ownership interest in the appeal bond funds currently held by the Chancery Clerk and Master. In support of her claim, the Trustee argues that the Chancery Court's June 1, 2004, Memorandum and Order is final and that the appeal bond funds protect only the award of fees to Tom Nebel, P.C., thereby precluding any claim of interest by the McRedmond Parties. Alternatively, the Trustee argues that the appeal bond funds currently held by the Chancery Clerk and Master are payable to Tom Nebel, P.C., under the 1998 Retainer Agreement, and that the 2003 Agreement is void for lack of consideration and voidable as a fraudulent transfer.
The McRedmond Parties seek summary judgment, asserting that pursuant to the 1998 Retainer Agreement, Tom Nebel, P.C., has no interest in any expenses awarded in the June 1, 2004, Memorandum and Order and that the expense award should be corrected to $238,037.80. In addition, the McRedmond Parties contend that they have a superior interest to Tom Nebel, P.C., in the appeal bond funds to the extent necessary to make them whole for fees and expenses paid by them to Tom Nebel, P.C., under the 1998 and 2003 Agreements.
V. THE CHANCELLOR'S JUNE 1, 2004, MEMORANDUM AND ORDER IS NOT PRECLUSIVE
The Trustee argues that the Chancellor's June 1, 2004, Memorandum and Order awarding attorneys' fees and expenses was a "final" order and, therefore, was preclusive of the relative interests of Tom Nebel, P.C., and the McRedmond Parties in the appeal bond held by the Chancery Clerk and Master. The burden of proof to establish preclusion is on the Trustee, and she has not carried her burden in her motion for summary judgment, nor can she do so in this case as a matter of law.
In Tennessee, judgments are treated like any other written instruments the question is always the intention of the Court. Livingston v. Livingston, 58 Tenn.App. 271, 281, 429 S.W.2d 452, 456 (1967) (citation omitted). A judgment must be construed not only with reference to the four corners of the instrument, but also in light of the pleadings, particularly the prayer of the complaint, Vanatta v. Vanatta, 701 S.W.2d 824, 826 (Tenn.Ct.App.1985) (citations omitted), and "the apparent purposes in the minds of the draftsman and the court." Hale v. Hale, 838 S.W.2d 206, 209 (Tenn.Ct.App.1992) (citation omitted). Accord State v. Phillips, 138 S.W.3d 224, 229 (Tenn.Ct.App. 2003) ("[a]scertaining the trial court's intention is the principal goal").
The pleadings filed prior to the Chancellor's June 1, 2004, Memorandum and Order offer the first glimpse of what she was resolving in June 2004. From the very beginning, first with Sherrard and then with Tom Nebel, P.C., all requests for attorneys' fees were made on behalf of the Chancery Plaintiffs. In the June 1, 2004, *885 Memorandum and Order itself, the Chancellor spent all but approximately two pages examining the Chancery Plaintiffs' claims against the Chancery Defendants for fees under Kentucky's common fund doctrine, which she had applied in her earlier orders. As explained in the Chancellor's January 16, 2004, order, the common fund doctrine provides an incentive to shareholders to retain an attorney to prosecute meritorious causes of action on behalf of corporations.[5] When a lawsuit is filed under the common fund doctrine and the court awards fees, such fees are awarded to spread the costs of the litigation among all beneficiaries, the primary beneficiaries being those who served as plaintiffs and advanced funds therefore. See Geier v. Sundquist, 372 F.3d 784, 790 (6th Cir.2004) (citing Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 100 S. Ct. 745, 62 L. Ed. 2d 676 (1980)). In its pleadings, Tom Nebel, P.C., requested fees and expenses on behalf of the Chancery Plaintiffs, recognizing that any such awards would inure to the Chancery Plaintiffs' benefit.
The June 1, 2004, Memorandum and Order is filled with the Chancellor's effort to resolve the attorneys' fee dispute between the Chancery Defendants and the Chancery Plaintiffs. Tom Nebel, P.C., and the Chancery Plaintiffs were clearly on the same side in their opposition to the Chancery Defendants' objections. The June 1, 2004, Memorandum and Order contains no hint of a dispute between the Chancery Plaintiffs and Tom Nebel, P.C., nor is there any discussion of their respective rights. In contrast, Sherrard, which was no longer representing the Chancery Plaintiffs, asked for and received a liquidation of its request for fees in the amount of $335,810. The remainder of the fee award ($1,967,078.33), the Chancellor awarded to Tom Nebel, P.C. Subsequent Chancery Court orders demonstrate that this award was merely a calculation of the total amount of fees to which the Chancery Plaintiffs and their various counsel were entitled.
These subsequent Chancery Court orders clearly demonstrate that the Chancellor never intended for the June 1, 2004, fee award to be a final adjudication of what Tom Nebel, P.C., was entitled to receive from the Chancery Defendants. The multiple beneficiaries on the Chancery Defendants' appeal bond approved by the Chancellor included the Chancery Plaintiffs as well as Tom Nebel, P.C. Following later filings by Mr. Harris and Ms. Peyton to establish their attorneys' liens, the Chancellor, in separate orders, awarded both fees to be deducted and paid from the fee awarded to Tom Nebel, P.C., on June 1, 2004.
Finally, the Chancellor rejected the second proffered settlement regarding fees on March 28, 2007, because it implicated in part the Chancery Plaintiffs' claim that they were owed money they previously advanced ($600,000) to Tom Nebel, P.C., during the Derivative Suit. On April 2, 2007, the Chancellor ordered distribution of the portions of the appeal bond to the other attorneys and required that the remainder of the appeal bond be held by the Chancery Clerk and Master pending further orders as to the dispute between the remaining beneficiaries, the Chancery Plaintiffs and Tom Nebel, P.C. Clearly, the Chancellor never intended that the June 1, 2004, Memorandum and Order would preclude the Chancery Plaintiffs' interest in the appeal bond, and she reserved that issue on March 28, 2007, before the Tom Nebel, P.C., bankruptcy petition was filed on April 25, 2007.
*886 Not only did the Chancellor not consider the June 1, 2004, Memorandum and Order preclusive to the interests of the McRedmond Parties; it was not and could not be preclusive. Preclusion is usually stated in the form of res judicata or collateral estoppel or more recently, claim preclusion or issue preclusion.[6] The Trustee has not mentioned these doctrines in her complaint or in her argument, and for good reason. The June 1, 2004, Memorandum and Order supports neither claims nor issue preclusion as to the McRedmond Parties' interests in the fees awarded or in the appeal bond.
First, as to claims preclusion, the claims in the Chancery Action dealt with by the Chancellor in the June 1, 2004, Memorandum and Order were quite different than the claims that the McRedmond Parties have with respect to attorneys' fees and the appeal bond. In 2004, the proceedings dealt with claims made against the Chancery Defendants on behalf of the Chancery Plaintiffs, not the McRedmond Parties' claims against Tom Nebel, P.C. Second, as to issue preclusion, the Trustee has not and cannot meet her burden to demonstrate that the issue raised by the McRedmond Parties here was actually litigated and decided in the June 1, 2004, Memorandum and Order and that it was actually necessary to the judgment. Nowhere in the June 1, 2004, Memorandum and Order does the Chancellor mention the dispute between the Chancery Plaintiffs and Tom Nebel, P.C., and it was certainly not decided there. Instead, the Chancellor noted that the dispute was alive and well in her Memorandum and Order of March 28, 2007.
To raise this issue for the Chancellor in 2004, Tom Nebel, P.C., would have had to give the McRedmond Parties notice that he intended to claim all of the fees and expenses regardless of what fees and expenses the McRedmond Parties had paid. Something of this nature is required under Tennessee law to assert and enforce an attorney's lien, much as Mr. Harris and Ms. Peyton filed notice of their liens and later requested distribution of their part of the appeal bond. See Schmitt v. Smith, 118 S.W.3d 348, 353 (Tenn.2003) ("so long as adequate notice of the lien is provided to the public and to future purchasers, the requirements of Tennessee Code Annotated sections 23-2-102 and 23-2-103 are satisfied"). But see Starks v. Browning, 20 S.W.3d 645, 651 (Tenn.Ct.App.1999) (notice requirement has less importance in disputes solely between attorney and client, which was not the case in June 2004).
It is thus clear that the Chancellor's June 1, 2004, Memorandum and Order was not a final one so as to preclude the McRedmond Parties from claiming an interest in the appeal bond funds still held by the Chancery Clerk and Master. Such *887 funds constitute an express trust for the beneficiaries. In re Elrod, 42 B.R. 468, 472-74 (Bankr.E.D.Tenn.1984), Carter Baron Drilling v. Excel Energy Corp., 76 B.R. 172, 174 (D.Colo.1987) (cash deposited "in the court pending appeal is in custodia legis, and may be considered the res of a trust"). Neither Tom Nebel, P.C., nor the McRedmond Parties held legal title to the funds at the time Tom Nebel, P.C., filed its Chapter 7 petition, nor do they now. At most, until their relative interests are determined here, they have a contingent interest in the funds pending an order to distribute the appeal bond, which was not made by the Chancellor and which now falls to this Court. Moreover, the Trustee has no more interest in the funds than Tom Nebel, P.C. See French v. Johnson (In re Coomer), 375 B.R. 800, 804 (Bankr. N.D.Ohio 2007) (citation omitted) (to extent an interest in property is limited in hands of debtor, it is then equally limited in hands of Chapter 7 Trustee).
Having determined that the Chancellor's orders do not finally resolve the dispute between the Trustee and the McRedmond Parties, we must now turn to an analysis of the contractual relationship between Tom Nebel, P.C., and the McRedmond Parties.
VI. THE CONTRACTUAL RELATIONSHIP BETWEEN TOM NEBEL, P.C., AND THE McREDMOND PARTIES
Because the relationship between an attorney and client is a contractual one in Tennessee, Alexander v. Inman, 974 S.W.2d 689, 694 (Tenn.1998); Starks v. Browning, 20 S.W.3d 645, 650 (Tenn.Ct. App.1999), this Court must now look to the 1998 and 2003 Agreements between Tom Nebel, P.C., and the McRedmond Parties (Appendices A and B) and to Tennessee law regarding attorney-client contracts.
A. The Trustee's Complaint
Counts I and II of the Trustee's second complaint allege (1) that the 2003 Agreement (Appendix B) is void for lack of consideration, and (2) that the 2003 Agreement must be avoided pursuant to Tennessee's version of the Uniform Fraudulent Conveyance Act, T.C.A. §§ 66-3-301, et seq., because Tom Nebel, P.C., received no new value for his promises under that agreement. Both counts are founded upon the Trustee's claim that the McRedmond Parties' receipt of payment in exchange for their shares in December 2003 pursuant to the Kentucky Short-Form Merger was a "Recovery" under Paragraph 3 of the 1998 Retainer Agreement (Appendix A) entitling Tom Nebel, P.C., to a fee of $340,328.56 because the merger was somehow "caused" by the Derivative Suit. That is, the $340,328.56 paid to Tom Nebel, P.C., by the McRedmond Parties after they signed[7] the 2003 Agreement was already earned by Tom Nebel, P.C., under the 1998 Retainer Agreement.
B. Tennessee Law Regarding the Interpretation of Contracts Between Attorney and Client
Both the McRedmond Parties and the Trustee agree that the 1998 Retainer Agreement is clear, and each argues respectively that extrinsic evidence in the form of the declarations of Mr. Nadler and Mr. Nebel cannot be used to deviate from the clear provisions of the 1998 Retainer Agreement. However, the Trustee and the McRedmond Parties do not agree on the "clear" meaning of the 1998 Retainer Agreement. The McRedmond Parties contend that the 1998 Retainer Agreement covers only recoveries from the Derivative Suit. The Trustee argues that the 1998 Retainer Agreement gives Tom Nebel, P.C., fees for any recovery whether or not within the rubric of the Derivative Suit, *888 including for example, money received for their shares through the Kentucky Short-Form Merger.
Before examining explicitly the 1998 and 2003 Agreements, the Court must first look to Tennessee law regarding the interpretation of contracts and, in particular, attorney-client contracts.
The interpretation of a contract in Tennessee is a question of law for the court, and the court's primary job is to determine what the parties intended in entering into the contract. Silva v. Buckley, No. M2002-00045-COA-R3-CV, 2003 WL 23099681, at *2 (Tenn.Ct.App. Dec. 31, 2003). Parties may not use parole or extrinsic evidence to vary the clear terms of a contract. Bradford v. Sell, 240 S.W.3d 834, 838 (Tenn.Ct.App.2007) (citations omitted). However, even if a contact is clear on its face, "`the court may consider the situation of the parties, the business to which the contract relates, the subject matter of the contract, the circumstances surrounding the transaction, and the construction placed on the contract by the parties in carrying out its terms.'" Burlison v. United States, 533 F.3d 419, 430 (6th Cir.2008) (quoting Silva v. Buckley, at *2). Just because parties to a contract disagree about its clear meaning does not mean the contract is ambiguous. Warren v. Metro. Gov't of Nashville & Davidson County, 955 S.W.2d 618, 623 (Tenn.Ct.App. 1997). Finally, Tennessee courts permit the admission of extrinsic evidence if it is useful in resolving latent ambiguities in a contract:
A latent ambiguity exists where: "the equivocality of expression, or obscurity of intention, does not arise from the words themselves, but from the ambiguous state of extrinsic circumstances to which the words of the instrument refer, and which is susceptible of explanation by the mere development of extraneous facts, without altering or adding to the written language, or requiring more to be understood thereby than will fairly comport with the ordinary or legal sense of the words and phrases made use of."
Burlison v. United States, 533 F.3d 419, 430 (quoting Mitchell v. Chance, 149 S.W.3d 40, 44 (Tenn.Ct.App.2004)).
Attorney-client contracts add another layer of rules which pose a heavy burden on the attorney (and now the Trustee) seeking to support his interpretation of the agreement with his clients. This additional burden results from the important fiduciary relationship between an attorney and his client. An attorney owes the client the "utmost good faith" in their dealings. Silva v. Buckley, 2003 WL 23099681, at *2 (citing Alexander v. Inman, 974 S.W.2d 689, 694).
As recognized by Tennessee cases, in order to enforce a contract with a client (or to accept the attorney's interpretation of the contract), an attorney has the burden to show:
(1) that he or she provided the client with the same information and advice that the attorney would have provided the client had he or she not been personally involved in the transaction;
(2) that the client fully understood the meaning and effect of the contract;
(3) that the client's understanding of the contract was the same as the attorney's; and
(4) that the contract is just and reasonable.
Alexander v. Inman, 903 S.W.2d 686, 694 (Tenn.Ct.App.1995). At a minimum "the client must fully understand the contract's meaning and effect. If the agreement is clear and unambiguous [in favor of the attorney's interpretation] the burden [shifts to] the client to show that the client did not have the same understanding as *889 the attorney." Silva v. Buckley, 2003 WL 23099681 at *3 (citation omitted).
C. The 1998 Retainer Agreement
It is undisputed that the 1998 Retainer Agreement prepared by Tom Nebel, P.C., was a purely contingent fee agreement drafted long before the December 2003 forced merger was on the horizon. Further, it is undisputed that in executing the 1998 Retainer Agreement, neither the McRedmond Parties nor Tom Nebel, P.C., contemplated a later forced sale of Elk Brand shares; indeed, at that time, the only thing in sight was the Derivative Suit before the Chancery Court.
The 1998 Retainer Agreement confirms that it is a fee agreement between the parties for representation in the Derivative Suit. Indeed, it is titled "Contingent Fee Retainer Agreement," it lists the McRedmond Parties as clients, and describes the "Claim" as the "Shareholder Derivative Action." (Appendix A) (emphasis added).
The Trustee argues that regardless of whether the parties had in mind only the Derivative Suit when they executed the 1998 Retainer Agreement, the language in Section 3 of that agreement covers any recovery or benefit procured by Tom Nebel, P.C., on the McRedmond Parties' behalf. This argument ignores not only the claim set forth under the title of the contract, it also ignores other clear language:
Recovery ... includes but is not limited to any and all quantifiable benefits, whether tangible or intangible, including but not limited to, payments or compensation of any nature whatsoever to Clients in settlement of this case and/or any benefits resulting from judgment being entered in favor of Clients. [Emphasis added.]
Further, the contract reads: "[i]f this litigation is settled or a verdict is reached [in the Derivative Suit] in favor of the corporation, Tom Nebel, P.C. will petition the Court for an award of attorney's fees...." Further, "Tom Nebel, P.C. shall not be liable for costs and expenses ... in connection with the prosecution of this claim." (Emphasis added.)
From the document itself, the conclusion is inescapable and clear that the 1998 Retainer Agreement deals only with Tom Nebel, P.C.'s representation in the Derivative Suit. Monies received by the McRedmond Parties from the forced merger and sale of their shares clearly do not fall within the contract. First, in 2003, when the Merger Money was received, the Derivative Suit was still going strong, with years of appeals to follow. Second, Tom Nebel, P.C., could not apply for fees from the merger in the Chancery Court as contemplated by the 1998 Retainer Agreement because the only claim before the Chancery Court was the Derivative Suit. Third, the sale proceeds from the Kentucky Short-Form Merger were not benefits or recoveries in any sensethe McRedmond Parties never wanted their shares converted to cash, they did not like the price paid, and they and Tom Nebel, P.C., did everything they could to oppose the merger.[8]
Indeed, Tom Nebel, P.C., had nothing whatsoever to do with the Merger Money. The Trustee has not and cannot show that *890 the Derivative Suit "caused" the merger and the receipt by the McRedmond Parties of the unwanted cash for their shares. The merger was automatic under Kentucky law, Tom Nebel, P.C., did everything it could do to stop it, and the McRedmond Parties were forced to hire other Kentucky counsel to represent their interest in it.
In sum, the Kentucky Short-Form Merger was clearly outside the scope of the 1998 Retainer Agreement, and Tom Nebel, P.C., was due no fee from the merger under that agreement.
D. The "Stipulation" in the 2003 Agreement
In addition to asserting that the 1998 Retainer Agreement is clear in its application to the Merger Money, the Trustee argues that by entering into the 2003 Agreement (Appendix B) (signed by only three of the McRedmond Parties), the McRedmond Parties "stipulated" that the 1998 Retainer Agreement required the payment of a fee to Tom Nebel, P.C., on account of the receipt of the Merger Money by all shareholders. The 2003 Agreement does begin with the language: "The parties will pay Mr. Nebel 1/3 of the amounts received [from the merger] as required by their contract for the performance of legal services."
The Court assumes first that this language does not violate the parole evidence rule even though it appears to deviate from the clear language of the 1998 Retainer Agreement, because it may relate to "the construction placed on the agreement by the parties in carrying out its terms." Bratton v. Bratton, 136 S.W.3d 595, 602 (Tenn.2004) (citation omitted). Even with this assumption, the Trustee has not carried nor can she carry her heavy burden mandated by the nature of the attorney-client contract under Tennessee law. The Trustee has not and cannot do so because the undisputed facts show that Tom Nebel, P.C., and the McRedmond Parties did not share the same interpretation of the 1998 Retainer Agreement and this language in the 2003 Agreement.
This inquiry must, of necessity, look to facts outside the contracts themselves relative to the parties' understanding. The declaration of Robert Nadler offered to demonstrate the McRedmond Parties' understanding states that when Mr. Nebel broached the subject of a fee for the Merger Money in 2003 under the 1998 Retainer Agreement, Mr. Nadler and the McRedmond Parties did not understand the 1998 Retainer Agreement to require such a payment, because it was clearly not contemplated when they signed the 1998 Retainer Agreement. Rather, because they recognized that Tom Nebel, P.C., had worked long and hard on the Derivative Suit on their behalf for which there was no end in sight, they agreed to modify the 1998 Retainer Agreement to guarantee and pay Tom Nebel, P.C., at least $340,328.56 (one-third of the Merger Money) regardless of whether they recovered any money in the Chancery Action. As shown above, the 1998 Retainer Agreement entitled Tom Nebel, P.C., only to a contingent fee. In return, Tom Nebel, P.C., agreed to continue to seek fees in the Chancery Action, and the McRedmond Parties would be entitled to the first $340,328.56 in awarded attorneys' fees so that they would be made whole for fees and expenses they had already paid. Accordingly, the McRedmond Parties certainly did not read the "stipulation" to deviate from the clear meaning of the 1998 Retainer Agreement.
Rather than contravening the 1998 Retainer Agreement, the McRedmond Parties' understanding is consistent with it. Under their interpretation, in exchange for a guaranteed payment of $340,328.56 from the Merger Money, that money was simply "deemed" to have been paid under the 1998 Retainer Agreement. In essence then, the language signaled the modification *891 of the 1998 Retainer Agreement. Such reading comports not only with the clear intent of the 1998 Retainer Agreement along with the McRedmond Parties' understanding as related by Mr. Nadler, it is also supported by the very fact that Tom Nebel, P.C., did not receive the $340,328.56 until after the 2003 Agreement was discussed and signed by certain of the McRedmond Parties.
The Trustee has simply provided nothing to the Court in her motion for summary judgment to dispute that the McRedmond Parties had a different and reasonable understanding of the contracts. When questioned before the Chancery Court and again in his deposition in this case, Mr. Nebel actually appears in agreement with the McRedmond Parties' understanding.
During a hearing in Chancery Court held on May 6, 2004, Mr. Nebel testified that "my first obligation is to pursue a fee here, and my clients do not owe me a third of anything they get on the valuation of the stock plus a fee as awarded by this Court. I do not get both."
In his deposition, taken on May 23, 2007, Mr. Nebel similarly testified as follows:
Q: Now, I think you testified earlier that if you were not in bankruptcy and the PC were not in bankruptcy and you received a check from the Clerk and Master for the funds that are on deposit over there, one of the things you would do is write a check to the clients for the expense award, and you would also write a check to the clients for the 340,000-odd-dollars that they paid you back in December of '03.
A. Correct.
....
Q: That's right. We established earlier that the entire $340,000 round numbers again of fees that were paid in December '03 went into the PC's account, and if theif the PC now receives the full amount of the fees that were awarded June 1 of '04, 1,764,190 and the PC retains both of those sums, it will have been double paid to the extent of $340,000. That would be true, wouldn't it?
A. Yes.
More recently, in his declaration submitted in support of the Trustee's motion for summary judgment, Mr. Nebel has changed his tune regarding the $340,328.56 paid to him in December 2003. Mr. Nebel is trying to "clarify" what he said twice before. Now his declaration states that the intent of the 1998 Retainer Agreement was to grant two fees, one for the Derivative Suit and one for the money received for the then non-existent merger:
6. The intent of the 1998 Retainer Agreement was to grant a contingency fee to Nebel PC for each and every separate "recovery" obtained either on behalf of Elk Brand in the Derivative Suit, or obtained by or on behalf of the individual McRedmond Parties as a result of a favorable outcome in the Derivative Suit.
7. ... As agreed compensation for Nebel PC's services in connection with the Derivative Suit, Nebel PC was awarded a one-third contingency fee pursuant to the terms of the 1998 Retainer Agreement.
8. A second and distinct recovery was obtained by or on behalf of the individual McRedmond Parties as a result of the favorable outcome in the Derivative Suit when the McRedmond Parties received $1.020 million from the Kentucky short-form merger... of Elk Brand.
9. Nebel PC's work resulted in two separate recoveries, one for Elk Brand and a second for the individual McRedmond Parties, and Nebel *892 PC was entitled to a contingency fee for each.
....
11. The First Recovery contingency fee has been awarded (though not yet paid) only once. It was awarded by the Chancery Court in connection with the Derivative Suit.
12. The Second Recovery contingency fee has been paid only once. It was paid by the individual McRedmond Parties.
13. The 1998 Retainer Agreement required the individual McRedmond Parties to pay the Second Recovery contingency fee directly because there was no legal basis upon which to shift that fee to any other party.
While changing, rather than "clarifying," his own testimony about his understanding of the 1998 Retainer Agreement, Mr. Nebel's dubious declaration does nothing to change the McRedmond Parties' understanding of their obligations and has no relevance thereto.[9] The Trustee cannot stand on this new interpretation of the 1998 Retainer Agreement under Tennessee law relating to attorney-client contracts.
E. Consideration for Mr. Nebel's Signing of the 2003 Agreement (The Fraudulent Conveyance Claim)
The Court has already held that Tom Nebel, P.C., was not entitled to a fee for the Merger Money under the 1998 Retainer Agreement, and that the 1998 Retainer Agreement was purely contingent. In return for the $340,328.56 and the promise that Mr. Nebel would retain that fee regardless of the outcome in the Derivative Suit, Mr. Nebel renewed his promises that the McRedmond Parties would be made whole from the first $340,328.56 in fees awarded in the Chancery Court. Thus, there was ample consideration for the 2003 Agreement.
In addition, Mr. Nebel should not be permitted to claim, regardless of the language in the 2003 Agreement, that there was no consideration for his promises there. As an attorney, he had an obligation to his clients to provide them the same information about the contract as he would have provided them if he had no interest in the matter. Silva v. Buckley, 2003 WL 23099681, at *2 (citing Alexander v. Inman, 903 S.W.2d 686, 694). Mr. Nebel has never testified that he told his clients there was no consideration for their paying him the $340,328.56 together with their guarantee that he could keep that money even if they ultimately lost the Derivative Suit.
Under the undisputed facts of this case, together with Tennessee contract law, it is clear that there was consideration for Tom Nebel, P.C.'s entry into the 2003 Agreement, and that new value was given for *893 Tom Nebel, P.C.'s promises therein, thereby defeating any fraudulent conveyance action.
VII. ANY LITIGATION EXPENSES PAID BY THE McREDMOND PARTIES MUST ALSO BE REIMBURSED BY THE APPEAL BOND
It is undisputed that as of June 2004, around the time that the Chancellor entered her initial fee award, the McRedmond Parties had paid directly or reimbursed Tom Nebel, P.C., for all litigation expenses incurred to date. It is also undisputed that since June 2004, Tom Nebel, P.C., incurred no material cost or expenses incident to its representation of the McRedmond Parties. It is further undisputed that to date, the McRedmond Parties have not been made whole with respect to the Derivative Suit litigation expenses just as they have not been made whole with respect to the $340,328.56.
Section 4 of the 1998 Retainer Agreement provides for the clients to pay expenses, for Tom Nebel, P.C., to be reimbursed for any such expense it pays, and clearly, as a result, to make whole the McRedmond Parties for any expenses awarded by the Chancery Court unless Tom Nebel, P.C., has some outstanding unencumbered expenses. Accordingly, under the circumstances, Tom Nebel, P.C., has no claim on the appeal bond funds for any litigation expenses paid on behalf of the McRedmond Parties.[10]
Since Tom Nebel, P.C., has already been reimbursed by the McRedmond Parties for any expenses he has incurred, payment to Tom Nebel, P.C., for expenses from the appeal bond funds would amount to more than double recovery for Tom Nebel, P.C., since it did not pay most of these expenses and since, to the extent it paid them, it had already been reimbursed.
The only real argument the Trustee makes against the distribution of the expense funds from the appeal bond to the Tom Nebel, P.C., estate is again that the Chancery Court entered a "final order" on June 1, 2004, awarding expenses and costs to Tom Nebel, P.C. This argument, we have seen, does not preclude the McRedmond Parties' claim to those funds.
Accordingly, along with fees, the McRedmond Parties are entitled to a distribution from the appeal bond for litigation expenses they have paid. The Court reserves the question of the proposed "correction" to the amount of the expenses to a future time.
VIII. THE McREDMOND PARTIES HAVE ESTABLISHED THEIR LEGAL RIGHTS TO A PORTION OF THE APPEAL BOND NOW HELD IN THE CHANCERY COURT
From all of the foregoing, it is apparent that the McRedmond Parties have made their case on this record that they are entitled as a matter of law to certain proceeds from the appeal bond funds for fees and expenses they have paid. Had this matter continued in Chancery Court, the Chancellor would have made just such a disbursement of funds under the applicable contracts once she considered the McRedmond Parties' claims reserved by her in the April 2, 2007, order.
IX. CONCLUSION
Accordingly, the Trustee's motion for summary judgment should be denied, and the McRedmond Parties' motion for summary judgment should be granted in part, there being no dispute in this record as to the McRedmond Parties' entitlement to certain fees and expenses from the appeal *894 bond funds now held by the Chancery Clerk and Master.
Counsel for the McRedmond Parties will prepare an order denying the Trustee's motion for summary judgment and granting the McRedmond Parties partial summary judgment on the issues resolved herein.
APPENDIX A
The Law Offices of
Tom Nebel, P.C.
Trial Attorneys
Contingent Fee Retainer Agreement
CLIENTS: Patrick J. McRedmond, Jr., Monica McRedmond Terry, Carole M. Nadler, Paul McRedmond, Maureen McRedmond Foy, Sharon McRedmond Pigott, and Joanne McRedmond Crowell on behalf of Elk Brand Manufacturing Company.
ATTORNEY: Tom Nebel
CLAIM: SHAREHOLDER DERIVATIVE ACTION
1. Matter Involved. The Clients retain Tom Nebel, P.C. (Trial Attorneys) to represent them, on behalf of the Elk Brand Manufacturing Company in a shareholder derivative action arising from the conduct of the majority shareholder and other directors.
2. Clients Functions. The Client agrees to perform the following functions:
A) To pay Tom Nebel, P.C. for the performance of legal services and to pay for all expenses incurred in concentration therewith, as specified in the below paragraphs.
B) To cooperate fully with Tom Nebel, P.C. and to provide all information known by or available to the clients which may aid the attorney in representing the clients in this matter.
3. Legal Fees. The clients agree to compensate Tom Nebel, P.C. for representation herein as follows:
____ A) 25% of any all recovery to the clients in the event the case is settled more than 90 days before the first scheduled trial date even if the case is later rescheduled for another date.
____ B) 33 1/3 of any and all recovery to the Clients in the event the case is settled 90 days or less before the first schedule trial date or in the event the case is tried but not appealed.
____ C) 40% of any and all recovery to the Clients in the event of appeal after a trial on the merits. This 40% fee shall be triggered by the filing of a notice of appeal.
Tom Nebel, P.C. agrees to petition the Court for an award of attorney's fees, and to the extent fees are awarded. Clients shall be credited for any fees recovered pursuant to the Order of the Court. If the Clients recover and the Court awarded fees fail to fully compensate Tom Nebel, P.C. as provided herein, the remaining obligations hereunder will be the responsibility of the Clients.
Recovery or recover includes but is not limited to any and all quantifiable benefits, whether tangible or intangible, including but not limited to, payments or compensation of any nature whatsoever to Clients in settlement of this case and/or any benefits resulting from judgment being entered in favor of Clients.
If an interim award of attorney's fees in made by the Court and the Court does not allocate the award of fees between Tom Nebel, P.C. and any other attorneys who before execution *895 of this agreement have represented Clients, then Clients and Tom Nebel, P.C. shall attempt to agree on the division of the interim award.
It is expressly understood between the Clients and Tom Nebel, P.C. that this derivative action was brought for the benefit of Elk Brand. If this litigation is settled or a verdict is reached in favor of the corporation, Tom Nebel, P.C. will petition the Court for an award of attorney's fees. Tom Nebel, P.C. will first attempt to collect all attorney's fees due from Elk Brand. The Clients will not incur any debt or liability to Tom Nebel, P.C. for attorney's fees unless as a result of a settlement of a judgment, an award of cash or other benefit is realized by the individual Clients. If no funds or other benefits are paid to or realized by the Clients, Tom Nebel, P.C. will not seek payment from the Client's for attorney's fees. Tom Nebel, P.C. retains all legal remedies for the collection of attorney's fees against Elk Brand and the defendants.
4. Expenses. Tom Nebel, P.C. shall not be liable for costs and expenses of any king and shall be reimbursed by Clients for necessary expenses in connection with the prosecution of this claim. Such expenses may include charges made by court reporters, expert witnesses, investigators, and electronic research as billed to Tom Nebel, P.C, and Additionally, Client agrees to reimburse Attorney for all expenses, long distance phone calls, and travel expenses.
Attorneys are authorized to pay from any settlement of judgment obtained on Clients' behalf any of Clients' unpaid costs and/or expenses incurred by Tom Nebel, P.C.
5. Other Firm Personnel. Tom Nebel, P.C. shall make use of legal assistants in the preparation of this litigation, and the legal assistant will, during portions of this claim, be the principal contact with the firm for questions, copies of documents, etc.
6. Termination of Agreement. Tom Nebel, P.C. may withdraw from this matter if Clients fails to honor the agreement, or if after investigation Tom Nebel, P.C. determines available evidence is insufficient to warrant further representation. Upon withdrawal. Client shall be responsible for reimbursing all costs and expenses advanced by Tom Nebel, P.C.
By evidence of the signatures of Clients below, each UNDERSTANDS and AGREES to the terms of this Agreement and hereby acknowledges receipt of a copy of same.
Patrick J. McRedmond, Jr.
Patrick J. McRedmond, Jr.
Monica McRedmond Terry 1-13-98
Monica McRedmond Terry
Carole M. Nadler 1-10-98
Carole M. Nadler
Paul McRedmond 1-15-98
Paul McRedmond
Maureen McRedmond Foy
Maureen McRedmond Foy
Sharon McRedmond Pigott 1-14-98
Sharon McRedmond Pigott
Joanne McRedmond Crowell Jan. 15, '98
Joanne McRedmond Crowell
Tom Nebel, P.C.
Attorney
APPENDIX B
Agreement
The minority shareholders of Elk Brand engaged Tom Nebel, attorney, to represent Elk Brand Corporation in derivative litigation. Following a jury trial in June/July *896 2003, the jury awarded Elk Brand a $6.9 million award against Walter Marianelli for violation of his employed the Kentucky short form merger statute and caused the minority shareholders to tender their stock for a fair value price. As of this date, the minority shareholders have been paid 609.18 per share. The derivative litigation continues and litigation in Kentucky over the fair value price may be required. The parties agree to the following:
1. The parties will pay Mr. Nebel 1/3 of the amounts receive as required by their contract for the performance of legal services. This is $203.06 per share. The total payment at this time will be $340,328.56. Each shareholder will bear his own share of the legal fees.
2. No additional fees will be payable by the plaintiffs unless and until they receive additional amounts from the fair price controversy related to the short to the short term merger, or another source such as settlement or Court awarded sums collected by the Plaintiffs.
3. Mr. Nebel agrees that he will file all claims against Elk Brand and others for attorneys fees and costs in all appropriate courts that arose out of the $6.9 jury award in the Chancery Court. He further agrees to prosecute these claims to the fullest degree possible.
4. Mr. Nebel agrees that he will refund the total attorneys fees paid by the plaintiffs to him or his firm if he is awarded any amounts by the courts. He agrees to the following method:
a. The first $340,328.56 (or such greater amount paid by the plaintiffs) or attorneys fees awarded to Mr. Nebel will be returned to the plaintiffs.
b. Amounts in excess of $340,328.56 (or such greater amount paid by the plaintiffs) belong solely to Mr. Nebel.
The above rules cab be illustrated by example: If the Chancery Court or another court awards Mr. Nebel $650,000, he will upon receipt of the funds from Elk Brand or others refund $340,328.56 to the plaintiffs. The excess, $309,367.14, will belong to Mr. Nebel. If the Chancery Court or another court awards Mr. Nebel less than $340,328.56, for example $250,000, the entire $250,000 will be refunded to the plaintiffs.
5. Mr. Nebel agrees to represent plaintiffs in respect to attorneys fees claimed by Sherrard and Roe and by Ken Jones. He further agrees to represent our claims for attorney fees and costs, which amount to over $300,000, in a manner that protects our interests.
6. Mr. Nebel agrees to make a claim on behalf of Elk Brand for the recovery of attorney fees paid to the directors and Milano.
G. Thomas Nebel 12/17/03
Date
Derivative Shareholders
Joanne M. Crowell
Paul McRedmond
Joseph P. Crowell
NOTES
[1] These defendants include Kristin Marie Terry Coode, Jan Michelle Crowell, Jeffrey Francis Crowell, Jennifer Hause Crowell, Joseph Patrick Crowell, Julie Ann Crowell, Jill Marie Crowell Fichtel, Graham Patrick McRedmond, Margaret Hunt McRedmond, Patrick J. McRedmond Jr. and Evelyn M. Rodgers as Executors of the Estate of Patrick J. McRedmond, Sr., Rachel Marie Nadler, Samuel Nathan Nadler, Sara Hollman Nadler, Jennifer Ellen McRedmond Ragsdale, Michael Anthony Terry, Patrick Wade Terry, Robert Joseph Terry, Joanne M. Crowell, Maureen M. Foy, Patrick J. McRedmond, Jr., Paul A. McRedmond, Carole M. Nadler, Sharon M. Pigott, and Monica McRedmond Terry.
[2] Louis McRedmond withdrew as a named plaintiff prior to the 1998 engagement of Tom Nebel, P.C.
[3] Mr. Jones and the Chancery Defendants compromised and settled the Jones Motion on April 19, 2004, so that matter was not litigated.
[4] The Chancellor noted in her Memorandum and Order of January 16, 2004, that the filing of the Kentucky Dissolution Suit was inconsistent with the Chancery Plaintiffs' position in the Chancery Action on behalf of Elk Brand as a going concern.
[5] Referencing the affidavit of Donald Carl Langevoort, the Lee S. & Charles A. Speir professor of law at Vanderbilt University School of Law.
[6] Res judicata or claim preclusion "bars a second suit between the same parties or their privies on the same cause of action with respect to all issues which were or could have been raised in the former suit." State ex rel. Cihlar v. Crawford, 39 S.W.3d 172, 178 (Tenn. Ct.App.2000). Collateral estoppel or issue preclusion bars the same parties or their privies from relitigating in a second suit issues that were actually raised and determined in the former suit. Massengill v. Scott, 738 S.W.2d 629, 631 (Tenn.1987); Cihlar, 39 S.W.3d at 178-79.
Preclusion in federal litigation following a judgment in state court depends on the Full Faith and Credit Statute, 28 U.S.C. § 1738, which requires the federal court to give the judgment the same effect as the rendering state would. Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S. Ct. 1327, 84 L. Ed. 2d 274 (1985). When the state judgment would not preclude litigation in state court of an issue that turns out to be important to a federal case, the federal court may proceed; otherwise not. Harris Trust & Sav. Bank v. Ellis, 810 F.2d 700, 704-06 (7th Cir. 1987).
[7] The 2003 Agreement was only signed by three of the McRedmond Parties.
[8] On November 25, 2003, on behalf of the Chancery Plaintiffs, Tom Nebel, P.C., filed in the Derivative Suit a request for an ex parte order restraining the majority shareholder from consummating the Kentucky Short-Form Merger. The Chancery Court denied the ex parte request due to inadequate notice. Tom Nebel, P.C., then filed a motion to alter or amend the ex parte denial order, which the Chancellor also denied on December 2, 2003. Tom Nebel, P.C., then filed in the Derivative Suit a request for temporary injunction to stay consummation of the Kentucky Short-Form Merger, which the Chancellor denied on December 9, 2003.
[9] Not only does Mr. Nebel's declaration construct a new agreement to pay two contingent fees out of whole cloth, it also does more than that. For summary judgment, "a party cannot create a disputed issue of material fact by filing an affidavit that contradicts the party's earlier deposition testimony." Aerel, S.R.L. v. PCC Airfoils, L.L.C., 448 F.3d 899, 906 (6th Cir.2006). See Penny v. United Parcel Serv., 128 F.3d 408, 415 (6th Cir.1997) (plaintiff's affidavit not considered "because a party cannot create a genuine issue of material fact by filing an affidavit, after a motion for summary judgment has been made, that essentially contradicts his earlier deposition testimony") (citation omitted). If Mr. Nebel's declaration was relevant to the task at hand, the Court would consider excluding it as a sham affidavit full of legal conclusions. Instead, it is merely irrelevant because it adds nothing to show that the McRedmond Parties had the same understanding of the 1998 and 2003 Agreements.
It should also be noted here that the Trustee's objection to evidence offered by the McRedmond Parties showing Mr. Nebel's recent disbarment is sustained pursuant to Federal Rule of Evidence 404(b).
[10] In addition, most of the litigation expenses were actually incurred and paid while Sherrard was representing the McRedmond Parties. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551763/ | 409 B.R. 1 (2009)
In re David B. SMITH and Susan L. Smith, Debtors.
No. 07-10538-JMD.
United States Bankruptcy Court, D. New Hampshire.
July 23, 2009.
*2 Richard D. Gaudreau, Esq., Richard D. Gaudreau, Attorney at Law, P.C., Salem, NH, for Debtor.
Charles W. Gallagher, Esq., Haughey, Philpot & Laurent, P.A., Laconia, NH, for BAC Home Loans Servicing, L.P.
MEMORANDUM OPINION AND ORDER
J. MICHAEL DEASY, Bankruptcy Judge.
I. INTRODUCTION
The Court has before it the Debtors' Assented Emergency Motion for Approval of Loan Modification of Existing Mortgage Loan on Home (Doc. No. 59) (the "Motion"). The Debtors request that the Court approve a loan modification on their home mortgage with BAC Home Loans Servicing, L.P. ("BAC").[1] BAC has agreed to a loan modification (the "Modification") with the Debtors that reduces the Debtors' mortgage payment for three years and adds the present arrearages to the principal loan amount. The Court held a hearing on the Motion on July 15, 2009. BAC is seeking court approval of the Modification because it is modifying a home mortgage loan with a debtor in bankruptcy, and BAC wants assurance that the Court does not disapprove of or find any fault with the Modification under applicable federal bankruptcy law or procedure. BAC's concerns arise because it signs agreements with debtors in many districts throughout the country, each of which may have different standards and processes for approving these types of agreements.
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). *3 This is a core proceeding in accordance with 28 U.S.C. § 157(b).
II. FACTS
The Debtors filed for chapter 13 bankruptcy in March 2007. BAC filed a motion for relief from the automatic stay in February 2009. The hearing on the motion for relief was continued several times so the Debtors could apply for, and the parties could negotiate, a loan modification agreement. Finally, on July 10, 2009, the parties filed the Motion and asked the Court to approve the Modification because BAC inserted language in the Modification that the Debtors "must secure court approval before the loan modification can be completed." The parties also asked for expedited treatment because BAC's offer on the loan modification is only valid for 30 days from June 18, 2009. If the Debtors do not obtain court approval and return the documents by July 18, 2009, BAC will automatically cancel the offer.
At the hearing on the Motion, BAC could not identify any applicable law or rule which requires approval of the Modification itself. The parties stated that they were effectively seeking comfort that the Court does not find any problems or fault with the Modification or its terms. The parties also conceded that the Modification itself does not present any dispute on which the Court can rule.
III. DISCUSSION
The Motion seeks court approval only because BAC insists on court approval for the Modification and not because of any dispute or controversy. Neither the parties, nor the terms of the Modification, can confer jurisdiction on this Court, however.
The bankruptcy courts are units of the federal district court. 28 U.S.C. § 151. "The jurisdiction of federal courts is defined and limited by Article III of the Constitution." Flast v. Cohen, 392 U.S. 83, 94, 88 S. Ct. 1942, 20 L. Ed. 2d 947 (1968). Under Article III, federal courts' judicial power is restricted to "cases" and "controversies." U.S. Const. Art. III, § 2; Flast, 392 U.S. at 94, 88 S. Ct. 1942. As a result, the core Article III limitation on federal judicial power is that federal courts cannot issue advisory opinions. Indeed, "the oldest and most consistent thread in the federal law of justiciability is that the federal courts will not give advisory opinions." Flast, 392 U.S. at 96, 88 S. Ct. 1942 (quoting Charles Alan Wright, Federal Courts 34 (1963)); see also Golden v. Zwickler, 394 U.S. 103, 108, 89 S. Ct. 956, 22 L. Ed. 2d 113 (1969) (federal courts "do not render advisory opinions"); Am. Postal Workers Union v. Frank, 968 F.2d 1373 (1st Cir.1992) (absent a case or controversy under Article III, plaintiff lacked standing); In re Ouellette, 2005 BNH 020, 2005 WL 1563532 (declining to issue an advisory opinion to confirm that real estate was properly abandoned for title insurance purposes because there was no legal or factual dispute for the court to resolve).
The prohibition against advisory opinions serves the policies of preserving the separation of powers by keeping courts out of the legislative process, conserving judicial resources by avoiding unnecessary judicial review, and ensuring that cases are presented to courts as specific disputes with precisely framed issues and arguments, not hypothetical legal questions. See Erwin Chemerinsky, Federal Jurisdiction § 2.2, at 49 (5th ed.2007).
One of the two generally accepted standards for a case to be justiciable (and not an advisory opinion) is that the case involves an actual dispute between adverse litigants.[2]See, e.g., Muskrat v. *4 United States, 219 U.S. 346, 31 S. Ct. 250, 55 L. Ed. 246 (1911). The "actual dispute" requirement generally prohibits federal courts from rendering opinions when the interests of the parties to the lawsuit are not truly adverse. If the parties' interests are not adverse, then a decision either way will not have any effect on the parties' conduct. Thus, the court's decision does nothing to change the status quo, and the court is not exercising its judicial function in any meaningful way.
In a bankruptcy proceeding, disputes are resolved through the commencement of an adversary proceeding or a contested matter, depending on the nature of the dispute. See Fed. R. Bankr.P. 7001, 9014. Unless the Bankruptcy Code requires the filing of an application, the parties must request resolution of a contested matter by motion. Fed. R. Bankr.P. 9014(a). Here, the parties are asking the Court to review and approve the Modification when both parties already agree to the terms. Therefore, their interests are not adverse, and any opinion the Court renders would be advisory. By itself, an agreement to approve a mortgage loan modification presents no case or controversy. Absent a dispute between the parties, or a requirement of applicable law, there is no contested matter and the Motion is simply seeking an advisory opinion of the Court. However, a loan modification agreement may be approved by the Court when it is presented in connection with the need for the bankruptcy court to resolve a dispute or take action otherwise required under the Bankruptcy Code. While many circumstances may require the Court to consider the appropriateness of a loan modification agreement, there are three common situations when such approval is both appropriate and avoids having the Court render an advisory opinion.
First, if the agreement resolves a motion for relief by serving as the parties' stipulation, then the agreement serves as a settlement of an actual dispute the same as any other settlement agreement in a traditional lawsuit. Motions for relief are contested matters involving adverse litigants with opposing interests. See Fed. R. Bankr.P. 4001(a), 9014. The adversarial nature of motions for relief qualify those proceedings as "cases" or "controversies" that meet the Article III constitutional requirements for justiciability. See 10 Lawrence P. King, Collier on Bankruptcy ¶ 9014. 01, at 9014-2 (Alan N. Resnick & Henry J. Sommer eds., 15th rev. ed. 2009) ("Contested matters resemble adversary proceedings in that there are (at least) two parties who are opposing each other with respect to relief sought by one of them.").
Second, the Court may review a loan modification in the context of plan confirmation because a secured creditor can agree to different treatment of its claim in a debtor's plan. Secured creditors can always accept less than what they are entitled to demand under their pre-petition contract with the debtor. Under § 1322(b)(2),[3] a debtor's plan may not modify a secured creditor's claim secured only by the debtor's principal residence. But nothing prevents a secured creditor from consenting to the modification of its claim. See 11 U.S.C. § 1325(a)(5)(A); *5 Flynn v. Bankowski (In re Flynn), 402 B.R. 437, 442 (1st Cir. BAP 2009). A debtor's proposed chapter 13 plan could include some agreed-upon different treatment for a secured creditor, and a court can still confirm the plan because one of the three options to confirm plans involving allowed secured claims is that "the holder of such [a] claim has accepted the plan." 11 U.S.C. § 1325(a)(5)(A). Indeed, a recurring implicit theme in chapter 13 is that secured creditors are free to waive protections given to them under the Bankruptcy Code. Cf. Cukierman v. Mechanics Bank of Richmond (In re J.F. Hink & Son), 815 F.2d 1314, 1317-18 (9th Cir.1987) (statutory prohibition against modification of unexpired leases based on a debtor's assumption or rejection was a prohibition that could be waived by those for whose benefit it was enacted); 8 Collier on Bankruptcy ¶ 1325.06[2], at 1325-30 (explaining that acceptance under § 1325(a)(5)(A) as an "alternative for protecting the holder of an allowed secured claim requires little explanation; if the holder of the claim is satisfied with its treatment under the plan, there is no need or justification for further scrutiny by the court").
Third, a debtor can modify a plan before or after confirmation under § 1323 or § 1329. A secured creditor can agree to a modification that incorporates the parties' loan modification agreement, much the same way the parties could incorporate the loan modification agreement into a debtor's plan as part of confirmation. In that context, the Court may consider the parties' loan modification as part of the plan modification, which, of course, is still subject to the other restrictions in chapter 13 of the Bankruptcy Code.[4]See 11 U.S.C. § 1323(a) (requiring compliance with § 1322 for pre-confirmation modifications); 11 U.S.C. § 1329(b)(1) (requiring compliance with §§ 1322(a), 1322(b), 1323(c), and 1325(a) for post-confirmation modifications).
IV. CONCLUSION
As a stand-alone motion, the Motion does not present the Court with any case or controversy. Accordingly, the Motion is DENIED. At the hearing on the Motion, the Court also held a continued hearing on the motion for relief previously filed by BAC. Consistent with this opinion and order, the parties subsequently submitted a stipulation to resolve the relief motion (Doc. No. 64), which included the Modification. The Court approved that stipulation by separate order (Doc. No. 65). This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
NOTES
[1] BAC was formerly Countrywide Home Loans Servicing, L.P., which is now owned by Bank of America. For simplicity, the Court uses "BAC" in this opinion.
[2] Although not relevant for this decision, the other standard for justiciability is that a federal court decision in one claimant's favor will have some effect. See, e.g., Hayburn's Case, 2 U.S. 408, 2 Dall. 409, 1 L. Ed. 436 (1792).
[3] In this opinion the terms "Bankruptcy Code," "section" and "§" refer to title 11 of United States Code, 11 U.S.C. § 101 et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. No. 109-8.
[4] Although the Debtors cited § 1329 in the Motion as the basis for the requested relief, that section deals with modifications of plans after confirmation. The Debtors never styled the Motion as a motion to modify their plan. In any event, the Debtors did not comply with the local rules on motions to modify. Under Local Bankruptcy Rule 3015-4, debtors must include a proposed modified plan with such motions and serve the motions, the modified plan, and the statement of reason on the chapter 13 trustee and all creditors and parties who have requested notice. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551768/ | 409 B.R. 322 (2009)
In re JONES & McCLAIN, LLP, Debtor.
James A. Prostko, Trustee, Movant,
v.
Lisa Deangelo and Terri Michel, Respondents.
No. 01-29104-JAD.
United States Bankruptcy Court, W.D. Pennsylvania.
August 12, 2009.
*324 Jonathan Jones, Middleburg Heights, OH, pro se.
James A. Prostko, Pittsburgh, PA, Trustee.
MEMORANDUM OPINION REGARDING TRUSTEE'S OBJECTIONS TO CLAIMS NO. 11 and 12
Related to Doc. # s 96, 97
JEFFERY A. DELLER, Bankruptcy Judge.
The matters before this Court are joint Objections To Claims (collectively the "Objections") filed by James Prostko ("Trustee"), Chapter 7 Trustee of the debtor law firm Jones & McClain, LLP (the "Partnership"). These Objections are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B), and this Court has proper subject matter jurisdiction pursuant to 28 U.S.C. § 1334(b).
I.
The Partnership was formed on April 8, 2000, to represent plaintiffs in personal injury actions on a contingency basis. Jonathan Jones ("Jones") and Thomas McClain ("McClain") were its general partners. The Partnership was dissolved as a matter of law on June 22, 2001, when Jones filed for personal bankruptcy. On August 31, 2001, Jones filed an involuntary Chapter 7 petition against the Partnership. See Dkt. # 1.
Terri Michel ("Michel") and Lisa Deangelo ("Deangelo" or collectively "Claimants") filed proofs of claim on June 13, 2002 ("Claim No. 11") and July 3, 2002 ("Claim No. 12" or collectively the "Claims") respectively.[1] The Claimants were employed by the Partnership from April 10, 2000, through May 18, 2001, to perform secretarial, paralegal and office management duties. The Claimants were dismissed without cause, due to the imminent dissolution of the Partnership. Prior to their employment by the Partnership, the Claimants performed similar duties for Jones for seven (7) or more years under the employment of Jones' previous law firm, Ogg Jones Cordes & Ignelzi ("Ogg *325 Jones"). Jones was the managing partner of Ogg Jones before beginning his new position as managing partner of the Partnership.
The Claimants, believing they were owed by the Partnership unpaid severance as well as cash payments for unused vacation time, filed proofs of claim to that effect in this bankruptcy case. The two principals of the Partnership were in disagreement as to the validity of the Claims. According to the Trustee, while Jones was supportive of the claims, McClain did not agree with the Claimants' representations, and thus McClain instructed the Trustee to object. See Audio Recording of Hearing Held May 26, 2009 at 1:47:07 to 1:47:09.[2] The Trustee, on March 3, 2009, filed an Objection to Claim No. 11 (Dkt.# 96) and an Objection to Claim No. 12 (Dkt.# 97). The Court heard testimony from the Claimants, as well as from McClain, in a joint hearing on both Objections held on May, 26, 2009.
II.
The Third Circuit Court of Appeals has clearly established that the burden of proof for claims brought in bankruptcy proceedings under 11 U.S.C. § 502(a) rests on different parties at different times. In re Allegheny Intern., Inc., 954 F.2d 167, 173 (3d Cir.1992). Initially, it is the claimant that must "allege facts sufficient to support the claim." Id. at 173. If those allegations set forth all necessary facts to establish a claim and are not self-contradictory, they "prima facie" establish the claim. In re Holm, 931 F.2d 620, 623 (9th Cir.1991) (quoting 3 L. King, Collier on Bankruptcy § 502.02 at 502-22 (15th ed.1991)). The burden then shifts to the objector to produce evidence sufficient to "refute at least one of the allegations that is essential to the claim's legal sufficiency." In re Allegheny Intern., Inc., 954 F.2d at 173-74. If the objector is successful in doing so, "the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence." Id. at 174 (citing In re WHET, Inc., 33 B.R. 424, 437 (Bankr.D.Mass.1983)). The burden of persuasion always remains with the claimant. Id. at 174 (citations omitted).
In the case before this Court, the Claimants met their initial burden upon filing proofs of claim, with supporting documents attached, that were both "sufficient to establish a claim" (Id. at 173) and "not self-contradicting." In re Holm 931 F.2d at 623. The objector, in this case the Trustee, then met his shifting burden by refuting an allegation essential to the claim, namely, the existence of a contract between the Partnership and the Claimants to pay severance and cash for unused vacation time. In re Allegheny Intern., Inc., 954 F.2d at 173-74. The Claimants are thus left with the burden of persuasion with respect to the existence of a contract, which is the subject of this Memorandum Opinion. Id. at 173 (citations omitted).
III.
The issues presented to this court are straightforward: Is the Partnership contractually obligated to 1) pay Claimants for accrued, but unused, vacation time, and 2) make severance payments to the Claimants? The Claimants allege that Jones, acting as managing partner of the Partnership, represented to the Claimants and *326 they consequently relied on his representations that their employment agreement with the Partnership would be "commensurate with what was received at the Ogg Jones firm." Audio Recording of Hearing Held May 26, 2009 at 1:52:12 to 1:52:26.
For the Claims to survive the Trustee's objections, the Claimants must meet their burden with respect to two basic allegations. First, they must show that Jones did, indeed, commit the Partnership to providing employment benefits and policies to the Claimants commensurate with those they received as employees of Ogg Jones. Second, the Claimants must show that the severance and vacation benefits they allege are owed to them by the Partnership were, in fact, in place at Ogg Jones during their tenure at that firm. In doing so, the Claimants will have established the existence of a contract between the Partnership and the Claimants. This Court finds that the Claimants have met their burden with regards to the existence of a contract to pay for accrued, but unused, vacation time. They have not, however, met their burden with regards to establishing the existence of a contract to pay severance.
IV.
Beginning with the question of cash for unused vacation, there are several important facts presented on the record. First, there is the testimony of the Claimants, Michel and Deangelo. Both Claimants have testified that Jones represented to them, in approximately late March of 2000, that the soon-to-be formed Partnership would provide to them the benefit of the same compensation and employment policies provided by the Ogg Jones firm. In the words of Michel, Jones conveyed that "everything would stay the same, vacation, seniority" and that "all the policies that existed at the Ogg Jones firm would carry over." Id. at 2:22:42 to 2:23:44. Additionally, the Claimants contend that Ogg Jones had a policy of providing cash for accrued, but unused, vacation pay to its employees. Michel claims to have knowledge of two prior employees of Ogg Jones, namely Shelly Molenda and Julia Cheia, having received such cash payments upon their dismissal without cause from Ogg Jones. Id. at 2:17:16 to 2:17:34. Deangelo testified to the existence of a memo in circulation at Ogg Jones in or around 1995, stating the policy of vacation day accruement, and the options of each employee to either a) use the accrued days, b) "carry them over" to the following year, or c) "cash them out" at the end of the year. Id. at 3:07:18 to 3:07:51.
Second, the evidence shows correspondence from Jones to various parties, addressing the issue of vacation time. Judging by the totality of the evidence, it is clear that Jones' opinion corroborates the testimony of the Claimants with regards to the Partnership's obligation to pay cash for unused vacation time. In a signed letter to his attorney, Jones writes that he "specifically spoke" to Terri Michel regarding payment for unused vacation time, and that he "committed the partnership to it."[3]*327 Movant's Ex. 3 at p. 3. Additionally, Jones writes, "my policy was always that vacation was earned in the prior year. Any departing employee received their unused vacation time for the year in cash, unless. . . fired for willful misconduct." Id. Jones, in his previous capacity as managing partner of Ogg Jones, would have been in a good position to know that firm's employment policy.
Finally, we have the testimony of McClain. McClain generally denies the Partnership having any policy to pay cash to employees for unused vacation time. However, it is admitted by McClain that Jones was the managing partner of the Partnership for the time in question. Audio Recording of Hearing Held May 26, 2009 at 3:31:06 to 3:32:19. McClain did not seem to have any responsibilities relating to the hiring or dismissal of personnel, which is corroborated by McClain's inability to recall the circumstances under which most of the other employees of the partnership were hired or dismissed, as well as an inability to properly recall the names of the other employees. Id. at 3:41:14 to 3:44:59. McClain, when asked at trial, could not recall if any vacation policy existed whatsoever at the Partnership, nor could he recall any details of a vacation policy from Ogg Jones, where McClain was previously employed as an Associate. Id. at 3:38:37 to 3:39:20.
For these reasons, the Court finds that McClain was not in a good position to offer testimony as to what Jones' representations to the Claimants regarding vacation benefits might have been, nor was he in a good position to offer testimony regarding the existence of certain vacation policies at Ogg Jones. Additionally, neither the Trustee, nor McClain represented by counsel, objected to any of the Claimants testimony as hearsay or on any other grounds. As such, the testimony provided by the Claimants, along with admissions of Jones' in his writings, is sufficient to carry the burden of proof as to the existence of a contract to pay cash for unused vacation time. With this threshold issue settled, we turn to the question of how such cash payments should be calculated.
V.
There is some dispute, or perhaps more appropriately characterized as confusion, amongst the parties as to the proper formula for accruing vacation time. The Claimants testified that the vacation policy at Ogg Jones and thus, by way of Jones' promise to the Claimants, at the Partnership was that vacation time would accrue in full on January 1st of any given year, having been earned over the prior year's employment. This method of accruing vacation time is common in corporate America. By way of example, an employee beginning work in January of 2010 would earn vacation to be used in 2011 throughout their 2010 employment. This vacation time earned in 2010 would thus be available, or accrue, to the employee in full as of January 1, 2011, and could theoretically be used in full during the first month of 2011 if the employee so desired. According to the totality of evidence before the Court, the Claimants have established this to be the policy that was in place at Ogg Jones, and the Trustee does not offer any *328 evidence to dispute this. It is also established by the testimony of Claimants, and not disputed, that a full year's vacation was set at 15 business days. Additionally, the Claimants assert, and it is not disputed, that Ogg Jones' policy allowed for, among other options, unused days to be carried over from previous years. A letter from Jones to McClain dated July 23, 2001, seems to demonstrate Jones' agreement with the Claimants' assertions. Movant's Ex. 3 at p. 8.
With regards to Claim No. 11 specifically, Michel asserts that she had six (6) vacation days remaining from her 2000 accrued budget, which she alleges she was entitled to carry over to 2001. This brings the total starting balance to 21 days of accrued vacation as of January 1, 2001. Michel then deducts 2 vacation days used in January 2001, to arrive at a net balance of 19 days accrued, but not used, as of her termination in May of 2001.
The Trustee, and McClain, object to the addition of these six (6) carry-over days, not because they offer any counter-evidence that would suggest that no carry over policy existed, but rather because they suggest that the six (6) days carried over were "Ogg Jones vacation time" and thus not properly owed to the Claimants by the Partnership. Audio Recording of Hearing Held May 26, 2009 at 2:37:22 to 2:37:32. Indeed, according to the formula explained above, any vacation days that Michel or Deangelo carried over from 2000 would have been earned in 1999, and thus earned while at Ogg Jones. However, this is not reason enough to exclude them.[4]
By way of deduction, the Trustee seems to argue that the employment agreement stipulated that time spent at Ogg Jones could not be used to earn vacation time at the Partnership. If this were the case, the Claimants would have had zero earned or accrued vacation time starting on April 10, 2000 (their first day of employment with the Partnership). It is hard to imagine that Jones, in conveying to the Claimants that "everything would stay the same" and that "seniority" would remain, was in fact suggesting that the Claimants would be forfeiting all accrued vacation time even for use in 2000, and thus would need to either forgo any vacation until 2001 or perhaps arrange to borrow against their to-be-accrued vacation on January 1, 2001. It is much more reasonable to assume that the agreement allowed for time spent at Ogg Jones to be used to earn vacation time at the Partnership. This would include time spent in 1999, accrued in 2000 and carried over into 2001 by way of the carry-over policy, as well as time spent in the first three months of 2000, accrued on January 1, 2001.
For these reasons, the 19 days of accrued vacation time, as calculated by Michel under the direction of Jones appears to accurately reflect the contracted amount. At her daily rate of $152.30, the total amount due to Michel by the Partnership for accrued, but unused, vacation is $2,893.70. Similarly, the Partnership owes $1,967.30 to Lisa Deangelo pertaining to Claim 12.[5]
*329 VI.
We now turn to the remaining issue: Was the Partnership contractually obligated to pay severance to the Claimants? Or, perhaps more to the point, did Ogg Jones have an established severance policy, which, by way of Jones' agreement with the Claimants, carried over to the Partnership? The best evidence offered on this topic comes in the form of Jones' notes and/or letters to his lawyer, to McClain, and to the Claimants.
In a handwritten memo from Jones' to Deangelo, dated May 17, 2001, Jones' conveys to Deangelo, "I am trying to construct some type of severance package for you and Terri, to make your landing in the `real world' a little softer." Movant's Ex. 5. Based on this May 17 memo, it appears that Jones had not yet constructed such a severance and thus had not committed the Partnership to it at that time.
The Partnership dissolved on June 22, 2001. In Jones' June 28, 2001 letter to his lawyer, Jones states, with regards to his desire to pay severance to the Claimants, "this is not a formal commitment of the partnership" and continues that he "would certainly like to pay something greater than zero." Movant's Ex. 3 at p. 3. Offering further support to the Trustee's case is the July 23, 2001 letter to McClain, where Jones again addresses the topic of severance for the Claimants:
I believe that [Claimants] are entitled to some form of severance pay. Given the number of years of service . . . the figure will not be that small, if traditional formulas are used . . . When I left USX, I believe they paid one (1) month for every year of service. Some companies pay much less (one week or a flat rate per year). You probably have access to information concerning what Hartford paid, if anything. I have made inquiries to other law firms, albeit larger defense firms, and I am waiting for an answer. Of course, I recognize that small personal injury firms probably pay nothing, on average, but I am not sure that this is the standard to aspire to.
Movant's Ex. 3 at pp. 8, 9. It is clear from this correspondence that, as of July 23, Jones still did not believe that a specific obligation to pay severance to the Claimants existed. This is evidenced by the "brainstorming" style of his letter, Jones' consideration of all of the potentially comparable severance policies they might adopt, and his solicitation of McClain's opinion on the matter.
McClain's testimony corroborates this point. McClain did not believe that any promise had been made that would obligate the Partnership to pay severance to the Claimants. Audio Recording of Hearing Held May 26, 2009 at 3:17:26 to 3:17:40. Additionally, Jones himself had no knowledge of any severance policy that may have existed at Ogg Jones. Movant's Ex. 3 at pp. 8, 9. The Claimants themselves testified that they had no knowledge as to the details of such a policy at Ogg Jones, nor did they have specific knowledge as to the existence of any severance policy at Ogg Jones whatsoever. Audio Recording of Hearing Held May 26, 2009 at 2:52:22 to 2:53:01.
The Claimants' argument also relies, in large part, on certain language contained in the "Policy Statement on Drugs and Alcohol" (the "Policy") which is attached to the Jones & McClain partnership agreement. The Policy, which amounts to a "three strikes and your out" rule, includes provisions for dealing with first-time, second-time and third-time offenders. A second *330 violation would require the Partner or employee to attend a mandatory 28-day in-patient program. As the Policy explains, "Failure to comply [with the mandatory 28-day in-patient program requirement] will subject the Partner or employee to automatic discharge. Employees discharged under this provision will receive one-month severance pay and be entitled to collect unemployment benefits." Movant's Ex. 10, Policy at p. 2. The Policy goes on to say, "A third violation of the firm's policy shall result in automatic expulsion. . . Any employee discharged for a third violation will lose all rights to severance pay or unemployment benefits." Id. at p. 3. (emphasis added).
The Claimants rely on this language to conclude that there must be a general severance policy that exists for employees otherwise, why would the Policy need to explicitly deny rights to severance pay for a third-time offender? It is clear to this Court, however, that this language was intended to avoid the aforementioned 1-month severance pay afforded to anyone dismissed under the Policy's provisions for a second violation. Indeed, this denial of severance for third-time offenders appears in the paragraph immediately following the introduction of the 1-month severance pay for second-time violators. It is not reasonable to assume, based on the language of this Policy, that a general severance policy existed for Partners and employees.
Given the evidence of Jones' beliefs leading up to, and after, the dissolution of the firm, and because no evidence has been offered to carry the burden as to the existence of a severance policy at Ogg Jones, this Court concludes that there was no contract between the Partnership and the Claimants to provide severance pay in the event of dismissal without cause.
VII.
This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. For the reasons set forth above, the Court sustains the Objections in part and denies them in part and finds that:
1. A contract to pay cash for accrued, but unused, vacation time does exist between the Partnership and the Claimants. The Partnership is therefore obligated to pay the portions of Claim No. 11 and Claim No. 12 that relate to vacation time, which amounts to $2,893.70 and $1,967.30 respectively.
2. A contract to pay severance does not exist between the Partnership and the Claimants. Therefore, the portions of Claim No. 11 and Claim No. 12 that relate to severance are disallowed, which amounts to $26,400.00 and $19,250.00 respectively.
NOTES
[1] It is worth briefly addressing the threshold issue of the proper filing of Claim No. 11 in this case. Terri Michel filed this claim on June 13, 2002 but neglected to include a claim for severance. Upon realizing her mistake in preparation for trial, she amended her claim on April 15, 2009, to include severance. The Court is satisfied that Michel's failure to include severance in her original claim was a clerical error on her part, made in good faith by a pro se claimant. However, since the claim for severance is denied in full, the point is moot.
[2] Citations to audio recordings refer to the audio record made by the Electronic Court Reporting System utilized in the United States Bankruptcy Court for the Western District of Pennsylvania. A copy of the audio file, and a transcript of the same, may be obtained upon submission of a written request and remittance of the requisite fee to the Clerk of the United States Bankruptcy Court.
[3] The Trustee suggests in his trial brief, although does not explicitly claim, that any promise by Jones made in March of 2000 to provide commensurate benefits to the Claimants could not have bound the Partnership, as the Partnership was not officially formed until April 8, 2000. By the Trustee's logic, it would seem that the full terms of the agreement would have had to be explicitly reiterated to the Claimants on the weekend of April 9 in order to bind the Partnership as of April 10, the first day of Claimant's employment. The Trustee is correct in one respect: that the Partnership was not yet bound as of late March, as it was yet to be formed. However, this Court disagrees with the extension of the Trustee's logic to claim that the representations made by Jones in March had no bearing on the agreement ultimately reached between the Partnership and the Claimants on April 10. This Court finds that Jones, by accepting their services on April 10, was, in effect, reextending to the Claimants the same terms that he represented to them in late March, only a few weeks earlier. Indeed, this Court finds that the Claimants have met their burden with respect to establishing that, on April 10, both Jones and the Claimants were of the understanding that the verbal representations in March would form the basis of the nonwritten employment agreement entered into on April 10.
[4] The Court notes that neither the Trustee nor McClain make any particular objection to any of the 15 days earned in 2000, accrued on January 1, 2001, even though the Claimants only worked at the Partnership for 9 months of 2000, and thus could be said to have earned only 75% of those 15 days while working for the Partnership, and the remaining 25% of that time while working for Ogg Jones. For this reason, the Trustee's position with regards to "Ogg Jones vacation time" is, at very least, inconsistent.
[5] Lisa Deangelo began 2001 with 15 days accrued (earned in 2000) and 4 days carried over (earned in 1999). She used a total of 3.5 days in January and February of 2001, leaving her with a net balance of 15.5 days upon her dismissal from the Partnership in May of 2001. At a daily rate of $126.92, the amount owed to her for unused vacation time totals $1,967.30. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551769/ | 409 B.R. 491 (2009)
In The Matter of Jeffrey E. WHITE, Debtor.
No. 09-11653.
United States Bankruptcy Court, N.D. Indiana, Fort Wayne Division.
July 24, 2009.
*493 D. Anthony Sottile, Reisenfeld & Associates, Cincinnati, OH, for BAC Home Loans.
Mark A. Warsco, Rothberg, Logan & Warsco, Fort Wayne, IN, trustee.
DECISION ON MOTION FOR RELIEF FROM STAY AND ABANDONMENT
ROBERT E. GRANT, United States Bankruptcy Judge.
The matter before the court involves a motion for relief from stay and abandonment filed by BAC Home Loans in this chapter 7 case a motion which the court is required to address with dispatch, 11 U.S.C. § 362(e) to which the trustee has objected. Ordinarily, the court would schedule such a motion and objection for a prompt trial. In this instance, however, little purpose would be served by doing so because, even when all of the motion's allegations are taken as true, it fails to allege the facts necessary to entitle BAC to the relief it seeks.[1] Under these circumstances where the motion does not allege facts justifying relief from the automatic stay the court sees no reason to burden either the trustee or itself with an expedited trial. Instead, the appropriate course of action is to deny the motion.
In contested matters, such as the one currently before the court, relief is sought by motion. Fed. R. Bankr P. Rule 9014(a). Bankruptcy Rule 9013 requires this motion to state both the relief sought and the grounds therefor "with particularity." Fed. R. Bankr.P. Rule 9013. This is the same standard of detail the Federal Rules of Civil Procedure require when pleading fraud or mistake, see, Fed.R.Civ.P. Rule 9(b), and satisfying it requires much more information than the simple notice pleading of Rule 8. In re Minton, 2006 WL 533352 *2 (Bankr.N.D.Ind.2006) (reader should not be left with any serious questions concerning what is to be done or why). "A well-pleaded claim grounded on mistake should include averments of what was intended, what was done, and how the mistake came to be made." Wright & Miller, Federal Practice and Procedure: Civil 3d, Vol. 5A, § 1299, p. 264. To plead fraud with particularity requires allegations concerning the identity of the person making the misrepresentation, the time, place and content of the misrepresentation, and the method by which it was communicated to the plaintiff. General Electric Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir.1997); Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir.1992); In re Eisaman, 387 B.R. 219, 222 (Bankr.N.D.Ind. 2008); In re Chochos, 325 B.R. 780, 783 (Bankr.N.D.Ind.2005). If the "fraud" complained of has a statutory basis, the complaint should contain allegations concerning the various elements of the statutory cause of action. General Electric Capital, 128 F.3d at 1079-80; Chochos, 325 B.R. at 783. But, conclusory allegations or the *494 mechanical recitation of the elements of a cause of action will not suffice. Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949-50, 173 L. Ed. 2d 868 (2009). The Supreme Court has made it clear that, while such allegations can provide "the framework of a complaint, they must be supported by factual allegations" for the complaint to be sufficient. Iqbal, 129 S.Ct. at 1950. Although the Court made these observations in the context of applying the general rules of pleading found in Rule 8 of the Federal Rules of Civil Procedure, if such allegations will not satisfy the requirements of Rule 8 they will not satisfy the more rigorous requirements of Rule 9(b).
When these lessons from traditional civil litigation are applied to the motion practice in bankruptcy proceedings, they give greater substance to Rule 9013's requirement that the "grounds" for the relief sought be stated "with particularity." A proper motion will contain factual allegations concerning the various requirements necessary for the relief being sought. Conclusory allegations or a mechanical recitations of those elements will not suffice; the motion should allege facts supporting those conclusions or satisfying those elements. In other words, the movant should plead the essential facts that it expects prove at trial: facts that, if true, would make a prima facie showing that it is entitled to the relief it seeks.
The circumstances that justify relieving a party of the automatic stay are specified at § 362(d) of the United States Bankruptcy Code. 11 U.S.C. § 362(d). The court may do so "for cause, including the lack of adequate protection of an interest in property" or when the debtor "does not have an equity in [particular] property" that is "not necessary to an effective reorganization." 11 U.S.C. § 362(d)(1), (2). It may also do so if the petition was part of a scheme to delay or defraud creditors and involved either the transfer of interests in real property or the filing of multiple cases involving real property. 11 U.S.C. § 362(d)(4).[2] The movant bears the burden of proving debtor's lack of equity in property and the party opposing the motion bears the burden of proof on all other issues. 11 U.S.C. § 362(g). Nonetheless, before the opposing party can be expected or required to move forward on those issues, it is entitled to know what it is supposed to prove regarding adequate protection, the lack of cause to terminate the stay, or the absence of a scheme. How can a party prove that a creditor is adequately protected or the absence of any cause or scheme unless it knows what that creditor needs to be protected from, what the supposed cause might be or the nature of the scheme? For this reason, the movant is expected to articulate some type of cause for terminating the stay, or to identify something that it should be protected from, and then give the court a reason to believe that its fears may be real, before the opposing party is required to prove that the creditor's fears are either unfounded or that it can be adequately protected. See, In re Sonnax Industries, Inc., 907 F.2d 1280, 1285 (2nd Cir.1990); In re Szymanski, 344 B.R. 891, 897 (Bankr.N.D.Ind.2006); In re Elmira Litho, Inc., 174 B.R. 892, 902-03 (Bankr. S.D.N.Y.1994).
In light of these requirements, in order to plead a prima facie case for relief from the automatic stay with the particularity required by Rule 9013, the movant must allege facts indicating that some kind *495 of cause exists for terminating the stay,[3] that it is exposed to some risk that it should be adequately protected from, or that it has an interest in property in which there is no equity. It should be remembered that these concepts cause, lack of adequate protection, and no equity are really legal conclusions derived from other, underlying facts, and so, consistent with Iqbal, the movant should allege those underlying facts and not just the conclusions it wants the court to draw from them. This means that the motion should plead facts that describe whatever cause it is the movant is complaining about and, if that cause is a lack of adequate protection, those facts should identify the risk that the movant believes threatens the value of its interest in property. See, 11 U.S.C. § 361; United Sav. Ass'n. of Texas v. Timbers of Inwood Forest Assoc., 484 U.S. 365, 369-70, 108 S. Ct. 626, 629-30, 98 L. Ed. 2d 740 (1988) (concerning the purpose of adequate protection). As for the question of equity in property, for the purpose of § 362(d)(2) equity is a function of the property's value, minus the amounts due on account of the liens and encumbrances against it, and any claimed exemption.[4]In re Indian Palms Assoc. Ltd., 61 F.3d 197, 206-07 (3rd Cir.1995); Matter of Sutton, 904 F.2d 327, 329 (5th Cir.1990); Szymanski, 344 B.R. at 896; In re Martin, 350 B.R. 812, 817 (Bankr.N.D.Ind.2006). Consequently, in order to successfully plead a lack of equity, the movant must come forward with all of those facts how much is the property worth, how much is owed on account of any liens against it and the amount of any exemption that may have been claimed by the debtor and it must do so with particularity: a general allegation that there is no equity will not suffice.
The present motion makes the following allegations:
1. The debtor filed a petition for relief under Chapter 7 on April 21, 2009.
2. BAC holds the first, and only, mortgage against the property commonly known as 472 East 5th Street, Peru, Indiana, which secures a debt in excess of $46,463.41.
3. The debtor has defaulted in his payments to BAC, both prior to and since filing bankruptcy, and has not made payments for the months of October 1, 2007 to July 1, 2009.
4. The debtor is unable to make adequate protection payments and so BAC is entitled to relief from the stay.
5. Sufficient grounds exist to waive the requirements of Rule 4001(a)(3), which would otherwise stay the effectiveness of an order granting the motion.
Even when all of these allegations are accepted as true they do not state an effective claim for either relief from the automatic stay or abandonment.
To begin with, nowhere does the motion identify which of the various prongs of § 362(d) the movant is relying upon for the relief it seeks. Is it complaining about the lack of adequate protection or some other cause for terminating the stay under § 362(d)(1), or is it proceeding under § 362(d)(2) because of a lack of equity in the property securing its claim, or both? As for the requirements of § 362(d)(2) and *496 § 554(b), the motion clearly fails to allege, with any degree of particularity, either a lack of equity in property or that the property is of inconsequential value and benefit. While it does allege the amount due on account of movant's lien, there are no allegations concerning the value of the property, and without information concerning value it is impossible to determine the question of equity or inconsequential value. As for alleging either cause or a lack of adequate protection under § 362(d)(1), the motion is similarly deficient. There are no allegations that would tend to suggest BAC's collateral is exposed to some type of risk for which it should be compensated or from which it needs to be protected, see, 11 U.S.C. § 361; Timbers, 484 U.S. at 369-70, 108 S.Ct at 629-30, and without alleging something about the risks it supposedly faces there can be no conclusion that there is a need for adequate protection. Unless there is first a need for adequate protection, there is no reason to conclude that it is lacking. As for the possibility that the motion is based upon the more general concept of cause, what is the cause that has been identified? Filing bankruptcy is not enough, neither is the creditor's desire to be freed from the stay, and, in a chapter 7 case such as this one, neither is the failure to make payments. See, Szymanski, 344 B.R. at 897; In re Kessler, 76 B.R. 434, 437 (Bankr.E.D.Pa.1987); In re Tashjian, 72 B.R. 968, 972-73 (Bankr. E.D.Pa.1987); In re Capodanno, 83 B.R. 285, 288 (Bankr.E.D.Pa.1988) (failure to make mortgage payments alone insufficient to obtain relief from stay).
BAC's motion fails to properly allege a basis either for relieving it of the automatic stay or abandoning its collateral because the motion lacks the particularity required by Bankruptcy Rule 9013. Since it fails to allege a sufficient basis for the relief it seeks, there is no reason to schedule further proceedings concerning either the motion or the chapter 7 trustee's objection thereto. Sadly, this motion is only one example of the ill-conceived, poorly considered, and hasty motions for relief from stay that have so burdened the bankruptcy courts in recent years. In re Brooks, 305 B.R. 827, 829 n. 2 (Bankr.N.D.Ohio 2004) ("I have heard that mortgagees often grade their lawyers on how quickly they can have a Motion for Relief on file.... This Court assesses the lawyer's performance on whether it comports with Fed. R. Bankr.P. 9011."). Such motions have prompted many courts to adopt local rules, promulgate general orders and devise local forms, all in effort to try get better and more precise information from movants early in the stay litigation process. See e.g., Local Rule 4001-1 (Bankr.N.D.Ill.) (requiring all motions for relief from stay to be accompanied by their Required Statement form); Proposed Local Rule 4001-1 (Bankr.D.Minn.); Local Rules of Bankruptcy Procedure 4001-1 (Bankr. D.Ariz.); R.I. L.B.R. 4001-1 (requiring completion of local Form R). These efforts are understandable, especially given the speed with which stay motions are to be processed and the parties' respective burdens of proof. In another sense, however, they are also unnecessary. Even in the absence of local forms, guidelines, general orders, and rules, the particularity requirements of Rule 9013 already obligate movants to provide most, if not all, of the information sought by such local initiatives. Those requirements need only to be observed and, if necessary, enforced.
BAC Home Loan's motion for relief from stay and abandonment will be DENIED. An order doing so will be entered.
NOTES
[1] The trustee's objection notes, among other things, that the motion fails to indicate the value of the property in question and, thus, at least to the extent it is based upon § 362(d)(2) and § 554(b), challenges the motion's sufficiency.
[2] There is yet another basis for terminating the stay, which is found at 11 U.S.C § 362(d)(3), but it applies only to single asset real estate cases pending under chapter 11 and so has no application to a chapter 7 case, such as this one, involving an individual.
[3] The "scheme" described in § 362(d)(4) is a species of cause under § 362(d)(2), rather than a completely separate basis for relief from stay, and so need not be discussed separately here.
[4] The analysis for determining equity under § 362(d)(2) is the same as that needed to determine whether property is of inconsequential value and benefit to the estate for the purposes of abandonment under § 554(b). Szymanski, 344 B.R. at 896. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551762/ | 409 B.R. 84 (2009)
In re Donald G. DEPUGH, Debtor.
No. 08-37521-H4-13.
United States Bankruptcy Court, S.D. Texas, Houston Division.
June 26, 2009.
*90 John Ernest Smith, John E. Smith & Associates, Houston, TX, for Debtor.
MEMORANDUM OPINION REGARDING: (I) DEBTOR'S OBJECTION TO LVNV FUNDING LLC'S PROOF OF CLAIM NUMBERS 12, 13, 14, AND 15; AND (II) MOTION OF LVNV FUNDING, LLC FOR LEAVE TO AMEND PROOF OF CLAIM NOS. 12-15 NUNC PRO TUNC
[Docket Nos. 37, 38, 39, 40, & 46]
JEFF BOHM, Bankruptcy Judge.
I. INTRODUCTION
In October of 2008, this Court issued a memorandum opinion in In re Gilbreath in which this Court took to task two unsecured creditorsLVNV Funding, LLC (LVNV) and eCast Settlement Corporation (eCast)who filed woefully deficient proofs of claim with utter disregard for the requirements clearly set forth in Bankruptcy Rule 3001 requiring creditors to attach documentation in support of their claims.[1] Following its ruling in Gilbreath, in order to prevent future violations of Bankruptcy Rule 3001 and to foster judicial efficiency and economy, on December 11, 2008, this Court issued a written notice and order in all of its Chapter 13 cases requiring creditors to seek leave of court or written consent of the debtor before amending a deficient proof of claim after the debtor has lodged a claim objection (the Notice and Order). See Notice and Order that Federal Rule 15, as Made Applicable by Bankruptcy Rule 7015, Shall Apply Whenever an Objection to a Proof of Claim Is Lodged, available at http://www. txs.uscourts.gov/bankruptcy/judges/jb/notice.htm.
Despite this Court's rulings in Gilbreath, the requirement that creditors seek leave of court to amend proofs of claim to which objections have been lodged, and this Court's continuing efforts to have creditors to comply with Bankruptcy Rule 3001,[2] LVNV, through its same counsel of record, Mark Stromberg (Stromberg), filed four proofs of claim in the present case on March 31, 2009 with no documents attached to them. Stromberg apparently finally got around to reading this Court's ruling in Gilbreath sometime thereafter because LVNV amended all of its deficient proofs of claim in this case on May 5, 2009twelve days after the bar date and twenty-eight days after the Debtor objected to LVNV's original proofs of claim. Following this action, Stromberg also apparently decided to check this Court's website for the first time since November of 2008. Much to his chagrin, no doubt, he discovered this Court's Notice and Order, because on May 8, 2009 he filed a motion for leave to amend nunc pro tunc LVNV's proofs of claim in this case.
Stromberg's failure to keep apprised of this Court's prior rulingsincluding those rendered against his own client in Gilbreathand his abject disregard for this Court's Notice and Order, which was issued, *91 in part, due to his client's prior violation of Bankruptcy Rule 3001, will, as in Gilbreath, preclude LVNV from pursuing its claims in the present case. For the reasons set forth below, LVNV's motion for leave to amend is denied and the Debtor's objections to LVNV's proofs of claim are sustained.
II. FINDINGS OF FACT
1. On November 25, 2008, Donald G. DePugh (the Debtor) filed a voluntary Chapter 13 petition, initiating the above-referenced Chapter 13 case. [Docket No. 1.]
2. The last day for a non-government creditor to file a proof of claim in this Chapter 13 case was April 23, 2009. See [Docket No. 16.]
LVNV's Original Proofs of Claim
3. On March 31, 2009, LVNV filed four proofs of claimcomprising claim numbers 12, 13, 14, and 15in the Debtor's Chapter 13 case (Proofs of Claim 12, 13, 14, and 15, respectively).
4. Proof of Claim 12 consists of the official proof of claim form along with one attachment. On the form, LVNV lists the amount of the claim as $19,060.36, lists the basis for the claim as "MASTERCARD," and provides the last four digits of an account number7880by which the Debtor may be identified.[3] Additionally, on the form, LVNV checked the box labeled, "Check this box if claim includes interest or other charges in addition to the principal amount of claim," which instructs the claimant to "[a]ttach itemized statement of interest or charges." No such itemized statement is attached to Proof of Claim 12. Rather, LVNV attached a single document to Proof of Claim 12 prepared by Resurgent Capital Services LVNV's servicing company[4]which contains the same information provided on the form with respect to the claim, but which also represents that LVNV purchased the debt from "Citibank."
5. Proof of Claim 13 also consists of the official proof of claim form along with one attachment. On the form, LVNV lists the amount of the claim as $13,278.68, lists the basis for the claim as "MASTERCARD," and provides the last four digits of an account number4344by which the Debtor may be identified.[5] Additionally, on the form, LVNV checked the box labeled, "Check this box if claim includes interest or other charges in addition to the principal amount of claim," which instructs the claimant to "[a]ttach itemized statement of interest or charges." No such itemized statement is attached to Proof of Claim 13. Rather, LVNV attached a single document to Proof of Claim 13 prepared by Resurgent Capital Services, which contains the same information provided on the form with respect to the claim, but which also represents that *92 LVNV purchased the debt from "Citibank."
6. Proof of Claim 14 also consists of the official proof of claim form along with one attachment. On the form, LVNV lists the amount of the claim as $20,756.99, lists the basis for the claim as "MASTERCARD," and provides the last four digits of an account number0555by which the Debtor may be identified.[6] Additionally, on the form, LVNV checked the box labeled, "Check this box if claim includes interest or other charges in addition to the principal amount of claim," which instructs the claimant to "[a]ttach itemized statement of interest or charges." No such itemized statement is attached to Proof of Claim 14. Rather, LVNV attached a single document to Proof of Claim 14 prepared by Resurgent Capital Services, which contains the same information provided on the form with respect to the claim, but which also represents that LVNV purchased the debt from "Citibank."
7. Proof of Claim 15 also consists of the official proof of claim form along with one attachment. On the form, LVNV lists the amount of the claim as $2,807.49, lists the basis for the claim as "UNSECURED CHARGE OFF," and provides the last four digits of an account number5703 by which the Debtor may be identified.[7] Additionally, on the form, LVNV checked the box labeled, "Check this box if claim includes interest or other charges in addition to the principal amount of claim," which instructs the claimant to "[a]ttach itemized statement of interest or charges." No such itemized statement is attached to Proof of Claim 15. Rather, LVNV attached a single document to Proof of Claim 15 prepared by Resurgent Capital Services, which contains the same information provided on the form with respect to the claim, but which also represents that LVNV purchased the debt from "Citibank" or "GOODYEAR."
8. On April 7, 2009, the Debtor filed objections to all four of LVNV's original proofs of claim (the Objections). [Docket Nos. 37-40.] The Debtor objects to Claims 12, 13, 14, and 15 on the following grounds: (1) LVNV failed to attach documentation to prove the existence of its purported claims; (2) LVNV failed to comply with Federal Rule of Bankruptcy Procedure 3001 (Bankruptcy Rule 3001); and (3) the Debtor denies that he has any liability to LVNV. In support of this third contention, the Debtor has attached an affidavit to the Objections, in which he swears that he does not owe any money to LVNV and that there is no proof of the debt, the transfer, or the proper amount owed. The Debtor requests that Claims 12, 13, 14, and 15 be disallowed.
9. On April 13, 2009, LVNV filed a Response to the Objections (the Response). [Docket No. 41.] In the Response, LVNV asserts that proofs of claim that fail to comply with Bankruptcy Rule 3001 are not automatically disallowed. LVNV also argues that the Debtor has not raised a "substantive" objection pursuant to 11 U.S.C. § 502(b) and that, as a result, the Objections should be overruled and *93 LVNV's claims should be allowed. In support of its position, LVNV cites the following cases in the Response: In re Taylor, 289 B.R. 379 (Bankr.N.D.Ind.2003) (for the proposition that claim objections must be couched in one of the nine statutory grounds enumerated in § 502(b)); In re Cluff, 313 B.R. 323 (Bankr.D.Utah 2004) (for the proposition that a claim objection based solely on a creditor's failure to comply with Bankruptcy Rule 3001 is invalid); In re Burnett, 306 B.R. 313 (9th Cir. B.A.P. 2004) (for the proposition that a claim should not be disallowed solely based on a creditor's failure to comply with Bankruptcy Rule 3001); In re Kemmer, 315 B.R. 706 (Bankr.E.D.Tenn.2004) (same); Szatkowski v. Meade Tool & Die Co., 164 F.2d 228 (6th Cir.1947) (for the proposition that amendments to proofs of claim should be freely allowed); In re G.L. Miller & Co., 45 F.2d 115 (2d Cir. 1930) (same); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir.1997) (for the proposition that claims should not be dismissed without giving the claimant an opportunity to amend); and In re Armstrong, 320 B.R. 97 (Bankr.N.D.Tex.2005) (for the proposition that only substantive objections based on § 502(b) provide a basis for disallowance). Notably, LVNV does not cite this Court's published opinion in Gilbreath or the published opinion of the Honorable Gray H. Miller, United States District Judge for the Southern District of Texas, in eCast Settlement Corp. v. Tran (In re Tran), 369 B.R. 312 (S.D.Tex.2007), which affirmed a ruling by Bankruptcy Judge Karen K. Brown, and which is binding on this Court.[8]
LVNV's Amended Proofs of Claim
10. On May 5, 2009twelve days after the bar date and twenty-eight days after the Debtor filed the ObjectionsLVNV amended all four of its proofs of claim to include documentation in support of each claim. The amount of the claim listed on each amended proof of claim is the same as the amount sought in LVNV's original proofs of claim. However, on the proof of claim form for each amended proof of claim, LVNV did not check the box marked, "Check this box if claim includes interest or other charges in addition to the principal amount of claim." Additionally, LVNV attached documents in support of each amended proof of claim.
11. LVNV attached the following documents to its Amended Proof of Claim 12:
a. A "Bill of Sale, Assignment and Assumption Agreement" between Citibank USA, National Association (referred to therein as "the Bank") and Sherman Originator, LLC (referred to therein as "Buyer") dated March 28, 2007, which contains the following language:
For value received and subject to the terms and conditions of the Purchase and Sale Agreement dated March 28, 2007, between Buyer and the Bank (the "Agreement"), the Bank does hereby transfer, sell, assign, convey, grant, bargain, set over and deliver to Buyer, and to Buyer's successors and *94 assigns, the Accounts described in Section 1.2 of the Agreement.
b. A "Sale and Assignment" dated March 31, 2007, which sets forth the following:
Sherman Originator LLC ("Originator")... hereby transfers, sells, assigns, conveys, grants and delivers to LVNV Funding LLC ("Company"), in accordance with the provisions of the Sale Agreement dated as of April 29, 2005, between Originator and Company (the "Agreement"), the Receivable Assets (as defined in the Agreement) identified on the Receivable File dated 3/31/07 that is hereby delivered to Company and accompanies this Sale and Assignment.
c. A number of invoices from 2006 showing various purchases made by the Debtor charged to his Sears credit card with an account number ending in 7880. None of these invoices indicates an outstanding account balance of $19,060.36the amount of LVNV's claim listed in Proof of Claim 12.
12. LVNV attached the following documents to its Amended Proof of Claim 13:
a. A "Bill of Sale, Assignment and Assumption Agreement" between Citibank (South Dakota), National Association (referred to therein as "the Bank") and Sherman Originator, LLC (referred to therein as "Bayer") dated June 26, 2007, which contains the following language:
For value received and subject to the terms and conditions of the Purchase and Sale Agreement dated June 26, 2007, between Buyer and the Bank (the "Agreement"), the Bank does hereby transfer, sell, assign, convey, grant, bargain, set over and deliver to Buyer, and to Buyer's successors and assigns, the Accounts described in Section 1.2 of the Agreement.
b. A "Sale and Assignment" dated June 30, 2007, which sets forth the following:
Sherman Originator LLC ("Originator")... hereby transfers, sells, assigns, conveys, grants and delivers to LVNV Funding LLC ("Company"), in accordance with the provisions of the Sale Agreement dated as of April 29, 2005, between Originator and Company (the "Agreement"), the Receivable Assets (as defined in the Agreement) identified on the Receivable File dated 6/30/07 that is hereby delivered to Company and accompanies this Sale and Assignment.
c. A number of invoices from 2006 showing various charges to the Debtor's "Citi Dividend Platinum Select" credit card with an account number ending in 4344. None of these invoices indicates an outstanding account balance of $13,278.68the amount of LVNV's claim listed in Proof of Claim 13.
13. LVNV attached the following documents to its Amended Proof of Claim 14:
a. A "Bill of Sale, Assignment and Assumption Agreement" between Citibank (South Dakota), National Association (referred to therein as "the Bank") and Sherman Originator, LLC (referred to therein as "Buyer") dated June 26, 2007, which contains the following language:
For value received and subject to the terms and conditions of the Purchase and Sale Agreement dated June 26, 2007, between Buyer and the Bank (the "Agreement"), the Bank does hereby transfer, sell, assign, convey, grant, bargain, set over and deliver to Buyer, and to Buyer's successors and assigns, the Accounts described in Section 1.2 of the Agreement.
*95 b. A "Sale and Assignment" dated June 30, 2007, which sets forth the following:
Sherman Originator LLC ("Originator")... hereby transfers, sells, assigns, conveys, grants and delivers to LVNV Funding LLC ("Company"), in accordance with the provisions of the Sale Agreement dated as of April 29, 2005, between Originator and Company (the "Agreement"), the Receivable Assets (as defined in the Agreement) identified on the Receivable File dated 6/30/07 that is hereby delivered to Company and accompanies this Sale and Assignment.
c. A number of invoices from 2005 and 2006 showing various charges to the Debtor's "AT & T Universal Platinum" credit card with an account number ending in 0555. None of these invoices indicates an outstanding account balance of $20,756.99the amount of LVNV's claim listed in Proof of Claim 14.
14. LVNV attached the following documents to its Amended Proof of Claim 15:
a. A "Bill of Sale, Assignment and Assumption Agreement" between Citibank (South Dakota), National Association (referred to therein as "the Bank") and Sherman Originator, LLC (referred to therein as "Buyer") dated June 26, 2007, which contains the following language:
For value received and subject to the terms and conditions of the Purchase and Sale Agreement dated June 26, 2007, between Buyer and the Bank (the "Agreement"), the Bank does hereby transfer, sell, assign, convey, grant, bargain, set over and deliver to Buyer, and to Buyer's successors and assigns, the Accounts described in Section 1.2 of the Agreement.
b. A "Sale and Assignment" dated June 30, 2007, which sets forth the following:
Sherman Originator LLC ("Originator")... hereby transfers, sells, assigns, conveys, grants and delivers to LVNV Funding LLC ("Company"), in accordance with the provisions of the Sale Agreement dated as of April 29, 2005, between Originator and Company (the "Agreement"), the Receivable Assets (as defined in the Agreement) identified on the Receivable File dated 6/30/07 that is hereby delivered to Company and accompanies this Sale and Assignment.
c. A number of invoices from 2005 and 2006 showing various charges to the Debtor's Goodyear credit card with an account number ending in 5703. None of these invoices indicates an outstanding account balance of $2,807.49the amount of LVNV's claim listed in Proof of Claim 15.
15. On May 8, 2009, LVNV filed a Motion of LVNV Funding, LLC for Leave to Amend Proof of Claim Nos. 12-15 Nunc Pro Tunc and Brief in Support Thereof (the Motion for Leave). [Docket No. 46.]
The Claim Objection Hearing
16. On May 21, 2009, this Court held a hearing on the Debtor's Objections and LVNV's Motion for Leave. Stromberg, counsel of record for LVNV, testified on behalf of LVNV. No other representative of LVNV appeared, including Joyce Montjoy, the "Bankruptcy Recovery Manager" of Resurgent Capital Services LVNV's servicing companywho prepared and signed Proofs of Claim 12 through 15 on behalf of LVNV. Stromberg introduced into evidence without objection LVNV's Amended Proofs of Claim 12 through 13 and the documents attached thereto. Additionally, Stromberg stated that he did not become aware of this *96 Court's Notice and Order until after he filed the amended proofs of claim, but that he was fully aware of this Court's opinion in Gilbreath. Stromberg also conceded that he only attempted to obtain the documents attached to LVNV's amended proofs of claim after the Debtor lodged the Objections. When attempting to show that the credit card accounts comprising LVNV's claims were among the "Accounts" and "Receivable Assets" described in the documents attached to LVNV's amended proofs of claim, Stromberg conceded that he forgot to include any such evidence in his exhibit booklet. At the conclusion of the hearing, this Court issued oral findings of fact and conclusions of law and ordered that the Motion for Leave was denied and, additionally, ordered LVNV to pay $750.00 to compensate the Debtor's counsel for the attorney's fees that he incurred in filing the Objections and appearing at the hearing, for which Stromberg was unprepared.
III. CONCLUSIONS OF LAW
A. Jurisdiction and Venue
The Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This claim objection proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (O). Additionally, this proceeding is a core proceeding under the general "catch-all" language of 28 U.S.C. § 157(b)(2). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir. 1999) ("[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case."); In re Ginther Trusts, No. 06-3556, 2006 WL 3805670, at *19 (Bankr.S.D.Tex. Dec.22, 2006) (holding that a matter may constitute a core proceeding under 28 U.S.C. § 157(b)(2) "even though the laundry list of core proceedings under § 157(b)(2) does not specifically name this particular circumstance"). Venue is proper pursuant to 28 U.S.C. § 1408(1).
B. Standard for Ruling on Claim Objections
Allowance of claims is governed by 11 U.S.C. § 502. Section 502(a) provides that a proof of claim filed under § 501 is deemed allowed unless a party-in-interest objects. Section 502(b) provides that once a claim objection is lodged, the Court, after notice and a hearing, shall determine the amount of the claim as of the petition date and "shall allow such claim in such amount" unless the claim falls under one of the nine statutory grounds for disallowance listed in § 502(b)(1)-(9).
The statutory grounds for disallowance most applicable to the dispute at bar are § 502(b)(1) and (9). Under § 502(b)(1), a claim must be disallowed if "such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because: such claim is contingent or unmatured." Additionally, under § 502(b)(9), a claim must be disallowed if "proof of such claim is not timely filed" with narrow exceptions carved out for tardy claims filed pursuant to 11 U.S.C. § 726(a)(1)-(3), or in accordance with the Bankruptcy Rules.
The form and content requirements for proofs of claim are set forth in Federal Rule of Bankruptcy Procedure 3001 (Bankruptcy Rule 3001). Bankruptcy Rule 3001(a) mandates that "[a] proof of claim shall conform substantially to the appropriate Official Form"that is, Official Form 10 (Form 10). Additionally, Bankruptcy Rule 9009 states that the Official Forms "shall be observed." Fed. R. Bankr.P. 9009. Paragraph 7 of Form 10 requires the claimant to "[a]ttach redacted *97 copies of any documents that support the claim, such as promissory notes, purchase orders, invoices, itemized statements or running accounts, contracts, judgments, mortgages, and security agreements" or a summary of such documents. Paragraph 7 of Form 10 also requires that "[i]f the documents are not available, please explain." Bankruptcy Rule 3001(c) requires that, when a claim is based on a writing, "the original or a duplicate [of the written document] shall be filed with the proof of claim"; or, if the writing has been lost or destroyed, "a statement of the circumstances of the loss or destruction shall be filed with the claim."
A proof of claim that comports with the requirements set forth in Bankruptcy Rule 3001, "shall constitute prima facie evidence of the validity and amount of the claim." Fed. R. Bankr.P. 3001(f). Three Bankruptcy Judges for the Northern District of Texas issued a joint opinion in In re Armstrong explaining the sort of documentation that a claimant must produce in order to avail its claims of prima facie validity pursuant to Bankruptcy Rule 3001(f). 320 B.R. 97 (Bankr.N.D.Tex. 2005). A credit card or consumer account creditor, like LVNV in this case, must provide "an account statement containing the debtor's name, account number, the prepetition account balance, interest rate, and a breakdown of the interest charges, finance charges and other fees that make up the balance of the debt, or attach enough monthly statements so that this information can be easily determined." Id. at 106; see also In re Relford, 323 B.R. 669, 674 (Bankr.S.D.Ind.2004) ("[A] credit card or consumer credit claim is based on both the credit card agreement and proof of the credit card's actual use. Accordingly, a claim for such debt must include the parties' credit agreement (an any amendments thereto), as well as evidence regarding the debtor's use of the credit card or consumer account."). Additionally, a claimant whose claims have been assignedalso like LVNV in this casemust "document its ownership of the claim" and produce "a signed copy of the assignment and sufficient information to identify the original credit card account." Id. (quoting In re Hughes, 313 B.R. 205, 212 (Bankr. E.D.Mich.2004)).
In Gilbreath, this Court described the burden-shifting process that § 502 and Bankruptcy Rule 3001 create during a proof of claim dispute. In re Gilbreath, 395 B.R. at 361-65. If, for example, an unsecured creditor files a proof of claim that fully complies with Bankruptcy Rule 3001, that claim is deemed prima facie valid and, if the debtor objects to that claim, he or she must produce evidence sufficient to rebut the presumption of validity and establish that the claim should be disallowed pursuant to § 502(b). If, however, an unsecured creditor files a proof of claim that fails to comply with Bankruptcy Rule 3001, the Debtor has no evidentiary burden to overcome when lodging a claim objection pursuant to § 502(b),[9] at which point the burden shifts *98 back to the claimant to prove the underlying validity of its claim by a preponderance of the evidence in order to have its claim allowed. See 11 U.S.C. § 502; In re O'Connor, 153 F.3d 258, 260-61 (5th Cir. 1998); In re Fid. Holding Co., 837 F.2d 696, 698 (5th Cir.1988). This Court rendered its decision in Gilbreathat least in partto help curb the growing trend of creditors filing seriously deficient proofs of claim in the name of frugality, only amending those claims to include the proper documentation after the debtor lodges an objection and the Court sets the matter for a hearing.
This Court believes that the Supreme Court created Bankruptcy Rule 3001 for a reason[10]so that debtors and other parties in interest can see and read the documents upon which claims are based in order to make an initial assessment of their validity. This Court does not believe that the Supreme Court contemplated that creditors could ignore Bankruptcy Rule 3001's requirements unless and until a debtor complains and then cry "no harm, no foul" by producing documents that should have been produced initially. This latter scenario subverts the fundamental process by which the American legal system is basedthat a claimant must come forward with at least some evidence that its claims are valid before collecting on their claims. Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 21, 120 S. Ct. 1951, 147 L. Ed. 2d 13 (2000) (recognizing that "the burden of proof is an essential element of the claim itself," and that "one who asserts a claim [has] the burden of proof that normally comes with it"). Though efficiency and the speedy resolution of the claims objection process is important to keep bankruptcy cases running smoothly, such efficiency should not come at the expense of accuracy, fairness, and fundamental evidentiary requirements. Every penny that goes to pay a creditor's allowed claim necessarily diminishes the pool of funds available to pay other creditors while, at the same time, reducing the probability that the Chapter 13 debtor will be able to propose, and make payments on, a feasible plan of reorganization. Creditors are provided ample leeway to have their claims presumed validand to shift the evidentiary burden to the debtorif they simply comply with Bankruptcy Rule 3001 the first time they file a proof of claim.
In order to ensure compliance with Bankruptcy Rule 3001 and to give effect to the burden-shifting framework described above, this Courtin accordance with Bankruptcy Rule 9014 and this Court's equitable power under 11 U.S.C. § 105(a)issued a Notice and Order that Bankruptcy Rule 7015 shall apply in all Chapter 13 cases in this Court after a claim objection is filed.[11] Bankruptcy Rule *99 7015 incorporates Federal Rule of Civil Procedure 15, which requires claimants to obtain "the opposing party's written consent or the court's leave" to amend a claim after being served with a responsein this case, a written objection to a proof of claim. Fed.R.Civ.P. 15(a)(2). As this Court pointed out in Gilbreath, "most bankruptcy courts have recognized that `[t]he trend of the cases appear to apply Rule 7015 to contested matters'" (here, the Debtor's Objections initiated a contested matter). In re Gilbreath, 395 B.R. at 366 (quoting In re MK Lombard Group I, Ltd., 301 B.R. 812, 816 (Bankr.E.D.Pa. 2003) and citing In re Stavriotis, 977 F.2d 1202, 1204 (7th Cir.1992) (noting that Bankruptcy Rule 9014 permits extension of Rule 7015 to contested matters); In re Best Refrigerated Express, Inc., 192 B.R. 503, 506 (Bankr.D.Neb.1996) (applying Rule 7015 through Rule 9014 to allow amendment to a filed proof of claim to relate back); Enjet, Inc. v. Mar. Challenge Corp. (In re Enjet, Inc.), 220 B.R. 312, 314 (E.D.La.1998) (noting that "numerous courts have applied Rule 7015 and Rule 15(c) explicitly or by analogy in non-adversary [bankruptcy] proceedings"); In re Brown, 159 B.R. 710, 714 (Bankr.D.N.J. 1993) (noting that Rule 15's "standards for allowing amendments to pleadings in adversary proceedings ... also apply to amendments to a proof of claim"); In re Blue Diamond Coal Co., 147 B.R. 720, 725 (Bankr.E.D.Tenn.1992) (extending Rule 9014 to apply Rule 7015 to contested matters); In re Enron Corp., 298 B.R. 513, 521-22 (Bankr.S.D.N.Y.2003) (invoking Rule 9014 to apply Rule 7015); 10 Collier on Bankruptcy ¶ 7015.02 n. 1 (Matthew Bender 15th ed. Rev.)).
Having described the applicable legal standard for ruling on claim objections and amendments to contested proofs of claim, the Court will now apply these standards to the dispute at bar.
Based on the standard articulated above, LVNV's original proofs of claim fall far short of compliance with Bankruptcy Rule 3001. LVNV's four original proofs of claim are nothing more than bare allegations that the Debtor owes LVNV money based on some "MASTERCARD" or "UNSECURED CHARGE OFF" with respect to certain accounts purchased from "Citibank" or "GOODYEAR." [Findings of Fact No. 4-7.] It was incumbent on LVNV to produce documentation supporting its claim andbecause it is not the original account holderto document ownership of its claims. See In re Armstrong, 320 B.R. at 106. The allegations in LVNV's original proofs of claim do not come within hailing distance of accomplishing either. LVNV's original proofs of claim are therefore not entitled to prima facie validity and, unless this Court grants the Motion for Leave and the documents attached to LVNV's amended proofs of claim are sufficient to clothe LVNV's claims with a presumption of validity, the Debtor's Objection is sufficient to shift the burden back to LVNV to prove the validity of its claims by a preponderance of the evidence.
Thus, before this Court addresses the validity of LVNV's claims, it must first *100 address the threshold question of whether the Motion for Leave should be granted.
C. LVNV's Motion to Amend
Because LVNVtwelve days after the bar datehas attempted to amend its proofs of claim after the Debtor lodged the Objection, [Finding of Fact No. 10], LVNV was required, pursuant to the Notice and Order, to obtain this Court's leave or the Debtor's written consent before amending its proofs of claim. Fed. R.Civ.P. 15(a)(2). Rule 15(a)(2)as applicable to this contested matter through Bankruptcy Rule 7015 and the Notice and Orderprovides that the Court should freely give leave to amend where justice so requires. Fed.R.Civ.P. 15(b)(1); Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct. 227, 9 L. Ed. 2d 222 (1962); Torch Liquidating Trust v. Stockstill, 561 F.3d 377, 390 (5th Cir.2009). In order to determine whether "justice so requires," a court may consider a variety of factors, such as (1) undue delay, (2) bad faith or dilatory motive on the part of the movant, (3) repeated failure to cure deficiencies by amendments previously allowed, (4) undue prejudice to the opposing party by virtue of allowance of the amendment, and (5) futility of the amendment. Foman, 371 U.S. at 182, 83 S. Ct. 227; Torch Liquidating Trust, 561 F.3d at 391. The Fifth Circuit has held that decisions concerning motions to amend are entrusted to the sound discretion of the trial court. See Quintanilla v. Tex. Television, Inc., 139 F.3d 494, 499 (5th Cir.1998).
This Court may deny LVNV's request for leave to amend if it finds that any one of these factors is present. Jacobsen v. Osborne, 133 F.3d 315, 320 (5th Cir.1998) (considering only the "futility" factor when a different factor was considered by the district court). The Court will address each equitable factor in turn.
1. Undue Delay
The controlling question for this factor is whether the delay in filing the amendment amounts to undue delay. Black's Law Dictionary Defines "undue" as "excessive or unwarranted." Black's Law Dictionary 1529 (7th ed.1999). Thus, delay amounts to "undue delay" where a party has waited an unreasonably long period of time to amend, or where the delay in filing the amendment is unwarranted. See, e.g., Chitimacha Tribe of La. v. Harry L. Laws Co., 690 F.2d 1157, 1164 (5th Cir.1982) (affirming district court's determination that request for leave to amend should be denied when the; party seeking to amend had access to the information beforehand and the information had not "only recently come to light"). The Fifth Circuit has held that "in exercising its discretion to deny leave to amend a complaint, a trial court may properly consider (1) an `unexplained delay' following an original complaint, and (2) whether the facts underlying the amended complaint were known to the party when the original complaint was filed." Southmark Corp. v. Schulte Roth & Zabel (In re Southmark Corp.), 88 F.3d 311, 316 (5th Cir.1996) (quoting Daves v. Payless Cashways, Inc., 661 F.2d 1022, 1025 (5th Cir.1981)).
Following its decision in Southmark, the Fifth Circuit has addressed the issue of undue delay in three opinions with facts comparable to the case at bar. In Parish v. Frazier, the Fifth Circuit affirmed the district court's conclusion that the plaintiffs delay in filing an amended complaint constituted "undue delay" where the delay "could have been avoided by due diligence, as plaintiff could have raised the additional claims in her [original] complaint or at least sought to amend at an earlier time." 195 F.3d 761, 763 (5th Cir.1999). The Fifth Circuit determined that, under such circumstances, the party seeking to amend *101 "bears the burden of showing that delay was due to oversight;, inadvertence or excusable neglect." Id. Because the plaintiff in Parish made no such showing, the district court's refusal to grant leave to amend was upheld. The Fifth Circuit came to a similar conclusion in Smith v. EMC Corp., where it upheld the district court's refusal to grant a plaintiff leave to amend where the plaintiff could have included the claim added to the amended complaint in the original complaint, but chose not to do so as part of "his own litigation strategy." 393 F.3d 590, 596 (5th Cir.2004). Because the plaintiff could have included the amended claim, his delay in filing his amended complaint constituted undue delay. Id. at 595-96. Finally, in Jones v. Robinson Property Group, L.P., the Fifth Circuit affirmed the district court's denial of the plaintiffs motion for leave to amend where the evidence giving rise to the newly asserted claim was available "long before" he amended his complaint to include that claim. 427 F.3d 987, 995 (5th Cir.2005). The court in Jones also reiterated its prior determination that the party seeking leave to amend "bears the burden of showing that [the] delay was due to oversight, inadvertence, or excusable neglect," Id. at 994-95.
Because LVNV attempted to amend its proofs of claim twelve days after the bar date, [Finding of Fact No. 10], there is no question that it bears the burden of providing some tenable excuse for failing to timely amend. Here, LVNV filed its Motion for Leave nearly a month after the Debtor objected to its proofs of claim and only after it had already filed its amendments. [Findings of Fact No. 5 & 6.] LVNV cannot reasonably argue that these documents were unavailable until after the bar date because the very same documents were attached to LVNV's Response, which was filed ten days before the bar date. [Findings of Fact No. 2 & 9.] It is also noteworthy that LVNV was able to obtain supporting documents and attach them to its Response a mere five days after the Debtor filed his Objections. [Findings of Fact No. 8 & 9.] It appears that these documentsall of which should have been attached to LVNV's original proofs of claimwere only a phone call away. Why that phone call was not made at the time LVNV filed its original proofs of claim, or even some reasonable time thereafter, this Court will not venture to guess. It is enough to conclude that LVNV had access toor could have easily acquiredthe documents attached to its amended proofs of claim long before it filed its untimely amendments to its proofs of claim on May 5, 2009, but, for some undisclosed reason, failed to do so. Indeed, LVNV called no witnesses at the May 21, 2009 hearing to explain the delay in obtaining the documents that it eventually attached to its amended proof of claim. Additionally, LVNV's counsel of record, Stromberg, offered no explanation for why these documents were not initially attached.
As discussed above, the Fifth Circuit has upheld a trial court's denial of a motion for leave to amend where counsel's failure to include additional claimsor, in this case, documentsoriginally was due, in part, to "his own litigation strategy." Smith v. EMC Corp., 393 F.3d 590, 596 (5th Cir. 2004). As LVNV's counsel of record, Stromberg's "litigation strategy" apparently involves disregarding applicable precedent and rulings against his clients in prior cases. This Court has already discussed Stromberg's failure to comply with Bankruptcy Rule 3001 despite this Court's ruling against LVNV in Gilbreath and despite this Court's Notice and Order. However, Stromberg's failures go much further back and beyond this District.
In August of 2006, following the joint opinion of three Bankruptcy Judges for the Northern District of Texas in In re *102 Armstrong, 320 B.R. 97 (2005), Bankruptcy Judge Harlin Hale, one of the co-authors of the joint opinion, issued a second published opinion specifically applicable to eCastfor whom Stromberg was counsel of record. In re Armstrong, 347 B.R. 581 (Bankr.N.D.Tex.2006). In that opinion, Judge Hale disallowed one of eCast's claims because eCast had failed to provide supporting documentation sufficient to establish prima facie validity or to overcome the debtor's claim objection.[12]Id. at 585. Judge Hale's comments with respect to Stromberg are particularly noteworthy:
There was no evidence of an "evidentiary link" between Lowe's and GE Capital Finance offered by eCast, other than Mr. Stromberg's say so at the hearing, which is argument and not evidence. This would not normally end the inquiry, because lack of prima facie validity in the face of a valid objection by the Debtor simply shifts the burden to eCast to prove its right to payment from the Debtor. However, since eCast offered no further evidence at the hearing, the Court finds that eCast has not met its burden of proof; and the Debtor's objection to claim number twelve will therefore be sustained.
Id. (internal citations omitted).
Even though Stromberg's "say so" was insufficient to support his client's evidentiary *103 burden in Armstrong, he nonetheless offered it to this Court at the May 21, 2009 hearing to support his contention that LVNV is the current owner and holder of the Debtor's accounts. Indeed, Stromberg's "say so" was also all that he offered in support of his client's position that valid and enforceable agreements exist between the original claim holders and the Debtor, and that the rights of those original claim holders have been assigned to his client. Notwithstanding rulings issued against his clients in both Armstrong and Gilbreath, Stromberg continues to believe that his word will be taken as gospel truth and that oral argument is as good as evidence. Unfortunately for Stromberg, he is as mistaken in this belief today as he was three years ago in Armstrong and last year in Gilbreath.
It is equally noteworthy that in the case at bar Stromberg had two opportunities to explain why LVNV could not obtain the documentation required to be attached to its proofs of claim, but he failed to avail himself of either. First, Form 10 specifically provides that if the documentation supporting the claim is unavailable, "please explain." Despite these instructions, Stromberg provided no explanation for why LVNV did not attach the requisite documentation to LVNV's original proofs of claim. Second, at the May 21, 2009 hearing, this Court gave Stromberg an opportunity to explain why the documents attached to LVNV's untimely amended proofs of claim were initially unavailable, but Stromberg failed to provide any proper explanationsuch as adducing testimony from Joyce Montjoy, the Bankruptcy Recovery Manager for Resurgent Capital Services, who prepared and signed all of LVNV's proofs of claim. See supra note 4.
Therefore, because LVNVthrough Stromberg, its counsel of recordfailed to adduce testimony at the May 21, 2009 hearing to explain the reason for the delay in filing its amended proofs of claim, and because the information provided in its amended proofs of claim was available when the original proofs of claim were filed, or, at the very least, ten days before the bar date (when LVNV filed its Response along with supporting documentation), this Court will not grant the Motion for Leave. See Southmark Corp., 88 F.3d at 316; see also Pam Capital Funding LP v. National Gypsum Co. (In re Kevco Inc.), 113 Fed.Appx. 29, 31 (5th Cir.2004) ("The district court does not abuse its discretion by denying a motion to amend where the plaintiff unduly delays in seeking an amendment and offers no explanation for the delay.") The "undue delay" factor weighs strongly against permitting LVNV to amend its original proofs of claim.
2. Bad Faith or Dilatory Motive
The Fifth Circuit recently defined "bad faith" as "a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive and implies the conscious doing of a wrong because of dishonest purpose or moral obliquity." Burnsed Oil Co. v. Grynberg, 320 Fed. Appx. 222, 230 (5th Cir.2009) (quoting Mississippi law and Black's Law Dictionary). Additionally, the Supreme: Court of Texas has defined "bad faith" as a "wilful disregard of and refusal to learn the facts when available and at hand." Citizens Bridge Co. v. Guerra, 152 Tex. 361, 258 S.W.2d 64, 69-70 (1953). Thus, this Court should refuse to allow the untimely amendments to LVNV's proofs of claim if LVNV's initial failure to comply with Bankruptcy Rule 3001 by attaching required documents was not prompted by an honest mistake, but was instead due to a willful disregard of available facts or applicable law.
*104 LVNV cannot claim that its initial failure to comply with Bankruptcy Rule 3001 was an honest mistake. LVNV through Stromberg, its counsel of record certainly knows that a credit card claimant is required to attach supporting documents to its proof of claim and that this Court requires claimants to obtain leave of Court or consent of the Debtor before amending contested proofs of claim. Stromberg participated at the claim objection hearing in Gilbreath and witnessed first hand the potential consequences of failing to comply with Bankruptcy Rule 3001. Indeed, this Court issued written findings of fact and conclusions; of law disallowing LVNV's claims in Gilbreath. See Exhibit A. Further, Stromberg was counsel of record for one of the claimants in the Armstrong case, where three Bankruptcy Judges for the Northern District of Texas issued a joint opinion spelling out the specific requirements of Bankruptcy Rule 3001. See In re Armstrong, 320 B.R. 97, 103-07 (Bankr.N.D.Tex.2005) (listing the various types of documents that claimants can attach to their proof of claim to comply with Bankruptcy Rule 3001).
Stromberg's attempt to plead ignorance of this Court's Notice and Order and applicable law falls on this Court's deaf ears. The applicable law of which Stromberg claims not to have been aware until after filing LVNV's original proofs of claim was, in fact, issued with respect to Stromberg's client as early as 2005, in Armstrong, and as recently as November of 2008, when this Court ruled against LVNV in the Gilbreath case. Further, Stromberg's failure to provide evidence of his client's ownership of its claims is conspicuously noted in Judge Hale's follow-up opinion to Armstrong relating to eCast's proofs of claim. In re Armstrong, 347 B.R. at 585.
Stromberg has offered no explanation for LVNV's initial failure to complyor to make even a minimal attempt to comply with Bankruptcy Rule 3001; nor could he, given his extensive involvement in cases where both LVNV and his other clients had claims disallowed for failing to produce; sufficient documentation and evidence in support of their claims. Indeed, Stromberg stated at the May 21, 2009 hearing that "we get the documents as quickly as we can when we're aware of an objection." Thus, by Stromberg's own admission, LVNV made no attempt to comply with Bankruptcy Rule 3001 when filing its original proofs of claim and only deigned to comply with Bankruptcy Rule 3001 after being called out for having violated it. Stromberg's self-professed ignorance of applicable law and this Court's Notice and Order can only be described as "willful ignorance," which constitutes bad faith. Citizens Bridge Co., 258 S.W.2d at 69-70.
LVNV's utter disregard for Bankruptcy Rule 3001's requirements when filing its original proofs of claim amounts to bad faith. This Court will not now permit LVNV to amend its deficient claims alter the bar date with documents that it either had, or could have easily obtained, in a timely manner. Thus, the "bad faith or dilatory motive" factor also weighs strongly against permitting LVNV to amend its original proofs of claim.
3. Repeated Failure to Cure Deficiencies
Generally, this factor considers whether a claimant has been given ample opportunity to amend its complaint to cure deficiencies, but has repeatedly failed to cure such deficiencies. Torch Liquidating Trust, 561 F.3d at 391; St. Germain v. Howard, 556 F.3d 261, 264 (5th Cir.2009) (upholding a district court's denial of a motion for leave after several opportunities to state a case); Herrmann Holdings *105 Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 566 (5th Cir.2002) (affirming a denial of a motion for leave after an initial complaint and two amendments); Price v. Pinnacle Brands, Inc., 138 F.3d 602, 607-08 (5th Cir.1998) (affirming denial of a motion for leave after the party had three chances to state a claim). Although courts have typically considered "repeated failure to cure deficiencies" with respect to multiple amendments filed by a party in the context of a particular case, this Court believes that a party's repeated failure to heed a court's prior rulings against it in other proceedings may properly be considered when determining whether to grant that party leave to amend after the deadline has expired. However, even if the "repeated failure" inquiry is limited to the particular proceeding at bar, LVNV's amended proofs of claim still fail to comply with Bankruptcy Rule 3001, see infra Part III.C.5, and are insufficient to carry LVNV's burden to prove the underlying validity of its claims by a preponderance of the evidence. See infra Part III.D.
As stated below, even if this Court granted LVNV leave to amend its deficient proofs of claim, its amended proofs of claim still fail to comply with Bankruptcy Rule 3001. See infra Part III.C.5. Thus, LVNV's amendments fail to cure the deficiencies in its original proofs of claim.
This Court also believes that the repeated failure of LVNVand its counsel of record, Strombergto comply with Bankruptcy Rule 3001 in cases before this Court and the Bankruptcy Court for the Northern District of Texas militate against granting LVNV leave to amend its proofs of claim in the present case. As discussed above, LVNV's total failure to comply with Bankruptcy Rule 3001 in Gilbreath ultimately resulted in disallowance of its claims in that case. See Exhibit A. Additionally, the failure of Stromberg's client to attach documentation to establish that it was the current owner and holder of the debtor's accounts caused its claims to be disallowed in Armstrong. In re Armstrong, 347 B.R. at 585.
Because LVNV's amended proofs of claim do not comply with Bankruptcy Rule 3001 and are insufficient to carry LVNV's burden of proof at this stage of the proceeding, and because LVNV and its counsel of record, Stromberg, have repeatedly failed to comply with Bankruptcy Rule 3001 despite this Court's ruling against LVNV in Gilbreath, despite Judge Hale's ruling against Stromberg's client in Armstrong, and despite this Court's Notice and Order that is displayed in bold, capital letters on this Court's website, this Court will not grant LVNV leave to amend its deficient proofs of claim in this case. Thus, the "repeated failure to cure deficiencies" factor also weighs against granting LVNV leave to amend.
4. Undue Prejudice
Counsel for LVNV, Stromberg, argued at the May 21, 2009 hearing that LVNV's untimely filing of its amended proofs of claim does not prejudice the Debtor in any way. Specifically, Stromberg argued that "we're in the same spot that we would have been" if LVNV had attached supporting documentation to its original proofs of claim. This Court strongly disagrees. Not only have LVNV's actions prejudiced the Debtor by causing him to incur attorney's fees needlessly; they have wasted the time of both this Court and the Debtortime which, at least for the Debtor, could have been better spent planning and drafting his Chapter 13 plan of reorganization and moving his bankruptcy case forward.
At the May 21, 2009 hearing, the Debtor argued that LVNV had access to the documentation attached to the amended proofs *106 of claim at the time of the original filing, or soon after, and assuredly before the deadline for filing a proof of claim. The Debtor further asserted that he has incurred substantial attorney's fees and costs in attempting to discover information that LVNV was required to produce along with its original proofs of claim.
In a normal lawsuit, the court inquires whether all owing an amended complaint would cause undue prejudice by requiring the opposing party to respond to unexpected theories of recovery based on different facts than those originally pled. See Chitimacha Tribe of La., 690 F.2d at 1164. In a bankruptcy case, the question of undue prejudice with respect to allowing untimely amendments to proofs of claim should also take into account whether the Debtor was forced to incur unnecessary expenses due to a creditor's initial failure to comply with Bankruptcy Rule 3001. Indeed, the very purpose of Bankruptcy Rule 3001 is to avoid such unnecessary expenses. See In re Armstrong, 320 B.R. at 104 ("The rules rightfully require creditors to attach minimal supporting documentation for their claims so that a debtor can evaluate their validity without discovery or extraordinary expense.").
While LVNV's amended proofs of claim do not allege some alternative and unexpected basis for recovery, LVNV's failure to initially include the documents that it attached to its amended proofs of claim has cost the Debtor $750.00 and has resulted in unnecessary hearings at which the Debtor was forced to incur additional fees and expenses for having his counsel appear. The Court concludes that forcing the Debtor to incur fees and expenses asking for documentation that LVNV was required to produce at the outset constitutes undue; prejudice to the Debtor. LVNV's initial failure to comply with Bankruptcy Rule 3001 not only harms the Debtor and reduces the probability that he will be able to propose and maintain payments on a feasible plan of reorganization; it also inures to the detriment of every other unsecured creditor. Every penny the Debtor expends to pay his attorney's priority claim for fees necessarily reduces the amount available to pay general unsecured creditors. "[T]he fact is that debtors in chapter 13 frequently live so close to the line that every penny counts: Every penny that they keep, and every penny that they put toward their plan." See In re Fauntleroy, 311 B.R. 730, 739 (Bankr. E.D.N.C.2004); see also In re T-H New Orleans Ltd. P'ship, 116 F.3d 790, 802 (5th Cir.1997) (noting that the dual aims of bankruptcy are payment of claims and a debtor's ability to obtain a fresh start).
LVNV's practice of ignoring the requirements of Bankruptcy Rule 3001 by failing to produce documentation to support its claims unless and until it becomes "aware of an objection" causes undue prejudice to the Debtor, all unsecured creditors, and, indeed, the entire bankruptcy system, by requiring unnecessary hearings.[13] LVNV *107 and Stromberg's disregard for Bankruptcy Rule 3001, which made the late-filed amendments necessary, caused the Debtor to incur unnecessary attorney's fees and depleted the limited pool of funds available for the Debtor to reorganize and pay other creditors. "Lawyers of experience who practice what we boast to be a learned profession owe a duty both to their clients and to the court, and, perhaps, even to other members of their profession who appear as opposing counsel, to prepare cases properly, to give the issues full consideration before preparing pleadings, and, in general, to exercise diligence in the practice of their profession." Lamar v. Am. Fin. Sys. of Fulton County, Inc., 577 F.2d 953 (5th Cir.1978).
Stromberg's failure to heed this Court's ruling against LVNV in Gilbreath, this Court's Notice and Order, and applicable case law from the Northern District which arose from cases in which he: was an actual participant, have caused the Debtor to incur considerable costs in objecting to LVNV's woefully deficient proofs of claim and prosecuting those objections at an evidentiary hearing for which Stromberg was unprepared. Therefore, the "undue prejudice" factor also weighs against granting LVNV's motion for leave to amend.
5. Futility of the Amendment
A court may deny a party's motion for leave to amend if such an amendment would be futile. Goldstein v. MCI WorldCom, 340 F.3d 238, 254-55 (5th Cir. 2003); see also Callegari v. Thomas, No. H-06-2843, 2006 WL 3448630, at *8 (S.D.Tex. Nov.28, 2006) (denying plaintiffs first motion for leave to amend where the plaintiff had not alleged "any additional facts not initially pleaded that could, if necessary, cure the pleading defects"). In Goldstein, the court noted that the plaintiffs' awareness of the defendants' objection, coupled with the fact that the plaintiffs had not alleged additional facts that would cure the original pleading's defects, supported the district court's decision to deny leave to amend. Goldstein, 340 F.3d at 254-55. Additionally, the Fifth Circuit noted "that the law firm representing the plaintiffs has apparently been previously warned by at least one circuit court against this kind of `wait and see' approach to requesting leave to amend." Id. at 255 n. 6. The Fifth Circuit also echoed the Sixth Circuit's frustration about the "cat and mouse" gamesmanship of class action plaintiffs who file defective pleadings and do not move to amend until an objection is raised. Id. at 255 n. 6 (citing Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir. 2002)).
This Court shares the frustration expressed by the Fifth and Sixth Circuits. This Court believes that LVNVlike the plaintiffs in Goldsteinfiled its deficient original proofs of claim without any intention of amending to include the documentation required by Bankruptcy Rule 3001 unless the Debtor lodged an objection. Indeed, LVNV's counsel of record, Stromberg, conceded at the May 21, 2009 hearing that his client and he make no attempt to obtain the documentation required to be attached to proofs of claim under Bankruptcy Rule 3001 until "we're aware of an objection." [Finding of Fact No. 16.] Thus, by Stromberg's own admission, his client and he make a regular practice of engaging of the sort of "wait and see" approach and gamesmanship denounced by the fifth Circuit in Goldstein.
*108 Additionally, as in Goldstein, LVNV's amended proofs of claim are futile. First, as this Court expressed at the May 21, 2009 hearing, the documents attached to LVNV's amended proofs of claim are insufficient to clothe LVNV's claims with prima facie validity. The first assignment documents attached to LVNV's amended proofs of claimall of which are virtually identicalmerely convey that "subject to the terms and conditions of the Purchase and Sale Agreement," Sherman Originator LLC purchased certain "Accounts described in Section 1.2 of the Agreement" from Citibank. [Findings of Fact No. 11-14.] The second assignment documents attached to LVNV's amended proofs of claimall of which, again, are virtually identicalpurport to transfer "in accordance with the provisions of the Sale Agreement," certain "Receivable Assets (as defined in the Agreement) identified on the Receivable File" between Sherman Originator LLC and LVNV. [Findings of Fact No. 11-14.] Additionally, although LVNV saw fit to submit a smattering of invoices indicating that certain accounts in the Debtor's name were charged for various amounts in 2005 and 2006, none of these invoices reflect the amounts claimed by LVNV in its amended proofs of claim.
Based on these documents, LVNV urges this Court, the Debtor, and, indeed, every other unsecured creditor or party-in-interest to presume (a) that the Debtor's accounts were among the bundle of accounts (twice) transferred, (b) that the accounts in question are based on valid and enforceable contracts between the Debtor and the original account holder, and (c) that the amounts claimed by LVNV in its amended proofs of claim 12 through 15 are the correct amounts owed by the Debtor despite the fact that none of the invoices provided by LVNV reflect an account balance in those amounts. This Court will not make any of these presumptions. In order to comply with Bankruptcy Rule 3001 and avail its claims of prima facie validity, it was incumbent on LVNV to provide "an account statement containing the debtor's name, account number, the prepetition account balance, interest rate, and a breakdown of the interest charges, finance charges and other fees that make up the balance of the debt, or attach enough monthly statements so that this information can be easily determined." In re Armstrong, 320 B.R. at 106. Additionally, because LVNV purports to be the second assignee of the Debtor's accounts, it was required to "document its ownership of the claim" and produce "a signed copy of the assignment and sufficient information to identify the original credit card account." Id. (quoting In re Hughes, 313 B.R. 205, 212 (Bankr.E.D.Mich.2004)).
Because LVNV's amended proofs of claim fail to satisfy the requirements of Bankruptcy Rule 3001, its late attempt to amend its proofs of claim is futile. Therefore, the "futility" factor also weighs against granting LVNV's motion for leave to amend its proofs of claim.
In sum, all five factors that may properly form the basis for a trial court's decision to deny a party leave to amend pursuant to Rule 15 are present in this case. Notably, only one of these factors would have provided sufficient grounds for this Court to refuse to grant LVNV's Motion for Leave. Thus, this Court concludes that the Motion for Leave should be denied. The consequence of this ruling is that LVNV's claims are not prima facie valid, and that LVNV bears the burden of proving the validity of its claims by a preponderance of the evidence under Texas law. In order to meet this burden, LVNV must rely on its original proofs of claim and any evidence adduced at the May 21, 2009 hearing.
*109 D. Validity of LVNV's Claims 12 Through 15
While the question of whether LVNV's claims are allowable in bankruptcy "is a matter of federal law and the bankruptcy court's exercise of equitable powers," the underlying validity of LVNV's claims is based on Texas contract law. See First City Beaumont v. Durkay (In re Ford), 967 F.2d 1047, 1050 (5th Cir.1992). Thereforebecause the Debtor's Objections shifted the burden to LVNV to prove the underlying validity of its claims by a preponderance of the evidenceLVNV now has the burden of proving the validity of its claims under Texas law, which requires proof that: (1) enforceable credit card agreements exist between the Debtor and the original account holders; and (2) LVNV is the current owner and holder of any rights under such agreements.
For a contract to be enforceable under Texas law, a creditor must produce evidence of the contract under which a debtor is allegedly liable. See Preston State Bank v. Jordan, 692 S.W.2d 740, 744 (Tex.App.-Fort Worth 1985, no writ). In order to prove the existence of an enforceable credit card agreement, the claimant must produce the agreement or prove up the agreement's material terms. See, e.g., McElroy v. Unifund CCR Partners, No. 14-07-00661-CV, 2008 WL 4355276, at *9-10 (Tex App.-Houston [14th Dist.] Aug. 26, 2008, no pet.) (determining that evidence of the debtor's signature card along with thirteen monthly account statements were insufficient to prove the existence of a contract without admitting the cardholder agreement or some other document describing its terms); Williams v. Unifund CCR Partners, 264 S.W.3d 231, 236 (Tex.App.-Houston [1st Dist.] 2008, no pet.) (determining that the claimant did not adduce sufficient evidence to establish the existence of a valid and enforceable credit card agreement as a matter of law because the claimant "did not produce the actual agreement or any other document that established the agreed terms, including the applicable interest rate or the method for determining the applicability and amount of finance charges"); Preston State Bank, 692 S.W.2d at 743-44 (holding that appellant/claimant failed to prove the existence of a valid and enforceable credit card agreement where "appellant failed to produce any evidence of a contract agreement under which appellee was allegedly liable to it"). Texas law also requires an alleged assignee of a contract to come forward with evidence of the assignment. See Skipper v. Chase Manhattan Bank USA, N.A., No. XX-XX-XXX CV, 2006 WL 668581, at *1 (Tex.App.-Beaumont, 2006, no. pet.) (citing cases).
At the May 21, 2009 hearing, LVNV admitted exhibits in support of its proof of claim. [Finding of Fact No. 16.] Those exhibits consist entirely of the documents attached to LVNV's amended proofs of claim. The Court specifically notes that LVNV did not offer into evidence the documents attached to its Response, which consist of selected pages from the Debtor's Schedule F, the two assignment documents in support of each claim that were attached to LVNV's amended proofs of claim, and four documents that appear to be computerized spreadsheet printouts containing a list of account numbers, including those accounts which LVNV contends it presently owns and which form the basis for LVNV's claims. As the Bankruptcy Court for the Northern District of Indiana very recently explained,
Documents attached to legal briefs, or documents which are merely filed on the court's docket record, do not constitute evidence concerning a matter before *110 the court unless those documents are specifically made a part of an evidentiary record applicable to a particular proceeding. This is true regardless of the independent admissibility of those documents as established by the submission by which those documents were sought to be placed before the court. Apart from failure to make a record by appropriate means, documents which lack a foundation for admissibility add nothing to the mix.
In re Watson, 402 B.R. 294, 297 (Bankr. N.D.Ind. March 11, 2009); see also In re Reyna, No. 08-10049-CAG, 2008 WL 2961973, at *6 (Bankr.W.D.Tex. July 28, 2008) ("Roundup Funding presented no evidence to support its claim. Its information was submitted in the form of a response with attached exhibits, all in the nature of argument, and not by affidavit or by witness testimony."). Accordingly, because the documents attached to LVNV's Response are not evidence, this Court may not consider them.
As discussed above, supra Part III.C.5, the documents attached to LVNV's amended proofs of claim are insufficient to meet even the minimal requirements set forth in Bankruptcy Rule 3001. If these documents are insufficient to notify Debtors of the basis for the claims and to document that LVNV is the current owner and holder of the claims asserted, they cannot possibly satisfy LVNV's steeper evidentiary burden of proving the validity of its claims by a preponderance of the evidence. As discussed above, the documents submitted by LVNV only reflect that Citibank sold Sherman Originator LLC a bundle of accounts described in some "Purchase and Sale Agreement," which LVNV has not produced, and that Sherman Originator LLC turned around and sold LVNV a number of "Receivable Assets" identified on some "Receivable File," which has also not been produced. [Findings of Fact No. 11-14, & 16.] Additionally, none of the invoices submitted by LVNV in support of its claims reflect that the Debtor owes the amounts asserted by LVNV in Claims 12 through 15. Based on these documents, the Court cannot determine: (a) whether the Debtor owes the amounts sought by LVNV; (b) whether LVNV is, in fact, the current owner and holder of the accounts in question; or (c) whether those credit card accounts are based on valid and enforceable agreements, as required by Texas law.
LVNV has wholly failed to prove that valid and enforceable credit card agreements existed between the Debtor and the original account holdersor to prove the material terms of any such agreements and has also failed to prove that LVNV is the current owner and holder of the Debtor's accounts. Thus, LVNV, once again, has fallen woefully short of meeting its burden of proving the validity of its claims by a preponderance of the evidence. Because it has failed to do so, this Court concludes that the Debtor's Objections should be sustained and that LVNV's claims should be disallowed.
IV. CONCLUSION
This Court previously used the term "willful ignorance" to describe the position taken by LVNV and its counsel of record, Stromberg, in this case, but this term is a generous assessment of this attorney and his client's outlook with respect to filing proofs of claim. A more apt description of Stromberg and LVNV's actions in this case is "deliberate malfeasance." Stromberg's former client was a party in the watershed Armstrong case, which dealt exclusively with the filing requirements for proofs of claim, and which was issued by three esteemed Bankruptcy Judges for the Northern District of Texas in 2005. Even more noteworthy is the fact that Stromberg's *111 client in that case. eCast, had one of its claims disallowed for the very same reason that LVNV's claims were disallowed in the Gilbreath opinion issued by this Court in November of 2008. Despite his extensive and direct involvement with issues relating to Bankruptcy Rule 3001 as early as 2005 and as recently as November of last year, Stromberg represented to this Court at the May 21, 2009 hearing that his client and he make no attempt to comply with Bankruptcy Rule 3001 unless and until an objection is filed. Thus, it appears that Stromberg and his client have a standing policy which involves willfully violating Bankruptcy Rule 3001 because it is cost-effective to do so.
This practice, which has been adopted by Stromberg and LVNV despite their undeniable awareness of applicable law, cannot be allowed to continue. It is clear to this Court that Stromberg and LVNV are content to rest on their grossly deficient proofs of claim in the hope that debtors will overlook their violation of Bankruptcy Rule 3001. Apparently, this approach has proven cost effective thus far. However, because the Debtor in this case caught onto LVNV's ruse and because this Court has already taken LVNV to task for a substantially similar failure in a prior case, LVNV will not only suffer disallowance of its claims, but Stromberg, as an officer of this Court, will be made to answer for his flagrant disregard for Bankruptcy Rule 3001, this Court's Notice and Order, and applicable law.
For the reasons set forth above, this Court concludes that the Debtor's Objection should be sustained, LVNV's Motion for Leave should be denied, and LVNV's Claim Numbers 12, 13, 14, and 15 should be disallowed. Additionally, Stromberg will be required to appear and show cause why he should not be sanctioned for repeatedly violating Bankruptcy Rule 3001, for failing to comply with this Court's procedures, as conspicuously set forth on this Court's website, and for willfully disregarding applicable case law in which he, himself, represented a party who had its claims disallowed for failing to produce sufficient supporting documentation. An order consistent with this Memorandum Opinion will be entered on the docket simultaneously with the entry of this Opinion.
EXHIBIT A
United States Bankruptcy Court,
S.D. Texas,
Houston Division.
In re Charles D. GILBREATH and
Kristin B. Gilbreath, Debtors.
No. 08-32404-H4-13.
June 26, 2009.
Michael Glen Walker, Walker Patterson PC, Houston, TX, for Debtors.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DEBTORS' OBJECTION TO CLAIM NUMBER 11, 12, 13, 14, AND 18 OF LVNV FUNDING LLC
[Docket Nos. 48-52]
JEFF BOHM, Bankruptcy Judge.
I. Findings of Fact
1. LVNV Funding LLC (LVNV) filed original proofs of claim 11, 12, 13, 14, and 18 in the Debtors' case on May 22, 2008.
2. Each proof of claim contains the last four digits of an account number and the amount due on that account and lists the creditor's name as "LVNV Funding LLC its successors and assigns as assignee of Citibank." LVNV's proofs of claim are signed by Joyce Montjoy, Bankruptcy Recovery *112 Manager of Resurgent Capital Services. All of LVNV's proofs of claim are for "unsecured charge off' from various credit card accounts held by the Debtors. Attached to LVNV's original proofs of claim are the following documents:
a. A document attached to proofs of claim 11, 12, 13, 14, and 18 prepared by Resurgent Capital Services containing the last four digits of an account number, the amount due as of the date the bankruptcy case was filed, and a "borrower information" section listing one or the other Debtors as the account holders. This document also explains that Resurgent Capital Services is a company that services accounts on behalf of LVNV.
b. A document attached to proof of claim 11 signed by a representative of Citibank, entitled "Bill of Sale and Assignment of Accounts," which contains the following language:
Citibank (South Dakota), N.A. (successor to Citibank USA, N.A.) ("Seller"), for value received, to the extent permitted by applicable law, and subject to the terms of that certain Purchase and Sale Agreement entered into as of July 11, 2003 (the "Agreement"), by and between Sears, Roebuck and Co., Sears National Bank, SRFG, Inc., SMTB, Inc., SVFT, Inc., SLRR, Inc. and Sears Financial Holding Corporation (collectively, "Originator") and Sherman Originator LLC ("Buyer"), then subsequently assumed by Seller pursuant to that letter dated October 30, 2003, transfers, sells, assigns, conveys, grants and delivers to Buyer, who simultaneously transfers, sells, assigns, conveys, grants and delivers to LVNV Funding LLC ("Subsequent Buyer") all rights, title and interest in and to the Chapter 13 Accounts which are described on the Disk furnished by Seller to Buyer in connection herewith; (ii) all payments on the proceeds of such accounts (each, an "Account") after the close of business on may 15, 2008, and (iii) all claims arising out of or relating to each Account.
c. A document attached to proofs of claim 12, 13, 14, and 18 entitled "Assignment and Assumption Agreement," which contains the following language:
THIS BILL OF SALE, ASSIGNMENT AND ASSUMPTION AGREEMENT is dated as of May 15, 2008, between Citibank (South Dakota), National Association ... (the "Bank") and Sherman Originator LLC ... ("Buyer").
For value received and subject to the terms and conditions of the Purchase and Sale Agreement ... between Buyer and the Bank (the "Agreement"), the Bank does hereby transfer, sell, assign, convey, grant, bargain, set over and deliver to Buyer, who simultaneously transfers, sells, assigns, conveys, grants, bargains, sets over and delivers to LVNV Funding LLC ("Subsequent Buyer"), and to Subsequent Buyer's, (sic) successors and/or assigns, the Accounts described in Section 1.2 of the Agreement.
3. The Debtors filed objections to LVNV's original proofs of claim 11, 12, 13, 14, and 18 on July 18, 2008. The Debtors' objections to LVNV's proofs of claim complained that LVNV did not attach documentation sufficient to support its claims and that the proofs of claim failed to meet the requirements of Fed. R. Bankr.P. 3001.
*113 4. The Court held a brief hearing on July 21, 2008, and informed the parties that they should return on August 18, 2008 for a trial on the merits.
5. On August 5, 2008, LVNV electronically filed additional documentation in support of its proofs of claim 11, 12, 13, 14, and 18. These filings contain the following documents in addition to those included in LVNV's original proofs of claim:
a. Affidavits signed by LVNV's personal representative certifying the following with respect to claims 11, 12, 13, 14, and 18:
Based on business records maintained on [the Debtor's Account], the Account is the result of an extension of credit or service to Charles Gilbreath by [Sears, Children's Place, Office Depot, Zales, and Citibank South Dakota N.A.] Said business records further indicate that the Account was then owned by Citibank South Dakota N.A. later sold and/or assigned Portfolio [11238, 11240, and 11270] to [LVNV's] assignor, Sherman Originator LLC, which included the [Debtor's] Account on May 15, 2008. Thereafter, all ownership rights were assigned to, transferred to and became vested in [LVNV] ....
[Docket Nos. 66-70.]
b. Bills of sale signed by a representative of Sherman Originator LLC (Sherman), which purport to convey to LVNV, "in accordance with the provisions of the Sale Agreement dated as of April 29, 2005, ... the Receivable Assets (as defined in the Agreement) identified in the Receivable File dated 5/31/08." [Docket Nos. 66-70.]
c. What appears to be portions of a computer file listing the Debtors' names and addresses, account numbers, and the balances on their respective accounts. [Docket Nos. 66-70.]
d. A power of attorney granting Resurgent Capital Services, the company that prepared and executed LVNV's original proofs of claim, authority to service LVNV's accounts and to file and sign proofs of claim. [Docket Nos. 66-70.]
6. On August 18, 2008, the Court held a hearing on Debtors' Objections to LVNV's proofs of claim. At the hearing, the Debtors argued that LVNV did not properly document its ownership of the accounts in question and therefore does not have standing as a matter of law to bring claims based on those accounts. The Debtors also asserted that the additional documents filed by LVNV on August 5, 2008 are insufficient to establish the validity of claims 11 through 14 and 18. In closing, the Debtors argued that LVNV's practice of filing proofs of claim without supporting documentation violates Bankruptcy Rule 3001 and that LVNV should not be allowed to retroactively comply with the rules by filing supporting documentation only after the Debtor objects and a hearing has been scheduled. LVNV did not move to admit any exhibits and did not offer any evidence at the hearing; LVNV's attorney made solely legal arguments. Thus, the record is bare.
II. CONCLUSIONS OF LAW
A. Jurisdiction and Venue
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), and 157(b)(1). This dispute is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), and (O). Venue is proper pursuant to 28 U.S.C. § 1408(1).
*114 B. LVNV's Burden of Production with Respect To its Original Proofs of Claim
A proof of claim executed and filed in accordance with the Bankruptcy Rules constitutes prima facie evidence of the validity and amount of that claim and is deemed allowed unless a party in interest objects. See 11 U.S.C. § 502(a); Fed. R. Bankr.P. 3001(f). However, proofs of claim that fail to comply with the Bankruptcy Rules are not prima facie valid and are therefore not deemed allowed. See Brock v. Brock (In re Brock), No. 06-4228, 2008 WL 2954621, at *6 (Bankr.E.D.Tex. July 31, 2008); In re Reyna, No. 08-10049-CAG, 2008 WL 2961973, at *3-6 (Bankr.W.D.Tex. July 28, 2008); In re White, No. 06-50247-RLJ13, 2008 WL 269897, at *3-5 (Bankr.N.D.Tex. Jan.29, 2008).
1. Prima Facie Validity of LVNV's Original Proofs of Claim
With respect to LVNV's original proofs of claim, counsel for LVNV argues that proofs of claim need not include supporting documentationthat supporting documentation need only be attached once a debtor objects and a dispute arises. In support of his contention, LVNV's counsel relies on the language of Bankruptcy Rule 3001(f), which states that "[a] proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity of the amount of the claim." Fed. R. Bankr.P. 3001(f). With regard to assigned claims, LVNV's counsel asserts that, because Bankruptcy Rule 3001(e) requires that "evidence of the transfer shall be filed by the transferee" on claims transferred after the proof of claim is filed, and is silent as to evidence required on claims transferred before the proof of claim is filed, no supporting evidence is required on the latter proofs of claim. See Fed. R. Bankr.P. 3001(e)(l)-(4).
LVNV's arguments ignore the plain language of Bankruptcy Rule 3001(a) and (c), the clear instructions on the Official Proof of Claim Form (Form 10), and the wealth of case law on the issue in this Circuit.
Bankruptcy Rule 3001(a) mandates that "[a] proof of claim shall conform substantially to the appropriate Official Form." Fed. R. Bankr.P. 3001(a). Additionally, Bankruptcy Rule 9009 states that the Official Forms "shall be observed." Fed. R. Bankr.P. 9009. Paragraph 7 of the official proof of claim form (Form 10) directs the creditor to "[a]ttach redacted copies of any documents that support the claim, such as promissory notes, purchase orders, invoices, itemized statements or running accounts, contracts, judgments, mortgages, and security agreements" or a summary of such documents. Paragraph 7 of Form 10 also directs that "[i]f the documents are not available, please explain." It is difficult to understand how a creditor could substantially comply with this instruction by filing a bare bones proof of claim without any explanation. At the very least, Form 10 instructs creditors to give a reason why supporting documents have not been attached.
Moreover, Bankruptcy Rule 3001(c) provides that when a claim is based on a writing (i.e. a credit card agreement),[1] "the original or duplicate shall be filed with the proof of claim," and "[i]f the writing has been lost or destroyed, a statement of the *115 circumstances of the loss or destruction shall be filed with the claim." Fed. R. Bankr.P. 3001(c). This language could not be more clearcreditors must attach documents giving rise to a claim (or copies of such documents) to their proof of claim or explain why they have not. See also In re Hight, No. 07-36683, 2008 WL 3539802, at *5 n. 7 (Bankr.S.D.Tex. Aug. 13, 2008) (determining that a creditor that failed to attach any supporting documentation to support its claims violated Bankruptcy Rule 3001(c)).
Indeed, the District Court for the Southern District of Texas recently affirmed the ruling by Bankruptcy Judge Brown that proofs of claim to recover amounts on a credit card account must be accompanied by either writings on which they were based or by an explanation of why such writings were not provided. eCast Settlement Corp. v. Tran (In re Tran), 369 B.R. 312, 316-17 (S.D.Tex.2007). Further, Bankruptcy Judges Felsenthal, Houser, and Hale, of the Northern District of Texas, determined that a lack of supporting documentation strips a claim of any prima facie validity. In re Armstrong, 320 B.R. 97, 104-05 (N.D.Tex.2005). The Armstrong court held that
in the case of a credit card or consumer account creditor, in order for the proof of claim to be given prima facie effect, the creditor must attach an account statement containing the debtor's name, account number, the prepetition account balance, interest rate, and a breakdown of the interest charges, finance charges and other fees that make up the balance of the debt, or attach enough monthly statements so that this information can be easily determined.
Id. at 106.
The Armstrong court also determined that a "transferee has an obligation under Bankruptcy Rule 3001 to document its ownership of the claim ... [by] attaching] a signed copy of the assignment and sufficient information to identify the original credit card account." Id. (internal marks omitted) (quoting In re Hughes, 313 B.R. 205, 212 (Bankr.E.D.Mich.2004)). Bankruptcy Judge Jones, also of the Northern District, rejected the argument that Bankruptcy Rule 3001(e)'s silence as to evidentiary requirements for claims assigned before the proof of claim was filed eliminates the need to comply with Bankruptcy Rule 3001(c) and Form 10. See In re White, 2008 WL 269897, at *4-5.
LVNV's original proofs of claim do not comply with Bankruptcy Rule 3001, the instructions in Form 10, or applicable law. First, LVNV failed to "[a]ttach redacted copies of any documents that support the claim," or a summary thereof in accordance with Rule 3001 and Form 10. LVNV instead attached a document prepared by its servicer containing the same information contained on the proof of claim form: the last four digits of the Debtors' account number and the amount owing on the account. LVNV did not attach the credit card agreement between the Debtors and the original credit card issuer, nor did it attach any summary thereof or give an explanation as to why supporting documents have not been provided. Second, LVNV checked the box in Form 10 to indicate that its claim includes interest or other charges in addition to principal. However, the form requires creditors who check this box to "[a]ttach [an] itemized statement of interest or charges," which LVNV failed to do. Third, the only other document attached to LVNV's original proofs of claim is a purchase agreement between Citibank and LVNV, which purports to transfer certain unnamed accounts (originally belonging to a credit card issuer, then sold to Sherman, then sold to Citibank) to LVNV. LVNV did not include *116 the purchase agreement between the original card issuer and Sherman, nor did it include the purchase agreement between Sherman and Citibank. The purchase agreement provided by LVNV does not establish LVNV's ownership of the Debtors' accounts. Therefore, LVNV failed to provide "sufficient information to identify the original credit card account," or to "document ownership" of its claims. Armstrong, 320 B.R. at 106.
Further, the information provided in the proof of claim form and LVNV's attached documents does not suffice to establish prima facie validity of LVNV's claims. LVNV has not attached any account statements, provided any information concerning the interest rate or finance charges or other fees that comprise the balance of the debt (despite having checked the box indicating that its claim includes interest and fees), or attached monthly statements so that this information can be determined. All of this information was required for LVNV's claims to enjoy prima facie validity. Id.
LVNV's argument that proving claims is too expensive is of no import. This Court has a duty to enforce the Bankruptcy Rules and the Bankruptcy Code as written. Even if the Court were inclined to consider the potential costs of complying with the Bankruptcy Rules, its decision would be the same. Bankruptcy Rule 3001(c) provides that if the documents supporting the creditor's claim cannot be produced, "a statement of the circumstances of the loss or destruction shall be filed with the claim." Fed. R.Bankr.P. 3001(c). Further, paragraph 7 of Form 10 allows a creditor to attach a summary of documents supporting the claim and requires some explanation if the documents are unavailable. These rules and instructions appear to be designed specifically to accommodate creditors like LVNV, who claim to be unable to produce documents. Given these provisions, it is difficult to understand how providing a summary of documents supporting a claim, or at least providing an explanation for why the proof of claim has nothing attached to it, unduly burdens creditors. The only explanation could be that certain creditors wish to continue their routine of executing and filing proofs of claim without objection and without any evidenceessentially, without having to do any work. This practice violates the Bankruptcy Rules and undermines the bedrock notion of the legal system that claimants bear the burden of proving their claims. See Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 21, 120 S. Ct. 1951, 147 L. Ed. 2d 13 (2000) (recognizing that "the burden of proof is an essential element of the claim itself," and that "one who asserts a claim [has] the burden of proof that normally comes with it").
For the reasons stated above, LVNV's original proofs of claim do not comply with Bankruptcy Rule 3001 and are not prima facie valid. Claims to recover amounts charged on credit card accounts must be accompanied by adequate supporting documents or copies thereof or, at the very least, an explanation of why such documents could not be produced. LVNV did neither in the case at bar. Further, because LVNV's claims have allegedly been assigned to it, proof of the assignments must also be provided to have standing. For all of these reasons, LVNV has failed to meet its initial burden of production with regards to original proofs of claim 11, 12, 13, 14, and 18.
2. Consequences of Failing to Attach Sufficient Documentation to Proofs of Claim
Although incomplete or insufficient proofs of claim are not prima facie valid, they are not automatically disallowed. See *117 In re Armstrong, 320 B.R. at 106. The debtor, however, "has no evidentiary burden to overcome" when objecting to a claim that is not prima facie valid. In re Tran, 369 B.R. at 318. Once the debtor objects to a proof of claim, the claim's validity becomes a "contested matter" and the burden shifts back to the creditor to prove the claim is valid by a preponderance of the evidence. See 11 U.S.C. § 502; In re O'Connor, 153 F.3d 258, 260-61 (5th Cir.1998); In re Fid. Holding Co., Ltd., 837 F.2d 696, 698 (5th Cir.1988). Because the Debtors in the case at bar are objecting to proofs of claim that do not enjoy prima facie validity, the Debtors do not have to overcome any evidentiary presumption in making their objections.[2] The *118 Debtors' objections are sufficient to shift the burden back to LVNV to prove ownership and validity of its claims in accordance with state law.
C. LVNV's Post-Objection Amendments to its Proofs of Claim
Before this Court proceeds with its analysis of the validity of LVNV's claims, it must first determine whether to consider LVNV's original proofs of claim or its proofs of claim as amended by LVNV's August 5, 2008 filings. If LVNV failed to properly amend its proofs of claim, LVNV must rely solely on its original proofs of claim to satisfy its burden of proof.
The Debtors filed their objections to LVNV's original proofs of claim on July 18, 2008. LVNV electronically filed affidavits and other documents in support of claims 11, 12, 13, 14, and 18 on August 5, 2008. Thus, LVNV amended all its claims without leave of Court or the consent of the Debtors after the Debtors lodged their objection. This case presents an interesting (and apparently novel) question: May a claimant freely amend its proof of claim after the debtor has objected and initiated a contested matter?[3]
1. Applicability of Bankruptcy Rule 7015 to Contested Matters
Generally, a creditor may freely amend its proofs of claim before they are successfully objected to by the debtor. See, e.g., First Nat'l Bank of Mobile v. Everhart (In re Commonwealth Corp.), 617 F.2d 415, 422 n. 12 (5th Cir.1980) (noting that "amendment of claims in bankruptcy is liberally allowed" within statutory limits). However, once the debtor objects to a proof of claim, it becomes a "contested matter" under Bankruptcy Rule 9014. See In re Cloud, No. 99-51109, 2000 WL 634637, at *2 (5th Cir.2000) (unpublished); see also Fed. R. Bankr.P. 3007, advisory committee's note ("The contested matter initiated by an objection to a claim is governed by rule 9014...."); Fed. R. Bankr.P. 9014, advisory committee's note ("[T]he filing of an objection to a proof of claim ... creates a dispute which is a contested matter...."). Further, Bankruptcy Rule 9014 makes applicable certain procedural rules contained in Part VII of the Bankruptcy Rules, and allows the court to "at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply." Fed. R. Bankr.P. 9014(c). Bankruptcy Rule 7015 makes Federal Rule of Civil Procedure 15 (Rule 15), governing amendments, applicable in adversary proceedings. Taken together, Bankruptcy Rules 9014 and 7015 make Rule 15 applicable in contested matters at the Court's election.[4]
*119 Further, most bankruptcy courts have recognized that "[t]he trend of the cases appear to apply Rule 7015 to contested matters." In re MK Lombard Group I, Ltd., 301 B.R. 812, 816 (Bankr.E.D.Pa. 2003); see also, e.g., In re Stavriotis, 977 F.2d 1202, 1204 (7th Cir. 1992) (noting that Bankruptcy Rule 9014 permits extension of Rule 7015 to contested matters); In re Best Refrigerated Express, Inc., 192 B.R. 503, 506 (Bankr.D.Neb.1996) (applying Rule 7015 through Rule 9014 to allow amendment to filed proof of claim to relate back); Enjet, Inc. v. Maritime Challenge Corp. (In re Enjet, Inc.), 220 B.R. 312, 314 (E.D.La.1998) (noting that "numerous courts have applied Rule 7015 and Rule 15(c) explicitly or by analogy in non-adversary [bankruptcy] proceedings"); In re Brown, 159 B.R. 710, 714 (Bankr.D.N.J. 1993) (noting that Rule 15's "standards for allowing amendments to pleadings in adversary proceedings ... also apply to amendments to a proof of claim"); In re Blue Diamond Coal Co., 147 B.R. 720, 725 (Bankr.E.D.Tenn.1992) (extending Rule 9014 to apply Rule 7015 to contested matters); In re Enron Corp., 298 B.R. 513, 521-22 (Bankr.S.D.N.Y.2003) (invoking Rule 9014 to apply Rule 7015); 10 Collier on Bankruptcy ¶ 7015.02 n. 1 (Matthew Bender 15th ed. Rev.).
Rule 15 requires claimants to obtain "the opposing party's written consent or the court's leave" to amend their claim after being served with a response (here, a written objection). Fed.R.Civ.P. 15(a)(2). It is therefore within this Court's power and discretion to refuse to consider the materials submitted by LVNV on August 5, 2008, in support of claim 11, 12, 13, 14, and 18, which were filed without the Court's leave or the Debtors' consent after the Debtors lodged their claim objections.
2. The Court's Equitable Power to Allow or Disallow Amendments to Contested Proofs of Claim Filed Without Leave of Court
Even if Bankruptcy Rule 7015 is reserved solely for adversarial proceedings, a number of courts have determined that proof of claim amendments are subject to the court's equitable powers under 11 U.S.C. § 105(a). See United States v. Johnston, 267 B.R. 717, 721 (N.D.Tex. 2001); see also In re Eden, 141 B.R. 121, 123-24 (Bankr.W.D.Tex.1992) (recognizing that "many bankruptcy courtsfor equitable reasonsdo permit amendments to proofs of claim, even past the bar date"). The Seventh Circuit explained that "[Bankruptcy] Rule 7015 is not ... the only possible authority for amendment. Another possible basis is the bankruptcy court's broad equitable jurisdiction." In re Unroe, 937 F.2d 346, 349 (7th Cir.1991). The District Court for the Northern District of Texas also determined that a bankruptcy court has authority to regulate amendments under its equitable powers pursuant to 11 U.S.C. § 105(a). Johnston, 267 B.R. at 721 (concluding that "the [bankruptcy] court's power to prevent abuse of process includes bending the time requirements ... to permit amendments" (internal marks omitted)).
3. Ruling on LVNV's Post-Objection Amendments
This Court is not prepared to make an ultimate determination as to whether every amendment to a proof of claim filed after the debtor objects requires strict adherence to Rule 15, and these are not the facts on which to do so. The Court does, however, believe that a bankruptcy court's equitable powers play some role in determining whether or not to allow an amendment filed without leave or consent in a contested matter. See Fed. R. *120 Bankr.P. 9014(c) (stating that the bankruptcy court "may" direct that other rules in Part VII shall apply). Here, LVNV's amendments (in the form of electronically filed affidavits), all of which were submitted fifteen days after this Court set the Debtor's objections for a hearing, should be subject to the strictures of Rule 15, incorporated through Bankruptcy Rule 7015. Creditors should not be permitted to file defective proofs of claim in hopes that the debtor will not object, but then, when the debtor does object and the matter is set for a hearing, to file the necessary supporting documents. This is one of the reasons Rule 15 was enactedto prevent undue prejudice and surprise to litigants and to permit opposing parties time to prepare for trial. See United States v. Saenz, 282 F.3d 354, 356 (5th Cir.2002) (determining that "prejudice to the opposing party," "bad faith," and "repeated failure to cure deficiencies" are considerations under Rule 15).
LVNV knew that the Debtors had objected to its original proofs of claim on July 18, 2008, but waited until well after this Court set the Debtor's objections for a hearing to amend the proofs of claim. Indeed, the amendments were filed (August 5, 2008) less than two weeks prior to the scheduled August 18, 2008 hearingwhich made it virtually impossible for the Debtors to conduct any discovery about the amendments, including taking the deposition of the individual who signed the affidavits that comprised the amendments. These tactics, taken together with LVNV's blatant disregard for Bankruptcy Rule 3001 and the instructions in Form 10 requiring LVNV to attach documents to its original proofs of claimsee infra, Section II(B)(1)speak to the inequity of permitting LVNV to amend its deficient proofs of claim without leave or consent. Therefore, the Court, pursuant to Bankruptcy Rules 9014 and 7015, Rule 15, and its equitable powers under 11 U.S.C. § 105(a), will not allow these amendments to LVNV's proofs of claim 11, 12, 13, 14, and 18. Because LVNV's amendments are disallowed, its original proofs of claim are all that remain to withstand the Debtors' objection.
D. Validity of LVNV's Original Proofs of Claim
The validity of LVNV's claim is based on Texas contract law, but whether its claim is allowable in bankruptcy "is a matter of federal law and the bankruptcy court's exercise of equitable powers." See First City Beaumont v. Durkay (In re Ford), 967 F.2d 1047, 1050 (5th Cir.1992). Section 502(b) provides nine grounds for disallowing a claim that has been objected to. 11 U.S.C. § 502(b). One of these grounds is that the claim "is unenforceable against the debtor under ... applicable law for a reason other than because such claim is contingent or unmatured." 11 U.S.C. § 502(b)(1). Courts have uniformly interpreted this to mean that a claim may be disallowed if it is unenforceable under applicable state law. See, e.g., Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 127 S. Ct. 1199, 167 L. Ed. 2d 178 (2007) (recognizing that § 502(b)(1) "requires bankruptcy courts to consult state law in determining the validity of most claims").
Under Texas law, a credit card issuer must prove that an enforceable contract exists under which the debtor is liable. See Preston State Bank v. Jordan, 692 S.W.2d 740, 744 (Tex.App.-Fort Worth 1985, no writ). Texas law also requires an alleged assignee of a contract to come forward with evidence of the assignment. See Skipper v. Chase Manhattan Bank USA, N.A., No. XX-XX-XXX CV, 2006 WL 668581, at *1 (Tex.App.-Beaumont 2006, no *121 pet. hist.) (citing cases). Therefore, LVNV has the burden of proving the validity of its underlying claim, which, under Texas law, requires (1) proof of an enforceable contract between the Debtors and the original creditor, and (2) proof of any subsequent assignment of that contract to LVNV.
The inevitable result of the disallowance of LVNV amendments is that LVNV's original proofs of claim must, alone, be sufficient to establish the validity of its claims. This is clearly not the case. First, as stated above, LVNV's original proofs of claim do not sufficiently document LVNV's ownership of claims 11, 12, 13, 14, or 18. In fact, there are at least two missing links in LVNV's chain of title. Second, LVNV provided no evidence that an enforceable contract existed between the Debtors and the original credit card issuer. Therefore, LVNV's original proofs of claim are insufficient to establish that LVNV's claims are valid under Texas law.
E. Even if LVNV's amendments were allowed, LVNV has still failed to establish the validity of claims 11, 12, 13, 14, and 18.
Even if this Court is incorrect in its conclusion that Bankruptcy Rule 7015 applies in this case and that LVNV's amendments to its proofs of claim should be disallowed, the additional documents submitted by LVNV on August 5, 2008 are still insufficient to establish the validity of claims 11, 12, 13, 14, and 18 by a preponderance of the evidence.
1. Proof of Ownership
In order to establish the validity of proofs of claim 11 through 14 and 18 over the Debtors' objection, LVNV had the burden of proving that it actually owns the claims. See In re Armstrong, 320 B.R. at 106 (requiring a creditor to prove ownership of the claim by attaching a "signed copy of the assignment and sufficient information to identify the original credit card account"); In re Reyna, 2008 WL 2961973, at *5-6 (disallowing creditor's claim where there was "no evidence to link the entity assigning the claim with an entity listed on the debtor's schedules"); In re Leverett, 378 B.R. 793, 801 (Bankr. E.D.Tex.2007) (requiring, at a minimum, that credit card claimants "include[] or attach[ ] documentary or other evidence pertaining to how it acquired the claim and showing that it is the current holder of the claim"); In re Padilla, No. 04-42708 H213, 2006 WL 2090210, at *4 (Bankr.S.D.Tex. June 29, 2006) (sustaining objections to a creditor's assigned claims where there was no proof of the assignment).
The Court notes, at the outset, that LVNV did not offer any evidence in support of its original or amended proofs of claim at the hearing. Although LVNV attached documents to its pleadings in the form of exhibits, LVNV's counsel never moved to admit these documents at the August 18, 2008 hearing. See In re Wilmington Hospitality L.L.C., No. 01-19401DWS, 2003 WL 21011689, at *1 n. 1 (Bankr.E.D.Pa. Apr.18, 2003) ("[Documents attached to pleadings are not evidence."). Therefore, LVNV has no evidence to support a claim. However, even if LVNV had moved to admit the exhibits attached to its pleadings, these exhibits would still be insufficient to establish the validity of LVNV's claims. The Court proceeds with its analysis under the fiction that the exhibits electronically filed on the docket had actually been offered as evidence.
a. LVNV's Submitted Affidavits
Affidavits may well be sufficient to establish the prima facie validity of an unchallenged *122 proof of claim, but once the debtor makes an objection (as the Debtors have done here), a creditor has the burden of proving its claims by a preponderance of the evidence as it would in any trial on the merits. In re Fid. Holding, 837 F.2d at 698. Affidavits, such as those submitted by LVNV, are generally inadmissible in a trial on the merits unless they qualify under an exception to the hearsay rule or contain statements made by party opponents.[5]Bd. of Pub. Instruction v. Meredith, 119 F.2d 712, 713 (5th Cir.1941) ("[U]sually ex parte affidavits are not sufficient to prove material facts in a contested case. . . ."); see also, e.g., FTC v. Nat'l Bus. Consultants, Inc., 376 F.3d 317, 322 n. 9 (5th Cir.2004) (determining that certain affidavits were hearsay and did not qualify for any exception under Fed. R.Evid. 803 or 804).
The affidavits filed by LVNV in support of proofs of claim 11, 12, 13, 14, and 18 contain inadmissible hearsay. All of LVNV's affidavits have been executed and signed by Sherrie A. Emerson (Emerson), an employee of LVNV. [Docket Nos. 66-70.] These affidavits contain out of court statements offered to prove the truth of their assertions. Emerson did not appear to give live testimony at the August 18, 2008 hearing on the Debtors' objections to the amended proofs of claim and was therefore not subject to cross examination, which deprives the Debtors of due process. See Kentucky v. Stincer, 482 U.S. 730, 737, 107 S. Ct. 2658, 96 L. Ed. 2d 631 (1987) ("[T]he Confrontation Clause is violated when hearsay evidence is admitted as substantive evidence against the defendant with no opportunity to cross examine the hearsay declarant at trial."); Mattox v. United States, 156 U.S. 237, 242, 15 S. Ct. 337, 39 L. Ed. 409 (1895) ("The primary object of the [Confrontation Clause] was to prevent depositions or ex parte affidavits... being used ... in lieu of a personal examination and cross examination of the witness.").
Additionally, the statements made in paragraph 3 of each affidavit are, in some cases, triple hearsay. For example, in all of LVNV's affidavits, Emerson testifies as to the accuracy of LVNV's business records, which are a "compilation" of information *123 provided to LVNV by Sherman. [Docket Nos. 66-70.] She also certifies that "[t]he records provided to [LVNV] have been represented" (presumably by Sherman) "to include information provided by Citibank." [Docket Nos. 66-70.] According to these affidavits, LVNV's claims are the result of an extension of credit to the Debtors by Sears, Children's Place, Office Depot, and Zales, and that the Debtor's account was subsequently assigned to Citibank, then to Sherman, and finally to LVNV. [Docket Nos. 66-70.] Ms. Emerson is not competent to testify as to the accuracy of the business records of LVNV's predecessors. Further, LVNV's business records are based entirely on information transmitted from Citibank to Sherman, and then from Sherman to LVNV. These statements are triple hearsay, which is manifestly unreliable and will not be considered by the Court.
Emerson's statements in LVNV's affidavits do not fall under any hearsay exception. Therefore, even if LVNV had offered its affidavits at the hearing which it did not the Court would have sustained an objection to their inadmissibility, and the affidavits would have held no evidentiary weight.[6]
b. LVNV's Submitted Bills of Sale
LVNV's submitted bills of sale are also insufficient to establish LVNV's ownership of claims 11, 12, 13, 14, and 18. At most, the bills of sale submitted by LVNV suggest that certain accounts (not necessarily the Debtors') were transferred from Citibank to Sherman, and then to LVNV.
The first bill of sale submitted by LVNV in support of its proof of claim 11 is subject to "the terms of that certain Purchase and Sale Agreement" between Sears and Sherman, which was subsequently assumed by Citibank and ultimately by LVNV. [Docket No. 66.] This bill of sale purports to transfer "all rights, title and interest in and to the Chapter 13 Accounts which are described on the Disk furnished by [Citibank] to [Sherman]." [Docket No. 66.] LVNV has not provided, nor has it attempted to prove the contents of, this "Disk," and this Court will not presume that the Debtors' accounts are on it.
Similarly, the first bill of sale LVNV submitted in support of its proofs of claim 12, 13, 14, and 18 relies on a "Purchase and Sale Agreement dated December 16, 2005, between [Sherman] and [Citibank]" and purports to transfer "Accounts described in Section 1.2 of the Agreement." [Docket Nos. 67-70.] LVNV has not provided this "Agreement." Once again, this Court will not presume that the Debtors' accounts are listed in this "Agreement."
The second bill of sale in support of all of LVNV's proofs of claim purports to transfer from Sherman to LVNV, "in accordance with the provisions of the Sale Agreement dated as of April 29, 2005 between [Sherman] and [LVNV] (the `Agreement'), the Receivable Assets (as defined in the Agreement) identified in the Receivable File." [Docket No. 66.] LVNV has not provided this "Receivable File," which allegedly includes the Debtors' accounts, and this Court will not presume that the Debtors' accounts are included therein.
Under the above-described circumstances, the Court cannot decipher which "Chapter 13 Accounts" or "Receivable Assets" are being assigned, or that such accounts *124 include any of the Debitors' accounts.[7]
c. Conclusion Regarding LVNV's Proof of Ownership
For the reasons stated above, LVNV has failed to prove by a preponderance of the evidence, that it is the present owner of claims 11, 12, 13, 14, and 18, as required by Texas law. Because the affidavits and documents filed by LVNV on August 5, 2008 were never offered at the hearing, they have no evidentiary value. Even if they had been offered, the Court would have sustained the Debtors' objections to their admission.[8] LVNV's affidavits contain inadmissible hearsay, and, in some cases, triple hearsay (i.e. statements by Ms. Emerson, an out of court declarant, based on information provided by Citibank, based on information provided by Sherman). This Court would also not have admitted LVNV's bills of sale because no foundation has been laid to except these documents from the hearsay rule. LVNV has the burden of proving ownership of its claims and was given ample opportunity to do so at the August 18, 2008 hearing.[9] No evidence or testimony was adduced by LVNV at that hearing. Therefore, LVNV has failed to establish the validity of claims 11, 12, 13, 14, and 18 in the face of the Debtors' objections.[10]
2. Proof of the Underlying Contract
LVNV has also failed to meet its burden of proving that enforceable contracts existed between the Debtors and the original account issuers. First, none of LVNV's documents in support of its proofs of claim were ever offered into evidence. Second, even if LVNV's affidavits and bills of sale had been offered, the Court would have sustained an objection to their admissibility because they are all based on hearsay. Third, while the bills of sale submitted by LVNV hint that agreements existed between the Debtors and the original credit card issuers, these hints, by themselves, are insufficient to establish an enforceable contract under Texas law. See, e.g., Preston State Bank, 692 S.W.2d at 744 (affirming trial court's dismissal of a credit card issuer's contract claim where the issuer "failed to introduce the contract between *125 itself and [the debtor] or the terms and conditions thereof"). LVNV did not provide the original contracts, nor did it provide any evidence from which an enforceable contract could be gleaned.
For the reasons set forth above, LVNV failed to meet its burden of proving the validity of claims 11, 12, 13, 14, and 18 under Texas law.
III. CONCLUSION
LVNV's burden of proof at this stage of the proceeding is greater than it was at the time of its initial filing because its claims have been contested. See Fid. Holding, 837 F.2d at 698. Even if admitted, the documents filed with the Clerk's office by LVNV on August 5, 2008 do not suffice to prove LVNV's ownership of its claims or that those claims are based on an enforceable contract under Texas law. However, these documents may have sufficed to establish prima facie validity had they been attached to LVNV's original proofs of claim. The point is this: LVNV could have availed itself of prima facie validity, avoided the strictures of the post-objection amendment process, and shifted the evidentiary burden to the Debtors had it correctly filed its proofs of claim to begin with. Instead, LVNV chose to disregard Rule 3001 and the instructions in Form 10 by not attaching any documents to its initial proofs of claim or by giving a written explanation why it could not do so. This omission permitted the Debtors to object without having to overcome any evidentiary hurdle, thereby requiring LVNV to meet a heavier burden of proof to establish the validity of its claims.
For the foregoing reasons, the Debtors' objections to LVNV's proofs of claim 11, 12, 13, 14, and 18 should be sustained. This Court reserves the right to make additional findings of fact and conclusions of law as it deems necessary and appropriate. An order consistent with these findings of fact and conclusions of law shall be entered on the docket simultaneously with the entry of this opinion.
NOTES
[1] This Court issued a published memorandum opinion with respect to eCast which is available at 395 B.R. 356 (Bankr.S.D.Tex.2008). With respect to LVNVthe very same creditor who is the subject of this Memorandum Opinionthis Court issued written findings of fact and conclusions of law reiterating, almost verbatim, applicable portions of the published memorandum relating to eCast. [Case No. 08-32404, Docket No. 137.] Those findings of fact and conclusions of law are attached to this Memorandum Opinion as Exhibit A.
[2] Since rendering its opinion in Gilbreath, this Court has issued another opinion, In re North Bay General Hospital, Inc., 404 B.R. 443 (Bankr.S.D.Tex.2009), which outlines the filing requirements for a proof of claim.
[3] This account number ending in 7880 corresponds to an account listed on the Debtor's Schedule F held by "CBUSA/Sears," which the Debtor has scheduled as "disputed." The amount of the disputed claim relating to this CBUSA/Sears account is listed on the Debtor's Schedule F as $18,467.91. [Docket No. 1.]
[4] The document attached to Proof of Claim 12and all of LVNV's other proofs of claim discussed belowstates that "Resurgent Capital Services services this account on behalf of the current creditor." Additionally, all of LVNV's original proofs of claim are signed by "Joyce Montjoy, Bankruptcy Recovery Manager of Resurgent Capital Services."
[5] This account number ending in 4344 corresponds to an account listed on the Debtor's Schedule F held by "Citibank," which the Debtor has scheduled as "disputed." The amount of the disputed claim relating to this Citibank account:is listed on the Debtor's Schedule F as $9,946.00. [Docket No. 1.]
[6] This account number ending in 0555 corresponds to an account listed on the Debtor's Schedule F held by "At & t Universal/Citibank," which the Debtor has scheduled as "disputed." The amount of the disputed claim relating to this At & t Universal/Citibank account is listed on the Debtor's Schedule F as $19,549.90. [Docket No. 1.]
[7] This account number ending in 5703 corresponds to an account listed on the Debtor's Schedule F held by "Goodyear/CBUSA NA/HSB," which the Debtor has scheduled as "disputed." The amount of the disputed claim relating to this Goodyear/CBUSA NA/HSB account is listed on the Debtor's Schedule F as $2,029.00. [Docket No. 1.]
[8] This Court agrees with the assessment of the Bankruptcy Court for the Northern District of Texas that decisions by the district court are binding on the bankruptcy courts of that district under the federal hierarchical judicial structure. Rand Energy Co. v. Strata Directional Tech., Inc. (In re Rand Energy Co.), 259 B.R. 274, 276 (Bankr.N.D.Tex.2001); see also In re Windmill Farms, Inc., 70 B.R. 618, 621-22 (9th Cir. B.A.P. 1987), rev'd on other grounds, 841 F.2d 1467 (9th Cir. 1988); Johnson-Allen v. Lomas and Nettleton Co. (In re Johnson-Allen), 67 B.R. 968, 972-73 (Bankr. E.D.Pa.1986); In re Windsor Commc'ns Group, Inc., 67 B.R. 692, 698-99 (Bankr. E.D.Pa.1986); In re Moisson, 51 B.R. 227, 229 (Bankr.E.D.Mich.1985); and see generally Daniel J. Bussel, Power, Authority, and Precedent in Interpreting the Bankruptcy Code, 41 UCLA L.Rev. L063 (1994).
[9] Some courts have suggested that even if a creditor's proof of claim fails to comply with Bankruptcy Rule 3001, the debtor's objection must still produce "some evidence which tends to `meet, overcome, or at least equalize' the statements on the proof of claim." In re Habiballa, 337 B.R. 911, 915 (Bankr.E.D.Wis. 2006) (quoting In re Cluff, 313 B.R. 323, 338 (Bankr.D.Utah 2004)). These courts essentially reason that because a proof of claim is signed under penalty of up to $500,000.00 or five years in prison, even a skeletal proof of claim should be afforded some sort of evidentiary weight. Id.
Despite these opinions, this Court is bound to follow the District Court's decision in Tran, see supra note 8, which holds that a debtor "has no evidentiary burden to overcome" in objecting to a claim that is not prima facie valid. In re Tran, 369 B.R. at 318. Additionally, even if this Court were to adopt the reasoning from the bankruptcy courts mentioned above, because the Debtor attached a sworn affidavit to the Objection, he has taken sufficient action to "meet, overcome, or at least equalize" the statements made in LVNV's original proofs of claim. In re Habiballa, 337 B.R. at 915.
[10] The Federal Rules of Bankruptcy Procedure are promulgated by the Supreme Court of the United States.
[11] Bankruptcy Rule 9014 allows a bankruptcy court to apply any of the Bankruptcy Rules in Part VII to a contested matter "at any stage in a particular matter." Fed. R. Bankr.P. 9014. Section 105(a) of the Bankruptcy Code, which allows a bankruptcy court to issue any order "necessary or appropriate to carry out the provisions of the Bankruptcy Code, has also been frequently applied to allow or disallow amendments to proofs of claim as a matter of equity. See, e.g., United States v. Johnston, 267 B.R. 717, 721 (N.D.Tex.2001) (concluding that "the [bankruptcy] court's power to prevent abuse of process includes bending the time requirements ... to permit amendments" (internal marks omitted)); In re Eden, 141 B.R. 121, 123-24 (Bankr.W.D.Tex.1992) (recognizing that "many bankruptcy courts for equitable reasonsdo permit amendments to proofs of claim, even past the bar date"). The Seventh Circuit has also explained that "[Bankruptcy] Rule 7015 is not ... the only possible authority for amendment. Another possible basis is the bankruptcy court's broad equitable jurisdiction." In re Unroe, 937 F.2d 346, 349 (7th Cir.1991).
[12] Judge Hale adopted the reasoning of Bankruptcy Judge Barbara Houseranother co-author of the joint Armstrong opinionin In re Rochester, No. 03-32184-BJH-13, 2005 WL 3670877 (Bankr.N.D.Tex. May 24, 2005), which set forth three scenarios under which assignee claimants may (or may not) clothe their claims with prima facie validity. Under the first scenario, the assignee claimant produces documentation of a "blanket assignment" of accounts to the assignee claimant from a creditor listed on the debtor's schedules along with copies of the underlying account documents. Under the second scenario, the assignee claimant produces documentation of a blanket assignment of accounts to the assignee creditor from some other creditor not listed on the debtor's schedules, but also produces additional documents sufficient to link the assignee claimant with an entity listed on the debtor's schedules. Under the third scenario, the assignee claimant produces documentation of a blanket assignment of accounts to the assignee creditor from another creditor not listed on the debtor's schedules, but does not produce sufficient documentation to link the assignee creditor with a creditor listed on the debtor's schedules. Under scenarios one and two, the assignee creditor has produced sufficient documentation to give rise to a presumption that the assignee claimant is the present owner and holder of the debtor's accounts. Under the third scenario, the assignee creditor has not. See In re Rochester, 2005 WL 3670877, at *5-8.
In Judge Hale's Armstrong case, one of the claims of eCast, for whom Stromberg was counsel of record, did not enjoy prima facie validity because it fell under scenario three. eCast's proof of claim contained an account number and a statement that the claim was assigned to eCast by General Electric/Lowes. In support of this claim, eCast submitted a Lowes credit card account summary for that particular account and a blanket assignment document showing that a bundle of accounts were transferred from GE Capital Finance, Inc. to eCast. Additionally, the debtor in that case had scheduled a debt due on a Lowe's credit card with the same account number. Applying Judge Houser's framework, Judge Hale concluded that eCast did not produce sufficient evidence to establish prima facie ownership of its claims. In re Armstrong, 347 B.R. at 585.
In the case at bar, there is no question that LVNV's original proofs of claim are insufficient to clothe its claims in prima facie validity because no supporting documents were attached to them. However, it is noteworthy that LVNV attached nearly identical documents to its amended proofs of claim to those submitted by eCast in Judge Hale's Armstrong case, which Judge Hale determined to be insufficient to give rise to prima facie validity. Thus, even if this Court were to grant LVNV's Motion for Leave, LVNV's claims would still not enjoy prima facie validity. Even more noteworthy is that Stromberg, as counsel for eCast, witnessed this result.
[13] Stromberg's statement at the May 21, 2009 hearing that he and his client, LVNV, attempt to obtain the documents; that Bankruptcy Rule 3001 requires to be attached to a proof of claim only after they become aware of an objection may properly be imputed to his client, LVNV. See, e.g., Link v. Wabash R.R., 370 U.S. 626, 633-34, 82 S. Ct. 1386, 8 L. Ed. 2d 734 (1962) ("Petitioner voluntarily chose this attorney as his representative in the action, and he cannot now avoid the consequences of the acts or omissions of this freely selected agent. Any other notion would be wholly inconsistent with our system of representative litigation, in which each party is deemed bound by the acts of his lawyer-agent and is considered to have notice of all facts, notice of which can be charged upon the attorney." (internal marks and citations omitted)); Tolliver v. Northrop Corp., 786 F.2d 316, 319 (7th Cir.1986) ("[A] litigant is bound by his lawyer's acts."). Thus, LVNV, through its counsel of record, Stromberg, has admitted that it willfully withholds the documentation required to be included with its original proofs of claim until the debtor lodges an objection.
[1] The District Court, in Tran, looking to Texas state law to determine the substance of the claims at issue, affirmed the bankruptcy court's ruling that claims to recover amounts on a credit card account are "claims based on a writing," which must comply with Fed. R. Bankr.P. 3001(c). See eCast Settlement Corp. v. Tran (In re Tran), 369 B.R. 312, 316-17 (S.D.Tex.2007).
[2] Courts disagree about the consequences of a creditor's failure to comply with Bankruptcy Rule 3001 and the instructions in Form 10. The Tenth Circuit Bankruptcy Appellate Panel (BAP) recently explained that two main schools of thought have developed on the subjectthe "exclusive view" and the "nonexclusive view." B-Line, L.L.C. v. Kirkland (In re Kirkland), 379 B.R. 341, 344 (B.A.P. 10th Cir.2007). Courts adopting the "exclusive view" hold that 11 U.S.C. § 502(b) provides the exclusive basis for disallowance of claims, and that the creditor's failure to attach documents, alone is not a basis for an objection. Id. at 344 n. 10 (listing courts that have adopted the "exclusive view"). The Tenth Circuit BAP also adopted the "exclusive view" in Kirkland. Id. at 344. Courts adopting the "nonexclusive view" hold that a creditor's failure to attach supporting documents is a valid ground for a claim objection, and that, once an objection is lodged, the claim must be disallowed if the creditor fails to prove its claim at the claim objection hearing. Id. at 344 n. 11 (listing courts that have adopted the "nonexclusive view"). So far, courts within the Fifth Circuit have adhered to the "nonexclusive view." See In re Armstrong, 320 B.R. at 106; In re Tran, 369 B.R. at 318.
Courts applying the "exclusive view" frequently make a distinction between "technical" and "substantive" objections. The Tenth Circuit BAP in Kirkland, for example, determined that an objection based solely on insufficient documentation that does not actually dispute liability for the debt is merely "technical," and does not invoke any of the statutory grounds for disallowance in 11 U.S.C. § 502(b). Kirkland, 379 B.R. at 346-47. To allow such a technical objection, Kirkland explains, would allow debtors to weasel out of undisputed debts and require unnecessary hearings. Id. at 348-49.
This Court need not decide the issue since the Debtors made substantive objections (i.e. that the Debtors did not owe LVNV anything because there was no proof of assignment). However, this Court believes that the "nonexclusive view" is particularly applicable in a case where, as here, a creditor files a skeletal proof of claim with no documentation attached to it. Although a debtor's claim objection must be couched in one of the statutory grounds for disallowance in § 502(b), complaining that the creditor has offered no documentation in support of its claims necessarily asserts that the claim is "unenforceable against the debtor ... under ... applicable law" under § 502(b)(1). 11 U.S.C. § 502(b)(1). This Court knows of no jurisdiction where a claim arising out of a credit card agreement is enforceable without proof of the underlying agreement. Neither is this Court aware of any jurisdiction where a purchaser of contract rights may establish the enforceability of those rights without proof of purchase. The technical/substantive distinction for claim objections seems; more applicable in a case where the creditor has at least made a good faith attempt to comply with Bankruptcy Rule 3001. Such is not the case here. If a creditor willfully disregards the language of Bankruptcy Rule 3001 by filing a proof of claim without documentation, then the debtor's objection about insufficient documentation should likewise be sufficient to shift the burden back to the creditor to produce the documents that it was required to produce in the first place. Otherwise, the technical/substantive distinction would render Bankruptcy Rule 3001 toothless. Bankruptcy Rule 3001 would never be enforced if debtors could not effectively object to proofs of claims for noncompliance with that rule. Further, it is the creditor's violation of Bankruptcy Rule 3001, not the debtor's objection, that creates the need for unnecessary hearings.
[3] This Court recently held that Bankruptcy Rule 7015, and, by extension, Federal Rule of Civil Procedure 15, applied where another creditor in this case attemptedwithout leave of courtto amend its proofs of claim, which originally attached no documents, after the debtor lodged an objection on the grounds that the original proofs of claim contained no documents evidencing ownership of the debt. In re Gilbreath, 395 B.R. 356, 365-67 (Bankr. S.D.Tex.2008). The Court shall therefore reiterate its reasoning from Gilbreath in the present case.
[4] The Court takes note of the bankruptcy courts in other circuits that have determined that Bankruptcy Rule 7015 is inapplicable to contested matters. Cf. In re Carr, 134 B.R. 370, 372 (Bankr.D.Neb.1991); In re Calisoff, 94 B.R. 1002, 1003 n. 2 (Bankr.N.D.Ill.1988). These courts have so held because Bankruptcy Rule 9014 does not expressly list Bankruptcy Rule 7015 among the rules in Part VII that "shall apply" in contested matters. However, this logic disregards the language of Bankruptcy Rule 9014(c), which states that "[t]he court may at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply." Fed. R. Bankr.P. 9014(c).
[5] Affidavits are typically submitted by parties on motions for summary judgment (for consideration of whether any genuine issue of material fact exists for trial), and are generally inappropriate for use at trial because of their hearsay character. See 10B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure: Civil § 2738, at 330-33 (3d ed.1998) ("[E]x parte affidavits, which are not admissible at trial, are appropriate on a summary-judgment hearing to the extent they contain admissible information."). Here, LVNV relies predominantly on affidavits to defend the validity of its proofs of claim after the Debtors objected to the original claims for, among other reasons, the absence of sufficient documentation showing LVNV's ownership of the debt. Because a bona fide dispute has arisen, and because these affidavits contain hearsay statements that do not fall within any exception, they are inadmissible and cannot satisfy LVNV's burden of proof.
Although Federal Rule of Civil Procedure 43, applicable to bankruptcy cases under Fed. R. Bankr.P. 9017, suggests that affidavits may be admissible in motion practice, that rule contains discretionary language. Fed. R.Civ.P. 43(c) ("When a motion relies on facts outside the record, the court may hear the matter on affidavits or may hear it wholly or partly on oral testimony or on depositions." (emphasis added)). The Court finds that affidavits should be given no weight in this case, where LVNV was given ample opportunity to present its case at a hearing with live testimony from witnesses. Moreover, that LVNV has the burden of proving the validity of its claims by a preponderance of the evidence, as it would in any civil trial on the merits, suggests that the hearsay character of LVNV's affidavits should not be ignored.
[6] In fact, counsel for the Debtor objected to the hearsay character of LVNV's submitted affidavits both in its written objection to LVNV's original proofs of claim and orally at the hearing.
[7] Although LVNV attached to its pleadings a redacted spreadsheet listing the Debtors' account information and balance, the Court will not presume that this is the same "Receivable File" described in the bill of sale between Sherman and LVNV; and this Court will also not presume that the spreadsheet submitted by LVNV came from the elusive "Disk" supplied to Sherman by Citibank. Indeed, the spreadsheet is untitled and its origin was never explained at the hearing or in, any of LVNV's affidavits, Neither were any of these documents offered into evidence.
[8] The Debtors principally complain in their objections to LVNV's affidavits that the affidavits contain inadmissible hearsay and that LVNV did not lay a proper foundation for its bills of sale, which are also hearsay. [Docket No. 80-84.]
[9] Indeed, LVNV had nearly a month following the initial hearing on July 21, 2008, to prepare for the August 18, 2008 hearing.
[10] It could also be argued, persuasively, that LVNV's failure to provide evidence that it owns claims 22 through 28 deprives LVNV of standing in the Debtors' case. See, e.g., Fla. Dept. of Ins. v. Chase Bank of Tex., N.A., 274 F.3d 924, 929-32 (5th Cir.2001) (holding that a receiver of insurance policies did not have standing because it failed to prove it was the assignee of the policyholders' claims); Redmon v. Griffith, 202 S.W.3d 225, 239 (Tex. App.-Tyler 2006, pet. denied) (holding that, for the purposes of standing to bring an action to recover on a contract, "[p]rivity is established by proving the defendant was a party to an enforceable contract with either the plaintiff or a party who assigned its cause of action to the plaintiff"). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551796/ | 412 B.R. 75 (2009)
In re Jill Susan MENDELSON a/k/a Jill Susan Romaine-Mendelson, Debtor.
No. 808-75371-reg.
United States Bankruptcy Court, E.D. New York.
March 12, 2009.
*76 Gabriel J. Ferber, Nesper Ferber & DiGiacomo, Amherst, NY, for Interested Party.
Stuart P. Gelberg, Garden City, NY, for Debtor.
Michael J. Macco, Melville, NY, for Trustee.
MEMORANDUM DECISION
ROBERT E. GROSSMAN, Bankruptcy Judge.
Before the Court is an objection by the Chapter 13 Trustee to confirmation of the Debtor's Chapter 13 plan. The Trustee argues, under 11 U.S.C. § 1325(b)(1)(B), that the Debtor's proposed Chapter 13 plan does not commit all of the Debtor's "projected disposable income" toward repayment of unsecured creditors. The Trustee's argument is two-fold. First, he argues that the Debtor is improperly taking a secured debt expense deduction on Form B22C for repayment of a car loan installment contract. The vehicle is owned jointly by the Debtor and her ex-husband, however, the payments are made solely by the ex-husband. Second, the Trustee argues that the Debtor has not included all of her "current monthly income" on Form B22C because her bank statements show significant deposits in excess of that which the Debtor reported, including funds she voluntarily withdrew from her qualified retirement savings account. For the reasons that follow, the Trustee's objection is sustained, in part, and overruled, in part.
Background
The Debtor filed a Chapter 13 petition on September 29, 2008. Schedule I to the petition lists $5,689.26 in net take home pay, and Schedule J lists $5,384.63 in average monthly expenses, leaving $304.63 in net monthly income. The Schedule J expenses include car loan installment payments of $140 for an unspecified vehicle, and $0 installment payments for a 2003 Chevrolet Equinox with a notation that the expense is "paid by ex-husband." On November 11, 2008, the Debtor filed an Amended Chapter 13 plan which proposes to pay $325 per month for 60 monthsa total of $19,500. Along with the Amended Chapter 13 plan, the Debtor filed an Amended Form B22C. The net result of the Debtor's calculations on Form B22C is that the Debtor has monthly disposable income of $294.86 under 11 U.S.C. *77 § 1325(b)(2). In reaching this figure, the Debtor took the IRS standard vehicle ownership expense on Lines 28 and 29, and secured debt repayment expenses on Line 47, for two vehicles: (1) a 2005 Chevrolet Equinox ("Equinox")[1], and (2) a 2007 Honda Element. This resulted in a total secured debt expense deduction of $489 for each vehicle.[2]
At the confirmation hearing on January 8, 2009, the Trustee asserted oral objections to confirmation under Section 1325(b).[3] First, the Trustee argues that the Debtor should not be permitted to take a vehicle ownership expense for the Equinox because, although the Debtor and her ex-husband own the vehicle jointly and are both obligated on the contract, the vehicle is being used exclusively by the ex-husband and he alone makes the monthly loan payments on that car. The Debtor, he argues, should not be permitted to take an expense for a payment that she does not make even if she is contractually obligated to do so. Concomitantly, the Trustee asserts that if the Debtor is permitted to deduct the ownership expense for the Equinox, she should be required to include the ex-husband's contributions on the income side of Form B22C. The Trustee argues that since the payments made by the ex-husband are for the Debtor's benefit they must be included in "current monthly income" under 11 U.S.C. § 101(10A).
Second, the Trustee objects to confirmation on the basis that the Debtor has not committed all of her "current monthly income" toward repayment of unsecured creditors. Specifically, the Trustee argues that the Debtor's bank statements show deposits significantly in excess of the income she reported on both Schedule I and Form B22C. The Trustee's calculation of the Debtor's average "current monthly income" based on bank deposits in the six months prior to the filing of the petition, is $18,437.61. In contrast, on Form B22C, the Debtor reported average current monthly income of $10,031 for the six month period prior to bankruptcy. There is, therefore, an $8,406.61 discrepancy between average current monthly income reflected in bank deposits and average current monthly income reported on Form B22C.
According to a statement filed by the Debtor's counsel on February 11, 2009, the *78 excess deposits are attributed to the following:
1. Withdrawals from the Debtor's Thrift Savings Plan within the 6 months prior to filing bankruptcy in the amount of $8,850.34;
2. Cash advance from the Debtor's mother's bank account in the amount of $17,400;
3. Repayments to the Debtor on a loan in the amount of $8,150;
4. A gift to the Debtor from her mother in the amount of $1,950; and
5. Deposits to the Debtor's bank account which were used to pay expenses for the party who gave the Debtor the monies to deposit, in the amount of $1,855.23.
The Trustee's position is that all of these deposits must be considered "income" to the Debtor under Section 1325(b) and the definition of "current monthly income" under Section 101(10A). Section 101(10A) states that "current monthly income" includes "income from all sources that the debtor receives [during the 6-month period preceding the bankruptcy] without regard to whether such income is taxable income . . ." 11 U.S.C. § 101(10A) (emphasis added).
In response, the Debtor argues that the statute permits her to take the secured debt expense deduction for her ex-husband's car because she is legally obligated on the debt. In other words, under Sections 1325(b)(3) and 707(b)(2)(A)(iii), she is permitted to deduct "all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition . . ." 11 U.S.C. § 707(b)(2)(A)(iii) (emphasis added). Because she is obligated on the Equinox installment loan contract and because the payments on the contract are contractually due for the post-petition period, the Debtor argues that she is permitted to deduct the expense regardless of whether she actually makes the payment.
With respect to the "excess income" not reported on Form B22C, the Debtor argues that distributions from a qualified retirement account such as her Thrift Savings account, should be excluded from "current monthly income." In support of this position, the Debtor argues that the retirement funds were earned and received over a period of years and not within the six months prior to filing. The distribution from the retirement account, she argues, is not "income," but rather is akin to a transfer from the Debtor's savings account to her checking account.
The Debtor has presented no legal arguments in support of excluding as income the other four categories of deposits into her bank account mentioned above.
Discussion
Resolution of the Trustee's objections to confirmation requires this Court to interpret Sections 1325(b) and 707(b), and revisit its recent rulings in In re Almonte, 397 B.R. 659 (Bankr.E.D.N.Y.2008), and In re Rahman, No. 808-73335, 2009 WL 205013 (Bankr.E.D.N.Y. Jan.23, 2009). Section 1325 of the Bankruptcy Code provides that if the trustee or the holder of an allowed unsecured claim objects to confirmation, the Court may not approve the plan unless,
. . . as of the effective date of the plan
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
*79 11 U.S.C. § 1325(b)(1)(B) (emphasis added).
"Projected disposable income" is not a defined term under the Bankruptcy Code. However, prior to the October 2005 enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), a debtor's projected disposable income figures were derived from actual income and expenses on Schedules I and J. Pursuant to BAPCPA, "disposable income" is now defined as:
. . . current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended
(A)(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and
(ii) for charitable contributions (that meet the definition of "charitable contribution" under section 548(d)(3) [FN1] to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made); and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
11 U.S.C. § 1325(b)(2) (emphasis added).
The Code provides that for above-median income debtors,[4] as we have in this case, the "amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor" under Section 1325(b)(2), shall be determined in accordance with Section 707(b)(2)(A) and (B). Section 707(b)(2)(A)(iii) deals specifically with expense deductions for secured debt repayments. Under this subsection, a debtor may take a monthly deduction for the total amount of payments "scheduled as contractually due" to a secured creditor within the 60-month period of a debtor's plan, divided by 60. The wording of the statute is less than clear and has been the focus of many bankruptcy court opinions. Section 707(b)(2)(A)(iii), provides that:
The debtor's average monthly payments on account of secured debts shall be calculated as the sum of
(I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and
(II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor's primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor's dependents, that serves as collateral for secured debts;
divided by 60.
. . .
11 U.S.C. § 707(b)(2)(A)(iii) (emphasis added).
The requirements of Section 707(b)(2)(A)(iii)(I) are implemented in practice through Line 47 of Form B22C.
In In re Almonte, 397 B.R. 659 (Bankr.E.D.N.Y.2008), this Court held that a debtor need not include in his "projected disposable income" calculation funds that he received from credit card cash advances *80 in the six months prior to filing bankruptcy. In so holding, the Court found that the debtor's historic "current monthly income" calculation is but a starting point for determining a debtor's "projected disposable income" under Section 1325(b)(1)(B). Where actual income reported on Schedules I differs from current monthly income this Court will take into consideration a debtor's actual projected income over the life of the plan. Specifically, the Court stated that:
. . . [I]f the chapter 13 trustee or an unsecured creditor objects to confirmation, the calculation of "disposable income" under Section 1325(b) and Form B22C is but a starting point in reaching the debtor's "projected disposable income." If a debtor's "disposable income" on Form B22C differs from the debtor's actual monthly disposable income reported on Schedules I and J, the Court may analyze the debtor's actual projected income over the life of the plan in order to avoid a result which the Court believes is inconsistent with two fundamental bankruptcy principles; that is, giving the honest but unfortunate debtor a "fresh start," and requiring a chapter 13 debtor to repay creditors what he can afford from his post-petition earnings. . . .
. . . .
If the Court were to include credit card cash advances taken within the six months preceding bankruptcy within this Debtor's "projected disposable income," it would commit to the plan funds which the Debtor would not reasonably be expected to have during the life of the case. It would be absurd to assume that the Debtor would continue to take cash advances in order to fund his chapter 13 plan, and the Court is not prepared to require that result.
Almonte, 397 B.R. at 667. Assuming, without deciding, that cash advances could be considered income, this Court found that where alleged "income" "would not reasonably be expected" to recur for a debtor during the life of the case, it should not be included in "projected disposable income."
On the expense side of the "projected disposable income" analysis, this Court held in Rahman, that a debtor should not be permitted to take a secured debt expense on Form B22C for mortgage payments on real property where the debtor has stated an intention in his Chapter 13 plan to surrender that real property:
As in Almonte, the Court does not believe the statutes require a finding that recognizes "fictional expenses" any more than "fictional income." As with the income side of the disposable income calculation, the Court finds that the expense side of the disposable income calculation is forward-looking. That is to say, expense calculations should not be a static evaluation of a debtor's obligations as they existed on the petition date. . . . [T]he Court must look at a debtor's stated intentions of record as they exist on the date of confirmation to determine what expenses are "reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor" during the Chapter 13 plan. One of the main requirements in Chapter 13 is that a plan be funded with all of a debtor's disposable income, [and] it would go against the very essence of Chapter 13 to allow a debtor to deduct an expense that he has stated he does not intend to actually pay during the life of the plan. . . . Every dollar of expenses deducted from a debtor's current monthly income is another dollar which is not repaid to unsecured creditors. Absent binding authority in this Circuit to the contrary, this Court is not prepared to *81 adopt a reading of the statute that permits a debtor to withhold disposable income from repayment to unsecured creditors.
Rahman, 2009 WL 205013, at *7.
Both the Almonte and Rahman decisions applied a forward-looking approach to the "projected disposable income" analysis under Section 1325(b)(1). As such, in Rahman this Court held that in calculating a debtor's "projected disposable income" the Court should take into consideration a debtor's stated intentions as of the petition date and look beyond the petition date to determine a debtor's secured debt expenses:
This approach finds support in certain forward-looking language of both Sections 1325(b) and 707(a). First, Section 1325(b)(1) requires that a debtor commit all of his "projected" disposable income "to be received" by the debtor towards repayment of unsecured debt. Use of the words "projected" and "to be received" implies that "projected disposable income" is a forward-looking concept and courts should look at a debtor's disposable income over the life of the plan. Second, Section 1325(b)(2)'s definition of "disposable income" allows a debtor to deduct expenses for "amounts reasonable necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor." 11 U.S.C. § 1325(b)(2)(A)(i) (emphasis added). The use of the words "to be expended" further implies that the calculation of expenses should be forward-looking. Third, Section 707(b)(2)(A)(iii) refers to amounts "scheduled as contractually due to secured creditors in each month of the 60 months following the petition date. . . ." 11 U.S.C. 707(b)(2)(A)(iii) (emphasis added). Reference to the 60 months "following" the petition date also implies that expenses should be forward-looking. To the extent that it is not clear that the language of Section 707 is future-oriented, one must remember that Section 707(b) is incorporated into Section 1325(b) by reference and should be read in light of that section.
Rahman, 2009 WL 205013, at *6 (footnote omitted).
1. Secured debt expense deduction
In this case, the Debtor has taken a secured debt expense deduction for a car which she owns subject to a retail installment contract on which the Debtor is an obligor. The Debtor freely acknowledges her ex-husband has exclusive use of the car and is solely responsible to make all payments due under the installment contract. However, it appears that not only is the Debtor not making the car loan payments on the Equinox, but neither is her ex-husband. On December 8, 2008, GMAC, LLC filed a motion for relief from the automatic stay, and the Section 1301 co-debtor stay, with respect to the Equinox. The motion alleges that the loan was in default beginning with the October 2008 payment. The motion was heard on January 5, 2009 and was granted without opposition.
In light of this Court's prior ruling in Rahman, this Court finds that the Debtor may not take the secured debt expense deduction for the Equinox. The Court would be stretching the bounds of reason to find that repayment of a loan on a vehicle driven exclusively by the Debtor's ex-husband is "reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor" under Section 1325(b)(2). Furthermore, although not stated directly in her proposed Chapter 13 plan, the Debtor's counsel has stated on the record that the Debtor has no intention of making the *82 contractual payments on this obligation.[5] Consistent with the approach as stated in Rahman, this Court does not believe a debtor may take a deduction for repayment of a secured debt where the debtor has clearly stated on the record that she does not intend to make the payments during the pendency of the case.
The court in the case of In re Quigley, 391 B.R. 294 (Bankr.N.D.W.Va.2008), came to the opposite conclusion. In Quigley, the debtor was listed as the title owner of the vehicle and both she and her ex-boyfriend were obligated on the note. The debtor's ex-boyfriend had exclusive possession of the vehicle and the debtor did not make payments on the obligation. The chapter 13 trustee objected to the secured payment expense by the debtor arguing that the vehicle was not necessary for the debtor's reorganization because she did not use the vehicle or make payments on the secured obligation. In Quigley, the court read Section 707(b)(2)(A)(iii) strictly and found that the debtor could properly take the deduction because she was legally obligated to repay the car loan and the car loan payments were "contractually due" regardless of whether she intended to make the payments. The court applied a "snapshot" approach to Section 707(b)(2)(A) and found dispositive of the issue the fact that on the date of the petition the debtor was contractually obligated to make the payments. However, the court also found that "if the Debtor takes a deduction from her current monthly income for a secured debt that she is contractually required to pay, but for which a non-debtor party is making the payments, then the Debtor must also include the amount of the third party payments in her calculation of current monthly income." Quigley, 391 B.R. at 316 (relying on Section 101(10A) which includes in "current monthly income" "any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor. . . .").
The "snapshot" approach applied by the Quigley court is directly at odds with the "forward-looking" or "crystal ball" approach which this Court applied in Almonte and Rahman and therefore, the Court declines to adopt the holding in Quigley. However, it is notable that the result under either approach applying the facts of this case is nearly the same. Although not a dollar-for-dollar exchange, the Quigley court required the debtor's secured debt expense to be added back into the income side of the means test.
2. Distributions from retirement account
The Trustee also objects to confirmation on the basis that the Debtor has failed to provide for all of her "current monthly income" on Form B22C. The Trustee makes this argument based on his review of the Debtor's bank statements for the six months prior to the petition which show significantly more "income" than reported by the Debtor on the means test. Specifically, the Trustee argues that the Debtor must include distributions from her retirement savings account received within the six-month period prior to the bankruptcy filing, in her disposable income calculations on Form B22C.[6]
*83 Similar facts were presented in the case of In re DeThample, 390 B.R. 716 (Bankr.D.Kan.2008). In DeThample, the bankruptcy court held that a singular distribution from a retirement account received within the six-month period prior to bankruptcy should be included within "current monthly income," but should not be included in a debtor's "projected disposable income" under Section 1325(b)(1). As this Court held in Almonte, the court in DeThample held that the "current monthly income" calculation under Section 1325(b)(2) and 101(10A) is but a starting point in the "projected disposable income" analysis. First, the court found that the retirement account distribution should be included in "current monthly income" because under the definition of that term in Section 101(10A), current monthly income includes "every dime a debtor gets during the relevant period except for those amounts specifically excluded by § 101(10A)(B), like Social Security Benefits." DeThample, 390 B.R. at 721. Next, the court focused on the term "projected disposable income" in Section 1325(b)(1) and found that that calculation must take into consideration both the historic figures which flow from the "current monthly income" calculation, and a debtor's "future income abilities." Id. at 723. In so holding, the court in DeThample adopted the forward-looking approach to "projected disposable income" and relied heavily on the Tenth Circuit Bankruptcy Appellate Panel decision in In re Lanning, 380 B.R. 17 (10th Cir. BAP 2007), which was subsequently affirmed by the Tenth Circuit, In re Lanning, 545 F.3d 1269 (10th Cir.2008), and also In re Kibbe, 361 B.R. 302 (1st Cir. BAP 2007). In DeThample, the debtor had not demonstrated a pattern of making withdrawals from the retirement account and moreover, the retirement account was nearly depleted to the point where future withdrawals would be minimal. Finally, the court noted that a forward-looking reading of the statute, which excludes from "projected disposable income" retirement account distributions which are not likely to recur post-petition, is consistent with the exemption scheme of Section 522 and Congressional intent to protect retirement assets from the reach of creditors. The court found:
[T]he debtors' draw of $4,000 on their 401(k) does not appear to be part of an ongoing pattern of payments. Indeed, according to debtors' amended Schedule C, only $400 remains in the 401(k) account. This affords sufficient factual predicate to find that a change of circumstances justifies excluding the pre-petition $4,000 401(k) distribution from debtors' CMI, at least for § 1325(b)(1)(B) purposes. While this Court declines to categorically declare that pre-petition 401(k) disbursements may in all cases be excluded from the projected disposable income calculation, where the draw does not appear to have been taken on a planned or periodic basis, it will likely be disregarded in the projected disposable income calculus. This reading is consistent with a reading of other portions of the Code, including *84 the clearly espoused policy of § 522(b)(4) which fully exempts any qualified retirement fund from the bankruptcy estate, § 522(b)(3)(C) that exempts a 401(k) fund for debtors claiming state law exemptions, § 522(d)(12) that exempts any 401(k) fund for debtors claiming federal exemptions, and § 522(n) which allows other Internal Revenue Code 408 funds to be exempted up to $1.0 million. Congress clearly intended that debtors' retirement assets be protected even in the event of debtors' bankruptcy.
DeThample, 390 B.R. at 725-26 (footnotes omitted).
Other courts have resolved this same issue by finding that retirement account distributions are not "income" and therefore are not included in "current monthly income" at all. Rather, these courts have found that the income in such situations is realized by the debtor at the time the retirement funds are deposited into the account, not when they are subsequently distributed to the debtor. A distribution from the retirement account under this reasoning, is analogous to a transfer from a debtor's savings account to his checking account. See Zahn v. Fink (In re Zahn), 391 B.R. 840 (8th Cir. BAP 2008); Simon v. Zittel, No. 07-31616, 2008 WL 750346 (Bankr.S.D.Ill. March 19, 2008); In re Wayman, 351 B.R. 808 (Bankr.E.D.Tex. 2006).
This Court is persuaded by and adopts the reasoning of the court in DeThample. The record in the case before the Court is that the Debtor withdrew $8,850.34 from her retirement account within the six months prior to the petition. There is no indication in the record that there was more than one withdrawal, or, if there was, that the withdrawals were systematic. Nor is there any indication in the record that the withdrawal(s) are likely to recur post-petition. As the court noted in DeThample, retirement monies are generally exempt from the reach of a debtor's creditors. Although the Debtor's schedules reflect that there is a significant balance remaining in her retirement accounts and it is possible that the Debtor will make withdrawals post-confirmation, the Court believes it would be inconsistent with its prior decisions and inconsistent with the stated intent of Congress to in essence compel the Debtor to withdraw funds from a qualified retirement account to fund a plan where the Debtor has not stated an intention to do so voluntarily. In light of these findings, the Court will not compel the Debtor to include voluntary withdrawals from her retirement account in her "projected disposable income" calculation on Form B22C.
Conclusion
For all of the foregoing reasons, the Court sustains the Trustee's objection to confirmation in part and finds that the Debtor should not be permitted to take a secured debt expense deduction for the Equinox, and overrules the Trustee's objection to confirmation in part and finds that the Debtor need not include withdrawals from her retirement account within "current monthly income."[7]
An order consistent with this Memorandum Decision will issue forthwith.
NOTES
[1] The Court will assume that there is only one Chevrolet Equinox at issue, whether it is a 2003 or 2005. Also, although the Debtor's petition indicates that the Equinox was leased, and there was some discussion on the record of the January 8, 2009 hearing indicating that the Equinox was leased, it appears that the car was the subject of a retail installment contract between the Debtor, Jeffrey D. Mendelson (her ex-husband) and Dobler Chevrolet. GMAC, LLC, as assignee of Dobler Chevrolet, filed a motion on December 8, 2008, seeking relief from the automatic stay in order to enforce its rights as against the Equinox as a result of the Debtor and her exhusband's failure to make the car loan payments. The motion attaches a copy of a retail installment contract which is evidence that the Equinox was not leased.
[2] While the Debtor only included an actual average monthly payment expense of $33.90 for the Equinox, as an above-median debtor she is permitted to take the IRS standard deduction of $489. See 11 U.S.C. § 1325(b)(3).
[3] The January 8th hearing date was the return date on a motion to dismiss by the Trustee. On December 18, 2008, the Trustee had filed a motion to dismiss alleging that the Debtor "failed to provide the Trustee with an affidavit of contribution including pay stubs attached from ex-husband; an amended means test to list tax refund; and bank statements from account 7654 from August 5, 2008 through September 30, 2008." To the extent these allegations are not already resolved or resolved by this Memorandum Decision, the Court will address the Trustee's motion to dismiss at a subsequent hearing.
[4] See 11 U.S.C. § 1325(b)(3) (explaining who qualifies as an above-median income debtor).
[5] Indeed, the vehicle by now may likely have been repossessed considering that the stay was lifted over two months ago. Although not central to this holding, it appears that the debt soon will be (or has already been) accelerated and there will no longer be any monthly payment scheduled as contractually due.
[6] The facts presented to the Court are that this was an early withdrawal from a retirement account, not a loan. This is based on the Debtor's statement of facts ("Statement"), dated February 11, 2009, which states that "[t]he debtor withdrew $8,850.34 from her Thrift Savings Plan within the six month CMI period." It is also based on the Debtor's tax Form 1099-R attached to the Statement which shows a gross distribution for 2008 of $8,850.34 attributable to an early distribution, as opposed to a loan. The Court notes that both Schedule I and Line 55 of Form B22C list a $1,138.36 expense for repayment of a Prudential retirement account loan. The Court assumes, however, that this is a repayment not attributable to the retirement withdrawals at issue in this decision. If that assumption is not correct this analysis could change substantially.
[7] The record has not been fully developed on the other categories of "excess income" referred to in the Debtor's statement of facts, dated February 11, 2009. As such the Court is not in a position to render a ruling as to whether the "income" reflected in those bank deposits should be included in "current monthly income." | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551548/ | 170 B.R. 61 (1994)
In re IVAN F. BOESKY SECURITIES LITIGATION.
Mark L. GLOSSER, Trustee for Pennsylvania Engineering Corp., Plaintiff,
v.
Victor POSNER, Defendant.
No. 89 Civ. 3789 (MP), MDL No. 732.
United States District Court, S.D. New York.
June 1, 1994.
*62 Berger & Montague, Philadelphia, PA, for plaintiff Glosser.
Wolf Popper Ross Wolf & Jones, New York City, co-lead/liaison counsel in MDL Dkt. No. 732.
Kirkland & Ellis, New York City, for defendant Posner.
MEMORANDUM AND ORDER
MILTON POLLACK, Senior District Judge:
This action was originally commenced in the United States District Court for the District of Delaware under the title of Rubin v. Posner et al., and was transferred to this Court by order of the Judicial Panel on Multidistrict Litigation filed May 25, 1989, pursuant to 28 U.S.C. § 1407.
It is self-evident that this Court has exclusive jurisdiction over this suit during its pendency in the site of the multidistrict proceedings in the Southern District of New York. See Manual for Complex Litigation, Second, § 31.121 (1985) ("Once a transfer under § 1407 becomes effective when the order granting the transfer is filed in the office of the clerk of the transferee court the jurisdiction of the transferor court ceases and the transferee court has exclusive jurisdiction.") With due respect and apologies to the Bankruptcy Court for the Western District of Pennsylvania, that Court has no jurisdiction to impair or impede or dictate proceedings affecting the parties or attorneys who have been transferred to this Court while the proceedings herein are incomplete, ongoing and have not been remanded to that or any other Court by the Multidistrict Panel; the action was transferred here and remains here until expressly remanded. See In re Baldwin-United Corp., 770 F.2d 328, 337 (2d Cir.1985) ("the jurisdiction of a multidistrict court is `analogous to that of a court in an in rem action or in a school desegregation case, where it is intolerable to have conflicting orders from different courts'" (quoting 17 C. Wright & A. Miller & E. Cooper, Federal Practice & Procedure, *63 § 4225)). See also Glasstech, Inc. v. AB Kyro OY, 769 F.2d 1574, 1576-77 (Fed.Cir. 1985) (holding that transferee court has exclusive jurisdiction following transfer and holding that "[t]he parties cannot confer jurisdiction by mutual consent.") A transferee court's inherent power cannot be circumscribed or usurped by impermissible actions taken by other federal courts, albeit that they may be bankruptcy courts.
The Pennsylvania Bankruptcy Court's orders of May 1994, made at the instance of the plaintiff in this suit, Mark L. Glosser, were undoubtedly the result of nondisclosure of the facts and the situation of this case in this District and with this Court, and therefore made inadvertently and without knowledge of the status of the case. Undoubtedly, the Bankruptcy Court was not informed by Glosser and those acting with him of the background to the case and of the exclusive authority of this Court in the premises or that this Multidistrict Court was in the midst of ongoing and uncompleted proceedings herein affecting this and other multidistrict proceedings as indicated more particularly hereafter. These delinquencies by Glosser were seemingly in flagrant contempt of this Court's jurisdiction, conferred by the Multidistrict Panel of the Judicial Conference, and control of this case and in disrespect of the Bankruptcy Court.
Plainly, as is indicated in the copy of the extraordinary annexed letter of Glosser to the attorneys for the plaintiff before this Court, said Glosser proceeded in secrecy before the Pennsylvania Court and in secrecy from this Court, failing to inform the Pennsylvania Bankruptcy Court of the status of this transferred action, and the authority of this Court in the premises. The orders so sought and obtained collide with, frustrate and would impair this Court's jurisdiction and authority in the ongoing and incomplete matters pending in this action and in other multidistrict matters related to and bearing hereon. As part of this Court's jurisdiction, this Court has before it the claim of Pennsylvania Engineering Corporation (of which Glosser is trustee) asserted against other defendants, including Drexel Burnham Lambert, Inc., for the same damages deriving from the identical securities transactions sued upon in this case.
Accordingly this Court directs the plaintiff herein, over whom this Court has personal jurisdiction, to immediately lay before the Bankruptcy Court for the Western District of Pennsylvania a copy of this memorandum and apply for the rescission of all orders obtained from that Court at the instance of Mark Glosser and any other, concerning any matter involved in this and any related claims during the pendency of this transferred action in this Court.
For the guidance of the Bankruptcy Court for the Western District of Pennsylvania, a brief summary of some salient matters affected by Glosser's improper actions follows.
On a motion on behalf of the plaintiff herein under Fed.R.Civ.P. 56 and based on findings of fact made by this Court in S.E.C. v. Drexel Burnham Lambert, 837 F.Supp. 587 (S.D.N.Y.1993), aff'd 16 F.3d 520 (2d Cir. 1994), this Court held that under the doctrine of collateral estoppel the plaintiff was entitled to partial summary judgment of liability and the case was then set for trial on the remaining issue of damages. On the verge of trial thereof, Posner offered to settle at a conference in Philadelphia at the offices of plaintiff's counsel herein. The negotiations continued in New York before the undersigned and agreement was reached on the amount of the settlement. Since the terms of the settlement included a demand that all outstanding matters pertaining to Posner be released by the plaintiff and vice versa, the parties were given a continuance of trial and the jury trial on the issue of damages originally demanded herein was waived.
The parties were directed to submit for this Court's consideration and approval the papers necessary to effectuate the contemplated result. Since there was complexity involved in the drafting, a period of approximately two weeks was envisioned before the parties would return to the Court and petition for this Court's approval and judgment to conclude this case and the subsidiary proceedings involved.
Unknown to this Court, however, Glosser in the interim undertook to assert that Berger *64 & Montague, plaintiff's attorneys of record, were discharged, and then to appear before the Pennsylvania Bankruptcy Court requesting an order to take over the settlement sum with the purpose to present this Court with a purported discontinuance of this suit and an alleged agreement of settlement prepared by him or Posner's attorneys and signed by himself and Posner's attorneys; the latter were apparently told that the Pennsylvania Bankruptcy Court had taken jurisdiction of the settlement proceeds and had ordered them to be deposited in the office of the Clerk of Court for the Western District of Pennsylvania.
Glosser's attempt to discharge plaintiff's attorneys herein was without regard to this Court's requirements and in violation of General Rule 3(c), which states:
An attorney who has appeared as attorney of record for a party may be relieved or displaced only by order of the court and may not withdraw from a case without leave of the court granted by order. Such an order may be granted only upon a showing by affidavit of satisfactory reasons for withdrawal or displacement and the posture of the case, including its position, if any, on the calendar.
The exact whereabouts of the $21 million settlement fund has not been disclosed although, at the hearing mentioned below, it was indicated to be in a so-called bonded account of Glosser with the Chemical Bank in New York, purportedly in compliance with the instruction of the Bankruptcy Court to deposit same with the Clerk of the Pennsylvania Court.
The actions of Glosser in secrecy from this Court having at that point come to light in part, this Court ordered a hearing for an explanation by Glosser's and Posner's attorneys. Upon telephone communication to the Bankruptcy Judge by this Court, it was assured that pending a hearing and action by this Court the Pennsylvania Court would hold matters in abeyance. Such a hearing was held at which it clearly appeared that the plaintiff Glosser had acted herein and in Pennsylvania in derogation of this Court's jurisdiction and authority in this multidistrict matter.
Posner's attorneys protested that their client had no choice but to comply with the Pennsylvania orders obtained by Glosser and that it was under those circumstances that they had delivered the moneys as directed and proceeded to sign the purported settlement papers and purported stipulation of discontinuance of this litigation.
Decision was reserved by this Court at the close of the hearing to give consideration to the irregularities which had occurred.
Suffice it to say, that this Court has no intention of entering into any sort of conflict with the Pennsylvania Bankruptcy Court and conceives that the first order of business is to require that the plaintiff Glosser, who is subject to the personal jurisdiction of this Court, shall take the laboring oar to set matters straight in the Pennsylvania Court and attorn to the multidistrict litigation jurisdiction of this Court so as to properly complete the settlement made in this Court on its record.
When that has been accomplished and when a proper judgment is entered herein by this Court, then a suggestion can be made by this Court to the Multidistrict Panel to transfer any settlement recovery with due regard for any charging lien of plaintiff's attorneys asserted herein.
So Ordered.
(ANNEX)
Mark L. Glosser
Attorney-At-Law
Suite 1331 Gulf Tower
Pittsburgh, PA 15219
(412) 281-6555
May 15, 1994
VIA FAX (215) 875-4604
David Berger
Berger & Montague, P.C.
1622 Locust Street
Philadelphia, PA 19103
*65
Re: Mark L. Glosser, Trustee for Pennsylvania
Engineering Corp. v. Victor Posner,
89 Civ. 3789 (MP) (S.D.N.Y.)
Dear David:
On Friday morning, May 13, 1994, I executed and delivered the settlement agreement and supporting documentation regarding the above captioned action. After delivering the executed documents, I left my office for the remainder of the day. Upon returning home Friday evening, I found several messages from my office indicating that you were trying to reach me. Although I did not know (Friday evening) what you wished to speak to me about, I was sure it was a continuation of our ongoing discussion concerning what court had jurisdiction over the estate of PEC and the settlement proceeds.
I did not give you advance notice of my intention to execute the settlement agreements as I know you disagree my proposed course of action. I did not wish to put you in a bind with Judge Pollack by giving you advance notice of my intentions nor did I wish to engage in additional discussion with you as my mind was made up. It was my intention to call and/or write you Monday morning advising you of this fact.
On Sunday morning, I received a phone call (at home) from Stan Siegel requesting, on your behalf, that I not execute the settlement agreements and that I call you at home to discuss the matter further. Stanley also mentioned several other matters which I will address below.
I can not (and will not) undo the execution and delivery of the settlement agreement. The settlement agreement reflects the binding contract between Posner and myself which was placed on the record before Judge Pollack. The settlement is concluded and I will not permit Victor Posner nor anyone else to undo it. I would also point out that the terms of the settlement as read into the record before Judge Pollack (and approved by Judge Pollack) called for the settlement proceeds to be administered by the United States District Court for the Western District of Pennsylvania and not by The United States District Court for the Southern District of New York.
Stanley also mentioned (although I cut him off) the possibility of your visiting Chief Judge Ziegler or of having Judge Ziegler call Judge Pollack. I do not agree or consent to either of these courses of action and I instruct you, as my attorney, not to undertake either course of action or in any other way attempt to communicate (except with my express written permission) with Judge Ziegler.
My reasons for these instructions are several First, I intend to have the debtors' estates and the funds contained therein administered in strict compliance with the Bankruptcy Code and the Rules of Bankruptcy Procedure. The only reason to speak to Judge Ziegler is to receive permission to attempt to circumvent, in some fashion, the Bankruptcy Code by giving Judge Pollack control over estate assets when the Code does not permit this.
Secondly, I believe that your duty as my attorney is coming into conflict with the duty that you owe to your firm as to other matters you have before Judge Pollack. I do not believe that you can appear before Judge Ziegler and advocate my interests as your client (i.e., advocate strict compliance with the Bankruptcy Code and control over estate assets) while at the same time seek to urge the Court to take an action contrary to my wishes as your client. It is my opinion that the course of action you wish Judge Ziegler to take is for your, and/or Judge Pollack's benefit, and not my (i.e., your client's) benefit.
In addition (as Stanley will tell you), Judge Ziegler made it clear to both of us that he will not call other judges concerning jurisdictional issues pretaining to cases which are before him. Conversely, Judge Ziegler indicated to Stanley and I that he does not expect other judges to call him regarding these same issues. I do not intend to ask Judge Ziegler to do something he has expressly stated his intention not to do.
Given the events since the settlement with Victor Posner was reached, I have come to the reluctant conclusion that your firm can *66 no longer represent me in the above captioned matter. It is with regret that I am notifying you that you no longer have any authority to act on my behalf in the above referenced matter and that your representation of me in this matter is terminated of now (i.e., Sunday, May 15, 1994).
I appreciate the work you have done on my behalf and I thank you for it. I do not believe any other law firm in the country could have attained better results. I regret that matters outside of our control have lead to my terminating your services as to the above referenced case. When and if I require the assistance of counsel in this case, I will retain new counsel and request that you cooperate with them.
Finally, as I have previously told you, Judge Ziegler advised Stanley and myself that he has no objection to Judge Pollack reviewing and passing on your fees as to the above referenced matter. I will obtain an order to this effect at the same time Judge Ziegler (after notice and hearing as required by the Bankruptcy Code) approves the settlement with Victor Posner. I anticipate that the hearing on my Motion to Approve the Settlement Agreement will be conducted by Judge Ziegler in approximately thirty (30) days.
Please excuse any typing or form errors in this letter as I am typing it and faxing it to you from my home computer as of this date, i.e., Sunday, May 15, 1994. I will not be available tomorrow. However, I will attempt to reach you by phone today or later in the week to personally convey my thoughts to you.
Thank you again for your able representation. I hope you understand my position.
Very truly yours,
/s/Mark L. Glosser
Mark L. Glosser | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551609/ | 315 B.R. 735 (2004)
In re Chester J. BUNGERT; and Josephine Bungert, Debtors.
Capital One Bank, Plaintiff,
v.
Chester J. Bungert; and Josephine Bungert, Defendants.
Bankruptcy No. 03-36299-SVK. Adversary No. 04-2039.
United States Bankruptcy Court, E.D. Wisconsin.
September 10, 2004.
*736 Robert M. Waud, Milwaukee, WI, for Debtors.
MEMORANDUM DECISION
SUSAN V. KELLEY, Bankruptcy Judge.
The issue is whether the Debtors' credit card debt to Capital One Bank ("Capital One") is discharged in bankruptcy. Capital One properly filed and served a nondischargeability complaint on the Debtors and their attorney, but the Debtors did not answer. Capital One then moved for default judgment, supported by the affirmation of its attorney.
JURISDICTION AND VENUE
The Court has jurisdiction pursuant to 28 U.S.C. § 1334(b) (2004). Venue is proper under 28 U.S.C. §§ 1408, 1409. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(I).
FACTS
According to the complaint and affirmation of Heath S. Berger, one of Capital One's lawyers, between May 9, 2003 and September 19, 2003, the Debtors used their Capital One credit card for twentythree purchases totaling $1,771.41 and received twenty cash advances in the amount of $8,035.00, for a total of $9,806.41. The exhibit attached to the Complaint shows that many of the purchases were made at grocery stores and pharmacies. The cash advances within 60 days of the bankruptcy petition totaled $2,385, including a check purchased on August 15, 2003 for $1,000. There is no evidence in the record of how the Debtors used the cash advances. The Debtors made payments of $100 each on June 4, 2003, July 4, 2003, and July 25, 2003, and filed a chapter 7 bankruptcy petition on October 10, 2003.
Capital One alleged that each time they used the credit card, the Debtors made an implied representation of an intent to repay the amounts they charged. Further, Capital One stated "upon information and belief that the Debtors knew that the alleged representations were false and were made to induce Capital One to continue to extend credit to the Debtors. Capital One also alleged "upon information and belief that the Debtors purchased "luxury good(s) and/or service(s), including but not limited to jewelry, gifts, furniture and home furnishings," and used cash advances to pay other debts and expenses.
The complaint alleged that Capital One justifiably relied on the representations, continued to extend credit to the Debtors, and sustained damages in the amount of $12,336.70. Finally the complaint stated that the Debtors were insolvent at the time they incurred the charges, and incurred the charges with a reckless disregard of whether they could repay the debt to the Capital One. This is the extent of the record; there are no transcripts of the § 341 meeting of creditors, evidence of when the Debtors first met with their bankruptcy attorney, nor any other details supporting Capital One's allegations.
DISCUSSION
I. Plaintiff must prove a prima facie case for nondischargeability in order to succeed on a Motion for Default Judgment.
A default by a defendant does not automatically entitle a plaintiff to entry of a default judgment. Mega Marts, Inc. v. Trevisan (In re Trevisan), 300 B.R. 708, 713 (Bankr.E.D.Wis.2003). See Fed. R. Bankr.P. 7055 (making Rule 55 applicable to bankruptcy adversary proceedings). In Trevisan, a nondischargeability action involving worthless checks, this Court held *737 that a plaintiff must prove a prima facie case under Bankruptcy Code § 523(a)(2)(A) in order to succeed on a motion for default judgment. Trevisan, 300 B.R. at 715 (noting the risk that the plaintiff obtained entry of default because of the debtor's inability to defend against the nondischargeability action). Trevisan held that the plaintiff did not prove its case, and denied the motion for default judgment. Id. at 719.
II. Various approaches have been used to analyze nondischargeability actions involving credit cards.
Bankruptcy Code § 523(a)(2)(A) provides in pertinent part:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debtfor money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained byfalse pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's ... financial condition.
11 U.S.C. § 523(a)(2)(A) (2004).
Historically, courts have developed several approaches when applying this provision to credit card cases. Chevy Chase Bank v. Briese (In re Briese), 196 B.R. 440, 446 (Bankr.W.D.Wis.1996); Chase Manhattan Bank v. Murphy (In re Murphy), 190 B.R. 327, 331 (Bankr.N.D.Ill. 1995). These include the "assumption of the risk," "totality of the circumstances" and "implied representation" tests. Briese, 196 B.R. at 446-47.
The "assumption of the risk" view espoused in First Nat'l. Bank of Mobile v. Roddenberry, 701 F.2d 927, 932 (11th Cir. 1983), evaluates the reasonableness of the issuer's decision to allow the debtor to use the credit card in the face of circumstances that suggest abuse of the privilege or imminent default.Courts adopting this test are reluctant to deny dischargeability of credit card obligations incurred before the issuer revoked the card. Briese, 196 B.R. at 446. These courts often are critical of the credit assessment and card issuance polices of the issuer, and hold the issuer "equally, if not more, responsible than the debtor for the debtor's predicament." Larry Bates, Excepting Credit Card Debt from Discharge in Bankruptcy: Why Fraud Can't Mean What the Courts Want it to Mean, 78 N.D. L.Rev. 23, 36 (2002).
Another approach is the "totality of circumstances" approach of In re Dougherty, 84 B.R. 653, 657 (9th Cir. BAP 1988). Briese, 196 B.R. at 447; See David F. Snow, The Dischargeability of Credit Card Debt: New Developments for a New Direction, 72 Am. Bankr.L.J. 63, 72 (1998). Under this test, the court applies a list of factors to the debtor's situation to see if the credit card debt should be discharged. Briese, 196 B.R. at 447. A modification of this approach was incorporated into a "misrepresentation/reliance" analysis by the Ninth Circuit Court of Appeals in Citibank (South Dakota), N.A. v. Eashai, 87 F.3d 1082, 1088 (9th Cir.1996). Within the "misrepresentation/reliance" scheme, the fact-driven "circumstances" approach is used to determine the debtor's fraudulent intent. Snow, supra, at 72. But see Briese, 196 B.R. at 452 (declining to apply the factors because, while "non-exclusive," they may nonetheless limit a court's investigation).
The "misrepresentation/reliance" test is now the most common view. Bates, supra, at 27 n. 28. The test, depending on the circuit, incorporates the elements of common law fraud: 1) the debtor made a representation; 2) the debtor knew the representation was false; 3) the representation was made with the intent to deceive; 4) the creditor relied on the representation; and 5) the creditor suffered an injury *738 or loss. E.g., Rembert v. AT & T (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998). See Snow, supra, at 67-68.
One difficulty with application of the misrepresentation/reliance test is that in a credit card situation, a debtor makes no express representation to the issuer of the card at the time of the card's use. The debtor is usually dealing with a third party (salesperson), or no person at all (cash machine); rarely if ever the issuer. Murphy, 190 B.R. at 331; Bates, supra, at 29.
In order to circumvent the problem of the lack of face-to-face contact and any actual representation being made, courts have developed the legal fiction of an "implied representation" for credit card transactions. Snow, supra, at 74. Early decisions held that the use of a credit card carried implied representations of both the ability and intent to repay the issuer. Bank One Columbus, N.A. v. McDonald (In re McDonald), 177 B.R. 212, 216 (Bankr.E.D.Pa.1994); B.C. Prange Co. v. Schnore (In re Schnore), 13 B.R. 249, 254 (Bankr.W.D.Wis.1981). However, the implied representation of the ability to repay was eliminated in light of the language of Bankruptcy Code § 523(a)(2)(A) making debts nondischargeable "other than a statement respecting the debtor's or an insider's financial condition." See, e.g., Anastas v. Am. Savings Bank (In re Anastas), 94 F.3d 1280,1285 (9th Cir.1996) (emphasizing the implied representation is only of the intent to repay, not ability to repay).
Currently, the "implied representation" analysis applies the fiction that with each use of the credit card, the debtor represents an intent to repay. Id.; AT & T Universal Card Services v. Mercer, 246 F.3d 391, 406 (5th Cir.2001); Rembert, 141 F.3d at 281; AT & T Universal Card Services v. Ellingsworth (In re Ellingsworth), 212 B.R. 326, 334 (Bankr.W.D.Mo. 1997).
Some courts are critical of the "implied representation" theory. AT & T Universal Card Services v. Alvi (In re Alvi), 191 B.R. 724, 731-32 (Bankr.N.D.Ill.1996); Mercer, 246 F.3d at 425-29 (dissenting opinion). Three arguments are made against application of the legal fiction employed in the theory. First, using a credit card, like issuing a check, is not a representation at all. Alvi, 191 B.R. at 732. According to the Supreme Court, checks are not factual assertions, and therefore cannot be categorized as "true" or "false." Williams v. U.S., 458 U.S. 279, 284, 102 S.Ct. 3088, 73 L.Ed.2d 767 (1982). From this, the Alvi court determined that the similarities between credit card use and the issuance of a check "make it illogical to conclude that the use of a credit card in an ordinary credit transaction necessarily involves a representation." 191 B.R. at 732.
Second, no representation was made at the time of the transaction, because the entire agreement between the debtor and the credit card issuer was made when the card was issued. Mercer, 246 F.3d at 426. According to this argument, the credit card agreement delineates the terms and conditions of card use, and therefore embodies the debtor's intent to repay the credit extended. Id. As the dissent in Mercer stated:
So what occurred when [the debtor] used the card... was simply the transfer of funds against the credit line previously established and on the terms and conditions previously established. No new loan agreement was made, and no new terms were agreed to. Hence, no new representations were made.
Id. at 427.
Lastly, from a policy standpoint, to infer an "implied representation" in a credit card transaction runs counter to the fundamental *739 principle of bankruptcy law that exceptions to discharge must be strictly construed in favor of the debtor. Id. at 425; Alvi, 191 B.R. at 732 n. 15. By inferring a representation is made when a credit card is used, the creditor is effectively "relieved of the obligation of proving that a false representation was made." Mercer, 246 F.3d at 426.
Avoiding the fray surrounding the appropriateness of the "misrepresentation/reliance" and "implied representation" theories for § 523(a)(2)(A) nondischargeability actions, the Seventh Circuit offered an analysis of "actual fraud" that circumvents the shortcomings of the other approaches. McClellan v. Cantrell, 217 F.3d 890, 892-93 (7th Cir.2000). In McClellan, the court noted that many courts and commentators assume that fraud requires proof of a misrepresentation. 217 F.3d at 892. However, the language of § 523(a)(2)(A) is not limited to "fraudulent misrepresentations," but also includes "actual fraud." Id. at 893 ("... by distinguishing between `false representation' and `actual fraud,' the statute makes clear that actual fraud is broader than misrepresentation."). In McClellan, the court defined "actual fraud" as "any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another." Id. See also 4 Alan N. Resnick and Henry J. Sommer, Collier on Bankruptcy 15th Rev. Ed. ¶ 523.08[1][e] (2004).
One commentator noted that McClellan's "actual fraud" analysis "may prompt a new and more realistic analysis of credit card abuse under § 523(a)(2)(A)." David F. Snow, Cheers for the Common Laiv? A Response, 74 Am. Bankr.L.J. 161, 171 (2000). It appears that McClellan has had that effect, at least in the Sixth and Seventh Circuits. See, e.g., Sears, Roebuck and Co. v. Green (In re Green), 296 B.R. 173, 179 (Bankr.C.D.Ill.2003) (applying McClellan to a credit card nondischargeability action under "actual fraud"); Citibank (South Dakota), N.A v. Brobsten (In re Brobsten), 2001 WL 34076352, at *3-4 (Bankr.CD.Ill. Nov. 20, 2001) (same); Fleet Credit Card Services, L.P. v. Kendrick (In re Kendrick), 314 B.R. 468, 471-72 (Bankr.N.D.Ga.2004); Mellon Bank, N.A. v. Vitanovich, Jr. (In re Vitanovich), 259 B.R. 873, 876-77 (6th Cir. BAP 2001) (noting that McClellan "announces a better approach to [credit card nondischargeability cases] by analyzing the use of the term `actual fraud' in 11 U.S.C. § 523(a)(2)(A)").
Applying the McClellan test in Brobsten, Bankruptcy Judge Perkins stated: "This Court is of the opinion that a credit card issuer may establish actual fraud for purposes of Section 523(a)(2)(A) by proving that the debtor's use of the card was made with an actual, subjective intent not to repay the issuer by discharging the debt in bankruptcy or otherwise." 2001 WL 34076352, at *4. Since debtors rarely admit to an intent not to repay, the plaintiff must resort to circumstantial evidence to prove the debtor's state of mind. Judge Perkins adopted the reasoning of In re Alvi, in which the Bankruptcy Court for the Northern District of Illinois listed the twelve factors used in determining whether a debtor intended to repay the credit card obligations:
1. The length of time between charges made and bankruptcy filing.
2. Whether an attorney was consulted regarding bankruptcy before the charges were made.
3. The number of charges made.
4. The amount of the charges.
5. The debtor's financial condition when the charges were made.
6. Whether the charges exceeded the credit limit of the card.
*740 7. Whether multiple charges were made on the same day.
8. Whether the debtor was employed.
9. The debtor's prospects for employment.
10. The debtor's financial sophistication.
11. Sudden changes in the debtor's buying habits.
12. Whether the purchases were for luxuries or necessities.
Id. at *4 (citing Alvi, 191 B.R. at 733).
III. Applying the approaches to the case at bar.
Capital One has relied upon the implied representation/reliance theory in its complaint and affirmation in support of its Motion for Default Judgment. However, even if Capital One had employed the less strenuous test suggested by McClellan, Capital One has not met its burden of proof by presenting evidence of the Debtors' fraudulent intent not to repay the credit card debt. See AT & T Universal Card Services, Corp. v. Sziel (In re Sziel), 206 B.R. 490, 493-94 (Bankr.N.D.Ill.1997) (denying motion for default judgment and dismissing complaint for lack of evidence of fraud). As in Trevisan, Capital One has relied on the unsupported allegations in its complaint and a declaration of its counsel, drawing sweeping legal conclusions, but offering no evidence other than a list of the credit card charges and cash advances on the card.
Moreover, Capital One has pled certain allegations, including that the debtors purchased luxury goods with the credit card and knew that their representations were false, "upon information and belief." Such statements are totally insufficient to sustain a prima facie case of fraud. Judge Posner called such allegations, clearly improper locution under the current federal rules, which impose (in the amended Rule 11) a duty of reasonable precomplaint inquiry not satisfied by rumor or hunch... [T]he duty to plead the circumstances constituting fraud with particularity could not be fulfilled by pleading those circumstances on "information and belief unless they were facts inaccessible to the plaintiff in which event he had to plead the grounds for his suspicions.
Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683-84 (7th Cir.1992) (citations omitted).
Although Capital One's unsupported allegations of fraud have gone unchallenged by the Debtors, due to the conclusory nature of the claims, this Court declines to accept them as admissions of the Debtors. In this respect, the Court heartily agrees with Sziel, supra, and FDS Nat'l Bank v. Alam (In re Alam), 314 B.R. 834, 841 (Bankr.N.D.Ga.2004), in which that court stated:
The Court in the exercise of its discretion will not, however, enter default judgment in a nondischargeability proceeding alleging actual fraud based on technical compliance with notice pleading rules. Unless there are specific factual allegations from which actual, subjective fraudulent intent may be inferred or Plaintiff produces evidence at a hearing that proves such intent, entry of default judgment based on actual fraud is not appropriate.
See also In re Savage, 303 B.R. 766, 772-73 (Bankr.D.Md.2003) (refusing to grant summary judgment based on unanswered Requests for Admissions).
Since, in this case, Capital One has not provided specific factual allegations about the Debtors' conduct, and has provided no evidence of fraud, other than a list of the charges and cash advances, which do not *741 alone establish the requisite fraudulent intent on the Debtors' part, Capital One has not satisfied its prima facie case of nondischargeability under Bankruptcy Code § 523(a)(2)(A).
CONCLUSION
Capital One's Motion for Default Judgment is denied, and its Complaint is dismissed for failure to state a cause of action. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551610/ | 315 B.R. 522 (2004)
In re Jeffrey RODGERS, Towner Vet Service, Jordahl Animal Hospital, Mountain View Vet Clinic, Vet Barn, Dakota Vet Equipment, Animal Medical Center, Debtors.
MWI Veterinary Supply Co., Plaintiff,
v.
Jeffrey Rodgers, Towner Vet Service, Jordahl Animal Hospital, Mountain View Vet Clinic, Vet Barn, Dakota Vet Equipment, Animal Medical Center, Defendants.
Bankruptcy No. 03-31266, Adversary No. 03-7062.
United States Bankruptcy Court, D. North Dakota.
August 13, 2004.
*524 Henry Eslinger, Richard Farroh, Grand Forks, ND, for defendant.
Mark Hanson, Fargo, ND, for plaintiff.
MEMORANDUM AND ORDER
WILLIAM A. HILL, Bankruptcy Judge.
By Complaint filed October 30, 2003, Plaintiff MWI Veterinary Supply Co. initiated *525 this adversary proceeding seeking determinations that Debtor/Defendants Jeffrey Rodgers, Towner Vet Service, Jordahl Animal Hospital, Mountain View Vet Clinic, Vet Barn, Dakota Vet Equipment, and Animal Medical Center (collectively, "the Debtor") are not entitled to a discharge pursuant to 11 U.S.C. § 727(a)(2) and that an outstanding debt owed by the Debtor to MWI in the amount of $72,638.84 is nondischargeable pursuant to 11 U.S.C. § 523(a)(6). By Answer filed November 26, 2003, the Debtor denies the allegations.
The matter was tried before the Court on June 24, 2004. Another adversary proceeding initiated in another bankruptcy case, MWI Veterinary Supply Co. v. Rhonda R. Rodgers, Adversary No. 04-7019, involves similar facts and issues, and was tried at the same time.[1] Upon consideration of the Joint Statement of Uncontested Facts and the facts gleaned from trial, the following constitutes the Court's findings of fact and conclusions of law.
I. FINDINGS OF FACT
A. The Divorce
The Debtor and Rhonda R. Rodgers were married on October 18, 1992. The parties entered into a divorce stipulation on January 9, 2003, and a divorce judgment and decree was entered on February 25, 2003. Rhonda Rodgers was given primary physical custody of their minor child, and neither of the Rodgers is obligated to pay alimony or spousal support to the other. The Debtor agreed to pay child support in the amount of $700.00, an upward deviation from the child support guideline amount of $508.00 per month based on his $2,600.00 net monthly income. The Debtor and Rhonda Rodgers talked about divorce at several times throughout their marriage. They had difficulties because of their various personal and professional roleshusband, wife, supervisor, bookkeeper, manager. In his January 22, 2004 deposition, the Debtor stated he and Rhonda Rodgers "had a terrible time working together." They began seriously discussing divorce in the summer of 2002 when the Internal Revenue Service began auditing them. Prior to the audit, Rhonda Rodgers had been the business manager of the Debtor's veterinary practices. The audit, especially in light of Rhonda Rodgers' role in the business prior to the audit, caused additional strain on their relationship. Rhonda Rodgers no longer wanted to be involved with the Debtor's business. The Debtor hired a law firm to take over the bookkeeping duties from Rhonda Rodgers, but she continued doing reception work for the Debtor until his veterinary clinic closed.
Michael Mclntee was the attorney of record for both parties in the uncontested divorce. He was a friend of the Debtor, an acquaintance of Rhonda Rodgers, and a client of the clinic. Attorney Mclntee sent them a letter dated December 12, 2002, stating with regard to his understanding of the Rodgers' relationship:
Jeff informed me that the two of you want to get divorced. It is not that the two of you really can't get along, it is just the fact that there is a great deal of debt against the clinics and Rhonda doesn't want to leave the clinic business with having that debt hanging over her.
Attorney Mclntee drew up the divorce agreement, but he was not involved in determining the property distribution and child support obligation; the Debtor and Rhonda Rodgers came to an agreement as *526 to these issues on their own. Attorney Mclntee did, however, advise the Debtor that the agreed child support obligation was more than he would owe under the child support guidelines.
As part of the divorce, the Debtor also agreed to provide health insurance coverage for their son and to pay for his uncovered medical expenses. Because the Debtor wanted their son to attend a Lutheran school, he agreed to pay for the private school expenses. The Debtor also agreed to provide medical insurance for Rhonda Rodgers for 18 months. Finally, the Debtor received all of the assets and the debts of his businesses.
Rhonda Rodgers received the marital home in Towner, North Dakota, and a fifth-wheel camper in the divorce, and she agreed to pay the remaining debts against them. She also received a 1999 Mercedes Benz owned by the Debtor's father. The Debtor testified he had intended to obtain title to the vehicle and then transfer title to Rhonda Rodgers, but she later decided she did not want the Mercedesit could not be used to pull the camper and licensing and insuring it was very expensive. The Mercedes was returned to the Debtor's father, and Rhonda Rodgers instead received a Ford F-250, a truck capable of pulling the camper. The F-250's engine blew up, but she has not asked the Debtor to provide her with another replacement vehicle.
The Debtor testified he thought the distribution of assets and debts in the divorce was fair because he was the sole proprietor of the businesses and Rhonda Rodgers was not responsible for either the debts or the assets of the businesses.
After the divorce, the Debtor paid Rhonda Rodgers a salary, and she continued to work for him until the veterinary clinic closed in September 2003. The clinic was in Minot, North Dakota, and had apartments both upstairs and downstairs. The upstairs apartment had four bedrooms, and the downstairs apartment had one bedroom. After the divorce, Rhonda Rodgers stayed in one of the apartments when the roads were bad or if she worked late and then worked the following day. Although there were times when both she and the Debtor stayed at the clinic, she testified the Debtor was usually at the former marital home in Towner when she stayed at the clinic.
The Rodgers went to Las Vegas February 21-24, 2003 for the Western States Veterinary Conference, a continuing education conference, despite the pending divorce. The Debtor testified that Rhonda Rodgers attended the conference notwithstanding the divorce because the tickets were already purchased and she still worked for him. The trip was planned many months in advance because of the popularity of the convention, which includes a large technology and product trade show that enables businesses to remain current with the latest products. Because Rhonda Rodgers handled the purchasing of products for the veterinary practices, it was practical for her to attend. Both the Debtor and Rhonda Rodgers testified they did not share a hotel room during the conference.
The Debtor and their son hauled the camper to Nebraska for Rhonda Rodgers after the divorce and left it at the Debtor's parent's home for her. Rhonda Rodgers testified that she allows the Debtor to use the camper because their son very much enjoys spending time in it.
B. The Veterinary Businesses
The Debtor owned and operated a number of sole proprietorship veterinary businesses over the years. After the Debtor graduated from veterinarian school, he began *527 working for Dr. Perry Nermoe, a veterinarian in Towner for 20 years. The Debtor eventually bought Dr. Nermoe's practice, Towner Vet Service, and Dr. Nermoe then worked for the Debtor. Towner Vet Service closed December 2002.
During some of the same time period during which the Debtor owned and operated Towner Vet Service, he also manufactured equine dental tools and taught seminars as Dakota Vet Equipment in Garrison, North Dakota. The Rodgers moved their residence from Garrison to Towner in 1997, and the Debtor did not reestablish the business after the move.
Mountain View Vet Clinic was a veterinary practice the Debtor owned in Bottineau, North Dakota. In the summer of 2002, the Debtor's partner was in rehabilitation and the Debtor could not find a veterinarian to replace him. The Debtor had to sell the practice, and the sale proceeds went to creditors.
The Debtor bought Jordahl Animal Hospital in Minot from Dr. Jordahl and operated the veterinary practice under that name until Dr. Jordahl died. After his death, his family asked the Debtor to change the name of the veterinary practice, and he renamed it Animal Medical Center. In 2001, the Debtor tried to sell Animal Medical Center because he could not get a large-animal veterinarian and maintaining three practices was too burdensome for him, but he was unable to find a buyer. Vet Barn was a veterinary supply business located in the same facility as the Jordahl Animal Hospital. The Debtor sold retail veterinary products through the Vet Barn, but not in the last several years. Animal Medical Center closed its doors on the same day as the first meeting of creditors, September 4, 2003.
C. The Debtor's Parents
Ronald and Betty Rodgers, the Debtor's parents, live in Valentine, Nebraska, where they own a truck stop and convenience store. Their businesses include Rodgers Oil Company, Rodgers Oil Company Auto, and Rodeo, Inc.
Over the years, the Debtor's parents loaned him substantial amounts of money. A promissory note dated June 16, 1996 memorializes a $90,000.00 loan from Ronald G. Rodgers d/b/a/ Rodgers Oil Co., Inc. to the Debtor at an 8% annual interest rate. The Debtor testified he used this loan for the initial purchase of his veterinary practice in 1996.
In approximately early 2003, the Debtor's father was receiving cancer treatments. Because of his father's health problems and the divorce of the Debtor and Rhonda Rodgers, his parents asked him to grant them a mortgage against Animal Medical Center to memorialize the other money they had lent the Debtor over the years. The Debtor and Rhonda Rodgers both signed a second mortgage in favor of Rodgers Oil Company in the amount of $446,102.22 on May 14, 2003. The Debtor testified they did not receive $446,102.22 when they signed the mortgage; instead, the mortgage was in exchange for money they had received in the past. The Debtor and Rhonda Rodgers were divorced at the time, but the mortgage references them as "Husband and Wife." The Debtor testified that bankruptcy was not even a thought at the time he and Rhonda Rodgers signed the second mortgage.
The Debtor also signed a handwritten document dated May 16, 2004, memorializing a $12,000.00 loan. The Debtor made informal payments to his parents on these debts, and he also worked for them as partial payment.
In March 2003, the Debtor sold an allterrain vehicle on e-bay for Rodgers Oil Company Auto. The buyer made the *528 $5,200.00 check payable to the Debtor although the seller was actually Rodgers Oil Company. The Debtor gave the check to his mother who deposited it into the Debtor's personal account rather than the Rodgers Oil Company Auto account. The Debtor realized the mistake when he saw the deposit on his bank statement, and he called his mother and told her of the mistake.
Betty Rodgers testified she inadvertently deposited the check into the wrong account, and her husband and the Debtor both caught the error. To remedy the mistake, she took $5,000.00 out of the Debtor's account and made a $5,000.00 certificate of deposit for her grandson, the son of the Debtor and Rhonda Rodgers, on June 6, 2003. She testified that she withdrew $200.00 less than the amount of the erroneous deposit as the Debtor's commission for selling the vehicle for Rodgers Oil Company Auto.
D. Job Hunting in Nebraska
In September 2003, after both the divorce and the closing of Animal Medical Center, Rhonda Rodgers was in Nebraska visiting her family. The Debtor asked her to contact a few veterinary clinics on his behalf to inquire about job openings. She visited Wachal Pet Health Center and spoke with Dr. Dean Frey about a position for the Debtor. Dr. Frey testified by deposition that Rhonda Rodgers told him "she was in town looking for employment for herself between Lincoln and Omaha, and that she was checking out veterinary employment for her husband Jeff." Rhonda Rodgers also spoke with Mary Miller-Kumpost of Superior Veterinary Clinic about a veterinary position open at the clinic, and the Debtor later interviewed for the position. Miller-Kumpost testified by deposition that neither the Debtor nor Rhonda Rodgers gave her the impression they were divorced.
E. MWI
Ron Schmitz, a sales representative for MWI since December 1999, testified at trial. Schmitz communicated primarily with Rhonda Rodgers on his routine sales calls to the veterinary clinic. He spoke with her about new products, accounts receivable, and the like. He testified that the Debtor occasionally had problems making timely payments, but the account would be brought current whenever he mentioned it. In February 2002, however, the Debtor did not bring the account current, and a large balance was owing. Schmitz spoke to Rhonda Rodgers, and she told him the Debtor had significant accounts receivable from fall business and that the Debtor would pay MWI when the money came in. At the end of May, Schmitz told Rhonda Rodgers all future sales would be cash on delivery only. Schmitz explained that MWI continued to sell product on credit to the Debtor until that time because of the Debtor's history of always bringing the account current.
The Debtor testified that he knew the debt to MWI was largein fact the debt was more than $200,000.00 in May 2002 so the Debtor asked MWI to take all of its product back because he was unable to pay the debt. Schmitz retrieved portions of MWI's product from the Debtor in June and July 2002 on several occasions but left much of the product behind, including several very costly items. Schmitz said he took back as much product as MWI could resell, and MWI credited the Debtor's account for the retrieved product. The Debtor testified he sold some of the remaining product that MWI refused to take back and continued to pay MWI. The Debtor said he knew the clinic might close, and he wanted to pay off the debt.
*529 MWI introduced into evidence the credit applications submitted to it by Jordahl Animal Clinic, Towner Vet Service, and Mountain View Vet Hospital. The applications are single-page documents and do not require the applicant to provide any financial information. Schmitz testified that completion of the application was the extent of the financial information gathered by MWI before extending credit. He also stated that MWI did not rely on the marital status of the Debtor and Rhonda Rodgers in extending credit.
The parties stipulated that the Debtor purchased veterinary supplies and materials for his practices from MWI from April 8, 2002 to January 24, 2003 in the amount of $72,638.84. MWI's claims against the Debtor arise out of this amount still owing.
MWI introduced into evidence a commercial financing statement prepared by Western State BankTowner and signed by the Debtor and Rhonda Rodgers on June 27, 2000, listing their net worth at $904,618.00. The financing statement does not include any debts owed to Rodgers Oil Company or the Debtor's parents. When questioned about the disposition of livestock included on the financing statement but not on the Debtor's bankruptcy schedules, the Debtor explained that the livestock was sold prior to his bankruptcy.
MWI also introduced into evidence a balance sheet prepared by Western State BankTowner and signed by the Debtor and Rhonda Rodgers for purposes of obtaining credit on September 30, 2002. The Debtor made hand-written corrections and comments to the balance sheet schedules, such that it indicates $13,488.00 in cash but includes a question mark as to the accuracy of that figure. It further indicates accounts receivable of $21,000.00; inventory and receivables of $86,000.00; not readily marketable bonds of $35,300.00; other intermediate assets of $115,850.00; and real estate and land of $400,000.00. The Debtor crossed out several items of machinery, equipment and vehicles, and he also noted items that were leased rather than owned and items in the possession of Dr. Nermoe. The Debtor explained that many of the vehicles included on the balance sheet had been either taken back by Rodgers Oil Company Auto or sold by the Debtor at auction on behalf of Rodgers Oil Company Auto. Others had gone back to the bank.
F. Bankruptcy
The Debtor testified that at the time of the divorce, he was unaware of the extent of his businesses' financial problems. After the IRS began its audit, he hired a tax attorney who eventually identified several financial problems with the businesses. He began considering bankruptcy only after he was advised of the gravity of his financial situation by the tax attorney.
The Debtor filed a voluntary Chapter 7 petition for bankruptcy relief on July 16, 2003. Towner Vet Service, Jordahl Animal Hospital, Mountain View Vet Clinic, Vet Barn, Dakota Vet Equipment, and Animal Medical Center are listed on the petition as trade names used by the Debtor. The Debtor listed MWI as an unsecured creditor owed $77,777.87 on Schedule F of the petition. Rodgers Oil Company is listed as a secured creditor owed $105,000.00 and $160,000.00 on Schedule D of the petition. The unsecured portion of the two debts is $20,000.00 and $53,000.00, respectively.
Rhonda Rodgers filed a voluntary Chapter 7 petition for bankruptcy relief on November 14, 2003. She testified that at the time of the divorce, she had no intention of filing bankruptcy; rather, MWI's efforts to collect from her on the Debtor's obligations led her to bankruptcy.
*530 G. Present Circumstances
The Debtor currently lives in Valentine, Nebraska. Although he stipulated prior to trial that he is currently employed by Rohrig Animal Hospital in Omaha, Nebraska, he testified at trial that he had been unemployed for the previous month and a half. He worked at Rohrig Animal Hospital for five months prior to his resignation, earning $66,000.00 annually plus a bonus of approximately $3,500.00.
At the time of trial, Rhonda Rodgers was living in Lincoln, Nebraska, with her sister and parents. She managed a warehouse for Butler Veterinary Supply Company of Omaha, Nebraska, from November 4, 2003 through its closure at the end of July 2004. She testified she did not have any job prospects after the closure of the warehouse, but that she planned to remain in Nebraska.
II. CONCLUSIONS OF LAW
MWI argues for both the general denial of a bankruptcy discharge to the Debtor and a determination of nondischargeability of the specific obligation owed to MWI by the Debtor.
A. 11 U.S.C. § 727(a)
MWI seeks to have the Debtor denied a discharge under 11 U.S.C. § 727(a)(2). Section 727(a) provides in relevant part:
(a) The court shall grant the debtor a discharge, unless
* * * * * *
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
11 U.S.C. § 727(a).
Denying a debtor a discharge is a drastic remedy. See In re McLaren, 236 B.R. 882, 893 (Bankr.D.N.D.1999). In light of the policy implications favoring debtors under the Bankruptcy Code, section 727 must be construed liberally in favor of the debtor and strictly against the objecting party, with the burden of proof thereunder resting squarely upon the latter. See id. The standard of proof is a preponderance of the evidence. See id.
1. Section 727(a)(2)(A)
MWI argues the Debtor should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2) because the Debtor transferred, removed and/or concealed property with an intent to hinder, delay, or defraud MWI. Specifically, MWI cites the transfer of assets in the divorce, the transfer of other assets, and the attempt to give the Debtor's parents a second mortgage and other security as the factual bases for its claim.
The elements essential to barring a discharge under section 727(a)(2)(A) are:
(1) that the act complained of was done within one year prior to the date of petition filing; (2) the act was that of the debtor; (3) it consisted of a transfer, removal, destruction or concealment of the debtor's property; and (4) it was done with an intent to hinder, delay or defraud either a creditor or an officer of the estate.
Kaler v. Craig (In re Craig), 195 B.R. 443, 449 (Bankr.D.N.D.1996). The dispute in this case primarily involves the last element.
*531 An intent to defraud can be established by circumstantial evidence or from inferences drawn from a debtor's course of conduct. See id. at 450. Courts have considered several factors in determining whether a debtor acted with actual intent to hinder, delay or defraud: (1) lack or inadequacy of consideration; (2) family, friendship or other close relationship between the 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 of 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. Riley v. Riley (In re Riley), 305 B.R. 873, 878-79 (Bankr.W.D.Mo.2004).
First, MWI asserts the Debtor knew MWI would be substantially certain to suffer harm because of the inequitable distribution of debts and assets in the divorce. In short, MWI asserts the divorce was a "sham" to defraud MWI. More specifically, MWI asserts the Debtor and Rhonda Rodgers conspired to defraud MWI by divorcing and agreeing to distribute all of their debt to the Debtor and all of their equity to Rhonda Rodgers, whereupon the Debtor would file bankruptcy and discharge the unsecured debt to MWI. In support of this contention, MWI cites specific examples of the Debtor's course of conduct: acquiescing to a distribution in the divorce of most of the debt and few of the assets; going to Las Vegas for a veterinary convention with Rhonda Rodgers days before their divorce was final; continuing to use assetssuch as the camperthat had been transferred to Rhonda Rodgers in the divorce; allowing Rhonda Rodgers to continue working for him after the divorce; staying in the same apartment as Rhonda Rodgers after the divorce; and referring to Rhonda Rodgers as his wife after the divorce.
The Court is simply not convinced the divorce was a "sham." The Debtor explained that he considered the property distribution fair because the business debts and assets were his not hers. He agreed to pay for private school for their son because such was his desire not hers. The divorce decree is undeniably bona fide, and the Court is less cynical than MWI about the post-divorce relationship between the Debtor and Rhonda Rodgers. The Court does not find the Debtor's references to his former spouse as his wife and similar references by Rhonda Rodgers to the Debtor as her husband indicative of a fraudulent divorce. Instead, the Court deems the references more likely indicative of inadvertencegiven the recency of the divorceand convenience and deems their civility and cooperation commendable rather than indicative of fraud. The dynamics of relationships between former spouses are as varied as the reasons for divorce, and the Court finds neither their reasons for the divorce nor their subsequent amicability unreasonable, much less intentionally fraudulent. The Debtor and Rhonda Rodgers provided ample explanation, and context, for their conduct.
MWI further uses a comparison of the Debtor's bankruptcy schedules to a financing statement and balance sheet prepared by a bank for the purpose extending credit to the Debtor to evidence the "mysterious disappearance" of assets of the Debtor. The Court, however, is unconvinced and concludes the Debtor provided reasonable explanations for the disposition *532 of the assets. In fact, he explained that many of the assets should not have been included in the financial documents in the first instance because they were assets of Rodgers Oil Company Auto, not the Debtor. The financial documents may not be a model of accuracy, and perhaps the Debtor should have been more vigilant about their accuracy prior to signing them, but the documents offer little in the way of support for the contention that the Debtor intended to defraud MWI. The Debtor allowed some of the assets, such as Towner Vet Service, to return to the title holder, and he sold other assets and remitted the proceeds to Western State Bank.
MWI lastly suggests that granting the Debtor's parents a second mortgage and other security is indicative of the Debtor's intent to defraud MWI. The Debtor testified that his parents had loaned him significant amounts of money over the years. Although his testimony and other evidence of the loans could have been more specific, the preponderance of the evidence is that such loans were indeed made. Other circumstances surrounding the transactions include that the Debtor's father was receiving cancer treatments and the Debtor and Rhonda Rodgers were recently divorced. Under these circumstances, it was reasonable both for the Debtor's parents to have sought to memorialize their previously informal agreements and for the Debtor to have complied.
For these reasons, the Court finds that MWI failed to prove by a preponderance of the evidence that the Debtor intended to defraud MWI, and therefore, section 727(a)(2) cannot serve as a basis for denial of discharge in this case.
B. 11 U.S.C. § 523(a)
The statutory exceptions to discharge in bankruptcy are narrowly construed to effectuate the fresh start policy of the Bankruptcy Code. Owens v. Miller (In re Miller), 276 F.3d 424 (8th Cir.2002). Accordingly, a creditor opposing discharge of a debt must prove the debt falls within an exception to discharge. Werner v. Hoftnann, 5 F.3d 1170, 1172 (8th Cir.1993). The standard of proof for exceptions to discharge under 11 U.S.C. § 523(a) is the preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
The Bankruptcy Code provides that an individual debtor in a Chapter 7 case is not discharged from any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). In this context, the term willful means deliberate or intentional. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); Hobson Mould Works, Inc. v. Madsen (In re Madsen), 195 F.3d 988, 989 (8th Cir.1999). The injury, and not merely the act leading to the injury, must be deliberate or intentional. Geiger, 523 U.S. at 61-62, 118 S.Ct. 974. Malice requires conduct which is targeted at the creditor, at least in the sense that the conduct is certain or almost certain to cause financial harm. Madsen, 195 F.3d at 989. Malice requires conduct more culpable than that which is in reckless disregard of the creditor's economic interests and expectancies. The debtor's knowledge that he or she is violating the creditor's legal rights is insufficient to establish malice absent some additional aggravated circumstances. Johnson v. Logue (In re Logue), 294 B.R. 59, 63 (8th Cir. BAP 2003). Conduct which is certain or almost certain to cause financial harm to the creditor is required. Id.
MIW argues the Debtor's obligation is nondischargeable pursuant to 11 *533 U.S.C. § 523(a)(6) because the "sham divorce" between the Debtor and Rhonda Rodgers, as well as the Debtor's other conduct discussed above, was willfully and maliciously intended by the Debtor to preclude MWI from payment of the amount owed.
As discussed above, the Court is not convinced the divorce was a "sham." The Court likewise is not convinced the Debtor willfully or maliciously injured MWI. In fact, the Debtor informed MWI to retrieve its product because he was unable to pay the debt. He wanted MWI to retrieve all of its product, which they did not do, and he even sold some of the remaining product MWI refused to take back and continued to pay MWI. The Debtor knew the clinic might close, and he wanted to pay off the debt. This conduct is demonstrative of good faith, not malice, and the Debtor's actions in seeking to restore MWI are wholly inconsistent with willfully injuring MWI. MWI failed to prove by a preponderance of the evidence that the Debtor willfully and maliciously injured MWI, and therefore, the debt does not fall within the exception to discharge provided under section 523(a)(6).
Based on the foregoing, the Complaint of Plaintiff MWI Veterinary Supply Co. based on sections 523 and 727 of the Bankruptcy Code is DISMISSED.
SO ORDERED.
JUDGMENT MAY BE ENTERED ACCORDINGLY.
NOTES
[1] A separate Order will be entered in MWI Veterinary Supply Co. v. Rhonda R. Rodgers, Adversary No. 04-7019. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551612/ | 315 B.R. 697 (2004)
In re LaDonna MaLinda THOMAS, Debtor.
No. 03-26213.
United States Bankruptcy Court, N.D. Ohio.
October 7, 2004.
*698 LaDonna MaLinda Thomas, Pro Se.
*699 Lenore Kleinman, Cleveland, OH, for U.S. Trustee.
MEMORANDUM OF OPINION
ARTHUR I. HARRIS, Bankruptcy Judge.
On March 2, 2004, the U.S. Trustee filed a motion (Docket # 6) seeking a refund of fees to the debtor and an assessment of fines against A. Paul Schwenke and PrivateBankruptcy.com for alleged violations of 11 U.S.C. § 110a section of the Bankruptcy Code which governs the activities of bankruptcy petition preparersi.e., persons, other than an attorney or an employee of an attorney, who prepare for compensation a document for filing. On July 9, 2004, the Court held an evidentiary hearing on the U.S. Trustee's motion and related filings. See Docket ## 6, 10, 11, 17, 18, and 19. Lenore Kleinman appeared for the U.S. Trustee. Neither Schwenke nor a representative of PrivateBankruptcy.com appeared at the hearing. For the reasons that follow, the U.S. Trustee's motion is granted in part and denied in part.
JURISDICTION
The Court has jurisdiction in this matter pursuant to 28 U.S.C. § 1334(b) and Local General Order No. 84, entered on July 16, 1984, by the United States District Court for the Northern District of Ohio. The U.S. Trustee's motion is a contested matter pursuant to Fed. R. Bankr.P. 9014 and a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). This memorandum constitutes the Court's findings of fact and conclusions of law as required by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
FACTS
On December 9, 2003, the debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On the second page of the petition, the debtor indicates that she is not represented by an attorney. Also on the second page of the petition, the words "Not Applicable" are typed under the caption "Signature of Non-Attorney Petitioner Preparer" where the printed name of a bankruptcy petitioner preparer would appear. There is no disclosure on the second page of the petition that PrivateBankruptcy.com or Schwenke prepared the debtor's petition. The petition, schedules, and the Statement of Financial Affairs do not contain the name, address, signature, or identifying taxpayer number of a bankruptcy petition preparer in the space provided. At the end of the Statement of Financial Affairs, the certification of non-attorney bankruptcy petition preparer, which indicates that the petition was prepared for a fee, also includes the words "Not Applicable." See U.S. Trustee Exhibit A. The debtor testified that she did not type the words "Not Applicable" on the software questionnaire or petition and that she believed the words were provided by PrivateBankruptcy.com's software program.
David O. Simon was appointed as the trustee in this case. On January 7, 2004, Simon conducted the meeting of creditors, pursuant to 11 U.S.C. § 341. The debtor appeared at the meeting alone. At the § 341 meeting the debtor testified that her petition and schedules were prepared online at a website known as www.PrivateBankruptcy.com. See U.S. Trustee Exhibit B. The debtor paid $149.00 for access to the website for the preparation of the schedules. See U.S. Trustee Exhibit D. After his examination of the debtor, Simon determined this case had no assets available for distribution to creditors and filed his report accordingly. See Docket ##4 and 5. Simon then referred this case to the U.S. Trustee for further investigation regarding *700 11 U.S.C. § 110. See U.S. Trustee Exhibits C and D.
A. Paul Schwenke is identified as the registered agent for a Utah limited liability company, cSave.net, LLC. cSave.net, LLC is identified on PrivateBankruptcy.com's website as the software provider for PrivateBankruptcy.com. PrivateBankruptcy.com's domain name is registered by cSave.net, LLC, and the administrative contact is Schwenke. The U.S. Trustee submits that through "Google" searches, it appears that PrivateBankruptcy.com, Schwenke, and cSave.net, LLC have the same address and telephone number based in Utah. See Docket # 6 at 1 n. 1. Since PrivateBankruptcy.com is a dba of cSave. net, LLC, the Court will treat all references to PrivateBankruptcy.com in the U.S. Trustee's motion and in this Memorandum of Opinion as including cSave.net, LLC dba PrivateBankruptcy.com.
Services Provided by PrivateBankruptcy. com
The debtor testified that www.Private-Bankruptcy.com provided a software program with information, instructions, and a questionnaire to prepare a bankruptcy petition and schedules. The debtor inputted information regarding her assets, debts, and financial affairs in the software program questionnaire online, and, after payment of the $149.00 access fee, the printed bankruptcy petition and schedules were then provided to her. The debtor paid the $149.00 access fee via the Internet on a service known as PayPal, which accepted her credit card payment. The debtor maintains her credit card account with Fifth Third Bank, located in Cleveland, Ohio. See U.S. Trustee Exhibit B at 6. The website indicates that a paralegal is assigned to each customer and is available to assist in completing the questionnaire. See U.S. Trustee Exhibit D (letter from PrivateBankruptcy.com indicating paralegals are available for assistance) and U.S. Trustee Exhibit E (copy of PrivateBankruptcy.com website homepage indicating paralegals are assigned to customers for assistance in completing the questionnaire). The website also provides assistance by e-mail, U.S. Trustee Exhibit I, page 9, and at least once, the debtor requested, and received, assistance by e-mail in completing the questionnaire.
PrivateBankruptcy.com's website provides detailed information regarding bankruptcy and how to complete the questionnaire. Some of the information provided to customers on the website in the "Frequently Asked Questions" section includes:
an explanation of the automatic stay and how to notify creditors to cease collection efforts after a bankruptcy petition is filed, and that failure to cease collection efforts may result in sanctions (U.S. Trustee Exhibit I, page 2)
a description of exempt assets, reaffirmation, and a secured creditor's right to file a motion for relief from the automatic stay (U.S. Trustee Exhibit I, pages 3-4)
a definition of asset and how to determine the market value of an asset (U.S. Trustee Exhibit I, page 4)
a description of how to determine the value of an asset jointly held with another person and if an asset is exempt, and a description of the procedures to follow in claiming an exemption (U.S. Trustee Exhibit I, page 5)
an explanation that the questionnaire provides the appropriate exemption based upon the state the debtor resides in and the asset claimed as exempt and the statement, "You will then select the exemption on the list that matches your property and our program will print the required information on Schedule C. (The required information includes the property description, your State's statutory *701 citation providing for the exemption, the value of the claimed exemption and value of the property before deducting the exemption.)" (U.S. Trustee Exhibit I, page 5)
an explanation of what a trustee can do with "exempt" and "nonexempt" property, and the debtor's option to (1) buy back nonexempt property from the trustee and/or (2) file a motion with the bankruptcy court to abandon property of little or no value to the trustee (U.S. Trustee Exhibit I, page 5)
a definition of (1) creditor, (2) secured creditor, (3) unsecured creditor, and (4) priority claim (U.S. Trustee Exhibit I, pages 5-6)
an explanation of filing eligibility (only spouses can file jointly), and if your non-spouse roommate is jointly liable on debts, an explanation of the need to list the roommate as a co-debtor and the statement, "Our program solicits the relevant information about a co-debtor from you, then generates the proper form (schedule H) with the co-debtor information." (U.S. Trustee Exhibit I, page 7)
Simon testified at the evidentiary hearing that, based upon his experience as a practicing attorney and Chapter 7 bankruptcy trustee for over 20 years, it is his opinion that the ordinary consumer does not understand fundamental bankruptcy terms such as asset, secured or unsecured creditor, and priority or non-priority claim, and other concepts necessary to prepare a bankruptcy petition. Simon further testified that in his experience he has found the common fee charged by a bankruptcy petition preparer is between $100.00 and $200.00.
LAW
Section 110 of the Bankruptcy Code provides in pertinent part:
Penalty for persons who negligently or fraudulently prepare bankruptcy petitions.
(a) In this section
(1) "bankruptcy petition preparer" means a person, other than an attorney or an employee of an attorney, who prepares for compensation a document for filing; ...
. . . .
(b) (1) A bankruptcy petition preparer who prepares a document for filing shall sign the document and print on the document the preparer's name and address.
(2) A bankruptcy petition preparer who fails to comply with paragraph (1) may be fined not more than $500 for each such failure unless the failure is due to reasonable cause.
(c) (1) A bankruptcy petition preparer who prepares a document for filing shall place on the document, after the preparer's signature, an identifying number that identifies individuals who prepared the document.
(2) For purposes of this section, the identifying number of a bankruptcy petition preparer shall be the Social Security account number of each individual who prepared the document or assisted in its preparation.
(3) A bankruptcy petition preparer who fails to comply with paragraph (1) may be fined not more than $500 for each such failure unless the failure is due to reasonable cause.
. . . .
(h) (1) Within 10 days after the date of the filing of a petition, a bankruptcy petition preparer shall file a declaration under penalty of perjury disclosing any fee received from or on behalf of the debtor within 12 months immediately prior to the filing of the case, and any unpaid fee charged to the debtor.
*702 (2) The court shall disallow and order the immediate turnover to the bankruptcy trustee of any fee referred to in paragraph (1) found to be in excess of the value of services rendered for the documents prepared. An individual debtor may exempt any funds so recovered under section 522(b).
DISCUSSION
In addition to asserting that their services do not constitute the work of a "bankruptcy petition preparer" as that phrase is defined under 11 U.S.C. § 110, Schwenke and PrivateBankruptcy.com also assert that this Court lacks personal jurisdiction over them. See Docket # 18. The Court will address the jurisdictional issue first.
I. This Court Has Personal Jurisdiction Over Schwenke and Private-Bankruptcy, com.
This Court rejects the argument that it lacks personal jurisdiction over Schwenke and PrivateBankruptcy.com for two reasons. First, even if the jurisdictional test were based on these entities' contacts with the State of Ohio, which it is not, the entities' contacts would be sufficient for purposes of due process. These entities solicited business from individuals located in the State of Ohio, were paid by funds from the debtor's bank account in Ohio, and were paid for services specifically designed to enable an individual to file documents with a bankruptcy court located in the State of Ohio. See generally Burger King Corp. v. Rudzewicz, All U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985); International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).
Even more important, however, is the fact that the relevant jurisdictional test focuses on the entities' contacts with the United States, not the State of Ohio. Pursuant to 28 U.S.C. § 1334, bankruptcy courts have been provided with federal question jurisdiction "over all bankruptcy cases and proceedings." Furthermore, Bankruptcy Rule 7004(d) provides for nationwide service of process and is applicable here, as the U.S. Trustee's motion is a contested matter. See Bankruptcy Rule 9014(b) addressing contested matters and requiring the motion "be served in the manner provided for service of a summons and complaint by Rule 7004." Because Rule 7004(d) provides for nationwide service and because this case involves a federal question, the standard to determine if personal jurisdiction exists is the national contacts analysis. See United Liberty Life Insurance Co. v. Ryan, 985 F.2d 1320 (6th Cir.1993) (concluding that federal statute providing for nationwide service of process requires determination only that party has contacts with United States, not particular state, for personal jurisdiction); accord Medical Mutual of Ohio v. deSoto, 245 F.3d 561, 566-68 (6th Cir.2001) (same); In re Federal Fountain, Inc., 165 F.3d 600 (8th Cir.1999) (contacts between defendant and state have no bearing on personal jurisdiction issue in bankruptcy adversary proceeding); Diamond Mortgage Corp. v. Sugar, 913 F.2d 1233, 1244 (7th Cir.1990) (same); In re Chari, 276 B.R. 206, 210-11 (Bankr.S.D.Ohio 2002) (applying Sixth Circuit's national contacts analysis in bankruptcy context); In re Tipton, 257 B.R. 865, 871-73 (Bankr.E.D.Tenn.2000) (same). Here, it is undisputed that PrivateBankruptcy.com and Schwenke have contacts with the United States, and therefore, it is evident that this Court has personal jurisdiction over the parties.
II. Schwenke and Privatebankruptcy.com Are "Bankruptcy Petition Preparers" as Defined in 11 U.S.C. § 110.
Section 110 of the Bankruptcy Code regulates the conduct of bankruptcy *703 petition preparers. Congress enacted § 110 as part of the Bankruptcy Reform Act of 1994 to protect consumers from abuses by non-attorney petition preparers. Congress recognized that some debtors sought assistance in document preparation from non-attorneys and, rather than watch this practice flourish underground, chose to "force it into the light by defining persons who provide such assistance and regulating their conduct in 11 U.S.C. § 110." In re Alexander, 284 B.R. 626, 630 (Bankr. N.D.Ohio 2002).
A bankruptcy petition preparer is defined as "a person, other than an attorney or an employee of an attorney, who prepares for compensation a document for filing." 11 U.S.C. § 110(a)(1). A "person" is defined under the Bankruptcy Code as including an individual, partnership, or corporation. 11 U.S.C. § 101(41). PrivateBankruptcy.com and Schwenke argue that they are not bankruptcy petition preparers, as they only provide a software program for debtors to prepare, on thenown, the petition and other bankruptcy documents for filing. No case law is submitted to support their position.
In addressing the U.S. Trustee's motion and Schwenke's response, the Court must grapple with the question whether persons that charge for on-line computer services in connection with the preparation of bankruptcy petitions, schedules, and statements fall within the definition of "bankruptcy petition preparer." While a few courts have found that some entities providing such services constitute petition preparers, the Court has found only limited case law that analyzes the statutory definition and explains why such on-line services either fall within or outside the definition.
One recent case that the Court finds instructive is In re Jolly, 313 B.R. 295 (Bankr.S.D.Iowa 2004). In Jolly, the U.S. Trustee moved for sanctions under Section 110 of the Bankruptcy Code against a company and its president that assisted the Jollys in preparing their Chapter 7 petition, schedules, and statement of affairs. In exchange for $195, the debtors received the "Alpha Chapter 7 Bankruptcy Kit" from the respondents. According to the court, "the Kit provides step-by-step instructions, advice, and examples of how to complete the documents for a chapter 7 bankruptcy case." 313 B.R. at 299. "The Kit counsels what is dischargeable and nondischargeable debt; reaffirmation agreements; avoiding liens; redeeming mortgaged property, [and other items]." Id. "Respondents did not provide their name, address, and signatures on the petition or statement of financial affairs; and they did not disclose the fees received from Debtors." Id.
After reviewing the definition of "bankruptcy petition preparer" contained in Section 110 of the Bankruptcy Code, including the legislative history, the Jolly court concluded that respondents were indeed petition preparers within the meaning of the statute.
The fact that the person does not place the date and numbers on the form does not excuse that person from advising the court of their participation in the process of preparing the documents for filing with the bankruptcy court. Neither does the fact that the person provides these services by computerized services excuse that person from revealing that person's role in the preparation of the documents.
This court concludes that "preparation" of a document includes both the physical preparation and the dictation or the determination of the information to be placed on the document by the "preparer."
313 B.R. at 300.
This court agrees with the Jolly court that "preparation" goes beyond the *704 physical typing or mere printing of the documents. Webster's Third New International Dictionary (2002) defines "prepare" as "to make ready beforehand for some purpose." Thus, for example, a person who for a fee provides a computerized service that asks the debtor a series of questions in order to produce a bankruptcy petition and related documents for filing is engaged in the activity of making these documents "ready beforehand." Moreover, such activity would fall within the plain meaning of the statute even if the debtor types his or her own answers to the automated questionnaire and prints the completed forms using the debtor's own printer. This is true because the person providing the computerized or automated service is engaging in the activity of making ready or "preparing" the debtor's petition and other documents.
While the court can envision a scenario where a person who sells kits of blank bankruptcy forms limited to the Official Forms and the instructions accompanying the Official Forms is not engaged in the activity of making ready or "preparing" such documents for filing, that is certainly not the situation in the present case. In the Official Form scenario described above, the person who sells the kits is simply providing a means for the debtor to prepare his or her own forms, without making any suggestions regarding how the forms are to be completed. In fact, the court can further envision a scenario where the kits being sold are computerized, "fillable" forms, again limited to the Official Forms and their accompanying instructions. Again, the distinction between this scenario and the actions of Schwenke and PrivateBankruptcy.com is that the person providing the fillable forms is simply providing a means for the debtor to prepare his or her own forms, without adding any suggestions, whether personalized or automated, as to how the forms are to be completed, beyond the instructions that are already a part of the Official Forms. In the present case, however, the debtor answered an automated questionnaire that went well-beyond the instructions accompanying the Official Forms. Moreover, the fee also included the personal assistance of a paralegal to answer additional questions either by telephone or by e-mail.
In determining that Schwenke and PrivateBankruptcy.com are "bankruptcy petition preparers," the Court need not look beyond the plain meaning of the statutory definition. Nevertheless, this interpretation of Section 110 is also consistent with the legislative history and policy behind having such individuals identify themselves, see In re Alexander, 284 B.R. at 630, and recent case law addressing similar situations. See In re Pillot, 286 B.R. 157 (Bankr.C.D.Cal.2002) (individual in control of website and company owning website were bankruptcy petition preparers under § 110 where debtor inputted information online, transmitted the information to website for processing, and then printed bankruptcy forms); In re Dunkle, 272 B.R. 450 (Bankr.W.D.Pa.2002)(individual and his company DocuPro, which prepared bankruptcy petitions based upon information provided by debtors from DocuPro's questionnaire, were subject to § 110 and permanently enjoined from assisting persons in filing bankruptcy cases in Western District of Pennsylvania); In re Moffett, 263 B.R. 805 (Bankr.W.D.Ky.2001)(use of computer software questionnaire program to solicit information and prepare debtor's petition and schedules violates § 110 and constitutes unauthorized practice of law); In re Farness, 244 B.R. 464, 469-72 (Bankr.D.Idaho 2000)(same); In re Kaitangian, 218 B.R. 102, 110 (Bankr. S.D.Cal.1998)(same). Although much of *705 the above case law focuses on whether certain actions constitute the unauthorized practice of law, this Court notes that no such issue is currently pending before this Court, and this Court makes no findings as to what actions may or may not constitute the unauthorized practice of law.
III. The Specific Violations of 11 U.S.C. § 110
The U.S. Trustee contends that PrivateBankruptcy.com and Schwenke have violated several provisions of 11 U.S.C. § 110. Section 110 provides that a maximum fine of $500.00 may be imposed for each violation unless the failure is due to reasonable cause. "Reasonable cause" has been found to exist where the "violation is unavoidable through no fault of the violator." See In re Nieves, 290 B.R. 370, 377 (Bankr.C.D.Cal.2003). Each alleged violation will be addressed individually.
1. Section 110(b)(1)Signature, Name, and Address on Petition
Section 110(b)(1) requires the petition preparer to sign the document and provide the printed name and address of the petition preparer. The portion of the petition in this case where that information should be provided is blank. PrivateBankruptcy.com and Schwenke have violated § 110(b)(1) by their failure to sign the petition and provide the required name and address.
2. Section 110(c)(1)Identification Number on Petition
Section 110(c)(1) requires the petition preparer to provide a tax identification number on the petition. The portion of the petition in this case where that information should be provided is blank. PrivateBankruptcy.com and Schwenke have violated § 110(c)(1) by failing to provide a tax identification number on the petition.
3. Section 110(b)(1)Signature, Name, and Address on Statement of Financial Affairs
Section 110(b)(1) requires a petition preparer, who prepares documents for filing such as the Statement of Financial Affairs, to provide the printed name and address of the petition preparer on the document. The portion of the Statement of Financial Affairs in this case where that information should be provided is blank. PrivateBankruptcy.com and Schwenke are in violation of § 110(b)(1) for failure to provide the required signature and information.
4. Section 110(c)(1)Identification Number on Statement of Financial Affairs
Similarly, section 110(c)(1) requires a petition preparer, who prepares documents for filing such as the Statement of Financial Affairs, to provide a tax identification number on the document. The portion of the Statement of Financial Affairs in this case where that information should be provided is blank. PrivateBankruptcy.com and Schwenke are in violation of § 110(c)(1) for failure to provide the required information.
5. Section 110(h)(1)Disclosure of Fees Paid by Debtor
Section 110(h)(1) requires that within ten days of the filing of the petition, the petition preparer must file a declaration disclosing the fees paid by the debtor within 12 months of the petition date. PrivateBankruptcy.com and Schwenke failed to file any such declaration in this case and are in violation of § 110(h)(1). The Court acknowledges that it may be difficult for a bankruptcy petition preparer to comply with the provisions of subsection 110(h) when the petition preparer may be unaware of when its customer actually files for bankruptcy, if at all. However, this potential problem can arise whether the *706 services are performed in person or online.
Under § 110(h)(2), a court may order the petition preparer to turn over to the trustee any fee charged in excess of the value of the services rendered to prepare the documents. In this case the debtor paid $149.00 for document preparation services. The debtor testified that she was satisfied with the service. The debtor received her discharge on March 9, 2004 (Docket # 8). The Court finds that the $149.00 charged by PrivateBankruptcy.com for document preparation is reasonable and not excessive. See, e.g., In re Alexander, 284 B.R. at 634-38 (concluding that reasonable value of petition preparer's services was $200). Accordingly, the Court finds no basis to cancel the fee agreement between the debtor and PrivateBankruptcy.com or to order PrivateBankruptcy.com and Schwenke to disgorge the $149.00 fee, as requested by the U.S. Trustee in his motion.
In the present case, the Court finds the circumstances warrant imposition of a fine of $100.00 per violation for a total of $400.00, with the fine to be imposed jointly and severally against PrivateBankruptcy.com and Schwenke. PrivateBankruptcy.com and Schwenke have provided no reasonable cause or explanation for the four violations of § 110; however, at the time that these violations occurred, it appears that no court had yet held that the actions of these two entities constituted the work of a "bankruptcy petition preparer" within the meaning of Section 110 of the Bankruptcy Code. The three instances cited by the U.S. Trustee in which these entities were sanctioned all occurred after the contacts with the debtor in this case. See U.S. Trustee Exhibits J, K, L (orders sanctioning Schwenke and PrivateBankruptcy.com in In re Briggs, Case No. 03-22407 (Bankr.D.Wyo. Feb. 20, 2004); In re Brandhagen, Case No. 03-06625 (Bankr.S.D.Iowa Feb. 13, 2004); In re Ernest, Case No. 04-20363 (Bankr.D. Wyo. June 30, 2004)). Nevertheless, this Court sees no reason, absent intervening circumstances, why future violations by PrivateBankruptcy.com, Schwenke, or any affiliated entities, should not receive the maximum penalty provided under Section 110 of the Bankruptcy Code.
CONCLUSION
For the foregoing reasons, the U.S. Trustee's motion to cancel fee agreement, refund fees, and assess fines (Docket # 6) is granted in part and denied in part. A. Paul Schwenke and cSave.net, LLC dba PrivateBankruptcy.com are jointly and severally fined a total of $400: $200 for two violations ($100 per violation) of 11 U.S.C. § 110(b)(1) plus $200 for two violations ($100 per violation) of 11 U.S.C. § 110(c)(1). Payment of the $400 in fines shall be made to the Clerk of this Court.
A separate order shall be entered in accordance with this memorandum of opinion.
IT IS SO ORDERED. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551613/ | 315 B.R. 87 (2004)
In re Matthew Craig KAPP and Kelly Ann Kapp, Debtors.
No. 03-43688.
United States Bankruptcy Court, W.D. Missouri.
September 7, 2004.
*88 Nell Adams, Blue Springs, MO, for Debtors.
MEMORANDUM OPINION
ARTHUR B. FEDERMAN, Bankruptcy Judge.
Debtors Matthew and Kelly Kapp filed a motion to suspend their Chapter 13 plan payments, and GMAC Mortgage Corporation (GMAC) objected, pursuant to 11 U.S.C. § 1322(b)(2). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) over which the Court has jurisdiction pursuant to 28 U.S.C. § 1334(b), 157(a), and 157(b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, I find that a motion to suspend plan payments is not an impermissible modification of a security interest in real property that is the Kapps' principal residence.
FACTUAL BACKGROUND
On June 12, 2003, the Kapps filed this Chapter 13 bankruptcy petition. On August 23, 2003, this Court confirmed their Chapter 13 plan. The plan provided for a bi-weekly payment to the Chapter 13 trustee in the amount of $590. From this payment, the trustee would pay GMAC a monthly payment of $802.62, and also pay to GMAC, over the life of the plan, prepetition arrearage in the amount of $5,700.
On May 6, 2004, the Chapter 13 trustee filed a motion to dismiss this case for default in plan payments. On July 6, 2004, the Kapps filed a motion to suspend $2,950 in plan payments, due to unanticipated medical expenses and a change in employer. GMAC objected to the motion to suspend, arguing that such a suspension modified their secured claim. On August 16, 2004, this Court held a hearing.
DISCUSSION
GMAC objected to a suspension of plan payments as an impermissible modification of its security interest. Section 1322(b)(2) of the Bankruptcy Code (the Code) prohibits the modification of the rights of mortgagees secured only by the debtors' principal residence:
(b) Subject to subsections (a) and (c) of this section, the plan may
.... .
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence.[1]
GMAC argues that because their claim is being paid through the plan, any suspension denies them a monthly payment. In addition, GMAC claims it must expend funds to pay insurance and taxes on the real estate. Nonetheless, two other sections of the Code seem to be in conflict with GMAC's position. Section 1322(b)(5) permits a debtor to cure any default within a reasonable period of time on a long-term secured claim:
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.[2]*89 And, section 1329 of the Code provides for modification of a plan after confirmation:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to
(1) increase or decrease the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments;
(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.[3]
In Harris v. Washington Mutual Homes Loans, Inc. (In re Harris),[4] the court concluded that by adopting section 1322(b)(5) "Congress clearly intended to allow Chapter 13 debtors to cure arrearages within a reasonable time while making regular payments to the Trustee, notwithstanding the requirements and exceptions set forth in section 1322(b)(2)."[5] Thus, the Harris court found that section 1322(b)(5) trumps section 1322(b)(2). In Central Bank of the South v. Thomas (In re Thomas),[6] the court found that a Chapter 13 debtor could cure a post petition default pursuant to a section 1329 modification of the plan, provided the debtor served notice and informed the court of any changed circumstances. Since the debtor had given notice of changed circumstances, the court held that the modification was not an impermissible modification of a creditor's rights in an indebtedness secured only by the debtor's residence.[7] The court went on to state that the legislative history underlying Chapter 13 makes clear that "if problems such as family illness, medical bills and layoff make execution of a confirmed plan impracticable, the Bankruptcy Code permits a temporary moratorium of payments."[8] In In re Chavez,[9] the court explained the extent of protections provided to mortgagees under sections 1322(b)(2) and 1322(b)(5). It found that the "focus should remain with what `must' be complied with for the plan to be confirmed; the lien must be retained, and present value must be given." [10] Likewise, the inquiry when debtors move to suspend or modify a Chapter 13 plan is the same. GMAC must be in the same situation at the conclusion of the Chapter 13 plan as it would have been in had there been no default, either prepetition or postpetition. If that is so, its rights have been protected. *90 If not, it has the same recourse it has under state law. Moreover, it has recourse during the course of the plan if it receives no payments. While the Kapps are permitted to suspend their payments to the trustee, that does not suspend GMAC's right to a monthly payment. As for GMAC, the debtors are in default, and GMAC can move this Court for relief from the automatic stay.
GMAC stated in its post-trial brief that it felt compelled to object to a suspension in preparation for a future motion for relief from stay. I disagree. As a rule, a motion to suspend payments occurs after debtors are already delinquent. In this case, as in many cases, the Chapter 13 trustee filed a motion to dismiss for a default in plan payments, then debtors filed a motion to suspend the payments that made up the default. Nothing in the Code prevented GMAC from filing a motion for relief from the automatic stay as soon as the trustee failed to make its payment. Indeed, Rule 3093-1 of the Local Rules provides that the granting of a suspension is without prejudice to such a motion:
RULE 3093-1. PLAN PAYMENT SUSPENSION
For purposes of Chapter 13, any order granting an abatement, waiver, or suspension, does not eliminate the payment; rather it adds the payment onto the end of the plan unless the order specifically provides otherwise. The granting of an abatement, waiver, or suspension is without prejudice to the rights of any secured creditor to seek a lift of the stay or other appropriate relief.[11]
And, such suspension is without prejudice to the right of the trustee, or any creditor, to later take the position that the plan now fails to amortize in sixty months, and that such failure is a basis for dismissal.[12]
I will, therefore, overrule GMAC's objection to the Kapps' motion to suspend payments in the amount of $2,950.
I am authorized to say that the other bankruptcy judges for the Western District of Missouri agree with this Memorandum Opinion.
An Order in accordance with this Memorandum Opinion will be entered this date.
NOTES
[1] 11 U.S.C. § 1322(b)(2).
[2] 11 U.S.C. § 1322(b)(5).
[3] 11 U.S.C. § 1329(a) and (b).
[4] 312 B.R. 591 (N.D.Miss.2004).
[5] Id. at 596.
[6] 121 B.R. 94 (Bankr.N.D.Ala.1990).
[7] Id. at 105. See also In re Chavez, 138 B.R. 979, 982 (Bankr.D.N.M.1992) (holding that while debtors cannot modify a home mortgage, they can cure any default over the course of the Chapter 13 plan); In re Davis, 110 B.R. 834, 836 (holding that a post confirmation curing of a default under section 1325(b)(5) does not, ipso facto, constitute an impermissible modification in contravention of section 1322(b)(2)); In re Palazzolo, 55 B.R. 17, 18 (Bankr.E.D.N.Y.1985) (holding that debtors are permitted to create new payment schedules within their plans to provide for the curing of mortgage defaults provided the new schedule does not extend the final due date); In re Simpkins, 16 B.R. 956, 957 (Bankr.E.D.Tenn.1982) (holding that curing defaults and maintaining regular payments on a claim secured only by a debtor's home does not modify the mortgagee's rights).
[8] 121 B.R. at 105.
[9] 138 B.R. 979, 982 (Bankr.D.N.M.1992).
[10] Id. at 984.
[11] Local Rules of Practice-United States Bankruptcy Court-Western District of Missouri 3093-1 (August 2003).
[12] 11 U.S.C. § 1322(d). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551614/ | 315 B.R. 198 (2004)
In re FIESOLE TRADING CORP., Debtor.
No. 99-47013.
United States Bankruptcy Court, D. Massachusetts.
October 1, 2004.
MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is a Motion to Authorize Reimbursement of Excess Tax Payments (the "Motion") filed by Frank A. Rizzo and Andrew Michael Rizzo (the "Movants"). The issue to be determined is whether a "responsible individual" under 26 U.S.C. § 6672 who personally pays to the United States (hereinafter the "IRS") some or all of its claim against the estate may be subrogated to that claim.
I. FACTS AND POSITIONS OF THE PARTIES
The material facts are not in dispute. On November 12, 1999, Fiesole Trading Corporation (the "Debtor") filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The case was converted to Chapter 7 on December 3, 2000. On Schedule E of the original petition, the Debtor listed the IRS as an unsecured priority creditor, based on unpaid withholding taxes, but for an unknown amount. The IRS filed a Proof of Claim on April 5, 2000, and filed an amended Proof of Claim on March 8, 2001 for a total of $15,837.67 in unsecured priority claims and $6,703.20 in general unsecured claims (the "IRS Claim").
The IRS Claim was indeed based on taxes withheld from employees' wages, but never remitted to the IRS as required by 26 U.S.C. §§ 3102(a), 3402(a) and 7501(a).[1] These taxes are typically called "Trust Fund" taxes because an employer is deemed to be holding the funds in *201 "trust."[2] Pursuant to I.R.C. § 6672(a), the IRS may look to an employer's "responsible individuals" for payment of Trust Fund taxes.[3] After filing its claim, the IRS determined the Movants here to be responsible individuals with respect to the Debtor's Trust Fund taxes, seized the Movants' personal income tax refunds and applied the seized amounts to reduce the Debtor's Trust Fund tax liability.[4]
On December 1, 2003, the Final Report of the Chapter 7 trustee (the "Trustee") was approved, and he was authorized to pay the IRS on its claim. After that payment was made, however, the IRS refunded $6,679.38 to the Trustee because the government's claim had been reduced postpetition by the Movants' tax refunds. The Movants followed with the instant Motion, pursuant to which they requested that the Court authorize the Trustee to pay them the funds returned by the IRS. In their brief supporting the Motion, the Movants characterized their request as one for subrogation to the IRS Claim. The Movants do not contend that they are entitled to subrogation insofar as the IRS Claim enjoyed priority under the Bankruptcy Code. Rather, in accordance with 11 U.S.C. § 507(d),[5] the Movants concede that, at best, they are unsecured creditors, entitled to participate with others to the extent of these returned funds.
While the Trustee has no objection to the relief sought by the Movants, there is existing case law which holds contrary to the Movants' subrogation request. See, e.g., Patterson v. Yeargin (In re Yeargin), 116 B.R. 621 (Bankr.M.D.Tenn.1990).
II. DISCUSSION
A. Theories of Subrogation
Pursuant to the subrogation remedy, "one who has been compelled to pay a debt *202 which ought to have been paid by another is entitled to exercise all the remedies which the creditor possessed against the other." Am. Surety Co. v. Bethlehem Nat'l Bank, 314 U.S. 314, 317, 62 S.Ct. 226, 86 L.Ed. 241 (1941). Although classic examples of entities that have a right to subrogation include guarantors, sureties and endorsers, Photo Mech. Servs. Inc. v. E.I. Dupont De Nemours Co. (In re Photo Chem. Mech. Servs., Inc.), 179 B.R. 604, 618 (Bankr.D.Minn.1995), the availability of subrogation is not so limited. In re Valley Vue Joint Venture, 123 B.R. 199, 208 (Bankr.E.D.Va.1991). As the Fifth Circuit Court of Appeals has aptly noted:
[Subrogation] is now a mechanism ... universally applied in new and unknown circumstances ... [I]t is broad enough to include every instance in which one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter.
Compania Anonima Venezolana De Navegacion v. A.J. Perez Export Co., 303 F.2d 692, 697 (5th Cir.1962).
In the context of a bankruptcy case, an entity's right of subrogation has been examined under either or both of two theories: 11 U.S.C. § 509 and state law doctrines of equitable subrogation. The Movants failed to specify the theory of subrogation upon which they rely.
Equitable subrogation has long been recognized under Massachusetts state law, see, e.g., Jackson Co. v. Boylston Mut. Ins. Co., 139 Mass. 508, 2 N.E. 103, 104 (1885), and has been generally described as "the substitution of one person in place of another, whether as a creditor, or as the possessor of any other rightful claim, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities." Id. In order to succeed on a claim of equitable subrogation under Massachusetts law, five criteria must be met: (1) the party seeking subrogation must have made the payment to protect his or her own interest; (2) the party seeking subrogation must not have acted as a volunteer in making the payment; (3) the party seeking subrogation must not have been primarily liable for the debt; (4) the party seeking subrogation must have paid off the entire debt; and (5) subrogation must not work injustice to the rights of others. E. Boston Sav. Bank v. Ogan, 428 Mass. 327, 701 N.E.2d 331, 334 (1998) (citing Mori v. U.S., 86 F.3d 890, 894 (9th Cir.1996)); see also 73 Am.Jur.2d Subrogation § 5 (2004).
Section 509 of the Bankruptcy Code also provides a right of subrogation. In relevant part, § 509 provides:
(a) Except as provided in subsection (b) or (c) of this section, an entity that is liable with the debtor on ... 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.
(b) Such entity is not subrogated to the rights of such creditor to the extent that
...
(2) as between the debtor and such entity, such entity received the consideration for the claim held by such creditor.
...
(c) The court shall subordinate to the claim of a creditor and for the benefit of such creditor an allowed claim, by way of subrogation under this section ... of an entity that is liable with the debtor *203 on ... such creditor's claim, until such creditor's claim is paid in full ...
11 U.S.C. § 509 (2004).
Therefore, pursuant to the relevant provisions of § 509, an entity is entitled to subrogation if: (1) the entity is liable with the debtor on a claim against the debtor (§ 509(a)); (2) the entity has paid all or part of the claim (§ 509(a)); and (3) the entity did not receive the consideration for the claim (§ 509(b)).[6] Furthermore, § 509(c) bars payment to an entity subrogated under § 509 until the creditor's claim has been paid in full.[7]
Courts are not generally in agreement as to whether or to what extent the requirements of equitable subrogation under state law inform the interpretation and application of requirements for subrogation under § 509 of the Bankruptcy Code. In re Photo Mech. Servs., 179 B.R. at 618-19 (providing extensive citations and a clear description of courts' varied treatment of subrogation in bankruptcy). Some courts have either explicitly or implicitly held that the requirements of equitable subrogation must be met before subrogation may be available in bankruptcy cases, even where a party seeks subrogation pursuant to § 509. See, e.g., Buckeye Union Ins. Co. v. Four Star Const. Co. (In re Four Star Constr. Co.), 151 B.R. 817, 820-21 (Bankr.N.D.Ohio 1993); In re FJS Tool & Mfg. Co., Inc., 88 B.R. 866, 870 (Bankr.N.D.Ill.1988); Bank of Am. v. Kaiser Steel Corp. (In re Kaiser Steel Corp.), 89 B.R. 150, 152 (Bankr.D.Colo.1988); Baxter v. Flick (In re Flick), 75 B.R. 204, 206 (Bankr.S.D.Cal.1987); Towers v. Moore (In re DiSanto & Moore Assocs., Inc.), 41 B.R. 935, 938 (N.D.Cal.1984). Many courts have noted that the requirements of § 509 are distinguishable from those of equitable subrogation, but have held or implied that either theory may provide a basis for subrogation in a bankruptcy case. See, e.g., Wilson v. Brooks Supermarket, Inc. (In re Missionary Baptist Found, of Am.), 667 F.2d 1244, 1246 (5th Cir.1982); Wetzler v. Cantor, 202 B.R. 573, 577 (D.Md.1996); Cuda v. Nigro (In re Northview Motors, Inc.), 202 B.R. 389, 401 (Bankr.W.D.Pa.1996); In re Spirtos, 103 B.R. 240, 243-45 (Bankr.C.D.Cal.1989). Other courts have held that the remedies of equitable subrogation and subrogation under § 509 are separate and distinct, but do not decide whether state law theories of equitable subrogation are available in a bankruptcy case. See, e.g., Cornmesser v. Swope (In re Cornmesser's, Inc.), 264 B.R. 159, 162-63 (Bankr.W.D.Pa.2001); In re Photo Mech. Servs., 179 B.R. at 618-19. Finally, a small number of courts have found that equitable subrogation principles do not apply in bankruptcy cases on account of the codification of subrogation *204 rights under § 509. See, e.g., Creditor's Comm. v. Mass. Dep't of Revenue, 105 B.R. 145, 148 (D.Mass.1989); Cooper v. Cooper (In re Cooper), 83 B.R. 544, 546 (Bankr.C.D.Ill.1988).
Bankruptcy is a matter of federal law. U.S. Const, art I, § 8, cl. 4.; N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 84 n. 36, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). As such, the Bankruptcy Code prevails over conflicting state law. U.S. Const, art VI, cl. 2; In re Reisnour, 49 B.R. 406, 408 (Bankr.N.D. 1985), affd 56 B.R. 225. Although state law may control the resolution of some issues in a bankruptcy case,[8] "[w]here the language of Congress indicates a policy requiring a determination that is different from that reached under State law, the Supremacy Clause of the United States Constitution, Article VI, does not permit State law to interfere with the intended result." United Bank of Ariz. v. Watkins Oil Service, Inc. (In re Watkins Service Oil, Inc.), 100 B.R. 7, 11 (Bankr.D.Ariz. 1989) (citing Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971)); In re Nelson, 59 B.R. 417 (9th Cir. BAP 1985). Because § 509 clearly delineates the requirements for and exceptions to subrogation, this Court will not superimpose state law doctrines to expand or contract the right to subrogation provided for under the Bankruptcy Code.[9]
This Court is therefore guided only by § 509 in determining whether the Movants are entitled to subrogation to the IRS Claim. The Movants will be entitled to subrogation if the following criteria are met: (1) the Movants must have been "liable with the debtor" on the IRS Claim; (2) the Movants must not have received the consideration for the claim; and (3) the IRS Claim must have been paid in full. It is undisputed that the third requirement, that of § 509(c), has been met. The IRS does not contend that there is any remaining balance due on the unpaid Trust Fund taxes. Thus, this Court is left to determine whether the other two criteria are satisfied.
B. Application
1. Liability with the Debtor
The Bankruptcy Code makes reference to entities that are "liable with the debtor" in two related provisions. The first, as discussed above, is § 509(a). The second usage is found in § 502(e)(1), which addresses the allowability of claims for reimbursement or contribution.[10] In both instances, the phrase "liable with the debtor" is intended to mean substantially the same thing. Thus, interpretations of liability with the debtor in the context of § 502(e) are equally applicable to determining liability with the debtor for the *205 purposes of § 509(a).[11]
Entities may be liable with a debtor in bankruptcy even if they do not fall into one of the traditional categories of guarantor or surety. Celotex Corp. v. Allstate Ins. Co. (In re The Celotex Corp.), 289 B.R. 460, 465-66 (Bankr.M.D.Fla.2003) ("the term `liable with the debtor' ... connotes a wide spectrum of co-obligors, far beyond the mere guarantor or surety"). As the Tenth Circuit Court of Appeals recently noted, liability with the debtor may be quite broadly defined:
The word "liable" means "[b]ound or obliged in law or equity." Black's Law Dictionary 824 (5th ed.1979). The word "with" means "in addition to." Id. at 1436. Consequently, looking to the plain language of [11 U.S.C. § 509] and giving effect to its meaning ... "an entity ... is liable with the debtor," § 509(a), 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." Id.
CCF, Inc. v. First Nat'l Bank and Trust Co. (In re Slamans), 69 F.3d 468, 473 (10th Cir.1995) (emphasis added). Furthermore, liability with the debtor may exist in non-contractual relationships such as that between joint tortfeasors. In re Baldwin-United Corp., 55 B.R. 885, 890 (Bankr.S.D.Ohio 1985) ("The phrase `an entity liable with the debtor' is broad enough to encompass any type of liability shared with the debtor, whatever its basis").
An employer's obligation to remit withheld taxes to the IRS arises from I.R.C. §§ 3102(a), 3402(a) and 7501(a). The liability of responsible individuals, however, arises under I.R.C. § 6672 and is deemed a "penalty" under the statute. For this reason, some courts have held that a responsible person has no right to subrogation for amounts paid to the IRS under § 6672, because the "responsible officer's personal liability ... is separate and distinct from the corporation's debt." In re FJS Tool, 88 B.R. at 870; see also In re Yeargin, 116 B.R. at 623.
Notwithstanding the facial characterization of the § 6672 assessment as a penalty, the Supreme Court, myriad circuit and district courts, and the IRS itself have viewed the § 6672 assessment not as a true penalty, but as an alternate means to collect the same tax owed by the corporation.[12] In addition, the legislative history *206 of § 7501, which requires the collection, withholding and remittance to the government of internal revenue taxes from third person employees, acknowledges that "the liability of the person collecting and withholding the taxes to pay over the amount is merely a debt..." S.Rep. No. 558, 73d Cong., 2d Sess., 53 (1935) (emphasis added). And, as the Supreme Court noted in Slodov, the predecessor to § 6672 was "enacted in 1919 while the debt concept prevailed." 436 U.S. at 255, 98 S.Ct. 1778 (emphasis added).
Indeed, the Internal Revenue Manual (the "IRM") states that § 6672 penalties "serve as an alternate means of collecting unpaid trust fund taxes ..." IRM 5.7.3.1 (approved Dec. 1, 2003). Furthermore, it is clearly the policy of the IRS to collect the taxes only once, IRS Policy Statement P-5-60, reprinted in IRM 1.2.1.5.14 (approved Feb. 2, 1993),[13] and responsible persons are entitled to an adjustment of their liability if the taxes are paid by the corporation or another responsible person, IRM 5.7.7.7 (approved Dec. 1, 2003).
The effect of IRS policy and practice is such that responsible individuals and the corporation are obligated to pay the same entity on the same debt, even though their obligations arise from a different source. This falls squarely within the meaning of "liable with" under the Bankruptcy Code. See In re Dow Coming Corp., 244 B.R. 705, 715 (Bankr.E.D.Mich.1999) (citing Pension Benefit Guaranty Corp. v. White Motor Corp. (In re White Motor Corp.), 731 F.2d 372, 374 (6th Cir.1984)) ("co-liability exists when each party is obligated to pay the same person for the same benefits even if the obligations of each party arise from a different source."); see also LTV Steel Co. v. Shalala (In re Chateaugay Corp.), 154 B.R. 416, 420 (S.D.N.Y. 1993) ("although the source of the liability may differ, each debtor must be liable to the same party for essentially the same claim"); McAllister Toning v. Ambassador Factors (In re Topgallant Lines), 154 B.R. 368, 381 fn. 12 (S.D.Ga.1993) (quoting In re Slamans, 148 B.R. at 625) ("`Liable with' means that `the parties are liable to the same creditor at the same time on the same debt'").
As the court in Dow Corning explained:
[The] rationale that a creditor is not "liable with the debtor" on an obligation to another creditor if the obligations arise from "independent" sources proves too much.... Every form of guarantee agreement creates an independent obligation on the part of the guarantor. Yet it also makes the guarantor coliable with the primary obligor on the same underlying debt, even though these obligations arise from different contracts.
244 B.R. at 715. Thus, the conclusion that an independent source of an entity's liability renders subrogation unavailable under § 509 clearly thwarts the provision's purpose and intended application, for it would prevent even the ordinary guarantor in some cases from claiming subrogation in a bankruptcy case. *207 Nowhere is the application of the IRS's stated policy on Trust Fund tax liability more clear than in the case sub judice. Although the Trustee remitted funds to fulfill the Debtor's liability for unpaid Trust Fund taxes, a portion of this amount, reflecting the portion of the obligation that had been met by the seizure of the Movants' tax returns, was returned by the IRS to the Trustee.
This Court therefore holds that the Movants, as responsible individuals within the meaning of I.R.C. § 6672, are "liable with" the Debtor for the underlying unpaid Trust Fund taxes. To hold otherwise would be to ignore the true nature of the § 6672 penalty as detailed by the courts, I.R.C. legislative history, the IRS and the factual record of this case.
2. The § 509(b)(2) Exception
Pursuant to 11 U.S.C. § 509(b)(2), subrogation is unavailable where, "as between the debtor and such entity [seeking subrogation], such entity received the consideration for the claim held by such creditor." As discussed above, this provision has been interpretated as codifying the common-law subrogation requirement that the entity must not have paid off its own debt or a debt for which it was primarily liable. See footnote 5, supra. In fact, many courts refusing to extend the right of subrogation to an entity seeking reimbursement for penalties assessed pursuant to § 6672 have held that either § 509(b) or the common law rule prevent such subrogation because the responsible individual is merely "discharging a debt in performance of his own obligations," In re FJS Tool, 88 B.R. at 871; see also In re Yeargin, 116 B.R. at 623 (responsible individual "has not paid the liability of another, he has only discharged the tax penalty for which he was primarily liable") and the relief from the individual's personal responsibility is often deemed the "consideration" for the claim. See, e.g., In re Barnes, 304 B.R. 489, 491 (Bankr. N.D.Ala.2004); Mason v. Pa. Dept. of Revenue (In re Davis), 145 B.R. 499, 501-2 (Bankr.W.D.Pa.1992); Ridge v. Smothers (In re Smothers), 60 B.R. 733, 735 (Bankr. W.D.Ky.1986). This Court disagrees.[14]
Even if this Court were to accept the "primary" versus "secondary" obligation interpretation of § 509(b)(2), this Court finds that the corporate Debtor is primarily liable for the unpaid Trust Fund taxes, while the liability of Movants as responsible individuals is secondary to the underlying tax obligation. Section 509(b)(2) does not address the direct relationship between the creditor and the potential subrogee. Rather, it looks to compare the obligations of the subrogee to those of the debtor"as between the debtor and such entity." In determining primary versus secondary, or "ultimate," liability between the Debtor (employer) and the entity seeking subrogation (responsible individual), it is clearly the corporate Debtor that is primarily liable for the IRS claim.
Liability under § 6672 is derivative of the underlying corporate obligation to remit withheld trust fund taxes. Responsible individuals are not assessed the penalty until it is determined that the corporation failed to properly pay over the taxes. In addition, "[i]f, after the assertion of the [Trust Fund Recovery Penalty], *208 the corporation pays the delinquent tax, the TFRP assessment will be abated." IRM 5.17.7.1.9 (approved Sept. 20, 2000).
Furthermore, the language of the IRM presents the underlying tax obligation as the primary obligation, while the liability of the responsible persons is considered secondary. In describing the purpose of the penalty, the IRM states that one purpose is to "facilitate the collection of such taxes from secondary sources" (i.e., responsible individuals), IRM 5.17.7.1 (approved Sept. 20, 2000) (emphasis added) and to "serve as an alternate means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company/business that failed to pay the taxes," IRM 5.7.3.1 (approved Dec. 1, 2003) (emphasis added). And, finally, as the Supreme Court noted in Sotelo, 436 U.S. at 279 fn. 12, 98 S.Ct. 1795, "[T]he Comptroller General of the United States wrote: `[The] IRS uses the 100-percent penalty only when all other means of securing the delinquent tax have been exhausted.'" Opinion B-137762, n. 10 (May 3, 1977) reprinted in 9 CCH 1977 Stand. Fed. Tax. Rep. ¶ 6614, p. 71, 438.
This Court therefore agrees with those courts which have found § 6672 liability to be secondary to the tax obligation of the employer. See In re Greenberg, 105 B.R. 691, 692 (Bankr.M.D.Fla.1989) (a claim against debtor for penalties assessed pursuant to § 6672 "does not represent the primary obligations of these Debtors, but only a secondary obligation"); Swift v. Levesque, 614 F.Supp. 172, 178 (D.Conn. 1985) (concluding that "a Connecticut court would view [unpaid trust fund taxes] as a corporate debt") (emphasis added); Reid v. United States, 558 F.Supp. 686, 688 (N.D.Miss.1983) ("it is clear that the original obligation is that of the employer and section 6672 is utilized only when the primary obligation is not met").
IV. CONCLUSION
For all of the aforementioned reasons, this Court rules that the Movants are entitled to be subrogated to the IRS claim pursuant to 11 U.S.C. § 509 and may share pro rata with other general unsecured creditors. An order will issue in conformity with this Memorandum of Decision.
ORDER
For the reasons set forth in this Court's Memorandum of Decision of even date, the Motion to Authorize Reimbursement of Excess Tax Payments filed by Frank A. Rizzo and Andrew Michael Rizzo is granted insofar as they are subrogated to the claim of the United States, pursuant to 11 U.S.C. § 509(a), and allowed a general unsecured claim against the estate in the amount of $6,679.38.
NOTES
[1] 26 U.S.C. §§ 3102 and 3402(a), part of the Internal Revenue Code (the "I.R.C."), require employers to withhold certain Social Security and income taxes from employees' wages. I.R.C. § 7501 states that taxes withheld from others, which are to be paid over to the Unit"trust" States, are held to be a "special fund in trust for the United States."
[2] Yet, the IRS must credit the employees for the withheld Trust Fund taxes even if the employer fails to remit the taxes to the IRS. Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d251 (1978).
[3] Section 6672 states, in relevant part:
(a) 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 any 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 amount of the tax evaded, or not collected, or not accounted for and paid over ...
I.R.C. § 6672(a) (2004). These individuals ("responsible individuals" or "responsible persons") are typically principals, directors or officers, since these are commonly the persons with the ability and responsibility to decide whether or not to remit the Trust Fund taxes to the IRS.
[4] The Movants assert that they had worked with an IRS taxpayer advocate and reached an agreement whereby they would resolve differences with the IRS and, in exchange, the IRS would pay over to the Movants estate funds paid to the IRS. Although proof of this assertion would certainly bolster the Movants' position, the presence or absence of any such agreement and its specific terms are not dispositive of the issues raised in this case.
[5] 11 U.S.C. § 507(d) provides that "an entity that is subrogated to the rights of a holder of a claim of a kind specified in subsection (a)(3), (a)(4), (a)(5), (a)(6), (a)(7), (a)(8), or (a)(9) of this section is not subrogated to the right of the holder of such claim to priority under such subsection." Although the IRS Claim is granted priority under 11 U.S.C. § 507(a)(8), 124 Cong. Rec. H. 11,112 (Sept. 28, 1978); S. 17,428 (Oct. 6, 1978) ("This category also covers the so-called `trust fund' taxes, that is income taxes which an employer is required to withhold from the pay of his employees, and the employees' share of social security taxes"), the Movants are not entitled to the IRS' priority status and may only be subrogated, if at all, to the amount of the claim as general unsecured creditors.
[6] It is generally held that § 509(b)(2) embodies the principle that one who is ultimately or "primarily" liable on a debt is not entitled to subrogation. Rubenstein v. Ball Bros., Inc. (In re New England Fish Co.), 749 F.2d 1277, 1282 (9th Cir.1984); In re Valley Vue, 123 B.R. at 205; In re Russell, 101 B.R. 62, 65 (Bankr.W.D.Ark.1989); Cooper v. Cooper (In re Cooper), 83 B.R. 544, 547 (Bankr.C.D.Ill. 1988); 124 Cong. Rec. H. 11,095 (Sept. 28, 1978); S. 17,411-12 (Oct. 6, 1978) ("Section 509(b)(2) reiterates the well-known rule that prevents a debtor that is ultimately liable on the debt from recovering from a surety or codebtor").
[7] Although not relevant on the facts of the present case, it is important to note that there are three additional "exceptions" to subrogation under § 509(b)(1). A claim of subrogation under § 509 shall not be granted to the extent that (1) the entity a has been allowed a claim for reimbursement or contribution under § 502; (2) the entity's claim has been disallowed other than under § 502(e); or (3) the entity's claim for reimbursement or contribution has been subordinated pursuant to § 510(a)(1) or (b). 11 U.S.C. § 509(b).
[8] See, e.g., 11 U.S.C. § 101(5) (definition of "claim" is broad enough to incorporate state law concepts); 11 U.S.C. § 510(a) (specifically defining enforceability of subordination agreements in terms of enforceability under applicable nonbankruptcy law).
[9] For instance, whereas equitable subrogation requires the entity seeking subrogation to have paid the claim in full, § 509(a) allows for subrogation as to partial payment of the creditor's claim (although the creditor must be paid in full, from any source, before the subrogated party may receive payment).
[10] Section 502 deals with the allowance of claims or interests. Subsection (e)(1) disallows claims for reimbursement or contribution of an "entity that is liable with the debtor" on a creditor's claim to the extent that: (1) the creditor's claim is disallowed; (2) the claim for reimbursement or contribution is contingent; or (3) the entity asserting the claim for reimbursement or contribution has asserted a right to subrogation under § 509. 11 U.S.C. § 502(e)(1) (2004).
[11] As other courts and legislative history make clear, the parallel nature of § 502(e)(1)(C) and § 509(b)(1)(A) means that
the surety or codebtor has a choice; to the extent a claim for contribution or reimbursement would be advantageous ... a surety or codebtor may opt for reimbursement or contribution under 502(e). On the other hand, to the extent that the claim for such surety or codebtor by way of subrogation is more advantageous ... the surety or codebtor may elect subrogation under section 509.
The section changes current law by making the election identical in all other respects.
124 Cong. Rec. H. 11,094 (Sept. 28, 1978). See also In re Early & Daniel Indus., Inc., 104 B.R. 963 (Bankr.S.D.Ind.1989); In re Trasks' Charolais, 84 B.R. 646 (Bankr.D.S.D.1988). Necessarily implied by this ability to make a choice between § 502(e) and § 509 is that the same entities will qualify as those "liable with the debtor" under both sections.
[12] See Slodov v. United States, 436 U.S. 238, 243-45, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978); United States v. Sotelo, 436 U.S. 268, 275, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978) (government argued, and the Supreme Court agreed, that assessments pursuant to § 6672 were not a penalty in the true sense, but merely a means of ensuring collection of Trust Fund taxes); United States v. Pepperman, 976 F.2d 123, 126-27 (3d Cir.1992); IRS v. Energy Res., Inc. (In re Energy Res., Inc.), 871 F.2d 223, 232-33 (1st Cir.1989); United States v. Technical Knockout Graphics, Inc. (In re Technical Knockout Graphics, Inc.), 833 F.2d 797, 799 (9th Cir.1987); United States v. Huckabee, 783 F.2d 1546, 1548-49 (11th Cir.1986); Newsome v. United States, 431 F.2d 742, 745 (5th Cir.1970); Kelly v. Lethert, 362 F.2d 629, 635 (8th Cir.1966); Botta v. Scanlon, 314 F.2d 392, 393 (2d Cir.1963); In re Thomas, 222 B.R. 742, 747 (Bankr.E.D.Pa.1998); Lostocco v. D'Eramo, 238 Ga.App. 269, 518 S.E.2d 690, 693 (1999); but see Mortenson v. Nat'l Union Fire Ins. Co., 249 F.3d 667, 671 (7th Cir.2001) (holding that assessments against responsible individual under § 6672 qualified as a "penalty" within the meaning of exclusion provision in corporation's directors' and officers' liability insurance).
[13] See also Sotelo, 436 U.S. at 279-80 n. 12, 98 S.Ct. 1795; Huckabee, 783 F.2d at 1548; Newsome, 431 F.2d at 745; Lethert, 362 F.2d at 635.
[14] To say that an entity has "received the consideration for the claim" or has discharged only its primary liability simply because it pays on a debt for which it has some personal obligation would render § 509 meaningless. Entities are required to have some sort of personal obligation to pay the claim before subrogation will be available; even guarantors have "personal liability" for the amounts they promise to pay. Discharging one's liability, therefore, cannot alone be a bar to subrogation. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551618/ | 315 B.R. 921 (2004)
In re David A. and Vicki B. WREN, Debtor.
No.93-10368 JTL.
United States Bankruptcy Court, M.D. Georgia, Albany Division.
October 8, 2004.
Thomas D. Lovett, Kelley, Lovett, Mullis and Blakey, P.C., Albany, GA, for Debtors.
*922 MEMORANDUM OPINION
JOHN T. LANEY, III, Bankruptcy Judge.
On August 23, 2004, the court held a telephonic hearing on the Motion of David and Vicki Wren to close the case nunc pro tunc. At the conclusion of the hearing, the court took the matter under advisement. After considering the parties' briefs and oral arguments, as well as applicable statutory and case law, the court makes the following findings of fact and conclusions of law.
PROCEDURAL HISTORY
The Wrens filed a Chapter 11 Bankruptcy proceeding May 13, 1993, which was confirmed on June 27, 1994. A final decree was entered on October 28, 1994. The Debtors asked the court to re-open the case in June 1996, but later withdrew the motion. The Debtors again moved to re-open the case January 2, 2002. The case was then re-opened on February 27, 2002, specifically to address an adversary proceeding against Sallie Mae Servicing, L.P. There have been no other actions besides the adversary proceeding in connection with this case since it was reopened.
Since the plan was reopened, the Wrens have not paid the Trustee any fees in accordance with the statute. The United States Trustee filed a motion to convert the case to a Chapter 7 on July 21, 2004. The Trustee cited the Wrens' failure to perform under 28 U.S.C. § 1930(a)(6) by not paying fees or submitting monthly operating reports in compliance with the statute as the basis for bringing the motion. In response, on July 23, 2004 the Wrens filed a motion to close the case nunc pro tunc to January 2, 2002, contending the fees and monthly reports were not necessary because the case was only opened for the filing of the adversary proceeding.
CONCLUSIONS OF LAW
The Eleventh Circuit defined nunc pro tunc in Cypress Barn. Inc. v. Western Electric Co., 812 F.2d 1363 (1987) as retroactive relief that "merely recites court actions previously taken but not properly or adequately recorded." Id. at 1364 (citations omitted).
This district has addressed the high burden placed on a party seeking a nunc pro tunc order in In re Brown, 251 B.R. 916 (Bankr.M.D.Ga.2000). In Brown the creditor seeking the retroactive relief had the burden to show that, if granted, the action "would injure no other interest... [which] could be a difficult burden to satisfy in some cases in that it requires proof of a negative circumstance." Id. at 919.
A. There are not extraordinary circumstances
The Middle District Bankruptcy Court has applied a requirement of extraordinary circumstances to grant retroactive relief. In In re Camp Lightweight, Inc., 76 B.R. 855 (Bankr.M.D.Ga.1987), a nunc pro tunc order was not granted because the debtor failed to establish extraordinary circumstances warranting retroactive relief. In that case, the attorney for a Chapter 11 debtor in possession neglected to have the have the debtor apply for authorization to employ counsel. The court declined to approve the appointment of counsel nunc pro tunc because "retroactive approval of appointment of a professional may be granted by the bankruptcy court in its discretion but that it should grant such approval only under extraordinary circumstances." Id. at 857 (citing In re Arkansas Co., 798 F.2d 645, 650 (3d Cir.1986)). In Camp Lightweight the attorney's "mere oversight" to seek appointment *923 did not meet the burden of extraordinary circumstances. Id.
In re Aquatic Development Group, Inc., 352 F.3d 671 (2d Cir.2003) also addressed the extraordinary circumstances requirement. Like the present case, the debtor in Aquatic wanted to close its Chapter 11 case nunc pro tunc to avoid paying United States Trustee fees. The fees were assessed when 28 U.S.C. § 1930(a)(6) was amended to require quarterly Trustee fees until a case is either converted or dismissed. Prior to that, § 1930(a)(6) discontinued payments when a plan was confirmed in addition to converted or dismissed cases. The Aquatic case had been confirmed and the debtor contended it was "substantially consummated." Id. at 675.
The debtor's motion to close the case nunc pro tunc was granted by the bankruptcy court and affirmed by the district court under a two prong test: "(i) if the application had been timely, the court would have authorized the [relief], and (ii) the delay in seeking [the relief requested] resulted from extraordinary circumstances." Id. at 676. The court found that the "prolonged nature of this plan and the timing of the amendment of ... § 1930; the consequences of that change; and the failure of the parties to adequately monitor the progress of this case" constituted extraordinary circumstances. Id.
The Second Circuit Court of Appeals reversed and found the bankruptcy court had abused its discretion. "First, the unusual length of time required to consummate the reorganization plan ... may well have been extraordinary, but there is no evidence in the record that the time required to consummate the plan caused [the debtor] to delay its request to close the bankruptcy case." Id. at 678-79 (emphasis added). Next, the court addressed the timing of the amendment to the Code. The court concluded that although this may have lead to unfortunate and unanticipated financial consequences to the debtor, it was not the cause of the delay in moving to close the case. Indeed, the court notes that such a change should have spurred the Debtor "to act diligently in seeking closure." Id. at 679. Finally the court discussed the parties' failure to adequately monitor the closure of the case. The court stated that simple neglect did not constitute extraordinary circumstances. Further, "characterizing [the debtor's] neglectful conduct as extraordinary circumstance justifying nunc pro tunc relief mistakes cause for effect[the debtor's] failure to act was itself the delay, rather than a `circumstance' leading to it." Id.
In the present case, extraordinary circumstances have not been presented. Like the debtor in Aquatic, the Wrens seek to avoid paying fees to the Trustee, but have failed to show extraordinary circumstances to justify granting such a motion nunc pro tunc. Although the Wrens have reopened their ten year-old case, which may be out of the ordinary, the delay in seeking this relief was not a result of "any circumstances sufficiently extraordinary to justify the rare and powerful relief of retroactive closure." Id.
B. There is no previous action by this court
In Cypress Barn the Eleventh Circuit stated that "a nunc pro tunc order merely recites court actions previously taken but not properly or adequately recorded." 812 F.2d 1363, at 1364. In the present case there is no prior action by the court in regard to this issue to correct.
C. Granting this motion would not further the objectives of the Bankruptcy Code
The standard the bankruptcy courts should use in deciding whether to *924 issue a retrospective order is whether the order "will further the purposes of the Bankruptcy Code." In re The Millard Development Corp., 2004 WL 1347049, *2 (Bankr.S.D.Fla.2004). Withholding Trustee's fees does not further the Bankruptcy Code. "These fees bear no relation to particular services performed by the Trustee. Indeed, the legislative history of the amendment to § 1930 makes it clear that the fees are used to offset other expenditures in the federal budget and that the amendment was added to increase the revenue raised from these fees." Aquatic, 352 F.3d 671, at 674.
In addition to furthering the Bankruptcy Code, the court in Hillard stated that "nunc pro tunc effect may, and should, be provided" when it can be done so "without unfairly prejudicing parties-in-interest." 2004 WL 1347049, *2. This reiterates the burden established in Brown that the retroactive relief cannot injure another interest. In the present case the Trustee's interest would be injured by granting the motion.
The Wrens claim that the case was reopened for mere administrative convenience. However, even if it were for the convenience of the court, the fees paid to the Trustee would still further the Bankruptcy Code. Contrariwise, if the court granted the retroactive relief the motion would be to the detriment of the Trustee and therefore in derogation of the Code. Nevertheless, this decision does not reach the issue of whether the Debtors are in fact required to file monthly reports and pay U.S. Trustee quarterly fees after the case is closed if it is re-opened to allow the Debtors to file an adversary proceeding, which is the subject of a motion that has not been fully briefed. The Debtors are directed to promptly file their reply brief on this issue.
D. Granting the motion would not give effect to an agreement already in place
This is not a situation giving effect to an agreement or situation already in place. Retroactive relief was appropriate in In re General Development Corp., 165 B.R. 685 (S.D.Fla.1994), when the court reinstated a settlement order nunc pro tunc that was substantially the same as the agreement originally approved. In contrast, in the present case if retroactive relief were granted there would be a change in the status quo adversely affecting a party-ininterest.
E. The case is distinguishable from In re Junior Food Mart and In re Menk
At the hearing, the Wrens relied on In re Junior Food Mart of Arkansas, Inc., 201 B.R. 522 (Bankr.E.D.Ark.1996). Like the present case, the debtor in Junior Food Mart reopened a closed Chapter 11 in order to permit the filing of an adversary proceeding. In that case, the court closed the case nunc pro tunc to allow the debtor to avoid liability for Trustee fees. Junior Food Mart is not persuasive in this case. First, it is not binding on this court. Second, Junior Food Mart "is of little precedential value, as it was decided before Congress enacted the clarifying provision to § 1930(a)(6), reaffirming that the fee statute would apply to all pending Chapter 11 cases regardless of confirmation status." Aquatic, 352 F.3d at 681 n. 1.
The Wrens also relied on In re Menk, 241 B.R. 896 (9th Cir. BAP 1999) for the proposition that it is not necessary for a case to be reopened for the court to exercise jurisdiction over an adversary proceeding. Therefore, when a case is reopened for purely administrative convenience it would be unfair to incur Trustee fees. The Wrens argue that the *925 reopening of the case was done at the request of the Clerk's office as an administrative convenience so that there would be an open file to place documents related to the adversary proceeding against Sallie Mae. Menk is not binding and is distinguishable from the present case. In Menk it was the creditor, and not the debtors who reopened the case. Further, Menk was a Chapter 7 case, thus mandatory quarterly fees in all open Chapter 11 cases under 28 U.S.C. § 1930(a)(6) were not at issue.
CONCLUSION
In the present case the Wrens have not met the heavy burden to grant retroactive relief set forth in Brown. There are no extraordinary circumstances as required under Camp Lightweight that would justify granting an order nunc pro tunc. Further, by withholding Trustee fees, this requested relief would not further the Bankruptcy Code and would unfairly prejudice a party-in-interest. Therefore the requested relief is denied.
An order in accordance with this Memorandum Opinion will be entered. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551854/ | 139 B.R. 868 (1992)
In re Warren and Vicki LYNCH, Debtors.
Bankruptcy No. 91-33673-7-S.
United States Bankruptcy Court, N.D. Ohio, W.D.
April 28, 1992.
Richard J. Szczepaniak, Toledo, Ohio, for Beneficial Ohio, Inc.
William L. Swope, Lima, Ohio, for debtors.
Bruce C. French, Lima, Ohio, trustee.
MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court upon Debtors' Motion to Avoid Lien pursuant to 11 U.S.C. Section 522(f). A Hearing was held and the parties filed citation lists on the issue. The Court has reviewed the documents submitted and the relevant case law, as well as the entire record in this matter. Based upon that review, and for the following reasons, the Court finds that the Debtors' Motion should be Granted, in part, and Denied, in part.
DISCUSSION
Warren and Vicki Lynch, Debtors, granted Beneficial Ohio Inc. [hereinafter "Beneficial"] a consensual non-purchase money security interest in the Debtors' personal property, to wit: One (1) AM/FM amplifier receiver, One (1) CD player, Two (2) speakers, One (1) tape deck, Two (2) ruby and diamond rings, One (1) ruby and diamond necklace, One (1) watch, and Two (2) cameras, and various tapes, CDs, and records. The Debtors filed a Motion to avoid this lien asserting that these items were household goods and that Beneficial's lien impaired the Debtors' exemption in these items. Beneficial also filed an Objection to Debtors' Motion to avoid the lien arguing that the items it had a lien on did not fit into the category of household goods.
This Court has adopted the definition of "household goods" found in In re Barnes, 117 B.R. 842 (Bkrtcy.D.Md.1990). *869 See, In re Wheeler, 140 B.R. 445 (N.D.Ohio 1992). In Barnes, the United States Bankruptcy Court for the District of Maryland defined "household goods" as "items of personal property reasonably necessary for the day-to-day existence of people in the context of their homes." Barnes, at 847. Based upon the evidence before it, this Court cannot find that the following items are household goods: Two (2) ruby and diamond rings, One (1) ruby and diamond necklace, One (1) watch, and Two (2) cameras. See In re Wheeler, 140 B.R. 445 (N.D.Ohio 1992) [cameras].
However, the Court has found that, in this case, the following items are household goods: One (1) AM/FM amplifier receiver, One (1) CD player, Two (2) speakers, One (1) tape deck and various tapes, CDs, and records. See In re Gray, 87 B.R. 591 (Mo.1988), In re Fisher, 11 B.R. 666 (Bkrtcy.D.Okla.1981), In re Vaughn, 64 B.R. 213 (Bkrtcy.S.D.Ind.1986), In re Barrick, 95 B.R. 310 (M.D.Pa.1989) [stereos].
In reaching the conclusions found herein, this Court has considered all of the evidence and arguments of counsel regardless of whether they are specifically referred to in this Opinion.
Accordingly, it is
ORDERED that the Debtors' Motion be, and is hereby, Granted, in part, and Denied, in part.
It is FURTHER ORDERED that the Court finds that the following items are household goods:
One AM/FM amplifier receiver, One CD player, Two speakers, One tape deck, and various tapes, CDs, and records.
It is FURTHER ORDERED that the Court finds that the following items are not household goods:
Two ruby and diamond rings, One ruby and diamond necklace, One watch and Two cameras. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552211/ | 41 B.R. 941 (1984)
In re UTICA FLOOR MAINTENANCE, INC., Debtor.
NIAGARA MOHAWK POWER CORPORATION, Appellant,
v.
UTICA FLOOR MAINTENANCE, INC., Respondent.
Bankruptcy No. 82-00049, No. 83-CV-1100.
United States District Court, N.D. New York.
August 5, 1984.
Anthony J. Fazio, Syracuse, N.Y., for appellant Niagara Mohawk Power Corp.
Stephen J. Gerling, Utica, N.Y., for appellee Utica Floor Maintenance.
MEMORANDUM-DECISION AND ORDER
McCURN, District Judge.
This appeal from an Order of the United States Bankruptcy Court, 31 B.R. 509, for the Northern District of New York, Leon J. Marketos, Bkrtcy. J., raises issues concerning the right of a utility company to setoff a Chapter 11 debtor's pre-petition security deposit against that debtor's pre-petition *942 indebtedness for utility services rendered. For various reasons set forth herein, it appears necessary for the matter to be reconsidered by the Bankruptcy Court, hence the case is remanded.
Background
On January 11, 1982, Utica Floor Maintenance, Inc. filed a voluntary petition in bankruptcy pursuant to Chapter 11 of the Bankruptcy Code. Prior to the filing of its petition, Utica Floor Maintenance, Inc. had given security deposits of $1,400 and $340 to Niagara Mohawk to assure payment of utility bills at its business locations in Chadwicks, New York and New Hartford, New York. At the time it filed its petition, the debtor owed Niagara Mohawk either $1,444.29 or $2,106.00 for pre-petition utility services.[1]
By Order dated June 16, 1982, the Bankruptcy Court directed Niagara Mohawk to retain the total pre-petition security deposit of $1,740.00 as security for the continuation of gas and electric services to the debtor so long as the debtor remained current in the payment for said services and subject to further Order of the Court.
On appeal by Niagara Mohawk, this Court held that the debtor's pre-petition security deposit could not be used as adequate assurance of payment for post-petition services during the period in which the utility's rights to such deposit remained unsettled. The matter was remanded to the Bankruptcy Court for a determination as to whether a monetary security deposit would be required to satisfy the utility's statutory right to adequate assurance of payment for post-petition services. 25 B.R. 1010 (Dec. 21, 1982).
Subsequently, Niagara Mohawk instituted an adversary proceeding to obtain an order (1) that the pre-petition security deposit held by Niagara Mohawk be setoff against the pre-petition debts owed by the debtor to the utility; and (2) that the debtor be required to post adequate assurance in the form of a deposit or other security for post-petition utility services.
On July 15, 1983, the Bankruptcy Court issued its "Memorandum-Decision, Findings of Fact, Conclusions of Law and Order." After reciting the pertinent background, the Court began its discussion of the setoff issue by observing that "the right of setoff is permissive, not mandatory," Mem.-Dec. at 4, quoting 4 Collier on Bankruptcy ¶ 553.02 at XXX-XX-XX (15th ed. 1983), and that, in its view, Bankruptcy Courts have discretion "to bar setoff when it tends to frustrate the rehabilitation of the debtor." Mem.-Dec. at 4. The Court then considered the statutory criteria for setoff, 11 U.S.C. § 553, and held that the $340.00 security deposit held by Niagara Mohawk in connection with the Debtor's New Hartford location did not qualify for setoff because it was obtained after 90 days before the date of the filing of the petition, while the debtor was insolvent, for the purpose of obtaining a right of setoff against the debtor. See 11 U.S.C. § 553(a)(3). With respect to the remaining $1,400.00 on deposit with Niagara Mohawk, the Court found that a setoff "would result in jeopardizing the debtor's prospects for a successful reorganization" and would "be inconsistent with Chapter 11 of the Bankruptcy Code and not in the interest of any of the creditors." Id. at 6. It therefore held that Niagara Mohawk was not entitled to setoff the security deposit against the pre-petition debts owed to it.
Turning next to Niagara Mohawk's request for a deposit from the debtor to secure its payment of post-petition utility bills, the Court decided that a deposit of $750.00 would satisfy the utility's statutory right to "adequate assurance." See 11 U.S.C. § 366. In its order, the Court directed Niagara Mohawk to "retain $750.00 . . . and return to the debtor the remaining *943 monies currently held on deposit for its account." Id. at 7.
Niagara Mohawk subsequently filed this appeal,[2] maintaining that the Bankruptcy Court erred in declining to permit the setoff. Although it does not challenge that part of the Order that sets an amount of $750.00 as adequate assurance of payment for post-petition utility services, it follows that if the utility is found to be entitled to the setoff it seeks, then the $750.00 must be paid from some source other than the pre-petition security deposit fund.
Discussion
"The doctrine of setoff has long occupied a favored position in our history of jurisprudence." Bohack Corp. v. Borden, Inc., 599 F.2d 1160, 1164 (2d Cir.1979). Today, the doctrine is embodied in 11 U.S.C. § 553, which is derived from and preserves with some changes the right of setoff of mutual debts in bankruptcy set forth in former § 68 of the superceded Bankruptcy Act. Section 553 provides, in pertinent part:
(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that
(1) . . .
(2) . . .
(3) the debt owed to the debtor by such creditor was incurred by such creditor
(A) after 90 days before the date of the filing of the petition;
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor.
(b)(1) . . .
It is well understood that a setoff, when allowed, "has the effect of paying one creditor more than another." Bohack, supra at 1165. The doctrine thus is in derogation of the policy against affording certain creditors a preference to the detriment of other creditors of the debtor's estate. However, as the Second Circuit has said in connection with former § 68, "[d]espite the preferential advantages bestowed upon certain creditors by virtue of section § 68, setoffs are accepted and approved because they are based upon long-recognized rights of mutual debtors." Bohack, supra at 1165.
Section 553 does, however, afford protection against an undue preference by, inter alia, prohibiting a setoff as to debts of the creditor to the debtor that were incurred for the purpose of obtaining a right of setoff, within 90 days of the commencement of the case, while the debtor was insolvent. § 553(a)(3). Invoking this section, the Bankruptcy Court disallowed setoff with respect to the $340 security deposit given by the debtor to the creditor in connection with the debtor's New Hartford store, which occurred within 90 days prior to its filing under Chapter 11. The Court's findings in this regard are brief; with respect to the state of mind element in subsection (a)(3)(C), it simply stated that "NIMO collected the deposit for the purpose of obtaining a right of setoff against the debtor." Mem.-Dec. at 5.
Although the amount at issue here is relatively small, and although the Bankruptcy Court is terribly overburdened, the requisite finding of a wrongful purpose cannot be sustained on appeal without some explanation for the finding, or at least some evidentiary record, to support that finding. In the absence of any submission to review except the aforementioned statement, it is necessary to remand that portion of the decision for further explanation or proceedings on that point, as necessary.
*944 With respect to the remaining security deposit of $1,400, which had been placed by the debtor with the utility in connection with its Chadwicks store, there is no question but that the express statutory criteria for setoff are satisfied: there are mutual debts owed by the creditor to the debtor (the security deposit) and by the debtor to the creditor (unpaid bills for pre-petition utility services), which arose before the commencement of the case, and none of the statutory exceptions to setoff apply. The issue, however, is whether the bankruptcy judge has the discretion, under these circumstances, to nevertheless deny setoff on the ground that it would "jeopardiz[e] the debtor's prospects for a successful reorganization." Mem.-Dec. at 6.
Niagara Mohawk contends, in substance, that once the Court determines that the formal criteria are met, it must permit the setoff, and cannot prevent it on the grounds that it will adversely effect the debtor's rehabilitation. There are, to be sure, a number of decisions that support this mechanistic view of the right of setoff. E.g., In re R.C.I. Enterprises Incorporated, 22 B.R. 549, 551 (Bkrtcy.Ct.S.D.Fla. 1982); In re Princess Baking Corp., 5 B.R. 587 (Bkrtcy.Ct.S.D.Cal.1980). But see In re Dartmouth House Nursing Home, Inc., 24 B.R. 256 (Bkrtcy.Ct.D.Mass.1982). However, it appears to this Court that there is more room for discretion in the application of § 553 than Niagara Mohawk would acknowledge.
The issue at hand was discussed at some length by the Second Circuit in Bohack Corp. v. Borden, Inc., supra, although the governing provision in that case was § 68 of the old Act. That discussion, reproduced in part below, suggests that setoff is favored; and if the substantive criteria for it are met, it should not be prevented, unless it poses a serious and immediate threat to the debtor, in which case it may be deferred to protect The reorganization. Thus, as the Court stated in discussing the doctrine of setoff generally:
Allowance or disallowance of a setoff is a decision which ultimately rests in the sound discretion of the bankruptcy court. This circuit, however, has repeatedly favored the allowance of setoffs. In In re Applied Logic Corp., [576 F.2d 952 (2d Cir.1978)], a bank was permitted to exercise its right to set off a debt owed it by the bankrupt against deposits and certificates of deposit held by the bank. Judge Friendly commented therein that
[t]he rule allowing setoff, both before and after bankruptcy, is not one that courts are free to ignore when they think application would be "unjust." It is a rule that has been embodied in every bankruptcy act the nation has had, and creditors . . . have long acted in reliance upon it. 576 F.2d at 957-958.
. . . The policy of the Bankruptcy Act is to allow setoffs and counterclaims. Western Land Planning Company v. Midland National Bank, 434 F.Supp. 616 (E.D.Wis.1977). This court is reluctant to disturb this policy unless compelling circumstances require it. A decision disallowing a setoff must not be made cavalierly. The statutory remedy of set off should be enforced unless the court finds after due reflection that allowance would not be consistent with the provisions and purposes of the Bankruptcy Act as a whole.
599 F.2d at 1165. The Court then went on to discuss the availability of setoff in Chapter XI proceedings, and explained that although the right is not "unqualified," it should not be regarded with disfavor, and should be allowed except where it would be inconsistent with the provisions of Chapter XI. Id. at 1167. That the Court contemplated interference with the right of setoff only under the most compelling circumstances is clear from its subsequent remarks:
Where property of the debtor is in the possession of a creditor, the need to protect the debtor from an immediate exercise of a setoff is evident. In Preferred Surfacing, Inc., [v. Gwinnett Bank & Trust Co., 400 F.Supp. 280 (N.D.Ga. 1975)] for example, the debtor had a general checking account with the respondent *945 bank. Shortly after the debtor filed its Chapter XI petition, the bank by means of setoff applied the sum on deposit against the amount of an outstanding indebtedness allegedly owed by the debtor to the bank. The bankruptcy court fully appreciated the devastating impact such a setoff could have on the arrangement proceeding and properly held the bank in contempt. In an ordinary bankruptcy, a bank may set off a deposit against an unmatured indebtedness even though done after the petition is filed. See generally, 4 Collier on Bankruptcy ¶ 68.02 (14th Ed. 1975). In a Chapter XI proceeding, however, where a business is struggling to resist bankruptcy, resort to such a unilateral, self-help remedy could thwart the arrangement entirely and push the debtor over the brink and into insolvency. Where an immediate setoff would seriously threaten the continued vitality of the debtor, the setoff should be deferred.
This seemingly harsh course of not permitting a creditor to exercise a right that would have been available in ordinary bankruptcy may be justified on the ground that the immediate sacrifice can be compensated, if the proceeding is successful, by appropriate recognition upon confirmation of the plan. In Re Yale Express Systems, Inc., 362 F.2d 111, at 116. In some instances, the setoff may ultimately be denied, but at the outset of the proceeding the deferral of the setoff amounts to little more than a provisional sequestration to give protection for the future. Lowden v. Northwestern National Bank & Trust Co., [298 U.S. 160, 56 S.Ct. 696, 80 L.Ed. 1114 (1936)]
Id. at 1167.
A recent Third Circuit decision also accords with the view that, under compelling circumstances, an application for setoff may be deferred to protect the debtor's rehabilitation, despite the satisfaction of the formal criteria of § 553. United States on Behalf of I.R.S. v. Norton, 717 F.2d 767 (3d Cir.1983). In Norton, the IRS asserted a right to retain two Chapter 13 debtors' tax refunds, and to setoff that amount against the debtors' outstanding tax obligations. The Court noted the tension between the policy favoring setoff and the policy, embodied by Chapter 13, favoring rehabilitation of a beseiged debtor. Id. at 773. Then, citing the recent Supreme Court decision United States v. Whiting Pools, Inc., 462 U.S. 198, ___, 103 S.Ct. 2309, 2314, 76 L.Ed.2d 515 (1983), it observed the "[e]ven creditors whose claims are secured under the Code must submit to the risk inherent in judicial suspension of the rights they normally would have to enforce their claims against property of the debtor." Id. The Court then affirmed the Bankruptcy Court's stay of the IRS's right to a setoff, which stay was effective "pending the development of a plan by which the debtors could pay off their creditors completely." Id. at 774.
Niagara Mohawk has suggested in its brief that the denial of setoff is particularly inappropriate where the creditor is a public utility, and where the debtor is not engaging in an activity of public importance, such as operating a railroad. The affirmance of a stay of setoff in Norton, supra, undermines that argument; the creditor was the United States; the debtors, two private citizens.
In sum, then, it appears to this Court that, notwithstanding the presence of the requisite elements of § 553, a Bankruptcy Court has discretion to defer or staythough ordinarily not barthe setoff of mutual debts, where there is an immediate and serious threat to the reorganization of the debtor.
With respect to the specific order, however, shortcomings in the record and the passage of time make it impossible for this Court to affirm. First, although the Bankruptcy Court stated its conclusion that the requested setoff would jeopardize the debtor's rehabilitation, given the strong policy favoring setoff and the requirement of compelling reasons to defer that right, a more substantial explanation of the factual basis for that conclusion is necessary. See, e.g., Bohack, supra at 1167-1169 (expressly *946 balancing "equities"). Second, inasmuch as a year has now elapsed since the Bankruptcy Court order issued, it may well be the case that circumstances have changed; if an immediate and serious threat did exist at the time of the order, it may no longer exist at the time this matter is reconsidered upon remand. Third, this Court does not have any record or knowledge of the rehabilitation plan, which would indicate the extent to which the creditor's interest is protected in the absence of a setoff. See Norton, supra at 774.
In short, the matter is remanded to the Bankruptcy Court for (1) explanation of the factual basis for the Court's decision with respect to the $350.00 deposit; and (2) reconsideration of the creditor's application in light of possibly changed circumstances; and in the event setoff is stayed, for some further indication of the factual basis for such stay.
IT IS SO ORDERED.
NOTES
[1] The Bankruptcy Court found that the debtor owed Niagara Mohawk $1,444.29, Mem.-Dec. at 3, a figure also used in this Court's prior decision in the case. 25 B.R. at 1010. However, Niagara Mohawk alleged in its adversary complaint that the debtor owed it $2,106.00, Complaint ¶ 6, and the debtor admitted as much in its Answer at ¶ 2. The discrepancy is not material to the issues on this appeal.
[2] As a result of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Public Law 98-353, 98 Stat. 333 (effective as of July 10, 1984) the basis for this Court's appellate jurisdiction is now 28 U.S.C. § 158, and not 28 U.S.C. § 1334 as invoked by the Appellant. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552322/ | 239 B.R. 698 (1999)
Chris ARFORD, et al., Appellants,
v.
Harvey R. MILLER, Esq., As Trustee for the liquidation of Stratton Oakmont, Inc., Appellee.
No. 98 Civ. 9209 RMB.
United States District Court, S.D. New York.
September 30, 1999.
*699 Weil, Gotshal & Manges LLP, New York City, by Adam C. Rogoff, Jonathan S. Henes, for Harvey R. Miller, trustee for the Liquidation of Stratton Oakmont.
Maddox, Koeller, Hargett & Caruso, New York City, by Steven B. Caruso, Thomas A. Hargett, for Customer claimants.
ORDER
BERMAN, District Judge.
This is an appeal from an order of the Honorable Tina L. Brozman, Chief United States Bankruptcy Judge, Southern District of New York ("Bankruptcy Court"), issued from the bench on October 19, 1998 and subsequently published as a written *700 opinion. See Securities Investor Protection Corporation v. Stratton Oakmont Inc., 229 B.R. 273 (Bankr.S.D.N.Y.1999). In her opinion, Judge Brozman determined that fifty-seven claimants ("Appellants" or "Claimants")[1] were not "customers" as defined by the Securities Investors Protection Act ("SIPA" or "Act"), 15 U.S.C. § 78aaa et seq. and, therefore, were not entitled to the protections of that Act. There are two issues before this Court: (i) did the Bankruptcy Court err in determining that the Claimants were not customers for purposes of SIPA, and (ii) should the case be remanded to the Bankruptcy Court for further development of the record. For the reasons set forth below, the Court answers both of these questions in the negative, affirms the decision of the Bankruptcy Court and denies the Appellants' request to remand the proceedings.
I. Background
The facts of this case are essentially undisputed. All of the Claimants were involved in a business relationship with Stratton Oakmont, Inc. ("Stratton Oakmont" or "Debtor"), a broker-dealer in the securities industry. Stratton Oakmont served as an "introducing broker" for the Claimants. All of the accounts established by Stratton Oakmont on behalf of the Claimants were handled on a "fully disclosed" basis by a second company, J.B. Oxford, the "clearing broker." Subject to written agreements entered into by Stratton Oakmont and the Claimants, all funds of the Claimants were held and traded by J.B. Oxford and no accounts were in the actual possession of Stratton Oakmont.
On January 24, 1997, Stratton Oakmont filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. Three days later, the Securities Investor Protection Corporation ("SIPC") filed an Application with the same Court asserting that the customers of Stratton Oakmont were entitled to and in need of the protections of SIPA. The Bankruptcy Court entered a "housekeeping order" directing the liquidation of Stratton Oakmont and establishing a claims process for "customers". In February 1997, claim forms were sent to 22,000 individuals who had engaged in business transactions with Stratton Oakmont. The Appellants completed and submitted those forms but their claims were denied by the Bankruptcy Trustee ("Trustee") on the grounds that those (i.e. Claimants) who alleged only that Stratton Oakmont had failed to sell their securities when requested to do so, were not customers under SIPA and, therefore, were not entitled to SIPA protections. The Claimants disputed the Trustee's determination that they were not customers and filed written objections with the Bankruptcy Court. The Trustee then sought and obtained a Bankruptcy Court order upholding the determination that the Claimants were not customers.
II. Analysis
Jurisdiction
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 158(a)(1).
Standard of Review
The District Court generally reviews the Bankruptcy Court's findings of fact under a "clearly erroneous" standard while it may consider its legal conclusions de novo. See In re Bonnanzio, 91 F.3d 296, 300 (2d Cir.1996); In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1994). Here, there do not appear to be any factual disputes between the parties. *701 Similarly, the Bankruptcy Court relied upon undisputed facts in deciding the Trustee's motion. The legal issue before this Court is whether or not the Claimants were "customers" for purposes of SIPA.
Determination of Customer Status
Under SIPA, "customer" is a term of art and its everyday usage is not applied. See In re Adler, Coleman Clearing Corp., 204 B.R. 111, 115 (Bankr. S.D.N.Y.1997); In re Hanover Square Securities, 55 B.R. 235, 238 (Bankr.S.D.N.Y. 1985) (citing In re Stalvey & Associates, 750 F.2d 464, 468 (5th Cir.1985)). The Act itself contains the following definition:
The term "customer" of a debtor means any person (including any person with whom the debtor deals as a principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such persons for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral security, or for purposes of effecting transfer. The term "customer" includes any person who has a claim against the debtor arising out of sales or conversions of such securities, and any person who has deposited cash with the debtor for purposes of purchasing such securities. . . .
15 U.S.C. § 78lll(2). The statutory language creates a requirement that in order to be a customer for purposes of SIPA the debtor must "hold" the securities. In this instance, Stratton Oakmont merely served as an introducing broker and never held or was in possession of Claimants' property or securities.
Subsequently enacted legislation confirms this conclusion. In 17 C.F.R. § 300.200 Congress declared that:
A person having one or more accounts cleared by the member on a fully disclosed basis for one or more introducing brokers or dealers is a customer of the member and shall be protected with respect to such account or accounts without regard to the protection available for any other account or accounts he may have with the member.
17 C.F.R. § 300.200. The Claimants acknowledge that this provision makes them "customers" of the clearing broker, J.B. Oxford. They also assert that, because the word "only" is not contained within the section, they may also be considered customers of the introducing broker, i.e. Stratton Oakmont. However, Claimants offer no support for this proposition. In the absence of any specific mention or establishment of introducing broker liability, it cannot be concluded that Congress extended the protections of the Act to include introducing brokers. The Bankruptcy Court correctly refused to extend the protections of the Act beyond its' articulated scope, as defined by Congress. Referring to 17 C.F.R. § 300.200, Judge Brozman declared that, "Applied to this situation, this means that these Claimants are not `customers' of Stratton, but rather of J.B. Oxford. Were J.B. Oxford to undergo a SIPA liquidation, these Claimants would more than likely be entitled to preferential `customer' treatment under SIPA." Securities Investor Protection Corporation v. Stratton Oakmont, Inc., 229 B.R. 273, 279 (Bankr.S.D.N.Y.1999).
Indeed, SIPA was designed to protect the investors in the event of the collapse of an investment house. See SIPC v. Executive Securities Corp., 1980 WL 1400, *1 (S.D.N.Y.) (citing Hearings on S.2348, S.3988 and S.3989, 91st Cong., 2d Sess. (1970)). In order to be entitled to the protections of the Act, Claimants must show not only that they entrusted securities to the brokerage house, but also that the losses they suffered were a result of that brokerage house's insolvency. See In re Brentwood Securities Inc., 925 F.2d 325, 327 (9th Cir.1991). Here, the Claimants have demonstrated neither that they entrusted securities to Stratton Oakmont nor that their losses were a result of J.B. Oxford's insolvency. SIPA does not protect *702 against all cases of alleged dishonesty and fraud. Id. at 330. As the Bankruptcy Court held, the Claimants here fail to meet the statutory definition of "customer."
Conversion Claims
The Appellants also allege that they are entitled to protection as customers based upon their claim that Stratton Oakmont "converted" their property by "failing to execute" sale orders. They seek to rely on the following language: "The term `customer' includes any person who has a claim against a debtor arising out of sales or conversions of such securities . . ." 15 U.S.C. § 78lll(2) (emphasis added).
While SIPA does not specifically define the term "conversion", courts have held that "failure to execute" claims do not constitute conversion and are not entitled to preferred "customer" status under SIPA. See, e.g., SEC v. JNT Investors, Inc., No. 72 Civ. 681, 1978 WL 1137 (S.D.N.Y. Feb.9, 1978); In re A.R. Baron, 226 B.R. 790, 796 (Bankr.S.D.N.Y.1998); In re Adler Coleman Clearing Corp., 195 B.R. 266, 275 (Bankr.S.D.N.Y.1996). See also In re Government Sec. Corp., 90 B.R. 539, 540-41 (Bankr.S.D.Fla.1988); In re First State Sec. Corp., 34 B.R. 492, 496 (Bankr.S.D.Fla.1983); SEC v. Howard Lawrence & Co., 1 B.C.D. 577, 579 (Bankr. S.D.N.Y.1975). Claimants suggest that, in the absence of a statutory definition, the Court should determine the meaning of conversion based on state law. This position is incorrect. The United States Supreme Court has stated that, "`in the absence of a plain indication to the contrary . . . Congress when it enacts a statute is not making the application of the federal act dependent on state law.'" Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 43, 109 S.Ct. 1597, 104 L.Ed.2d 29 (1989) (quoting Jerome v. United States, 318 U.S. 101, 104, 63 S.Ct. 483, 87 L.Ed. 640 (1943)); NLRB v. Natural Gas Utility Dist. of Hawkins County, 402 U.S. 600, 603, 91 S.Ct. 1746, 29 L.Ed.2d 206 (1971); Dickerson v. New Banner Institute, Inc., 460 U.S. 103, 119, 103 S.Ct. 986, 74 L.Ed.2d 845 (1983). In JNT Investors, Inc., 1978 WL 1137 at *2, the court held:
[c]onversion of stock, of course, generally involves an unauthorized sale of stock. Even assuming in the instant case the broker's refusal to execute [the claimant's] sell order was willful and intentional rather than negligent, . . . it does not appear that his conduct constituted conversion. Generally some affirmative act is required to establish conversion; mere nonfeasance does not suffice.
Federal courts have consistently accepted the idea that conversion requires some sort of affirmative act, as opposed to a failure to act. See Kubin v. Miller, 801 F.Supp. 1101, 1118 (S.D.N.Y.1992); JNT Investors, Inc., 1978 WL 1137 at *2. Breach of contract rather than conversion appears to be the appropriate legal theory where failure to act is involved. As the Bankruptcy Court correctly determined, the (alleged) injury to the Claimants did not result from the affirmative actions (conversion) of Stratton Oakmont. See also SEC v. S.J. Salmon & Co., Inc., 72 Civ. 560 (S.D.N.Y. Oct. 3, 1973).
Request for Remand
The Appellants also ask the Court to remand the proceeding to the Bankruptcy Court so that they may engage in further discovery. Granting this request would appear to serve no useful purpose. For the reasons set forth herein, Stratton Oakmont's alleged failure to sell remains outside the scope of SIPA protection. Further, the Claimants should not be granted additional discovery because, in the prior Bankruptcy proceeding, they stipulated that all relevant facts were mutually agreed upon and they failed to engage in discovery at the appropriate time.[2]
*703 III. Conclusion
For the reasons stated above, and having reviewed the legal issues decided by the Bankruptcy Court de novo, the decision of the Bankruptcy Court is hereby AFFIRMED.
NOTES
[1] The Appellants are fifty-seven individuals who opened accounts with the Debtor, Stratton Oakmont, prior to January 24, 1997. All of the Appellants utilized J.B. Oxford as their "clearing firm" but continued to make calls concerning their accounts to Stratton Oakmont. When Stratton Oakmont filed its petition in Bankruptcy, Appellants filed claims with the Bankruptcy Trustee which were subsequently denied on the grounds, among others, that they were not "customers" of Stratton Oakmont.
[2] Before the Bankruptcy Court, Claimants asserted that the essential facts were not in dispute. See Trustee's Brief, note 15 (quoting the Hearing Transcript, at p. 19 and p. 21). Now, at the eleventh hour the Claimants are seeking to develop new information through discovery. These positions are openly inconsistent. The Appellants had ample time and opportunity to engage in discovery prior to and during the Bankruptcy proceeding. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552327/ | 239 B.R. 440 (1999)
In re BBS NORWALK ONE, INC., Debtor.
Bankruptcy No. 98-51068.
United States Bankruptcy Court, D. Connecticut.
February 1, 1999.
*441 James Berman, Zeisler & Zeisler, Bridgeport, Connecticut, for BBS Norwalk One, Inc.
Peter D. Morgenstern, Bragar, Wexler, Eagel & Morgenstern, New York City, for the Official Committee of Unsecured Creditors.
Leo Fox, New York City, for Virginio Battanta.
MEMORANDUM AND ORDER
ALAN H.W. SHIFF, Chief Judge.
The debtor and Virginio Battanta have filed competing plans of reorganization. The narrow issue addressed here is whether a minority shareholder of a debtor in possession has the authority under applicable state and bankruptcy law to file a plan of reorganization that proposes to mortgage the debtor's property to fund the plan.
BACKGROUND
The debtor is incorporated in Delaware. Its shareholders are John Steele and B & B Properties, Inc., who hold a 10% and 90% interest respectively. The ownership of B & B Properties is currently being litigated in a New York state court. In that litigation, Virginio Battanta asserts a 100% interest, and Hugo Bunzl asserts a 50% interest. For the purposes of this proceeding, the parties agree that Battanta is at least a 50% shareholder of B & B Properties. Battanta, Bunzl, and Steele comprise the debtor's board of directors. The debtor's sole asset is a commercial property located in Norwalk, Connecticut.
On September 26, 1991, Battanta, Bunzl, and Steele executed a shareholders' agreement ("Agreement"), which by its terms, is governed by New York law.[1] The Agreement provides that a shareholder, who wants "to sell to any third party 5 or more . . . of the Shares held by such Shareholder", *442 must give written notice to the nonselling shareholders. Shareholders' Agreement, at 6. The notice operates as an offer to the non-selling shareholders to purchase the shares at the same price and terms as the offer to the proposed purchaser. The non-selling shareholders then have 30 days to accept the offer.
On June 5, 1998, the debtor filed this Chapter 11 case. The debtor and the Official Committee of Unsecured Creditors filed a liquidating plan on November 2, 1998. Battanta filed a competing plan on November 30, 1998. Battanta's plan proposes to refinance the debtor's property. Both plans propose to pay creditors in full.
DISCUSSION
Under the Business Corporation Law of New York, the disposition of substantially all of a corporation's assets out of the regular course of business is authorized only if there is board approval and approval by shareholders holding at least two-thirds of the shares entitled to vote. N.Y.BUS.CORP.LAW § 909 (McKinney 1997). Additionally, New York law authorizes the board of directors to mortgage corporate assets without shareholder consent. N.Y.BUS.CORP.LAW § 911. There is no statutory authority, however, for minority shareholders or directors to mortgage corporate property.
Battanta's plan provides that upon confirmation, he will become the majority shareholder and the holder of another director's position. His plan is premised upon the contention that Steele's authorization for the filing of this case and his support of the debtor's liquidation plan in effect stated his intentions to "sell his 10% shareholder interest (and his seat as director on the Board)." Memorandum of Law in Support of Virginio Battanta's Disclosure Statement and Plan of Reorganization, at 6. As a consequence, Battanta claims a right of first refusal under the Agreement which permits him to purchase Steele's 10% interest.[2] Battanta's right to Steele's position on the board of directors is not explained, nor has he provided any authority to support his right to become a majority shareholder and director.
New York law does not support Battanta's argument.[3] First, it is observed that a right of first refusal does not:
give its holder the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer property first to the party holding the preemptive right so that he may meet a third-party offer. . . .
Metropolitan Transp. Auth. v. Bruken Realty Corp., 67 N.Y.2d 156, 163, 501 N.Y.S.2d 306, 492 N.E.2d 379 (1986).
More to the point, New York courts hold that a liquidation, in or out of bankruptcy, is not the equivalent of a shareholder's offer to sell shares to a third-party. In Sands Point Land Co. v. Rossmoore, 43 Misc.2d 368, 251 N.Y.S.2d 197 (N.Y.Sup.Ct.1964), the board of directors proposed to dissolve the corporation and liquidate the company's assets. The board's proposal was approved by the requisite vote of the shareholders. Id. at 199. An individual shareholder objected to the dissolution and liquidation and requested fair value for his shares from the *443 corporation. The corporation cited a provision in its charter which required shareholders who wished to sell their shares to first offer them to the corporation for par value and rejected the request on the basis that the shareholder decision to dissolve and liquidate the company's assets is equivalent to shareholders offering to sell their shares. Id. at 200-01. The court held that the shareholder had not offered to sell his shares, the liquidation did not compel the shareholder to sell the shares, and the charter provision governing the sale or transfer of shares was therefore not effectuated. Id. at 201. Further, the shares of all the shareholders were canceled because of the liquidation and dissolution. The court stated "[i]t is well settled that restrictions on the sale or transfer of corporate stock . . . apply only to voluntary sales." Id. at 200. See also LIN Broadcasting Corp. v. Metromedia, Inc., 74 N.Y.2d 54, 60, 544 N.Y.S.2d 316, 542 N.E.2d 629 (1989) (noting that right of first refusal "contemplates a willing seller" and merely gives other party a chance to buy before owner sells); In re Pace Photographers, Ltd., 71 N.Y.2d 737, 747-48, 530 N.Y.S.2d 67, 525 N.E.2d 713 (1988).
Here, the corporation voted to file for bankruptcy relief. If that relief comes in the form of liquidation, as proposed in the debtor's plan, Steele is not voluntarily offering to sell his shares to a third-party. Rather, the liquidation of the corporation would cancel the shares and the right of first refusal contained in the Agreement would not be implicated. Moreover, Steele's mere support of a liquidating plan, which may or may not be confirmed, does not constitute an offer to sell his shares.
A different outcome might result if the Agreement contained express language that a dissolution or liquidation would invoke the right of first refusal. See Doniger v. Rye Psychiatric Hospital Center, 122 A.D.2d 873, 505 N.Y.S.2d 920, 923 (2nd Dept.1986).[4] Here, however, the Agreement only triggers a right of first refusal for the purchase of shares when a shareholder offers to sell to a third-party, see supra at 441.
ORDER
Accordingly, IT IS ORDERED that Battanta's plan is not confirmed.
NOTES
[1] The parties agree that New York law governs this determination. However, even if it were argued that Delaware law controls based on the debtor's incorporation, the parties agree that the governing statutes of New York and Delaware are substantially the same.
[2] Even assuming that this argument has merit, Bunzl would have the same right.
[3] Battanta does not cite any authority for his position and his reliance on the cases he does cite is misplaced. In In re River Bend-Oxford Associates, Inc., 114 B.R. 111 (Bankr.D.Md. 1990), the only issue addressed by the court was whether second-tier equity owners (as here) were parties in interest entitled to file a plan. The court held that they did, which is of little consequence in this case as Battanta's right to file his plan has not been challenged. Battanta also relies on In re Stolrow's Inc., 84 B.R. 167 (9th Cir. BAP 1988), which dealt with a shareholder's objection to confirmation of a plan that excluded him from the opportunity to purchase the corporate-debtor's assets. Neither a right of first refusal nor a sale of shares was at issue in that case.
[4] In Sands Point, the court noted that provisions, which restrict the sale of shares by providing for a right of first refusal, did not apply to the transfer of shares by judicial sale or operation of law unless such provisions expressly included those transfers. Sands Point Land Co. v. Rossmoore, 251 N.Y.S.2d at 201. That view of New York law comports with Doniger, where the court recognized that a shareholders' agreement should be interpreted so that it would not "exclude any possible method whereby their ownership interests would be affected, including a proceeding for judicial dissolution" when there was specific language to support that result. Doniger v. Rye Psychiatric Hospital Center, 505 N.Y.S.2d at 923. An example of the broad language in the Doniger provision follows:
An offer shall be made . . . [i]n case of the passage or disposition of shares in any voluntary or involuntary manner whatsoever, including but not limited to passage or disposition . . . under judicial order, legal process. . . .
Id. Compare to the language of the debtor's provision, see supra at 441. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551918/ | 139 B.R. 615 (1992)
In re Clyde W. MARKER, Debtor.
Clyde W. MARKER, Plaintiff,
v.
Ann M. MARKER, Defendant.
Ann M. MARKER, Plaintiff,
v.
Clyde W. MARKER, Defendant.
Bankruptcy No. 91-1683-BM, Adv. Nos. 91-0333-BM, 91-0522-BM.
United States Bankruptcy Court, W.D. Pennsylvania.
April 17, 1992.
*616 *617 M. Farley Schlass, Bethel Park, Pa., John M. Silvestri, Pittsburgh, Pa., for Ann M. Marker.
Mark L. Glosser, Stone, Glosser and Stone, Pittsburgh, Pa., for debtor.
Alan E. Cech, Flaherty & Sheehy, Pittsburgh, Pa., trustee.
MEMORANDUM OPINION
BERNARD MARKOVITZ, Bankruptcy Judge.
Several matters are before the court at this time. Ann M. Marker (hereinafter "Marker") seeks in Adversary No. 91-0522-BM to have Clyde W. Marker (hereinafter "debtor") denied a general discharge pursuant to 11 U.S.C. § 727(a) on grounds that he concealed and under-valued some of his assets. In the alternative, Marker seeks to have debts of $140,000 and $30,000 owed to her by debtor declared nondischargeable pursuant to 11 U.S.C. § 523(a)(5) and (6). According to Marker, the debts are nondischargeable because they are in the nature of alimony, support, or maintenance. She also maintains that a portion of the debt of $30,000 is nondischargeable because it was awarded as damages for willful and malicious injury by debtor.
Debtor seeks a determination in Adversary 91-0333-BM that these same debts are not in the nature of alimony, support, or maintenance and therefore are dischargeable. Marker has filed what she titles a "counterclaim" in this adversary action wherein she seeks a determination that all the assets listed in debtor's bankruptcy schedules are equitably owned by her and debtor and a determination that said assets are within the constructive custody of the court having jurisdiction over their divorce proceeding.
Marker's request that debtor be denied a general discharge shall be denied. However, for reasons set forth below, the two debts owed to her by debtor are determined to be nondischargeable.
-I-
FACTS
Debtor and Marker were married in 1968. He is now 55 years old and she is 52 years old. They have a son now 20 years old who supports himself. Although Marker on rare occasions was employed in minimum wage jobs during their marriage, for the most part she was a homemaker whose primary responsibility was maintaining the home and raising her three children from a previous marriage and the child from her marriage to debtor.
Debtor and Marker were separated in May of 1986. Thereafter debtor commenced divorce proceedings against Marker in 1987 in the Court of Common Pleas of *618 Allegheny County, Pennsylvania (hereinafter "state court").
An order was issued in state court on November 3, 1988, awarding Marker alimony pendente lite and child support of $1,500 per month. The award was based in part on a finding that debtor had a monthly net income of $3,500 while Marker had a monthly earning capacity of only $300.
Debtor and Marker were granted a divorce in December of 1990. An order which disposed of claims for equitable distribution, alimony, and counsel fees was issued by the state court on March 20, 1991.
The marital assets were divided by the state court as follows. Debtor was awarded his pension plan, a boat and trailer, a life insurance policy, the parties' joint income tax refunds, and the parties' interest in a family-owned business known as Marker & Sons, Inc. Marker was awarded the marital residence and household goods, a savings account, and her jewelry and automobile.
Debtor was directed to execute a deed conveying the marital residence to Marker. In addition, debtor was ordered to pay Marker the sum of $140,000 by May 31, 1991 for her share of their interest in Marker & Sons, Inc. Debtor was also directed to satisfy a judgment by Equibank against the marital property, half of which payment was to be deducted from the $140,000 payment to Marker. Finally, the court directed that the parties' time-share property was to be sold and that the net sale proceeds were to be divided evenly between them.
The court explained that Marker was to receive a lump sum payment of $140,000 instead of installment payments due to the considerable risk that she otherwise would not be paid. Payment was to be made by May 31, 1991, because debtor was capable of procuring such a sum either from the family business or through a loan in which his interest in the business was pledged as collateral.
Marker was awarded approximately sixty percent (60%) of the marital property. In arriving at this outcome, the state court took into account the parties' ages, the length of their marriage, the contribution of both to the marriage, the vast discrepancy in their earnings, debtor's separate estate in the form of his entitlement to one-half of his deceased father's one-third interest in Marker & Sons, Inc., the needs of the parties, and their standard of living during the marriage.
As for alimony, Marker's alimony pendente lite and child support of $1,500 per month were terminated as of May 31, 1991. She instead was awarded permanent alimony of $800 per month, which was to commence on June 1, 1991, and was to terminate upon the death of either party or upon Marker's cohabitation or remarriage.
As for counsel fees, debtor was directed to pay $30,000 of the counsel fees incurred by Marker during the divorce proceeding. Of that amount, $10,000 was awarded because debtor's obdurate and vexatious conduct caused additional legal hours to be utilized. The remaining $20,000 was awarded to fulfill Marker's needs as she clearly required these services and debtor had the ability to pay for them.
On April 8, 1991, debtor filed a motion in the divorce proceeding for post-trial relief. Oral argument on the motion was scheduled for June 6, 1991.
On May 17, 1991, approximately three (3) weeks before oral argument was to be heard, debtor filed a voluntary chapter 7 petition. The original bankruptcy schedules listed assets valued at $52,155.00. Included were the following: the marital residence ($44,000); the time share property ($6,000); a boat and trailer ($2,000); and 226 shares (33%) of stock in Marker & Sons, Inc., which was valued at "NONE". Debtor also listed unsecured debt of $224,902.23.
Debtor amended his bankruptcy schedules on June 2, 1991 to include additional assets valued at $129,255.00. Included was debtor's interest in a pension plan ($14,000). Additionally, debtor listed the value of his interest in Marker & Sons, Inc. as $133,000, instead of "NONE".
*619 -II-
DENIAL OF GENERAL DISCHARGE
A chapter 7 debtor shall be granted a discharge unless one of eight exceptions is present. Two of those exceptions are set forth at 11 U.S.C. § 727(a)(2) and (3), respectively:
(a) The court shall grant the debtor a discharge, unless
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated or concealed, or has permitted to be transferred, removed, destroyed, mutilated or concealed
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure was justified under all of the circumstances of the case . . .
Section 727 is the core of the "fresh start" provision, which permits the honest debtor to receive a new start in life "free of the manacles of debt". Matter of Brooks, 58 B.R. 462, 464 (Bankr.W.D.Pa. 1986). The primary thrust of the objections to discharge which are set forth at § 727(a) is to provide a means whereby abusive conduct by a debtor can be dealt with by denying them a discharge. In re Rusnak, 110 B.R. 771, 775 (Bankr.W.D.Pa. 1990).
Caution is required when dealing with the right to a discharge. As a consequence, § 727(a) must be strictly construed against the objector and in favor of the debtor. In re Rusnak, 110 B.R. at 776 (citing In re Leichter, 197 F.2d 955, 959 (3d Cir.1952), cert. denied, 344 U.S. 914, 73 S.Ct. 336, 97 L.Ed. 705 (1953)). The burden of proving that debtor should be denied a discharge is upon the objector. See Bankruptcy Rule 4005.
Marker must establish the following in order for debtor to be denied a discharge pursuant to 11 U.S.C. § 727(a)(2):
(1) debtor transferred, removed, destroyed, mutilated, or concealed property;
(2) the property belonged to debtor;
(3) the transferral, removal, destruction, mutilation, or concealment occurred within one year of the filing of the petition; and
(4) debtor intended to hinder, delay, or defraud a creditor.
See In re Tarle, 87 B.R. 376, 378 (Bankr. W.D.Pa.1988).
Marker must establish the following in order for debtor to be denied a discharge pursuant to 11 U.S.C. § 727(a)(3):
(1) debtor failed to keep or preserve books or records; and
(2) such failure makes it impossible to ascertain debtor's financial condition and material business transactions.
See Matter of Decker, 595 F.2d 185, 187 (3d Cir.1979).
Marker points to a virtual myriad of reasons why debtor should be denied a general discharge. The allegations raised by Marker in this regard are too numerous for each one of them to be addressed. Only the most plausible allegations will be discussed. A reader may note that on some occasions only a conclusion is offered with little or no reasoning. This treatment is utilized because there was a paucity of credible proof. The remainder of the reasons are totally without merit and therefore will not be addressed.
A.) Income From Sale Of Scrap Metal
Debtor failed to report in his bankruptcy schedules and other statements his interest in a scrap metal business and the income derived from the sale of scrap metal. Marker alleges that debtor sought to conceal this property interest and therefore should be denied a general discharge.
*620 The insistence that debtor should be denied a discharge for this reason is unfounded. Marker failed to establish that debtor received such income within one year of the filing of his bankruptcy petition and has not established through credible evidence that debtor intended to hinder, delay, or defraud any creditor or the chapter 7 trustee by failing to report this income. Clearly debtor's schedules could have been more artfully drawn. However, these deficiencies equally clearly do not merit a denial of a discharge.
B.) C & R Partnership
C & R is a partnership formed by debtor and his brother which owns and leases to Marker & Sons, Inc. a prefabricated metal building situated on property owned by Marker & Sons, Inc. Marker insists that debtor should be denied a discharge for failing to report his interest in the partnership and in the income derived therefrom.
The allegation that debtor sought to conceal his interest in C & R is at the very least without merit. While it is true that debtor did not list his interest in C & R on Schedule B-2, the statement of income submitted by debtor clearly identifies the asset and lists income derived from C & R. In addition, a tax return for the partnership was appended to the petition.
C.) General American Life Insurance Policy
Marker further alleges that debtor should be denied a discharge because he failed to schedule his interest in the cash surrender value of a life insurance policy issued by General American Life Insurance Company.
It is not necessary to discuss this insurance policy in detail. The allegation that debtor failed to disclose any interest in it in the schedules is altogether groundless. Although debtor failed to disclose the life insurance policy in the original schedules, any interest he has in it was disclosed in the amended schedules, which recited that it was listed for the sake of completeness and not because it was an asset of the estate. To the contrary, debtor averred and the documents substantiated that the policy in question was owned by his employer.
D.) Interest In Marker & Sons, Inc.
Debtor stated in the amended schedules that he owns thirty-three percent (33%) of the stock in Marker & Sons, Inc. and declared that the value of his interest is $133,000.
Marker contends that debtor in truth owns fifty percent (50%) of the stock and that its value is well in excess of $133,000. According to Marker, debtor should be denied a discharge because he under-valued his interest in Marker & Sons, Inc. and because he under-reported the extent of his ownership in the business.
The insistence that debtor should be denied a discharge for these reasons is without merit. Marker has not shown by the evidence offered at hearing that debtor's interest is greater than thirty-three percent (33%)[1] or that the value of his interest is greater than $133,000. Moreover, there has been no showing that debtor intended to hinder, delay, or defraud any creditor or the trustee by claiming that he owned only 33% of the stock and that its value was only $133,000.
The remaining grounds offered for denying debtor a discharge have even less merit in fact or law. For that reason they will not be addressed.
-III-
DISCHARGEABILITY OF DEBTS
Marker seeks a determination in Adversary No. 91-0522-BM that the debt of $140,000 owed to her by debtor for her share of their interest in Marker & Sons, Inc. and that the debt of $30,000 owed to *621 her by debtor for legal fees incurred by her in the divorce proceeding are not dischargeable pursuant to 11 U.S.C. § 523(a)(5) because they are in the nature of alimony, support, or maintenance. She further argues that a portion of the debt of $30,000 is not dischargeable pursuant to 11 U.S.C. § 523(a)(6) because it constituted damages for willful and malicious injury.
Debtor seeks a determination in Adversary No. 91-0333-BM that these debts are dischargeable for the reason that they are in the nature of a property settlement rather than in the nature of alimony, support, or maintenance.
11 U.S.C. § 523(a)(6) provides in part as follows:
(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
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record, determination made in accordance with State or territorial law by a governmental unit, or property settlement agreement, but not to the extent that
(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise . . .; or
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support.
Since Marker objects to the discharge of these particular debts, she has the burden of proving that they are not dischargeable. See In re Gianakas, 917 F.2d 759, 761 (3d.Cir.1990). This she must show by a preponderance of the evidence. Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 659-61, 112 L.Ed.2d 755 (1991).
The determination as to whether a particular obligation is "in the nature of alimony, maintenance, or support" for bankruptcy purposes is a question of federal, not state, law. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 364 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6320; also S.Rep. No. 989, 95th Cong., 2d Sess. 79 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5865. A debt may qualify as alimony, maintenance, or support, for purposes of § 523(a)(5), even if it does not legally qualify as such under state law. See In re Yeates, 807 F.2d 874, 878 (10th Cir.1986). The bankruptcy court must look beyond the label, if any, attached to a given obligation to ascertain its true nature. See In re Gianakas, 917 F.2d at 762.
Whether the obligations at issue here are in the nature of alimony, maintenance, or support, as opposed to being part of a property distribution, depends on the intent of the state court which issued the equitable distribution decree. In re Gianakas, 917 F.2d at 762.[2]
Three principal "indicators" must be examined in order to determine that intent.
The court must first examine the language and substance of the decree in the context of surrounding circumstances, using extrinsic evidence when necessary. In re Gianakas, 917 F.2d at 762. This threshold inquiry frequently will not yield conclusive results, however. The state court may not have indicated whether a given obligation is intended as support for the understandable reason that the possibility of a subsequent bankruptcy proceeding was not taken into account when the decree was issued. In re Gianakas, 917 F.2d at 763. Moreover, an obligation designated by the court as a property settlement nonetheless may be related to support for bankruptcy purposes. See Buccino v. Buccino, 397 Pa.Super. 241, 251-52, 580 A.2d 13, 18-19 (1990).
*622 The second factor which must be considered in determining the true nature of a given obligation is the financial circumstances of the parties at the time the decree was issued. Whether one spouse had custody of minor children, was employed or not, or was employed in a less remunerative position than the other spouse may be highly salient considerations. In re Gianakas, 917 F.2d at 763 (citing Shaver v. Shaver, 736 F.2d 1314, 1317 (9th Cir.1984)).
The third factor is the function served by an obligation at the time of the decree. A debt which serves to maintain daily necessities such as food, clothing, and transportation in all likelihood is in the nature of support or maintenance. In re Gianakas, 917 F.2d at 763 (citing In re Yeates, 807 F.2d at 879)).
The Memorandum Opinion and accompanying Order issued by the state court does not conclusively indicate whether the $140,000 debt owed to Marker was intended to be in the nature of maintenance or support or was intended as a property settlement. Because it had no reason to take into account debtor's subsequent bankruptcy when it divided the marital estate, the state court did not find it necessary to indicate in a clear and unequivocal manner whether this obligation was intended as maintenance or support or as a property settlement. On the one hand, the court stated that said $140,000 was awarded to Marker "for her share of the parties' interest in the family business". On the other hand, when it explained the basis for awarding Marker approximately sixty percent (60%) of the "marital property", the court referred to the vast discrepancy in the parties' respective earning capacities and to their needs. Extrinsic evidence must be resorted to in determining the true nature of this particular obligation.
Things are different, however, for at least a portion of the $30,000 obligation to Marker for legal fees incurred by her during the divorce proceeding. As has been noted, debtor was ordered to pay Marker $10,000 in legal fees because of his "misconduct" and an additional $20,000 because debtor was able to pay them and Marker was unable to do so without additional permanent alimony. Debtor does not contest the award of $800 per month in permanent alimony for the obvious reason that it is in the nature of maintenance or support. The state court gave clear indication that the $20,000 obligation was in lieu of additional alimony. Had the state court not required debtor to pay this sum to Marker, it presumably would have increased her alimony.
A review of the financial circumstances of the parties strongly indicates that both obligations are in the nature of maintenance or support rather than a property settlement.
The disparity in the financial circumstances of the parties at the time of the decree was considerable. Marker was fifty-one years old at the time. Except for occasional part-time jobs that paid the minimum wage, Marker was a homemaker whose primary responsibility was maintaining the home and raising the children. Her earning capacity was severely limited by her lack of training and experience and by her age and education. The state court considered such factors and concluded that Marker had an earning capacity of only $800 per month. Debtor, by contrast, was found to have a monthly net income of $5,400.
The relative circumstances of the parties also suggest that the purpose of the $140,000 obligation was to enable Marker to obtain life's daily necessities. As has been noted, Marker was awarded the marital residence and its contents, a savings account, her jewelry and her automobile, and one-half of the net proceeds of the sale of the parties' time-share property.
The funds in the savings account had already been used by Marker during the divorce proceeding to support herself. Although Marker was also awarded $800 a month in permanent alimony, it would have been difficult (perhaps even impossible) for her to maintain herself without an additional award of money. It is unlikely that she would have been able for very long to maintain the marital residence, put food on the table, provide herself with transportation, and pay all her other bills, including *623 substantial legal fees incurred during the divorce proceeding. Before long she would have been unable to provide herself with the daily necessities. The purpose of $140,000 debt to be paid by a date certain was to provide Marker with a financial cushion with which to maintain and support herself over the long haul. The order directing a lump sum payment rather than smaller installments was to insure compliance and deter the irascibility debtor had manifested during the protracted proceedings.
In addition, the purpose of the $30,000 in legal fees awarded to Marker was to make it possible for her to provide herself with the necessities i.e., legal services. In all, Marker incurred in excess of $40,000 in legal fees during the divorce proceedings. Had Marker not been awarded this amount, she would not have been able to pay her legal fees without depriving herself of a considerable part of her daily necessities.
The foregoing analysis indicates that both the $140,000 debt to Marker for her share of the parties' interest in Marker & Sons, Inc. and the $30,000 award for legal fees are in the nature of maintenance or support. Accordingly, they are not dischargeable pursuant to 11 U.S.C. § 523(a)(5).
-IV-
COUNTERCLAIM
Marker seeks in her "counterclaim" a determination: (1) that she has an equitable interest in the marital assets by virtue of debtor's request in the divorce proceeding for equitable distribution of those assets; and (2) that debtor's assets remain in the custody of the state court i.e., are in custodia legis pending distribution of the marital assets in accordance with the decree of March 18, 1991.
It is far from clear what advantage or benefit Marker is seeking to obtain in this court by bringing this so-called "counterclaim". Marker has made no meaningful attempt to explain her counterclaim and has left it to this court to divine its meaning.
Although it has been denominated a "counterclaim", it appears to be more on the order of a defense to debtor's claim that the two obligations are dischargeable. The above "relief" appears to be significant only in the event these obligations are dischargeable. If they are not dischargeable, then the "counterclaim" has no effect.
In light of the determination that these two obligations are not dischargeable, it is not necessary to address the "counterclaim".
An appropriate Order shall be issued.
ORDER OF COURT
AND NOW at Pittsburgh this 17th day of April, 1992, in accordance with the foregoing Memorandum Opinion of this same date, it is hereby ORDERED, ADJUDGED and DECREED that the request by Ann M. Marker that Clyde W. Marker be denied a general discharge be and is DENIED.
NOTES
[1] The chapter 7 trustee has brought an action at Adversary 91-0480-BM against debtor and others in which he seeks a determination whether debtor own 33% or 50% of the stock of Marker & Sons, Inc.. The determination that Marker has not shown that debtor owns more than 33% has no effect on the trustee's action, which remains to be tried.
[2] Although Gianakas involved a settlement agreement reached by the parties to the divorce proceeding, rather than a decree issued by the court having jurisdiction over the divorce proceeding, the analysis set forth in Gianakas applies with equal force to the latter type of situation. The only salient difference is that the intent to be ascertained is that of the state court rather than that of the parties to the divorce proceeding. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/480570/ | 807 F.2d 427
55 USLW 2412, 1 U.S.P.Q.2d 1485
UNITED STATES of America, Plaintiff-Appellee,v.Paul Quentin BAKER, Defendant-Appellant.
No. 86-2233
Summary Calendar.
United States Court of Appeals,Fifth Circuit.
Dec. 24, 1986.
Thomas S. Berg, Asst. Federal Public Defender, Roland E. Dahlin, II, Houston, Tex., for defendant-appellant.
Henry K. Oncken, U.S. Atty., Susan L. Yarbrough, Asst. U.S. Atty., Appellate Div. James R. Gough, Asst. U.S. Atty., Houston, Tex., for plaintiff-appellee.
Appeal from the United States District Court for the Southern District of Texas.
Before REAVLEY, JOHNSON and DAVIS, Circuit Judges.
REAVLEY, Circuit Judge:
1
Paul Baker appeals his conviction for trafficking in counterfeit goods, claiming that an element of the offense is knowledge of the criminality of the conduct and that the jury should have been so charged. We reject his contention and affirm his conviction.
2
* Prior to 1984 trademark counterfeiting was addressed by the civil penalties found in the Lanham Act, 15 U.S.C. Secs. 1051-1127. In 1984, however, Congress determined that "penalties under [the Lanham] Act have been too small, and too infrequently imposed, to deter counterfeiting significantly." S.Rep. No. 526, 98 Cong., 2d Sess. 5 (1984), reprinted in 1984 U.S.Code Cong. & Ad.News 3182, 3627, 3631. Accordingly, Congress enacted the Trademark Counterfeiting Act of 1984, Pub.L. No. 98-473, tit. 11, chap. XV, 98 Stat. 2178, criminalizing much of the conduct that formerly had been subject only to civil penalties. The statute subjects to criminal penalties anyone who
3
intentionally traffics or attempts to traffic in goods or services and knowingly uses a counterfeit mark on or in connection with such goods or services.
4
Id. Sec. 1502(a) (codified at 18 U.S.C. Sec. 2320).
5
Paul Baker was convicted under this new statute for dealing in counterfeit watches. He does not dispute that he intentionally dealt in the watches. He also admits that he knew the "Rolex" watches he sold were counterfeit. His contention is that the statute requires that he act with knowledge that his conduct is criminal. He asserts that he did not know trafficking in counterfeit goods is criminal and that he would not have done so had he known he was committing a crime. The district court denied a motion to dismiss on this ground and refused to instruct the jury that Baker could not be convicted if he did not have the purpose to "disobey or disregard the law." Baker's sole contention on appeal is that the statute requires knowledge that the conduct is criminal and that the district court's rulings were thus erroneous.
II
6
Although this is a case of first impression as to this statute, the underlying legal principles are well established. "The definition of the elements of a criminal offense is entrusted to the legislature, particularly in the case of federal crimes, which are solely creatures of statute." Liparota v. United States, 471 U.S. 419, 105 S. Ct. 2084, 2087, 85 L. Ed. 2d 434 (1985). Thus our job on this appeal is to determine what Congress intended when it enacted the statute under which Baker was convicted. Both the language of the statute and the legislative history lead to the inescapable conclusion that Baker need not have known his conduct was a crime.
7
The statute clearly sets out the elements of the crime and the mental state required for each element. The defendant must intentionally deal in goods and he must knowingly use a counterfeit mark in connection with those goods. There is no ambiguity in this language and nothing in the statute suggests that any other mental state is required for conviction. The plain language of the statute--"the most reliable evidence of its intent," United States v. Turkette, 452 U.S. 576, 593, 101 S. Ct. 2524, 2534, 69 L. Ed. 2d 246 (1981)--thus counsels us to reject Baker's position. As we have earlier stated, "we will not presume from congressional silence that Congress intended to make knowledge a prerequisite to violating the statutory provision." United States v. Schmitt, 748 F.2d 249, 252 (5th Cir.1984), cert. denied, 471 U.S. 1104, 105 S. Ct. 2333, 85 L. Ed. 2d 850 (1985).
8
Our reading of the statute is confirmed by resort to the legislative history. The committee reports on the bill contain detailed descriptions of the mental states required for conviction, yet nowhere do they state that knowledge of illegality is an element of the crime. For example, the Senate Judiciary Committee report states:
9
Subsection 2320(a) forbids intentional trafficking in goods or services when the defendant knows the goods or services are counterfeit. Thus, the bill has two mental state requirements: first, that the defendant "intends" to traffic in goods or services, and second, that he or she "knows" that the goods or services are counterfeit.
10
S.Rep. No. 526, 98 Cong., 2d Sess. 11 (1984), reprinted in 1984 U.S.Code Cong. & Ad.News 3627, 3637; see also H.R.Rep. No. 997, 98 Cong., 2d Sess. 10 (1984). We can hardly imagine a clearer legislative history against Baker's position. When Congress states that a statute has two mental state requirements, we cannot legitimately hold, as Baker would have us, that the statute has three mental state requirements.
11
It is not surprising that Congress would allow conviction of one who knows that he is selling bogus "Rolex" watches even though he does not know his conduct is punishable as a crime. While it is true that "the general principle that ignorance or mistake of law is no excuse is usually greatly overstated" (American Law Institute, Model Penal Code Sec. 2.02 comment 131 (Tent.Draft no. 4 1955)), the principle continues to be valid to the extent that ordinarily "the criminal law does not require knowledge that an act is illegal, wrong, or blameworthy." United States v. Freed, 401 U.S. 601, 612, 91 S. Ct. 1112, 1119, 28 L. Ed. 2d 356 (1971) (Brennan, J., concurring).1 Baker's claim is merely that, even though he had the mental states required by the face of the statute, he should not be convicted because he did not know that Congress had passed a statute criminalizing his conduct. This clearly is not the law. A defendant cannot "avoid prosecution by simply claiming that he had not brushed up on the law." Hamling v. United States, 418 U.S. 87, 123, 94 S. Ct. 2887, 2911, 41 L. Ed. 2d 590 (1974).
12
For these reasons, Baker's reliance on Liparota v. United States, 471 U.S. 419, 105 S. Ct. 2084, 85 L. Ed. 2d 434 (1985), is misplaced. The Court in that case analyzed a statute providing criminal penalties for anyone who "knowingly transfers, acquires, alters, or possesses [food stamp] coupons or authorization cards in any manner not authorized by [statute] or regulations." 7 U.S.C. Sec. 2024(b)(1). The Court found that Congress intended the word "knowingly" to modify the final phrase of the statute and thus to make knowledge of the statutes and regulations an element of the offense. It held, therefore, that the statute required that a defendant know his activity--e.g., transfer or possession of the stamps--was not authorized by statute or regulations.
13
The Court expressly rejected the idea, however, that it was creating a mistake of law defense. It stated that, while one had to know that his activity was unauthorized, "it is not a defense ... that one did not know that possessing food stamps in a manner unauthorized by statute or regulations was illegal." Id. 105 S.Ct. at 2088 n. 9. In other words, the law about which the defendant has to know is "not the law defining the offense; it is some other legal rule that characterizes the attendant circumstances that are material to the offense." American Law Institute, Model Penal Code Sec. 2.02 comment 131 (Tent.Draft no. 4 1955), cited in Liparota, 105 S. Ct. at 2088 n. 9. A defendant could be convicted without any knowledge whatsoever of the law making his conduct criminal. Liparota, therefore, merely held that, as to one statute, Congress intended to make knowledge of an attendant legal rule (authorized possession of stamps) an element of the offense. It does not stand for the proposition that a defendant can be excused by ignorance of the law that makes his conduct criminal.
14
AFFIRMED.
1
A noted treatise in the area summarizes this principle as follows:
It bears repeating here that the cause of much of the confusion concerning the significance of the defendant's ignorance or mistake of law is the failure to distinguish two quite different situations: (1) that in which the defendant consequently lacks the mental state required for commission of the crime and thus ... has a valid defense; and (2) that in which the defendant still had whatever mental state is required for commission of the crime and only claims that he was unaware that such conduct was proscribed by the criminal law, which ... is ordinarily not a recognized defense.
W. LaFave & A. Scott, Criminal Law Sec. 47, at 362-63 (1972). Baker's contention clearly falls within the second of the situations described. | 01-03-2023 | 08-23-2011 |
https://www.courtlistener.com/api/rest/v3/opinions/1552138/ | 41 B.R. 231 (1984)
In re NORTHLAKE BUILDING PARTNERS, an Illinois limited partnership, Debtor.
NORTHLAKE BUILDING PARTNERS, an Illinois limited partnership, Petitioner,
v.
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY, Respondent.
Bankruptcy No. 81 B 12214, Adv. Nos. 81 A 3988, 81 A 4165.
United States Bankruptcy Court, N.D. Illinois, E.D.
June 20, 1984.
Schwartz, Cooper, Kolb & Gaynor, Chtd., Chicago, Ill., for debtors.
Rosenthal & Schanfield, Chicago, Ill., for respondent.
MEMORANDUM OPINION AND ORDER
EDWARD B. TOLES, Bankruptcy Judge.
This cause coming on to be heard upon the application of NORTHLAKE BUILDING *232 PARTNERS, an Illinois limited partnership [Debtor], represented by SCHWARTZ, COOPER, KOLB & GAYNOR, CHTD., for the entry of preliminary injunctive relief pursuant to Section 105(a) of the Bankruptcy Code, against NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY [Respondent], represented by ROSENTHAL & SCHANFIELD, and also upon the motion of Respondent for the entry of judgment on Count II of its complaint against Debtor and KENNETH NASLUND [Naslund], the general partner of Debtor; and the Court having reviewed the pleadings filed in this cause, and having on March 1, 1984, afforded the parties an opportunity for hearing, and being fully advised in the premises;
The Court Finds:
1. Debtor is involved in the operation of the Northlake Hotel, located in Northlake, Illinois. The hotel provides lodging, meals, recreation and minor nursing care to approximately 260 elderly persons. Portions of the facility are also used for special events, such as bingo, conventions and the like, through which Debtor derives a substantial amount of business and income. Naslund is the sole general partner of Debtor, and he is also responsible for the day-to-day operations of the hotel.
2. Prior to the institution of these bankruptcy proceedings, Debtor and its partners were involved in a civil action instituted by Respondent in the United States District Court for the Northern District of Illinois, Eastern Division, docket number 81 C 2913, in which Respondent sought to obtain a judgment in excess of Three Million ($3,000,000) Dollars against Debtor for breach of a mortgage agreement and also, inter alia, to collect on the personal guarantee made by Naslund upon that same partnership debt. The underlying debt was secured by a mortgage interest in Debtor's sole major asset: the Northlake Hotel. Following Debtor's institution of these voluntary Chapter 11 bankruptcy proceedings, Debtor, on December 21, 1981, removed the above cause of action to this Court.
3. The Court entered an Order on June 22, 1982, which denied Respondent's motion to remand that cause of action to the district court. Also on that date, this Court entered an Order which denied Respondent's motion to lift the stay to permit Respondent to pursue its foreclosure action against Debtor and its partners. The basis for that Order was that Debtor had a substantial equity in the hotel property, and that Respondent's secured interest in the hotel premises was adequately protected, inasmuch as Respondent had received substantial payments from Debtor during the course of these bankruptcy proceedings.
Subsequently, Respondent filed a motion requesting this Court to delineate the scope of the automatic stay, to the end that Respondent might proceed to judgment on its complaint against Kenneth Naslund, individually, upon his personal guarantee of Debtor's mortgage debt. See 25 B.R. 543. This Court entered an Order on June 2, 1983, which denied Respondent's motion. Respondent appealed.
On August 23, 1983, the United States District Court entered an order which remanded the cause to this Court for determination, inter alia, of Debtor's entitlement to the entry of injunctive relief which would restrain respondent from pursuing its claim against Naslund. Debtor did subsequently file the present application for the entry of injunctive relief, which matter is now before this Court for decision.
4. Naslund testified in support of Debtor's application for injunctive relief at the March 1, 1984, hearing. Aside from being Debtor's sole general partner, Naslund is responsible for the management of Debtor's hotel. For his services, Naslund receives an Eleven Thousand ($11,000) Dollar per-month fee. However, $5,500$5,700 of this amount is used to pay the salaries of key management personnel employed by Naslund, and other funds are used to purchase certain supplies used in the management of the hotel. Naslund, himself, nets only $500 to $600 per week from Debtor for his management services.
*233 5. Debtor currently owes Naslund approximately One Million Five Hundred Thousand ($1,500,000) Dollars. Naslund also owns a partial interest in a condominium unit in which he resides with his wife. Naslund has no other assets of substantial value.
6. It is clear that Naslund devotes a great deal of time to the management of the Northlake Hotel. That facility, which employs approximately 60 persons, is now operating at a profit. Naslund testified that if Respondent were permitted to proceed with its cause of action against him personally, he would find it difficult to continue to execute his management responsibilities respecting the hotel.
The Court Concludes and Further Finds:
1. The Court would first observe that it has authority, pursuant to Section 105(a) of the Bankruptcy Code (11 U.S.C.A. § 105(a) (1979)), to issue an injunction which would restrain Respondent from pursuing its cause of action against Kenneth Naslund, Debtor's general partner. Landmark Air Fund II v. Bancohio National Bank (In re Landmark Air Fund II), 19 B.R. 556, 559 (Bankr.N.D.Ohio 1982). Respondent does not dispute the Court's power to issue injunctive relief in this cause, but instead argues that Debtor is not entitled to such relief on the merits. The Court does not agree.
2. The standard for granting a preliminary injunction is well settled in this district. The Debtor must show (1) it has at least a reasonable likelihood of success on the merits, (2) it has no adequate remedy at law and will otherwise be irreparably harmed, (3) the threatened injury to it outweighs the threatened harm the preliminary injunction may cause the Respondent, and (4) the granting of the preliminary injunction will not disserve the public interest. Machlett Laboratories, Inc. v. Techny Industries, Inc., 665 F.2d 795, 796-97 (7th Cir.1981).
3. In the context of bankruptcy proceedings, the first factor noted above (reasonable probability of success on the merits) has been held to pertain to the debtor's prospects for successful reorganization. See e.g. Lahman Manufacturing Co., Inc. v. First National Bank of Aberdeen (In re Lahman Manufacturing Co., Inc.), 33 B.R. 681, 684-85 (Bankr.D.S.D.1983). In the instant case, Debtor has filed a plan of reorganization, which is currently awaiting confirmation. In view of the Debtor's current ability to earn a profit, as testified to by Naslund at the March 1, 1984, hearing, the Court would conclude that Debtor has demonstrated that it has a reasonable probability of success on the merits for purposes of the instant motion.
4. It further appears that Debtor has established the second ground for injunctive relief: the prospect of irreparable harm if relief is not granted, and the want of an adequate remedy of law. Naslund, as has been shown, is intimately connected with the management of Debtor's business and, therefore, with the Debtor's ability to emerge from these bankruptcy proceedings as a going concern. Naslund testified that if he is required to account for his personal guarantee of Debtor's three million ($3,000,000) dollar mortgage debt to Respondent, his ability to execute management responsibilities on behalf of Debtor would be impaired. Respondent asserts that Naslund may file a personal bankruptcy and thereby avoid the consequences of his personal guarantee. Respondent concludes, on this basis, that Debtor has an adequate remedy at law which should preclude the entry of injunctive relief.
5. Nonetheless, it is Debtor, not Naslund, who now applies for injunctive relief respecting the Respondent. Debtor cannot force Naslund to declare bankruptcy; nor can it force him to continue to manage its hotel. Debtor has no adequate remedy at law with reference to Respondent's proposed course of action, and it would be irreparably harmed if it were to lose what appears of record to be a competent manager.
6. In contrast, the benefit which Respondent might obtain if it is permitted to proceed against Naslund appears to be minimal, *234 if existent at all. The only asset owned by Naslund which might be sold to satisfy his guarantee to Respondent, is Naslund's part-ownership interest in the condominium unit in which he and his wife reside. The value of that part-ownership interest does not appear of record. Nonetheless, after homestead interests are deducted, and after allowance is made for Naslund's other debts which aggregate $295,000, the proceeds which may be realized from the sale of the unit would surely fall far short of satisfying Respondent's three million dollar claim.
7. Naslund testified that his partnership interest in his "Engineers Collaborative" business was valueless. His partnership interest in Debtor is, of course, of little value while Debtor remains in bankruptcy. Naslund's salary is not substantial, and the monies once contained in his money market fund were withdrawn, and loaned to Debtor.
8. The Court fails to see how Respondent's actual financial position with respect to its mortgage interest would materially improve should the Court permit it to proceed against Naslund on his personal guarantee. Debtor, on the other hand, has adequately shown that the threatened injury which would accrue from Respondent's proposed course of conduct far outweighs the harm, if any, which the grant of the application for a preliminary injunction may cause to Respondent.
9. The final factor of the Court's analysis concerns the possible effect of the entry of injunctive relief upon the public interest. On this point, it is clear that the public interest will be best served if Debtor, with the assistance of Naslund, continues to work as they have toward the eventual goal of successful reorganization. Sixty persons employed by Debtor will continue to have jobs. Two hundred sixty elderly people will have a place to live. The hotel premises will continue to form part of the community's tax base.
Apart from the possible costs which Debtor might encounter if it is required to replace its current management the Court does not consider it to be in the best interests of the estate to permit Debtor's management to be disrupted at this stage of the proceedings.
10. The Court would also note that in the context of a partnership bankruptcy, the courts are particularly concerned with reference to the actions which a partnership creditor might commence against individual partners. This is so, because all creditors of a partnership may generally look toward the assets of the individual general partners to satisfy the partnership debt. Inasmuch as a major policy of the Bankruptcy Code is to prevent a destructive "race for assets" by the Debtor's creditors, courts have held that where, as here, the partnership is proceeding to reorganize its affairs, injunctive relief may properly issue to prevent a particular creditor from proceeding against the general partners individually. Old Orchard Investment Co. v. A.D.I. Distributors (In re Old Orchard Investment Co.), 31 B.R. 599, 602-603 (W.D.Mich.1983). For this reason, and for the reasons noted above, the Court concludes that Debtor's application for a preliminary injunction should be allowed.
11. Respondent also moved the Court, on October 3, 1983, for entry of judgment upon its complaint against Naslund, individually, with the stipulation that any execution of such judgment would be limited to Naslund's non-partnership assets. However, as noted above, Naslund has few "non-partnership" assets with which he could satisfy a three-million dollar judgment. Out of fairness to the other partnership creditors, see Old Orchard Investment Co. v. A.D.I. Distributors (In re Old Orchard Investment Co.), 31 B.R. 599, 602-603 (W.D.Mich.1983), and in consideration of the other individuals, noted above, who might be materially harmed should Debtor's attempt to reorganize fail, the Court concludes that Respondent's motion should be denied[1].
*235 IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the application of NORTHLAKE BUILDING PARTNERS, Debtor, for a preliminary injunction restraining NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY from proceeding against KENNETH NASLUND upon his personal guarantee respecting certain partnership debt be, and the same is hereby, allowed; provided, that NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY is granted leave to apply to this Court to dissolve the preliminary injunction entered herein should Debtor's reorganization proceedings abate.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the motion of NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY for the entry of judgment upon Count II of its complaint, which was originally docketed in the district court as number 81 C 2913, be, and the same is hereby, denied.
NOTES
[1] This Order is entered pursuant to clause D(2) of the General Order adopted on December 20, 1982, by the Circuit Council presiding in this judicial district, inasmuch as this Order does not dispose of the merits of Respondent's state-law claim against Naslund, and also because the relief granted is in the nature of automatic stay litigation. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552159/ | 41 B.R. 849 (1984)
In the Matter of Charles B. MILLS and Roberta Jane Mills, Debtors.
Bankruptcy No. 82-1389, Adv. No. 82-2242.
United States Bankruptcy Court, W.D. Pennsylvania.
September 10, 1984.
M. David Halpern, Altoona, Pa., for defendant.
Daniel J. Ratchford, Hollidaysburg, Pa., for debtors.
MEMORANDUM OPINION
GERALD K. GIBSON, Bankruptcy Judge.
The matter presently before the Court is a Complaint to Avoid Additional Lien on Real Estate Held to be Exempt Property, wherein Debtors allege as follows. Prior to the filing of their petition under Chapter *850 7 of the Bankruptcy Code, Debtors transferred their interest in certain real estate located at 533 W. 20th Street, Tyrone, Blair County, Pennsylvania to a Trustee for the benefit of their children. On Schedule B-4, Debtors claim an exemption of $15,000 in the aforementioned real estate. Debtors allege that at the time of filing, Central Counties Bank, defendant herein, was a judgment creditor who had attempted to revive the lien of their judgment against the present owners of the real estate located at the above address. Debtors allege that the attempted revival inhibits their rights under the Code to claim this property as exempt. Debtors further allege that the value of the property in question is less than the Debtor's statutory exemption. Debtors presently seek the avoidance of Defendant's lien pursuant to § 522(f).
In its answer, Defendant asserts that the Bankruptcy Court lacks jurisdiction over the subject matter in that the real estate in question was not a part of the Debtor's estate at the time the bankruptcy petition was filed. Defendant denies that the subject property can be claimed as exempt. Further, assuming arguendo that the exemption could be claimed, the value of the property exceeds the exemption as allowed by the Bankruptcy Code.
The facts are briefly as follows. On March 31, 1981 Debtors transferred by deed their interest in the property located at 533 W. 20th Street to Frieda M. Harris as Trustee for Tammala Mills and Carlos Mills, minor children of Debtors. On their Statement of Financial Affairs, Debtors indicate that the property was transferred pursuant to a property settlement agreement between husband and wife; and that at the time of filing, the wife resided in the home with her two minor children.
On April 16, 1982 Debtors filed a petition under Chapter 7 of the Bankruptcy Code. At that time, Defendant herein was a judgment creditor of husband and wife. Subsequent to the discharge of Debtors, Defendant filed a Praecipe for Writ of Revival of their judgment entered at No. 2554-1979 and had it indexed against Frieda M. Harris, Trustee for Tammala Mills and Carlos Mills, terre-tenants. As indicated on Schedule B-4, Debtors claim as exempt the property in question located at 533 W. 20th Street, Tyrone, Pa.
In its brief, Defendant argues that since the property was transferred more than one year before filing, Section 548 of the Bankruptcy Code which allows the trustee to avoid certain transfers made within a year of filing, is inapplicable.
Defendant further argues that the subject real estate is not property of the estate and is therefore not subject to the exemption provisions of § 523.
Defendant finally argues that since the real estate was not owned by Debtors at the time of filing, nor otherwise subject to avoidance provisions of the Code, Debtors cannot challenge the writ of revival entered as against the terre-tenants.
The Court first examines § 522(d)(1) of the Bankruptcy Code which provides as follows:
(d) The following property may be exempted under subsection (b)(1) of this section:
(1) The debtor's aggregate interest, not to exceed $7,500 in value, in real property or personal property that the debtor or a dependent of a debtor uses as a residence . . .
While § 522(d)(1) authorizes certain exemptions, it is fundamental that a debtor may only exempt "his" interest.
The estate created under § 541 is broad and all-encompassing, and includes all legal and equitable interests of the debtor in property, both tangible and intangible, including exempt property. 4 Collier on Bankruptcy § 541.07 at 541-28 (15th Ed.1984). Nonetheless, it is clear that in the case at bar, Debtors had no interest in the subject property at the time of filing. Even if the trustee had recovered the property pursuant to the fraudulent conveyance provisions of the Code, a debtor may not claim exemptions out of the recovered property if the transfer was voluntary. 3 *851 Collier on Bankruptcy § 522.08 at 522-35 (15th Ed.1984).
Based upon the foregoing, the Court is satisfied that § 522(f) which allows the debtor to avoid a lien to the extent that it impairs debtor's exemption is inapplicable in the case at bar. Accordingly, Debtors' complaint is dismissed.
An appropriate order will be entered. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552149/ | 41 B.R. 701 (1984)
In the Matter of Mary Ellen HECHT, M.D., formerly d/b/a The Hecht Group, Debtor.
Albert TOGUT, as Trustee in Bankruptcy for Mary Ellen HECHT, M.D., formerly d/b/a The Hecht Group, Plaintiff,
v.
CHEMICAL BANK, Defendant.
Bankruptcy No. 82 B 10438, Adv. No. 83-5489A.
United States Bankruptcy Court, S.D. New York.
August 2, 1984.
*702 Albert Togut, New York City, for trustee; Kenneth Coleman, New York City, of counsel.
Meiselman, Boland, Reilly & Pittoni, Mineola, for Chemical Bank; Richard Nigro, New York City, of counsel.
DECISION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT REGARDING SETOFF
BURTON R. LIFLAND, Bankruptcy Judge.
This adversary proceeding was commenced by the Chapter 7 trustee of the Estate of Mary Ellen Hecht, M.D. The trustee seeks to recover $87,800.08 plus interest from Chemical Bank ("Chemical"), the defendant in this action. Prior to Dr. Hecht's bankruptcy petition, Chemical set off funds in Dr. Hecht's checking account against certain promissory notes owed by Dr. Hecht to Chemical. The trustee now alleges that Chemical "improved its position" within the meaning of Section 553(b) of the Bankruptcy Code, and seeks to recover that portion of the setoff which represents the alleged improvement in position.
Chemical has interposed an answer and moves for summary judgment dismissing the trustee's complaint. The trustee has cross-moved for summary judgment. For the reasons set forth below, this court denies Chemical's motion for summary judgment and grants the trustee's motion for summary judgment.
Dr. Mary Ellen Hecht filed a Chapter 7 petition on March 8, 1982. On April 15, 1982, Albert Togut was appointed as permanent trustee of this estate ("the trustee"). Prior to the filing of the petition, Dr. Hecht was doing business as "The Hecht Group", an unincorporated association whose purpose was to provide second surgical opinions. The course of events which led to Chemical's exercise of its asserted right of set-off are as follows:
Commencing on December 16, 1980 and continuing until October 27, 1981, Dr. Hecht obtained a total of nine loans from Chemical. The loans totalled $200,000 plus interest. Each loan was evidenced by a promissory note payable to Chemical. On September 25, 1981 and October 27, 1981, the outstanding loans were consolidated into two unsecured loans, evidenced by two promissory notes in the amounts of $190,000.00 and $10,000.00 respectively ("the notes").
During this period Dr. Hecht also kept money on deposit at Chemical in a general checking account. On December 8, 1981, ninety days prior to the bankruptcy petition, Dr. Hecht had the sum of $13,416.27 on deposit in this account.[1]
The notes became due and payable on December 15, 1981, 83 days before Dr. Hecht filed her bankruptcy petition. On that date the amount in Dr. Hecht's checking account totalled $101,216.35.[2]
On December 16, 1981, one day after the notes matured, Chemical set off the amount in Dr. Hecht's checking account against the amounts due on the notes. *703 Chemical was left with an insufficiency of $105,093.24. However, had Chemical set off these amounts on December 8, 1981, ninety days before the filing of the bankruptcy petition, Chemical would have had an insufficiency of $191,919.01. The trustee claims that under Bankruptcy Code Section 553(b), Chemical's right of setoff is limited to the amount Chemical would have recovered had the setoff occurred ninety days before the bankruptcy petition was filed. Therefore, by waiting until December 16th to exercise its right of setoff, Chemical improved its position by the amount of $86,825.77, representing the difference between the insufficiency which existed on December 16, 1981 and the insufficiency which existed on December 8, 1981.[3]
It is Chemical's position, however, that because the notes did not become due until December 15, 1981, there was no mutual debt, as defined in section 553(b) of the Code, prior to that date. Therefore there was no right of setoff until that date, and hence no insufficiency could be calculated prior to that date. In other words, Chemical argues that "the first date during the ninety days immediately preceding the date of the filing of the petition on which there is an insufficiency," 11 U.S.C. § 553(b)(1)(B), was December 15, 1981, the day before the setoff actually occurred.
The trustee contends that Chemical's interpretation of the "mutual debt" requirement of Section 553(a) to require maturity is erroneous. The trustee argues that the maturity date of the notes is irrelevant to the trustee's right to recover under Section 553(b) because section 553(a), which grants the right of setoff to creditors, allows a creditor to setoff against any "claim of such creditor against the debtor," 11 U.S.C. 553(a), regardless of whether such claim is "mature or unmatured," as that term is defined in Section 101(4) of the Code.
A careful reading of the Bankruptcy Code demonstrates the merits of the trustee's argument. Section 553 of the Code provides in pertinent part:
(a) . . . this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case. . . .
(b)(1) . . . if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, "insufficiency" means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such a claim.
Thus, Section 553(a) allows a creditor to offset a mutual debt owed by the creditor to the debtor against a claim of the creditor against the debtor, so long as these mutual debts arose before the commencement of the case[4], and so long as the setoff is valid under state law.
*704 In contrast, Section 553(b) represents a conscious decision by Congress to restrict the right of setoff under state law and to treat its exercise as a preference under certain limited circumstances, for the benefit of other unsecured creditors of the debtor. This Congressional intent is aptly expressed by Collier as follows:
[S]ection 553 is not intended to enlarge the doctrine [of setoff] or to permit a setoff when the general principles of legal or equitable setoff did not previously authorize it. In fact, what is evident on comparison of § 553 to its predecessor, Section 68 of the Chandler Act, is that the earlier setoff provision is now considered to have been too broad. The result was that in too many cases, certain creditors received a preference to the detriment of other creditors and the debtor's estate. Consequently, § 553 has restricted the right of setoff beyond what was done in earlier acts, and contains restrictions somewhat similar to those found in the preference section.
4 Collier ¶ 553.02 at 553-9 (1979).
Accordingly, Section 553(b) limits the right of a creditor to "improve his position" based upon the setoff of a mutual debt within the ninety day period preceding the filing of the bankruptcy petition. Under the so-called "improvement in position" test, which is derived from the [Code's] preference section,
"any increase during the three months before bankruptcy in the amount of the debt owing by the creditor to the debtor would not be permitted to be offset. In the bank context, for example, if a debtor had on deposit $5,000 three months before the filing of the petition and $8,000 on the date of filing, then only $5,000 could be offset."
H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 185 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6145. The trustee is thus permitted under this subsection to recover the amount by which the insufficiency on the date of setoff is less than the insufficiency would have been had the setoff occurred ninety days before the filing of the bankruptcy petition or on the first day after the ninetieth day on which there was an insufficiency. See e.g., In re Duncan, 10 B.R. 13, 16 (Bankr.E.D.Tenn.1980); In re Ohio-Erie Corporation, 22 B.R. 340, 342 (Bankr.N.D.Ohio 1982). See generally Ahort, Bank Setoff under the Bankruptcy Reform Act of 1978, 53 Am.Bankr.L.J. 205 (1979). As used in Section 553(b), the term "insufficiency" can be simply defined as the debt still owed by the debtor to the creditor after setoff.
The following passage from the Collier Treatise illustrates how the improvement in position test is applied:
[S]uppose that on the 90th day prior to bankruptcy the debtor comes to the bank and receives a $12,000 loan to be repaid in 3 monthly installations of $4,000. The debtor opens a bank account on the 90th day before bankruptcy with a balance of $2,000. Thus the insufficiency on the 90th day before bankruptcy is $10,000. On the 60th day before bankruptcy the debtor pays $4,000 on the loan reducing the debt owed to the bank to $8,000. . . . On the 30th day before bankruptcy the debtor pays only $3,000 on the loan due to cash flow problems. On the 29th day before bankruptcy the bank declares an event of default, accelerates the debt and setoff [sic] the $2,000 in the bank account. The insufficiency on the date of setoff was $3,000 ($5,000-$2,000). The improvement in position is $7,000 ($10,000-$3,000). *705 4 Collier on Bankruptcy ¶ 553.08 at p. 553-46.
In the instant case, Dr. Hecht owed $205,335.28 on the notes on December 8, 1981. The amount in her checking account on that date totalled $13,416.27. Thus, the insufficiency on that date totalled $191,919.01. On December 16, 1981, Dr. Hecht owed $206,309.59 on the notes.[5] The amount in Dr. Hecht's checking account on that date totalled $101,216.35. Hence, the insufficiency on the date of the setoff equalled $105,093.24. As in the above example, the insufficiency on the date of setoff was less than the insufficiency on the ninetieth day before the filing of the petition. Therefore the trustee is entitled to recover the difference between the insufficiencies, notwithstanding the fact that the debt owed on the notes was unmatured on December 8, 1981.
Chemical's argument that an insufficiency could not be calculated on December 8, 1981 because the notes had not matured on that date is totally inapposite. It is true that under New York law, a bank's right to setoff time instruments may not be exercised until the day after the time instrument matures. Marine Midland Bank of New York v. Graybar Electric, 41 N.Y.2d 703, 706, 709, 395 N.Y.S.2d 403, 407, 405, 407, 363 N.E.2d 1139, 1141, 1142 (1977); Uniform Commercial Code § 3-122(1)(a) (with regard to time instruments a cause of action does not accrue until the day after maturity). However, in the case at bar it is undisputed that Chemical acted properly in setting off the debts on December 16th. The issue before this Court is not the point at which setoff was proper, but rather whether an insufficiency can be calculated as of December 8, 1981 despite the fact that the debt had not matured as of that date. A careful reading of the Code definitions of "claim," "debt," and "insufficiency" show that the only logical answer to this question is an affirmative one.
"Insufficiency" is defined in Section 553(b)(2), supra, as the "amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim." 11 U.S.C. § 553(b)(2). Section 101(4) of the Code defines "claim" as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. . . ." [emphasis added]. The Code definition of "debt" is "liability on a claim." 11 U.S.C. § 101(11). In applying the Code definitions of "claim" and "debt" to the Code definition of "insufficiency" in section 553(b)(2), the only logical conclusion is that an insufficiency is the amount by which a creditor's right to payment, regardless of whether such right is matured or unmatured, exceeds a debt the creditor owes to the debtor.
Indeed, this is the view which is taken in the Collier Practice Guide, which states that,
By virtue of the Code's elimination of the concept of provability, its broad definition of the terms `debt' . . . and `claim' . . ., its allowance of contingent or unmatured claims . . . and its provision for the estimation of contingent or unliquidated claims . . ., the setoff of unmatured, unliquidated and contingent claims should be permissible under the Code.
4 Collier Bankruptcy Practice Guide ¶ 66.05[3] at 66-12-13.
Thus, while under New York Law a bank may not exercise its right of setoff until after the maturity date of the loan, nevertheless once the setoff has been validly exercised an insufficiency may be calculated as of a date before the loan has matured, and the trustee may recover this insufficiency despite the fact that an actual setoff of those amounts would be prohibited on that date.
In re Duncan, supra, presents a factual situation analogous to the instant case. In In re Duncan, the debtor borrowed money *706 from the defendant bank in February 1980, giving in exchange a promissory note payable in monthly installments commencing in March 1980 and maturing in February 1981. When no payments were made, the bank set off the balance in the debtor's bank account against the debtor's promissory note. The court, in determining whether the setoff created an improvement in the bank's position, calculated an insufficiency on the date the loan was made, despite the fact that the loan was not to mature until a year later. Thus, as in the case at bar, the court was able to determine the amount of the insufficiency before the maturity date of the loan.
Similarly, in the instant case the insufficiency can be calculated as of the ninetieth day prior to bankruptcy, irrespective of the fact that the debt did not actually mature until seven days later.
It is clear that in drafting Code Section 553(b) Congress intended to limit the amount a creditor can offset under state law. Since federal bankruptcy law is preemptive, such Congressional intent must take precedence over any state law to the contrary:
When the language of an avoiding power established under Federal bankruptcy law "is plain, and if the law is within the constitutional authority of the law-making body which passed it, the sole function of the courts is to enforce it according to its terms," Central Trust Co. v. Official Creditors Committee of Geiger Enterprises, Inc., 454 U.S. 354, 102 S. Ct. 695 [70 L. Ed. 2d 542] (1982), and [state law] policy arguments against its enforcement are not relevant.
In re Richardson, 23 B.R. 434, 448 (Bankr. D.Utah 1982). See also In re Frank, Bankruptcy L.Rep. (CCH) ¶ 69,830 (1984).
This Court thus finds that the fact that the debt to Chemical was unmatured ninety days prior to the petition does not justify a conclusion that an insufficiency cannot be calculated at that point. If this Court were to hold otherwise, the basic purpose behind 11 U.S.C. § 553(b), to limit the improvement in one creditor's position and thus benefit all unsecured creditors, would be frustrated.
Accordingly, Chemical's motion for summary judgment is denied and the trustee's cross-motion is granted.[6]
It is so ordered.
NOTES
[1] Dr. Hecht maintained a second Chemical checking account containing $237.00. According to the record, Chemical did not set off the amount in this account.
[2] This increase in the amount in Dr. Hecht's checking accounts was principally caused by the deposit by Dr. Hecht, of $78,588.95, the proceeds of the sale of her vacation residence.
[3] The trustee actually alleges that Chemical improved its position by $87,800.08. However, the Court holds that this figure is erroneous, as it results from the trustee's failure to accurately calculate the amount of interest which had accrued as of December 8, 1981 as well as the trustee's inclusion of a second checking account in the December 8, 1981 calculations.
[4] The "mutual debt" requirement is an extension of Section 68 of the former Bankruptcy Act. See Wolf v. Aero Factors Corp., 126 F. Supp. 872 (S.D.N.Y.1954). A debt is considered mutual when it is between the same parties in the same right or capacity. In re T & B General Contracting Inc., 12 B.R. 234, 238 (Bankr.M.D.Fla.1981); In re Brendern Enterprises, Inc., 12 B.R. 458, 459 (Bankr.E.D.Pa.1981); In re Dartmouth House Nursing Home, Inc., 24 B.R. 256, 264 (Bankr.D. Mass.1982); 4 Collier on Bankruptcy ¶ 553.04 at 553-22. In addition, both debts must be owing when the bankruptcy petition is filed. Framingham Winery, Inc., 7 B.R. 624, 627 (Bankr.D. Mass.1980); In re Jefferson Mortgage Co., Inc., 25 B.R. 963, 971 (Bankr.D.N.J.1982).
The requirement of mutuality of debt is satisfied in the instant situation. Both debts were incurred by the same parties in their individual capacities. A deposit in a bank account creates a debt owed to the depositor by the bank, Katz v. First Nat. Bank of Glen Head, 568 F.2d 964 (2d Cir.1977), just as a loan by a bank to its depositor creates a debt owed to the bank by the depositor. Thus, the debt owed by Chemical to Dr. Hecht is represented by the balance in Dr. Hecht's checking account, and Chemical's claim against Dr. Hecht is represented by Dr. Hecht's promissory notes.
[5] The increase in the amount due on the notes on December 16, 1981 over the amount due on December 8, 1981 was caused by the accrual of interest on the notes.
[6] The trustee alleges as an alternative ground for recovery that Chemical's motion for summary judgment must be denied since a material question of fact exists with regard to whether certain funds were deposited for the purpose of obtaining a right of setoff. See Katz, supra, 568 F.2d at 968. Because this Court finds in favor of the trustee's cross-motion for summary judgment it is unnecessary to address this alternative theory. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552139/ | 41 B.R. 16 (1983)
In re BIG THREE TRANSPORTATION, INC., Debtor.
James G. MIXON, Trustee, Plaintiff,
v.
MID-CONTINENT SYSTEMS, INC., E. Sidney Groves, Lehman D. Blackshear and Ronnie D. Sleeth, Defendants.
Bankruptcy No. FA 80-114, Adv. No. AP 82-164.
United States Bankruptcy Court, W.D. Arkansas, Fayetteville Division.
November 18, 1983.
*17 James G. Mixon, Bentonville, Ark., for plaintiff.
Allen W. Bird, II, Little Rock, Ark., for defendant, Mid-Continent.
Richard L. Miller and F.H. Martin, Fayetteville, Ark., for defendants Groves and Lehman.
Thomas B. Burke, Fayetteville, Ark., for defendant Sleeth.
MEMORANDUM OPINION
CHARLES W. BAKER, Bankruptcy Judge.
Before the Court is an Adversary Proceeding brought by the Trustee to set aside certain alleged preferential transfers in the amount of $170,000.00 paid by the debtor to Mid-Continent Systems, Inc. The Complaint also requests judgment against E. Sidney Groves, Lehman D. Blackshear and Ronnie D. Sleeth. The Complaint came on for a hearing on December 9, 1982, and was continued until and concluded on June 24, 1983. The Trustee, Hon. Jim Mixon, appeared pro se. Hon. F.H. Martin appeared on behalf of Lehman Blackshear. Ronnie D. Sleeth was represented by Hon. Tom Burke. Hon. Tom Thrash and Hon. Allen Bird represented Mid-Continent Systems, Inc. (hereinafter Mid-Continent).
The Trustee called Lehman D. Blackshear, Phillip Ames, Daniel Neil McCoy, and Kenneth W. Lance as witnesses and introduced some 27 exhibits. Mr. Thrash presented testimony from Lehman Blackshear, Joe Bailey, Paul A. Maestri, Phillip Ames, and Donald Robert Lafferty. Mr. Bird introduced testimony from Dalton Gilbert Seago, Sr. During the trial of the case, a Motion for Directed Verdict was granted, without objection from the Trustee as to Defendant Ronnie D. Sleeth. The Trustee never obtained service as to the Defendant E. Sidney Groves, thus, the Complaint is dismissed without prejudice as to him.
The Court has jurisdiction over this dispute pursuant to 28 U.S.C. § 1471 and § 1481, 11 U.S.C. § 105, and General Order No. 24 of the United States District Court for the Eastern and Western Districts of Arkansas.
The Court, having researched the issues presented and being fully advised in the premises, makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1) Big Three Transportation, Inc. (hereinafter "Big Three") is an Arkansas corporation *18 owned by Lehman Blackshear, Sidney Groves, Ronnie Sleeth, Bud O'Dell, and Tommy Thompson, Jr.
2) Lehman Blackshear was an officer and member of the Board of Directors as well as a thirty percent (30%) shareholder in Big Three.
3) In 1977, Mid-Continent agreed to extend a line of credit to Big Three upon the condition that Sleeth, Groves, and Blackshear guarantee the indebtedness of Big Three to Mid-Continent. (Trustee's Exhibit 4).
4) Blackshear was aware of monthly balance sheets and profit-loss statements prepared by Phillip Ames, Big Three's accountant, which showed steadily increasing losses from January 31, 1980 through July 30, 1980. (Trustee's Exhibits 5 through 9).
5) In December of 1979, Big Three had a positive net worth of $50,000. The company still had a positive net worth in early January 1980, but showed a negative net worth by the end of January, 1980, from which it never recovered.
6) The figures on the financial statements compiled by Phillip Ames were based on actual cost minus depreciation (book value) as opposed to fair market value. (Trustee's Exhibits 5 through 9).
7) After the first six months of 1980, Big Three's net operating loss was $1.2 million. (Plaintiff's Exhibit 25).
8) Big Three's liabilities exceeded its assets on the following dates and by the following amounts:
March 7-10, 1980 $199,000
March 31, 1980 $200,000
May 2-5, 1980 $310,000
9) On March 7, 1980 Big Three conveyed a check for $20,000 to Mid-Continent. On March 31, 1980 Mid-Continent received a $100,000 check from Big Three. On May 2, 1980 Big Three conveyed a check for $50,000 to Mid-Continent.
10) The $20,000 payment on March 7, 1980 was made within forty-five (45) days of the January 29, 1980 statement reflecting current charges of $64,055.56. The $100,000 check of March 31, 1980 was within forty-five (45) days of the March 4, 1980 statement showing a balance due of $20,819.00.
11) Daniel Neil McCoy, a transportations consultant, represented a group of investors in attempting to arrange the purchase of Big Three in June of 1980. Negotiations for the sale broke down due to, among other things, the Creditors' Committee's belief that the proposed consideration was insufficient. It was at this point that the Creditors' Committee filed an Involuntary Petition against Big Three (August 20, 1980).
CONCLUSIONS OF LAW
1) The Trustee has the burden of proving that transfers are preferential. Constructora Maza, Inc. v. Banco de Ponce, 616 F.2d 573 (1st Cir.1980); Wilkie v. Brooks, 515 F.2d 741 (6th Cir.1975).
2) Lehman Blackshear qualified as an insider as defined by 11 U.S.C. § 101(25)(B)(i) and (ii).
3) The Code requires that the insider/transferee have "reasonable cause to believe the debtor was insolvent at the time of such transfer" before the transfer may be avoided. 11 U.S.C. § 547(b)(4). It is difficult to formulate any well defined rule for finding "reasonable cause." The criteria most often relied upon by the courts include a transferee's knowledge of "undercapitalization of the debtor, sales below cost, checks drawn on a bank account and payment refused by reason of insufficient funds, a consistent pattern of overdrafts, operating losses, irregular, unusual, or criminal conduct, secretiveness, slow payment, collection measures taken by other creditors, rescue of the debtor from embarrassment by friends or relatives and reliance on financial statements or reports." Dean v. Planters National Bank, 176 F. Supp. 909, 914 (1969). Almost all these elements are present in the case at bar. For these reasons, as well as the conclusions listed below, the Court finds Lehman *19 Blackshear, an insider/guarantor, had reasonable cause to believe the debtor was insolvent at the time of these payments to Mid-Continent.
A. The book value of the assets of the debtor is deemed by the Court to be the best evidence of the financial status of the debtor under the circumstances of this case, i.e., a significant portion of the debtor's assets are recently acquired. The testimony of an expert accountant may be received on this issue. Boston National Bank v. Early, 17 F.2d 691 (1st Cir.1927). The statement of a certified public accountant, not verified, furnished the president of the defendant bank several months before the alleged preference in an entirely different transaction, is not admissible on the question of insolvency, but is admissible on the question as to whether the defendant had reasonable cause to believe that the debtor was insolvent. Schwemer v. Milwaukee Commercial Bank, 185 Wis. 243, 201 N.W. 398 (1924).
B. It is true, as Mid-Continent points out, that the assets of the debtor should include the value of the debtor's ICC operating authority. The Court simply cannot accept, however, Mid-Continent's estimate of $400,000 to $500,000 as the authority's value. The Court is not persuaded the operating authority would have any value in excess of book value ($128,098) and doubts that the authority is even worth that amount. The best evidence of the value of the operating authority is the amount of income it is able to generate. Here, debtor was operating at ever increasing losses in spite of the fact it possessed this so-called "valuable" authority.
C. The Court ascribes no value to the contracts to purchase the twenty-five (25) trucks and twenty-five (25) trailers. For these contracts to be an asset of the estate, Mid-Continent would have to have shown that the debtor had the capacity to take advantage of these contracts and, obviously, it did not. If the contract rights were so valuable, the debtor could have effectuated an assignment of those valuable rights, and debtor did not do so.
D. The Court does not credit Daniel Neil McCoy's opinion that Big Three was worth more than the company's balance sheet reflected. Mr. McCoy obviously had no expertise to give such an opinion. In addition, Mr. McCoy's testimony, in general, lacks credibility with the Court. The testimony of the certified public accountant as to the value of the assets and net worth of the debtor is considerably more reliable than that of Mr. McCoy. In this regard, Matter of Briarbrook Development Corp., 11 B.R. 515, 4 C.B.C.2d 871 (Bkrtcy.1981), cited by Mid-Continent, is inapposite as, there, the accountant's testimony was found by the Court to be incredible, and for good reason.
E. Furthermore, the Court rejects Mid-Continent's contention that the issue of solvency must necessarily be resolved by estimates of the fair market value of the debtor's estate. Unaudited financial statements may be admissible as the best available evidence, and it is for the trier of fact to assess the accuracy of such statements. In Re Roco Corp., 701 F.2d 978 (1st Cir.1983); Braunstein v. Massachusetts Bank and Trust Co., 443 F.2d 1281 at 1284 (1st Cir.1971).
4) The payments by the debtor of the three checks (Trustee's Exhibits 13, 14, and 15) constitute preferential transfers within the meaning of 11 U.S.C. § 547. The transfers were to or for the benefit of a creditor, the insider/guarantors. The payments reduced the insider/guarantors' contingent liability to Mid-Continent under the guaranty. 11 U.S.C. § 101(9) and 502(e)(2). The insolvency of the debtor and antecedency of the debt have already been discussed and established. (See Conclusion No. 2). 11 U.S.C. § 547(b)(4)(B), then, enlarges the preference period to between 90 days and one year thereby encompassing all three payments. Such transactions are clearly preferential transfers. Cooper Petroleum Co. v. Hart, 379 F.2d 777 (5th Cir.1979); Kobusch v. Hand, 156 F. 660 (8th Cir.1907), *20 cert. denied, 209 U.S. 547, 28 S. Ct. 758, 52 L. Ed. 720 (1908).
5) It is true that the property transferred must be included among the debtor's assets when its insolvency at the time of the transfer is at issue. In Re: Utrecht Coal Co., 63 F.2d 745 (2d Cir.1933). Notwithstanding that inclusion, however, the debtor was still insolvent on the dates these transfers occurred.
6) 11 U.S.C. § 547(c) provides:
The Trustee may not avoid under this section a transfer . . . (2) to the extent that such transfer was (A) in payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee; (B) made not later than 45 days after such debt was incurred; (C) made in the ordinary course of business or financial affairs of the debtor and the transferee, and (D) made according to ordinary business terms.
Pursuant to this section the $20,000 check of March 7, 1980 in payment of the $64,055.56 balance is not preferential. Likewise, $20,819.00 of the $100,000 payment of March 31, 1980 is not preferential. The $20,819 figure is the balance due on the account reflected in the March 4, 1980 statement.
Mid-Continent has also argued that the Trustee has failed to maintain his burden by not proving that Mid-Continent received more by this alleged preferential payment than it would have received in a Chapter 7. The assets of Big Three are valued at $5.6 million in the schedules. Debtor's equity therein was listed at $1.5 million. Liquidation value would, doubtlessly, be even less than that. When these assets are weighed against the scheduled $9 million in secured debt and $2 million in unsecured debt, it is clear that by receiving half of its $340,000 unsecured claim via the transfers in question, Mid-Continent received more than it would have in a Chapter 7 liquidation. The June 7, 1982 Order converting the case to a Chapter 7 noted that the Trustee possessed cash in the sum of $454,983.01 to pay priority, administrative and general unsecured claims. With $2 million in general unsecured claims in addition to attorney's fees, accountant's fees, auctioneer's commission, and other priority claims, Mid-Continent could not have received $170,000 of its $340,000 claim in a Chapter 7.
8) With regard to Mid-Continent's final argument, each guarantor is liable on his obligation for the entire amount of the debt to Mid-Continent (Trustee's Exhibit 4). The fact that two of the insider/guarantors herein have been dismissed as defendants does not diminish the liability of Lehman Blackshear on his guaranty nor does it diminish the amount owed by Mid-Continent to the Trustee.
9) Finally, the Court will address the most difficult and critical issue in this case and that is whether judgment for the preferential transfers may be had against Mid-Continent, as "initial transferee," pursuant to 11 U.S.C. § 550(a)(1). The Court is well aware of decisions from other Bankruptcy Courts which have held it inequitable to not allow the initial transferee to keep whatever money was paid to it during the period of more than ninety (90) days but less than one year before filing and allow the trustee to recover only from those insiders/guarantors for whose benefit such payments were made. See In Re Church Buildings and Interiors, Inc., 14 B.R. 128, 5 C.B.C.2d 74 (Bkrtcy.W.D.Okla. 1981); In Re Duccilli Formal Wear, Inc., 24 B.R. 699, 8 B.C.D. 1180 (Bkrtcy.S.D. Ohio 1982); In Re Cove Patio Corp., 19 B.R. 843 (Bkrtcy.1982). Invariably, these cases rely on 4 Collier on Bankruptcy § 550.02 (15th Ed.1981), which contends that in such a fact situation recovery should be restricted to the insider/guarantor and the creditor (here, Mid-Continent) should be protected. "Otherwise a creditor who does not demand a guarantor can be better off than one who does." Collier, supra. The Court appreciates that analysis of what is apparently perceived to be an inequitable result.
This Court, however, refuses to overlook the unambiguous language of 11 U.S.C. § 550(a)(1):
*21 § 550. Liability of transferee of avoided transfer. (a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 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; (emphasis supplied)
That language is susceptible of no other interpretation than the result reached herein. The drafters of the Code could very easily have omitted the "initial transferee" language. Since they obviously did not, however, drafters of loan guaranty agreements will have to consider the literal meaning of § 550(a)(1) in advising their lending institution clients.
As one author in the American Bankruptcy Law Journal has stated:
As hard as one searches, one is unable to uncover any material evidence in the Code or its legislative history that Congress intended paragraph 550(a)(1) to operate less than literally merely because of one of the potential defendants designated in that paragraph supplies the factual predicate for avoiding a transfer. In fact, in the original bills approved by the Senate and the House of Representatives, each version of Section 550 mandated recovery from the "initial transferee" alone.[1]
Pitts, "Insider Guaranties and the Law of Preferences," 55 American Bankruptcy Law Journal, 343, 347 (1981).
Therefore, the Court hereby enters judgment for the Trustee in the amount of $129,181 against Mid-Continent Systems, Inc. and Lehman Blackshear.
SO ORDERED.
NOTES
[1] S.2266, 95th Cong.2d Sess. § 101 (1978) (proposed 11 U.S.C. § 550(a)(1); H.R. 8200, 95th Cong. 1st Sess. § 101 (1977) (proposed 11 U.S.C. § 550(a)(1)). In the precursor to Section 550 proposed by the Commission on the Bankruptcy Laws of the United States, the primary target of the trustee's recovery was likewise the initial transferee. REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R.Doc. No. 93-137, 93rd Cong. 1st Sess., pt. II, at 178 (1973) (§ 4-409(a)). In explaining this section, the Commission stated that it "covers all initial transferees of recoverable property, not just those preferred." id at 180 note 2 (emphasis supplied). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552169/ | 41 B.R. 829 (1984)
In re Daniel J. LEMME, d/b/a L & L Building Products, L & L Construction, and East River Grain Dryers, all sole proprietorships, Debtor.
NORWEST BANK SIOUX FALLS, National Association, Plaintiff,
v.
Daniel J. LEMME, d/b/a L & L Building Products, L & L Construction, L & L Construction and Plumbing, Inc., and East River Grain Dryers, Defendant.
Bankruptcy No. 483-00317, Adv. No. 484-0002.
United States Bankruptcy Court, D. South Dakota.
August 31, 1984.
*830 Wilson Kleibacker, Lammers, Lammers, Kleibacker & Casey, Madison, S.D., for plaintiff.
Cecelia A. Grunewaldt, Stuart & Gerry, Sioux Falls, S.D., for defendant.
MEMORANDUM DECISION
PEDER K. ECKER, Bankruptcy Judge.
The above-entitled matter is before the Court on Norwest Bank of Madison's (bank's) objection to the debtor's claim of homestead exemption. The debtor requested a hearing on the bank's objection and the same was held on April 10, 1984. At the close of the hearing, the Court took the matter under advisement, reserving ruling until both parties filed memorandums of law. The Court has received the memorandums and has carefully analyzed the arguments of counsel therein.
The debtor claimed the following real property as exempt on Schedule B-4 of his bankruptcy schedules:
"Madison, Lemme's First Addition, Sec XX-XXX-XX, lot 1 and lot 5 and home thereon on behlf (sic) of dependents."
Both parties now agree that lot 5 referred to above is not being claimed as part of the homestead exemption.
The debtor purchased lot 1, along with contiguous property, on a contract for deed from Leonard A. Johnson in 1981. The debtor mortgaged the Johnson contract for deed property to the bank on January 5, 1982. The instrument used was a collateral real estate mortgage which secured loans to the debtor of up to $50,000. The mortgage, which was signed only by the debtor, contained a waiver of homestead and was intended to secure operating capital for the debtor's construction business. There is no dispute that the debtor was married at the time the mortgage document was executed.
The debtor assigned his equity in the Johnson contract for deed to the bank on April 28, 1982. The bank recorded the assignment on April 30, 1982. The debtor and his brother entered into a contract on May 2, 1983, for the construction of a home to be built for the brother on lot "1." The debtor's brother was unable to complete the purchase because he could not obtain financing. The debtor and his family moved into the home originally built for the debtor's brother late in the fall of 1983. The debtor filed a chapter 7 petition in bankruptcy on October 13, 1983.
The debtor insists that the bank does not have a mortgage on lot "1," the debtor's current residence and claimed homestead, because the bank failed to have the debtor's wife sign the mortgage, which contained a waiver of homestead, or otherwise obtain a waiver of homestead from the debtor's wife. As authority for its position, the debtor cites S.D.C.L. § 43-31-17 (1983) which provides:
A conveyance or encumbrance of a homestead by its owner, if married and both husband and wife are residents of this state, is valid if both husband and wife concur in and sign or execute such conveyance or encumbrance either by joint instrument or by separate instruments. However, for the sole purpose of a spouse of a person in the armed forces making application for a home loan under 38 U.S.C. 1701, et seq., the signature of the spouse alone is sufficient to convey or encumber the homestead if the person in the armed forces is officially declared to be: missing in action, captured in line of duty by a hostile force, or *831 forcibly detained or interned in line of duty by a foreign government or power.
S.D.C.L. § 43-31-17 (1983) precludes the conveyance or encumbrance of a homestead by its owner, if married, without the concurrence of both the husband and wife. The case law supports the plain meaning of S.D.C.L. § 43-31-17 (1983). O'Neill v. Bennett, 49 S.D. 524, 207 N.W. 543 (1926).
Although neither party directly addressed it, the dispositive issue in this case is whether lot 1 was attached with the character of a homestead when the debtor mortgaged the property to the bank.
The most important and controlling fact to be considered in determining whether the homestead character has attached is intent. Harter v. Davison, 53 S.D. 399, 220 N.W. 862 (1928); Aisenbrey v. Hensley, 70 S.D. 294, 17 N.W.2d 267 (1945). The South Dakota Supreme Court had occasion to address an issue similar to the one at bar in Jensen v. Griffin, 41 S.D. 30, 168 N.W. 764 (1918), and laid down the following rules:
If at the time of contracting for the material for the new house it was the intention of both husband and wife to erect it for nonhomestead purposes, then the mechanics' liens attached both to the building and the land upon which it was situated. Chas Betcher Co. v. Cleveland, 13 S.D. 347, 83 N.W. 366.
If at that time both husband and wife intended that the new house should be their home, then the liens never attached to either building or land (Pol.Code, § 3228), unless acts of estoppel be proven, which respondent has the burden of showing.
Although the foregoing rules address the validity of a mechanic's lien, the Court is convinced that they are equally applicable to a collateral mortgage.
The debtor and his wife did not intend lot 1 to be their homestead when the debtor encumbered the property to the bank. The record reflects the fact that the debtor intended to use the property in his construction business. Nothing in the record indicates that either the debtor or his wife intended lot 1 as their homestead until sometime after the debtor encumbered it. Consequently, lot 1 was not attached with the character of a homestead when it was encumbered to the bank and, therefore, under the rules announced in Jensen v. Griffin, supra, the bank's lien attached and remains valid. The bank did not need the debtor's wife's homestead waiver to perfect its lien.
The instant case is obviously distinguishable from those cases where one spouse encumbers an existing homestead without the concurrence of the other. See, e.g., Farmers' and Merchants' National Bank of Milbank v. Bank of Commerce of Milbank, 49 S.D. 130, 206 N.W. 691, 692-93 (1925) (property being used as homestead at time husband unilaterally encumbered). S.D.C.L. § 43-31-17 (1983) precludes a spouse's unilateral conveyance or encumbrance of a homestead. It does not preclude a spouse's unilateral conveyance or encumbrance of property to which the character of a homestead has not attached. Nor does the statute divest a valid prior grantee or encumbrancer of its interests if the property subsequently takes on the character of a homestead. It is axiomatic, however, that S.D.C.L. § 43-31-17 (1983) requires spousal concurrence in any transfer that occurs subsequent to the time the homestead character attaches to the property.
Accordingly, based on the foregoing analysis, the bank's objection to the debtor's homestead exemption must be and is sustained. This Memorandum Decision constitutes the Court's Findings of Fact and Conclusions of Law in the above-entitled matter pursuant to Bankr.R.P. 7052 and 9014 and F.R.Civ.P. 52. Counsel for the bank is directed to submit a proposed Order and Judgment, consistent with the Court's Findings of Fact and Conclusions of Law, in accordance with Bankr.R.P. 9021, to the Clerk of this Court forthwith. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552176/ | 41 B.R. 926 (1984)
In re JOHNS-MANVILLE CORPORATION, et al., Debtors.
OCCIDENTAL CHEMICAL CORPORATION, Plaintiff-Appellant,
v.
JOHNS-MANVILLE CORPORATION, et al., Defendants-Appellees.
No. 83 Civ. 3561-CSH.
United States District Court, S.D. New York.
July 31, 1984.
As Amended September 5, 1984.
*927 Conboy, Hewitt, O'Brien & Boardman, New York City (David R. Davies, New York City, of counsel), Carpenter, Bennett & Morrissey, Newark, N.J. (John E. Keale, Newark, N.J., of counsel), for plaintiff-appellant.
Davis, Polk & Wardwell, New York City (Lowell Gordon Harriss, Miriam G. Cedarbaum, Susan P. Johnston, New York City, of counsel), Levin & Weintraub & Crames, New York City (Herbert S. Edelman, New York City, of counsel), for defendants-appellees.
MEMORANDUM OPINION AND ORDER
HAIGHT, District Judge:
Occidental Chemical Corporation ("Occidental") appeals from an order of the Bankruptcy Court (Burton R. Lifland, Judge) denying Occidental's application for relief from the stay of proceedings entered pursuant to 11 U.S.C. § 362 in reorganization proceedings commenced by appellee Johns-Manville Corporation ("Manville"). Occidental sought pre-trial discovery of Manville in aid of its defense of third-party asbestosis litigation. Judge Lifland denied Occidental's application, together with comparable applications of similarly situated parties, in a comprehensive opinion dated January 10, 1983, reported at 26 B.R. 420 (Bankr.S.D.N.Y.1983), and implemented by order dated March 21, 1983. Prosecution of the appeal has been delayed by the circumstances about to be related.
Occidental uses asbestos in its chemical manufacturing processes. According to its offer of proof, in December 1974 Occidental made one sale to Manville of surplus asbestos fiber which it had in one of its factories. Manville used Occidental's fiber at its plant at Manville, New Jersey. All the asbestos fiber in question was used in one building of the Manville facility, the "I" building, and was completely consumed during 1975.
During 1977 through 1980, nine actions involving numerous claims for death or injury were commenced in the United States District Court for the District of New Jersey by employees or former employees of Manville at the Manville plant. These suits allege injury or death as a result of exposure to asbestos fiber or asbestos-containing products during the course of employment at the Manville facility. Manville and various of its subdivisions are defendants. Occidental is also a defendant in these actions.
On August 26, 1982 the Manville entities filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. That petition was triggered by the thousands of claims asserted against Manville by asbestosis sufferers. The § 362 stay of proceedings took effect that day. One of the New Jersey suits is Bialy v. Johns-Manville, et. al., Civ. No. 79-1336 (D.N.J.). This appeal is particularly concerned with Bialy for reasons that will appear. On October 14, 1982 the district judge to whom Bialy was assigned severed all direct claims and crossclaims against the Manville entities. Discovery deadlines were imposed. I infer that comparable orders were made in the other New Jersey cases.
In these circumstances, a number of adversary proceedings and motions came on before Bankruptcy Judge Lifland. A number of companies such as Occidental found themselves in comparable situations; that is to say, they were co-defendants with Manville in asbestosis death and injury litigation, with the litigation having been stayed as to Manville, but still proceeding against them. In the omnibus proceedings before Judge Lifland, Manville requested "declaratory relief to extend the automatic stay under Section 362 . . . to encompass various direct actions and discovery proceedings brought against present, former and future Manville officers, directors, employees, insurers, sureties and other agents." 26 B.R. at 422. Occidental, for its part, sought "to obtain relief from the automatic stay to depose various representatives of Manville on issues specific to its *928 factual defense to various asbestos lawsuits pending against it in the District of New Jersey." Id. at 424.
Judge Lifland granted Manville significant expansions of the § 362 stay of proceedings to cover discovery against officers and employees of Manville. Manville had argued that exposing its officers and employees to discovery in all the suits whose commencement had triggered the reorganization proceeding in the first place would undermine the reorganization efforts. Judge Lifland accepted that argument, in principle, stating in his opinion:
"The massive drain on these numerous individuals' time and energy at this crucial hour of plan formulation in either defending themselves or in responding to discovery requests could frustrate if not doom their vital efforts at formulating a fair and equitable plan of reorganization." 26 B.R. at 426 (footnote omitted).
Occidental's brief on appeal describes the practical effect of Judge Lifland's ruling:
"By virtue of that opinion, Occidental was precluded from obtaining deposition or trial testimony from current employees of the debtors and was precluded from obtaining documentary evidence necessary to its defense." Brief at 2.
Footnotes to the Occidental brief before this Court indicate that in subsequent proceedings, the bankruptcy judge granted some limited discovery. This is said to include "depositions of former employees of the debtors as well as depositions of any current employees who are named defendants in any given lawsuit." Brief at 2 n. 1. Occidental says that the deposition or trial testimony of these individuals would do it no good in the pending litigation. In addition, at a hearing on March 1, 1983 Judge Lifland directed Manville to provide counsel for Occidental with Manville's certified answers to interrogatories which had been answered and certified prior to the filing of the bankruptcy petition; to provide counsel for Occidental with answers to interrogatories with respect to one deceased plaintiff; and to permit counsel for Occidental to review Manville's records relating to the supply of asbestos fiber and asbestos-containing products to the Manville, New Jersey facility. As to the latter entitlement, Occidental argues that absent the right to obtain testimony of a custodian of those records by deposition or trial testimony (which is barred by the bankruptcy judge's current order), these records cannot be authenticated or admitted into evidence at trial.
In addition to making these arguments, largely unsuccessful, before Judge Lifland, Occidental proceeded on other fronts as well. On April 1, 1983 the United States Court of Appeals for the Third Circuit entered an order temporarily staying the trials of the New Jersey cases. Occidental also undertook settlement discussions with counsel for plaintiffs. It is not entirely clear from the record on this appeal what happened to the stay issued by the Third Circuit; but I infer that, at least in respect of the Bialy case, the stay has been lifted. It also appears that settlement efforts were successful as to certain of the cases. But the Bialy wrongful death case has not been settled. It is currently scheduled for trial before Judge Stern of the District of New Jersey this fall.
The Third Circuit's stay, and the possibility of settling all cases, caused Occidental to defer prosecution of this appeal. In the present circumstances, however, Occidental now presses its appeal from Judge Lifland's order to obtain discovery from Manville which it regards as essential to its defense of the Bialy suit.
The defense which Occidental seeks to establish in Bialy is this. Bialy was a long-term employee of Manville at the New Jersey facility. Bialy worked in the "I" building for some unspecified period in 1975. That year and that location are important because, as noted supra, Occidental contends that it furnished asbestos fiber to Manville on only one occasion, and that the fiber was used only in the "I" building and only during 1975.
Occidental's further contentions are summarized in their brief on appeal:
*929 "Levels of airborne asbestos dust at the Manville facility were much higher during the 1930's through the 1960's than during the 1970's when both state and federal restrictions were imposed upon manufacturing facilities. Most plaintiffs in the Smith and Bialy cases allegedly had continuous and heavy exposure to airborne asbestos dust during the course of their employment at the Manville facility in the decades prior to 1970. Further, the various asbestos related diseases from which plaintiffs allegedly suffer have a latency period of from 15 to 30 years. Given the recognized latency period for asbestos related diseases and given the difference in the levels of plaintiffs' exposure to asbestos over the years of their employment, Occidental contends that any exposure to asbestos fiber supplied by Occidental in 1975 could not have caused or contributed to plaintiffs' illnesses." Brief at 7-8.
While of course intimating no view on the merits, I am bound to say that Occidental asserts plausible lines of defense. In aid of those assertions, Occidental appeals from Judge Lifland's order in order to obtain limited relief from the stay of proceedings against debtors for the purpose of obtaining specific items of discovery. Those items include, according to Occidental's brief on appeal,[1] the following:
"(a) the deposition of a representative of Johns-Manville with knowledge of information contained in Johns-Manville's answers to Interrogatories respecting where and when asbestos fiber supplied by Occidental was used at the Manville facility; (b) the deposition of employees of Johns-Manville with knowledge of Johns-Manville's industrial hygiene surveys of the Manville facility; (c) the production of records and deposition testimony of a representative of Johns-Manville with knowledge of its dust control equipment, maintenance records regarding same and any changes in same during the course of plaintiffs' employment; (d) production of records and deposition testimony of a representative of Johns-Manville with knowledge of the company's health practices and procedures at the Manville facility; (e) the deposition of a representative of Johns-Manville with knowledge of the manner in which Occidental's asbestos fiber was used in `I' Building in 1975; (f) the production of plaintiffs' personnel records and the deposition of the custodian of same for purposes of establishing whether or not a given plaintiff was exposed to asbestos fiber supplied by Occidental; (g) production of records and the deposition testimony of Clifford Sheckler, one of Johns-Manville's former management employees, with respect to an epidemiological survey which was done at the Manville facility; and (h) the production of Johns-Manville's records concerning the supply of asbestos fiber and asbestos containing products to the Manville facility as well as the deposition of the custodian of those records." Brief at 9-10 (footnotes omitted).
Counsel for Manville, while at oral argument not entirely unsympathetic to Occidental's litigation difficulties, insists that Judge Lifland's order should not be disturbed; that the consequences of permitting such discovery in this case (which may very well prompt numerous comparable demands for relief in other asbestos actions) would be distracting, disruptive of the reorganization efforts, and wasteful of the reorganization estate's assets; and that Occidental should pursue other remedies. On that last point, the remedies Manville suggests are an appeal to the trial judge for a stay of the trial, if the evidence sought to be obtained from Manville is as vital to the defense as Occidental says it is; or a renewed application to Bankruptcy Judge Lifland, on the same basis of trial need, so *930 that the Bankruptcy Judge may strike a proper balance of competing interests in view of the present status of the reorganization proceeding.
Two earlier appeals have been taken to judges of this Court from Bankruptcy Judge Lifland's order staying discovery against Manville. The first of these was taken by Lac D'Amante Du Quebec, Ltd. ("Lake Asbestos"), another furnisher of asbestos fiber to Manville, and co-defendant with Manville in comparable litigation. Lake Asbestos had participated with Occidental in the omnibus proceedings before Judge Lifland. Lake Asbestos's appeal was heard by Judge Brieant. 83 Civ. 3212, 4263, 5018-CLB. In a memorandum and order dated January 9, 1984, Judge Brieant rejected the appeal, holding that the bankruptcy judge had acted "in an appropriate exercise of his discretion" under § 105(a) of the Bankruptcy Code. Slip op. at 12. 11 U.S.C. § 105(a) is the bankruptcy equivalent of the All Writs statute, which authorizes the bankruptcy court to "issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title." Judge Brieant stated: "At least as of the present, which is the only time as of which this Court may speak, the determination of the Bankruptcy Court to continue the stay is entirely reasonable, and absolutely necessary if there shall be any hope of reorganizing the Debtor in accordance with the statutory goal." Slip op. at 11. Judge Brieant recognized, however, that "stays of proceedings of the sort present here are not intended to be permanent. They must be reasonable as to scope and duration." Slip op. at 10-11. Judge Brieant concluded his rejection of the Lake Asbestos appeal by reiterating that:
". . . affirmance of these denials of relief from the stay by the Bankruptcy Court is without prejudice to future application(s) for complete or partial relief from the stays imposed pursuant to § 362 of the Bankruptcy Code and the Bankruptcy Court's prior orders, based on the circumstances and the equities of the case as they may then exist." Slip op. at 24.
The second appeal was heard by District Judge Leval. The appeal was taken by Norton Company and Textron, Inc. CCH Bankruptcy Law Reports, ¶ 69,862 at 85,083 (S.D.N.Y. April 24, 1984). Former or present employees of a Manville plant in Marrero, Louisiana had commenced asbestosis actions against Manville. Norton and Textron were also named as defendants as the manufacturers of an allegedly defective filtration mask which the plaintiffs alleged was used by them at the Marrero plant. As with Occidental in the case at bar, Norton and Textron were barred from discovery against Manville by Bankruptcy Judge Lifland's order.
Judge Leval reversed that order and permitted discovery to take place against Manville. Norton and Textron were in the first instance requesting document production and sworn answers to interrogatories, although their counsel candidly stated that they "foresee a likelihood that they may also require the deposition of some Manville employees, primarily at the Marrero plant, on the same subjects." CCH Bankruptcy Law Reports, ¶ 69,862 at 85,084. Judge Leval permitted the discovery, which he characterized as "relatively straightforward, specific, and limited to the operations of the Marrero plant," ibid., because he was convinced that Norton and Textron "will be enormously prejudiced by denial of access to this discovery." The defenses asserted by Norton and Textron closely paralleled the defenses which Occidental wishes to assert in the Bialy death action in New Jersey. Norton and Textron questioned whether the plaintiffs in question had even used the filtration masks at the pertinent time periods. Secondly, they contended that "the extent of their implication can be importantly limited by this information: If a plaintiff worked for twenty years at the Marrero plant with asbestos exposure throughout, but used the N/T mask for only the last two or three years of the twenty year employment, Norton/Textron might be responsible for only a small percentage of the exposure." Id. at 85,084. *931 Judge Leval recognized the concerns expressed by Bankruptcy Judge Lifland, but concluded that solicitude for Manville's reorganization was not sufficient to overcome the fact that "the deprivation of this discovery is of devastating prejudice to Norton/Textron in facing the pending Marrero trial." Id. at 85,085.
Judge Leval distinguished Judge Brieant's affirmance of Judge Lifland in Lake Asbestos because Judge Brieant had stressed in his affirming opinion that the persons of whom discovery was there sought "were high executives and persons deeply involved in the reorganization negotiations." Id. at 85,085. In his discussion of Judge Brieant's opinion, Judge Leval remarked that "the discovery here sought is not substantially similar to that sought by Lake and Occidental." Ibid. If this is intended to suggest that Occidental was involved together with Lake in the appeal before Judge Brieant, I must respectfully note that, as pointed out in the procedural history of the case at bar, that is incorrect. The Occidental appeal had not been perfected before Judge Brieant, and was not before him. The Occidental appeal was perfected before me, and forms the subject matter of this opinion.
Trial counsel for Occidental in the case at bar argue that the discovery requested of Manville in the Bialy case is relatively narrow and specific, is limited to the operations of one particular Manville plant, and need by no means engage the energies of all the Manville top brass who are engaged in the reorganization project.
Decision of this appeal requires the balancing of a number of legitimate concerns. Manville's efforts at reorganization, in fulfillment of the purposes and objectives of the Bankruptcy Code as recognized by Bankruptcy Judge Lifland and District Judge Brieant, are of course entitled to consideration. But so are the interests of Occidental, which wishes to make an effective defense to substantial claims. Finally, the asbestosis plaintiffs or their families (Bialy is a death case) must also be considered.
Because of this last-named factor, I have no sympathy with Manville's suggestion that Occidental should attempt to persuade District Judge Stern in New Jersey to further delay the trial of the Bialy action if it cannot be settled. Of course, I would not presume to suggest to Judge Stern whether or not he should grant such a stay if Occidental applies to him for it. I hold only that this argument carries no weight with me within the context of the appeal from Judge Lifland's order. That is because those who allegedly suffered or lost family members through exposure to asbestosis are entitled to a resolution of their claims for compensation against parties such as Occidental, who may be liable. It does not gracefully lie in Manville's mouth to say that those remedies should be indefinitely delayed.
I come then to competing interests of Occidental and Manville.[2] In the case at bar, I find myself in agreement with Judge Leval's analysis in the Norton and Textron case. The Bialy suit which Occidental is defending in New Jersey involves the death of a Manville employee. What occurred or did not occur at the Manville plant where decedent worked is crucial to the case. Manville is the only source from which Occidental can develop the exculpatory or mitigatory evidence it seeks. Denial of that evidence to a litigant in Occidental's position works a degree of hardship and prejudice which no court should countenance, absent overwhelming policy considerations pointing the other way. In the case at bar, I am not satisfied that Manville has made such a showing. I reach that conclusion, even assuming (which seems plausible enough) that other litigants may be inspired to press demands for the relief which Occidental seeks by this appeal. But even assuming that every Manville co-defendant in an action commenced by a Manville *932 employee (and I am advised by counsel that there are about 1,000 of these) follows suit, I conclude that we have now reached a stage in the proceedings where limited discovery of Manville must be permitted. It is a year and a half since Judge Lifland's original analysis of January 10, 1983. The bankruptcy judge himself characterized his action as "permitting this short breathing spell so as to remove the obstacle to a consensual plan of reorganization," 26 B.R. at 427. That "short breathing spell" has extended for over eighteen months; and, although I am advised that significant progress is being made, particularly in respect of Manville's relations with its liability underwriters, counsel could give me no assurance at oral argument that the end is in sight. In these circumstances, only three alternatives exist. Asbestosis plaintiffs must wait indefinitely for a resolution of their claims (and we deal here with employees in pain or their families in want); defendants such as Occidental must go to trial deprived of possible defenses; or there must be some loosening of the bonds which prevent such litigants from obtaining discovery from Manville.
Balancing the considerations as best I can, I opt for the last of these alternatives, and reverse Bankruptcy Judge Lifland's order insofar as it relates to Occidental. The rationale of this Court, it will be observed, is limited to cases where the plaintiffs were Manville employees, the case arises out of the functioning of a particular Manville plant, and the discovery sought therefore rests within the sole custody and control of Manville itself.
It is also a part of this Court's rationale that, even within these particular boundaries, discovery should be as limited as possible. What a defendant in Occidental's situation urgently needs for its defense should be made available to it; to the extent that the trial judge may minimize the distracting effect upon the Manville reorganization by circumscribing discovery in such cases, he or she is in the best position to do so. There is, for example, nothing to prevent Manville's counsel in a given case from arguing to a trial judge that the very considerations which troubled Bankruptcy Judge Lifland should be considered within the context of a protective order under Rule 26(c), F.R.Civ.P. The trial judge is generally in the best position to evaluate the needs of and appropriate limitations upon discovery. District Judge Stern cannot perform that function in the Bialy case because Bankruptcy Judge Lifland's order precludes all discovery from Manville. But Occidental has satisfied me that, in this case at least, the Bankruptcy Court's bar against discovery cannot stand.
I reach that conclusion because of the considerations previously expressed; and also because I am not persuaded that permitting limited discovery in this or comparable cases would bring about so disruptive an effect upon Manville's reorganization efforts as to condone the imposition of an injustice upon others. For that reason I conclude that Judge Lifland's sweeping bar of discovery in respect of Occidental must be reversed. If, under the supervision of the trial judge, such discovery is limited to those precise questions which Occidental needs to know about activities and conditions at the plant in question as they relate to the particular plaintiff, it is hard for me to envision those high-level individuals having the reorganization in charge being forced to abandon that project. To be sure, such discovery activities will cost Manville money; but as Judge Lifland himself recognized:
"Manville is currently a self-professed financially sound efficient enterprise with vast resources." 26 B.R. at 428.
And Judge Leval aptly observed:
"Manville is a giant corporation of vast resources. It can well afford the expense of furnishing fairly demanded disclosure without prejudice to either the interests of its creditors or the ability to reorganize." CCH Bankruptcy Law Reports, ¶ 69,862 at 85,085.
Nothing in the record before me points toward a different conclusion.
For the foregoing reasons, the appeal is allowed. The order of the Bankruptcy *933 Court is reversed to the extent specified in this opinion, and the case is remanded to the Bankruptcy Court for further proceedings consistent herewith.
It is SO ORDERED.
NOTES
[1] The quoted excerpts from Occidental's brief refer to the Bialy case and to a series of consolidated suits referred to by the plaintiff's name of Smith. According to information supplied by Occidental's Counsel, most of the Smith cases have been settled although one Smith case and Bialy remain for trial. The discovery requests stated in the text of Occidental's brief may therefore have narrowed. But that assumption is not essential to the conclusion I reach.
[2] I also reject Manville's alternative procedural suggestion that Occidental again apply to the Bankruptcy Court for relief. That would constitute an inappropriate abdication of this Court's appellate responsibility. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552148/ | 41 B.R. 868 (1983)
In re Floyd A. OSWALT and Shelia Beatrice Oswalt d/b/a Oswalt Construction Company, Debtors.
The FIRST NATIONAL BANK OF GREENVILLE, Plaintiff,
v.
Floyd A. OSWALT and Shelia Beatrice Oswalt, d/b/a Oswalt Construction Company, Defendants.
Bankruptcy No. S83-40042, Adv. No. 83-4238.
United States Bankruptcy Court, N.D. Mississippi.
December 6, 1983.
*869 James Milam, Campbell & Delong, Greenville, Miss., for First Nat. Bank of Greenville.
Robert D. Evans, Crawford & Evans, Greenville, Miss., for Floyd A. Oswalt, et al.
OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
CAME ON to be heard and was heard the amended complaint for determination of existence, extent and priority of secured status and security interests, filed by The First National Bank of Greenville, referred to herein as Plaintiff and/or Creditor; answer and affirmative defenses having been filed by Floyd A. Oswalt and Shelia Beatrice Oswalt, d/b/a Oswalt Construction Company, referred to herein as Defendants and/or Debtors; all parties being present in Open Court and represented by their respective attorneys of record; on proof in Open Court; and the Court having heard and considered same, finds as follows, to-wit:
FINDINGS OF FACT
I.
Pertinent to this case, the Debtors executed five (5) promissory notes in favor of the Creditor, each of which will be discussed hereinbelow:
A. The Debtors executed a promissory note, dated August 28, 1978, in the total sum of $55,503.60, including pre-calculated interest, payable in 120 monthly installments in the sum of $462.53, beginning October 1, 1978. This particular promissory note was secured by the residence of the Debtors located at 2760 Essex Place, Greenville, Mississippi, being also described as Lot 105 of the Country Club Estates Addition to the City of Greenville. The promissory note, disclosure statement, and deed of trust were introduced as Plaintiff's Exhibits 1 and 2 at the trial of this case.
On the first page of the deed of trust, there appears the following language: "WHEREAS, Debtor desires to secure prompt payment of (a) the indebtedness described above according to its terms and any renewals or extensions thereof, (b) any additional and future advances with interest thereon which Secured Party may make to Debtor as provided in Paragraph 1, (c) any other indebtedness which Debtor may now or hereafter owe to Secured Party as provided in Paragraph 2, (d) any advances with interest which Secured Party may make to protect the property herein conveyed as provided in Paragraphs 3, 4, 5, and 6, and (e) the full, prompt and timely performance by Debtor of each and every covenant, agreement or obligation undertaken by Debtor as hereinafter set forth (all being herein referred to as the "indebtedness")."
On page 2 of the deed of trust, there appears this additional language: "2. This Deed of Trust shall also secure any and all other indebtedness of Debtor due to Secured Party with interest thereon as specified, or of any one of the Debtors should there be more than one, whether direct or contingent, primary or secondary, sole, joint or several, now existing or hereafter arising at any time before cancellation of this Deed of Trust. Such indebtedness may be evidenced by note, open account, overdraft, endorsement, guaranty or otherwise."
The disclosure statement applicable to this particular indebtedness contains the following language: "NOTICE: The Security Agreement or Deed of Trust will secure Future or other indebtedness and will cover After-Acquired Property."
The interpretation of the two paragraphs appearing in the Deed of Trust and the single paragraph in the Disclosure Statement constitutes the crux of this lawsuit.
The Court notes that the parties stipulated that the Defendants have advised the Plaintiff that said Defendants will tender to the Plaintiff a sum of money pursuant to Section 89-1-59, Mississippi Code of 1972, as amended, although the exact amount of the proposal is disputed, in order to prohibit *870 the foreclosure of the collateral described in the aforementioned Deed of Trust.
The Court also notes that as to this particular indebtedness, as well as, the other four (4) indebtednesses owed by the Defendants to the Plaintiff, that the parties stipulated that all were in default at the time of the filing of the petition for relief, and continue to remain in default.
B. The Debtors executed a promissory note in favor of the Creditor, dated June 6, 1978, in the total sum of $15,858.00, including pre-calculated interest, payable in 120 monthly installments in the sum of $132.15, beginning on the 15th day of July, 1978. This promissory note was secured by rental property owned by the Debtors at 1282 Belfast, Greenville, Mississippi, being also described as Lot 4, Block 2 of the Pecan Park Addition to the City of Greenville. The promissory note, disclosure statement, and deed of trust were introduced as Plaintiff's Exhibits 4 and 5 at the trial of this case. The language in the deed of trust and the disclosure statement is identical to the language set out under Paragraph A. hereinabove. The Plaintiff foreclosed its security interest in the property described in this particular deed of trust, which will be more fully discussed in Paragraph C. hereinbelow.
C. The Debtors executed a promissory note in favor of the Creditor, dated December 9, 1981, in the total sum of $35,685.00, including pre-calculated interest, payable in 60 monthly installments in the sum of $594.75, beginning on February 1, 1982. This promissory note was secured by the identical collateral as that described in Paragraph B. hereinabove, being Lot 4, Block 2, Pecan Park Addition to the City of Greenville. The promissory note, disclosure statement, and deed of trust were introduced as Plaintiff's Exhibits 10 and 11 at the trial of this case. The language in the deed of trust is identical to that set out under Paragraph A. hereinabove, but the future advance or other indebtedness clause is omitted in the disclosure statement.
As set out hereinabove, the parties have stipulated that the Plaintiff foreclosed its security interest in the real property described as Lot 4, Block 2, Pecan Park Addition to the City of Greenville and credited the account of the Defendants with the proceeds of the foreclosure sale in the sum of $13,200.00. The parties further stipulated that by the application of the foreclosure sale proceeds, the Defendants' obligation set out in Paragraph B. hereinabove was discharged, and the balance of the proceeds were applied to the indebtedness discussed in this paragraph which was not fully discharged. The parties further stipulated that none of the three (3) deeds of trust have been satisfied or cancelled of public record; therefore, the balance of the indebtedness discussed in this paragraph constitutes a very material element of this litigation.
D. The Debtors executed a promissory note in favor of the Creditor, dated August 8, 1980, in the total sum of $8,955.72, which also included pre-calculated interest. This particular promissory note was secured by a 1972 International Truck which has been seized and foreclosed by the Plaintiff. The Plaintiff announced to the Court that it is not pursuing the alleged deficiency in this litigation resulting from the inadequacy of proceeds realized at the foreclosure sale. Consequently, there is no need to further discuss this particular indebtedness.
E. The Debtors executed a promissory note in favor of the Creditor, dated June 16, 1981, in the total sum of $14,238.72, including pre-calculated interest, payable in 48 monthly installments in the sum of $296.64, beginning on July 15, 1981. This promissory note was unsecured and along with the related disclosure statement was introduced as Plaintiff's Exhibit 13 at the trial of this case.
The Court notes that the parties have stipulated that the amount of the obligation owed pursuant to this particular promissory note to the Plaintiff is secured by the collateral described under Paragraph A. hereinabove, being Lot 105 of the Country Club Estates Addition to the City of Greenville. *871 Consequently, as to this indebtedness, the only question is to ascertain the precise amount owed.
II.
In view of the fact that there is no dispute that the indebtedness described in Paragraph IB. hereinabove, has not been paid in full, as well as, that the Plaintiff is not seeking to recover the foreclosure deficiency applicable to the indebtedness discussed in Paragraph ID. hereinabove, the first undertaking by this Court centers on the calculation of the outstanding balances related to the indebtednesses discussed in Paragraphs IA., IC., and IE. hereinabove. The Plaintiff elicited testimony and introduced into evidence the computer printouts applicable to the Debtors' accounts with the Plaintiff. In the absence of any evidence to contradict the testimony and documentary evidence, the Court hereby finds that the following amounts are owing by the Debtors to the Plaintiff, to-wit:
Balance from
Promissory Testimony and Demand from Amount
Note Exhibits Pleadings Allowed
_____________________________________________________________
A. $26,319.22 (Ex. 3 & 7) $26,319.22 $26,319.22
C. 18,732.52 (Ex. 12)
or
18,727.52 (Ex. 7) 18,727.52 18,727.52
E. 8,209.60 (Ex. 14)
or
8,184.60 (Ex. 7) 8,164.60 8,164.60
________
Total Amount Allowed $53,211.34
Each of these debts is calculated effective February 23, 1983, the date the petition in bankruptcy was filed, and the computations exclude collection costs or attorneys fees.
III.
That as to the Debtors' contention that the proceeds realized from the foreclosure sale of the Pecan Park Addition property, being $13,200.00, were totally inadequate and commercially unreasonable, the Court finds that the Plaintiff had the property appraised by a competent real estate appraiser prior to the foreclosure sale and purchased the property at the sale at the appraised valuation. There is no competent evidence before this Court to contradict the appraisal report offered into evidence by the Plaintiff; and because of such, the Court is compelled to accept the Plaintiff's appraisal as being completely fair. Therefore, the Court determines that the foreclosure sale was conducted in a commercially reasonable manner, and likewise, the credit of $13,200.00 to the Debtors' account will not be modified.
IV.
The Debtors offered testimony through Floyd A. Oswalt that he did not read nor comprehend the express written language set forth in any of the three deeds of trust. The Plaintiff timely objected to this testimony as being in violation of the parol evidence rule, and the Court reserved ruling on the objection during the course of the trial. The Court hereby finds that even if the Plaintiff's objections were overruled, the testimony, in and of itself, is insufficient to warrant a modification of the written language contained in the deeds of trust and the two disclosure statements. There is no evidence of probative value to indicate mutual mistake, fraud, or duress; so consequently, this case now boils down to the singular issue as to whether the future advances clause or "dragnet clause" in the August 28, 1978, deed of trust secures the remaining balance of the December 9, 1981, indebtedness, which initially was legally collateralized by totally different property. In other words, since the parties have stipulated that the balance of the indebtedness discussed in Paragraph IE. is secured by the collateral described in Paragraph IA., the Court now must determine whether the balance of the indebtedness described in Paragraph IC., is also secured by the collateral described in the deed of trust discussed in Paragraph IA.
CONCLUSIONS OF LAW
V.
Initially there appears to be a sharp contradiction in Mississippi law. Newton County Bank, Louin Branch Office v. Jones, 299 So. 2d 215 (Miss.1974), permitted a "dragnet clause", encumbering in one *872 deed of trust the homestead property of a husband and wife, to additionally secure a second indebtedness created solely by the husband which was also secured by entirely different property. To the apparent contrary, Amos v. Lance, 355 So. 2d 84 (Miss. 1978), held that an unliquidated deficiency resulting from a foreclosure sale conducted pursuant to one deed of trust was not secured by property encumbered by another deed of trust containing a "dragnet clause". In Amos, the debtor executed a deed of trust, encumbering certain real property in Desoto County, Mississippi; this instrument contained a clear and unambiguous "dragnet clause". Subsequently, the debtor became secondarily liable on a corporate indebtedness in the sum of $60,000.00, which was secured by real property in Panola County, Mississippi. A foreclosure sale was conducted on the Panola County property, securing the corporate indebtedness, with sale proceeds being realized in the sum of $15,000.00. The lender commenced foreclosure proceedings on the first deed of trust, encumbering the Desoto County property, on the theory that this property because of the "dragnet clause" secured the debtor's other indebtedness, on which he was secondarily liable. The Mississippi Supreme Court upheld the lower court decision enjoining this foreclosure, but spoke primarily to the issue that the foreclosure deficiency had not been reduced to a liquidated claim or judgment in a court of proper jurisdiction. There is no discernable comment as to what the decision might have been concerning the efficacy of the "dragnet clause" had the foreclosure deficiency been appropriately reduced to a liquidated sum. This factor distinguishes the Amos case from the case now before this Court inasmuch as the claims of the Plaintiff Bank against the Oswalts have now been defined and are set forth hereinabove as liquidated amounts.
Because the Amos case contained no citations whatsoever, and the singular thrust of the opinion dealt with the issue of an unliquidated foreclosure deficiency, this Court is of the opinion that Amos does not overrule Newton County Bank. This is also consistent with subsequent rulings of the Mississippi Supreme Court, as discussed more fully hereinbelow.
The Court confirmed that "dragnet clauses" are enforceable in this State in a decision styled Whiteway Finance Company, Inc. v. Green, 434 So. 2d 1351 (Miss.1983). This particular opinion specifically cited as authority Newton County Bank, as well as, Holland v. Bank of Lucedale, 204 So. 2d 875 (Miss.1967); Trapp for Use and Benefit, etc. v. Tidwell, 418 So. 2d 786 (Miss.1982); and Walters v. M & M Bank of Ellisville, 218 Miss. 777, 67 So. 2d 714 (1953).
A decision rendered by United States District Judge Harold Cox in the United States District Court, Southern District of Mississippi, Western Division, Civil Action No. W83-0026(C), dated March 4, 1983, styled In the Matter of: Michael Joseph Fields, Bankrupt: Michael Joseph Fields (Plaintiff) v. First National Bank (Defendant), unreported, but apparently affirmed by the Fifth Circuit, unequivocally holds that a "dragnet clause" is valid and enforceable in securing other debts owed by a bankrupt to a lending institution which had also required and obtained other security instruments when entering into both prior and subsequent loan transactions with the bankrupt. Coincidentally, this decision reversed the United States Bankruptcy Judge who had decided that two of the five obligations were not encompassed by the "dragnet clause".
Judge Cox, in his opinion, states as follows, to-wit:
"It is suggested that these debtors did not understand and that this Bank did not take the trouble to single out this "dragnet" clause and explain its harsh provisions to these debtors......
In the absence of any fraud, or overreaching of any kind by this Bank, these debtors made their covenant with this Bank for their money accommodations, and cannot contend under the facts and circumstances that they do not owe this Bank under the proper application of the *873 words and phrases employed in this printed "dragnet" provision in this deed of trust, although these debtors were not interested enough in this solemn business transaction to even read or try to understand anything in the instrument which they did not understand, and under the circumstances the "dragnet" clause in this deed of trust is perfectly legal and perfectly binding on these debtors, even though they did not read and now contend that they do not, even now on reflection, understand those harsh provisions of this "dragnet" clause. This Court has no power or authority to make any exceptions for any debtors who now seek to establish that this "dragnet" clause, and this deed of trust is so harsh and so unreasonable as to be against the common law of Mississippi. That contention simply is untenable, and this Court is thus impelled to discharge its duty by construing and applying this "dragnet" clause in this deed of trust exactly as provided therein......
The First Natchez Bank on July 8, 1982, took an appeal to this Court from the judgment of the Bankruptcy Judge made on July 2, 1983, wherein the two notes marked Exhibit "1" and Exhibit "2" were adjudged by the Bankruptcy Judge to be unsecured by this deed of trust, although they were heretofore made by these same debtors to this same Bank with no fraud involved. Under the circumstances this Court is constrained to disagree with the Bankruptcy Judge in that respect, and adjudges as a fact that both of these notes marked Exhibit "1" and Exhibit "2" were and are secured by this deed of trust to this Bank under this "dragnet" clause. Likewise, I agree with the Bankruptcy Judge that the other notes mentioned in his Opinion were and are secured by that deed of trust. Accordingly, the judgment of the bankruptcy court is reversed and this Court affirmatively adjudges as a matter of law on this record that both of those notes appearing as Exhibit "1" and Exhibit "2" are secured by this deed of trust to this Bank......"
For the reasons stated hereinabove, this Court hereby finds that the balance of the indebtedness described in Paragraph IC., hereinabove, is also secured by the collateral described in the deed of trust discussed in Paragraph IA., which also secures the indebtedness described in Paragraph IA., as well as, the indebtedness discussed in Paragraph IE.
VI.
In view of the fact that the real property described in Paragraph IA., hereinabove, is appraised at a value in excess of the total amount of the indebtednesses owed by the Debtors to the Plaintiff, the Plaintiff has demanded interest to be accrued on the indebtednesses from and after February 23, 1983, the date of the filing of the petition for relief in this cause. 11 U.S.C. Section 506(b) provides, inter alia, that to the extent that an allowed secured claim is secured by property the value of which is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided under the agreement under which such claim arose. Although there is no evidence before this Court to permit a decision concerning costs and/or attorney fees, this Code Section does permit the accrual of interest at the contract rate subsequent to the date of filing, not to exceed the valuation of the collateral, which in this case, the Court sets at $68,000.00, being the lesser amount contained in the Plaintiff's appraisal.
VII.
The Court notes that the parties hereto have previously agreed to a consent order granting relief from the automatic stay of provisions of 11 U.S.C. Section 362, and although the Debtors have been officially discharged, the consent order will be entered by the Court contemporaneously herewith. In addition, a separate order will be entered by the Court consistent with the findings of this Opinion. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552157/ | 41 B.R. 935 (1984)
In the Matter of DISANTO & MOORE ASSOCIATES, INC., Debtor.
Edward F. TOWERS, Trustee of the Chapter 7 Estate of Disanto & Moore Associates, Inc., Plaintiff and Appellee,
v.
Larry L. MOORE and Mary E. Moore, Defendants and Appellants.
Bankruptcy No. 3-83-00817 TLK, Civ. No. C-84-2791 SAW.
United States District Court, N.D. California.
August 3, 1984.
*936 Angell, Holmes & Lea, Barry D. Hovis, San Francisco, Cal., for defendants and appellants.
Merle C. Meyers, Goldberg, Stinnett & MacDonald, San Francisco, Cal., for plaintiff and appellee.
*937 MEMORANDUM AND ORDER OF REMAND
WEIGEL, District Judge.
This is an appeal pursuant to 28 U.S.C. § 1334(a) from a summary judgment rendered by the bankruptcy court in favor of plaintiff Edward F. Towers, trustee for the Chapter 7 estate of DiSanto & Moore Associates, Inc. ("DiSanto & Moore"). The court granted the trustee's prayer for a determination that appellants, Larry L. Moore and Mary E. Moore ("the Moores"), are not entitled to assert any security interest in assets of the debtor.
BACKGROUND
On January 15, 1982, DiSanto & Moore entered into a written agreement with Wells Fargo Bank, N.A. ("Wells Fargo") whereby Wells Fargo made available to DiSanto & Moore an open line of credit in the amount of $50,000. By this agreement, DiSanto & Moore granted to Wells Fargo a security interest in all of DiSanto & Moore's accounts receivable, contract rights, instruments and general intangibles to secure repayment of all amounts borrowed pursuant to the line of credit. Wells Fargo properly perfected this security interest on January 18, 1982. DiSanto & Moore's obligations under the agreement were also personally guaranteed by the Moores, who are the parents of Gerald Moore, a 33 1/3% stockholder in DiSanto & Moore.
DiSanto & Moore failed to make timely repayments of amounts borrowed as required by the January 15 agreement, and Wells Fargo began to press the corporation for payment. DiSanto & Moore asked the Moores for a loan of funds sufficient to enable the corporation to satisfy its outstanding obligations under the January 15 agreement. Following abortive attempts to reach a security agreement, the Moores on May 12, 1982 executed a check payable to DiSanto & Moore for $48,248.55, the exact balance then owing to Wells Fargo under the January 15, 1982 agreement.[1] Neither party disputes the facts (1) that these funds were given for the express purpose of extinguishing the corporation's entire obligation under the January 15 agreement and (2) that the funds were so used.
To procure the funds so conveyed to DiSanto & Moore, the Moores borrowed from Wells Fargo $48,248.55 pursuant to a loan agreement secured by a deed of trust covering a house owned by the Moores. DiSanto & Moore agreed to make all payments due from the Moores in connection with this loan agreement. This obligation undertaken by DiSanto & Moore was not secured.
In January, 1983, DiSanto & Moore fell into arrears on the payments due to be made to Wells Fargo on behalf of the Moores. On January 11, 1983, Wells Fargo at the request of the Moores executed a written assignment to the Moores of "all of its right, title and interest in and under" the January 15, 1982 security agreement. Notice of this assignment was duly filed. The Moores subsequently foreclosed upon the security interest purportedly obtained by virtue of this assignment, and collected DiSanto & Moore accounts receivable totaling $9,187.24.
On April 15, 1983, DiSanto & Moore filed a voluntary petition for relief pursuant to Chapter 7 of the United States Bankruptcy Code. Edward F. Towers as trustee for the debtor then commenced this action, seeking a declaration that the Moores do not hold any valid security interest in DiSanto & Moore assets, and a judgment requiring the Moores to return to the estate all amounts realized as a result of their assertion of such a security interest.
The Moores, in response, contended that their asserted security interest should be upheld on one of two alternative theories. First, they argued, the January 11, 1983 assignment by Wells Fargo transferred to them an enforceable security interest in DiSanto & Moore accounts and other assets. Second, they contended that they are *938 entitled under principles of equity to be subrogated to the rights of Wells Fargo secured under the January 15, 1982 agreement. The bankruptcy court rejected both of these contentions and entered summary judgment for the trustee. The Moores now appeal.
ANALYSIS
1. Assignment of the Security Interest.
While a security interest may under appropriate circumstances pass by assignment, see Cal.Comm. Code § 9406(1); Johnson v. Mortgage Guaranty Co., 117 Cal. App. 416, 422, 4 P.2d 208 (1931), a security interest has no existence independent of the obligation whose payment or performance it secures. See Cal.Comm. Code § 1201(37); In re Belize Airways Ltd., 7 B.R. 604, 607 (Bankr.S.D.Fla.1980); Van Diest Supply Co. v. Adrian State Bank, 305 N.W.2d 342, 31 U.C.C.Rep.Serv. (Callaghan) 420, 426 (Minn.1981). Wells Fargo's security interest ceased to be effective on May 12, 1982, upon satisfaction of the entire debt owed by DiSanto & Moore. See In re Sanelco, 7 U.C.C.Rep. Serv. (Callaghan) 65, 70 (M.D.Fla.1969). The security interest could not later be transferred to secure a separate obligation owed by the debtor to another creditor such as the Moores. See Belize Airways, 7 B.R. at 606-07; Van Diest, 31 U.C.C.Rep. at 426; Sanelco, 7 U.C.C.Rep. at 70. The bankruptcy court was therefore correct in its conclusion that the Moores do not in their own right hold any valid security interest in DiSanto & Moore assets.[2]
2. Equitable Subrogation.
The Moores contend, however, that they were also entitled to secured status because they are subrogated to the position of Wells Fargo, a secured creditor whose claim they extinguished by advancing funds to DiSanto & Moore.
Under California law, one who claims to be equitably subrogated to the rights of a secured creditor must satisfy five criteria. These are: (1) the subrogee must have made a payment to protect his own interest; (2) the subrogee must not have acted as a volunteer; (3) the payment must be used to satisfy a debt for which the subrogee was not primarily liable; (4) the entire debt must have been paid; and (5) subrogation must not work any injustice to the rights of others.[3]Caito v. United California Bank, 20 Cal. 3d 694, 704, 576 P.2d 466, 471, 144 Cal. Rptr. 751, 756 (1978); Grant v. De Otte, 122 Cal. App. 2d 724, 728, 265 P.2d 952, 955 (1954). Stated another way, the doctrine of equitable subrogation "is broad enough to include every instance in which one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter." Caito, 20 Cal.3d at 704, 576 P.2d at 471, 144 Cal. Rptr. at 756; Estate of Kemmerrer, 114 Cal. App. 2d 810, 814, 251 P.2d 345, 347 (1952).
The bankruptcy court advanced four reasons for refusing the Moores' claim to subrogation. These reasons were: (1) the Moores made the payment used to satisfy Wells Fargo as "volunteers" and not as persons acting to protect their own interests; (2) subrogation might potentially work an injustice to the rights of other creditors; (3) the Moores waived any right to subrogation by seeking to obtain a security *939 interest by assignment; and (4) the claim to subrogation is barred in bankruptcy by 11 U.S.C. § 509(b). None of these reasons withstands close scrutiny.
The bankruptcy court concluded that the Moores acted as "volunteers" principally on the basis of deposition testimony given by Larry Moore. In the deposition, Moore recalled that
In May of 1982, the bank was pressing DiSanto & Moorefor harder collateral than they had under theI guess the Security Agreement and, one way of keeping the business going and viable was to give the bank a Second Deed of Trust on my house, so I obtained a Second Deed of Trust and turned the funds over to DiSanto & Moore, who in turn paid the funds to the bank.
From this testimony, the court found that even though the Moores were liable as sureties on the January 15, 1982 agreement, their "primary motive" in providing funds to satisfy the outstanding obligation under the agreement was to assist the corporation in which their son was one-third owner. As a consequence, the court reasoned, the Moores must be classified as "mere volunteers" not entitled to subrogation.
The court's analysis misconceives the nature of the requirement that a subrogee must have made a payment to protect his own interest and not as a volunteer. This rule applies to preclude subrogation where the putative subrogee, in satisfying a creditor's claim, pays a debt for which neither he nor his property is answerable and which he is under no obligation to pay. Grant v. De Otte, 122 Cal.App.2d at 729, 265 P.2d at 955; see Guy v. Du Uprey, 16 Cal. 196, 198 (1860); Schlitz v. Thomas, 61 Cal. App. 635, 638, 216 P. 51 (1923). In this case, the Moores did not stand in such a posture, because as guarantors of DiSanto & Moore's obligation under the January 15, 1982 agreement they were ultimately answerable for payment of the outstanding debt. As a matter of law, the payment by the Moores of this outstanding debt was made to "protect" their obligation as surety. See, e.g., Estate of Kemmerrer, 114 Cal.App.2d at 812-13, 251 P.2d at 347 (payment of funeral expenses and expenses of last illness not "voluntary", even if expenses incurred from humanitarian motives, if persons paying expenses would have been entitled to share in an estate chargeable with payment of such expenses).
The bankruptcy court also concluded that subrogation should be denied because it might lead to injustice for other creditors of the estate. The court observed that some of these creditors may have extended credit to DiSanto & Moore after May 12, 1982 while under the impression that DiSanto & Moore assets were not encumbered by any outstanding security interest. The court reasoned that although these creditors would have received notice of a potential security interest held by Wells Fargo had they checked the applicable state file, they might also have learned from Wells Fargo that there were then no debts outstanding secured by the collateral described in the financing statement. Because such creditors might not have extended credit to DiSanto & Moore had they known of the Moores' right to subrogation, the court further reasoned, it would risk injustice to allow such subrogation.
The bankruptcy court erred in granting summary judgment against the Moores on their claim to subrogation on this basis, without making any inquiry concerning whether there were any creditors actually prejudiced by subrogation in the manner hypothesized. The record does not show whether any creditors extended credit during the "gap" between May 12, 1982, when Wells Fargo's claim was extinguished, and April 15, 1983, when DiSanto & Moore filed for bankruptcy. Moreover, the financing statement filed by Wells Fargo on January 18, 1982 would have accorded the bank a security interest with priority superior to that of any "gap" creditor with respect to amounts advanced by Wells Fargo to DiSanto & Moore even after May 12, 1982. See Cal.Comm. Code § 9312(5), (7); id. Uniform Comm. Code Comment (examples *940 1, 4, 5 & comment 7). Subrogation of the Moores to the secured position of Wells Fargo does not work any injustice to these creditors in the absence of some further justifiable expectation on the part of the creditors. Cf. French Lumber Co. v. Commercial Realty & Finance Co., 346 Mass. 716, 195 N.E.2d 507, 509 (subrogation did not work injustice to rights of creditor known to be subordinate to creditor to whose rights subrogee was to succeed).
Such a justifiable expectation might, for example, have arisen from an agreement by DiSanto & Moore to refrain from further borrowing from Wells Fargo. The record does not conclusively show the presence or absence of creditors whose justifiable expectations would be prejudiced by subrogation. Thus the summary judgment for the trustee cannot be sustained on this basis. Even if it should be determined on remand that some but not all creditors are prejudiced by subrogation, however, subrogation should not be denied entirely. Rather, the Moores should be permitted to exercise Wells Fargo's security interest as to any assets remaining after "prejudiced" creditors have been paid the pro rata share of the bankrupt estate they would have received in the absence of subrogation.
The bankruptcy court based its conclusion that the Moores waived any right to subrogation on the case of Jack v. Wong Shee, 33 Cal. App. 2d 402, 92 P.2d 449 (1939). The court there ruled that when a party seeking subrogation has previously asserted an inconsistent legal theory, and thereby deprived other creditors of an opportunity to take steps necessary to protect their interest in the event of subrogation, the party may be said to have waived any right of subrogation it might have had. Id. at 412, 92 P.2d 449. The holding in Jack is thus a subset application of the rule that subrogation will be denied where it will work injustice to creditors. The record in this case does not conclusively show that any creditor suffered prejudice as a result of the failure of the Moores to more promptly assert a right of subrogation. Consequently the entry of summary judgment against the Moores may not be sustained on the basis of their attempt to obtain an assignment of Wells Fargo's security interest.
The final ground cited by the bankruptcy court for denying subrogation was 11 U.S.C. § 509(b), which provides that an "entity is not subrogated to the rights [of a creditor it has paid as surety] to the extent that . . . a claim of such entity for reimbursement or contribution on account of a payment of such creditor's claim is allowed under section 502(a)(1)." This statutory provision does not bar the Moores' claim to subrogation. As the legislative statements accompanying the Bankruptcy Act of 1978 reveal, this section, in combination with 11 U.S.C. §§ 502(e) and 509(a), is intended to allow a surety or codebtor who pays a creditor's claim in full to elect between subrogation to the creditor's position and a direct claim for reimbursement against the estate. See 124 Cong.Rec. S 17406 (Oct. 6, 1978), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 6505, 6518. The Bankruptcy Act thus does not preclude, but in fact acknowledges, the Moores' state law right to subrogation.
CONCLUSION
The judgment of the bankruptcy court is reversed and the case is remanded for the purpose of further proceedings necessary to ascertain the extent, if any, to which other creditors of the estate would suffer prejudice as above defined if the Moores are subrogated to the rights of Wells Fargo. All such creditors shall participate in the estate to the same extent that they would participate if subrogation were not allowed. After provision is made for payment of these creditors, if any, the Moores shall be subrogated to the rights of Wells Fargo to treat DiSanto & Moore assets as security as provided in the agreement of January 15, 1982.
REVERSED and REMANDED.
NOTES
[1] Apparently by mistake, this instrument was dated "5/12/81."
[2] The Moores are correct in arguing that if a security interest passed to them under the January 11, 1983 assignment, that interest would have been perfected by Wells Fargo's prior filing and the notice of assignment. The trouble with the argument as to the facts here before the Court is that no security interest passed to the Moores under the January 11 assignment.
[3] It is not a prerequisite for subrogation that the payment be made directly to the creditor whose claim was extinguished. Rather, it has been deemed sufficient that funds were advanced to the debtor for the purpose of satisfying the creditor's claim, and that the claim was in fact satisfied in its entirety. See, e.g., Simon Newman Co. v. Fink, 206 Cal. 143, 144, 273 P. 565 (1928); French Lumber Co. v. Commercial Realty & Finance Co., 346 Mass. 716, 195 N.E.2d 507, 509 (1964). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552244/ | 41 B.R. 1018 (1984)
In re TINNELL TRAFFIC SERVICES, INC., Debtor.
T. Larry EDMONDSON, Trustee, Plaintiff,
v.
BRADFORD-WHITE CORPORATION, Defendant.
Bankruptcy No. 380-00716, Adv. No. 382-0165.
United States Bankruptcy Court, M.D. Tennessee.
August 7, 1984.
*1019 T. Larry Edmondson, Nashville, Tenn., Trustee.
Brent S. Gorey, Robert A. Kargen, Philadelphia, Pa., George E. Barrett, Nashville, Tenn., for defendant.
MEMORANDUM
GEORGE C. PAINE, II, Bankruptcy Judge.
The trustee has moved for summary judgment, asserting that the defendant, Bradford-White Corporation, has received preferential transfers from the debtor, Tinnell Traffic Services, Inc., in the amount of $53,114.83. The defendant has filed a cross-motion for summary judgment asserting that the funds it received from the debtor were not property of the debtor but were property of the defendant held by the debtor in constructive trust. Upon consideration of the evidence presented, stipulations, *1020 briefs of the parties, applicable authority and the entire record, this court concludes that the trustee's motion for summary judgment should be GRANTED and that the defendant's cross-motion for summary judgment should be DENIED.
The following shall represent findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
On February 1, 1978, the debtor and the defendant entered into a contract. The debtor agreed to audit and pay all freight bills it received on behalf of the defendant in return for commission payments. The defendant agreed to reimburse the debtor each week for payments made on its behalf. Pursuant to the contract, the debtor forwarded to the defendant on a weekly basis a list of all freight bills paid for the defendant and all checks drawn to pay those bills. Upon receipt of the list, the defendant would reimburse the debtor by transferring funds to one of the debtor's bank accounts.
On February 22, 1980, the debtor knowingly sent a false freight bill list and invoice list to the defendant. The list and invoice showed that the defendant owed the debtor $53,114.83 for the payment of freight bills when in fact these bills had never been paid. The defendant, unaware that the list and invoice were false, transferred $53,114.83 to a bank account of the debtor at the United American Bank in Nashville, Tennessee.
On February 28, 1980, the debtor advised the defendant that the freight bill list and invoice were false and that the debtor was returning the defendant's money. On March 3, 1980, the defendant received a check drawn by the debtor in the amount of $53,114.83. The debtor's check was drawn on the same account in which the defendant had transferred money to the debtor several days earlier and was honored by United American Bank on March 4, 1980.[1]
I.
The court recognizes that in order for summary judgment to be granted, it must determine upon consideration of the entire record that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. McAllester v. Aldridge (In re Anderson), 30 B.R. 995, 1000 (M.D.Tenn.1983). In the case at bar, the court has determined that no material facts are disputed.
In order to establish the existence of a preferential transfer pursuant to 11 U.S.C. § 547(b) (West 1979), the trustee must establish the threshold element that the property transferred belonged to the debtor. Waldschmidt v. Ranier (In re Fulghum Construction Company), 7 B.R. 629, 631 (Bankr.M.D.Tenn.1980), aff'd., 14 B.R. 293 (M.D.Tenn.1981), aff'd. in part and rev'd. in part, 706 F.2d 171 (6th Cir. 1983). See also Loeb v. G.A. Gertmenian & Sons (In re A.J. Nichols, Ltd.), 21 B.R. 612, 615 (Bankr.N.D.Ga.1982); Huddleston v. Chesnut (In re Rector), 14 B.R. 1008, 1010 (Bankr.E.D.Tenn.1981). Young v. Nadelson Displays, Inc. (In re Lucasa International, Ltd.), 14 B.R. 980, 982 (Bankr. S.D.N.Y.1981); 4 COLLIER ON BANKRUPTCY § 547.08 at 547-10 (15th ed. 1983). To determine the debtor's rights in specific property, the court must look to state law. Bojalad & Company v. Holiday Meat Packing, Inc., 30 B.R. 737, 741 (Bankr.W.D.Pa.1983); Albion Production Credit Association v. Langley, 30 B.R. 595, 598 (Bankr.N.D.Ind.1983); Central Trust Company v. Shepard, 29 B.R. 928, 931 (Bankr.M.D.Fla.1983); Turner v. Burton, 29 B.R. 628, 630 (Bankr.D.Me.1983).
In the present case, the defendant alleges that it did not receive property of the debtor's, but merely received a return of its own property. Since the debtor originally acquired the defendant's property by fraud, the defendant argues that the property *1021 was held by the debtor as a trustee under a constructive trust. Upon an examination of the law of constructive trust in Tennessee, this court is of the opinion that the property transferred was owned by the debtor and was not impressed with a constructive trust.
Under Tennessee law, a constructive trust is a "judge-created trust(s) . . . which enable(s) a court, without violating all rules of logic, to reach an interest in property belonging to one person yet titled in and held by another." Wells v. Wells, 556 S.W.2d 769, 771 (Tenn.Ct.App.1977). While Tennessee courts have recognized that constructive trusts may be impressed on property which a party obtained by fraud, the courts have held that constructive trusts are equitable remedies imposed by the court within the court's discretion. McAllester v. Aldridge (In re Anderson), 30 B.R. 995, 1014 (M.D.Tenn.1983); Akers v. Gillentine, 191 Tenn. 35, 231 S.W.2d 369, 371 (1948); Browder v. Hite, 602 S.W.2d 489, 492-493 (Tenn.Ct.App.1980); State v. Holland, 51 Tenn.App. 344, 367 S.W.2d 791, 795 (1962); Fehn v. Schlickling, 26 Tenn.App. 608, 175 S.W.2d 37, 40 (1943); H. GIBSON, SUITS IN CHANCERY § 383 (6th ed. 1982). Since constructive trusts are judge-created equitable remedies, the trust does not come into existence until imposed by a court of equity. Memphis Memorial Park v. McCann, 133 F. Supp. 293, 298-299 (M.D.Tenn.1955); G. BOGERT, THE LAW OF TRUST AND TRUSTEES § 471 (1978).
In this case, it is clear that a constructive trust did not exist at the time the debtor transferred the funds to the defendant. Without a judicial decree imposing a constructive trust on the property in question, this court must hold that the property transferred from the debtor to the defendant was indeed property of the debtor.
II.
Although this court is convinced that the threshold element of § 547(b) has been met, it is appropriate to consider whether this court should at this time impose a constructive trust on the funds in question and allow the defendant to retain the funds. McAllester v. Aldridge (In re Anderson), 30 B.R. 995, 1013 (M.D.Tenn.1983). Upon an analysis of § 547(d) of the Bankruptcy Code and the interests of the parties to this litigation, this court is convinced that a constructive trust should not be imposed.[2]
The trustee has the right under § 547(b) of the Bankruptcy Code to avoid the preferential transfers for the benefit of all unsecured creditors.
The policy underlying § 547(b) is to "facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor" and to discourage creditors from "racing to the courthouse to dismember the debtor during his slide into bankruptcy." H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 177-178 (1977) U.S.Code Cong. & Admin.News 1978, 5787, 6138. Cohen v. Kern (In re Kennesaw Mint, Inc.), 32 B.R. 799, 805 (Bankr.N.D.Ga.1983). See also Ray v. Security Mutual Finance Corporation (In re Arnett), 13 B.R. 267, 269-270 (Bankr.E.D.Tenn.1981) rev'd. on other grounds, 731 F.2d 358 (6th Cir.1984).
In the case at bar, the debtor engaged in a fraudulent scheme in which approximately 10 to 15 creditors were induced to pay the debtor on the basis of false freight bills and invoices. These defrauded customers are unsecured creditors of this bankruptcy estate. To allow the *1022 defendant in this case to receive funds paid to the debtor under a constructive trust theory would be detrimental to these unsecured creditors. This court can find no reason to treat the defendant any differently from all the other defrauded creditors in this estate and will not impose a constructive trust for the defendant's benefit.[3]
III.
Since the trustee has established that the funds in question were property of the debtor, the court must determine whether the trustee has carried his burden with respect to the five essential elements of a § 547(b) preference. Waldschmidt v. Ford Motor Credit Company (In re Murray), 27 B.R. 445, 447 (Bankr.M.D.Tenn. 1983); Eggleston v. Third National Bank, 19 B.R. 280, 281-82 (Bankr.M.D.Tenn. 1982). See also Steel Structures, Inc. v. Star Manufacturing Company, 466 F.2d 207, 217 (6th Cir.1972).[4] In the case at bar, the court must also consider whether the defendant is entitled to retain the funds in question under either the contemporaneous exchange exception pursuant to 11 U.S.C. § 547(c)(1) or under the business debt exception pursuant to 11 U.S.C. § 547(c)(2). Either of these theories require the defendant to bear the burden of proof in establishing the elements of a § 547(c) exception. Waldschmidt v. Miracle Motors (In re Haynes), 28 B.R. 136 (Bankr.M.D.Tenn. 1983).
Based on the stipulations and the pleadings of the parties, it is clear that the five essential elements of § 547(b) have been established. First, this court has determined that the debtor did not hold the funds in question in a constructive trust; therefore, the defendant did not receive the funds as a trust beneficiary but as a creditor. Second, the parties have stipulated that the defendant received the funds in question as a repayment of funds previously forwarded to the debtor. Third, the transfer took place within 90 days of the date of the filing of the bankruptcy petition. Fourth, the debtor is presumed to have been insolvent pursuant to 11 U.S.C. § 547(f) (West 1979).[5]Middle Tennessee Marine, Inc. v. I.T.T. Diversified Credit Corp., No. 380-02844, Adv.Proc. No. 380-0650 (Bankr.M.D.Tenn., May 1, 1981); McLemore v. Carson, Ltd. (In re Sealy), 34 B.R. 947, 952 n. 5 (Bankr.M.D.Tenn. 1983); Cohen v. Kern (In re Kennesaw Mint, Inc.), 32 B.R. 799, 803 (Bankr.N.D. Ga.1983). Fifth, the defendant, an unsecured creditor, received 100% payment of its debt as a result of the transfer in question. Had this transfer not occurred, the defendant would have received significantly less on its unsecured claim under this Chapter 7 liquidation.
IV.
The defendant argues that the transfer is excepted from avoidance pursuant *1023 to 11 U.S.C. § 547(c)(1) (West 1979).[6] In order to establish a § 547(c)(1) exception, the defendant must prove not only that a substantially contemporaneous exchange for new value occurred but also that the debtor and creditor intended the transaction to be a contemporaneous exchange for new value. Ray v. Security Mutual Finance Corporation (In re Arnett), 731 F.2d 358 (6th Cir.1984); Ray v. Gulf Oil Products (In re Blanton Smith Corporation), 37 B.R. 303, 307 n. 6 (Bankr. M.D.Tenn.1984); Eckles v. Pan American Marketing (In re Balducci Oil Company, Inc.), 33 B.R. 843, 846 (Bankr.D.Colo.1983); Ford Motor Credit Company v. Ken Gardner Ford Sales, Inc., 23 B.R. 743, 746-747 (E.D.Tenn.1982);
Based on the stipulations submitted by the parties, the court is convinced that no basis exists for a § 547(c)(1) defense. Based upon fraudulent invoices, the defendant transferred to the debtor $53,114.83. Four days later, the debtor admitted that it had deceived the defendant and accordingly, paid the defendant $53,114.83. The transaction in question was clearly a situation in which the debtor had a change of heart and paid the defendant for funds it had wrongfully obtained. A contemporaneous exchange for new value was not intended by the parties and indeed, never occurred.
Finally, the defendant contends that it is entitled to the funds in question pursuant to 11 U.S.C. § 547(c)(2) (West 1979).[7] In order to establish a § 547(c)(2) exception, one of the key elements a defendant must establish is that the debt was incurred and payment was received within the ordinary course of business. In each case, the court must determine which transactions are within the scope of the debtor's normal business activity. Cohen v. Kern (In re Kennesaw Mint, Inc.), 32 B.R. 799, 804-805 (Bankr.N.D.Ga.1983); Ford Motor Credit Company v. Ken Gardner Ford Sales, Inc., 23 B.R. 743, 747 (E.D.Tenn.1982); Weill v. Southern Credit Union (In re Bowen), 3 B.R. 617 (Bankr.E. D.Tenn.1980).
In the present case, the transfer in question is far from the ordinary business transaction contemplated by § 547(c)(2). When the debtor admitted to the defendant that it had received payments based on false invoices, the debtor was in effect notifying the defendant that it had departed from normal business procedures. To allow an exception under § 547(c)(2) in this case would be to sanction an activity by the debtor which appears to be ultra vires.
The court will accordingly enter an order GRANTING summary judgment to the trustee and requiring the defendant to turnover to the trustee preferential transfers in the amount of $53,114.83.
IT IS, THEREFORE, SO ORDERED.
NOTES
[1] From the time the funds in question were credited to the debtor's account until the time when the funds were withdrawn from the debtor's account, the account never fell below $53,114.83.
[2] This court has in the past reserved the use of the remedy of imposing a constructive trust for cases in which extreme injustices would result. In the Anderson case, the court imposed a constructive trust to avoid the gross inequity of depriving a party of its title to land due to a technical defect in the party's deed. See also County-Uptown Motel, Inc. v. PLM/Hotel-Motel Division, Inc., 35 B.R. 499 (Bankr.E.D.Tenn. 1983); First National Bank of Boston v. Computer Input Services, Inc., 33 B.R. 292 (Bankr. E.D. Pa.1983); Central Trust Company v. Shepard, 29 B.R. 928 (Bankr.M.D.Fla.1983); Travelers Insurance Company v. Angus, 9 B.R. 769 (Bankr.D.Or. 1981).
[3] The court recognizes that the Bankruptcy Code has made provisions for defrauded creditors by allowing them to except their debts from discharge. Although this remedy may not be totally satisfactory when a creditor is defrauded by a corporate debtor, the court notes that defrauded creditors may be able to impose liability on the officers of a corporation if the creditors can establish that the officers were aware of the fraud.
[4] 11 U.S.C. § 547(b) (West 1979) provides in relevant part:
"(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of property of the debtor
(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
. . . . .
(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."
[5] 11 U.S.C. § 547(f) (West 1979) states:
"(f) For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition."
[6] 11 U.S.C. § 547(c)(1) (West 1979) provides in relevant part:
"(c) The trustee may not avoid under this section a transfer
(1) to the extent that such transfer was
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange;. . . . "
[7] 11 U.S.C. § 547(c)(2) (West 1979) provides:
"(c) The trustee may not avoid under this section a transfer
. . . . .
(2) to the extent that such transfer was
(A) in payment of a debt incurred in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made not later than 45 days after such debt was incurred;
(C) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(D) made according to ordinary business terms;. . . . " | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552292/ | 41 B.R. 282 (1984)
In the Matter of Gilles I. MADORE, Debtor.
WRIGHT-PATT CREDIT UNION, Plaintiff,
v.
Gilles I. MADORE, Defendant.
Bankruptcy No. 3-82-00819, Adv. No. 3-82-0335.
United States Bankruptcy Court, S.D. Ohio, W.D.
July 3, 1984.
James K. Hoefling, Dayton, Ohio, for defendant, Gilles I. Madore.
Martin Scharff, Dayton, Ohio, for plaintiff, Wright-Patt Credit Union.
DECISION
ELLIS W. KERR, Bankruptcy Judge.
FACTS
Facts can be no better stated than the Joint Stipulations. Therefore, a copy is attached as follows and incorporated herein.
LEGAL ISSUES
Are set out with Stipulations and Facts and incorporated herein be reference.
1. Defendant, Gilles I. Madore, purchased a 1979 Chevrolet Monza in Canada about November 5, 1979.
2. Defendant executed a promissory note to the Royal Bank of Canada November 5, 1979 in the amount of $5000.00 with interest @ 15¾%.
3. Defendant executed a security agreement to the Royal Bank of Canada November 5, 1979 in the amount of $5000.00 which agreement described said 1979 Chevrolet Monza.
4. Defendant obtained Ontario, Canada auto title to said Chevrolet Monza January 26, 1979 being # OCY-695 on which no mortgage or security was noted.
5. Defendant presented said Ontario title to the Clerk of Courts of Franklin County, Ohio, March 11, 1981 and obtained Ohio Certificate of Title No. XXXXXXXXX. Said Ohio Title indicated on its face that there was no lien, mortgage or encumbrance.
6. Said Ohio Certificate of Title bears a notation of a first lien to Wright-Patt Credit Union Inc. of Fairborn, Ohio on October 6, 1981.
7. Said vehicle was taken by person or persons unknown to defendant and without his permission or knowledge from the premises where defendant resided in March 1982.
8. Defendant filed his petition in Bankruptcy March 23, 1982 under Case No. 3-82-00819 in which he listed in Schedule *283 A-2 the Royal Bank of Canada and Wright-Patt Credit Union.
9. Defendant secured a co-signer on his note to Wright-Patt Credit Union.
10. That Plaintiff lent to the Defendant the sum of $3000.00 plus interest at the rate of 1.1667 percent per annum on the unpaid balance; that Defendant gave to Plaintiff a mortgage on said Chevrolet.
11. That there remains due and owing Plaintiff the sum of $2,718.40 plus interest at the rate of 1.1667 percent per month on the unpaid balance since March 12, 1982.
LEGAL ISSUES
1. What effect does the Ohio Certificate of Title Law, O.R.C. 4505.01-4505.99 have upon the respective rights of Royal Bank of Canada and Wright-Patt Union?
2. Does the Ohio Certificate of Title Law grant to Wright-Patt Credit Union a prior right of possession in the event defendant fails to pay his promissory note by virtue of the fact that the Wright-Patt Mortgage was the only one recorded on the face of defendant's Ohio Certificate of Title?
3. Can Defendant be guilty of fraud in presenting his clear Ohio Title to plaintiff, at its request, in order to record thereon its mortgage lien under the provisions of Section 523(a)(2)(A), 11 U.S.C.
4. If defendant failed to inform plaintiff of his indebtness to the Royal Bank of Canada and if he failed to disclose that there was a previous valid and subsisting security agreement and note on said vehicle when he presented plaintiff with the Ohio Title and applied for a loan, does that amount to fraud on the part of the defendant within the scope of Sections 523(a)(2)(A) and (B), which makes plaintiff's debt non-dischargeable?
CASES CITED
The incurring of a mere debt must be distinguished from a debt incurred to secure property for which security is given.
Cases cited by both parties have been examined. Most have fact situations entirely different from those in the case under consideration.
There was no reference to the creditor taking any security interest in the following cases: In re West, 21 B.R. 872 (Bankruptcy M.D.Tenn.1982); In re McVan, 21 B.R. 632 (Bankruptcy E.D.Pa.1982); In re Wetmore, 8 B.R. 629 (Bankruptcy M.D.Fla. 1981); In re Rauch, 18 B.R. 97 (Bankruptcy W.D.Mo.1982); In re Quintana, 4 B.R. 508, 2 C.B.C.2d 293 (Bankruptcy S.D.Fla. 1980); In re Garman, 643 F.2d 1252 (7th Cir.1980).
Security was involved in the following cases: In re Tashman, 21 B.R. 738 (Bankruptcy Vt.1982)security is office equipment and Volvo; In re Valley, 21 B.R. 674 (Bankruptcy Mass.1982)security is truck-tractor; In re Miller, 5 B.R. 424, 2 C.B.C.2d 849 (Bankruptcy W.D.La.1980)involves materialman's lien; In re Coughlin, 27 B.R. 632 (1st Cir. Bankruptcy App.Panel 1983)security was an airplane.
The Tashman case cited by defendant, 21 B.R. 738 has facts not even similar to those in the instant case. In that case real estate, office equipment, and a Volvo were involved. Of major importance were discrepancies between Schedules and pro forma statements, release of real estate, renewal of two previous notes and the listing by the C.P.A. debtor of $160,000.00 as the value of his practice. Further the court decision was based on the failure of the plaintiff to sustain the burden of proof.
Defendant also cites the Valley case 21 B.R. 674. Here again the facts were not even similar to those in the instant case. In that case security was a truck-tractor and a log skidder. There was a question as to debtor being in partnership with one Ladd. Testimony indicated that at the suggestion of the plaintiff bank's loan officer the loan documents were drafted to reflect a partnership loan. The bank alleged "partner" Ladd represented the skidder was unencumbered. It was not. The bank claimed Ladd's misrepresentations were attributable to the debtor because they were *284 partners. The court found the bank failed to establish all elements necessary to find non-dischargeability as to this and other matters. That case included nothing about whether there was a lien noted on a certificate of title as to a vehicle. The only vehicle was a truck. The court found debtor had no idea as to where the truck was. Nothing in that case supports the position of the defendant in the instant case.
It is the application of the law to the facts of each case in the many decisions of various courts that has resulted in so many seemingly conflicting decisions. What is required for determining non-dischargeability of debts incurred by fraud or false representation is definitely stated by Section 523(a)(2)(A) and (B) of the Bankruptcy Code. It is the facts of each case, the burden of proof, clear and convincing evidence, and other matters upon which courts rely that result in so many different decisions that any attorney can find many cases to cite to support his or her position.
CONCLUSION
The most important evidence in this case was the November 5, 1979 instrument (Plaintiff's Exhibit 7) wherein the debtor assigned as collateral security to the Royal Bank of Canada the 1979 Chevrolet Monza. The debtor was designated mortgagor and the bank mortgagee. Debtor knew he had given a mortgage on this vehicle. He knew what a mortgage was. He was not an ignorant person with little knowledge of business. On the contrary he was in business. He and one Dasner in June 1981 formed a corporation. Debtor testified that one of the reasons he came to the United States was to go into business with Dasner. When he secured an Ohio certificate of title on the vehicle and the plaintiff's lien noted on it the debtor knew there was a "mortgage" on it in favor of the Canadian bank. And he intended it be an act which he knew was fraudulent.
Other matters indicate a "wheeling and dealing" attitude. His demeanor as a witness left a lot to be desired. In getting a loan he did not even list Royal Bank of Canada as one to whom a debt was owed. (Plaintiff's Exhibit 1). He had not forgotten. Plaintiff's Exhibit 9 is a copy of Schedule A-2 filed in his bankruptcy case pertaining to creditors holding security. Royal Bank of Canada and Wright-Patt Credit Union are both listedthe security as to each is the 1979 Chevrolet Monza.
We deem it unnecessary to discuss or make an analysis of each of the exhibits introduced in the trial of this case. It is sufficient to say that considering them all together they reveal as a whole a "picture" that can lead only to these conclusions of this court.
The history of bankruptcy law and cases indicates a tendency at times for courts to emphasize the extent of responsibility of creditors to investigate credit ratings of debtors. Too often little is said of responsibilities of the debtors. In this case what was the responsibility of the plaintiff to make a greater investigation as to the activities of the defendant in Canada as to debts incurred there? In our opinion it was not so great as the responsibility of the defendant to reveal that there was a lien on the vehicle in question of which lien the defendant was well aware.
We simply do not believe the statement of the defendant that he did not intend to deceive the plaintiff.
The failure of the defendant to inform the plaintiff of the lien was, in effect, a false representation upon which the plaintiff reasonably relied and sustained loss and damage as the result. The evidence as to this was clear and convincing.
Whether the plaintiff did or did not require a co-signer does not alter the situation. The evidence is clear that having a first lien on the vehicle was the thing most important to the plaintiff.
There was also evidence of defendant seeking other loans by giving credit information that was incomplete. This emphasizes the character of the operations by the defendant.
The debt of the defendant must be found to be non-dischargeable and we so find.
*285 Judgment shall be granted the plaintiff for $2,718.40 with interest at 1.1667 a month. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552300/ | 41 B.R. 259 (1984)
In re Clarence Robert MORGAN, Debtor.
COMPREHENSIVE ACCOUNTING CORP., Plaintiff,
v.
Clarence Robert MORGAN, Defendant.
Bankruptcy No. 3-82-01700, Adv. No. 3-83-0964.
United States Bankruptcy Court, Tennessee.
June 26, 1984.
*260 R. Louis Crossley, Jr., Knoxville, Tenn., for plaintiff.
Christopher W. Martin, Knoxville, Tenn., for debtor.
MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION TO AMEND
CLIVE W. BARE, Bankruptcy Judge.
At issue is whether a creditor who has filed a timely objection to the debtor's discharge under 11 U.S.C.A. §§ 727(a)(2)(A), 727(a)(2)(B), 727(a)(3), and 727(a)(5) (1979) may amend its complaint after the expiration of the deadline for filing such a complaint by asserting as additional grounds 11 U.S.C.A. §§ 727(a)(4)(A) and 727(a)(4)(C) (1979).
I
The debtor filed a petition for relief under chapter 11 on November 5, 1982. On November 7, 1983, the debtor's chapter 11 reorganization case was converted to a liquidation proceeding under chapter 7. Notice was given to the plaintiff and other creditors establishing January 2, 1984, as the deadline for filing an objection to the debtor's discharge. On December 30, 1983, plaintiff filed a complaint asserting 11 U.S.C.A. §§ 727(a)(2)(A), 727(a)(2)(B), 727(a)(3), and 727(a)(5) (1979) as grounds for denial of the debtor's discharge. Plaintiff did not file a motion requesting an extension of time for amending the complaint. After the deadline, plaintiff took the pretrial discovery deposition of the debtor on February 28, 1984. As a result of information obtained in the deposition, plaintiff moved the court on March 16, 1984, for leave to amend its complaint to allege 11 U.S.C.A. §§ 727(a)(4)(A) and 727(a)(4)(C) (1979) as additional grounds for denial of the debtor's discharge.
In support of its reliance upon 11 U.S.C.A. § 727(a)(4)(A) (1979)[1] plaintiff maintains that the debtor fraudulently failed to report certain assets and prepetition transfers in his schedule of assets and in his statement of financial affairs. Specifically, plaintiff asserts that the debtor failed to include a 1976 Ford automobile and failed to report the gratuitous transfer of $1,620.00 worth of toothpaste approximately two weeks before commencement of his chapter 11 case. Additionally, plaintiff asserts that the debtor fraudulently failed to report $259.96 in receipts in his October 1983 operating statement.
The factual basis of plaintiff's reliance upon 11 U.S.C.A. § 727(a)(4)(C)[2] is not apparent *261 from the pleadings, briefs, or arguments of counsel.
II
Plaintiff is entitled to amend and assert 11 U.S.C.A. § 727(a)(4)(A) (1979) as grounds for denial of the debtor's discharge.
The issue here is whether a timely-filed complaint objecting to discharge may be amended after the expiration of the deadline for filing such a complaint. Plaintiff is not seeking here to initially file its complaint objecting to discharge after the expiration of the deadline. This case is controlled, therefore, by Bankruptcy Rule 7015 and Fed.R.Civ.P. 15(c), governing the amendment of pleadings, and not by the application of any doctrine of "excusable neglect" to permit enlargement of the time for originally filing a complaint objecting to discharge. Thus, the determination of plaintiff's right to amend is not affected by the change in the new bankruptcy rules eliminating "excusable neglect" as a basis for enlarging the time for filing a complaint objecting to discharge. Bankruptcy Rule 9006(b)(3); Bankruptcy Rule 4004(b). See Bradco Supply Corp. v. Lane, 37 B.R. 410, 11 B.C.D. 707, 710 (Bankr.E.D.Va. 1984) ("No permissive feature based on excusable neglect to extend the filing of complaints exists in the new Rules.").[3]
Bankruptcy Rule 7015 provides for the applicability of Rule 15 of the Federal Rules of Civil Procedure in adversary proceedings. Fed.R.Civ.P. 15(c) provides:
Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading.
The Federal Rules have shifted the emphasis from the legal theory relied upon to the conduct of the defendant forming the basis of the plaintiff's claim. 3 Moore's Federal Practice ¶ 15.15[3] at 198 (1984). The search, then, under Fed.R.Civ.P. 15(c) is for "a common core of operative facts in the two pleadings." 6 C. Wright & A. Miller, Federal Practice and Procedure § 1497 at 495 (1971). Thus:
The fact that an amendment changes the legal theory on which the action initially was brought is of no consequence if the factual situation upon which the action depends remains the same and has been brought to defendant's attention by the original pleading.
Id. at 500.
In its original complaint plaintiff relied upon 11 U.S.C.A. §§ 727(a)(2)(A) and 727(a)(2)(B) (1979), alleging that the debtor fraudulently concealed and transferred property. Plaintiff included no specific facts supporting the allegations in the original complaint. However, in its subsequent motion for summary judgment, plaintiff pointed to three specific instances: (1) the debtor's failure to include a 1976 Ford automobile in his schedule of assets, (2) the debtor's failure to report in his statement of financial affairs the gratuitous transfer of $1,620.00 worth of toothpaste two weeks before filing bankruptcy, and (3) the debtor's failure to include $259.96 in receipts on his October 1983 operating statement.
Clearly, plaintiff's § 727(a)(4)(A) cause of action, based upon the debtor's rendering of allegedly false accounts, arises out of *262 the same conduct, transactions, or occurrences which form the factual basis of plaintiff's original cause of action for fraudulent concealment of property under §§ 727(a)(2)(A) and (B). Pursuant to 11 U.S.C.A. § 521(1) (1979) and Bankruptcy Rule 1007 the debtor was required to file a schedule of assets and liabilities and a statement of financial affairs. The essential thrust of plaintiff's § 727(a)(2) cause of action is that the debtor concealed property and transfers of property which he was required to disclose to the court and to his creditors. Any such concealment necessarily involves representations in the statement and schedules as to the nature and extent of the debtor's property and transactions. In a very real sense, the act of rendering the allegedly false account is the act of concealment or at least is an integral and essential part of the alleged act of concealment. "Omission of property from verified schedules may be both a false oath and a concealment." 4 Collier on Bankruptcy ¶ 727.04[1A] at 54 (15th ed. 1984). Thus, though founded on a different legal theory than that asserted in the original complaint, plaintiff's § 727(a)(4)(A) cause of action is plainly rooted in the same essential conduct, transaction, or occurrence the debtor's assertedly fraudulent failure to reveal the existence of property and transactions which he was required to disclose.
In Littlejohn v. Englund, 20 B.R. 957 (Bankr.E.D.Mich.1982) the court found that a claim under 11 U.S.C.A. § 523(a)(2)(A) (1979), alleging the obtaining of property by false representations, related back to a claim under 11 U.S.C.A. § 523(a)(4) (1979), based upon a contractor's fraud or defalcation in a fiduciary capacity. The court observed that, in determining the relation back of an amendment, "the emphasis is on whether the specific conduct of the Defendant as alleged in the Amended Complaint can be identified with the original claim." Littlejohn, 20 B.R. at 960. See also, Citizens State Bank of Owensboro v. Wahl, 31 B.R. 471 (Bankr.W.D.Ky.1983) (§ 523(a)(2) (B) claim related back to § 523(a)(2)(A) claim). Similarly, in the instant case the transactional basis for both causes of action is the same.
Furthermore, the court finds no "`undue delay, bad faith or dilatory motive on the part of the movant . . . [nor] undue prejudice to the opposing party. . . .'" Wahl, 31 B.R. at 472 (quoting Foman v. Davis, 371 U.S. 178, 83 S. Ct. 227, 9 L. Ed. 2d 222 (1962)). The debtor was amply apprised by the original complaint of plaintiff's basic contention that the debtor had failed to truthfully and accurately disclose the extent of his assets and transactions. The debtor was thus fairly put on notice by the original complaint. C.f. McCullough v. Anderson, 30 B.R. 229, 233 (Bankr.S.D.Fla. 1983) (oral motion at trial to amend complaint denied where "debtors were not given a reasonable opportunity to defend against the expanded charges.")
The authorities relied upon by the debtor are distinguishable from the instant case. In Citizens Fidelity Bank and Trust Co. v. Wahl, 28 B.R. 688 (Bankr.W.D.Ky.1983), the plaintiff predicated its original complaint on a cause of action under 11 U.S.C.A. § 523(a)(2)(A) (1979) for obtaining money, etc., by false pretenses, a false representation, or actual fraud. The plaintiff sought to amend by adding causes of action under 11 U.S.C.A. § 523(a)(4) (1979) for fraud or defalcation in a fiduciary capacity and 11 U.S.C.A. § 523(a)(6) (1979) for willful and malicious injury to another entity or the property of another entity. The court denied leave to amend. Characterizing prejudice to the opposing party as "the most important factor considered by the courts in deciding whether leave to amend should be granted," Wahl, 28 B.R. at 690, the court observed:
The test of relation back is the adequacy of notice given to the defendant by the original complaint of the general wrong and conduct complained of.
Wahl, 28 B.R. at 690.
As previously noted, that test is well satisfied in the instant case.
In Coccia v. Fischer, 4 B.R. 517 (Bankr. S.D.Fla.1980), the plaintiff sought to *263 amend a complaint which failed to allege any grounds for denial of discharge under 11 U.S.C.A. § 727 (1979) by adding after the deadline a § 727 cause of action. In essence, then, no complaint objecting to the discharge under § 727 was filed within the required period. No basis whatsoever for objecting to the debtor's discharge was asserted prior to the deadline. The plaintiff was attempting to assert a new cause of action with an entirely different transactional basis than that of the original complaint. That situation is clearly different from the instant case. See also Channel v. Channel, 29 B.R. 316, 318 (Bankr.W.D. Ky.1983) ("gross differences not only in the basis of the claim . . . but in the type, measure and burden of proof" prevent amended complaint asserting objection to discharge from relating back to a complaint asserting nondischargeability of a single debt).
Plaintiff will therefore be permitted to amend its complaint to assert a cause of action predicated on 11 U.S.C.A. § 727(a)(4)(A) (1979). However, plaintiff has failed to indicate the factual basis for its amendment predicated on 11 U.S.C.A. § 727(a)(4)(C) (1979). As the court is unable to determine whether plaintiff would attempt to contend that this claim arises out of the same conduct, transaction, or occurrence as does the original complaint, the court must deny plaintiff's motion insofar as it seeks to amend and assert a cause of action based upon 11 U.S.C.A. § 727(a)(4)(C) (1979).
IT IS SO ORDERED.
NOTES
[1] 11 U.S.C.A. § 727(a)(4)(A) (1979) provides:
(a) The court shall grant the debtor a discharge, unless
. . . . .
(4) the debtor knowingly and fraudulently, in or in connection with the case
(A) made a false oath or account. . . .
[2] 11 U.S.C.A. § 727(a)(4)(C) (1979) provides:
(a) The court shall grant the debtor a discharge, unless
. . . . .
(4) the debtor knowingly and fraudulently, in or in connection with the case
. . . . .
(C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forebearing to act. . . .
[3] The question of when an amendment to a complaint "relates back" to the original complaint is altogether different from the question of whether the late filing of a complaint may be permitted for excusable neglect. By way of analogy, under the former Rules of Bankruptcy Procedure, although the six month period for filing a proof of claim under Rule 302(e) was absolute and mandatory, and could not be extended for excusable neglect, 11 U.S.C.A. Rules Bankr. Proc. Rule 906(b) (1977), it was nonetheless well established that the courts had "`power to allow the amendment of a defectively filed proof of claim, even after the expiration of the time designated by the statute for the filing of claims.'" In re Alsted Automotive Warehouse, 16 B.R. 924, 925 (Bankr.E.D.N.Y.1982) (quoting In re Gibraltar Amusements Ltd., 315 F.2d 210, 213 (2nd Cir. 1963)). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552291/ | 41 B.R. 606 (1984)
In re SOUTHERN INDUSTRIAL BANKING CORPORATION, d/b/a Daveco, Debtor.
Bankruptcy No. 3-83-00372.
United States Bankruptcy Court, E.D. Tennessee.
July 16, 1984.
*607 Frantz, McConnell & Seymour, Arthur G. Seymour, Sr., E. Bruce Foster, Jr., Knoxville, Tenn., for trustee.
Smith, Cohen, Ringel, Kohler & Martin, Michael S. Haber, Atlanta, Ga., Lockridge & Becker, James A. McIntosh, Knoxville, Tenn., for debtor.
Bernstein, Susano, Stair & Cohen, Bernard E. Bernstein, J. Thomas Jones, Knoxville, Tenn., for Creditors' Committee.
Irwin A. Deutscher, Nashville, Tenn., trustee.
Benesch, Friedlander, Coplan & Aronoff, Howard Sokolsky, H. Jeffrey Schwartzberg, Cleveland, Ohio, Caplin & Drysdale, Robert E. Mannion, Washington, D.C., for investors.
Dearborn & Ewing, James R. Kelley, Nashville, Tenn., for East Tennessee Bancorp, Inc.
Hunton & Williams, John A. Lucas, Knoxville, Tenn., for Bank of Commerce and East Tennessee Bancorp, Inc.
K. Rodney May, Washington, D.C., for Securities & Exchange Commission.
Dr. Roland E. Duncan, Creditor, pro se.
Peggy Golliher, Creditor, pro se.
Janet Ritter, Creditor, pro se.
MEMORANDUM ON APPLICATIONS FOR COMPENSATION BY ATTORNEYS AND ACCOUNTANTS FOR THE INVESTORS
CLIVE W. BARE, Bankruptcy Judge.
At issue is the reasonableness of accountant and attorney fees incurred by an investor group for services in connection with the debtor's chapter 11 plan. Because postconfirmation payment is sought from assets of the debtor's successor in interest, which has issued securities and acquired property under the reorganization plan, applicants seek court approval of their fees as reasonable, 11 U.S.C.A. § 1129(a)(4)(B)(ii) (1979).
I
Southern Industrial Banking Corporation (SIBC), an industrial loan and thrift institution, was principally engaged in the business *608 of making loans and obtaining capital through the sale of unsecured, uninsured investment certificates when it filed a chapter 11 petition on March 10, 1983. SIBC continued as a debtor in possession only until April 18, 1983, when the court ordered the appointment of a trustee due to gross mismanagement of the affairs of SIBC by its current management. 11 U.S.C.A. § 1104(a)(1) (1979). Although the scheduled value of the SIBC assets is $48,890,936.50, after investigation the trustee reported the net liquidation value of assets was only $30,403,677.74, an amount substantially less than the $51,302,449.91 in reported liabilities. Approximately $50,000,000 of the liabilities scheduled represented "investment certificates" and "passbook savings," owing to nearly 5,800 creditors.
In July 1983, Frank Cihak met with the trustee to discuss the acquisition of SIBC by an investor group he represented.[1] Previous to this meeting, on or about June 17, 1983, the investor group retained Peat, Marwick, Mitchell & Co. (Peat Marwick) to examine both the feasibility of acquiring certain state-chartered Tennessee banks and the reorganization of SIBC. On or about September 9, 1983, the investor group retained Benesch, Friedlander, Coplan & Aronoff (Benesch), a law firm in Cleveland, Ohio, to represent the investor's objective of acquiring both SIBC and two existing banks, also located in East Tennessee, whose deposits, unlike those of SIBC, were insured by the Federal Deposit Insurance Corporation (FDIC). On October 3, 1983, a disclosure statement and a plan for reorganization of SIBC, formulated and prepared by Benesch, were filed with the court. Thereafter, two additional law firms were also retained by the investor group. Dearborn & Ewing of Nashville, Tennessee, was retained to assist in the investor's organization of East Tennessee Bancorp, Inc., a bank holding company. Caplin & Drysdale, of Washington, D.C., agreed to serve as special bank counsel representing the investor group in negotiations with both FDIC and the Federal Reserve Board.
On October 28, 1983, the court found that the SIBC disclosure statement, as amended, contained adequate information to enable a reasonable investor typical of the holders of claims or interests to make an informed judgment about the SIBC plan. 11 U.S.C.A. § 1125(a)(1) (1979). A modified plan was conditionally confirmed on November 28, 1983, but the effective date of confirmation was postponed to afford the trustee and the investor group opportunity to fulfill certain conditions precedent, including obtaining necessary regulatory approvals, to their respective performance under the reorganization plan. Upon the representations of the trustee and the attorneys for the investor group that all conditions precedent had been either fulfilled or waived, an order was entered establishing January 20, 1984, as the effective date of confirmation.
Generally, the confirmed plan provides for:
(1) the creation of East Tennessee Bancorp, Inc., a bank holding company, with a capital infusion of not less than $3,000,000 by the investor group;
(2) acquisition of the Bank of Commerce of Morristown by East Tennessee Bancorp, Inc.;
(3) transfer to a liquidating trust of certain contingent assets of SIBC, consisting of approximately $26,000,000 in commercial loans of doubtful collectibility and the trustee's causes of action to recover preferential transfers and fraudulent conveyances;
(4) merger of SIBC, with all its remaining assets, and the Bank of Commerce of Morristown; and
(5) issuance to SIBC creditors of cash, FDIC-insured certificates of deposit, contingent interest certificates of participation in the liquidating trust,[2]*609 preferred stock in East Tennessee Bancorp, and warrants to purchase East Tennessee Bancorp common stock.
FDIC approved the proposed merger of SIBC and the Bank of Commerce of Morristown on January 18, 1984.[3] In consideration of FDIC approval the investor group, acting through East Tennessee Bancorp, agreed to make a capital infusion of at least $4,300,000 in the resultant bank, Bank of Commerce, and to assume a $600,000 obligation of the Bank of Commerce of Morristown. The merger was consummated on January 30, 1984.
General creditors of SIBC received different consideration pursuant to the confirmed plan, dependent upon the amount of their claim. Approximately one-third of these creditors, those with claims exceeding $5001, received a package consisting of a ten-year federally insured variable rate certificate of the Bank of Commerce (for 30 percent of their claim), a certificate of interest in the SIBC liquidation trust (for 54 percent of their claim), shares of convertible preferred stock in East Tennessee Bancorp (for 16 percent of their claim), and warrants to purchase East Tennessee Bancorp common stock.
II
The following fee applications requesting court approval, pursuant to 11 U.S.C.A. § 1129(a)(4)(B)(ii) (1979), have been filed:
Hours Fee Total
Applicant Expended Requested Expenses Compensation
Benesch 3,300.75 $328,817.50 $23,623.71 $352,441.21
Caplin & Drysdale 145.7 26,870.50 2,207.25 29,077.75
Dearborn & Ewing 321.45 31,415.50 5,271.05 36,686.55
Peat Marwick 724 93,635.00 10,755.00 104,390.00
Each application includes attachments reciting the services performed. The applications of the three law firms also include a statement of the customary hourly rate charged for the services of each attorney involved. Further, all four applicants assert that from the inception of their retention they expected their fees and expenses to be paid by East Tennessee Bancorp, as organizational expenses, provided that the SIBC reorganization plan was confirmed.
Frank Cihak, spokesman for the investor group and president of the Bank of Commerce, testified at the hearing on the four applications before the court. Cihak, as an investor, has been involved in six different successful bank acquisitions. According to his testimony, he and his co-investors in previous bank acquisitions have treated accountant and attorney fees incurred in the acquisition process as organizational expenses. Cihak further testified that organizational expenses, such as the accountant and attorney fees requested by the applicants, are generally paid with capital funds invested in the bank holding company purchasing the acquired bank.
Glenn Hodges, chairman of the SIBC creditors' committee, orally objected to payment of the requested fees from funds of East Tennessee Bancorp because this would diminish the value of the stock (in East Tennessee Bancorp) issued to SIBC creditors under the confirmed plan. Hodges stated that the creditors' committee felt the investor group should pay the fees sought. He further stated that the investor group never explained to the creditors' *610 committee that these fees would be paid from assets of the SIBC successor in interest.
Cihak concedes that prior to confirmation the investor group never discussed with either the creditors' committee or the trustee the fact that the investors intended to pay the accountant and attorney fees at issue with East Tennessee Bancorp funds. However, he contends there was no secret about the expected source of payment. Indeed, Cihak points out that the projected income statement of East Tennessee Bancorp, an exhibit to the SIBC amended disclosure statement included in the printed material mailed to all scheduled creditors, reflects organizational costs of $100,000 per annum for a six-year period.[4] According to Cihak, the fees in question represent these previously projected organizational costs. The adequacy of this disclosure disclosure being a prerequisite to confirmation of the debtor's planis not at issue.
III
Section 1129(a)(4) of Title 11 of the United States Code enacts:
Confirmation of plan
(a) The court shall confirm a plan only if all of the following requirements are met:
. . . .
(4)(A) Any payment made or promised by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in, or in connection with, the case, or in connection with the plan and incident to the case, has been disclosed to the court; and
(B)(i) any such payment made before confirmation of the plan is reasonable; or
(ii) if such payment is to be fixed after confirmation of the plan, such payment is subject to the approval of the court as reasonable.
This provision is nearly identical to § 221(4) of the Bankruptcy Act of 1898,[5] which was designed to "eliminate the practice of fixing reorganization fees and expenses by private arrangement, thereby decreasing the effective amount of recovery of the creditors." In re P-R Holding Corp., 147 F.2d 895, 899 (2d Cir.1945). See also 6A Collier on Bankruptcy ¶ 11.09, 245 (14th ed. 1977): "Section 221(4) . . . is one of the many protective measures of Chapter X designed to afford a comprehensive judicial supervision of all compensation and expenses in reorganization cases." (Footnote omitted.) Code § 1129(a)(4) maintains the protection formerly afforded under § 221(4).
The bankruptcy court had exclusive jurisdiction to assess the reasonableness of fees and expenses within the scope of § 221(4) of the former Bankruptcy Act. Brown v. Gerdes, 321 U.S. 178, 64 S. Ct. 487, 88 L. Ed. 659 (1944). This jurisdiction continues under the Code with respect to fee applications for services rendered "in, or in connection with, the case, or in connection with the plan and incident to the case." 11 U.S.C.A. § 1129(a)(4) (1979). Review by the bankruptcy court of the reasonableness of fees and expenses within the scope of Code § 1129(a)(4) is not limited to fees and allowances payable from assets of the debtor's estate. See Leiman v. Guttman, 336 U.S. 1, 69 S. Ct. 371, 93 L.Ed. *611 453 (1949) (bankruptcy court has exclusive jurisdiction to pass on reasonableness of claim for attorney services rendered for protective committee in a reorganization proceeding); In re Int'l Power Securities Corp., 119 F. Supp. 31 (D.N.J.1954) (review of reasonableness of fees requested by indenture trustee from funds made available by a third party pursuant to a proposed settlement integral to the debtor's plan of reorganization). Because the applicants seek payment for services rendered in connection with the debtor's plan, or incident to the debtor's case, this court clearly has jurisdiction to rule on the reasonableness of the payments sought, even though the source of payment is a bank holding company, not the debtor's estate.[6] 11 U.S.C.A. § 1129(a)(4)(B)(ii) (1979).
IV
The applicants maintain that the only interest of the SIBC estate to be protected is "ensuring that securities issued by East Tennessee [Bancorp, Inc.] under the plan are not improperly diminished in value through excessive or unsupportable payments" made pursuant to Code § 1129(a)(4). Observing there is no authority articulating the criteria composing the standard of "reasonableness" to be applied to requests within Code § 1129(a)(4), applicants assert their fee requests are reasonable per se. Their assertion is based on the fact that the aggregate compensation for which approval is sought, approximately $533,000, is less than the organizational costs of $600,000 projected for East Tennessee Bancorp by Cihak. Also, applicants contend that no interested party has disputed the time spent in performance of their services, their customary billing rates, or the beneficial result obtained for SIBC creditors. Further, applicants maintain the standard of reasonableness based on the facts set forth in 11 U.S.C.A. § 330(a) (1979)[7] is inapposite because Code § 330 explicitly applies only to trustees, examiners, professional persons employed by either a trustee or an official committee of creditors or equity security holders, and the debtor's attorney. However, applicants alternatively contend that their fee requests are reasonable even if "reasonableness" under Code § 1129(a)(4)(B)(ii) is gauged by the factors in Code § 330.
The Securities and Exchange Commission (SEC), which has participated in this case since its commencement, 11 U.S.C.A. § 1109(a) (1979), has filed a brief on the question of this court's jurisdiction to review the instant fee applications and the appropriate elements to determine reasonableness under Code § 1129(a)(4). Although concurring in applicants' belief that jurisdiction exists and court approval of their fee applications is required by Code § 1129(a)(4), the SEC urges the court to reject the per se standard proposed by the applicants. Maintaining the services performed by applicants are ordinarily performed by attorneys for either a debtor in possession or a trustee and that the purpose of Code § 1129(a)(4) is similar to that of Code § 330, the SEC argues the factors to determine reasonableness set forth in Code § 330time expended, nature, extent and value of professional services, and the cost of comparable services in a nonbankruptcy caseare likewise applicable to requests for approval pursuant to Code § 1129(a)(4)(B)(ii). Further, the SEC contends that incongruous results will occur if *612 the same standard is not applied, since fees for similar services, though disallowed under Code § 330, could go unchallenged when paid from a source other than the estate, even though payment may nonetheless affect the return to creditors. No position, however, is taken by the SEC with respect to the reasonableness of the payments sought by the applicants.
Code § 1129(a)(4)(B)(ii) explicitly requires the court to determine the reasonableness of the payments sought by the applicants. This duty exists even in the absence of any challenge or objection to an applicant's request for approval.[8] A common sense approach dictates that "reasonableness" cannot be ascertained without reference to the time required to perform the services for which payment is requested, the benefit or result achieved, the skill required under the circumstances, the ability or expertise of the applicant, and the customary fee for similar services. These factors govern the determination of whether the payment requested by each applicant is reasonable.
V
The lodestar approachmultiplying the time expended by appropriate hourly ratesserves as a starting point to assess the reasonableness of the fees for which approval is requested. See Lindy Bros. Builders, Inc. v. American Radiator & Std. Sanitary Corp., 487 F.2d 161, 167 (3rd Cir.1973). Based on the remaining factors material to determining reasonableness the lodestar figure may be adjusted downward or upward.
A division of authority exists on the question of whether compensation should be limited to the prevailing local rate even though the customary billing rate of an attorney or other professional is higher in his own locale. In a recent decision, Judge Newsome concluded the customary rate of a Los Angeles law firm representing a debtor in a complex case filed in Ohio furnishes the starting point in fixing compensation:
To limit fees to the rates charged by Cincinnati bankruptcy lawyers, merely because these cases happened to be filed in Cincinnati, would be a position too capricious and parochial to withstand analysis under [Code] § 330.
Matter of Baldwin United Corp., 36 B.R. 401, 402 (Bankr.S.D.Ohio 1984). Contra In re Sutherland, 14 B.R. 55 (Bankr.D.Vt. 1981) (Code § 330 limits compensation to cost in community in which legal services rendered). According to Judge Pelofsky, when determining a reasonable fee the court must consider "local sensibilities and the economics of the local bar" as well as the "economics of out-of-state counsel and the customary fee in other jurisdictions." In re Global Int'l Airways Corp., 38 B.R. 440, 443 (Bankr.W.D.Mo.1984). In a complex case compensation based on a professional's customary billing rate, though exceeding the prevailing local rate, may be justified due to the professional's experience or expertise. In re Atlas Automation, Inc., 27 B.R. 820 (Bankr.E.D.Mich. 1983). However, if a local professional with the required expertise could have been retained, a professional from another jurisdiction may be "reasonably compensated" even though the allowed fee is based on a rate lower than his customary charge. In re Nova Real Estate Inv. Trust, 25 B.R. 252 (Bankr.E.D.Va.1982), modified 30 B.R. 347 (1983) (premium permitted given result obtained).
Clearly, in the absence of available local counsel with the personnel and resources necessary in a complex case, the prevailing local rate simply may not be reasonable compensation for a firm outside the jurisdiction whose customary billing *613 rate exceeds the local rate. Likewise, when a firm has expertise uncommon to any local firm, reasonable compensation obviously should not be ascertained by any prevailing local rate.
Benesch
The Benesch application for approval of payment reflects billing for 3,300.75 hours, consisting of 3,263.75 hours for attorneys and 37 hours for legal assistants. Approval of compensation in the amount of $328,817.50 plus reimbursement of expenses totaling $23,623.71 is sought. A statement detailing the services performed is attached to the application. Generally, Benesch was responsible for the formulation and preparation of the debtor's disclosure statement and confirmed plan of reorganization. These tasks required the simultaneous presence in Knoxville of as many as seven lawyers from the Benesch firm on at least one occasion. Benesch also played a principal role in the preparation for hearings on the adequacy of the disclosure statement and the confirmation of the SIBC plan. Further, Benesch provided memoranda of law on various issues; researched sophisticated questions pertaining to securities regulations, including 11 U.S.C.A. § 1145 (1979) (Exemption from securities laws); and assisted co-counsel in various endeavors, including the procurement of FDIC coverage for certificates issued under the SIBC plan. Though twenty different attorneys with Benesch performed some service, seven attorneys, whose hourly billing rate varies from $50 to $190, are responsible for in excess of ninety-five (95) percent (3,132) of the hours billed.
The court finds that $100.23, the average hourly rate for services billed, is an appropriate rate for computing the lodestar. Given the complexity and formidable time pressures involved the rate is not excessive.[9] Multiplying 3,263.75 by $100.23, the lodestar figure is $327,125.66. Considering the result achieved and the skill demonstrated under demanding circumstances,[10] an upward adjustment of the lodestar might have been justifiable. However, Benesch specifically "has not requested and does not request a premium above and beyond the amount of the compensation for services determined by the hours actually rendered in connection with its representation of the Investors. . . . "[11]
Reasonable payment to Benesch for its services in this case amounts to $327,125.66 for legal fees plus $1,677.50 for fees of legal assistants. Additionally, Benesch is entitled to recover $19,809.48 of the expenses claimed. The balance, $3,814.23, claimed for "computer research" and "document reproduction" should be charged to overhead expenses. See Matter of Rego Crescent Corp., 37 B.R. 1000, 1009 (Bankr. E.D.N.Y.1984) (photocopying on office copier is overhead expense in operation of law office).
Caplin & Drysdale
For its services Caplin & Drysdale (Caplin) seeks approval of fees totaling $26,870.50 and expenses of $2,207.25. The fee request, based on 145.7 attorney hours, equates to an average hourly rate of $184.82.
Caplin primarily dealt with FDIC and the Federal Reserve Board. The first proposal *614 by the investor group was rejected by FDIC, whose counter-proposal was likewise rejected by the investors. Caplin developed, or participated in the development of, four alternative proposals. Extensive negotiations occurred between Caplin and representatives of the two federal regulatory agencies. A review of Caplin's summary of attorney services reveals that twenty-six (26) percent of its charges relate exclusively to telephone conferences.[12] Additional hours are charged to telephone conferences and other services without appropriating the time for each service.
More than seventy (70) percent of Caplin's billing is attributable to one attorney, whose customary billing rate is $195 per hour. Nearly twenty-five (25) percent of the charges are for services of a second attorney whose billing rate is ordinarily $175 per hour. These rates substantially exceed the prevailing local rate in the Knoxville area.
From a careful review of Caplin's application and supporting documents, it does not appear that the general nature of its services was extraordinary. Conferences with members of the investor group, federal regulatory officials, or co-counsel constitute the majority of the time billed. Additionally, a significant amount of time is attributable to preparation of applications to the FDIC and the Federal Reserve Board. The court finds that $100 is an appropriate hourly rate to compute the lodestar, which for Caplin's services is $14,570. However, in recognition of the customary fees and expertise[13] of Caplin's attorneys in the specialized field of governmental regulation of financial institutions, combined with the impracticality of retaining local counsel to negotiate with federal regulatory officials in Washington, D.C., the court finds that $21,855 ($150 per hour) represents reasonable compensation. Caplin is also entitled to recover $2,006.95 of the expenses reported. Postage and "xeroxing" expenses totaling $200.30 are disallowed because such costs are overhead expenses.
Dearborn & Ewing
Dearborn & Ewing (Dearborn), retained as Tennessee counsel for the investor group, requests approval of its fee of $31,415.50 and recovery of expenses totaling $5,271.05. The fee represents 301 hours billed by eleven different attorneys and 20.45 hours of paralegal service.
The services performed by Dearborn, summarized in its application, need not be detailed herein. However, Dearborn was generally responsible for incorporating East Tennessee Bancorp, preparing documents attendant to the merger of SIBC with Bank of Commerce of Morristown, assisting in obtaining confirmation and in consummation of the SIBC plan, and providing legal advice on matters involving both Tennessee and federal law.
The average hourly rate for the legal services billed by Dearborn is $102. James R. Kelley, whose customary billing rate is $110 per hour, is responsible for sixty-six (66) percent of the hours billed. Twenty-nine (29) percent of the attorney time is attributable to four attorneys who customarily charge $85 per hour.
Examining the nature of the services provided by Dearborn, the court finds $100 is a reasonable hourly rate of compensation. Thus, the lodestar for Dearborn's services is $30,100. Although Dearborn contributed to the favorable result achieved, its contribution does not appear to have been extraordinary. Clearly, expertise in commercial and corporate law was required. However, expertise in these two areas of law is not uncommon. The sum of $30,810.75 consisting of $30,100 for legal fees and $710.75 in paralegal fees, represents reasonable compensation for Dearborn's services. Of the $5,271.05 in *615 expenses for which reimbursement is sought, Dearborn is entitled to $4,438.37. A "xerox" expense of $832.68 is disallowed as an overhead expense.
Peat Marwick
Peat Marwick seeks approval of its compensation request of $93,635, plus $10,755 in expenses, for the period between June 17, 1983, and January 31, 1984. The fee request, based on 724 hours of services, represents an average hourly rate of $129.33. Though no customary hourly rate is reported for the accountants rendering services, Peat Marwick represents that its fee is based on rates normally charged to its clientele as a whole.
Peat Marwick performed a variety of accounting services, beginning with a review of the financial and tax positions of SIBC and two state-chartered banks (Bank of Commerce of Morristown and City and County Bank of Jefferson County) the investors proposed to acquire. Peat Marwick prepared both cash flow projections and projected financial statements. Research involving the tax consequences of a "G" reorganization and other intricate or unusual questions was required. Additionally, many hours were spent conferring with members of the investor group, their attorneys, and federal regulators. Although these services are described in an exhibit to the application, neither the time involved nor the identity of the accountant performing the described service is reported. However, the exhibit does reflect that nearly fifty-five (55) percent of the hours billed are attributable to partners. Also, managers and tax specialists are jointly responsible for approximately forty (40) percent of the time charged.
Because a reasonable rate of compensation for the services performed is $100 per hour, the lodestar figure for Peat Marwick's services equals $72,400. However, considering the difficulty of the issues researched and the time constraints, the expertise required, the contribution toward a successful result, and the fact that the customary rate in Peat Marwick's Chicago office for a partner's services exceeds the lodestar rate, $79,640 ($110 per hour) represents reasonable compensation.
Peat Marwick seeks reimbursement for the following expenses:
Travel, Lodging & Meals $ 6,797
Delivery 272
Telephone 571
Computer Time Charges 1,109
Photocopying 195
Secretarial and Administrative
Charges 1,811
_______
$10,755
No documentation to substantiate these charges has been submitted. The court will nonetheless presently approve reimbursement totaling $843 for delivery and telephone expenses. Upon presentation of copies of receipts for travel, lodging and meals, the court will consider approval of those expenses.[14] Reimbursement for the remaining expenses, all of which are overhead expenses, is disapproved.
VI
Under the former Bankruptcy Act counsel for creditors or shareholders contributing to a Chapter X plan of reorganization were entitled to compensation from the estate. See Securities and Exchange Comm'n v. First Securities Co., 528 F.2d 449, 452 (7th Cir.1976). The applicants unquestionably contributed to the confirmation and consummation of the SIBC plan. As Mr. Bernstein, attorney for the creditors' committee, observed at the hearing on these applications, the services performed by the applicants were necessary. It is unjust to "muzzle the ox when he treadeth out the corn."[15] Other parties would have been required to perform absent performance by the applicants.
*616 Further, the court reiterates that the compensation approved is a charge against the assets of East Tennessee Bancorp. The source of payment is a pool of funds consisting in part of $5,600,000 in capital infused by the investor group, who maintain they would merely have withheld from their investment an amount equaling the compensation sought by the four applicants if any dispute had been anticipated. Viewed from this perspective, and assuming federal regulatory approval could have been obtained with a reduced capital investment and a corresponding elimination of $600,000 in projected organizational costs, the fees in question are essentially being paid by the investor group.
No payment for their services has been received by any of the four applicants. Accepting Cihak's unchallenged testimony that standard accounting principles permit a lump sum "up front" payment of organizational costs, though such costs are disclosed as amortized, East Tennessee Bancorp may pay to applicants the amounts approved as reasonable compensation when the orders for payment become final.
NOTES
[1] This investor group consists of sixteen individuals, including Cihak, a corporation, and a trust.
[2] Proceeds from the collection of commercial loans to the extent of $5,000,000 are appropriable to a reserve fund to complement the capital requirements of the SIBC successor in interest. Recoveries attributable to the avoidance of fraudulent transfers and preferences are payable to the successor in interest.
[3] The investor group's original proposal, merger of SIBC with two existing FDIC-regulated banks, was modified when the investors withdrew their plan to acquire City and County Bank of Jefferson County.
[4] Cihak testified that the amortization of $600,000 in organizational expenses did not necessarily mean that these expenses would not be paid "up front."
[5] This section provided: "Confirmation by court The judge shall confirm a plan if satisfied that
. . . . .
(4) all payments made or promised by the debtor or by a corporation issuing securities or acquiring property under the plan or by any other person, for services and for costs and expenses in, or in connection with, the proceeding or in connection with the plan and incident to the reorganization, have been fully disclosed to the judge and are reasonable or, if to be fixed after confirmation of the plan, will be subject to the approval of the judge. . . ." 11 U.S.C.A. § 621(4) (1970), repealed by Bankruptcy Reform Act of 1978, 92 Stat. 2549, 2635.
[6] See note 8, infra.
[7] Compensation of officers
(a) After notice to any parties in interest and to the United States trustee and a hearing, and subject to sections 326, 328, and 329 of this title, the court may award to a trustee, to an examiner, to a professional person employed under section 327 or 1103 of this title, or to the debtor's attorney
(1) reasonable compensation for actual, necessary services rendered by such trustee, examiner, professional person, or attorney, as the case may be, and by any paraprofessional persons employed by such trustee, professional person, or attorney, as the case may be, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title; and
(2) reimbursement for actual, necessary expenses.
[8] In addition to the oral objection of Glenn Hodges on behalf of the creditors' committee, six creditors submitted letters to the court either specifically or arguably objecting to payment of the applicants' fees from assets of the debtor's estate. Payment, however, is sought from East Tennessee Bancorp, whose assets consist of the capital infused by the investor group, the former assets of the Bank of Commerce of Morristown, plus all SIBC assets other than those transferred under the terms of the confirmed plan to the liquidating trust.
[9] Tenn.Code Ann. § 45-5-609 (Supp.1983) authorized the State Commissioner of Financial Institutions to approve the merger of an industrial loan and thrift like SIBC, after its conversion to an industrial bank, into a state bank, provided a merger agreement was filed on or before December 1, 1983. Such a merger was feasible only if a plan of reorganization for SIBC could be confirmed prior to December 1, 1983.
[10] Representation of the investor group was afforded the highest priority in the bankruptcy department of the Benesch firm. The summary of attorney services reflects that 119.75 hours of attorney services were performed by eight attorneys on one day, September 28, 1983. Howard Sokolsky, a partner in Benesch chiefly responsible for the preparation of the SIBC disclosure statement and plan of reorganization, logged 92.5 hours in a six-day period preceding filing of the disclosure statement and proposed plan of reorganization.
[11] See Application for Approval of Payment of Compensation at 13, filed March 9, 1984.
[12] This equals 38.6 hours.
[13] Robert C. Pozen, the attorney responsible for the majority of the services rendered by Caplin, has authored a book on financial institutions and investment management. His associate, Robert E. Mannion, served for four years as a Deputy General Counsel of the Board of Governors, Federal Reserve System.
[14] Copies of these receipts, if any, should be submitted to the court within fifteen (15) days from entry of the order on Peat Marwick's application for approval of payment of compensation.
[15] Deuteronomy 25:4; I Timothy 5:18. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552340/ | 239 B.R. 560 (1999)
In re Michael Wayne BAMMAN, Debtor.
Bankruptcy No. 99-42609.
United States Bankruptcy Court, W.D. Missouri.
September 30, 1999.
Lydia M. Carson, Kansas City, MO, for debtor.
*561 Bruce E. Strauss, Kansas City, MO, for Karen Bamman.
Gary D. Barnes, Kansas City, MO, Chapter 7 Trustee.
Richard V. Fink, Kansas City, MO, Chapter 13 Trustee.
MEMORANDUM OPINION AND ORDER
FRANK W. KOGER, Chief Judge.
Karen R. Bamman has filed a Motion for Relief From Automatic Stay in the debtor's case, requesting this Court to modify the stay so that she can proceed in State Court in obtaining a divorce from the debtor, Michael Wayne Bamman, and dividing the marital property. This Court held a hearing on Mrs. Bamman's Motion and the debtor's response thereto on August 30, 1999. As directed at the hearing, the parties have submitted memoranda on the issue, and the Court hereby issues the following Findings of Fact and Conclusions of Law pursuant to Fed.R.Bankr.P. 7052.
Factual and Procedural Background
Karen Bamman is seeking a dissolution of her marriage to the debtor in an action pending before the Circuit Court of Jackson County, Missouri, where the petition for marital dissolution is scheduled to be heard on October 5, 1999. On July 2, 1999, while the marital dissolution case was pending in the Jackson County Circuit Court, Debtor filed a Chapter 7 Petition for Relief in this Bankruptcy Court, thereby staying the dissolution proceeding from going forward pursuant to 11 U.S.C. § 362. Hence, Karen Bamman filed the instant Motion for Relief From Automatic Stay, seeking to have the stay modified so that she can proceed with her marital dissolution action against the debtor.[1]
On August 13, 1999, the debtor filed a Response to Motion for Relief From Automatic Stay in which he agrees that the marital dissolution proceeding should go forward. However, he also expresses his belief that unsecured creditors should be represented regarding their interest in non-exemptible assets. He suggests that there are enough non-exemptible assets to pay the joint debts and asserts that if this Court allows the Circuit Court to divide the assets, those assets may be depleted before the Trustee can seize them for the benefit of the joint creditors. Debtor prays this Court for "an order modifying the automatic stay for the purpose of allowing Karen R. Bamman to continue the dissolution of marriage as long as the Trustee can adequately preserve non-exemptible assets for the benefit of the unsecured creditors."
On August 16, 1999, the Chapter 7 Trustee filed an Objection to Karen Bamman's Motion for Relief From Automatic Stay, wherein he points out that the debtor's schedules list a "½ interest in Real Estate Escrow" in the amount of $25,676.16. The Real Estate Escrow apparently represents the proceeds from the sale of the marital home, which is presumably held by Mr. and Mrs. Bamman as tenants by the entireties. Further, according to the Chapter 7 Trustee, the debtor had testified at the § 341 meeting of creditors that despite listing them on his schedules as individual debts, several of the debts listed on his Schedules D and F, totaling over $65,000, are in fact joint debts. Thus, according to the Chapter 7 Trustee, the amount of joint debt substantially exceeds the debtor's share of the Real Estate Escrow. Consequently, the Trustee asserts that at a minimum, the joint creditors of the bankruptcy estate should be paid from the debtor's interest in the Real Estate Escrow and further asserts that if the marriage dissolution is permitted to proceed to the extent the issue regarding the Real Estate Escrow is litigated there, it would hinder, delay and burden the administration of the bankruptcy estate.
*562 On August 27, 1999, the Debtor filed a motion to convert his Chapter 7 case to a Chapter 13 case pursuant to 11 U.S.C. § 1307, and that Motion has been granted. As a result, although the Court has considered the arguments raised by the Chapter 7 Trustee, ruling on his Objection is now moot.
Discussion
The jurisdiction to determine the right to and grounds for a divorce falls exclusively with the state court, and a state court action as it pertains to those issues should not be stayed. See In re Hohenberg, 143 B.R. 480, 483 (Bankr. W.D.Tenn.1992) (citations omitted). The same is true for maintenance or support awards. See In re Calhoun, 715 F.2d 1103, 1107 (6th Cir.1983) (obligations of alimony, support and maintenance are issues within the exclusive domain of the state courts); Hohenberg, 143 B.R. at 483. Clearly, the automatic stay in this case must be modified so that Karen Bamman can proceed to obtain a dissolution of her marriage to the debtor and a determination regarding maintenance or support. The debtor does not oppose this and this Court has no desire to tread that ground, even if it did have jurisdiction. The automatic stay is therefore modified for that purpose.
The issue of the property division presents a more difficult issue, however. While this Court has the authority to determine the relative rights and obligations of a debtor under a state court decree dividing the marital and non-marital property and debts of the debtor and his former spouse, this Court is not in the business of granting divorces and dividing the marital property under non-bankruptcy domestic relations law. In re Bain, 143 B.R. 715, 717 (Bankr.W.D.Mo.1992). The issue of dividing the marital property under domestic relations law is "appropriately left to the province of the state courts." Id. (citing In re White, 851 F.2d 170 (6th Cir.1988)).
As the Sixth Circuit did in In re White, this Court concludes that it is proper, at least under these circumstances, to defer "to the divorce court's greater expertise on the question of what property belongs to whom" under state domestic relations law. In re White, 851 F.2d at 173; In re Bain, 143 B.R. at 717. As one court has said, the definition of the debtor's interest in property must be made after reference to state law, and it will be helpful to this Court in this case if the state court will classify and equitably divide the marital property so that this Court can determine what is property of the bankruptcy estate. See In re Hohenberg, 143 B.R. at 485 (citing In re White, 851 F.2d at 173-74). This is particularly true in this case since it appears that the debtor has mislabeled or misrepresented the character (as joint or individual) of debts and assets on his schedules. Furthermore, although he was asked by the Chapter 7 Trustee to file amended schedules correcting these problems, the debtor failed to do so. It also appears from the United States Trustee's involvement in this matter that there may be other issues regarding omissions from the schedules as well.[2]
As a result, the Court will modify the stay so as to permit the Circuit Court of Jackson County to determine the nature of Mr. and Mrs. Bamman's property and debts as being separate or joint. Karen Bamman's separate property and debts are extraneous to this bankruptcy case. However, all of Michael Bamman's separate property and all of the jointly owned property became property of Michael's bankruptcy estate pursuant to 11 U.S.C. § 541 when he filed his petition in bankruptcy. Under Eighth Circuit precedent applicable in this case, joint debts must be *563 paid from the joint assets before the nondebtor spouse is to receive any part of those joint assets. Van Der Heide v. LaBarge (In re Van Der Heide), 164 F.3d 1183 (8th Cir.1999). In bankruptcy, once an entireties asset is liquid, the bankruptcy trustee is to distribute the money first to the joint creditors and then, if there is any money remaining after payment to joint creditors, to the estate and the nondebtor spouse according to their respective interests. In re Rentfro, 234 B.R. 97, 99 (Bankr.W.D.Mo.1999) (citing Van Der Heide, 164 F.3d at 1184-85); In re Brown, 234 B.R. 907, 910 (Bankr.W.D.Mo.1999).
As a result, while the automatic stay is modified so that the Circuit Court can characterize and divide the property, this Court specifically retains its jurisdiction over the distribution and treatment of Michael's separate property as well as any joint property of Mr. and Mrs. Bamman so that the bankruptcy trustee can administer the assets for the benefit of the appropriate creditors through the bankruptcy estate. Karen Bamman will receive her respective interest in remaining joint property as determined by the state court, if any, after payment to the appropriate creditors through this bankruptcy estate pursuant to the principles outlined in Van Der Heide.
This Court recognizes that this may present some difficulties for the Circuit Court in dividing property or awarding maintenance and that the result reached herein may appear to prejudice Karen Bamman's right under Missouri domestic laws. However, "[a] decision to lift the automatic stay under section 362 of the Code is within the discretion of the bankruptcy judge and this decision may be overturned on appeal only for an abuse of discretion." In re Robbins, 964 F.2d 342, 345 (4th Cir.1992) (citing In re Boomgarden, 780 F.2d 657, 660 (7th Cir.1985)). This Court feels this result is appropriate under the Eighth Circuit's Van Der Heide opinion which plainly mandates that this Court is required to treat the joint property and creditors in a specific manner which is, arguably, contrary to Missouri law.
Finally, while some parties or observers may view Michael Bamman's bankruptcy filing as an inappropriate effort to undermine or thwart Karen's rights in the domestic proceeding, see In re Bain, 143 B.R. at 717, the Court declines to make such a judgment at this time. Again, the Court notes that Karen Bamman is protected, to a degree, by the Order enlarging the time in which she may file a nondischargeability complaint.
Conclusion
The automatic stay is hereby modified so that the Circuit Court of Jackson County can determine the issues pertaining to the marital dissolution of Michael and Karen Bamman, including the actual dissolution of the marriage of Karen Bamman and Debtor Michael Wayne Bamman; the determination as to whether either party is entitled to maintenance or support and the amount thereof; the characterization of the Bammans' property and debts as separate or joint; and any other issues pertaining to the dissolution of their marriage. The Circuit Court may make an award of property to the individual parties; however, such an award may not be distributed or effectuated until after the joint property has been administered through this bankruptcy estate according to bankruptcy law. This Court specifically retains jurisdiction to determine the issues as to distribution and treatment of any of Michael Bamman's separate property as well as any property which the Circuit Court determines to be jointly owned at this time. In other words, because this Court must determine which creditors are to be paid from the joint property under Eighth Circuit precedent, it must be understood that any award of property which is currently owned jointly by the Bammans cannot be delivered or transferred to either of them individually until after the property has been administered through Michael Bamman's *564 bankruptcy estate pursuant to Eighth Circuit bankruptcy law.
NOTES
[1] Karen Bamman also filed a Motion for Enlargement of Time to File a Complaint Pursuant to 11 U.S.C. § 523, which this Court has granted.
[2] The United States Trustee has filed, and was granted, a Motion for Extension of Deadline in which to file a § 707(b) motion to dismiss for substantial abuse. The U.S. Trustee alleges it has requested additional financial information in that regard which the debtor has failed to provide. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551872/ | 139 B.R. 785 (1992)
In re ORION PICTURES CORP., et al., Debtors.
ORION PICTURES CORP., Plaintiff,
v.
SHOWTIME NETWORKS, INC., f/k/a Showtime/The Movie Channel, Defendant.
Nos. 91-B-15635 (BRL), 92 Civ. 2247 (JFK), Adv. No. 91-8737A.
United States District Court, S.D. New York.
April 13, 1992.
*786 Willkie Farr & Gallagher, New York City (Francis J. Menton, Jr., Alexandra Margolis, Gregory M. Cooke, of counsel), for debtors/plaintiff.
Shearman & Sterling, New York City (R. Paul Wickes, Frederick Davis, Brian Chevlin, Donna Bogdanski, of counsel), for defendant.
OPINION AND ORDER
KEENAN, District Judge:
Showtime Networks, Inc. ("Showtime") has moved for an order under 28 U.S.C. § 157(d) and Bankruptcy Rule 5011(a) withdrawing the reference of the adversary proceeding between Debtor Orion Pictures Corporation ("Orion") and Showtime from bankruptcy court. For the reasons that follow, Showtime's motion is denied.
BACKGROUND
On December 11, 1991, Orion filed a voluntary petition for reorganization under Chapter 11 in the Southern District of New York. The case was referred to the Bankruptcy Court pursuant to the standing order of reference, 28 U.S.C. §§ 157-58, and is currently before Chief Judge Lifland. Orion continues to operate and manage its properties as debtor in possession under 11 U.S.C. §§ 1107 and 1108.
On March 20, 1992, Orion initiated an "adversary proceeding" against Showtime in bankruptcy court. Orion alleges that Showtime has anticipatorily breached a licensing agreement ("Agreement") dated August 1, 1986. The initial complaint sought several forms of relief, including an order allowing assumption of the Agreement under section 365 of the Bankruptcy Code, an order of specific performance that Showtime must pay Orion the amounts provided under the Agreement, and a declaration that Showtime was estopped from invoking the "key-man" clause of the Agreement. As an alternative form of relief, Orion requested $77 million in damages. Simultaneously with the filing of the complaint, Orion filed a motion to assume the agreement. On April 2, 1992, Orion filed an amended complaint that seeks an award of specific performance and drops the demand for damages.
Upon filing the initial complaint on March 20, Orion moved ex parte to expedite discovery and set an accelerated trial date in the adversary proceeding. Chief Judge Lifland signed an order adopting Orion's proposed schedule, requiring Showtime to answer and serve all document requests by April 3, to produce all requested documents by April 10, and setting an April 23 discovery cutoff and a May 14 trial date. See Certification of H. Gwen Marcus ("Marcus Cert.") in Support of Showtime's Motion for Withdrawal of the Reference, Exh. C. On March 30, 1992, Showtime asked Judge Lifland to alter the ex parte order he had entered setting the pre-trial schedule. He denied the request. Showtime thereafter filed with this Court its motion to withdraw the reference.
DISCUSSION
A motion for withdrawal of a case or proceeding is brought in district court. See Bankruptcy Rule 5011(a), 11 U.S.C. This Court may withdraw the adversary proceeding *787 from the bankruptcy court "for cause shown." 28 U.S.C. § 157(d).
The United States District Court has exclusive and original jurisdiction over all cases and civil proceedings arising under title 11 of the Bankruptcy Act. 28 U.S.C. § 1334. Cases or proceedings arising under title 11 are referred automatically to the United States Bankruptcy Court. 28 U.S.C. § 157(a). 28 U.S.C. § 157 defines the parameter of the bankruptcy courts' jurisdiction to hear and adjudicate cases and proceedings referred to them by district courts. Section 157(b)(1) provides that
bankruptcy judges may hear and determine all cases under Title 11 and all core proceedings under Title 11, or arising in a case under Title 11, and may enter appropriate orders and judgments. . . .
Core proceedings are matters that govern the administration of the debtor's estate. A non-exhaustive list of core proceedings is set forth at section 157(b)(2); of particular relevance in this case are subsections (A) and (O), which Orion claims apply to the instant adversary proceeding. Subsection (A) provides that "matters concerning the administration of the estate" are core, and subsection (O) provides that "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship" are also core.
A non-core proceeding, in contrast, is defined as a "proceeding that is not a core proceeding but that is otherwise related to a case under Title 11." 28 U.S.C. § 157(c)(1). In non-core proceedings, the bankruptcy judge is required to submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment is entered by the district judge after de novo review of those findings. 28 U.S.C. § 157(c)(1).
Section 157(d) permits the district court to withdraw its reference of a bankruptcy petition or any case or proceeding related to the petition as follows:
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.
Showtime proceeds under the first sentence of section 157(d), which provides for permissive withdrawal of a case or proceeding for "cause." Cause is not defined in the Act. In evaluating motions to withdraw a reference for cause, courts consider two principal factors in determining whether cause exists. The first factor is the nature of the proceeding, i.e. whether it is core or non-core; the second factor is judicial economy. See Acolyte Elec. Corp. v. New York, 69 B.R. 155, 166 (Bankr. E.D.N.Y.1986).
A. Nature of the Proceeding
Showtime asserts that cause in this case is two-fold. First, it asserts that withdrawal is necessary because the adversary proceeding is a non-core proceeding in which they are entitled to a jury. Second, it argues that Judge Lifland's "abusive" ex parte scheduling order "raises serious doubt about Showtime's ability to receive a fair hearing in the Bankruptcy Court." Memorandum of Law in Support of Defendant Showtime Networks Inc.'s Motion for Withdrawal of the Reference ("Showtime Mem.") at 5. The Court is not persuaded by either contention.
Whether Orion's action against Showtime is a core proceeding as defined in 28 U.S.C. § 157(b)(2) is a determination to be made by the Court. See Hatzel & Buehler, Inc. v. Orange & Rockland Utilities, Inc., 107 B.R. 34, 39-40 (D.Del.1989); In re Luis Electrical Contracting Corp., 100 B.R. 155, 156 (E.D.N.Y.1989); In re Leedy Mortgage Co., 62 B.R. 303, 306 (E.D.Pa.1986). The Court finds that the adversary proceeding in this case is a core proceeding within the meaning of section 157(b)(2)(A) ("matters concerning the administration *788 of the estate" are core proceedings).
As Orion concedes, the question of whether collection by a debtor's estate of contract claims owing to it is core or non-core has not met with uniform treatment. Nonetheless, this Court finds persuasive the reasoning of Chief Judge Charles Brieant's decision in In re Leco Enterprises, Inc., 125 B.R. 385, 389 (S.D.N.Y.1991). In Leco, Judge Brieant found that collection of a pre-petition account receivable concerned "the administration and liquidation of an asset of the Debtor's estate" and therefore fell within the plain meaning of 28 U.S.C. §§ 157(b)(2)(A) and (O). As Judge Brieant explained, the adversary proceeding
involves a claim for $101,098.99 allegedly owed to the Debtor which if collected would inure to the benefit of the estate or the creditors of the estate. Accordingly, the prompt resolution of this adversary proceeding is essential to the administration of the estate and the adjustment of the debtor-creditor relationships since these funds are inextricably linked to the liquidation of the estate.
125 B.R. 385, 389-90 (S.D.N.Y.1991). This reasoning applies with equal, if not greater, force in the instant case, which involves a potential debt of $77 million, not $101,000.00. Orion's recovery of a sum that large could do nothing but affect the administration and liquidation of the estate. Cf. Affidavit of Lawrence Bernstein in Opposition to Showtime's Motion to Withdraw the Reference ("I believe that successful reorganization of Orion requires resolution of the Showtime dispute."); Affidavit of Peter Nolan In Opposition to Showtime's Motion to Withdraw the Reference at ¶¶ 2-4. Accordingly, this adversary proceeding is a core proceeding within the plain meaning of 28 U.S.C. § 157(b)(2)(A).
Whether Orion complied with a contractual condition in the Orion/Showtime Agreement, and therefore whether the Agreement remains valid, is the issue to be determined in the adversary proceeding. It is also an issue that must be determined before the bankruptcy court can decide Orion's motion to assume.[1]See Letter of Francis J. Menton, Jr., April 8, 1992 ("resolution of the issues regarding Orion's compliance with a contractual condition is necessary to determining Orion's motion to assume."); see also Letter of R. Paul Wickes, April 10, 1992 ("Debtor may be right that the adversary proceeding is a "precursor to determination of the motion to assume.").
The determination of the dispute over the status of the Agreement is therefore a necessary part of the bankruptcy court's determination of the motion to assume the Agreement, and thus "it is an integral part of the administration of the case. As such, it is part of a core proceeding." In re Nexus Communications, Inc., 55 B.R. 596, 598 (Bankr.E.D.N.C.1985).
B. Judicial Economy
The determination that this is a core proceeding is one of the two relevant factors in evaluating Showtime's motion to withdraw the reference. Discretionary withdrawal of a reference for cause also includes a consideration of judicial economy. In this case, judicial economy also weighs against withdrawing the reference. As Orion observes, "[t]he adversary proceeding was commenced as supplemental to the motion to assume in compliance with technical procedural requirements." Menton Letter at 4. The motion to assume will be heard by the bankruptcy court in connection with the overall administration of Orion's reorganization efforts under Chapter 11. Because the adversary proceeding and the motion to assume are intertwined, and because the assumption motion will be heard by the bankruptcy court, leaving the adversary proceeding in bankruptcy court would promote judicial economy. To withdraw the reference would be to derail the orderly and efficient administration of the debtor's Chapter 11 proceeding.
*789 Showtime's argument that Judge Lifland's "abusive" scheduling order constitutes cause for withdrawing the reference finds no support in the cases. Citing not a single authority for its proposition, Showtime only argues that it would be prejudiced if it were forced to proceed in bankruptcy court. This Court does not agree that it would suffer any prejudice. Further, as Orion correctly observes, the proper avenue for relief from such an order is to seek leave to appeal the order under 28 U.S.C. § 158 and Bankruptcy Rule 8001. Showtime's moving to withdraw the reference is essentially an attempt to make an end-run around Judge Lifland's discovery order. This tactic is inappropriate and will not be sanctioned.
CONCLUSION
For the reasons set forth above, Showtime's motion for withdrawal of the reference is denied. This action is ordered removed from the Court's active docket.
SO ORDERED.
NOTES
[1] That motion was brought simultaneously with the filing of the complaint in bankruptcy court, and is scheduled to be heard by Judge Lifland on the day set for trial of the adversary proceeding. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551875/ | 139 B.R. 128 (1992)
In re Anthony STENDARDO and Loretta Stendardo, Debtors.
Anthony STENDARDO and Loretta Stendardo, Plaintiffs,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION c/o Sovran Mortgage Corporation, Defendants.
Civ.A. No. 90-6526, Bankruptcy No. 89-10581S, Adv. No. 90-0375.
United States District Court, E.D. Pennsylvania.
February 5, 1992.
Final Order on Denial of Reconsideration April 22, 1992.
*129 Irwin Trauss, Community Legal Services, Inc., Philadelphia, Pa., for plaintiffs.
Joan P. Brodsky, Philadelphia, Pa., for defendants.
MEMORANDUM
LOWELL A. REED, Jr., District Judge.
INTRODUCTION
In this bankruptcy appeal, the debtors, Anthony and Loretta Stendardo ("the Debtors"), have sought appellate review of an August 29, 1990 Order of the bankruptcy court allowing the Federal National Mortgage Association ("FNMA") to maintain a secured proof of claim against the Debtors in the amount of $9,955.70.
Jurisdiction over this bankruptcy appeal in this court is pursuant to 28 U.S.C.A. § 158(a) (West 1968 & Supp.1991). I have reviewed the record on appeal (Document No. 1), which includes an extensive stipulation of facts and the August 29, 1990 opinion and Order of the bankruptcy court, as well as the appellate briefs of the Debtors and FNMA (Document Nos. 4 and 6, respectively). For the reasons set forth below, I must vacate the August 29, 1990 Order insofar as it allows FNMA to maintain a secured proof of claim against the Debtors in the amount of $9,944.70, and remand this case to the bankruptcy court for entry of an Order limiting the secured proof of claim to $5,803.08 in accordance with the opinion which follows.
BACKGROUND
The facts underlying this appeal are set forth in a stipulation contained in the record on appeal (Document No. 1, Tab 5).
In October 1970, Pasquale and Kathryn Stendardo, husband and wife, entered into a consumer loan agreement with an entity called Bogley, Harting, Mahoney and Lebling Inc. ("Bogley, Harting"). They signed a $7,250, 20-year note obligating them to Bogley, Harting. The note was secured by a mortgage against residential realty located at 2716 E. Birch Street, Philadelphia, Pennsylvania, which was also in the amount of $7,250. In November 1970, the note and mortgage were assigned to FNMA. By deed dated June 7, 1972, Pasquale and Kathryn transferred 2716 E. Birch Street to the Debtors.
On May 30, 1985, the Debtors filed a voluntary Chapter 13 bankruptcy petition. This Chapter 13 bankruptcy was voluntarily converted to a Chapter 7 bankruptcy by Order dated October 16, 1986. On February 11, 1987, FNMA obtained a default judgment in mortgage foreclosure against the Debtors for $6,391.09. The Debtors received a Chapter 7 discharge from their debts by Order dated January 10, 1989. They filed the instant Chapter 13 petition one month later on February 10, 1989.
On January 2, 1990, FNMA filed a secured proof of claim in the current bankruptcy case of the Debtors. It is the amount of the secured claim of FNMA that forms the crux of the dispute underlying this appeal. FNMA included in its proof of claim certain periodic sums that it expended after it received the foreclosure judgment and after the Debtors filed their current Chapter 13 case. These periodic payments were for real estate taxes, hazard insurance, and FHA mortgage insurance. The parties have stipulated to $5,803.08 as a starting point for calculation of the secured claim of FNMA. The disputed postjudgment and post-bankruptcy petition costs ("the expenditures") total $4,152.62.
THE BANKRUPTCY COURT OPINION
The decision of the bankruptcy court is reported in In re Stendardo, 117 B.R. 833 (Bankr.E.D.Pa.1990). The court determined that the expenditures were properly included as a part of the secured claim of FNMA. Thus, this claim was valued at $9,955.70the stipulated amount of $5,803.08, plus the expenditures ($4,152.62).
The bankruptcy court decision was based on two alternative grounds. First, the court rejected the argument of the Debtors that the doctrine of merger, which holds that the terms of a contract or mortgage on which a claim is based merge into a judgment and disappear, prohibited reimbursement *130 of FNMA for the expenditures. Id. at 838-39. It found that the terms of the mortgage of the Debtors allowed FNMA to continue making these expenditures post-judgment. Id. Second, assuming arguendo that the doctrine of merger did apply, the bankruptcy court concluded that FNMA would still be entitled to include the expenditures in its allowed proof of claim, because the Debtors still had the legal obligation to pay these costs, and because it would constitute "unjust enrichment" to permit the Debtors to escape liability to FNMA for the expenditures. Id. at 840-41.
DISCUSSION
The Scope of Review on Appeal
The scope of review of the district court here is well-settled. Findings of fact of a bankruptcy court may not be set aside unless clearly erroneous. In re Larry E. Brenner and Judith A. Brenner, Nos. 89-8322, 89-8680, 1991 WL 214051, at *2-*3, 1991 U.S.Dist. LEXIS 15043, at *7-*8 (E.D.Pa. Oct. 18, 1991) (citing 11 U.S.C.A. Rule 8013; Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988)). Legal conclusions of a bankruptcy court are subject to a plenary review on appeal. Id. (citing Brown, 851 F.2d at 84).
"Interpretation of an ambiguous contract is a question of fact." In re F.A. Potts & Co., Inc., 115 B.R. 66, 68 (E.D.Pa.) (citing STV Engineers, Inc. v. Greiner Engineering, Inc., 861 F.2d 784, 787 (3d Cir.1988)), aff'd, 922 F.2d 830 (3d Cir.1990). "However, the court must first determine whether the contract . . . [is] ambiguous as a matter of law." Id. (citations omitted). If the contract or instrument in question is not susceptible to differing interpretations, it is not ambiguous. Id. at 70.
The Doctrine of Merger
As the bankruptcy court acknowledged, Pennsylvania has long recognized the doctrine of merger, which provides generally that the terms of a mortgage or note are merged into a judgment and thereafter no longer provide the basis for determining the obligations of the parties. In re Stendardo, 117 B.R. 833, 837 (E.D.Pa.1990). The doctrine was addressed by the Supreme Court of Pennsylvania in Lance v. Mann, 360 Pa. 26, 60 A.2d 35, 36 (1948):
[i]t is elementary that judgment settles everything involved in the right to recover, not only all matters that were raised, but those which might have been raised. . . . The cause of action is merged in the judgment which then evidences a new obligation.
See also In re Lehal Realty Associates, 112 B.R. 588, 589 (Bankr.S.D.N.Y.1990) (a judgment determines the rights of the parties in accordance with the concept of res judicata) (citing Montana v. U.S., 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)).
The doctrine of merger is not without its exceptions. An exception relevant here provides that parties to a contract or mortgage may rely upon a particular term or provision post-judgment if they clearly evidence such an intent in the documents. See, e.g., In re Presque Isle Apartments, L.P., 112 B.R. 744, 747 (Bankr.W.D.Pa. 1990).
The FNMA mortgage in question is excerpted in the opinion below. In re Stendardo, 117 B.R. at 836. The mortgage clearly provides that the Debtors must pay monthly not only principal and interest, but the sums which comprise the expenditures as well, namely, payments for real estate taxes, hazard insurance, and mortgage insurance. Id. From this the bankruptcy court concluded that the doctrine of merger did not prevent FNMA from including the expenditures in its secured proof of claim:
The mortgage between FNMA and the Debtors, as set forth at pages 835-836, supra, clearly provides that the Debtors assumed responsibility for, inter alia, the taxes and insurance charges due on . . . [2716 East Birch Street, Philadelphia, Pennsylvania]. FNMA made these payments on their behalf. The mortgage provides that the amounts paid by FNMA for these charges may be included as part of the loan and secured by the mortgage.
Id. at 838-39.
This factual analysis does not preclude operation of the doctrine of merger. The inclusion of costs for real estate taxes, mortgage insurance, and hazard insurance in the mortgage as part of the monthly mortgage payment required by the Debtors does not authorize FNMA to include amounts expended for such items post-judgment in its secured proof of claim. As indicated in In re Presque Isle Apartments, 112 B.R. at 747, what is needed for such authorization is language in the mortgage *131 which clearly indicates that the obligation of the Debtors to make monthly payments for these items continues even after FNMA obtains a judgment in a foreclosure action. I conclude as a matter of law that the language of the FNMA mortgage here (Document No. 1, Tab 5, Exhibit B) is not susceptible of such an interpretation, and, therefore, that in this regard, this mortgage is not ambiguous.
The cases cited by the court below do not support a contrary conclusion. Neither In re Rorie, 98 B.R. 215 (Bankr.E.D.Pa.1989), nor In re Presque Isle Apartments support the proposition that mere mention of an obligation in a mortgage is sufficient to continue the obligation post-judgment. In fact, both of these decisions support the need for clear language indicating that a term or clause in an agreement will remain operative after a judgment is obtained.
Thus, in In re Rorie, the bankruptcy court applied a statutory post-judgment interest rate where the FNMA mortgage in question did not state that the contract rate was to survive a judgment:
As the debtor here has proposed to pay the entire allowed secured claim of FNMA, and as the mortgage instrument does not provide for the contract rate to continue after judgment, I agree with the debtor that . . . [pre-bankruptcy] interest runs here at the [statutory] rate of 6% from the entry of judgment until the commencement of this chapter 13 case.
In re Rorie, 98 B.R. at 219 (emphasis supplied) (citation and footnote omitted). The bankruptcy court applied the same reasoning and reached the same conclusion in In re Presque Isle Apartments:
A mortgage merges with a judgment in foreclosure. . . . Once a claim is reduced to judgment, the legal rate of interest applies unless the documents evidence a clear intent to continue the contractual rate of interest post-judgment. . . . [The mortgagee's] . . . documents reveal no such intent. Therefore, after entry of judgment on February 18, 1986, . . . [the mortgagee] is only entitled to the legal rate of interest as long as the obligation is based upon the judgment.
In re Presque Isle Apartments, 112 B.R. at 747 (citations omitted).
The court below also cited In re Smith, 92 B.R. 127 (Bankr.E.D.Pa.1988), rev'd on other grounds, 98 B.R. 708 (E.D.Pa.1989), and In re Herbert, 86 B.R. 433 (Bankr. E.D.Pa.1988), in support of its decision to allow FNMA to include the expenditures in its secured proof of claim. The sums allowed to be included in the proof of claim of the mortgagee in these cases, however, were not for periodic payments of taxes, hazard insurance, or mortgage insurance, but for standard expenses incidental to a mortgage foreclosure action. In re Smith, 92 B.R. at 133 (filing and service charge of $223.50 and $400 for scheduling of sheriff's sale); In re Herbert, 86 B.R. at 435 ($1,224.15 incurred in the judgment execution process). See generally 22 Pennsylvania Practice 2d §§ 121:73-76 (1984) (describing the process attending enforcement of property mortgages).
Unjust Enrichment
The bankruptcy court determined that even if the doctrine of merger did apply here, FNMA would still be entitled to include the expenditures in its secured proof of claim, because the Debtors still had the legal obligation to pay these costs, and because it would constitute unjust enrichment to permit the Debtors to escape liability to FNMA for the expenditures. In re Stendardo, 117 B.R. 833, 840-41 (Bankr. E.D.Pa.1990).
For the proposition that the Debtors still had the legal obligation to pay the expenditures, the bankruptcy court relied upon a series of cases that are distinguishable from the mortgage foreclosure context here. These decisions do not involve a setting in which a mortgagee has obtained a foreclosure judgment and seeks thereafter to hold a debtor liable for certain post-judgment payments; rather, they address the question of what obligations debtors are liable for as parties to an installment land sale contract that has yet to be foreclosed upon. In re Rowe, 110 B.R. 712, 714-15, 726 (Bankr.E.D.Pa.1990); In re Capodanno, 83 B.R. 285, 286-88 (Bankr. E.D.Pa.1988); In re Fox, 83 B.R. 290, 290-91 (Bankr.E.D.Pa.1988). Consequently, I conclude as a matter of law that these cases do not provide an alternative ground on which to allow FNMA to incorporate the expenditures in its secured proof of claim.
The determination of the bankruptcy court that the doctrine of unjust enrichment also entitled FNMA to seek reimbursement in its proof of claim for the expenditures is also problematic. The elements needed to fulfill the doctrine of unjust enrichment are
`benefits conferred on . . . [the recipient of services] by . . . [the party performing the services], appreciation of such benefits by . . . [the recipient], and acceptance *132 and retention of such benefits under such circumstances that it would be inequitable for . . . [the recipient of services] to retain the benefit without payment of value.'
Burgettstown-Smith v. Langeloth, 403 Pa.Super. 84, 588 A.2d 43, 45 (1991) (quoting Wolf v. Wolf, 356 Pa.Super. 365, 514 A.2d 901, 905-06 (1986)). In addition, the recipient of a benefit must be placed upon notice that the party performing the services expected to be paid. Fontaine v. Home Box Office, Inc., 654 F.Supp. 298, 303 (C.D.Cal.1986); Sachs v. Continental Oil Co., 454 F.Supp. 614, 619-20 (E.D.Pa.1978) (citations omitted).
Here, I must note at the outset that there is no showing in the record that the Debtors benefited from the post-judgment payment of the taxes and insurance premiums at issue. Receipt of a benefit by a party from whom reimbursement is sought is, by definition, a threshold requirement for recovery under the equitable doctrine of unjust enrichment. W.F. Magann Corp. v. Diamond Mfg. Co., Inc., 775 F.2d 1202, 1208 (4th Cir.1985). Further, the appellate record does not reveal how, if at all, the Debtors were placed upon notice that FNMA was making the payments and that it expected to be reimbursed. Nor is this element discussed in the opinion below. Accordingly, I conclude as a matter of law that the bankruptcy court erred in holding that the doctrine of unjust enrichment provided FNMA with a basis for including the expenditures in its secured proof of claim.
CONCLUSION
For the foregoing reasons, I shall vacate the August 29, 1990 Order of the bankruptcy court to the extent that it authorized FNMA to maintain a secured proof of claim against the Debtors in the amount of $9,944.70, and remand this case to the bankruptcy court so that it may enter an Order entitling FNMA to a secured proof of claim in the stipulated amount of $5,803.08. I realize that the conclusion reached today may reverberate beyond the parties to this appeal insofar as mortgagees continue to make periodic payments in connection with mortgages that do not clearly provide for the repayment of the pertinent obligations post-judgment. A solution may perhaps be found, however, in careful contract drafting, or, in the case of FNMA, in appropriate amendments to the statute or regulations governing FNMA mortgages.
FINAL ORDER
April 22, 1992.
AND NOW, this 22nd day of April 1992, upon consideration of the motion of the Federal National Mortgage Association ("FNMA") for reconsideration of the February 5, 1992 Order of this Court (Document No. 9), and the response of Anthony and Loretta Stendardo ("the plaintiffs") thereto, and having found that FNMA has essentially reiterated the arguments it made in opposition to the appeal of the plaintiffs, an improper basis for a motion for reconsideration, see, e.g., Aiken v. Bucks Assoc. for Retarded Citizens, Inc., No. 91-2672, 1992 WL 13073, at *3, 1992 U.S. Dist. LEXIS 756, at *8-*9 (E.D.Pa. Jan. 23, 1992); DiTommaso v. Union Central Life Ins. Co., No. 89-6323, 1991 WL 249977, at *2, 1991 U.S. Dist. LEXIS 17079, at *7-*8 (E.D.Pa. Nov. 25, 1991); Macario v. Pratt & Whitney Canada, Inc., No. 90-3906, 1991 WL 98902, at *2, 1991 U.S. Dist. LEXIS 7429, at *4 (E.D.Pa. June 4, 1991) ("`Whatever may be the purpose of . . . [a motion for reconsideration] it should not be supposed it is intended to give an unhappy litigant one additional chance to sway the judge.'") (citation omitted), it is hereby ORDERED that the motion of FNMA is DENIED.
IT IS FURTHER ORDERED that this case is hereby REMANDED to the bankruptcy court for the entry of an Order consistent with the February 5, 1992 Memorandum and Order of this Court. The jurisdiction of this Court is hereby relinquished. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551876/ | 139 B.R. 120 (1992)
In re PRIVATE CAPITAL PARTNERS, INC., Debtor.
PRIVATE CAPITAL PARTNERS, INC., Plaintiff,
v.
RVI GUARANTY CO., INC. and US West Financial Services, Inc., Defendants.
Bankruptcy No. 91 B 21573, No. 92 ADV. 5003.
United States Bankruptcy Court, S.D. New York.
April 27, 1992.
*121 *122 Shaw, Licitra, Parente, Esernio & Schwartz, P.C., Garden City, N.Y., for plaintiff.
Miller & Wrubel, P.C., New York City, for defendants.
DECISION ON MOTIONS FOR SUMMARY JUDGMENT
HOWARD SCHWARTZBERG, Bankruptcy Judge.
The Chapter 11 debtor, Private Capital Partners, has brought this adversary proceeding against RVI Guaranty Co., Ltd. ("RVI") and US WEST Financial Services ("USWFS") to recover fees incurred by the defendants for investment banking services the debtor performed in connection with USWFS's acquisition of RVI. The defendants, RVI and USWFS, have moved for summary judgment pursuant to Federal Rule of Civil Procedure 56 as incorporated by Bankruptcy Rule 7056 on each of the debtor's three claims for such investment banking fees.
The debtor alleges that under certain contracts, RVI owes the debtor a $300,000.00 fee which became due when RVI met its first year gross revenue projection and $500,000.00 for additional investment banking services the debtor rendered to RVI after the transaction was completed. The debtor also seeks payment of the $500,000.00 investment banking fee from USWFS on the ground that either USWFS was a direct obligor to the debtor on the $500,000.00 portion of the fee or guaranteed payment of that fee by RVI.
The defendants have moved for summary judgment as to each of the debtor's three claims. First, RVI argues that the $300,000.00 fee is a finder's fee and is rendered unenforceable because there is no writing signed by RVI as required under New York General Obligations Law § 5-701. Second, RVI claims that it does not owe the $500,000.00 additional investment banking services fee because such services were never performed. As to the debtor's third claim, which is against USWFS, USWFS argues that it is not liable on the alleged guaranty of $500,000.00 because the services were not performed, and in any event, the debtor did not reduce the guaranty to writing as required by New York General Obligations Law § 5-701(a)(2).
BACKGROUND
On October 10, 1991, the debtor filed with this court a petition for reorganizational relief under Chapter 11 of the Bankruptcy Code and was continued in management and possession of its property and business in accordance with 11 U.S.C. §§ 1107 and 1108. The debtor is engaged in the business of investment banking.
On or about September 6, 1989, the debtor and RVI entered into a letter agreement (the "Letter Agreement") confirming the debtor's appointment as the exclusive financial advisor and placement agent to RVI. RVI is a property and casualty insurer, specializing in residual value insurance of high quality assets. Pursuant to the Letter Agreement, the debtor was engaged to prepare a private placement offering (the "Offering") to raise between $20,000,000.00 and $50,000,000.00 in the form of equity, convertible preferred stock or other financial instruments.
*123 Pursuant to the Letter Agreement, the debtor was to receive a fee equal to 3½% of the amount raised by the debtor on behalf of RVI and was to be paid in a manner to be outlined in the Offering. On October 20, 1989, the debtor prepared the Offering. However, the Offering did not specify the manner or amount which the debtor was to be paid. The debtor concedes this point. Debtor's Rule 13(h) Statement, at 1.
The debtor contends that in January of 1990, prior to the closing of the RVI/USWFS transaction, Howard Chickering ("Chickering"), the President of RVI, advised Gerald H. Houghton ("Houghton"), an Executive Vice-President of the debtor, that RVI refused to proceed if the debtor's entire $1,750,000.00 fee was to be paid at the closing of the RVI/USWFS transaction. Affidavit of Gerald H. Houghton, at 4. The debtor claims that Houghton entered into an oral agreement with Chickering such that the debtor's investment banking fee of $1,750,000.00 was payable as follows: (a) the sum of $950,000.00 payable upon closing of the Offering on January 19, 1990; (b) the sum of $300,000.00 on the date that RVI met its first year gross revenue projection of $5,088,055.00, as reflected in the Offering; and (c) the sum of not less than $500,000 for additional investment banking services to be rendered by the debtor to RVI during 1990.
On January 19, 1990, Houghton advised the law firm drafting the closing documents that provisions (b) and (c) above of the oral agreement should be incorporated into the closing documents for the RVI/USWFS transaction. The debtor contends that this information was incorporated in a Schedule of Liabilities to the RVI/USWFS Acquisition Agreement (the "Acquisition Agreement") under which USWFS acquired all of the stock of RVI. On February 1, 1990, the closing took place and RVI paid the debtor $950,000.00. Houghton Affidavit, at 5.
The debtor takes the position that the Schedule of Liabilities should be read together with the debtor's letter of January 19, 1990 such that RVI is obligated to pay the debtor the $300,000.00 portion of the fee. The debtor also claims that on or about January 19, 1990, USWFS guaranteed payment of the $500,000.00 portion of the fee to the debtor, although no written guaranty was ever entered into between RVI and USWFS.
The debtor also argues that RVI and USWFS acknowledged their obligation to pay the $500,000.00 portion of the fee in a letter agreement dated February 1, 1990 (the "Additional Services Agreement"). Both RVI and USWFS signed this Additional Services Agreement, which reads as follows:
This letter sets forth our understanding that, in consideration for your agreement to forego $500,000.00 in fees for investment banking services rendered in connection with the investment by US WEST Financial Services, Inc. in our common stock and preferred stock, we and US WEST Financial Services, Inc. agree to make all reasonable efforts in good faith to provide you with fee income of $500,000.00 or more by discussing first with you where appropriate possible retention for investment banking services required by us or US WEST Financial Services, Inc. and by recommending and referring you to third parties who may require investment banking services of a type provided by you.
Sincerely,
RVI Guaranty, Ltd.
By: s/Howard Chickering, Pres.
ACKNOWLEDGED
US WEST FINANCIAL SERVICES,
INC.
By: s/Robert Pinkerton, VP
Additional Services Agreement, attached as Exhibit 4 to Houghton Affidavit.
The defendants' disagree with the debtor's version of the fee arrangement. The defendants claim that USWFS refused to purchase RVI's stock pursuant to the fee structure set forth in the Letter Agreement, not that USWFS and RVI simply wanted to defer the payment of the fees. Therefore, to close the deal, the defendants claim the Letter Agreement was vacated. In the alternative, the defendants argue that "the Letter Agreement only provides *124 for a percentage fee and does not refer to the $300,000.00 fee or $500,000.00 fee alleged in the Complaint." Defendants' Memorandum of Law, at 7 n. 2. As to the $300,000.00 portion of the fee, RVI argues that because the Letter Agreement was vacated and because RVI did not sign the Offering, the debtor must rely on the alleged oral agreement between Chickering and Houghton, which is unenforceable under New York General Obligations Law § 5-701(a). Even if the oral agreement were valid or the Letter Agreement had not been vacated, RVI contends that there never was an agreement that RVI would have to pay the $300,000.00 portion of the fee if RVI did not meet its 1990 projections in 1990, regardless of whether RVI achieved such revenue projections in 1991. Reply Affidavit of Chickering, at 2. RVI argues that the debtor's claim for an additional $500,000.00 investment banking fee has no merit because the services were never performed.
USWFS contends that the debtor's claim for $500,000.00 against it based on a theory that USWFS guaranteed RVI's payment of that amount is meritless as a matter of law because the debtor offers no writing setting forth this guaranty. Therefore, under section 5-701(a)(2) of the New York General Obligations Law, the guaranty is unenforceable. With regard to the debtor's argument that both are obligated to the debtor as a result of the Additional Services Agreement, USWFS argues, as does RVI, that they are not primarily liable to the debtor because the services were never performed.
The debtor claims that on or about May 1, 1991, RVI reached its first year gross revenue projection of $5,088,055.00, triggering payment of the $300,000.00 portion of the fee from RVI. The debtor further states that it performed services for RVI and USWFS after February 2, 1990 and therefore is entitled to the $500,000.00 additional fee.[1] The debtor has requested payment of both the $300,000.00 and $500,000.00 portions of the fee from RVI and the $500,000.00 portion from USWFS. Both RVI and USWFS have refused to pay the debtor these portions of the fees the debtor alleges are now due and owing.
The Letter Agreement contains a provision requiring the application of New York law to resolve disputes concerning that agreement.
DISCUSSION
Summary Judgment
RVI and USWFS have moved for summary judgment under Federal Rule of Civil Procedure 56, which is made applicable to this adversary by Bankruptcy Rule 7056. In ruling on a motion for summary judgment, the court must review the pleadings, depositions, answers to interrogatories, admissions and affidavits, if any, to determine if there is no genuine issue as to any material fact so that the moving party is entitled to a judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986). The moving party has the burden of showing 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, 2553, 91 L.Ed.2d 265 (1986). The inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 599, 106 S.Ct. 1348, 1362, 89 L.Ed.2d 538 (1986). The nonmoving party may oppose a summary judgment motion by making a showing that there is a genuine issue as to a material fact in support of a verdict for that party. Anderson, 477 U.S. at 249, 106 S.Ct. at 2510.
This is a case in which the plaintiff's counsel has attempted to refine the issues to be decided by including new causes of action in its memoranda of law in opposition to the defendants' motion for summary judgment. Such practice is contrary to the *125 Federal Rules of Civil Procedure applicable in this adversary proceeding. See, e.g., Morgan Distributing Co., Inc. v. Unidynamic Corp., 868 F.2d 992, 995 (8th Cir. 1989) (a brief in response to a motion for summary judgment cannot amend a complaint); O'Brien v. National Property Analysts Partners, 719 F.Supp. 222, 229 (S.D.N.Y.1989) (The plaintiff's statements regarding an alleged security fraud "encompass a level of particularity that does not exist in the Complaint and it is axiomatic that the Complaint cannot be amended by the briefs in opposition to a motion to dismiss." (citing Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir.1984), cert. denied, 470 U.S. 1054, 105 S.Ct. 1758, 84 L.Ed.2d 821 (1985)); Jacobson v. Peat, Marwick, Mitchell & Co., 445 F.Supp. 518, 526 (S.D.N.Y.1977) ("It is true that counsel for the plaintiff makes the necessary averment in his memorandum of law, but a party is not entitled to amend his pleading through statements in his brief.")
The procedure for amending or supplementing pleadings is governed by Rule 15(a), which in this case would allow the plaintiff to amend its complaint only by leave of court or by written consent of the adverse party because the instant defendants have filed an answer. Fed.R.Civ.P. 15(a). To the extent that the plaintiffs have asserted causes of action in their memoranda not present in their complaint, the plaintiff is granted leave to amend its complaint to include such causes of action. Courts will permit amendment of pleadings for virtually any purpose, including to add claims, alter legal theories or request different or additional relief. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 72 (2d Cir. 1990); Jones v. New York City Human Resources Admin., 539 F.Supp. 795, 801 (S.D.N.Y.1982). However, the defendants' motion for summary judgment on those causes of action asserted in the complaint will now be considered.
The Debtor's Claim Against RVI for $300,000.00
Under the debtor's first cause of action against RVI, it seeks $300,000.00 based on RVI's breach of the terms of the Offering. Specifically, the debtor claims that the Offering called for a $300,000.00 payment by RVI on the date that RVI met its first year gross revenue projection of $5,088,055.00. The debtor alleges that on or about May 1, 1991, RVI reached this figure. Because the Offering contained no such terms, the defendants' motion for summary judgment is granted as to this claim.
The court grants the debtor leave to amend its complaint to include a claim against RVI for the balance of the original $1,750,000.00 not received at the closing of the RVI/USWFS transaction. Should the alleged modification of the Letter Agreement of September 6, 1989 be ineffective, the Letter Agreement may be a basis for such a claim. Moreover, the debtor is granted leave to amend its complaint to include a claim as to the $300,000.00 fee based on the theory that there are two documents in writing that allegedly satisfy the Statute of Frauds with regard to this item, namely the Letter Agreement of September 6, 1989 and the Schedule of Liabilities accompanying the Acquisition Agreement. These documents are referred to in the debtor's memoranda of law, whereas the complaint is bottomed on the Offering, which does not support the claimed $300,000.00 fee.
The Debtor's Claim Against RVI for $500,000.00
In its complaint, the debtor seeks $500,000.00 from RVI on the theory that RVI breached the Letter Agreement of September 6, 1989. The debtor contends that it has performed the services for RVI and has requested payment, but has not been paid. The Letter Agreement, however, makes no provision for a $500,000.00 fee, but rather, only provides for a 3½% fee based on the entire amount of money the debtor raised. The form of payment was to be outlined in the Offering and the debtor concedes that this information was not contained in the Offering.
*126 The debtor in its memoranda in opposition to the defendants' motion for summary judgment now asserts a new cause of action to recover $500,000.00 from RVI. The new cause of action is based on a breach of the the Additional Services Agreement, a contract not mentioned in the complaint. Under this theory, the debtor asserts that by signing the Additional Services Agreement, RVI agreed "to make all reasonable efforts in good faith" to provide the debtor with $500,000.00 of investment banking services and "to refer" the debtor third parties who may require such investment banking services. Plaintiff's Memorandum in Opposition to Defendants' Motion for Summary Judgment, at 8. The debtor now attempts to claim that RVI breached the Additional Services Agreement because RVI failed to discuss possible transactions in good faith. This claim is one for fees involving services for which RVI itself failed to retain the debtor or to refer the debtor to others. This claim suggests a different cause of action for a different injury not in the debtor's complaint. Therefore, the defendants' motion for summary judgment with regard to the debtor's claim for $500,000.00 based on the breach of the Letter Agreement is granted. The debtor is given leave to amend its complaint to include a claim against RVI based on breach of the Additional Services Agreement.
The Debtor's Claim Against USWFS for $500,000.00
Initially, the debtor claimed that USWFS was liable, as guarantor, for $500,000.00 for additional investment banking services rendered after the closing of the RVI/USWFS transaction. Complaint, at ¶ 24. However, the debtor has failed to offer any written document evidencing such a guaranty. New York General Obligations Law § 5-701(a)(2) specifically provides:
(a) Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking:
. . . .
(2) Is a special promise to answer for the debt, default or miscarriage of another person.
N.Y.Gen.Oblig.Law § 5-701(a)(2) (McKinney 1989). Without a written guaranty agreement, the debtor's claim based on a guaranty theory must be denied because the claim is barred by the Statute of Frauds as a matter of law. England Strohl/Denigris, Inc. v. Weiner, 538 F.Supp. 612, 614 (S.D.N.Y.1982), aff'd, 740 F.2d 954 (2d Cir.1984).
The debtor also argues that USWFS is liable, as a primary obligor along with RVI, for the $500,000.00 portion of the fee pursuant to the Additional Services Agreement. Plaintiff's Memorandum in Opposition to Defendants' Motion for Summary Judgment, at 11. However, the only claim the debtor asserted against USWFS in the complaint was the claim that USWFS had guaranteed payment by RVI of the $500,000.00 portion of the fee for services in connection with the transaction.
Consequently, the debtor's claim that USWFS breached the terms of the Additional Services Agreement is insufficient for the same reason that claim cannot at this stage in the pleadings be decided as against RVI, namely because that cause of action was not asserted in the complaint. Accordingly, the defendants' motion for summary judgment with regard to the debtor's claim for $500,000.00 against USWFS pursuant to the Letter Agreement of September 6, 1989 is granted. The debtor is given leave to amend its complaint to include a claim against USWFS based on the breach of the Additional Services Agreement.
Non-Core Proceeding
The defendants' claim that the debtor's causes of action should be characterized as non-core proceedings in accordance with 28 U.S.C. § 157(c), citing Ben Cooper, Inc. v. The Insurance Co. of the State of Pennsylvania (In re Ben Cooper), 896 F.2d 1394 (2d Cir.), vacated and remanded, ___ U.S. ___, 111 S.Ct. 425, 112 *127 L.Ed.2d 408 (1990), superseded, 924 F.2d 36 (2d Cir.), cert. denied, ___ U.S. ___, 111 S.Ct. 2041, 114 L.Ed.2d 126 (1991). The Ben Cooper case is not controlling in the instant case because we are here dealing with a prepetition contract claim. Ben Cooper stands for the proposition that a post-petition contract claim implicates an essential part of administering the bankruptcy estate, and therefore, is a core proceeding. On the other hand, it is settled law in this court that a garden variety prepetition breach of contract case invokes no substantive principles of bankruptcy law and is a non-core proceeding. In re Thomson McKinnon, 1991 WL 263144 (Bankr. S.D.N.Y. Dec. 13, 1991), aff'd, (S.D.N.Y. Jan. 28, 1992); In re Wills Motors, Inc., 131 B.R. 263 (Bankr.S.D.N.Y.1991); In re Golden Distributors, Ltd., 128 B.R. 342 (Bankr.S.D.N.Y.1991); In re J.T. Moran Financial Corp., 119 B.R. 447 (Bankr. S.D.N.Y.1990). Accordingly, this adversary proceeding will be treated as a noncore proceeding, which will require proposed findings of fact and conclusions of law if it is to be tried in the bankruptcy court.
The court is surprised that the defendants, rather than the plaintiff, argued that this adversary proceeding is a non-core proceeding, especially in light of the defendants' demand for a jury trial. It appears that the defendants either misunderstand the theory of jury trials in bankruptcy cases or they do not seriously expect that their demand for a jury trial has much vitality. Manifestly, the courts universally hold that there is no right to a jury trial in non-core proceedings because the district court must review the bankruptcy court's proposed findings of fact and conclusions of law on a de novo basis. Ben Cooper, 896 F.2d. at 1403; Taxel v. Electronic Sports Research (In re Cinematronics, Inc.), 916 F.2d 1444, 1451 (9th Cir.1990); Beard v. Braunstein, 914 F.2d 434, 445 (3d Cir.1990); Kaiser Steel Corp. v. Frates (In re Kaiser Steel Corp.), 911 F.2d 380, 389-92 (10th Cir.1990); In re United Missouri Bank of Kansas City, N.A., 901 F.2d 1449, 1454-57 (8th Cir.1990). Nonetheless, the issue as to the defendants' right to a jury trial has not been submitted to the court. Therefore, this issue will not be addressed at this time. As Scarlet O'Hara said in Gone With The Wind, "Tomorrow is another day."
PROPOSED CONCLUSIONS OF LAW
1. This court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a). The debtor's suit against RVI and USWFS is a non-core proceeding within the meaning of 28 U.S.C. § 157(c)(1). This is a civil proceeding which neither arises under title 11 nor arises in a case under title 11, but is related to a case under title 11, as authorized under 28 U.S.C. § 1334(b). Accordingly, the proposed conclusions of law are submitted to the district court for a final order or judgment to be entered by the district court after considering the proposed conclusions and after reviewing de novo those matters to which any party has timely and specifically objected as expressed in 28 U.S.C. § 157(c)(1).
2. The defendants' motion for summary judgment should be granted as to the debtor's first claim for $300,000.00. The debtor should be given leave to amend its complaint to include a claim for $300,000.00 based on the Schedule of Liabilities accompanying the Acquisition Agreement and any other documents allegedly satisfying the Statute of Frauds.
3. The defendants' motion for summary judgment should be granted as to the debtor's second claim for $500,000.00. The debtor should be granted leave to amend its complaint to include a claim for $500,000.00 based on the Additional Services Agreement and any other documents allegedly satisfying the Statute of Frauds.
4. The debtor should be given leave to amend its complaint to include a claim for $800,000.00 based on a breach of the Letter Agreement of September 6, 1989.
5. The defendants' motion for summary judgment with regard to the debtor's claim for $500,000.00 against USWFS is granted. The debtor should be given leave to amend *128 its complaint to include a cause of action against USWFS based on the Additional Services Agreement and the claim that USWFS is primarily liable for this amount.
NOTES
[1] The debtor claims that it was prevented from performing additional services for the defendants because of the defendants' bad faith repudiation of the February 2, 1990 Acquisition Agreement. Debtor's Rule 13(h) Statement, at 2. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551877/ | 139 B.R. 97 (1992)
MANVILLE CORPORATION, Manville Sales Corporation (f/k/a Johns-Manville Sales Corporation), Plaintiffs,
v.
UNITED STATES of America, Defendant.
No. 91 Civ. 6683 (RWS).
United States District Court, S.D. New York.
April 3, 1992.
As Amended April 8, 1992.
*98 Davis Polk & Wardwell (Lowell Gordon Harriss, of counsel), Kaye, Scholer, Fierman, Hays & Handler, New York City, for plaintiffs.
Otto G. Obermaier, U.S. Atty., S.D.N.Y. (Edward A. Smith, Paula T. Dow, Paul K. Milmed, Asst. U.S. Attys., Daniel Pinkston, Trial Atty., Environmental Defense Section U.S. Dept. of Justice, of counsel), New York City, for the U.S.
OPINION
SWEET, District Judge.
Defendant United States of America (the "Government") has moved for an order dismissing the declaratory judgment action brought by the Manville Corporation and the Manville Sales Corporation (collectively "Manville") on the ground that Manville's complaint is not yet ripe for adjudication. For the reasons set forth below, the Government's motion is denied.
Prior Proceedings[1]
On August 26, 1982, the Johns-Manville Corporation and its affiliated entities, including the Manville Corporation and the predecessors to Manville Sales Corporation, filed petitions under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., in the United States Bankruptcy Court for the Southern District of New York. This action was precipitated in part by the massive amount of liability Manville anticipated facing for personal injuries arising from asbestos exposure and asbestos-related property damage claims.
The Bankruptcy Court entered an order on July 16, 1984, fixing October 31, 1984, as the date by which claims had to be filed against Manville or be forever barred. The bar date was later extended to January 31, 1985. The order setting the bar date required Manville to conduct a notice campaign, pursuant to which notices were printed in numerous publications and mailed to over 23,000 entities, including the Administrator of the Environmental Protection Agency ("EPA") and all ten EPA regional offices. The Government failed to *99 file a proof a claim, either before or after the final bar date.[2]
Prior to entering bankruptcy, Manville had instituted litigation against the United States seeking contribution or indemnity from the Government for asbestos claims arising out of naval shipyards owned or controlled by the Government. One of the defenses the Government asserted in these actions was its sovereign immunity, which later proved to be successful. The Government probably would have waived this defense had it filed a proof of claim in Manville's bankruptcy proceedings, see 11 U.S.C. § 106, a fact the Government apparently was well aware of before the bar date, see Complaint ¶ 22.
The Bankruptcy Court confirmed Manville's Second Amended and Restated Plan of Reorganization on December 22, 1986. The order became final on October 28, 1988, and the reorganization plan consummated on November 28, 1988. Manville's obligations under the plan will continue until all asbestos health related claims have been provided for by the Manville Personal Injury Settlement Trust.
Manville commenced this adversary action on July 19, 1991, in Bankruptcy Court, to seek a declaratory judgment that the Government had bankruptcy claims against Manville with respect to four specific environmental clean-up operations, that the Government failed, deliberatively, to file a proof of claim, and that these claims have been discharged by the confirmation of the reorganization plan.
The Government filed its present motion on September 17, 1991. The parties then stipulated and moved to withdraw the reference from the Bankruptcy Court pursuant to 28 U.S.C. § 157. Their motion was granted and the reference withdrawn by the Honorable Jack B. Weinstein of the Southern and Eastern Districts of New York on October 9, 1991. On November 6, 1991, the matter was transferred to this Court's docket pursuant to Rule 16 of the Rules For the Division of Business Among District Judges of the Southern District. Oral argument was heard on January 9, 1992, and the motion considered submitted as of that date.
Facts
Manville seeks a judgment declaring that its liability to the Government under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601 et seq. ("CERCLA"), and under other environmental statutes for four specific Superfund sites was discharged in bankruptcy. These four sites are: an asbestos mill, ponding basin, and the City of Coalinga, California ("Coalinga Asbestos Mill Site"); a landfill in Arapaho County, Colorado ("Lowry Landfill Site"); a paint stripping and solvent manufacturing and recycling facility in South Hope, Maine ("Union Chemical Site"); and a facility used to store transformers, liquids and other materials contaminated with polychlorinated biphenyls ("PCBs") in Baldwin, Florida ("Yellow Water Road Site"). The EPA has undertaken enforcement or response activities at each site.
Coalinga Asbestos Mill Site
From 1962 to 1974, the Coalinga Asbestos Company mined and milled asbestos on a plot of land approximately twenty miles from the City of Coalinga owned by the Southern Pacific Land Company. Johns-Manville Sales Corporation was an incorporator and shareholder of the Coalinga Asbestos Company.
The EPA first inspected the mill in 1973, apparently to check its compliance with national emission standards. The agency conducted another inspection of the site in May 1980, while in October 1980, the California Regional Quality Control Board inspected the mill to determine whether *100 waste discharges were in compliance with the state's environmental regulations. The state concluded that corrective measures were necessary to prevent asbestos from entering drainage basins. In April 1982, Southern Pacific and Manville submitted plans to the state proposing remedial actions that were never implemented due to Manville's subsequent bankruptcy filing.
The Coalinga Asbestos Mill Site was placed on the National Priorities List of hazardous wastes sites by the EPA in September 1984. The site consists of three distinct areas: the Coalinga mill area; a ponding basin of the California Aqueduct; and the City of Coalinga. The EPA states that it is studying and assessing the three areas separately. At the ponding basin, the EPA will evaluate the actions undertaken there by other state and federal agencies in 1992.
At the City of Coalinga, the EPA has completed a remedial investigation and feasibility study ("RI/FS"). The agency issued a Record of Decision ("ROD") on July 19, 1989, selecting a remedial plan of action for the area. The Southern Pacific Transportation Company has and will continue to execute the plan, and has reimbursed the EPA for its past response costs at the City of Coalinga.
The EPA informed Manville that it was a potentially responsible party ("PRP") for the mill area cleanup in 1988. On September 21, 1990, the agency issued a ROD for the site that estimated cleanup operations would take two years and cost at least $1.8 million.
On January 30, 1991, the EPA sent Manville and five other PRPs a letter entitled "Special Notice Letter for the Johns-Manville Coalinga Mill Area Operable Unit of the Coalinga Mine Superfund Site, Fresno County, California, and Demand for Payment" ("Coalinga Mill Letter"). Invoking the provisions of CERCLA § 122(e), 42 U.S.C. § 9622(e), the letter sought to "expedite the remedial process and facilitate a settlement". Coalinga Mill Letter 2. The letter requested the PRPs collectively submit a "good faith" settlement offer stating, among other things, their willingness and ability to undertake remedial action. If accepted after negotiations, the settlement would be embodied in a consent decree between the PRPs and the EPA that would not be binding on the Government until approved by the agency and the Department of Justice. See id. at 2-3. The letter also "demanded" the reimbursement of costs of $1,531,947.30 already expended by the Government in its response action and interest from the date the letter was received, pursuant to § 107(a), 42 U.S.C. § 9607(a). Coalinga Mill Letter 3-4.
Three of the mill area PRPs, not including Manville, submitted a good faith offer to the EPA on April 9, 1991. They subsequently signed a consent decree in July 1991, which also was signed by the EPA in September 1991 but has not yet been approved by the Department of Justice nor a federal court. See § 122(d); 42 U.S.C. § 9622(d).
On March 26, 1991, Manville responded to the Coalinga Mill Letter with a letter stating that Manville believed its liability had been fully discharged in the bankruptcy proceedings. Manville alleges that after the EPA received its response, the agency advised Manville that it would issue a Unilateral Administrative Order against Manville pursuant to § 106(a), 42 U.S.C. § 9606(a). In late September, 1991, however, an EPA official advised Manville that, after the complaint in this action was filed, she was told not to take any further enforcement action against Manville. Ray Affidavit ¶ 5.
Lowry Landfill Site
Between July 1977 and November 1980, the Waste Transport Company allegedly delivered liquid sludge from the Manville Technical Center to the Lowry Landfill in Colorado. The EPA began an investigation of the landfill in 1981 and may have known of possible Manville contributions to the landfill in 1983.
Manville received requests for information concerning the landfill from the EPA in 1985 and 1986. After examining its records to no avail, Manville responded that it had no knowledge or records of any waste shipments by it to the site from 1966 *101 to 1980. The EPA therefore did not list Manville as a PRP for Lowry Landfill.
In 1990, the EPA allegedly received documents from a third party showing that the Waste Transport Company had delivered wastes from Manville to Lowry Landfill from 1977 to 1980. The agency therefore notified Manville that it was a PRP in a letter dated December 7, 1990, and that Manville had contributed 702,761 gallons of waste water and oil to the landfill. This figure was revised downward to 250,000 gallons in May 1991.
The EPA has initiated de minimis settlement negotiations with the Lowry Landfill PRPs. See § 122(g), 42 U.S.C. § 9622(g) At first, Manville was not eligible to participate in these discussions, but became potentially eligible when the EPA revised its estimate of Manville's volumetric contribution to the site On August 1, 1991, the EPA set the final eligibility requirements for participating in the Lowry Landfill de minimis settlement. To participate, a PRP must meet three requirements: (1) its § 104(e) response must be adequate and complete; (2) its volumetric contribution to the landfill must be 300,000 gallons or less; and (3) it must not be involved in any litigation against the EPA concerning Lowry Landfill. It apparently is the EPA's position that Manville was eligible to participate in the de minimis settlement before it filed the present complaint, and that, unless it drops the allegations regarding the landfill, it is now barred from participating. Ray Affidavit ¶ 7.
The EPA has incurred roughly $19 million in response costs at the Lowry Landfill Site. Manville estimates that the ultimate response costs for the site will approach $500 million.
Union Chemical Site
The Union Chemical Company owned and operated a paint stripping and solvent manufacturing business at the Union Chemical Site from 1967 to 1986. Beginning in 1969, Union Chemical also operated a solvent recovery facility at the site. Manville's Lewiston, Maine, roofing plant allegedly sent 6,450 gallons of waste solvents to the site between 1979 and 1984. The Maine Department of Environmental Protection discovered groundwater contamination at the site in 1979.
The EPA has been active at Union Chemical since 1984. On March 23, 1987, the agency notified Manville that it was a PRP. The State of Maine, the EPA, and approximately 288 PRPs, including Manville, reached a settlement concerning the Union Chemical Site in 1987 by which the PRPs agreed to reimburse the state and the EPA for response costs incurred for past cleanup activities and to finance an RI/FS. The Union Chemical Site was listed on the National Priorities List in October 1989.
The RI/FS was completed in 1989, and the EPA signed a ROD for the site on December 27, 1990. The estimated cost of implementing the ROD is $10-$15 million.
On February 28, 1991, the EPA sent Manville and about 400 other PRPs a letter entitled "Special Notice Pursuant to Section 122(e) of CERCLA for Remedial Design/Remedial Action at the Union Chemical Company, Inc. Site in South Hope, Maine" ("Union Chemical Letter"). This letter contained:
a formal demand for reimbursement of the costs, including interest thereon, that have been incurred and that are expected to be incurred in response to the environmental problems at the site [pursuant to § 107(a)]. This letter also provide[d] notice of a period of negotiations seeking [Manville's] voluntary participation in the performance or financing of the remaining response actions necessary at the Site.
Union Chemical Letter 1. The amount of costs that the EPA had incurred by that time was $1.75 million. The type of negotiations suggested is similar to the "good faith" procedures set forth in the Coalinga Mill Letter. The Union Chemical Letter also stated that the EPA was considering a de minimis settlement. See id. at 5.
On May 22, 1991, Manville responded to this letter by again notifying the EPA that it believed the Government's claims were discharged in bankruptcy. On August 8, 1991, the EPA, the state, and 60 PRPs *102 other than Manville reached a settlement by which these PRPs agreed to perform the selected remedy and to reimburse a portion of the response costs incurred. The underlying consent decree was lodged with the United States District Court for the District of Maine on December 4, 1991.
Yellow Water Road Site
The American Environmental Energy Corporation owns the Yellow Water Road Site. In 1981, it entered into a joint venture with the American Electric Corporation for the purpose of developing a PCB incinerator on the site. As part of the venture, PCB-contaminated liquids and equipment were sent to and stored at the site.
Manville's Green Cove Springs, Florida, pipe plant was a customer of the American Electric and sent wastes to American Electric's Ellis Road facility. American Electric in turn sent the wastes to the Yellow Water Road Site.
The EPA commenced a criminal investigation against American Electric in 1982 that partially involved its disposal of wastes at Yellow Water. American Electric eventually was acquitted, and the EPA initiated a removal action at the site in November 1984. Due to the threatened release of PCBs at the site, the EPA conducted an emergency response between December 1984 and June 1985, incurring costs. The EPA listed the Yellow Water Road Site on the National Priorities List on June 10, 1986.
In March 1987, the EPA sent information requests to a number of PRPs, including Manville. A steering committee was formed by 53 of the PRPs, and the chair-person of the committee notified Manville of its PRP status in April 1987. The EPA and the steering committee entered into an Administrative Order by Consent in September 1987 by which the committee agreed to perform a RI/FS. The report was submitted to the EPA in 1990 and the agency selected a remedy for soil contamination in a ROD dated September 28, 1990. The site has been divided into two cleanup units, one for soil contamination and one for groundwater contamination. A remedy for the groundwater contamination has not been chosen yet.
Pursuant to § 106(a), 42 U.S.C. § 9606(a), the EPA issued a Unilateral Administrative Order for Remedial Design ("Yellow Water Order") on March 5, 1991, directing Manville and 87 other PRPs to perform the remedial design specified in the ROD. Manville again responded by asserting that the EPA's claim had been discharged in bankruptcy, in addition to a number of other defenses.
The order states that:
[u]nder Section 106(b) of CERCLA, 42 U.S.C. § 9606(b), Respondents shall be subject to civil penalties of not more than $25,000 for each day in which a violation of this Order occurs or a failure to comply continues. Failure to comply with this Order, or any portion hereof, without sufficient cause, may result in liability under Section 107(c)(3) of CERCLA, 42 U.S.C. § 9607(c)(3), for punitive damages in an amount at least equal to, and not more than, three times the amount of any costs incurred by EPA as a result of such failure to comply.
Yellow Water Order 20-21. Most of the PRPs are in compliance with the order, but not Manville. On December 10, 1991, the EPA amended the Yellow Water Order to delete Manville from the list of respondents subject to its terms, effectively withdrawing the order against Manville.
Discussion
Relying principally on In re Combustion Equipment Associates, Inc., 838 F.2d 35 (2d Cir.1988), the Government contends that Manville's complaint for a declaratory judgment must be dismissed since the underlying dispute is not ripe for adjudication. Indeed, the Government asserts that the panoply of remedies available to it under CERCLA and CERCLA itself mandate that this dispute will not be justiciable until the EPA initiates a judicial enforcement action, if ever.
Manville's complaint places the Court precisely at "the intersection of bankruptcy law and environmental law". In re Chateaugay Corp., 944 F.2d 997, 999 (2d Cir. *103 1991). The intersection is not a harmonious one; each set of laws directs a decision-maker towards competing objectives and policies. See id. at 1002. Simply put, the Bankruptcy Code seeks to provide a debtor with a "fresh start" as fast as possible, while CERCLA seeks to postpone the inception of litigation as long as possible by focusing on remedial activities. See generally id.; Combustion Equipment, 838 F.2d at 37; Drabkin, Moorman & Kirsch, Bankruptcy and the Cleanup of Hazardous Waste: Caveat Creditor, 15 Envtl. L.Rep. (Envtl.L.Inst.) 10168 (1985); Note, Dividing the Toxic Pie: Why Superfund Contingent Contribution Claims Should not be Barred by the Bankruptcy Code, 66 N.Y.U.L.Rev. 850 (1991). Further compounding this action are the separate policies of the Declaratory Judgment Act, 28 U.S.C. § 2201. See Combustion Equipment, 838 F.2d at 36.
I. Statutory Jurisdiction
The exercise of a court's power to issue a declaratory judgment is discretionary, and whether a court exercises that power is frequently controlled by whether an underlying controversy is ripe. See 28 U.S.C. § 2201(a); Abbott Laboratories v. Gardner, 387 U.S. 136, 148, 87 S.Ct. 1507, 1515, 18 L.Ed.2d 681 (1967); Combustion Equipment, 838 F.2d at 37. Ripeness itself, though, also can be constitutional limit on a district court's jurisdiction. See U.S. Const. art. III, § 2. Before addressing the constitutional issue and deciding whether this particular controversy is ripe, however, it would be more prudent to first determine whether jurisdiction over the matter has been statutorily precluded, assuming the underlying controversy is ripe.
Manville's Complaint alleges that "[t]his Court has jurisdiction over the proceeding pursuant to 28 U.S.C. §§ 157, 1334 and 2201; Bankruptcy Rule 7001; [and] paragraphs 28(b), (f) and (k) of the Order of Confirmation". Complaint ¶ 3. Section 1334(b) provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11" Section 2201 (the Declaratory Judgment Act) further provides that:
In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section 505 or 1146 of title 11, or in any civil action involving an antidumping or countervailing duty proceeding regarding a class or kind of Canadian merchandise, as determined by the administering authority, any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.
28 U.S.C. § 2201. None of the exceptions set forth in the Declaratory Judgment Act apply here. Therefore, as this action is an adversarial proceeding squarely arising out of and related to Manville's title 11 proceedings, Manville has pleaded a proper jurisdictional predicate.
The Government contends, however, that CERCLA § 113(h) precludes the Court from exercising jurisdiction over the Complaint. Section 113(h) provides that:
No Federal court shall have jurisdiction under Federal law other than under section 1332 of Title 28 (relating to diversity of citizenship jurisdiction) or under State law which is applicable or relevant and appropriate under section 9621 of this title (relating to cleanup standards) to review any challenges to removal or remedial action selected under section 9604 of this title, in any action except one of the following:
(1) An action under section 9607 of this title to recover response costs or damages or for contribution.
(2) An action to enforce an order issued under section 9606(a) of this title or to recover a penalty for violation of such order.
(3) An action for reimbursement under section 9606(b)(2) of the title.
*104 (4) An action under section 9659 of this title (relating to citizens suits) alleging that the removal or remedial action taken under section 9604 of this title or secured under section 9606 of this title was in violation of any requirement of this chapter. Such an action may not be brought with regard to a removal where a remedial action is to be undertaken at the site.
(5) An action under section 9606 of this title in which the United States has moved to compel a remedial action.
CERCLA § 113(h), 42 U.S.C. § 9613(h). These broad restrictions on a court's ability to review the Government's actions in the CERCLA context run to the core of CERCLA's policy of executing cleanup efforts as quickly as possible without the delay imposed by piecemeal litigation. See Voluntary Purchasing Groups, Inc. v. Reilly, 889 F.2d 1380, 1385-90 (5th Cir.1989); Note, supra, at 859-63; cf. Wagner Seed Co. v. Daggett, 800 F.2d 310, 314-15 (2d Cir.1986). The Government thus argues that this Court cannot review the allegations within Manville's Complaint since the EPA has not initiated a judicial enforcement action against Manville.
"Whether and to what extent a particular statute precludes judicial review is determined not only from its express language, but also from the structure of its statutory scheme, its objectives, its legislative history, and the nature of the administrative action involved." Block v. Community Nutrition Institute, 467 U.S. 340, 345, 104 S.Ct. 2450, 2454, 81 L.Ed.2d 270 (1984); see also Traynor v. Turnage, 485 U.S. 535, 542, 108 S.Ct. 1372, 1378, 99 L.Ed.2d 618 (1988) ("The presumption in favor of judicial review may be overcome `only upon a showing of "clear and convincing evidence" of a contrary legislative intent'" (citations omitted)). No doubt were Manville contesting whether it had contributed to the wastes at the sites or challenging the methods the EPA used to remedy the site, § 113(h), would bar this action. See Reardon v. United States, 947 F.2d 1509, 1512-14 (1st Cir.1991) (en banc); Voluntary Purchasing Groups, 889 F.2d at 1390-91.
Expansive legislative history and purposes not to the contrary, § 113(h) does not, however, paint with as broad a brush as the Government suggests. By its terms, the statute limits review of "any challenges to removal or remedial action selected under section 9604 of this title". 42 U.S.C. § 9613(h); Reardon, 947 F.2d at 1515. The statute therefore must yield to allow review in situations not within its reach. See id. at 1514-17; Chateaugay Corp., 944 F.2d at 1006.
In both Combustion Equipment and Chateaugay Corp, the Second Circuit noted the breadth of § 113(h), but did not apply it. See Chateaugay Corp., 944 F.2d at 1006; Combustion Equipment, 838 F.2d at 37. The Combustion Equipment court only mentioned the statute in passing in affirming the district court's dismissal of a declaratory judgment action on narrowly-drawn ripeness grounds. See id. at 41.
The Chateaugay Corp. court found the statute to be inapplicable to a pre-confirmation adversary proceeding in bankruptcy. The EPA initiated the action within the debtor's Chapter 11 proceedings, seeking a declaratory judgment that response costs incurred post-confirmation are not dischargeable. The Government argued that § 113's ban on pre-enforcement review required that it receive a judgment in its favor. The Court of Appeals rejected this contention, noting that it had not been asked "to `review any challenges to removal or remedial action [under § 104] or to review any order issued under [§ 106(a)]'". 944 F.2d at 1006 (quoting 42 U.S.C. § 9613(h)). Rather, the court noted that "nothing prevents the speedy and rough estimation of CERCLA claims . . . with ultimate liquidation of the claims to await the outcome of normal CERCLA enforcement proceedings". Id. It therefore declined to decide whether CERCLA impliedly repealed authority conferred on federal courts by the Bankruptcy Code. Id.; see also Reardon, 947 F.2d at 1517 (§ 113(h) does not preclude judicial review of due process challenge of CERCLA).
*105 The Government argues that because Manville seeks a post-confirmation dischargeability determination, Chateaugay Corp. does not apply and the Bankruptcy Code's policy of accelerated litigation is not implicated. However, the distinctions between the form of this action and that of Chateaugay Corp. do not require that Chapter 11's chief policy of providing the debtor with a fresh start be ignored. Indeed, accelerated litigation often is just a mechanism by which to achieve a fresh start while preserving as many of the debtor's assets as possible. See Note, supra, at 869. The broad sweep of the Bankruptcy Code obviously is in conflict with CERCLA's objectives. But absent clear and convincing evidence that Congress wished to preclude review of the dischargeability of environmental claims, this Court should not reach to create an exception to Bankruptcy's across-the-board legislative scheme to advance the objectives of another statute. Chateaugay Corp., 944 F.2d at 1002.
Here, Manville primarily seeks a determination of whether the Government had claims against Manville and if so, whether those claims have been discharged. The Complaint seeks a declaration of the scope of Manville's chapter 11 reorganization, a proceeding specifically contemplated by the Bankruptcy Code and the Declaratory Judgment Act, see 28 U.S.C. § 2201, Bankr.R. 7001(6), (9), and does not fall within the terms of § 113(h). Moreover, a complete ban on this type of proceeding does not appear on the face of the Declaratory Judgment Act, see 28 U.S.C. § 2201(a), although others do, leading to the conclusion that a complete ban was not intended. See Chateaugay Corp., 944 F.2d at 1006; In re Charter Co., 862 F.2d 1500 (11th Cir.1989); cf. Combustion Equipment, 838 F.2d at 37. The Government's ripeness contention therefore must be addressed.
II. Ripeness
A. Combustion Equipment
In Combustion Equipment, the Second Circuit was faced with a record comparable to the one presented here. There, Carter Day brought an adversary proceeding against the Government seeking a declaratory judgment that any CERCLA liability it may have had for two land-fills in New Jersey had been discharged in its Chapter 11 proceedings.
Carter Day filed for reorganization in 1980. Its bar date was fixed as October 29, 1982, and its reorganization plan confirmed in December 1983. In September and October 1983, the EPA notified Carter Day that it was a PRP for the cleanup of the landfills. The landfills were operated by a subsidiary of Carter Day that was liquidated under Chapter 7 of the Bankruptcy Code. Hazardous wastes were discovered in the groundwater at both sites. The State of New Jersey had filed a proof of claim against Carter Day, but the claim was disallowed prior to confirmation under New Jersey law.
The EPA funded a RI/FS at the sites that was completed in May 1986. Fearing liability, Carter Day initiated an adversary proceeding against the EPA and the New Jersey Department of Environmental Protection in June 1986 seeking a declaratory judgment that any CERCLA claims the agencies may have had against Carter Day were discharged in bankruptcy. A ROD based upon the RI/FS was issued by the EPA in September 1986.
The district court withdrew the reference and then dismissed the Carter Day's complaint on ripeness grounds. See 73 B.R. 85 (S.D.N.Y.1987). Applying the two-pronged ripeness test set forth in Abbott Laboratories, 387 U.S. at 149, 87 S.Ct. at 1515-16, for use in the administrative context, the Court of Appeals affirmed.
Abbott Laboratories requires a court to examine both the fitness of the issue presented for judicial review and the hardship to the parties if consideration of the issue is withheld. The Combustion Equipment court employed two factors in determining whether the issue was fit for review: (1) whether the EPA's actions were final[3] and (2) whether the issue presented was purely legal. See 838 F.2d at 37-38.
*106 The Second Circuit first held that the EPA's issuing of the PRP letter to Carter Day was "not a final, definitive ruling with the status of law demanding immediate compliance since it does not impose any liability on Carter Day". Id. at 38. Rather, the court found that the only requirement the letter imposed on Carter Day was that it answer seven questions concerning the site. The court also relied on the fact that the over 190 PRP letters were sent out for the two landfills to parties who were "potentially responsible" and "`may be liable'". Id. (emphasis in original).
The court next held that a purely legal issue was not presented. It noted that under Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985), the ultimate legal arguments, i.e. whether a claim exists and has been discharged, see Chateaugay Corp., 944 F.2d at 1009, may depend on the ultimate enforcement action the EPA takes. Since the EPA's activities were at a relatively early stage in the CERCLA scheme, the eventual enforcement action it would take against Carter Day, if any, could not be forecasted. Combustion Equipment, 838 F.2d at 39.
Lastly, the court held that any impingement on Carter Day's fresh start caused by the PRP letter was outweighed by other factors. First, the court noted that any potential hardship was speculative absent EPA action and that even the presence of some possible harm does not render a dispute ripe. Second, the court found Carter Day's concern "disingenuous" given its failure to include its potential liability in the schedule of liabilities during the reorganization proceedings. Third, the court held that the alleged hardship was outweighed by the potential hardship to the EPA and Superfund if PRPs were allowed to challenge the EPA at such an early stage. Id. at 39-40. Thus, under Abbott Laboratories, the court found the dispute to be not ripe for adjudication.
B. The Present Dispute
Although the parties agree that the CERCLA activities here have proceeded to a more advanced state than that at issue in Combustion Equipment, the Government contends that this action cannot be considered ripe until the EPA institutes a "final" judicial enforcement action against Manville and that the EPA will suffer a greater hardship than Manville if forced to litigate Manville's liability at this stage. Manville asserts that the action is ripe since the Government has effectively backed it into a corner at the four sites by demanding specific sums from Manville and by issuing specific orders and taking coercive actions against Manville.
Because of the EPA's more advanced activities at the four sites, Combustion Equipment does not squarely control the present action. See Combustion Equipment, 838 F.2d at 41. Therefore, to determine whether the present action is ripe, the Court must examine Manville's Complaint under the test set forth in Abbott Laboratories, with Combustion Equipment serving as a guide.
1. Fitness for Judicial Review
The Administrative Procedure Act is not implicated here, see Combustion Equipment, 838 F.2d at 38. Therefore, the three-part test used to determine whether an agency's actions are final, see FTC v. Standard Oil Co., 449 U.S. 232, 240-43, 101 S.Ct. 488, 493-95, 66 L.Ed.2d 416 (1980); Pacific Resins & Chemicals Inc. v. United States, 654 F.Supp. 249, 252-53 (W.D.Wash.1986), does not apply. The Government, nevertheless, asserts that the first prong of that test should control this action, and that the Complaint should be dismissed since "there has not been a `final, definitive ruling with the status of law'". Reply Memorandum of Law 16 (quoting Combustion Equipment, 838 F.2d at 38). If this Court were to adopt the Government's artful editing of the Second Circuit's opinion as law, the Declaratory Judgment Act would be rendered a nullity *107 in this context because, under CERCLA, "true" finality would not exist until the EPA initiated an enforcement action. This outcome is rejected.
First, pre-enforcement judicial review of CERCLA claims is allowed in the bankruptcy context. See Chateaugay Corp., 944 F.2d at 1008. Therefore, to the extent there is a clash between the Bankruptcy Code and CERCLA in this context, CERCLA does not completely override the Code.
Second, absolute finality is not a requirement. Instead, threatened enforcement or the need for a party subject to a statute or regulation to go to great lengths to prepare for the eventual enforcement of an agency's definitive action often will suffice. Compare, e.g., Pacific Gas & Electric Co. v. State Energy Resources Conservation & Development Commission, 461 U.S. 190, 201-02, 103 S.Ct. 1713, 1721, 75 L.Ed.2d 752 (1983) (years of advance planning and development required before certification of nuclear power plant rendered controversy over certification moratorium ripe) and Lake Carriers' Association v. MacMullan, 406 U.S. 498, 507-08, 92 S.Ct. 1749, 1756, 32 L.Ed.2d 257 (1972) (although enforcement of environmental statute post-poned, threat of future enforcement still forced plaintiffs to attempt to comply, creating immediate and real controversy) and Abbott Laboratories, 387 U.S. at 152-53, 87 S.Ct. at 1517 (controversy existed where plaintiff either had to change operations to meet regulations or risk criminal or civil penalties for noncompliance) with Pacific Gas & Electric, 461 U.S. at 203, 103 S.Ct. at 1721 (challenge to statute providing for interim storage of nuclear fuel not ripe because statute called for case-by-case determinations and it was not known whether commission would ever find a plant's capacity to be inadequate) and Toilet Goods Association v. Gardner, 387 U.S. 158, 162-63, 87 S.Ct. 1520, 1524, 18 L.Ed.2d 697 (1967) (although agency action "final" whether enforcement actually would take place was uncertain).
Third, a declaratory judgment action is more fit for judicial review if it raises primarily legal issues. If factual issues are raised, the action is more fit for review if the issues arise out of events that have already occurred, thus providing a more concrete framework for the legal issues presented. See Combustion Equipment, 838 F.2d at 39-40.
Here, the EPA has not just identified Manville as someone who may be liable along with a large number of other potentially responsible parties. At each site in question, the EPA has either threatened Manville with enforcement or has initiated coercive settlement processes unique to CERCLA that can severely jeopardize Manville's interests if it exercises its right not to participate. See 42 U.S.C. § 9622; Neuman, No Way Out? The Plight of the Superfund Nonsettlor, 20 Envtl.L.Rep. (Envtl.L.Inst.) 10295 (1990).
For example, the Coalinga Mill Letter stated that the EPA was invoking CERCLA § 122 to expedite the remedial and settlement processes. The object of doing so is to reach a settlement within 120 days that will be entered as a consent decree between the parties. If a collective good faith offer is not made, "EPA will take appropriate measures," Coalinga Mill Letter 2, and if all of the PRPs do not participate, "EPA will seek the participation of the remaining parties," id. at 3. Failure to settle can have dire consequences. Under § 122, settling parties can receive releases from future CERCLA liability and are shielded from contribution claims from nonsettling parties, see § 122(f), (h)(4), 42 U.S.C. § 9622(f), (h)(4). Nonsettling parties, however, might be held jointly and severally liable for the remaining clean-up costs. See B.F. Goodrich Co. v. Murtha, 958 F.2d 1192, 1198 (2d Cir.1992); Neuman, supra, at 10300-03.
The letter places Manville squarely on the horns of a dilemma. It can opt to settle, assuming responsibility for a significant amount of clean-up costs and waiving what it considers to be a strong defense, or it can wait, potentially exposing itself to almost limitless liability for clean-up costs *108 beyond the scope of any settlements.[4] The EPA's argument that it may never choose to initiate an enforcement action if Manville decides not to participate in the settlement is disingenuous. The letter is plainly final in threatening future enforcement actions against Manville unless it chooses the path of least resistance and settles. In this sense, therefore, the EPA's actions are final and Manville's liability fit for judicial review.
Moreover, the Coalinga Mill Letter explicitly states the "with this letter EPA demands that you [Manville] reimburse EPA for its costs incurred to date and future response costs incurred by EPA pursuant to Section 107(a) of CERCLA." Through November 30, 1990, these costs were $1,531,947.30, and interest is to be calculated from the date the letter was received by Manville. Id. at 3-4. The letter does not qualify this demand for payment. The EPA's actions at the mill area of the Coalinga Asbestos Mill Site are therefore sufficiently final for review.
For essentially the same reasons, the EPA's actions in terms of Manville's liability at the Union Chemical Site are also sufficiently final as well. The Union Chemical Letter also sought a settlement, with the same results, and contained a formal demand for payment not unlike that in the Coalinga Mill Letter.
At the Lowry Landfill Site, the EPA has determined Manville's volumetric contribution of wastes to the site and has sought to compel Manville to participate in de minimis settlement negotiations. Since the EPA has determined the percentage of waste in the landfill attributable to Manville, it no doubt has determined Manville's liability. Yet the EPA has barred Manville from participating in the settlement negotiations unless Manville waives its defense to liability and incurs costs. Again Manville is forced to choose between paying a sum certain now in spite of its defense or potentially exposing itself to joint and several liability for that indivisible portion of the estimated $500 million clean-up cost for this site not satisfied through the settlement process.
The EPA previously issued a Unilateral Administrative Order for Remedial Design against Manville for the first clean-up unit at the Yellow Water Road Site. The order specifically required Manville and other PRPs to comply with its terms or face fines and punitive damages. Although Manville was recently deleted from the order, that the EPA originally issued the order against Manville implies that the agency has determined with some certainty that Manville is liable for the site. The agency's actions at these two sites therefore are sufficiently final as well.
Although the Complaint does not raise purely legal issues, see e.g., Pacific Electric & Gas, 461 U.S. at 201, 103 S.Ct. at 1720-21 (preemption), the facts upon which the legal determinations would be made stem mostly from the past and are fit for a declaratory judgment. See, e.g., Chateaugay Corp., 944 F.2d at 1001; In re Jensen, 127 B.R. 27 (Bankr. 9th Cir.1991). To the extent there is a concern that legal determinations may be based on what kind of enforcement actions the EPA takes in the future, see Chateaugay Corp., 944 F.2d at 1006-09, it should be noted that the EPA initiated the adversary declaratory judgment action at issue in Chateaugay Corp., and that the timing of the actions in terms of the EPA's enforcement activities there is similar to that here. This issue did not seem to be of much concern pre-petition, and it is difficult to see why it should be otherwise post-petition.
The EPA therefore has undertaken enforcement actions at each of the sites at issue that has the effect of imposing final liability, and the legal issues presented turn on facts primarily based in the past. The questions presented within Manville's Complaint are thus fit for judicial review. Lake Carriers' Association, 406 U.S. at 507, 92 S.Ct. at 1755-56.
*109 2. Hardship to the Parties
The second prong of the ripeness test requires the Court to analyze the hardship to the parties. See Combustion Equipment, 838 F.2d at 39. The Government asserts that, because CERCLA's remedial scheme would be jeopardized by allowing an inquiry to occur at this time and because Manville failed to schedule its environmental liabilities, the harm to the EPA and CERCLA outweigh any harm suffered by Manville. See id. at 39-40.
The Government's argument ignores the differences between the state of the proceedings in Combustion Equipment and here. First, the EPA's enforcement activity has advanced well beyond the initial PRP stage at issue in Combustion Equipment. Second, Manville's bankruptcy was by no means a run of the mill reorganization, and it would be facetious for the Government to claim it was unaware of those proceedings. Although Manville may be subject to some criticism for failing to schedule these liabilities, Manville alleges that the Government's hands may also be far from clean.
Furthermore, the carefully constructed reorganization, as well as the future of the asbestos-claims fund, may realistically be threatened by the EPA's actions. Both are threatened by Manville's inability to determine on its own the answers to the questions presented here, which prevents it from carefully choosing from among the options available to it. A wrong move has the potential of rendering Manville's reorganization one of the biggest wastes of judicial resources ever, and of wiping out the asbestos-claims fund in short order. Manville presently is subject to increasing fines and penalties and the threat of the CERCLA settlement scheme. Postponing a decision will likely work a substantial hardship on all those subject to the Manville reorganization, thus rendering the controversy ripe for adjudication. See Pacific Gas & Electric, 461 U.S. at 201, 103 S.Ct. at 1720-21; Lake Carriers' Association, 406 U.S. at 508, 92 S.Ct. at 1756; cf. Jensen, 127 B.R. at 33.
Conclusion
For the reasons set forth above, Manville's Complaint meets both prongs of the Abbott Laboratories test and is ripe for adjudication. The Government's motion to dismiss the complaint for want of jurisdiction is therefore denied.
It is so ordered.
NOTES
[1] The Prior Proceedings and Facts are drawn from both the allegations in Manville's complaint, which are treated as true for the purposes of this motion, and the affidavits both parties have submitted, which the Court may and has considered for purposes of this motion, see Land v. Dollar, 330 U.S. 731, 735 n. 4, 67 S.Ct. 1009, 1011 n. 4, 91 L.Ed. 1209 (1947).
[2] The Government asserts that
The Complaint does not allege that the Debtors' respective bankruptcy petitions scheduled claims relating to environmental damages at any of the Sites.
. . . While some Government officials of course knew of the Manville reorganization proceedings and copies of the Bankruptcy Court's Bar Date Order may have been sent to the EPA, it does not appear that such Order was served on EPA as required by the Bankruptcy Rules, and the Complaint does not so allege.
Memorandum of Law 3 (Sept. 17, 1991).
[3] The Administrative Procedure Act, 5 U.S.C. § 701 et seq., was not implicated in Combustion Equipment because Carter Day's complaint did not seek review of the propriety of the EPA's acts. 838 F.2d at 38. Likewise, the finality requirement of the Administrative Procedure Act is not implicated here.
[4] Three of the mill area PRPs have signed a consent decree but the decree itself has not been fully approved. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551883/ | 139 B.R. 739 (1992)
In re Joann SAINZ-DEAN, Debtor.
Bankruptcy No. 91-12972 DEC.
United States Bankruptcy Court, D. Colorado.
March 4, 1992.
*740 James Kaplan, Machol, David & Michael, Denver, Colo., for debtor.
Audris Hampton, Robert Reed and Karen Castle, Burke & Castle, P.C., Denver, Colo., for Union Planters Nat. Bank.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
DONALD E. CORDOVA, Bankruptcy Judge.
THIS MATTER came on for hearing on the Debtor's Motion to Confirm her Second Amended Plan filed on September 11, 1991. A creditor, Union Planters National Bank ("Union"), filed an Objection to Confirmation and a Motion for Relief from Stay and For Adequate Protection. The Court has heard the evidence and legal argument, and has read the briefs submitted by the parties and hereby makes the following findings of fact and conclusions of law.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
1. The Debtor filed a Chapter 13 bankruptcy petition with a proposed plan on March 8, 1991, and later filed an Amended Plan and a Second Amended Plan which is the subject of the dispute in this action.
2. The Debtor proposes to bifurcate the claim of Union into secured and unsecured portions. Union made a loan to the Debtor of $88,904.00 on August 21, 1987 which is secured by a Deed of Trust upon the Debtor's principal residence ("residence"). The parties have stipulated that the residence has a fair market value of approximately $50,000.00.
3. The proposed bifurcation would leave Union secured to the extent of the fair market value of the residence and treat Union as an unsecured creditor for the remaining debt balance of approximately $37,426.00. The Debtor's Amended Plan provides that she will make monthly payments at the same principal and interest rate provided for in the Promissory Note until the secured portion is paid. The unsecured portion is treated as a Class IV claim and Union will be paid $3,143.00 which is 8.4% of that claim.
4. As of November 1, 1990, the Debtor was in arrears on her payments to Union, but she cured the arrearages and as of March 1, 1991, was current.
5. The Debtor seeks this Court's approval of her Second Amended Plan and bifurcation of Union's claim. Debtor relies on the holding in In re Hart, 923 F.2d 1410 (10th Cir.1991) as support for her position. The Tenth Circuit held that Debtors in Chapter 13 bankruptcies could utilize the provisions of 11 U.S.C. § 506(a) to bifurcate claims secured only by the Debtor's residence into secured and unsecured portions, and that only the secured portion was entitled to protection under 11 U.S.C. § 1322(b)(2).
6. Union asks this Court to distinguish the holding in In re Hart, 923 F.2d 1410 (10th Cir.1991) based on the fact that the Debtor's loan is insured by the Federal Housing Association ("FHA") and should, therefore, receive different treatment. Union states that when mortgagor defaults on a federally insured loan, the lender is reimbursed only for the amount of the secured portion, rather than for the total amount of the indebtedness. Union argues that it is contrary to public policy to allow bifurcation of federally insured loans.
*741 MERITS
Subsequent to the time this case was argued and submitted to the Court, the United States Supreme Court decided the case of Dewsnup v. Timm, ___ U.S. ___, 112 S.Ct. 773, 116 L.Ed.2d 903 (1991). In that case, the Supreme Court denied a Chapter 7 Debtor the right to "strip down" a creditor's lien on real property to the value of the collateral when that value is less than the amount of the claim secured by the lien. The Supreme Court affirmed the Tenth Circuit Court of Appeals which refused to allow the Debtor to use § 506(d)[1] to redeem real property by paying the secured creditor the current fair market value of the property. See, In re Dewsnup, 908 F.2d 588 (10th Cir.1990).
In the Dewsnup case, the Chapter 7 Debtor filed an adversary proceeding for the purpose of reducing the creditor's lien on land using the provisions of 11 U.S.C. § 506(a) and (d). § 506(d) provides that a lien is void to the extent that it secures a claim against the Debtor that is not an allowed secured claim. The Debtor owed approximately $120,000.00 on the Note but the fair market value of the land securing the debt had a judicially determined value of only $39,000.00. The Debtor sought to "strip down" the lien using § 506(a) and (d). The Supreme Court held that "§ 506(d) does not allow the petitioner to strip down respondent's lien, because respondent's claim is secured by a lien and has been fully allowed pursuant to § 502." Id. ___ U.S. at ___, 112 S.Ct. at 778. Therefore, the claim could not be classified as "not an allowed secured claim for purposes of the lien voiding provisions of § 506(d)." The Supreme Court recognized the many ambiguities in the relationship between § 506(a)[2] and other provisions in the Bankruptcy Code and limited its holding to the facts of the case.
The secured creditor and the United States in the Dewsnup case both argued that the words "allowed secured claim" in § 506(d) should be read "term by term" to refer to any claim that is, first, allowed, and, second, secured. They maintained that 506(d) should have the simple and sensible function of voiding a lien whenever a claim secured by the lien itself had not been allowed. This approach would insure that the Code's determination not to allow the underlying claim against the Debtor personally was given full effect by preventing its assertion against the Debtor's property. The Supreme Court adopted their position and stated that "the fresh start policy cannot justify an impairment of respondent's property rights, for the fresh start does not extend to an in rem claim against property, but is limited to a discharge of personal liability." Id. at ___, 112 S.Ct. at 777.
The Supreme Court recognized that historically "a lien on real property passed through bankruptcy unaffected." Id. ___ U.S. at ___, 112 S.Ct. at 778. See also, Farrey v. Sanderfoot, 500 U.S. ___, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991). The Court stated that it was unaware of any pre-Code provision, other than in reorganization proceedings, which permitted involuntary reduction of the amount of a creditor's lien for any reason other than payment on the debt. The Court noted the absence of any legislative history expressing any intent to "grant a debtor the broad new remedy against allowed claims to the *742 extent that they become `unsecured' for purposes of § 506(a) without the new remedy's being mentioned somewhere in the Code itself or in the annals of Congress." Id. at ___, 112 S.Ct. at 779. Since neither Congress nor the Code provided for the "strip down," the Court labeled the approach "not plausible" and "contrary to basic bankruptcy principles." Id. at ___, 112 S.Ct. at 779.
The issue addressed by the Tenth Circuit in the Hart case was "whether a home mortgage protected by 11 U.S.C. § 1322(b)(2) can be bifurcated into secured and unsecured portions based on the fair market value of the property under a threshold application of the provisions of 11 U.S.C. § 506(a) to an undersecured mortgage." Id. at 1411. § 1322(b)(2) provides as follows:
(b) subject to subsections (a) and (c) of this section, the plan may
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
In the Hart case, the outstanding mortgage balance was $55,000.00, and the fair market value of the residence securing the mortgage was stipulated to be $30,000.00. The Hart's proposed to bifurcate the claim into $30,000.00 secured and $25,000.00 unsecured, thus stripping down the secured creditor's lien. The bankruptcy court allowed bifurcation because it found that the mortgage was secured by more than the Debtor's principal residence and, was therefore removed from the protection of § 1322(b)(2). The district court reversed the bankruptcy court, holding that the modification of the mortgage was inappropriate given the protection provided for residential mortgages under 11 U.S.C. § 1322(b)(2). The district court found the mortgage to be secured only by the Debtor's principal residence.
The Tenth Circuit reversed the district court and held that "the bifurcation was a recognition of the legal status of the creditor's interest in the debtor's property, and not a modification of the mortgage." Id. at 1411. Bifurcation was accomplished "by applying the general principles of § 506(a) to the mortgage and then protecting only the secured claim by the provisions of § 1322(b)(2)." Id. at 1413. In permitting bifurcation, the Court followed the Third and Ninth Circuits in holding "that an undersecured mortgage is, for the purposes of the Bankruptcy Code, two claims, and only the secured claim is protected by § 1322(b)(2)." Id. at 1415. See, Hougland v. Lomas & Nettleton Company (In re Hougland), 886 F.2d 1182 (9th Cir.1989); and Accord Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123 (3rd Cir. 1990). The Court did not limit its holding to those situations where the mortgage was secured by more than the Debtor's principal residence, but also applied it to those fact situations where it was secured only by the Debtor's principal residence.
The Tenth Circuit approved the confirmation of the Hart's Chapter 13 Plan reasoning that since it provided for payment in full of the "secured claim," it did not modify the secured creditor's rights as prohibited by 11 U.S.C. § 1322(b)(2). Their holding permitted the Debtor to "strip down" the amount of the creditor's lien. It is noted here that the mortgage in the Hart case was federally insured and although the issue was not raised nor decided in Hart, it is not a persuasive argument. Public policy arguments have been uniformly rejected. Judge Brorby wrote a dissent claiming that the analysis employed by the majority rendered § 1322(b)(2) essentially meaningless. He also noted that the Fifth, Eighth and Eleventh Circuits disagreed with the majorities' approach.
To allow the proposed bifurcation and resulting reduction of the secured creditor's claim in this case seems inconsistent with the Supreme Court's holding that liens should pass through bankruptcy unaffected unless paid for. The act of bifurcation in this case allowing two claims a secured and an unsecured results in the involuntarily reduction of the amount of the creditor's mortgage without paying him for it. The Court believes this result is inconsistent with the Dewsnup analysis but in accordance with the Hart holding.
*743 This Court believes the Hart holding would probably not be followed by the Tenth Circuit in light of the Dewsnup decision. However, this Court is compelled to follow the mandate of the Hart decision absent a Supreme Court or Tenth Circuit decision to the contrary. See, Litman v. Massachusetts Mutual Life Insurance Company, 825 F.2d 1506 (11th Cir.1987). Although the Dewsnup decision casts doubt on the Hart analysis, it does not specifically overrule the holding, and therefore, this Court feels bound by it and will hold accordingly.
IT IS, THEREFORE, ORDERED, based upon the reasons stated above that the Debtor's Motion to Confirm the Second Amended Chapter 13 Plan is hereby GRANTED. The Plan does comply with the requirements of 11 U.S.C. § 1322(b)(2).
IT IS FURTHER ORDERED that the creditor's Motion For Relief From Stay is hereby DENIED.
NOTES
[1]
(d) to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void unless
(i) such claim was disallowed only under §§ 502(b)(5) or 502(e) of this title; or
(ii) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under § 501 of this title.
[2] 11 U.S.C. § 506(a) provides as follows:
(a) an allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to set off under § 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to set off, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to set off is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest..... | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551889/ | 139 B.R. 247 (1992)
In re BEESLEY, Marvin G., Debtor.
L.D. FITZGERALD, Trustee, Plaintiff,
v.
Marvin G. BEESLEY, a married man; Intermountain Marine Sales, Inc., an Idaho corporation; and Jim Herzog, individually, Defendants.
Adv. No. 90-6120, Bankruptcy No. 89-00892-7.
United States Bankruptcy Court, D. Idaho.
February 7, 1992.
*248 Daniel C. Green, Racine, Olson, Nye, Cooper & Budge, Pocatello, Idaho, for plaintiff.
M. Brent Morgan, Pocatello, Idaho, for defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
ALFRED C. HAGAN, Chief Judge.
The trustee filed this action, under the provisions of 11 U.S.C. § 549(a), to avoid the post petition sale of a boat by the debtor to the defendant Jim Herzog. Mr. Herzog then transferred title to the boat to his business, Intermountain Marine Sales, Inc. The sale was not authorized by the court.
The debtor asserts the sale was in the ordinary course of business and therefore not an avoidable transfer under 11 U.S.C. § 549. In the alternative, the debtor contends he funded his unconfirmed chapter 13 plan with the proceeds of the sale and since the trustee received the funds from the sale of the boat he should not be allowed to avoid the sale.
11 U.S.C. § 549(a) provides in pertinent part: ". . . the trustee may avoid a transfer of property of the estate(1) that occurs after the commencement of the case; and . . . (B) that is not authorized under this title or by the court.".
The debtor sold his boat to his friend and creditor, Mr. Herzog, on June 19, 1989 for $3,200.00, approximately two months after he had filed his chapter 13 petition. The chapter 13 petition was converted to a chapter 7 case on October 24, 1989.
The debtor's business is the sale and leasing of mobile homes. The sale of his boat, property kept for personal use as opposed to business inventory, was not in the ordinary course of his business.
The use of the proceeds from the sale of the boat to fund the debtor's unconfirmed chapter 13 plan does not relieve the debtor of the consequences arising from the unauthorized sale of the boat. A chapter 13 debtor is required to be ". . . an individual with regular income . . ."[1] with which to fund a plan. The use of the proceeds of an unauthorized sale to fund an unconfirmed chapter 13 plan does not vitiate the avoidability of the transaction. It is not a transaction authorized by the code.
The sale is voidable, since the sale was a post petition transfer, not authorized by the court or the provisions of Title 11 of the United States Code, and the trustee is entitled to recover the value of the property transferred.
The trustee contends he is entitled to recover the fair market value of the boat, which he alleges to be $6,294.25, since that was the sale price of the boat sold by Mr. Herzog to a third party, rather than the $3,200.00 Mr. Herzog paid the debtor for the boat.
In re Vann,[2] held the term "value" in Section 550(a) means fair market value.
In re Nance,[3] involved a case similar to this, only the debtors transferred property *249 for less than its full value within one year of the filing of their petition. The party to whom the property was transferred later sold the property to a transferee without knowledge of the voidability of the transfer, for full value, as in this case. The court held the trustee could recover the difference between what the initial transferee paid for the property and what he sold it for, essentially his profit. Such a result seems fair and equitable in this case, since the debtor obtained the benefits of the $3,200.00 paid him by Mr. Herzog, and Mr. Herzog realized a profit and should be required to return that profit to the trustee.
Mr. Herzog is thus found to be a good faith transferee. Any improvements, under § 550(d)(1), Mr. Herzog may have made to the boat have not been itemized.
Therefore, the trustee may recover $3,094.25 from Mr. Herzog and Intermountain Marine Sales, Inc., as a joint and severable judgment. The remaining $3,200.00 the trustee may recover from the debtor under the provisions of 11 U.S.C. § 550(d)(1).
Counsel for the trustee may prepare a form of judgment for signature in accordance with these findings of fact and conclusions of law.
NOTES
[1] 11 U.S.C. § 109(e).
[2] 26 B.R. 148, 149 (Bankr.S.D.Ohio 1982).
[3] 26 B.R. 105, 107 (Bankr.S.D.Ohio 1982). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551892/ | 139 B.R. 677 (1992)
In re Richard/Jacquelene WEAVER, Debtors.
CITIBANK, Plaintiff,
v.
Jacquelene WEAVER, Defendant.
Bankruptcy No. 91-3132, Related No. 91-30091.
United States Bankruptcy Court, N.D. Ohio, W.D.
January 7, 1992.
*678 Darryl J. Chimko, Rochester Hills, Mich., for plaintiff.
Dean E. Sheldon, Toledo, Ohio, for defendant.
MEMORANDUM OPINION AND ORDER
RICHARD L. SPEER, Bankruptcy Judge.
This cause comes before the Court after Trial on Complaint to Determine Dischargeability of Debt. At the trial, the parties had the opportunity to present the evidence and arguments they wished the Court to consider in reaching its decision. The Court has reviewed the testimony, the documents which were admitted at Trial, and the arguments of counsel, as well as the entire record in this case. Based upon that review, and for the following reasons, the Court finds that the debt for Three Thousand Six Hundred Eighty-Five Dollars and Sixty-Seven Cents ($3,685.67) should be nondischargeable.
FACTS
The Debtor, Jacquelene Weaver, submitted an application for credit to the Plaintiff, Citibank, in order to receive a line of credit in the form of a credit card in June of 1989. Based upon the application and an independent credit investigation, the Plaintiff granted the Debtor a Visa credit card with a credit limit of Five Thousand Dollars ($5,000.00).
The Debtor incurred charges and made the requisite monthly payments until October 11, 1990. From November 20, 1990, to December 3, 1990, the Debtor incurred charges of Six Hundred Eighty-Five Dollars and Sixty-Seven Cents ($685.67) and one cash advance in the amount of Three Thousand Dollars ($3,000.00) for a total of Three Thousand Six Hundred Eighty-Five Dollars and Sixty-Seven Cents ($3,685.67). The Debtor never made a payment on this obligation. The Debtor filed a joint petition for bankruptcy on January 9, 1991. Plaintiff contended that the Debtor was aware of her inability to repay or did not intend to repay the charges incurred on the revolving line of credit. Therefore, when the Plaintiff filed its Complaint to Determine Dischargeability of Debt, it sought to have the debt declared nondischargeable under Section 11 U.S.C. 523(a)(2)(A), which excepts from discharge those debts obtained through fraud.
The Debtor contended that she was un-aware of her inability to pay the charges and that she fully intended to pay the charges at the time they were incurred. The Debtor claimed her inability to repay the charges was caused by the sudden and unexpected termination of her husband's employment which ultimately lead to their filing a petition for bankruptcy.
LAW
The Plaintiff seeks to have the Debtor's charges declared nondischargeable under Section 523(a)(2)(A), which states in pertinent part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), 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).
In order for the Plaintiff to succeed in its claim, it must prove the following elements: (1) that the Debtor made false representations; (2) that at the time made, the Debtor knew them to be false; (3) that the representations were made with the intention and purpose of deceiving the Plaintiff, (4) that the Plaintiff reasonably relied on the representations; and (5) that *679 the Plaintiff sustained the alleged injury as a proximate result of the representation having been made. In re Phillips, 804 F.2d 930, 932 (6th Cir.1986); In re Martin, 761 F.2d 1163, 1165 (6th Cir.1985). A preponderance of the evidence is the standard to be applied to all Section 523(a)(2)(A) dischargeability exceptions. Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 655, 112 L.Ed.2d 755 (1991).
The major issue to be resolved is whether the Debtor had the intent to deceive the Plaintiff at the time the charges were incurred. "Because direct proof of intent, the Debtor's state of mind, is nearly impossible to obtain, the creditor may present evidence of the surrounding circumstances from which intent may be inferred." In re Long, 124 B.R. 54, 56 (Bkrtcy.N.D.Ohio 1991); Matter of Van Horne, 823 F.2d 1285, 1287 (8th Cir.1987); In re Guy, 101 B.R. 961, 978 (Bkrtcy. N.D.Ind.1988).
A review of the testimony at Trial reveals that the Debtor relied solely on her husband's income for support and that she never intended to file for bankruptcy when she had made the charges. She had planned to repay the charges with her husband's paycheck, but she did not remember what she actually did with the final paycheck because she had been ill at that time. When the Debtor was asked why she had signed both her name and social security number, but used her husband's financial information on the credit card application, she testified that she was not very good with paper work. Also, she listed her employment as President of Gro-Care, a corporation in which she had no interest. Her husband testified that he implicitly agreed to repay the charges his wife had incurred, but he had no idea that she had the credit card until the time they filed for bankruptcy. The Court finds it curious that he was willing to repay a debt that he did not know existed.
In addition, the Debtor was unable to logically explain why she was unaware of her tenuous financial condition. The Debtor's husband testified that he did not keep money in their joint bank account due to the fact it was being garnished as a result of a prior lawsuit in relation to his business. He also said that he and his wife would be bankrupt if his business were to go bankrupt. The Debtor testified that she had received some sort of service of process but did not know that it regarded her husband's business. After the Debtor's husband was terminated from his employment on December 27, 1990, the Debtor and her husband filed a petition for bankruptcy on January 9, 1991. The Court finds that, based on the surrounding circumstances and the Debtor's conduct, it can infer that the Debtor had the intent to deceive the Plaintiff.
The Court must also determine if the Plaintiff was reasonable in relying on the false representations of the Debtor. Reliance, in credit card financial arrangements, is necessarily limited to only infrequent inquiries by the lending institution as to the credibility of the purchases made on the card holder's account. In re Satterfield, 25 B.R. 554, 561 (Bkrtcy.N.D.Ohio 1982). Where a Debtor has a past charge and payment history which would cause no reason for a creditor to question it, it is reasonable for that creditor to continue its creditor/debtor relationship and to reasonably rely on the representations that the debtor has both the intent and ability to repay the charges incurred on a credit card account. In re Higgs, 39 B.R. 181, 184 (Bkrtcy.N.D.Ohio 1984). In the present case, the Debtor's past payment and charge history until the charges in question were incurred would give no reason for the Plaintiff to question the Debtor's intent nor ability to repay the charges incurred. Therefore, the Court finds the Plaintiff reasonably relied on the Debtor's false representations.
A Creditor will be deemed to have suffered a loss as a result of a Debtor's misrepresentations when they have extended credit for which they have not been compensated. In re Higgs, 39 B.R. 181, 185 (Bkrtcy.N.D.Ohio 1984). In the present case, the Debtor has filed a Chapter 7 petition in bankruptcy and has made no offer of repayment of the charges so *680 that the Plaintiff will suffer a complete loss unless relief is granted.
The Court finds that the Debtor, Jacquelene Weaver, did knowingly make false representations, that were made with the intent to deceive, and that the Plaintiff did rely on those representations. As a result, a loss was sustained by the Plaintiff. Therefore, the debt owed to the Plaintiff is nondischargeable pursuant to Section 523(a)(2)(A).
In reaching these conclusions, the Court has considered all the evidence and arguments of counsel, regardless of whether or not they are specifically referred to in this opinion.
Accordingly, it is
ORDERED that the debt owe to Citibank for Three Thousand Six Hundred Eighty-Five Dollars and Sixty-Seven Cents ($3,685.67) be, and is hereby, declared Nondischargeable. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551897/ | 139 B.R. 535 (1992)
In re James W. HAMMONDS a/k/a Jack Hammonds d/b/a Warren Precision, SS # XXX-XX-XXXX EIN XX-XXXXXXXX, Debtor.
Bankruptcy No. 91-21321-SBB.
United States Bankruptcy Court, D. Colorado.
April 23, 1992.
*536 William A. Bianco, Madison E. Bond, Davis, Graham & Stubbs, Denver, Colo., for Tom H. Connolly, trustee for the Estate of Miniscribe Corp.
John D. Hindorff, Hopp & Associates, P.C., Longmont, Colo., for debtor.
MEMORANDUM OPINION AND ORDER
SIDNEY B. BROOKS, Bankruptcy Judge.
THIS MATTER comes before the Court upon Tom Connolly's ("Creditor" herein) Motion to Dismiss filed September 13, 1991, Debtor's Response to Motion to Dismiss filed October 7, 1991, Creditor's Reply in Support of Motion to Dismiss filed December *537 16, 1991, and Debtor's late-filed[1] Response to Reply in Support of Motion to Dismiss filed March 5, 1992.
The principal issue before the Court, and one of first impression in this District, is whether the Debtor's Chapter 7 case should be dismissed for bad faith. The creditor seeks dismissal pursuant to 11 U.S.C. § 707(a).[2] The Court concludes, on Creditor's Motion, that the case must be dismissed on the grounds of bad faith under 11 U.S.C. § 707(a).
This Court, having reviewed the files[3] and being sufficiently advised in the premises, makes the following findings of fact and conclusions of law.
I. FACTUAL BACKGROUND.
MiniScribe Corporation ("MiniScribe") filed a Voluntary Petition pursuant to Chapter 11 of the Bankruptcy Code on January 1, 1990 (Bankruptcy Case No. 90-B-00001-E). MiniScribe, acting as debtor and debtor-in-possession, filed a Complaint against James W. Hammonds ("Hammonds" or "Debtor") d/b/a Warren Precision (Adversary Proceeding No. 90-1198-RJB) seeking to recover transfers of $42,886.75 made to Hammonds which were alleged to be preferential transfers. 11 U.S.C. § 547. On December 24, 1990, judgment was entered in favor of MiniScribe and against Hammonds in the amount of $42,886.75 plus costs and interest. Execution proceedings against Hammonds were subsequently commenced and writs of garnishment against several entities were issued.
On April 4, 1991, Hammonds filed a Voluntary Petition pursuant to Chapter 13 of the Bankruptcy Code which stayed the execution proceedings. Since only a Petition had been filed, the Court issued a notice which set April 23, 1991 as the deadline to file the necessary statements and schedules. On April 29, 1991, six days after the established deadline, the Debtor filed his Chapter 13 Statement. The Chapter 13 Trustee filed a Motion to Dismiss the case on May 13, 1991 because no plan had yet been filed. The Chapter 13 Trustee scheduled a meeting with the Debtor for June 25, 1991 to resolve the deficient filing. Tom Connolly, the Trustee for the estate of MiniScribe,[4] filed a Motion to Dismiss the *538 Chapter 13 case on May 16, 1991, asserting both bad faith and failure to file a Chapter 13 Plan and Plan Analysis as reasons for the dismissal. 11 U.S.C. § 1307(c). Connolly alleged that the Chapter 13 case was filed only to frustrate and stay MiniScribe's collection efforts.[5] In the absence of an effective response,[6] the Chapter 13 case was summarily dismissed on Connolly's motion on June 13, 1991 without an explicit recitation by the Court of the reasons therefor. The Court issued a Notice of Dismissal on July 3, 1991 and the file was closed on July 15, 1991.
The Debtor's Chapter 13 Statement stated that the Debtor had operated Warren Precision[7] as a "husband & wife" manufacturing business for four and one-half years, or since August, 1986. Priority debts of accrued wages payable and taxes to the Internal Revenue Service and the Colorado Department of Revenue were scheduled, as well as debts to three secured creditors, payments to none of which were in arrears. Only two unsecured creditors were scheduledthe MiniScribe judgment and a trade creditor, Swiss Lenox. The schedule of current income and expenditures showed a monthly income of $12,375.00 and itemized monthly expenses totalling $12,075.00, leaving $300.00 per month which would assumedly have been dedicated to payments under a future proposed Chapter 13 plan. The monthly expenses alleged for Debtor's family of three[8] included the following items:
Utilities $555.00
Food 550.00
Clothing 500.00
Laundry/Cleaning 75.00
Medical/Drug 650.00
"Other" [non-automobile] Insurance 560.00
Transportation $ 350.00
Recreation 250.00
Payments for Support of Dependents[9]
Not Living at Home 300.00
Charitable Contributions 50.00
Automobile Repair, Maintenance and
Licenses 250.00
Home Maintenance 200.00
The Debtor's scheduled assets included $45,000.00 in a joint checking account and $16,000.00 in cash.
Following the dismissal of the Chapter 13 case Connolly, again proceeding in his attempts to collect upon the MiniScribe judgment, filed a motion to have judgments entered against the garnishees and to have the garnished funds paid into the Court registry. A response was due from the Debtor on August 12, 1991 but was not filed until August 15, 1991. The very next day, on August 16, 1991, the Debtor filed a Voluntary Petition pursuant to Chapter 7 of the Bankruptcy Code initiating the instant case. The Chapter 7 statement and schedules were also filed on August 16, 1991 and reveal the following:
A. The Debtor is currently employed by an entity known as Precision Technology, Inc.;[10]
B. The Debtor had terminated his employment with Warren Precision[11] which had continued from April 1987 through June 1991;
C. The schedule of assets does not contain a reference to a specified bank balance and cash on hand is now only $500.00;
D. The Debtor's prior bankruptcy is disclosed as case number 91-14520- *539 PAC[12] which was allegedly dismissed because "debtor could not prepare confirmable plan";
E. The Debtor discloses that he sold contracts and contract liabilities on July 31, 1991, 16 days pre-Petition, to Precision Technology for "Consideration and its disposition: Sale";
F. Priority debts now include only increased amounts for taxes;
G. Secured debts are the same as listed in pleadings of prior bankruptcy;
H. The only listed unsecured creditor is now MiniScribe;[13]
I. The Debtor's current net income is now stated as $2,700.00 per month; and
J. The Debtor's current expenses total $4,265.00 and still include the following items:
Utilities $555.00
Food 550.00
Clothing 500.00
Laundry/Cleaning 75.00
Medical/Drug 650.00
Transportation 350.00
Recreation 250.00
Charitable Contributions 50.00
Home Maintenance 200.00
II. ARGUMENTS.
In the instant Motion to Dismiss, Connolly asserts that the Chapter 7 case should be dismissed because (1) the Debtor is barred under 11 U.S.C. § 109(g) from filing another bankruptcy petition within 180 days of the dismissal of his last petition, and (2) this bankruptcy Petition was filed in bad faith and solely to frustrate the efforts of Debtor's sole unsecured creditor.
The Debtor responds (1) that he could not formulate a Chapter 13 Plan, thus the prior case was dismissed (since there is no express finding of "willful failure to abide with court orders" the present case should not be dismissed under Section 109(g).), and (2) that the present case was not filed in bad faith.
In his reply, Connolly points to the following as evidence of the Debtor's alleged bad faith filing:
A. The Debtor intends to retain his trade and personal debt and discharge only his tax liability and his debt to MiniScribe;
B. The Debtor has engaged in a sham transaction whereby the Debtor has transferred, without consideration, all of his business assets to Precision Technology, a new corporation owned solely by his wife;[14]
C. The Debtor privately assured at least one of his business creditors that it will be paid by the new corporation, and the new corporation has been discharging the prior trade debt;[15]
D. No other creditor, other than Connolly, the MiniScribe Trustee, was pressuring the Debtor at the time that the instant bankruptcy Petition was filed and it was Connolly's collection efforts that convinced the Debtor to file for bankruptcy protection; and
E. The Debtor is using the Bankruptcy Code to resolve his dispute with Connolly while continuing his business as usual.[16]
In response, the Debtor reasserts his position as stated before, but adds the specific arguments that (1) "the MiniScribe [judgment] just kind of put the icing on the cake" thus precipitating the original bankruptcy *540 filing;[17] (2) he is merely a wage earner and although he has "sole management responsibility as to the direct manufacturing. . . . Aleta Hammonds [his non-debtor wife] `[o]versees all of the paperwork in the office, and whatever has to be done' . . . she is his superior, supervisor, sets his salary and the employees report to her, in addition to himself";[18] (3) he received no monetary consideration for the transfer of assets, however, he did receive "a lot of relief"[19] and "retained the liability for any and all trade debts of Warren Precision due to any transfer that he may have made;[20] (4) the transfer was not a taxable event "This in and of itself is `consideration'";[21] and (5) the "mere assertion that Precision Technology, Inc. is paying trade debts on transferred leases does not relieve the debtor from any liability for such debts, it is merely the payment by a new company to continue the use of leased machinery that would certainly be surrendered in the event of no payment at all."[22]
III. DISCUSSION.
A. 11 U.S.C. § 109(g).
Section 109(g) of the Bankruptcy Code provides, in part, as follows:
§ 109. Who may be a debtor.
* * * * * *
(g) Notwithstanding any other provision of this section, no individual . . . may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if
(1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case;
* * * * * *
11 U.S.C. § 109(g) (emphasis added).
The Order entered June 13, 1991 which dismissed the Debtor's Chapter 13 case reads as follows in its entirety:
THIS MATTER having come before the Court upon the Motion to Dismiss this Chapter 13 Case filed by Creditor Tom H. Connolly, as Trustee of the bankruptcy estate of MiniScribe Corporation, proper notice being made and no objections sustained, the Court, being fully advised in the premises, does hereby
ORDER that this Chapter 13 case is hereby dismissed.
Based upon the record in the previous case, this Court is unable to find that Judge Clark dismissed the Debtor's Chapter 13 case because of a willful failure to prosecute his case. Although both Connolly and the Chapter 13 Trustee stated as reasons for their respective motions to dismiss the Debtor's failure to proffer a proposed Chapter 13 Plan and Plan Analysis, the dismissal Order is not expressly premised upon a finding of willfulness. Additionally, it appears that the Debtor attempted to respond to Connolly's motion but was precluded by an undisclosed procedural error. In sum, this Court cannot conclude that the Debtor's previous bankruptcy case was dismissed for "willful failure . . . to appear before the Court in proper prosecution of the case." 11 U.S.C. § 109(g)(1).
B. 11 U.S.C. § 707(a).
The Bankruptcy Code provides for dismissal of a voluntary Chapter 7 case. Section 707(a) provides, in part, as follows:
The court may dismiss a case under this chapter only after notice and a hearing and only for cause including
(1) unreasonable delay . . . that is prejudicial to creditors;
(2) nonpayment of any fees . . .; and
*541 (3) failure . . . to file . . . the information required by paragraph (1) of section 521. . . .
11 U.S.C. § 707(a) (emphasis added).
The instances of "cause" set forth in Section 707(a) are merely illustrative and are not an exhaustive listing. See, H.R. No. 95-595, 95th Cong., 1st Sess. 380 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 94 (1978), U.S.Code Cong. & Admin.News 1978 pp. 5787, 5880, 6336. Accord, In re Campbell, 124 B.R. 462, 464 (Bankr.W.D.Pa.1991) ("A Chapter 7 case may also be dismissed for other reasons which constitute `cause'.").
A debtor's good faith is an implicit jurisdictional prerequisite to the filing of a case under the Bankruptcy Code.[23]See, e.g., In re Doss, 133 B.R. 108, 109 (Bankr. N.D.Ohio 1991); Campbell, supra at 464; In re Rognstad, 121 B.R. 45, 49 (Bankr.D.Hawaii 1990). But see, In re Latimer, 82 B.R. 354, 363 (Bankr.E.D.Pa. 1988). Absence of good faith is generally held to be sufficient cause for dismissal. See, e.g., Doss, supra at 109; In re Jones, 114 B.R. 917, 926 (Bankr.N.D.Ohio 1990); In re Ravick Corp., 106 B.R. 834, 842 (Bankr.D.N.J.1989).
Although not defined in the Bankruptcy Code, good faith, at the very least, requires a showing of honest intention. In re Johnson, 708 F.2d 865, 868 (2nd Cir. 1983); In re Sky Group Int'l, Inc., 108 B.R. 86, 90 (Bankr.W.D.Pa.1989).[24]
The Bankruptcy Code is intended to serve those persons who, despite their best efforts, find themselves hopelessly adrift in a sea of debt. If, instead, a debtor seeks to discharge debts by shielding his wealth, "such an individual is not seeking a `fresh start,' but is requesting the Court to permit him to continue living `like a king.'" In re Brown, 88 B.R. 280, 285 (Bankr.D.Hawaii 1988).
"Good faith and candor are necessary prerequisites to obtaining a fresh start. The bankruptcy laws are grounded on the fresh start concept. There is no right, however, to a head start." Jones, supra at 926. "Bankruptcy protection was not intended to assist those who, despite their own misconduct, are attempting to preserve a comfortable standard of living at the expense of their creditors." Id. Even if a debtor is in technical compliance with the requirements of the Bankruptcy Code, if he is attempting to overutilize the protections afforded by the bankruptcy process to the unconscionable detriment of creditors, the case may be dismissed for cause. Sky Group, supra at 90.
Once the question of good faith/bad faith is put in issue, the party bringing the bankruptcy Petition has the burden of proving that the Petition was brought in good faith. Id. Put another way,
[a] determination as to the good faith vel non of a bankruptcy filing requires examination of all the facts and circumstances of a particular case. In particular, it requires inquiry into any possible abuses of the provisions, purposes, or spirit of bankruptcy law and into whether the debtor genuinely needs the liberal *542 protections afforded by the Bankruptcy Code.
Campbell, supra at 464 (citation omitted).
Dismissal based upon lack of good faith must be undertaken on an ad hoc basis.
It should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish lifestyle, and intention to avoid a large single debt based on conduct akin to fraud, misconduct or gross negligence. It was not abuse of discretion to conclude that the factors found in this case amounted to a lack of good faith. . . .
In re Zick, 931 F.2d 1124, 1129 (6th Cir.1991) (emphasis added).
Certain characteristics of a Chapter 7 case ripe for dismissal on grounds of bad faith are present in the instant case. Those characteristics include (1) one or few creditors in number; modest debt in amount relative to assets or income; (2) lack of candor and completeness in debtor's statements and schedules; (3) improper or unexplained transfers, or absence, of debtor's pre-petition assets; (4) multiple case filings or other extraordinary procedural gymnastics; and (5) existence of a predominant dispute between debtor and a single creditor.[25]
The Debtor admits that he transferred all or substantially all of his non-exempt assets to his wife on the eve of bankruptcy for no real consideration.[26] He continues to run the business as he did before, under a new name, but in the same location and with the same customers and suppliers as before. Indeed, the general trade creditors as well as the lessors of the business facility and equipment continue to be paid and payments to them have never become delinquent.[27] Debtor remains essentially the same businessman who is simply determined not to pay his principal creditor and is using the instant bankruptcy case as yet another device to delay. See, In re Khan, 35 B.R. 718, 719 (Bankr.W.D.Ky.1984).
While seeking the protection afforded by the Bankruptcy Code, Debtor has attempted to conceal his income from his creditors by claiming inflated expenses and adopting a not uncomfortable lifestyle which he wishes the MiniScribe Estate and the IRS to indirectly finance. The Debtor does not seek discharge of any personal obligations and continues to spend a relatively inordinate amount of money on personal expenses, while expending precious little, actually nothing, on the substantial MiniScribe debt.
This is certainly not a debtor who demonstrates his good faith by exercising a degree of good, old-fashioned "belt-tightening" to pay his creditors. Indeed, the Debtor's own schedules filed in the first case reflect that he had enough cash on hand and in a bank to pay at least a substantial portion of the MiniScribe judgment as well as his taxes right then, however, by the time of the filing of the second Petition, these funds had dwindled dramatically and inexplicably.
While some ability to repay debts is certainly not, in and of itself, adequate cause for dismissal of a Chapter 7 case,[28] except *543 perhaps under Section 707(b),[29] when considered in conjunction with (1) the transfer of non-exempt corporate assets, without fair consideration, to Debtor's non-debtor spouse, (2) a continuing comfortable lifestyle, (3) a deliberate and persistent pattern of evading a single major creditor, (4) less than candid, full disclosure, and (5) Debtor's prior procedural gymnastics in Bankruptcy Court, this Court must find that the Debtor lacks the requisite good faith and falls well short of the image of an "honest but unfortunate" debtor.[30] In short, the facts and circumstances of this case demonstrate conduct decidedly not in good faith.
The reason why this Debtor seeks to avail himself of the protections and benefits of the Bankruptcy Code is transparent. If he is successful, MiniScribe will be sent away empty-handed while the Debtor retains control of corporate assets and an ongoing business of an undisclosed value. "Such a result surely was not contemplated by Congress and would be a patent abuse of the Bankruptcy Code." Campbell, supra at 465. Such result is also beyond the countenance of this Court.
The instant Petition misapplies and discredits the Bankruptcy Code. The only reasonable inference that this Court can make is that it was filed in bad faith. This Court agrees with Judge Fitzgerald who, in a similar case, concluded, "[t]his Debtor who has acted in bad faith and is able to meet his obligations cannot use this court as an escape hatch simply because he has primarily business debts, the existence of which preclude a § 707(b) analysis." In re Maide, 103 B.R. 696, 700 (Bankr.W.D.Pa. 1989). This Court will not provide the Debtor safe harbor.
Accordingly, it is hereby
ORDERED that the Motion to Dismiss is GRANTED; and it is
FURTHER ORDERED that the within Petition is DISMISSED.
NOTES
[1] This Court, by way of its February 11, 1992 Amended Order, advised the Debtor that certain materials outside of the pleadings and evidence in the nature of deposition testimony would be considered in the disposition of Connolly's Motion to Dismiss and announced that the matter would be treated on terms consonant with motions for summary judgment pursuant to Rule 7056, Fed.R.Bankr.P. and Local Rule 10(C). See, In re Edmonds, 924 F.2d 176 (10th Cir. 1991). Consequently, the Debtor was given until March 2, 1992 to respond.
[2] Of some interest in this case is the circumstance that, but for the predominance of business debt, this Debtor's case might have been a promising candidate for dismissal for "substantial abuse," pursuant to 11 U.S.C. § 707(b). Dismissal for "substantial abuse" is not available for consideration due to the preponderance of business debt. See e.g., In re Walton, 866 F.2d 981 (8th Cir.1989) (ability to pay, failure to fully disclose financial condition and indications that a debtor has not suffered any calamity, but merely desires to avoid paying debts constitute substantial abuse); In re Kelly, 841 F.2d 908 (9th Cir.1988) (where a debtor's monthly income surplus would allow him in Chapter 13 to pay off two-thirds of his unsecured debt in three years and all of it in five, case dismissed on substantial abuse); In re Day, 77 B.R. 225 (Bankr. D.N.D.1987) (ability to pay 100% of unsecured debt, therefore case dismissed for substantial abuse); Matter of Webb, 75 B.R. 264 (Bankr. W.D.Mo.1986) (purpose of debtor rehabilitation is disserved if bankruptcy courts must be used in order to afford debtors basis for making their creditors pay for their luxuries); In re Kress, 57 B.R. 874 (Bankr.D.N.D.1985) (debtor had ability to pay back his unsecured creditors 100% in just over three years); In re Bryant, 47 B.R. 21 (Bankr.W.D.N.C.1984) (conscious disregard of bankruptcy provisions and bad faith efforts to avoid paying creditors amounted to substantial abuse). See also, In re Gyurci, 95 B.R. 639, 644 (Bankr.D.Minn.1989) ("`I know it when I see it. . . .'" (quoting Justice Stewart in Jacobellis v. State of Ohio, 378 U.S. 184, 197, 84 S.Ct. 1676, 1683, 12 L.Ed.2d 793 (1964))).
[3] This Court, in addition to the files in the instant case, has reviewed the file in the Debtor's previously aborted Chapter 13 case, 91-14530-PAC.
[4] The MiniScribe bankruptcy case was converted to a Chapter 7 proceeding on April 26, 1991 and Tom Connolly was appointed as interim trustee. Connolly filed a motion in the adversary to be substituted as plaintiff which was granted on July 22, 1992.
[5] The motion further stated that the Debtor's bankruptcy counsel previously offered to voluntarily dismiss the Chapter 13 case if Connolly would agree to settle the MiniScribe judgment for a lesser amount.
[6] The file does contain a Notice of Returned Document dated June 5, 1991, the date that objections were due.
[7] Warren Precision's address is listed as: 1035 Delaware Ave., #B, Longmont, Colorado.
[8] Although the budget says that there are four people in the household, only the Debtor, the Debtor's wife, and the Debtor's 20-year old daughter, Gina, are identified.
[9] The identity of the referenced "dependents" is/are not revealed.
[10] Precision Technology's address is listed as: 1035 Delaware Ave., #B, Longmont, Colorado. Compare, note 7, infra.
[11] Warren Precision's address is now listed as: 1121 Delaware # 4, Longmont, Colorado. Compare, note 7, infra.
[12] The case number should read 91-14530-PAC.
[13] Debtor alleges that Swiss Lenox, an ordinary trade creditor, was paid in full in the ordinary course of business after the filing of the dismissed Chapter 13 case but prior to the filing of the instant case.
[14] The Articles of Incorporation for Precision Technology, Inc. were filed with the Office of the Colorado Secretary of State on July 18, 1991. The registered agent for Precision Technology is Aleta Hammonds, the Debtor's wife. The Board of Directors is made up of Aleta Hammonds, John Hindorff, Debtor's bankruptcy counsel, and Maureen Reiff, an individual whose specific identity is undisclosed but whose address is identical to the office address of the Debtor's bankruptcy counsel, Mr. Hindorff.
[15] See, note 13, infra.
[16] See, note 5, infra.
[17] See, Response to Reply in Support of Motion to Dismiss at ¶ 4 (quoting pages 6-7 of the transcript of Debtor's 2004 exam testimony).
[18] See, id. at ¶ 7 (quoting page 15 of the transcript of Debtor's 2004 examination testimony).
[19] See, page 22 of the transcript of Debtor's 2004 examination testimony.
[20] See, Response to Reply in Support of Motion to Dismiss at ¶ 8.
[21] See, id. at ¶ 8.
[22] See, id. at ¶ 8.
[23] The "good faith requirement also comports with the bankruptcy court's role as a court of equity, where those seeking relief must approach the court with clean hands and an honorable purpose." In re Jones, 114 B.R. 917, 926 (Bankr.N.D.Ohio 1990). (The Court's inherent authority to control its own docket is also cited.)
[24] Attempting to quantify or formulate a test on the issue of bad faith, one bankruptcy court has stated:
Although no one factor predominates in the factual determination of a bad faith case, the elements often found in such cases include the following:
(a) frivolous purpose, absent any economic reality;
(b) lack of an honest and genuine desire to use the statutory process to effect a plan of reorganization;
(c) use of a bankruptcy as a device to further some sinister or unworthy purpose;
(d) abuse of the judicial process to delay creditors or escape the day of reckoning in another court;
(e) lack of real debt, creditors, assets in an ongoing business; [and]
(f) lack of reasonable probability of successful reorganization.
In re Bingham, 68 B.R. 933, 935 (Bankr. M.D.Pa.1987).
[25] In analyzing the instant case, this Court finds particular merit in what is commonly referred to as the "smell test." According to the late Irwin Younger, "the most important item in the courtroom and all too seldom used is the judge's nose. Any trial judge will inevitably come to the conclusion on occasion that a certain case or claim or defense has a bad odor. Simply put, a matter smells. Some smell so bad they stink." Morgan Fiduciary, Ltd. v. Citizens & Southern Int'l Bank, 95 B.R. 232, 234 (S.D.Fla. 1988) (paraphrasing Younger).
[26] See, In re Maide, 103 B.R. 696, 698 (Bankr. W.D.Pa.1989) (the court found that a transfer made without consideration "indicates a lack of good faith and militates for dismissal.").
[27] "Voluntary repayment is not forbidden by the Bankruptcy Code [citation omitted], but neither is the right to choose the recipients of such largesse unrestricted." Maide, supra at 700.
[28] Accord, In re Bridges, 135 B.R. 36, 37 (Bankr. E.D.Ky.1991); In re Frisch, 76 B.R. 801, 803 (Bankr.D.Colo.1987) (Votolato, Visiting Judge); In re Beck Rumbaugh Associates, Inc., 49 B.R. 920, 922 (Bankr.E.D.Pa.1985). See also, H.R. No. 95-595, 95th Cong., 1st Sess. 380 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 94 (1978) ("The section [§ 707(a)] does not contemplate, however, that the ability of the debtor to repay his debts in whole or in part constitutes adequate cause for dismissal. To permit dismissal on that ground would be to enact a nonuniform mandatory chapter 13, in lieu of the remedy of bankruptcy.") (emphasis added). Compare, e.g., In re Krohn, 886 F.2d 123 (6th Cir.1989) (dealing with the "substantial abuse" standard in § 707(b)).
[29] See, note 2, infra.
[30] See, Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934)). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1551898/ | 139 B.R. 235 (1992)
In re WHEELER TECHNOLOGY, INC., aka Wheeler Aircraft, Debtor.
Hugh SMITH, Alexair, Inc., Appellants,
v.
WHEELER TECHNOLOGY, INC., Unsecured Creditors Committee, United States Trustee, Appellees.
BAP No. WW-91-1373 ROMe, Bankruptcy No. 90-33683T.
United States Bankruptcy Appellate Panel, of the Ninth Circuit.
Argued and Submitted September 20, 1991.
Decided January 16, 1992.
*236 Paul B. Snyder, Tacoma, Wash., for appellants.
J. Todd Tracy, Seattle, Wash., for appellees.
Before RUSSELL, OLLASON, and MEYERS, Bankruptcy Judges.
MEMORANDUM
RUSSELL, Bankruptcy Judge:
A creditor appeals from an order of the bankruptcy court removing him from the Unsecured Creditors' Committee for failure to comply with a court order to return goods in his possession that the debtor was attempting to redeem under Washington law. The order requiring the turnover of the goods was the result of a motion rather than an adversary proceeding as is required by the Bankruptcy Rules. The court subsequently awarded the debtor attorney's fees and costs incurred in recovering the goods held by the creditor. We reverse and vacate the orders.
I. FACTS
Creditor Hugh Smith and Alexair, Inc.[1] ("Hugh Smith/Alexair") appeals from the April 10, 1991 order on the bankruptcy court entitled "Order on Final Hearing Re Order to Show Cause to Hugh Smith and/or Alexair, Inc." Hugh Smith was a creditor of the debtor, Wheeler Technology, Inc., aka Wheeler Aircraft Company *237 ("Wheeler"). Wheeler was in the business of constructing airplane kits sold for home built airplanes. Wheeler stored proprietary molds and plugs for these kits at a storage unit operated by Point Fosdick Landlockers.
When Wheeler fell behind in rent payments on the storage unit, Point Fosdick Landlockers sold the contents at a private sale on October 4, 1990 to the appellant, Mr. Hugh Smith/Alexair, Inc. The day after the sale, on October 5, 1990, Alexair and two other creditors filed an involuntary Chapter 7[2] petition against Wheeler. On October 29, 1990, Wheeler converted the involuntary Chapter 7 to a voluntary Chapter 11. On December 12, the U.S. Trustee appointed an Unsecured Creditors' Committee and the appellant, Hugh Smith was among those appointed[3].
In January 1991, Wheeler learned that Hugh Smith/Alexair had purchased the contents of the storage unit and obtained an order for Hugh Smith to be examined regarding the purchase under Bankruptcy Rule 2004. Prior to the examination, counsel for Wheeler advised counsel for Hugh Smith/Alexair that Wheeler was exercising its redemption rights under Washington state law, Wash.Rev.Code 19.150.110, and that he was holding a check for the amount necessary to redeem the property from Hugh Smith/Alexair.
On February 12, 1991, after being served with the Rule 2004 order and having been notified that Wheeler was exercising its redemption rights, Hugh Smith/Alexair, Inc. transferred the goods to a purchaser in Canada. On February 14, 1991 at the Rule 2004 examination, Wheeler attempted to tender the cashiers check to redeem the goods. The tender was rejected because (1) the check was made payable to Hugh Smith, not Alexair, Inc., the name on the bill of sale and (2) because the check did not include costs allowable under the state statute. Wash.Rev.Code 19.150.110.
Counsel for Wheeler contacted the Canadian purchaser, advising him that Wheeler was exercising its redemption rights. The Canadian purchaser responded that he would return the goods upon payments of the costs incurred in shipping the goods to Canada.
As expiration of the six month redemption period approached, Wheeler still did not have information on the costs incurred by Hugh Smith/Alexair. Wheeler filed an ex parte Motion for Order to Show Cause to hold Hugh Smith/Alexair in contempt for failure to provide an accounting of the costs incurred in the purchase of the goods from the storage unit. The hearing was set for March 12, 1991 and Hugh Smith was personally served. The Canadian purchaser was served via facsimile and over-night mail.
The Canadian purchaser did not appear at the hearing and Hugh Smith requested a continuance that was denied. The court orally ruled that the goods must be returned to the United States and delivered to Wheeler, Inc. by March 20, 1991. The court further ordered Hugh Smith/Alexair, Inc. to be removed from the Unsecured Creditors' Committee pending the return of the goods.
A hearing was scheduled to determine what additional costs, if any, Wheeler should pay and to consider monetary sanctions. At the final hearing, the court permanently removed Hugh Smith/Alexair from the Unsecured Creditors' Committee for (1) knowingly violating the automatic stay by removing property of the estate out of the United States and (2) for failure to comply with the court's March 19, 1991 order directing the return of the goods by March 20, 1991. In an order entered April 10, 1991 the court imposed monetary sanctions of $2,059.76 in attorney's fees and costs to be paid to Wheeler by Hugh Smith/Alexair pursuant to 362(h).
*238 II. ISSUES
1.) Whether the court abused its discretion in removing the appellant from the Unsecured Creditors' Committee as a sanction for violating the automatic stay and for failing to comply with the order directing return of the subject property by March 20, 1991.
2.) Whether a turnover of property can be ordered by the bankruptcy court without the benefit of an adversary proceeding.
III. STANDARD OF REVIEW
We review the imposition of sanctions for an abuse of discretion. See Callow v. Amerace Corp., 681 F.2d 1242, 1243 (9th Cir.1982). The interpretation and application of the Bankruptcy Rules is purely a question of law and is reviewed de novo. In re Holm, 931 F.2d 620 (9th Cir.1991); In re Cardinal Enterprises, 68 B.R. 460, 462 (9th Cir. BAP 1986), aff'd without opinion, Cardinal Enterprises v. Far West Federal Bank, 844 F.2d 791 (9th Cir.1988).
IV. DISCUSSION
A. Removal From The Creditors' Committee
The bankruptcy court, in its oral findings of fact and conclusions of law[4], found the actions of the appellant especially egregious because of his position on the Unsecured Creditors' Committee and the fact that he had above average knowledge of not only the automatic stay, but also that the debtor attempted to exercise its redemption rights. Those facts were largely undisputed[5]. (See ER 11)
The issue of whether a court is empowered to remove a creditor from the Creditors' Committee presented some difficulty, as the court recognized:
Despite the absence of section 1102(c)[6] from the Code as of 1986, it defies the Court's imagination that this Court would not be in a position to enforce its orders through all appropriate means, particularly when one is dealing with a member of the official Creditors' Committee who acts for all of the creditors within the unsecured class, to require that person to put aside specific concerns and conditions and a specific desire to benefit certain parties potentially by taking these kinds of actions in the circumstances where that person owes a duty to the committee in general and to the creditors of that class in general.
And thus if Mr. Smith was not willing to comply with the Court order, I could see no recourse and still see no recourse than to determine under section 105 that he should not be a member of a constituent representative group in the case. To do so, to permit him to remain in that position if he desired to ignore the Court order, in my view would be rewarding activities that are far from those that the Court would expect of a member of the Creditors' Committee now.
See, ER 10:16-17.
We agree with the Hugh Smith/Alexair's assertion that the court had acted beyond its powers in removing him from the Creditors' Committee as a sanction. As the court noted in the 1986 revision of the Code, Congress deleted 1102(c) which had *239 given the bankruptcy court the power, after notice and a hearing, to change the membership or size of the Creditors' Committee that it had appointed.
Since the 1986 revision of 1102, bankruptcy courts have held that courts no longer have this power because of the 1986 nationwide expansion of the Office of the U.S. Trustee. The power to appoint and delete members of the Creditors' Committee now resides exclusively with the U.S. Trustee. Matter of Gates Engineering Co., Inc., 104 B.R. 653, 654 (Bankr.D.Del. 1989) ("Subsequent to 1986, subsection (c) was deleted in 1102 so that the court no longer had any authority over the composition of committees appointed by the U.S. Trustee."); In re Drexel Burnham Lambert Group, Inc., 118 B.R. 209, 210 (Bankr. S.D.N.Y.1990) ("Noteworthy is the absence of any indication in the statute that the court may add to or delete an unsecured creditor from a committee.").
At least one bankruptcy court has rejected an attempt to use 105[7] to achieve a result contrary to the legislative history and Congressional intent in deleting sub-section (c) of 1102. Matter of Gates Engineering, 104 B.R. 653, 654 (Bankr. D.Del.1989) ("However, the court cannot under the provisions of 105 circumvent the unambiguous language of the three sections of the Code previously stated in light of the deletion of subsection (c) in 1986.")
We agree with the interpretation set forth in the above cases and therefore must reverse the April 10, 1991 order of the court removing the appellant, Hugh Smith/Alexair from the Unsecured Creditors' Committee.
B. Turnover of Property
Wheeler's action to recover property was inappropriately brought by means of an ex parte motion where an adversary proceeding is required. Bankruptcy Rule 7001 explicitly states that an action to recover money or property is an adversary proceeding, subject to the procedural rules therein.
On March 4, 1991, Wheeler filed an ex parte Motion and Order to Show Cause why Hugh Smith/Alexair should not be held in contempt for not providing Wheeler with a breakdown of the costs payable in order to exercise rights of redemption under state law. The motion was served on Hugh Smith/Alexair March 5, 1991. The hearing was set for March 12, 1991. On March 19, 1991 an order was entered requiring Hugh Smith/Alexair to turn over the contents of the Point Fosdick Landlocker on or before 5:00 p.m., March 20, 1991. The Appellant Hugh Smith/Alexair was ordered to turn over this property even though the ex parte motion contained no such request. (ER 1, 2, 3, 7) In the court order of April 10, 1991, Wheeler was awarded $2,059.76 in attorneys fees and costs to recover the property, which was the same amount required to redeem[8]. (ER 8)
The March 19, and April 10, 1991 orders are void because they violate the procedural requirements incorporated in the Bankruptcy Rules. Basic notions of due process require that parties be apprised of any action against them and that they be allowed a reasonable opportunity to respond. The Supreme Court in Mullane v. Central Hanover Bank & Trust Co. recognized this:
An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and to afford them an opportunity to present *240 their objections. The notice must be of such nature as reasonably to convey the required information . . . and it must afford a reasonable time for those interested to make their appearance.
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950) (citations omitted).
The concept of due process is no less applicable in bankruptcy proceedings. It is incorporated into the bankruptcy code by the procedural requirements of Part VII of the Federal Rules of Bankruptcy Procedure. Rule 7001 requires an action to recover property to be brought as an adversary proceeding. The bankruptcy rules governing adversary proceedings were intended to provide essentially the same procedural and due process protections as the Federal Rules of Civil Procedure[9]. The bankruptcy rules specifically designate the recovery of property as an action receiving those procedural protections:
Rule 7001. Scope of Rules of Part VII.
An adversary proceeding is governed by the rules of this Part VII. It is a proceeding (1) to recover money or property. . . .
Federal Rules of Bankruptcy Procedure 7001.
The relief requested by Wheeler was only a breakdown of costs associated with the purchase of the contents of the storage locker in order to tender the appropriate amount. The relief granted, however, far exceeded the relief requested. The resulting order mandated a turnover of property. (Order of March 19, 1991, ER 12) While ex parte motion procedure may or may not have been appropriate for the requested relief, it clearly does not provide the due process protection required for the ordered turnover of property. The required procedure is an adversary proceeding pursuant to Bankruptcy Rule 7001. "A turnover action is an adversary proceeding which must be commenced by a properly filed and served complaint." In re Perkins, 902 F.2d 1254, 1258 (7th Cir.1990); Accord, In re Interpictures, Inc., 86 B.R. 24, 29 (Bankr.E.D.N.Y.1988); In re Gold Leaf Corp., 73 B.R. 146, 147 (Bankr.N.D.Fla. 1987); In re Ace Industries, Inc., 65 B.R. 199, 200 (Bankr.W.D.Mich.1986); In re Riding, 44 B.R. 846, 858 (Bankr.D.Utah 1984).
The bankruptcy court in In re Riding stated:
The modern bankruptcy rules provide a mechanism for resolving turnover disputes in a manner that affords the parties a fair opportunity to present their sides of the issue, while promoting efficiency and uniformity in practice. To permit turnover by motion in this case would justify permitting it in other cases as well. The Bankruptcy Rules mandate that the court await the commencement of an adversary proceeding before determining whether turnover shall be required. Thus, before the bankruptcy court may order turnover of property . . . a complaint must be filed, process served, an answer or motion interposed, discovery conducted, a hearing held, and findings of fact and conclusions of law made.
In re Riding, 44 B.R. 846, 859 (Bankr. D.Utah 1984).
The ex parte motion did not adequately apprise Hugh Smith/Alexair of what it was to defend against. Even if a motion were appropriate, the relief granted was not requested in the motion[10]. The motion contains no mention of a turnover of property. Appellee Hugh Smith/Alexair could not realistically be expected to prepare a defense to that which was not contained in the motion.
*241 Further, the expedited hearing did not afford Hugh Smith/Alexair sufficient time to respond in a meaningful manner. Having been served on March 5, 1991 for a hearing on March 12, 1991, Hugh Smith/Alexair had seven days to prepare. With responsive pleadings required to be filed and served at least two business days prior to the hearing, Hugh Smith/Alexair's counsel had even less time to respond to relatively complex issues including the potential removal from the Creditors' Committee as well as the other issues[11]. This truncated time frame does not comport with the requirements of procedural due process.
Appellate courts have voided bankruptcy court orders violative of due process. See In re Center Wholesale, Inc., 759 F.2d 1440 (9th Cir.1985) (A cash collateral order was deemed void on due process grounds where an interested creditor had insufficient notice to adequately prepare for the hearing.); In re Perkins, 902 F.2d 1254, 1257 (7th Cir.1990) (Orders of a bankruptcy and district court were vacated where a turnover action brought by motion should have been brought as an adversary proceeding.); In re Blumer, 66 B.R. 109 (9th Cir.BAP 1986), aff'd without opinion 826 F.2d 1069 (9th Cir.1987) (The Panel set aside an ex parte order approving an extension of credit as void in violation of procedural due process.)
V. CONCLUSION
The bankruptcy court abused its discretion in removing Hugh Smith/Alexair, from the Unsecured Creditors' Committee as a sanction for violation of the automatic stay and for failure to comply with a court order. Since the 1986 revision of the Code deleting 1102(c), the bankruptcy court no longer has the power to delete a member from that committee and 105 cannot be used to circumvent clear Congressional intent to place that power in the Office of the U.S. Trustee. Further, the turnover of property cannot be ordered on the basis of a motion without the initiation of an adversary proceeding as expressly required by the Bankruptcy Rules. We REVERSE and VACATE the March 19, and April 10, 1991 orders.
NOTES
[1] Hugh Smith is the principal of Alexair, Inc.
[2] Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. 101-1330 and to the Federal Rules of Bankruptcy Procedure, Rules XXXX-XXXX.
[3] Hugh Smith was elected vice chairman of the unsecured creditors' committee.
[4] The court made lengthy oral findings of fact and conclusions of law at the hearings on March 12, March 19, and April 10, 1991. (ER Exhibits 9, 10, 11.)
[5] The appellant does not dispute the finding that he was in violation of the automatic stay, but in his reply brief he does dispute the amount of attorney's fees awarded. He argues that the court's award was not reasonable and there was no evidence in support of the amount awarded. A review of the transcripts shows that the court awarded an amount considerably less than that requested by the debtor. The debtor requested $3,800 in attorney's fees based upon the affidavit of Mr. Cullen. The court awarded a sanction of $2,059.76 for attorney's fees and costs: the actual cost of storage, transportation and loading of the goods and $500 in attorney's fees. ER 12:3-4.
[6] Prior to its deletion in the 1986 amendments, 1102(c) provided:
On request of a party in interest and after notice and a hearing, the court may change the membership or the size of a committee appointed under subsection (a) of this section if the membership of such committee is not representative of the different kinds of claims or interests to be represented.
11 U.S.C. 1102(c) (1988).
[7] Section 105 provides in part:
(a) the court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse or process.
11 U.S.C. 105(a) (1988).
[8] Both the March 19, 1991 and April 10, 1991 orders are appealed herein.
[9] "These Part VII rules are based on the premise that to the extent possible practice before the bankruptcy courts and the district courts should be the same. These rules either incorporate or are adaptations of most of the Federal Rules of Civil Procedure." Advisory Committee Note, Bankr.Rule 7001, 11 U.S.C.A. (West 1989).
[10] Even Rule 9014, which governs contested matters that are appropriately resolved by motion, provides that "reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought." Federal Rules of Bankruptcy Procedure 9014.
[11] Hugh Smith/Alexair filed a Motion for Continuance on March 8, 1991. That motion was denied. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552704/ | 199 B.R. 628 (1996)
In re James and Betty ERWIN, Debtors.
Bankruptcy No. 95-43277-H4-13.
United States Bankruptcy Court, S.D. Texas, Houston Division.
August 23, 1996.
*629 Patrick Devine, Devine & Livingston, Houston, Texas, for Debtors.
OPINION ON DEBTOR'S MOTION TO AVOID LIEN ON TOOL OF TRADE
WILLIAM R. GREENDYKE, Bankruptcy Judge.
James and Betty Erwin ("Debtors") have moved pursuant to 11 U.S.C. § 522(f)(1)(B)(ii) to avoid the lien claimed by Allied Finance ("Allied") upon their 1988 Ford Crown Victoria LTD. Allied filed a proof of claim which asserts a secured claim in the amount of $5,600. Debtors admit owing such amount to Allied; however, they also assert that the vehicle is an exempt tool of trade used in Debtor's profession as a constable. Upon consideration, the Court has concluded that Debtors may not avoid the lien pursuant to § 522(f)(1)(B)(ii) of the bankruptcy code.
I. Factual Background
On May 2, 1995 Debtors filed a voluntary petition under chapter 13 of the bankruptcy code. On September 25, 1995 they filed a motion to avoid the lien on their 1988 Ford Crown Victoria LTD as an exempt tool of trade. In addition, they claimed the vehicle as exempt pursuant to Tex.Prop.Code §§ 42.001 & 42.002.
In support of their motion, Debtors claim that the vehicle is necessary for Mr. Erwin to perform his duties as a Harris County Constable. The car does not contain the outside markings of a constable's car, apparently to avoid difficulties in serving legal papers on parties being summoned. However, the car does contain the necessary emergency lights, spot light, and communications equipment; although recently, the local constable force has modernized to use portable communications equipment.
Allied, on the other hand, argues that the automobile is not a tool even though the Debtor uses his patrol car in his job as a constable. Allied also has alleged that the automobile is not peculiarly adapted for Debtor's employment.
II. Analysis
Section 522(f) of the bankruptcy code allows a debtor to avoid a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under § 522(b) if the lien is a non-possessory, nonpurchase-money security interest in any implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor. See, 11 U.S.C. § 522(f)(1)(B)(ii) (1978).[1] This statute allows the debtor to avoid a lien on property claimed as exempt under a state law exemption statute or under the under the federal exemption statute. 11 U.S.C. § 522(b). In other words, "although a state may elect to control what property is exempt under state law, federal law determines the availability of lien avoidance under § 522(f) of the Code." In re Nash, 142 B.R. 148, 153 (Bankr. N.D.Tex.1992) (citation omitted); See Also, In re Neal, 140 B.R. 634, 638 (Bankr. W.D.Tex.1992). An exception, or limitation on the ability to avoid a lien provided for in section § 522, however, is that in cases in which a debtor has opted to utilize state exemption statutes, if the state allows unlimited exemption of property or prohibits avoidance of a consensual lien on property that could otherwise be claimed as exempt, the debtor may not avoid a security interest to the extent that the value of the property is in excess of $5,000. 11 U.S.C. § 522(f)(3) (1994).
*630 As noted above, Debtors have opted to utilize the exemptions provided by the Texas Property Code as opposed to those listed in § 522(d) of the code. The Texas Property Code specifically allows a personal property exemption for "tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession." Tex. Prop.Code § 42.002(a)(4) (1991) (emphasis added) (Note: 1991 amendment rewrote the entire section).[2]
Following the 1991 amendment of the Texas personal property exemption statute, recent cases have noted a broader meaning should be given to the term "tools of trade." See, In re Legg, 164 B.R. 69, 72 (Bankr. N.D.Tex.1994). In Legg, the Court overruled the requirement that to be exempt, tools must be peculiarly adapted to the trade or profession, and noted that the Texas Legislature obviously did away with the requirement that items must be peculiarly adapted by adding boats and motor vehicles to the 1991 amendment. Id. In Legg, the court allowed a debtor who regularly used a caterpillar front-end loader, truck, and other equipment in his fertilizer business to claim such items as exempt tools of trade. Id. at 73.
The current test for determining whether an item may be claimed as an exempt tool of trade in Texas is whether the item is "fairly belonging to or usable in the debtor's trade." In re Nash, 142 B.R. 148, 152 (Bankr.N.D.Tex.1992) (citing Meritz v. Palmer (In re Meritz), 266 F.2d 265, 268 (5th Cir.1959)) (The Court in Nash held that the Texas exemption for tools of trade applies to large farm items such as plows, tractors, and other farming equipment). Another aspect of this test is to consider whether the item is used with sufficient regularity to indicate an actual use by the debtor. Id.; In re Hrncirik, 138 B.R. 835, 840 (Bankr.N.D.Tex.1992) (holding that wrecked, unusable pickup truck was not eligible for exemption as tool of trade since it was not necessary to debtor's farming business).[3] In other words, since the amendment of the Texas personal property exemption statute in 1991, the appropriate test for determining what constitutes a tool of trade is the "use test." In re Baldowski, 191 B.R. 102, 104 (Bankr.N.D.Tex.1996). Consequently, those items which have merely a general value and use in a business are not included within the scope of the exemption. In re Neal, 140 B.R. 634, 637 (Bankr.W.D.Tex.1992).
There are no reported cases interpreting the amendment to the Texas exemption statute involving motor vehicles. However, one case, interpreting a Virginia statute which allows a personal property exemption for motor vehicles, concluded that a debtor could not avoid a lien on a motor vehicle used in their trade unless the vehicle is "necessary for use in the court" of debtor's occupation or trade. In re Weinstein, 192 B.R. 133, 136 (Bankr.E.D.Va.1995) (emphasis added). In Weinstein, the court concluded that the debtor could not avoid the lien on his truck which was used in his profession as a heating and air conditioning mechanic. Id. The court also noted that whether a vehicle is "necessary" to an occupation must remain a fact dependent issue. An explicit statutory exemption for motor vehicles, although intended to be construed liberally, could potentially be interpreted to allow a debtor who stores tools or utensils in his or her vehicle, or merely utilizes the vehicle to commute back and forth to work to utilize the exemption in conjunction with § 522(f)(1)(B) to avoid a nonpossessory, nonpurchase-money lien. Id.
*631 Although the Texas exemption statutes are to be construed broadly, the 1991 amendment to the statute, while specifically authorizing an exemption for motor vehicles, appears to have been intended by the legislature merely to add a new category to the exemption, recognizing that in certain cases automobiles may constitute a tool of trade. However, adding an exemption for automobiles was not intended to allow debtors with vehicles having only a remote, or even a moderate nexus with their trade or profession to avoid a nonpossessory, nonpurchase-money lien via the bankruptcy process. Almost all persons engaged in a trade or profession utilize an automobile as a means to commute to and from their employment, as well as in the pursuit of their employment. As a result, the determination of whether a debtor may avoid a lien on a motor vehicle exempted under the Texas statute is largely dependant on the facts and circumstances of each case. Consequently, this Court will follow Judge Akard's reasoning in the Legg case and apply the use test to our facts. 164 B.R. 69 (Bankr.N.D.Tex.1994).
At the evidentiary hearing on this matter, Debtor testified that he uses the vehicle for personal or family use in addition to its use in conjunction with his employment. Debtor receives a car allowance from his employer based upon his use of the vehicle to serve legal documents on private parties. He further testified that any four-door vehicle, such as a rental car, would be suitable for the performance of his duties as a constable. The Debtor is also not self employed. See, In re Legg, 164 B.R. at 72 (noting that recent case law seems to consider any self-employed activity to qualify as a trade or profession).[4] These factors have led this Court to conclude that the Debtor's use of the vehicle is too tenuous in relation to his employment as a constable to justify avoidance of Allied's lien on the vehicle. In other words, this car is not "necessary" to his alleged trade any car would be adequate.
Based on the foregoing findings and conclusions, it is hereby
ORDERED that Debtor's Motion to Avoid Lien on Exempt Property (Docket # 17) is DENIED. It is further
ORDERED the Clerk's Office provide notice of this memorandum opinion and order to Debtors, counsel for Debtors, Allied Finance Company, counsel for Allied Finance Company, and the Chapter 13 Trustee.
NOTES
[1] Section 522(f)(1) states "notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is . . . a nonpossessory, nonpurchase-money security interest in any . . . implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor . . ." 11 U.S.C. § 522(f)(1)(B)(ii).
[2] Before 1991, the statute allowed a personal property exemption for "tools, equipment, books, and apparatus, including a boat, used in a trade or profession." Tex.Prop.Code § 42.002(2) (1979). In other words, the 1991 amendment broadened the exemption to include automobiles. In addition, under the pre-1991 statute, courts held that items could not be claimed as an exempt tool of trade unless they were "peculiarly adapted" to the trade or profession. In re Weiss, 92 B.R. 677 (Bankr.N.D.Tex.1992). However, the "peculiarly adapted" requirement has been diffused somewhat since the 1991 amendment of the statute.
[3] Another post-1991 case concerning the amendment to the Texas personal property exemption statute held that a debtor who was in the business of computer-aided drafting could exempt his computer equipment and software as tools of the trade even though some pieces of equipment were generic in nature. In re Neal, 140 B.R. 634, 641 (Bankr.W.D.Tex.1992).
[4] This point was not argued at trial. Because it was not raised, this decision is based on the tool of trade issue alone. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552408/ | 239 B.R. 859 (1999)
In re Jeffrey and Geneva DURANT, Debtors.
Bankruptcy No. 96-15929.
United States Bankruptcy Court, N.D. New York.
May 12, 1999.
*860 *861 David P. Antonucci, Watertown, New York, for debtors.
Charu Narang, Assistant County Attorney, County Attorney's Office, Watertown, New York.
Mark Swimelar, Syracuse, New York, Chapter 12 Trustee.
MEMORANDUM DECISION AND ORDER
ROBERT E. LITTLEFIELD, Jr., Bankruptcy Judge.
Before the court is a Motion for Contempt and Damages filed by Jeffrey and Geneva Durant ("Debtors") on July 30, 1998. The Debtors ask that the Jefferson County Department of Social Services ("JCDSS") and Amy Farmer ("Farmer"), a caseworker at the JCDSS's Child Support Enforcement Services, be held in civil contempt for violating a prior order of this court and the automatic stay provisions of 11 U.S.C. § 362.[1]
JURISDICTION
The court has jurisdiction over the parties and the subject matter of this core proceeding under 28 U.S.C. §§ 1334(b), 157(b)(1), and 157(b)(2)(A).
FACTS
On August 28, 1987, Jeffrey Durant ("Durant") obtained a Judgment of Divorce against Wendy Durant (now known as Wendy Boice) ("Boice") from Hon. George G. Inglehart of the State of New York Supreme Court, County of Jefferson. Judge Inglehart ordered Durant to pay Boice thirty-five dollars per week as child support for each of the three children residing with her. Boice then filed a Petition for Enforcement of Child Support Payments against Durant on October 25, 1993. On August 23, 1994, James L. Gorman, Hearing Examiner, Jefferson County Family Court issued a decision whereby child support payments were to be made through the JCDSS's Support Collection Unit from an income execution on Durant's milk checks.
Debtors filed a Chapter 12 petition on November 5, 1996. Thereafter, JCDSS continued to levy on the Debtors' milk checks. Debtors' counsel then brought a contempt proceeding returnable March 27, 1997. On April 17, 1997, this court signed an order directing that all income levies and executions filed by JCDSS against the income of the Debtors shall cease effective March 27, 1997. According to Farmer's affidavit, she was told by her supervisors to terminate the income execution on March 26, 1997.
On October 20, 1997, Durant filed a petition in Jefferson County Family Court for a downward modification of his child support obligations to Boice, which was denied by Robert Jenkins, Hearing Examiner, Jefferson County Family Court, on June 19, 1998. According to Durant's affidavit, on July 24, 1998, Debtors received an income execution for child support arrears of $9,324.78. Debtors, however, claim that all post-petition support was current and that the pre-petition support claim was treated in the plan.
In her affidavit, counsel for the JCDSS and Farmer, Charu Narang, Esq. ("Narang"), Assistant County Attorney for the County of Jefferson, states that she authorized Farmer to garnish the milk checks of the Debtors on June 25, 1998, for current support only because she believed that the Debtors' Chapter 12 Plan had been confirmed and that it contained no provision for the payment of the child support. *862 (Narang Am.Aff. at 2, ¶ 7.) Farmer's affidavit describes that on March 26, 1997, she was first told to terminate the income execution on Debtor's milk checks. (Farmers Aff. at 2, ¶ 7.) Then on April 21, 1998, she was again told to suspend the child support income executions. (Farmer Aff. at 2, ¶ 9.) Further, on June 25, 1998, Farmer states that she was told by Narang that she could levy an income execution on Debtors, milk checks for current support. (Farmer Aff. at 2, ¶ 11.) This stayed in effect until July 30, 1998, when the execution was amended to garnish only for current support as the original execution inadvertently garnished for arrears. (Farmer Aff. at 2, ¶ 12.) Finally, Narang directed Farmer to suspend the execution entirely on August 10, 1998. (Farmer Aff. at 2, ¶ 13.)
Debtors' motion alleges that the JCDSS and Farmer, individually, should be held in civil contempt for violating this court's prior Order of April 17, 1997, and the automatic stay provisions of 11 U.S.C. § 362. The court held a hearing on the matter on September 10, 1998. At the conclusion of the hearing, the parties were asked to submit briefs in support of their positions on the motion for contempt.
ARGUMENT
In their opposition to the motion for contempt, JCDSS and Farmer explain their continuing levy on the Debtors' milk checks, in alleged violation of a prior order of this court and the automatic stay. As an explanation, they contend that this court's order lacked specificity and was therefore not effective. (Narang Am.Aff. at 4, ¶¶ 22, 23.) Further, they contend that despite an order of this court specifically requiring all income levies and executions by the JCDSS against the Debtors to cease, as well as the automatic stay provisions of § 362,[2] in order for the JCDSS Support Collection Unit to terminate these services, a modification petition must be filed by the Debtors in Jefferson County Family Court. (Narang Am.Aff. at 4, ¶¶ 25, 26.) The memoranda of law submitted by the JCDSS and Farmer contain only one defense which is that they are immune from any liability under the doctrine of sovereign immunity and the Eleventh Amendment.
Debtors argue: the Eleventh Amendment does not apply or if it does apply, it has been waived; the respondents should be held in contempt; damages should be awarded against them; and sanctions should be ordered in accordance with FED. R.BANKR.P. 9011.
DISCUSSION
In their original memorandum of law, JCDSS and Farmer rely on Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), which stands for the proposition that each state is a sovereign entity which is not subject to suit by an individual without that state's consent. In order for Seminole to apply it must first be shown that JCDSS and Farmer are each considered an "arm of the state" for Eleventh Amendment purposes. In their Supplemental Memorandum of Law, they cite to New York State Social Services Law ("SSL") in an attempt to show that they warrant this type of treatment. SSL section 111-h governs the establishment of the County Support Collection Unit and states in relevant part:
1. Each social services district shall establish a support collection unit in accordance with regulations of the department to collect, account for and disburse funds paid pursuant to any order of *863 child support or child and spousal support issued under the provisions of section two hundred thirty six or two hundred forty of the domestic relations law, or article four, five, five-A or five-B of the family court act . . .
N.Y. SOCIAL SERVICES LAW § 111-h (McKinney Supp.1998).
SSL section 111-d provides for state reimbursement to the county of a portion of funds expended by the local Support Collection Unit:
1. The provisions of section one hundred fifty-three of this chapter shall be applicable to expenditures by social services districts for activities related to . . . the enforcement and collection of support obligations owed to recipients of aid to dependent children and persons receiving services pursuant to section one hundred eleven-g of this title.
2. The local share of expenditures incurred by the department for the provision of centralized collection and disbursement services pursuant to section one hundred eleven-h of this title shall be charged back to the social services districts. The local share shall be fifty per centum of the amount expended by the department after deducting therefrom any federal funds properly received or to be received on account thereof . . .
N.Y. SOCIAL SERVICES LAW § 111-d (McKinney Supp.1998).
JCDSS and Farmer assert that these sections of the statute "clearly" show that the JCDSS is established under New York State statutes, and funded in part by New York State funds. (JCDSS and Farmer's Supp.Mem. of Law at 2.) A cursory review of the case law on the subject reveals that the issue requires considerably more analysis than is offered by any of the parties in this matter.
In addition to the statute, JCDSS and Farmer cite two cases which they claim support their position. In Rivkin v. County of Montgomery, 838 F.Supp. 1009 (E.D.Pa.1993), the court dealt with a suit by a litigant against a county prothonotary. The court ruled that the prothonotary was not entitled to immunity because the Commonwealth of Pennsylvania would have nothing to do with the relief sought in the case and that any relief would most likely be paid from the county treasury. Id. at 1012. In coming to this conclusion, the court stated that one of the most important factors in determining immunity is "whether any judgment would be paid from the state treasury." Id. This court is in agreement with Rivkin, however, other than submitting sections of the SSL for the court to interpret, the JCDSS and Farmer have made no argument to distinguish themselves from the county prothonotary or reasons why they should not be treated in the same manner.
Next, the JCDSS and Farmer cite In re Platter, 140 F.3d 676 (7th Cir.1998), where the United States Court of Appeals, Seventh Circuit ruled that since the Dekalb County Division of Family and Children Services ("DFCS") had instituted an adversary proceeding in bankruptcy court, it had waived its Eleventh Amendment immunity. Id. at 679-80. In its opinion, the court put forth four factors which DFCS would have to establish in order to warrant immunity. Id. at 679. These factors are: (1) that it is an agency of the state; (2) that the Eleventh Amendment applies; (3) that Congress had no authority to abrogate its Eleventh Amendment immunity under the Bankruptcy Code; and (4) that DFCS has not waived this immunity. Id. The court went on to discuss the effect of the filing of an adversary proceeding on the issue of immunity, but never discussed the first factor of whether the DFCS is an agency of the state.
This court is in agreement with the assertion that if a state entity files an adversary proceeding in a bankruptcy case, that state entity has waived its Eleventh Amendment immunity. However, that is not the issue in the case at hand since there has been no adversary nor any *864 claim filed by JCDSS or Farmer. Platter does not apply to the issue here which is whether JCDSS and Farmer are to be considered arms of the state and immune from suit.
JCDSS and Farmer are contending that the Debtors' motion for contempt against them is barred by the Eleventh Amendment. They bear the burden of proving that they are entitled to this immunity. "`Whatever its jurisdictional attributes, [Eleventh Amendment immunity] should be treated as an affirmative defense,' and `[l]ike any other defense, that which is promised by the Eleventh Amendment must be proved by the party that asserts it and would benefit from its acceptance.'" Christy v. Pennsylvania Turnpike Commission, 54 F.3d 1140, 1144 (3rd Cir.1995) (quoting ITSI TV Productions, Inc. v. Agricultural Associations, 3 F.3d 1289, 1291 (9th Cir.1993)).
The Eleventh Amendment of the United States Constitution states:
The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens or subjects of any Foreign State.
U.S. Const. Amend. XI. The Supreme Court has expanded the effect of the wording of the amendment by barring not only suits brought against a state by citizens of another state but also suits against a state brought by citizens of the same state. Edelman v. Jordan, 415 U.S. 651, 94 S.Ct. 1347, 39 L.Ed.2d 662 (1974); Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890). The Supreme Court has also held that counties are not automatically immune from suit under the Eleventh Amendment. See Mt. Healthy City School Board of Educ. v. Doyle, 429 U.S. 274, 280, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977); Edelman v. Jordan, 415 U.S. 651, 668, 94 S.Ct. 1347, 39 L.Ed.2d 662 (1974); Lincoln County v. Luning, 133 U.S. 529, 10 S.Ct. 363, 33 L.Ed. 766 (1890). The Court in Mt. Healthy City School Board determined that Eleventh Amendment immunity for the Mt. Healthy Board of Education depended on whether it was to be treated as an "arm of the state," or as a municipal corporation or other political subdivision to which the Eleventh Amendment would not extend. Mt. Healthy City School Board of Educ., 429 U.S. at 280, 97 S.Ct. 568. The answer to this question, the Court stated, depends on the "nature of the entity created by state law." Id.
The Second Circuit has addressed the "arm of the state" doctrine, and has twice discussed the issue of whether county branches of the Department of Social Services are to be considered arms of the state. In Holley v. Lavine, 605 F.2d 638 (2d Cir.1979), the Monroe County Department of Social Services argued that it should be considered an arm of the state for Eleventh Amendment purposes for its administration of the Aid to Families with Dependent Children Program ("AFDC Program"). The court found that the Eleventh Amendment did not apply to the Monroe County Department of Social Services and it was not immune from suit. In support of the assertion that the decisive issue was not whether the state had control over the policies of the Monroe County Department of Social Services, the court cited Lake Country Estates, Inc. v. Tahoe Regional Planning Agency, 440 U.S. 391, 401, 99 S.Ct. 1171, 59 L.Ed.2d 401 (1979), in which the Supreme Court stated that it would not afford counties and municipalities Eleventh Amendment protection where those entities only exercise a "slice of state power." Holley v. Lavine, 605 F.2d at 643-44.
The Holley Court stated that the factor of greater significance was the source of the entity's funds. Id. at 644. The court analyzed New York Social Services Law, the New York State Constitution and New York County Law to determine whether Monroe County was reimbursed by the state for the AFDC Program. Id. Fifty percent of the AFDC Program's funds came from the Federal Government, twenty-five *865 percent from the state, and twenty-five percent from Monroe County. Id. The court concluded that Eleventh Amendment protection for Monroe County was not warranted in order to protect the state treasury from liability, and in that situation Monroe County should not be treated as an arm of the state. Id. at 644-45.
In contrast, in Marbley v. Bane, 57 F.3d 224 (2d Cir.1995), the Second Circuit held that another county branch of the New York State Department of Social Services was entitled to Eleventh Amendment immunity. The plaintiffs in Marbley sued county social services commissioners for their administration of New York's Home Energy Assistance Program (hereinafter "HEAP"). The court found that the county defendants were entitled to Eleventh Amendment protection because they acted as arms of the state in administering the HEAP program. Id. at 233. In doing so, the court looked to state law to determine the source of the funding of the HEAP Program, which was entirely funded by the state. Id.
The court distinguished its Marbley decision from its decision in Holley by stressing that in Holley it gave great weight to the fact that the entity upon whom rested the obligation to make the AFDC Program's payments to the recipient appeared to be the county. Id. at 233. Additionally, in Holley the plaintiff was suing for retroactive relief from the AFDC Program, twenty-five percent of which was funded by the state, as opposed to the situation in Marbley where the entire HEAP Program was funded by the state. Id. at 232-33.
Debtors cite Doe, by Hickey v. Jefferson County, 985 F.Supp. 66 (N.D.N.Y.1997), where an allegedly abused child sued the County of Jefferson, the JCDSS, and several individuals for failure to report several instances of child abuse and maltreatment. An individual defendant moved to dismiss on Eleventh Amendment grounds, which the court denied. In its decision the court noted that it was unclear whether the defendant was an employee of the state or the JCDSS, but that issue was not outcome determinative because the plaintiff was not seeking payment from state funds or seeking to impose liability on the state. Id. at 69. Therefore, the court did not make an explicit finding that the JCDSS was not entitled to immunity, but stated, in general, the Eleventh Amendment does not apply to counties because they are not considered to be an arm of the state. Id. at 69, n. 2.
Another case decided by Hon. Thomas J. McAvoy, United States District Court, Northern District of New York, discussed the Marbley-Holley analysis. In Gonzales v. Wing, 167 F.R.D. 352 (N.D.N.Y.1996), the court stated, "in determining whether a county is entitled to immunity from suit, the Second Circuit has focused on issues such as who bears the `ultimate responsibility' for the allegedly violated duties at issue, and . . . the source of funding for the agency duties in question." Id. at 355. The court decided that the county branch of the Department of Social Services was not entitled to Eleventh Amendment immunity because there was an insufficient factual and legal basis submitted by the defendant to apply a Marbley-Holley analysis. Id.
Following the Marbley-Holley line of cases, the Second Circuit attempted to clarify the arm of the state issue in Mancuso v. NYS Thruway Authority, 86 F.3d 289 (2d Cir.1996), by applying a six factor test from Feeney v. Port Authority Trans-Hudson Corporation, 873 F.2d 628 (2d Cir.1989), aff'd on other grounds, 495 U.S. 299, 110 S.Ct. 1868, 109 L.Ed.2d 264 (1990). In Mancuso, the court found that the New York State Thruway Authority was not an arm of the state and could be held liable for monetary damages. In coming to this conclusion, the court analyzed the following factors set forth in Feeney: (1) how the entity is referred to in the documents that created it; (2) how the governing members of the entity are appointed; (3) how the entity is funded; (4) whether the entity's function is traditionally *866 one of local or state government; (5) whether the state has a veto power over the entity's actions; and (6) whether the entity's obligations are binding on the state. Mancuso, 86 F.3d at 293. If the six factors "point in different directions," a court must then determine: if allowing the entity to be sued in federal court (a) threatens the integrity of the state and (b) exposes the state treasury to risk. Id. "If all the elements are evenly balanced, `the vulnerability of the State's purse [is] the most salient factor.'" Id. (citing Hess v. Port Auth. Trans-Hudson Corp., 513 U.S. 30, 48, 115 S.Ct. 394, 130 L.Ed.2d 245, (1994)).
Although the JCDSS is the entity being sued in this case, it is the Support Collection Unit which levied the income execution on the Debtors' milk checks, committing the alleged contempt. Thus, as a division of the JCDSS, the Support Collection Unit is the specific entity of concern when analyzing the Feeney factors in this case.
The first of the Feeney factors, how the entity is referred to in the documents that created it, weighs against a finding of immunity. Section 111-a designates the department[3] (hereinafter "state department") as the single state agency to supervise the administration of the state's child support program and requires that a single organizational unit be established within the state department for that purpose. N.Y. SOCIAL SERVICES LAW § 111-a (McKinney Supp.1998). However, as discussed earlier, section 111-h directs each social services district[4] (hereinafter "county SSD") to establish a support collection unit in accordance with regulations of the state department to collect, account for and disburse funds pursuant to an order of child support. N.Y. SOCIAL SERVICES LAW § 111-h (McKinney Supp.1998). Further, section 111-c directs each county SSD to establish a single organizational unit which shall be responsible for such district's activities in assisting the state in enforcement and collection of support in accordance with the regulations of the state department. N.Y. SOCIAL SERVICES LAW § 111-c (McKinney Supp.1998).
How the entity is referred to in these sections of the statute weighs against a finding of immunity because the support collection unit is created by the county SSD, even though it is state law directing it to do so in accordance with state regulations. Section 111-h clearly says that each county SSD shall establish a support collection unit. Via these sections of the statute, the state department delegates the duty of establishing the support collection unit to the county SSD and the responsibility of the county SSD's activities in assisting the state in enforcement and collection of support, to the organizational unit established by the county SSD.
The second factor, how the governing members of the entity are appointed, weighs slightly in favor of a finding of immunity. Section 65 provides that there shall be a county commissioner of public welfare in each county who shall administer the public assistance and care for which the county public welfare district is responsible. N.Y. SOCIAL SERVICES LAW § 65 (McKinney Supp.1998). The county commissioner is to be appointed in accordance with the provisions of section 116.[5]*867 Section 111-b provides that the organizational unit within the state department shall be responsible for the supervision of the activities of state and local officials relating to enforcement of support. N.Y. SOCIAL SERVICES LAW § 111-b (McKinney Supp.1998). As stated above, section 111-c indicates that the support collection unit is established by the county SSD, however, section 111-b gives the state department[6] supervision over any activities of the county officials relating to the support collection unit. Thus, the second factor weighs in favor of immunity since the governing members of the collection support unit are representatives of the county but are supervised by the state.
The third factor, how the entity is funded, weighs against immunity. Section 111-d sets out that the county is responsible for fifty percent of the expenditures relating to the support collection unit after first deducting any federal funding. N.Y. SOCIAL SERVICES LAW § 111-d (McKinney Supp.1998). This factor supports the Debtors because it is unknown how much federal funding the support collection unit receives, thus the JCDSS and Farmer have not met their burden of proof on the issue. In addition, in the case law previously discussed, the Second Circuit denied immunity in the Holley case when twenty-five percent of the funding was from the state but granted immunity in the Marbley case when one hundred percent of the funding came from the state. In the case at hand, the most the state could be responsible for is fifty percent of the total expenditures. Though there is not cut off point discernible from the case law as to how much state funding is required to consider the entity an arm of the state, the JCDSS and Farmer do not advance any legal argument regarding a 50% state funding factor and thus fail to carry their burden of proof on this argument.
The fourth factor, whether the entity's function is traditionally one of local or state government is inconclusive on the issue of immunity. As previously discussed, according to the language of sections 111-c and 111-h, the support collection unit is established by the county SSD. N.Y. SOCIAL SERVICES LAW §§ 111-c and 111-h (McKinney Supp.1998). It is to be run by the county, by county officials, in accordance with state regulations, and under state supervision. With this information alone, it is impossible for the court to come to a conclusion on whether support collection is traditionally a county or a state function. Since the JCDSS and Farmer offered no proof in regard to the fourth Feeney factor, they fail to sustain their burden on this factor as well.
The fifth factor, whether the state has veto power over the entity's actions, weighs against immunity. The relevant portions of section 20(2) state that the state department shall:
(b) supervise all social services work, as the same may be administered by any local unit of government and the social services officials thereof within the state, advise them in performance of their official duties and regulate the financial assistance granted by the state in connection with said work.
N.Y. SOCIAL SERVICES LAW § 20(2)(b) (McKinney Supp.1998). Subsection (3) goes on to say the state department is authorized:
(a) to supervise local social services departments and in exercising such supervision the department shall approve or disapprove rules, regulations and procedures made by local social services officials within thirty days after filing of same with the commissioner.
N.Y. SOCIAL SERVICES LAW § 20(3)(a) (McKinney Supp.1998). Also, subsection (3) authorizes the state department:
*868 (e) to withhold or deny state reimbursement, in whole or in part, from or to any social services district or any city or town thereof, in the event of the failure of either of them to comply with law, rules or regulations of the department relating to public assistance and care or the administration thereof;
(f) to promulgate any regulations the commissioner determines are necessary, in accordance with the provisions of section one hundred eleven-b of this chapter, and to withhold or deny state reimbursement, in whole or in part, from or to any social services district, in the event of the failure of any such district to comply with such regulations relating to such district's organization, administration, management or program.
N.Y. SOCIAL SERVICES LAW § 20(3) (McKinney Supp.1998).
What these sections of the statute create is not a veto power over the county's actions but a power to deny the county reimbursement. Under the SSL, the means which the state department has to assure that the county districts conform to the state department's regulations is the power to withhold reimbursement. As persuasive as this power may be, it is not an absolute veto power which the state department holds over the county's actions. The statute only provides for disapproval of rules, regulations, and procedures that the local social services officials may implement, and the withholding of reimbursement for failure to comply with law, rules or regulations of the state department. N.Y. SOCIAL SERVICES LAW § 20(3)(a), (e) (McKinney Supp.1998). The court finds no section of the SSL which allows the state department to veto a decision of the county such as the one at issue here, just provisions for withholding reimbursement. Other than the sections of the SSL, the JCDSS and Farmer have submitted no proof on the fifth factor and consequently have failed to meet their burden of proof in regard to that factor.
Finally, the sixth factor, whether the entity's obligations are binding on the state, weighs against immunity. "[A] judgment against a county department of social services or its commissioner in his official capacity does not bind the state and is not automatically payable out of state funds." Holley v. Lavine, 464 F.Supp. 718 (W.D.N.Y.1979), aff'd, 605 F.2d 638 (2d Cir.1979) (citing Toia v. Regan, 54 A.D.2d 46, 387 N.Y.S.2d 309 (N.Y.App.Div.4th Dept.1976)). The sections described above also indicate that the obligations of the JCDSS Support Collection Unit are not necessarily binding on the state. In fact, as stated earlier, section 20(3) of the statute reveals that the state department may withhold or deny reimbursement to the county for a failure to comply with rules and regulations of the state department.
The legislative scheme of the relevant sections of the SSL in this case is very similar to that in Holley v. Lavine, 464 F.Supp. 718 (W.D.N.Y.1979), aff'd, 605 F.2d 638 (2d Cir.1979). Under the legislative scheme of the Social Services Law, "county governments have an obligation to finance public assistance payments even if higher levels of government refuse to reimburse the county." Id. at 724. "Although in most cases state and federal funding is available for reimbursement, there is no clear rule requiring the state to indemnify the counties for judgments entered against them." Id. The JCDSS and Farmer have failed to prove that the obligations of the Jefferson County Support Collection Unit are binding on the state.
Because the six Feeney factors point in opposite directions, the court must determine whether allowing the entity to be sued in federal court will threaten the integrity of the state and whether it will expose the state treasury to risk. Mancuso, 86 F.3d at 293. As discussed above, the state treasury would be minimally affected, if at all, by a judgment against the JCDSS and Farmer. Therefore, the sole question to be determined is whether a suit against them in federal court will *869 threaten the integrity of the state. Since the entity which is subject to the suit here is the Support Collection Unit established by the JCDSS, the integrity of the state will not be affected. Even though the Support Collection Unit is to be run in accordance with the regulations of the state department and funded in part by the state department, it is still established by the county and associated with the county. In fact, it is the Jefferson County Attorney who represents them in this case. The court finds that subjecting the JCDSS and Farmer to suit in federal court for the violation of a court order would not affront the dignity of New York State. The state has not direct involvement in the defense of this motion and any finding of contempt would be directed at the Support Collection Unit of the JCDSS and its employee Amy Farmer. The integrity of the state would not be affected.
In summary, other than citing sections of the Social Services statute, JCDSS and Farmer have submitted no relevant law to support an "arm of the state" analysis in their favor. It is not evident from the statute alone that JCDSS or Farmer should be considered an arm of the state under the standards discussed above. Section 111-d explains that the county is to be responsible for a share of the expenditures incurred pursuant to section 111-h. The county SSD's are responsible for fifty percent of the amount expended by the state department, after deducting any federal funding it receives. The JCDSS and Farmer submitted no proof as to the percentage of the expenditures that would be covered by federal funding, virtually no proof that could be used in an analysis of the Feeney factors and no relevant case law on the issue. Thus, the court finds that they have failed to meet their burden of proving they are immune from suit under the Eleventh Amendment.
With regard to Defendant Amy Farmer, the court finds that she is not immune from suit under the Eleventh Amendment for the reasons set forth above. Because Farmer's actions are not considered those of the state, the arguments set forth regarding the Seminole decision are not applicable. Farmer also argues that she was exercising the power granted to her under section 111-t of the Social Services Law and doing so under direction of her superiors, specifically the Jefferson County Attorney. (JCDSS and Farmer's Supp.Mem. of Law at 6-8.) The court will consider this an argument invoking the doctrine of respondeat superior. Under the doctrine of respondeat superior, "[I]n the absence of any negligent behavior by an employer, liability for acts of an employee may generally be imposed upon the employer . . . if the employee was acting within the scope of his employment." Cornell v. State of New York, 46 N.Y.2d 1032, 1033, 416 N.Y.S.2d 542, 389 N.E.2d 1064 (1979).
Farmer was clearly acting in accordance with the direction of her superiors and within the scope of her employment under SSL section 111-t. According to Farmer's affidavit, on June 25, 1998, she was told by the Assistant County Attorney's Office that she could levy the Debtors' milk checks. (Farmer Aff. ¶ 11.) Narang's affidavit also states that she authorized Farmer to garnish the Debtors' milk checks. (Narang Aff. ¶ 7.) Therefore, any liability resulting from the actions of Farmer in relation to this proceeding would shift to the Support Collection Unit and the JCDSS.
Having concluded that no Eleventh Amendment immunity is applicable, the court turns to the underlying facts of the instant controversy.
As stated supra at 862, the collection of alimony, maintenance, or support from non-estate property is not stayed by 11 U.S.C. § 362. Property of the estate is defined by 11 U.S.C. § 541(a) which specifically enumerates seven subsections of interests, all of which is estate property regardless of who holds it or where it is located.
*870 In a Chapter 12, 11 U.S.C. § 1207(a) specifically includes as property of the estate:
(1) all property of the kind specified in such section 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 of this title, 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 of this title, whichever occurs first.
However, 11 U.S.C. § 1227(b) states:
Except 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.
On July 14, 1997, this court signed the Confirmation Order in this Debtors' case. Paragraph 9 of said Order provides:
All of the Debtor(s) wage and property of whatever nature and kind and wherever located, shall remain under the exclusive jurisdiction of this Court; and title to all of the debtor's property of whatever nature and kind, and wherever located is hereby vested in the Debtor during the pendency of these Chapter 12 proceedings pursuant to the provision of 11 U.S.C. § 1227 except to the extent necessary for the Court to continue to exercise its jurisdiction.
Thus by the explicit terms of the Order, title to the Debtors' property revested in the Debtors as of confirmation "except to the extent necessary for the court to continue to exercise its jurisdiction." This court interprets that provision as reducing property of the estate to "property and future earnings of the debtor dedicated to fulfillment of the chapter 13 plan." Security Bank of Marshalltown v. Neiman, 1 F.3d 687 (8th Cir.1993).
As explained by the Hon. Keith M. Lundin in his Chapter 13 treatise:[7]
The vesting of property of the estate in the debtor at confirmation under § 1327(b) may have the most undesirable effect for debtors of dissolving the automatic stay of actions against the property vesting in the debtor. Section 362(c)(1) provides that "the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate." At confirmation, § 1327(b) appears to have precisely the effect contemplated in § 362(c)(1). Debtors who fail to "provide otherwise" in the plan invite the possibility of disintegration of the chapter 13 estate at confirmation and a Pandora's box of possible postconfirmation problems.
2 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY (2nd ed., Wiley Law Publications 1994), § 6.16 at 6-56, 6-57 (footnotes omitted).
Regarding the matrimonial exception found in 11 U.S.C. § 362(b)(2), Judge Lundin states:
The precise wording of the plan may be important when the debtor is subject to alimony, maintenance, or support obligations. There is an exception to the automatic stay in § 362(b)(2) that allows the collection of alimony, maintenance, or support "from property that is not property of the estate." Absent a contrary provision in the plan or order of confirmation, a Chapter 13 debtor's postpetition wages (at least those in excess of the amount committed to fund the plan) revest in the debtor at confirmation under § 1327(b). If the wages revested in the debtor are no longer "property of the estate," a former spouse could collect alimony, maintenance, or support from those wages, probably without first seeking relief from the automatic stay. To protect against this outcome, the Chapter 13 plan should very specifically continue the estate, to include all postconfirmation wages of the debtor those committed *871 to funding the plan and those to be received by the debtor pending completion of payments under the plan.
Id. at 6-57, 6-58 (footnotes omitted).
As Judge Lundin indicates, a Chapter 13 plan should very specifically continue the estate pending completion of the plan. Such a plan provision is also specifically authorized by 11 U.S.C. § 1222(b)(10) which provides that the Chapter 12 plan may "provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity." For example, the standard Chapter 13 confirmation order utilized in this court revests property in the debtor upon "completion of the plan."[8]
In this case, in the words of § 362(2)(B), the JCDSS was engaged in the "collection of alimony, maintenance, or support from property that is not property of the estate" because of paragraph 9 of the July 14, 1997 Confirmation Order. Thus, no violation of § 362 occurred if JCDSS's levy reached only those earnings of the Debtors not dedicated to fulfillment of the Plan, in effect, earnings not necessary for submission to the trustee. The record is unclear whether JCDSS's levy extended that far. If the parties cannot or will not stipulate to the facts necessary for a determination of this issue within fifteen (15) days of the date of this order, the court will schedule an evidentiary hearing.
The second prong of the Debtors' motion is an allegation that JCDSS has violated court orders and should be found in contempt. Specifically, Point V of the Debtors' brief states: "In this case, the Respondent [sic] has also violated two (2) prior orders of this court: the prior restraining order resulting for [sic] the debtors [sic] motion and the order of confirmation." (Debtors' Brief in Support of Mot., November 3, 1998 at 19.)
THE APRIL 17, 1997 ORDER
The court assumes that the "prior restraining order" refers to this court's Order of April 17, 1997, directing that all income levies cease effective March 27, 1997. However, because of the specific language of paragraph 9 of the Confirmation Order, the April 17, 1997 Order was effectively amended by the Confirmation Order and the provisions of § 1227(b) and § 362(b)(2)(B). By operation of black letter law, an income levy could commence postconfirmation to collect support from non-estate property. JCDSS could, if otherwise proper under state law, reach the earnings of the Debtors not dedicated to the fulfillment of the Plan. As was the problem with the alleged § 362 violation supra, it is unclear whether the JCDSS's levy extended to sacrosanct earnings necessary for plan fulfillment.[9] If the parties cannot or will not stipulate to the facts necessary for a determination of this issue within fifteen (15) days of the date of this order, the court will schedule an evidentiary hearing.
THE JULY 14, 1997 CONFIRMATION ORDER
11 U.S.C. § 1227(a) provides with certain exceptions not relevant here:
. . . the provisions of a confirmed plan bind . . . each creditor, . . . whether or not the claim of such creditor, . . . is provided for by the plan, and whether or not such creditor, . . . has objected to, has accepted, or has rejected the plan.
Paragraph 11(e) of the Confirmation Order provides that the prepetition arrears owed to Wendy Boice would be disbursed by the trustee through the Plan as a priority claim.
*872 Section 1222(a)(2) provides that the plan shall
(2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim.
The 1994 amendments to the Bankruptcy Code amended § 507 to include as a priority claim: "debts to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child. . . ." 11 U.S.C. § 507(a)(7). Through this amendment, Congress has announced its intent to allow bankruptcy courts to include payment of child support obligations in Chapter 13 plans. In re Camacho, 211 B.R. 744 (Bankr.D.Nev. 1997). Therefore, child support arrears can be properly included in a Chapter 12 plan as well. Thus, the holders of support claims are "creditors" bound by the confirmed plan under § 1327(a)[10] just as are other creditors. 2 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY, supra, § 6.10 at 6-15 (footnotes omitted).
It is conceded by JCDSS that an execution was issued against the Debtors' earnings for support arrears. The amended affidavit of Charu Narang states, "On July 30, 1998, I was informed that Jeffrey Durant's account was charging for arrears, as well as current support. I immediately authorized Mr. Schofield to stop the collection of arrears on this account." (Narang Am.Aff. at 2, ¶ 11.)
It is clear then that JCDSS, for whatever reason, followed its own course in pursuing the alleged arrears. By doing so, the terms of the Confirmation Order were violated. Pursuant to Bankruptcy Rule 9020(a), the JCDSS is in contempt of the Confirmation Order of July 14, 1997. There is, of course, the question of damages, if any, flowing from JCDSS's contempt. If the parties cannot or will not settle the matter within fifteen (15) days of this order, an evidentiary hearing will be scheduled to explore the issue of damages.
In summary, the court finds:
1) JCDSS is not immune from the consequences, if any, of violating this court's orders;
2) There is no person liability flowing to Amy Farmer;
3) Issues of fact must be explored regarding any violation of 11 U.S.C. § 362 and or this court's Order of April 17, 1997; and
4) JCDSS is in violation of this court's July 14, 1997 Order confirming the Debtors' Chapter 12 Plan. The court will issue a separate order of contempt pursuant to Bankruptcy Rule 9020(a). If not settled, an evidentiary hearing will be scheduled to determine damages.
It is so ORDERED.
NOTES
[1] Debtors' brief requests that the Jefferson County Attorney also be held in contempt. Debtors did not include the Jefferson County Attorney in their motion and have not raised this issue until now. Consequently, this issue is not properly before the court and will not be addressed.
[2] 11 U.S.C. § 362(a) states in part that the filing of a petition "operates as a stay, applicable to all entities, of . . . (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate."
11 U.S.C. § 362(b)(2)(B) provides that the filing of a petition does not operate as a stay "of the collection of alimony, maintenance, or support from the property that is not property of the estate."
[3] Section 2 states that when used throughout the chapter unless otherwise stated, "[d]epartment means the state department of social services."
[4] Section 2 states that when used throughout the chapter unless otherwise stated, "[s]ocial services district means a city or county social services district as constituted by section sixty-one."
[5] Section 116 provides that the county commissioner is to be appointed by the county board of supervisors thereof, except when the county has a county executive, county president, county manager or other officer or board authorized to appoint heads of administrative departments or the chief executive officer of the social services department, then by the executive, president, manager, other officer or board. N.Y. SOCIAL SERVICES LAW § 116 (McKinney Supp.1998).
[6] Section 11 states that the chief executive and administrative officer of the state department shall be the commissioner of social services who is appointed by the governor with the advice and consent of the senate. N.Y. SOCIAL SERVICES LAW § 11 (McKinney Supp. 1998).
[7] The provisions of § 1327(b) mirror those of § 1227(b).
[8] 11 U.S.C. § 1322(b)(9) mimics § 1222(b)(10).
[9] From the affidavits, briefs and arguments of counsel, the court cannot discern any measurable violation of the April 17, 1997 Order between its issuance and the entry of the July 14, 1997 Confirmation Order. The problem then, if any, is found postconfirmation.
[10] The creditor provisions of § 1327(a) mirror those of § 1227(a). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552352/ | 239 B.R. 117 (1999)
In re SENSITIVE CARE, INC., et al., Debtors.
Bankruptcy No. 399-31463-SAF-7.
United States Bankruptcy Court, N.D. Texas, Dallas Division.
August 30, 1999.
*118 Wm. Chris Wolffarth, Johnson & Wolffarth, L.L.P., Dallas, TX, for Robert Milbank, Jr., Trustee.
Hal F. Morris, Assistant Attorney General, Office of the Attorney General, Bankruptcy & Collections Division, Austin, TX, for the Texas Department of Human Services.
Peter A. Winn, Assistant U.S. Attorney, United States Attorney's Office, Dallas, TX, for Health Care Financing Administration.
Jeffrey Cook, Sullivan, Parker & Cook, Dallas, TX, for William Ed Campbell and Don Miller, Trustees.
James F. Adams, Passman & Jones, P.C., Dallas, TX, for Sundance Rehab. Corp., Suncare Respiratory Services, Inc. and Sunsolution, Inc.
David F. Staber, Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas, TX, for Karan Associates, et al.
ORDER
STEVEN A. FELSENTHAL, Bankruptcy Judge.
Sensitive Care, Inc., or one of its subsidiaries, owned and operated several nursing homes in the State of Texas. On February 24, 1999, involuntary bankruptcy petitions had been filed against Sensitive Care and several subsidiaries and affiliates. The bankruptcy court entered orders for relief and directed that the cases be jointly administered.
Prior to the petitions, the United States and the State of Texas took several actions to protect public moneys while assuring the wellbeing and care of the nursing home residents. At the request of the State of Texas, a state court appointed trustees for several of the nursing homes. The United States and the State of Texas made funds available to the trustees to operate several of the homes. See "Outline of Pre-Bankruptcy Government Actions," attachment A.
With the entry of the orders for relief, Robert Milbank, the trustee for the jointly administered bankruptcy estates, moved the court to compel a turnover of funds held by the state court-appointed trustees. The State of Texas by its Department of Human Services moved the court to excuse the turnover requirement. The state also moved the court to lift the automatic stay to allow a set-off of funds held by the state. The state also filed a notice of intent to exercise a right of recoupment. With the state court-appointed trustees, the Texas Department of Human Services moved the court for authorization to pay the trustees' operating expenses.
The Chapter 7 trustee, the state and the United States then negotiated a compromise of these motions. See settlement agreement, filed July 1, 1999, document no. 148, pages 20-24 of the motion to approve the compromise and settlement, attachment B. The trustee filed a motion to approve the compromise pursuant to Bankruptcy Rule 9019. Several creditors objected to the settlement. The court conducted an evidentiary hearing on the motion to approve the settlement on July 21, 1999.
On July 21, 1999, the court granted the motion to approve the settlement by findings of fact and conclusions of law issued from the bench. See transcript of bench ruling, attachment C. The court entered an *119 order granting the motion on August 3, 1999. See court order, attachment D.
In its bench ruling, the court complimented the state and federal agencies for their cooperative and constructive approach to protecting the nursing home residents while addressing the financial concerns of the debtor as perceived by the agencies. In turn, the settlement with the trustee harmonized protection of residents and matters of public fisc with the rights and priorities of creditors under the Bankruptcy Code.
The court has presided over several significant cases involving nursing homes. From that perspective, the court concluded that the post-petition settlement among the trustee and the state and federal governments following the coordinated pre-petition efforts of the state and federal governments fairly balanced competing interests while protecting nursing home residents. This process may well serve as a useful precedent for future cases.
Accordingly, the court directs that this order be docketed in the records of this case.
SO ORDERED.
"ATTACHMENT A"
OUTLINE OF PRE-BANKRUPTCY GOVERNMENT ACTIONS SENSITIVE CARE, INC.
On November 17, 1998, the Office of Inspector General of the Department of Health and Human Services ("HHS-OIG") completed an audit of intravenous (IV) services at 13 skilled nursing facilities which belonged to a chain operating as Sensitive Care Nursing Homes, Inc. ("Sensitive Care"). HHS-OIG's audit made a determination that Sensitive Care was paying substantially more for IV therapy services than prevailing rates, that the majority of IV services provided were not medically necessary, and that nursing services and IV equipment were being improperly claimed as ancillary expenses instead of routine expenses on Sensitive Care's Medicare cost reports. According to the preliminary audit results, as much as 80% of IV charges were improper, resulting in estimated Medicare overpayments of over $7 million. HHS-OIG also alleged that Sensitive Care management were aware that these charges were improper, but had refused to change the abusive billing pattern because it resulted in higher Medicare billing reimbursement. The audit report was transmitted to the local United States Attorney's Office (the "USAO"), to the Health Care Financing Administration ("HCFA") to Texas Department of Human Services ("TDHS") and the Texas Attorney General ("Texas AG").
After consultation between HHS-OIG auditors and TDHS personnel, it became clear to the authorities that, even without its billing improprieties, Sensitive Care was in precarious financial condition. Several large vendors had not been paid in months. In spite of the financial insolvency of the company, its owners continued to make dividend payments to themselves. Thus even before a suspension of Medicare payments (the usual administrative response to suspected fraud), it appeared to state and federal authorities that Sensitive Care was already in imminent danger of failing to meet its payroll, creating an immediate danger of jeopardy to its residents. The authorities made the determination that a suspension of Medicare payments to Sensitive Care would push the already financially troubled company over the edge. Accordingly, TDHS, HCFA, the USAO, the Texas AG and OIG-HHS developed and implemented the following approach to protect the residents from the financial insolvency of their nursing homes and to stop the fraudulent billing practices at the homes, without jeopardizing the quality care in the nursing facilities.
On Friday, January 22, 1999, HCFA directed Mutual of Omaha, the Medicare fiscal intermediary, to suspend Medicare payments to Sensitive Care without prior notice effective Monday, January 25, 1999. *120 On Monday, January 25, 1999, as the suspension went into effect, the Texas AG, on behalf of TDHS, filed a petition in Travis County State Court for the immediate appointment of state trustees to oversee the facilities citing as grounds the financial emergency at Sensitive Care. On Monday, January 25, 1999, TDHS in close conjunction with HCFA, implemented a plan to stabilize the facilities, including close monitoring of the facilities by State surveyors, contact with family members to assure them of the safety of the residents, and coordinated communications with the press and with concerned politicians. On Wednesday, January 27, 1999, Sensitive Care agreed to the appointment of the state trustees, and on the same day the state trustees opened a bank account in their own names and HCFA lifted the suspension. The Order of the Travis County State Court authorized funds to be made available to the state trustees from the state's emergency Medicaid trust fund to ensure the health and safety of the residents.
While the facilities were managed by the state trustees, HCFA and TDHS attempted to facilitate the transition to new management. Their plan was that if new owners could not be identified, the facilities would be closed and the residents moved to other identified facilities in an orderly fashion. Once in place, however, the state trustees learned that the financial situation at Sensitive Care was much worse than anyone could have predicted. Employee paychecks from two weeks prior to the suspension bounced, health and liability insurance had not been paid, and the company owed more than $14 million to its suppliers. Further, the trustees learned that Sensitive Care management had not implemented a program to bill under the Medicare Prospective Payment System, which was to have been in place by January 1, 1999. This meant that no mechanism was in place to bill Medicare, and no new Medicare funds would be coming into the facilities. Because of the tremendous expense of operating the facilities, the state's emergency Medicaid trust fund was soon exhausted and TDHS had to request additional funds from the Legislature.
In the mist of the crisis, TDHS requested financial assistance from HCFA. Although HCFA did not have an emergency discretionary fund, on February 26, 1999, HCFA informed TDHS that the trustees should request an accelerated payment from Mutual of Omaha based on the failure of Sensitive Care's management to implement the Prospective Payment System. On March 11, 1999, Mutual released a check in the amount of $1,097,973.10 to the state trustees as an extraordinary advance loan on future billings to ensure that funds were available for the operation of the homes and the care of the residents.
Lack of interest among potential buyers caused the state trustees to close three facilities in February 1999. Upon the closing of these facilities, lessors interested in preserving the usefulness of their buildings for nursing home purposes proposed new management companies for the facilities. On March 1 and 5, 1999, the responsibility for day to day operations at the 10 remaining facilities was transferred to the new management companies, which HCFA and TDHS approved on the condition that they completed appropriate federal and state licensing and certification requirements. As the formal licensing and certification process was completed, TDHS and the state trustees continued to monitor the operation of the nursing homes. Thus, the crisis abated.
Throughout the crisis, no serious quality of care issues arose. No injuries or deaths of nursing home residents occurred because of transfer trauma, and the relocation of residents was minimized and took place in a safe and orderly process.
"ATTACHMENT B"
* * *
applies to both core and non-core proceedings. See In re ILCO, 48 B.R. at 1020; In re Lion Capital Group, 48 B.R. 329, 332 *121 (S.D.N.Y.1985); In re White Motor Corp., 42 B.R. at 701; see also In re X-Cel, Inc., 46 B.R. 202, 204 (N.D.Ill.1984), rev'd on other grounds, 776 F.2d 130 (7th Cir.1985) ("Core proceedings include most matters which are integral to the adjudication of the bankruptcy or were traditionally before the bankruptcy courts."). The Chapter 7 Trustee takes a contrary position. Accordingly, litigation of these claims would not only be unduly expensive but would result in substantial delay to debtor's liquidation efforts.
III.
SETTLEMENT
The Settlement provides as follows:
30. The State Nursing Home Trustees shall transfer all funds in their possession to the
-----------
to refer to bankruptcy judges "any or all cases under Title 11 and any or all proceedings arising under Title 11 or arising in or related to a case under Title 11." An express limitation on the authority of district courts to refer matters to bankruptcy courts is contained in 28 U.S.C. § 157(d). That section provides:
The district court may withdraw in whole or in part, any case 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 . . . withdraws proceeding if the court determines that resolution of the proceeding requires consideration of both Title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce 28 U.S.C. § 157(d) (1994) (emphasis added).
Chapter 7 Bankruptcy Trustee within 10 days of entry of an Order Approving this Motion to Compromise and Settle. The Order shall expressly recite that until DHS and TWC have received the sum of approximately $2,058,480 through recoupment, setoff and payments under this settlement, and until HCFA has been paid the sum of approximately $1,097,973.10 all funds shall retain their original characteristics as if still in the hands of the State Nursing Home Trustees. By way of example, but not by limitation, funds segregated by the State Nursing Home Trustees as trust funds, shall not lose their alleged trust fund characteristics simply by transfer to the bankruptcy estate.
31. The Chapter 7 Trustee shall make payment within 10 days of receipt of the monies from the State Nursing Home Trustees on ALL invoices for goods and services provided to State Nursing Home Trustees incurred on their watch as administrative expenses approved by the Court and attached to the Order approving the Compromise. The Order approving Compromise and Settlement shall contain provision for the State Nursing home trustees to seek additional bills to be paid as administrative expenses should late bills come in. The Chapter 7 Trustee reserves the right to object to the payment of any individual bill(s) as either being improperly characterized as an administrative claim (e.g., unreimbursed employee healthcare claim caused by lack of funding of Sensitive Care's self insurance plan) or due to lack of adequate accounting documentation.
32. Payment by the Chapter 7 Trustee within 10 days of receipt from the State Court Trustees to HCFA of the $1,097,973.10.
33. Relief from stay shall be granted to DHS to allow setoff of $652,011 to DHS for repayment to Nursing Home Trust Fund, plus allowance of setoff of approximately $28,350 additionally owed to The Texas Work Force Commission, plus allow recoupment of $1,115,130 as supplemental payment/overpayment from DHS out of the sum of $1,795,491 currently held by DHS.
34. Balance of moneys owing to DHS of approximately $262,989 (which have been traced to payments to State Nursing Home Trustees by State Nursing Home Trust Fund) shall be paid by the Chapter 7 Trustee within 10 days of receipt to DHS for balance of its claim of $915,000 owing to Nursing Home Trust Fund (for total *122 payment under this settlement of approximately $2,058,480).
35. DHS and HCFA shall be allowed to file ANY additional claim(s) but agree voluntarily to subordinate such additional claims to:
(a) all allowed administrative claims awarded by court to Chapter 7 Trustee, his Attorneys, his accountants (and any other professionals retained by the trustee whose fees are allowed by the court as administrative priority),
(b) all allowed priority claims including unreimbursed health care claims of employees of Sensitive Care caused by lack of funding of Sensitive Care's self insurance plan costs,
(c) DHS and HCFA further agree to subordinate to distribution of the FIRST Eight-Hundred Thousand Dollars ($800,000) of allowed Unsecured Claims to non insider, (as defined under 11 U.S.C. § 101(31)), or affiliated entities of Sensitive Care,
(d) The Bankruptcy Trustee shall not be required to file cost reports with HCFA for 1998 and 1999. HCFA will not file a claim in the bankruptcy estate based solely upon the failure of the Bankruptcy Trustee to file such reports. Should the Bankruptcy Trustee file a claim for 1998 or 1999 Medicare monies, HCFA reserves the right to assert any defenses or claims of offset to such claims. HCFA reserves the right to file cost reports on behalf of the bankruptcy estate, should it choose to do so.
(e) The Bankruptcy Trustee shall file cost reports for 1998 and 1999 (partial) as required by DHS and shall fully cooperate with both DHS and HCFA in their audits.
36. The Bankruptcy Trustee and his counsel shall incur no personal liability for completion and filing of any cost reports on behalf of Sensitive Care.
37. DHS further agrees to subordinate from any funds it may actually be paid directly by the bankruptcy estate (and not pursuant to recoupment or setoff) the costs to the estate of compiling and filing Cost Reports at the sole election of DHS for years 1998 and the applicable portion of 1999.
38. Notwithstanding the foregoing subordination provisions, as a material condition to this settlement, nothing herein shall preclude or limit in any way DHS and/or HCFA from effectuating recoupment and/or seeking relief from stay to effectuate setoff from any future Medicaid/Medicare moneys that may subsequently be due to Sensitive Care (by way of example but not by limitation, should the pending CHOW application for Sensitive Care, Inc.'s' facilities be denied).
39. As a further material condition to this Compromise and Settlement, the Order approving this Compromise and Settlement Agreement shall specifically recite:
Due to the unique facts and circumstances present in this case, the position of the Department of Human Services and the Health Care Financing Administration in entering into this Compromise and Settlement Agreement shall expressly not be treated as precedential nor shall it ever be cited as precedential against the Department of Human Services or any agency(ies) of the State of Texas or against the Health Care Financing Administration.
WHEREFORE, the Chapter 7 Trustee, State Nursing Home Trustees, Health Care Financing . . .
* * *
"ATTACHMENT C"
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION
IN RE: SENSITIVE CARE, INC. DEBTOR
BK. NO: 399-31463-SAF-7
*123 TRANSCRIPT OF PROCEEDINGS
(Court's Ruling)
BE IT REMEMBERED, that on the 21st day of July, 1999, before the HONORABLE STEVEN FELSENTHAL, United States Bankruptcy Judge at Dallas, Texas, the above styled and numbered cause came on for hearing, and the following constitutes the transcript of such proceedings as hereinafter set forth:
* * * * * *
THE REPORTER: All rise.
THE COURT: Thank you. Please be seated.
The Court will give a bench ruling on the motion of the trustee to approve the compromise and settlement. That's actually a joint motion, but under the Bankruptcy Code, the Court addresses the fact that the trustee is asking for the relief under Bankruptcy Rule 9019. The approval of settlements by a Chapter 7 trustee are core matters over which this Court has jurisdiction to enter a final order. The Court is required to make findings of facts and conclusions of law. The Court may do so by a bench ruling, so the parties should understand that this bench ruling will constitute the Court's findings and conclusions.
Because I'm giving this bench ruling immediately following the hearing, I obviously haven't written it out. So I will reserve the right to revise or edit or supplement or clarify these findings if necessary.
I'm going to focus the findings and conclusions on the objections, and I'll say at the outset that the Karan objection has been effectively resolved. The parties to the settlement have resolved the question on funds after March 5, 1999. The Chapter 7 trustee has agreed with Karan that the limited objection to the motion to approve the compromise will be construed by the Court as an application for payment of either on administrative expense or as an expense that would be incurred in the ordinary course of business by the state court trustees. The application is contested by the Chapter 7 trustee. Under this settlement the application will be resolved by this Court on notice and hearing.
The settlement resolves four motions, a motion for a turnover and a corresponding motion to excuse turnover, a motion to lift the stay to permit setoff and a motion for administrative expenses. There has also been a notice regarding recoupment which is resolved by this settlement as well.
The Bankruptcy Court may approve a settlement if it is in the best interest of the bankruptcy estate and if it is fair and equitable. The fair and equitable standard originally comes from the 5th Circuit's decision in the Aweco case which was a Chapter 11 case that basically stands for the proposition that fair and equitable are terms of art under Chapter 11 as they relate to the priorities established in Chapter 11. We're in Chapter 7 here, so the fair equitable standard should relate to the priorities in Chapter 7 which means, in effect, that the settlements have to be consistent with the priorities of the Bankruptcy Code unless agreed to by the parties at each level of priority. The 5th Circuit also recognizes that the Court must take care if approving a settlement over the objection of a creditor. To determine if these standards are met, the Court has to look at the probability of success in litigation with due consideration for the uncertainty in fact and law. The Court has to look at the complexity and likely duration of the litigation with any intended expenses, inconvenience and delay, and the Court has to consider all other factors that would bear upon the exercise of the Court's discretion to approve a settlement.
The Court will find and conclude that this settlement is in the best interest of the estate and is fair and equitable, and the Court will grant the motion to approve the compromise and overrule the remaining objection by the Sun Entities to the compromise.
*124 The property of the estate issues are difficult and would take some time to litigate even though Section 541 is very broad. And it's probably fair for the Court to start its analysis with an assumption that because Section 541 is very broad, the trustee has a leg up coming in. The state and federal governments, however, are protected under the Bankruptcy Code in the exercise of the police powers, particularly here in the state, which has the immediate responsibility for the health and well-being of the citizens of the state. And the Bankruptcy Code excludes actions taken by the state pursuant to the police power from the reach of the automatic stay of the Bankruptcy Code. Case law also recognizes that funds subject to recoupment are not property of the bankruptcy estate. And while it may be a timing issue, lift stay motions to permit setoff are often granted.
With this settlement, the operating expenses incurred by the state court trustees would be paid. The state court trustees would then be in a position to seek discharges from the state court that appointed them. As testified by Dr. Ferris and confirmed by Mr. Miller, even if you questioned, as Mr. Adams did in his closing argument, how HCFA decided to suspend payments, HCFA in the exercise of its discretion made that decision but then coordinated with the State of Texas to make sure that that decision did not affect the patients of the Sensitive Care facilities. And that resulted in the petition in the state court that resulted in the appointment of the state court trustees and permitted the state court trustees to either close or take over the operations of the nursing homes, in return for which HCFA lifted the suspension and started delivering funds again permitting services to be provide to the patients.
There really is no conflict with the Bankruptcy Code. The state court trustees are custodians, and the Bankruptcy Code recognizes under Section 503 and Section 543 that the expenses they incurred in the ordinary course of their operations get paid by order of the Bankruptcy Code. That in turn assures that the exercise of the police power by the state is honored in the bankruptcy case. So here we have via the exercise of the police power state court trustees appointed by a state court. The bankruptcy case is subsequently filed. The state court trustees hold funds. The turnover of the funds would naturally occur. Everything would come into the bankruptcy case. But the Bankruptcy Code assures that the state court custodian, here the trustees are protected and the expenses that they incurred are paid thereby honoring the activities taken by the state court pursuant to the police power. It seems to me it's all harmonized and this settlement preserves that harmony. The settlement, therefore, permits the state court trustees to complete their work and allows for an orderly transition to the bankruptcy case. The settlement also permits for recoupment and the setoff for the State of Texas, and it permits the recovery of the $1.1 million that occurred during the gap period of time between the filings of the involuntary petitions and the order for relief under Chapter 7.
Sun contends that the settlement is premature. The evidence establishes, however, that it's timely. The state court trustees are holding funds. The State of Texas is holding funds. Funds have been segregated. There are ripe disputes of whether we have property of the estate involved. The state court trustees need to wrap up their activities. The Bankruptcy Code provides for turnover of funds held by custodians and for payment of operating expenses incurred by custodians. All of that is ripe for resolution.
Sun also contends that the settlement is too vague. The federal government and the state government and the Chapter 7 trustee have preserved certain issues. It's appropriate that they do so. Not all issues in the bankruptcy case have to be resolved when four motions are settled. Several of *125 those issues will involve very difficult cost-benefit analysis. I suspect the trustee will be consulting with the creditor body concerning how to perform that cost-benefit analysis, and indeed as the hearing revealed, Sun's position as a creditor is implicated in some of the issues that would be triggered by the filing of certain operating reports and certain actions that HCFA might take; and, therefore, how all that's done is going to have to be analyzed with some consideration by all the parties involved. And it's appropriate for the settlement to preserve those issues and put that analysis off for another day.
Likewise, it's appropriate to recognize that all the expenses that were incurred between January 27 and either March 1 or March 5 may not be known yet or there may be questions about them. So it's appropriate that there's a mechanism preserved for the trustee to get those resolved.
It strikes me that the best argument Sun has is that there's too little for the estate. This argument contends that this settlement is not in the best interest of the unsecured creditors. The Court must assess the complexity of the litigation and the length of time it would take to resolve the litigation and whether the settlement falls within a range of reasonableness. If we look at this at the unsecured creditor level, if the trustee lost completely, there is a scenario that there would be no funds available for distribution to unsecured creditors. So one range of litigating is that the unsecured creditors get nothing, the trustee spends the $160,000 that the trustee currently has, loses all the property of estate issues, loses the lift stay issue, loses the recoupment issues, and ends up without having any funds that will get him past the administrative expense level.
The testimony established that the current settlement had an $800,000 subordination, and if the trustee elects not to expend funds to go after greater recovery, that would yield a three to four cent dividend.
The other extreme would be if the trustee wins. If the trustee wins, then all the property of the estate issues would be resolved in the trustee's favor. That was $5.1 million worth of funds. The trustee concedes, however, that there's really no defense to the recoupment issue. So that takes 1.1 out, so that's $4 million. The state has a motion to lift stay on the 900,000. Considering the range of reasonableness and the complexity of the litigation, it's more likely than not that the stay would be lifted and the setoff permitted. The parties have to remember that part of the analysis for lifting the stay is cause, and we have the state court trust funds here to finance nursing homes. Cause would likely exist to have the state setoff the $9000,0000 to have those funds available to aid other residents of other nursing homes.
That leaves 3.1 million. We know roughly 400,000 is covered by Section 503 and 543, that we have the expenses of the custodians here, the state court trustees, and the Bankruptcy Code directs that they get paid by priority, so they get paid. We then have the $1.1 million from HCFA that came in the gap period. Those funds came to the trustees with the anticipation that they would be used to pay ordinary expenses. And the Bankruptcy Code under 502(f) gives gap period ordinary expenses a priority over unsecured creditors.
However parties may analyze the various issue that come up with the use of provider numbers and whether the funds went to the state court trustees over the provider numbers or came directly to the debtor, all of that eventually gets resolved by what actually happened, and here the 1.1 million was advanced by HCFA for ordinary course operating expenses. For purposes of this analysis, the Court has to assume they are going to be treated as a priority under 502(f) and pay back money to HCFA. That means that we're down to 1.6 million.
The trustee says its administrative expenses are bound to be a half a million. *126 That leaves 1.1 million, and there's no subordination. So we have 1.1 million for unsecured creditors under that scenario without subordination. The settlement has $800,000 for unsecured creditors with subordination. From the point of view of non-government unsecured creditors, with that subordination, the settlement is virtually as good as a win for the trustee since it avoids all the litigation to get there. That is, $8000,0000 for non-government unsecured creditors may be better for them than $1.1 million, with a trustee win, without the subordination.
The settlement is therefore within a range of reasonableness and in the best interest of the bankruptcy estate.
In the whole analysis, I can just take the Karan claim as a wash. If it's good, it's going to get paid. It's either a custodial expense or it's part of the settlement. And if it's not good, it doesn't get paid. But either way, it's a wash. It's either paid or not paid under the settlement or if we proceeded without the settlement.
So the Court will find that the settlement is in the best interest of the estate. It is fair and equitable. It is consistent with the priorities of the Bankruptcy Code, and as a matter of fact, it puts the unsecured creditors in about the best position they could be in, it seems to me. It gets these issues resolved. It has funds with the trustee and it leaves the trustee, the unsecured creditors, HCFA and the state in a position where they are all going to have to make a cost-benefit analysis to figure out how to go about approaching the issues that remain.
Because the approval of a compromise is vested in the discretion of the bankruptcy court, it is appropriate for the bankruptcy court to consider other issues that may impact the estate. And I recognize here that the nursing home resident-care issue has been resolved pre-petition by the actions taken by the State of Texas with the appointment of the trustees and the actions taken by the state trustees and the home operations taken over by others. That could have all fallen into this Court. So when I look at the estate, it's appropriate to think about how the estate would have looked had all those nursing homes and the residents of those nursing homes been part of the bankruptcy estate; and, therefore, it's appropriate for the Court to recognize that HCFA and the State of Texas did coordinate their efforts to make sure that the financial issues did not take priority over the human issues and, in fact, that the human issues were preserved and addressed, and then that the state court trustees and the bankruptcy trustee worked with HCFA and the State of Texas to coordinate all of these matters for an orderly transition to the bankruptcy estate.
The governmental agencies involved are to be complemented for acting in the best public interest and in such a fashion that not only protected the health and well-being of the residents but preserved and recognized the financial issues that are triggered in the bankruptcy case.
And in that regard, the Court would suggest that the parties formulate an outline of the procedure followed prior to the bankruptcy case and that the Court would attach that outline with the settlement to an order approving the settlement and have it reported in the Bankruptcy Reporter so that there is an outline available in the event that this occurs elsewhere. It provides precedent for all the parties involved on how to handle this. Now, I recognize that there is an issue here as to whether what triggered all this and the appropriateness of what triggered all this, and by stating that, I don't mean to suggest that I'm anticipating how any of those issues are going to get resolved. But rather what I'm recognizing is that there can be problems with payments had HCFA acted in the exercise of its discretion that can have an impact on nursing homes, obviously.
*127 We now have a precedent when HCFA so acts, where the nursing home itself is in dire financial condition, for an orderly resolution of the issues that protect both the residents and the rights of the creditors. We will sort through those other creditor rights in due course, but it strikes me that the precedent for how this was handled should be out there and be available without each regional HCFA director and each state attorney general having to figure out how to go about this anew.
So if counsel would prepare that document, I will then clean up this transcript so it reads well, attach it to an order granting the motion and then have the order, the transcript of the bench ruling, the outline of the procedure that was followed pre-petition and the settlement all filed in the Bankruptcy Reporter.
Any other matters we need to take up?
(No response was given.)
THE COURT: Okay. Thank you.
(End of Court's Ruling.)
CERTIFICATE
I, DIANE M. DENNIS, Acting Official Court Reporter in and for the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, certify that during the hearing of the above-entitled and numbered cause, I reported in shorthand the proceedings hereinafter set forth, and that the foregoing pages contain a full, true and correct transcript of said proceedings.
GIVEN UNDER MY HAND AND SEAL OF OFFICE on this the 3rd day of August, 1999.
\s\Diane M. Dennis, CSR, RPR
Certified Shorthand Reporter #4347
Acting Official Court Reporter
United States Bankruptcy Court
Northern District of Texas
Dallas Division
"ATTACHMENT D"
Hal F. Morris
State Bar No. 14485410
Edith Stuart Phillips
State Bar No. 15923600
Assistant Attorneys General
Bankruptcy & Collections Division
P.O. Box 12548
Austin, Texas XXXXX-XXXX
ATTORNEYS FOR THE TEXAS DEPARTMENT OF HUMAN SERVICES
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF TEXAS DALLAS DIVISION
IN RE: SENSITIVE CARE, INC. DEBTOR
CASE NO. 99-31463-SAF-7
(Administratively Consolidated)
Hearing: July 13, 1999
9:30 a.m.
AGREED ORDER GRANTING JOINT MOTION TO APPROVE COMPROMISE AND SETTLEMENT AGREEMENT PURSUANT TO BANKRUPTCY RULE 9019 BETWEEN THE CHAPTER 7 BANKRUPTCY TRUSTEE, STATE NURSING HOME TRUSTEES, HEALTH CARE FINANCING ADMINISTRATION AND THE TEXAS DEPARTMENT OF HUMAN SERVICES
On the 21st day of July, 1999, the Court considered the Joint Motion to Approve Compromise and Settlement Agreement (Joint Motion) Pursuant to Bankruptcy Rule 9019 Between the Chapter 7 Bankruptcy Trustee, State Nursing Home Trustees, Health Care Financing Administration ("HCFA") and the Texas Department of Human Services ("DHS").
*128 The Court, having found notice of this Motion to be proper and that all applicable rules of procedure have been complied with, having duly considered the arguments of counsel, having listened to the evidence, and having taken judicial notice of the Court's file in these proceedings, finds that the Joint Motion to Approve Compromise and Settlement Agreement Pursuant to Bankruptcy Rule 9019 Between the Chapter 7 Bankruptcy Trustee, State Nursing Home Trustees, Health Care Financing Administration and the Texas Department of Human Services has merit and is in the best interests of the bankruptcy estate and should therefore be approved.
It is therefore ORDERED:
1. The State Nursing Home Trustees shall transfer all funds in their possession in the estimated amount of $3,267,140.09 to the Chapter 7 Bankruptcy Trustee within ten (10) calendar days of entry of this Order Approving this Joint Motion. Until DHS and TWC have received the sum of $2,058,480 through recoupment, setoff and payments under this settlement, and until HCFA has been paid the sum of $1,097,973.10 all funds shall retain their original characteristics as if still in the hands of the State Nursing Home Trustees. By way of example, but not by limitation, funds segregated by the State Nursing Home Trustees as trust funds, shall not lose their alleged trust fund characteristics simply by transfer to the bankruptcy estate.
2. It is further ORDERED that the Chapter 7 Trustee shall make payment within ten (10) calendar days of receipt of the monies from the State Nursing Home Trustees on ALL invoices for goods and services provided to State Nursing Home Trustees incurred on their watch as administrative expenses approved by the Court and attached to the Order approving the Compromise. The Chapter 7 Trustee reserves the right to object to the payment of any individual bill(s) as either being improperly characterized as an administrative claim (e.g., unreimbursed employee healthcare claim caused by lack of funding of Sensitive Care's self insurance plan) or due to lack of adequate accounting documentation. This Order is without prejudice to the State Nursing home trustees filing subsequent pleading(s) seeking to have additional bills be paid as administrative expenses should late bills come in.
3. It is further ORDERED that the Chapter 7 Trustee shall make payment to the Health Care Financing Administration within ten (10) calendar days of receipt from the State Court Trustees of the sum of $1,097,973.10.
4. It is further ORDERED that relief from the automatic stay shall be granted to the Texas Department of Human Services to allow setoff of $652,011 to DHS for repayment to Nursing Home Trust Fund, plus allowance of setoff of approximately $28,350 additionally owed to The Texas Work Force Commission.
5. It is further the finding of this Court and it is thus ORDERED that DHS is entitled to recoupment of $1,115,130 as supplemental payment/overpayment from DHS out of the sum of $1,795,491 currently held by DHS.
6. It is further ORDERED that the balance of moneys owing to DHS of $262,989 (which have been traced to payments to State Nursing Home Trustees by State Nursing Home Trust Fund) shall be paid by the Chapter 7 Trustee within ten (10) calendar days of receipt to DHS for balance of its claim of $915,000 owing to Nursing Home Trust Fund for total payment under this settlement of approximately $2,058,480.
7. It is further ORDERED that DHS and HCFA shall be allowed to file ANY additional claim(s) against the debtors but *129 have agreed to voluntarily subordinate such additional claims to:
(a) all allowed administrative claims awarded by court, including payments to Chapter 7 Trustee, his Attorneys, his accountants (and any other professionals retained by the trustee whose fees are allowed by the court as administrative priority),
(b) all allowed priority claims including unreimbursed health care claims of employees of Sensitive Care caused by lack of funding of Sensitive Care's self insurance plan costs, and including payments to the Chapter 7 Trustee,
(c) to distribution of the FIRST Eight-Hundred Thousand Dollars ($800,000) of allowed Unsecured Claims to non insider, (as defined under 11 U.S.C. § 101(31)), or non affiliated entities of Sensitive Care,
8. It is further ORDERED that the Bankruptcy Trustee shall not be required to file cost reports with HCFA for 1998 and 1999 and that HCFA shall not file a claim in the bankruptcy estate based solely upon the failure of the Bankruptcy Trustee to file such reports. Should the Bankruptcy Trustee file a claim for 1998 or 1999 Medicare monies, HCFA reserves the right to assert any defenses to such claims.
9. It is further ORDERED that the Bankruptcy Trustee shall file cost reports for 1998 and 1999 (partial) as required by DHS and shall fully cooperate with both DHS and HCFA in their audits.
10. It is further ORDERED that the Bankruptcy Trustee and his counsel shall incur no personal liability for completion and filing of any cost reports on behalf of Sensitive Care.
11. DHS further agrees, and it is accordingly SO ORDERED that DHS shall subordinate from any funds it may actually be paid directly by the bankruptcy estate (and not pursuant to recoupment or setoff) the costs to the estate of compiling and filing Cost Reports at the sole election of DHS for years 1998 and the applicable portion of 1999.
12. It is further ORDERED that nothing herein shall preclude or limit in any way the Bankruptcy Trustee from making claim for Medicare or Medicaid monies that may be subsequently due to Sensitive Care subject to any defenses or claims of offset or recoupment that HCFA or DHS might assert to such claims. By way of example but not by limitation, DHS and HCFA reserve the right to require Sensitive Care to exhaust its administrative remedies prior to any judicial review.
13. It is further ORDERED that nothing herein shall preclude or limit in any way DHS and/or HCFA from effectuating recoupment and/or seeking relief from stay to effectuate setoff from any future Medicaid/Medicare moneys that may subsequently be due to Sensitive Care (by way of example but not by limitation, should the pending change in ownership (CHOW) application for Sensitive Care, Inc.'s' facilities be denied).
14. It is further ORDERED that due to the unique facts and circumstances present in this case, the position of the Texas Department of Human Services and the Health Care Financing Administration in entering into this Compromise and Settlement Agreement shall expressly not be treated as precedential nor shall it ever be cited as precedential against the Texas Department of Human Services or any agency(ies) of the State of Texas or against the Health Care Financing Administration.
SO ORDERED this 3rd day of August, 1999.
\s\Steven A. Felsenthal
STEVEN A. FELSENTHAL
United States Bankruptcy Judge
*130
APPROVED AS TO FORM AND CONTENT:
\s\Hal F. Morris
HAL F. MORRIS
Assistant Attorney General
ATTORNEYS FOR THE TEXAS
DEPARTMENT OF HUMAN SERVICES
AND THE TEXAS WORKFORCE COMMISSION
\s\Peter A. Winn
PETER A. WINN
Assistant U.S. Attorney
United States Attorney's Office
\s\Andrea Rentie
ANDREA RENTIE
Assistant Regional Counsel
U.S. Department of Health and Human
Services
ATTORNEYS FOR HEALTH CARE FINANCING
ADMINISTRATION
\s\William Chris Wolffarth
WILLIAM CHRIS WOLFFARTH
Johnson & Wolffarth, L.L.P.
COUNSEL FOR CHAPTER 7 TRUSTEE
\s\_________
DAVID BRAGG
Bragg, Chumley, McQuality & Smithers
ATTORNEY FOR DAVID FRENCH,
TRUSTEE
\s\__________
MARK CHOUTEAU
Hilgers & Watkins
ATTORNEY FOR JENNY KING,
TRUSTEE
\s\Jeffrey Cook
JEFFREY COOK
Sullivan, Parker & Cook
ATTORNEY FOR WILLIAM ED CAMPBELL
AND DON MILLER, TRUSTEES | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552705/ | 199 B.R. 258 (1996)
In re MARTIN PAINT STORES, a Partnership, Debtor.
Bankruptcy No. 95 B 43607(SMB).
United States Bankruptcy Court, S.D. New York.
August 6, 1996.
*259 *260 Siegel, Sommers & Schwartz, L.L.P., New York City (James Beldner, Ronald Sussman, Eric Haber, of counsel), for Debtor.
Teitelbaum, Braverman & Borges, New Hyde Park, New York (Shari Braverman, of counsel), for Creditors Committee.
Gold & Wachtel, New York City (John H. Reichman, of counsel), for Southern Boulevard, Inc. d/b/a Persuasion Ladies' Stores.
Barry S. Schwartz, New York City, for Pretty Girl, Inc.
Feldco Realty Co., Bronx, New York, Landlord pro se.
MEMORANDUM REGARDING ASSUMPTION AND ASSIGNMENT OF LEASE
STUART M. BERNSTEIN, Bankruptcy Judge.
The debtor presently rents space from Feldco Realty Company ("Feldco") in a commercial building (the "Premises") located at 947 Southern Boulevard in the Bronx. It seeks, with the support of the Creditors' Committee, to assume the lease and assign it to Pretty Girl, Inc. Pretty Girl sells ladies clothing.
Feldco and Southern Boulevard, Inc. d/b/a/ Persuasion Ladies' Stores ("Persuasion"), another tenant in the Premises who is engaged in the same business as Pretty Girl, object to the proposed assignment. For the reasons that follow, the objections are overruled.[1]
FACTS
At all relevant times, the debtor was engaged in the retail sale of paint, hardware and other home improvement products at a chain of stores located in the greater New York area. When it commenced this chapter 11 case on August 18, 1995, it operated approximately 30 such stores, including one at the Premises. After initial attempts to reorganize failed, the debtor decided to liquidate and auction its remaining leases.
At the auction, Pretty Girl bid $75,000.00 for the lease at the Premises. The lease runs through July 31, 2007, and the present monthly rental is $9,500.00. The debtor owed Feldco approximately $18,000.00 in prepetition arrears, and the net gain to the estate, after curing the default and paying commissions, would total approximately $40,000.00. Clearly the highest and best (and only) offer, the debtor and the Creditors' Committee accepted Pretty Girl's bid.[2]
Feldco objected. Through one of its partners, William Feldman, Feldco conceded that the Premises was not a shopping center. He raised several issues, but only two need detain me. First, he contended that Feldco's lease with Persuasion precluded him from renting the debtor's space to Pretty Girl. He did not, however, bring the other lease to court, and I did not consider this objection further at that time.
Second, he pointed to a use clause in the debtor's lease which limited the tenant to selling hardware, paint and related items. *261 Over the years, he had been careful to avoid renting to competitors of his existing tenants, and was concerned that Pretty Girl's presence might harm Persuasion's business and threaten Feldco's ability to collect rent. However, the evidence adduced at an evidentiary hearing conducted on June 26, 1996, showed that the amount of Persuasion's rent did not depend on its sales or income. Further, Persuasion had survived in the face of substantial competition during its ten years at the Premises. According to Feldman, five or six ladies clothing stores already operated within a two block radius, and Persuasion had competed against many of them during its tenancy.
At the conclusion of the June 26, 1996 hearing, I overruled the landlord's objection, granted the debtor's application, and directed the debtor to settle an order which it did shortly thereafter. Before I signed the order, two related events occurred. First, Persuasion commenced a state court action against Feldco and Pretty Girl, and obtained an ex parte temporary restraining order that prevented Pretty Girl from selling ladies' clothes at the Premises. The moving papers failed to describe the bankruptcy court proceedings, and the hearing on the preliminary injunction was scheduled five weeks into the future.[3] In addition, Persuasion filed an objection in this court to the proposed order.
Persuasion based its objection on two grounds: the use clause in the debtor's lease, and the exclusivity provision in its own. Its lease with Feldco provides that the "[l]andlord will not rent space in this building to any other tenant who sells ladies clothes exclusively." It is undisputed that Pretty Girl sells ladies' clothes exclusively, and Persuasion asserted that the proposed assignment would cause "irreparable and incalculable injury."
Although I expressed reservations regarding Persuasion's standing, I assumed that it had standing, and I scheduled an evidentiary hearing for July 24, 1996 to consider Persuasion's objection. The only witness to testify at that hearing was Nathan Cohen, a principal of Persuasion. He described the Premises as a three story commercial building with five stores located at the street level. Aside from the debtor and Persuasion, he did not identify the other tenants.
Mr. Cohen testified that Persuasion has been a tenant at the premises for approximately ten years. During this period, three to four competitors of Persuasion have operated within a two block radius, and three still do. Cohen insisted on the exclusivity provision in Persuasion's lease to limit competition. He testified that Persuasion's sales dropped 20% during the last year when a third competitor moved onto the same block, and opined that Pretty Girl's presence would hurt sales because it could undersell Persuasion, at least on the Pretty Girl-manufactured merchandise which comprised a small part of Persuasion's business. Mr. Cohen also stated that Pretty Girl could adversely affect foot traffic, but was clearly speculating and lacked any expertise on this issue.
I reserved decision, but called the parties in one week later to render an oral decision from the bench. I granted the debtor's application, and signed the order at that time. I stated, however, that the issue of Persuasion's standing still troubled me even though I had assumed standing and heard its objection. I now conclude that Persuasion lacked independent standing to object to the proposed assumption and assignment, and have issued this memorandum primarily to explain my reasoning on this issue.
DISCUSSION
A. The Requirements of Section 365
Section 365 governs the assumption and assignment of unexpired leases. In all cases, *262 the debtor must cure any defaults, compensate the lessor for any pecuniary injury, and provide "adequate assurance of future performance." 11 U.S.C. §§ 365(b)(1), 365(f)(2). On this last requirement, the Bankruptcy Code distinguishes between shopping center and non-shopping center leases. Section 365(b)(3), which deals with shopping center leases, provides:
(3) For the purposes of paragraph (1) of this subsection and paragraph (2)(B) of subsection (f), adequate assurance of future performance of a lease of real property in a shopping center includes adequate assurance
(A) of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease;
(B) that any percentage rent due under such lease will not decline substantially;
(C) that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and
(D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.
These provisions are intended to protect the landlord's economic expectations rather than those of the other tenants. The legislative history to an earlier version of section 365(b)(3)[4] states:
A shopping center is often a carefully planned enterprise, and though it consists of numerous individual tenants, the center is planned as a single unit, often subject to a master lease or financing agreement. Under these agreements, the tenant mix in a shopping center may be as important to the lessor as the actual promised rental payments, because certain mixes will attract higher patronage of the stores in the center, and thus a higher rental for the landlord from those stores that are subject to a percentage of gross receipts rental agreement. Thus, in order to assure a landlord of his bargained for exchange, the court would have to consider such factors as the nature of the business to be conducted by the trustee or his assignee, whether that business complies with the requirements of any master agreement, whether the kind of business proposed will generate gross sales in an amount such that the percentage rent specified in the lease is substantially the same as what would have been provided by the debtor, and whether the business proposed to be conducted would result in a breach of other clauses in master agreements relating, for example, to tenant mix and location.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 348-49 (1977) ("House Report") (emphasis added); see S.Rep. No. 989, 95th Cong., 2d Sess. 59 (1978) ("Senate Report").
The Bankruptcy Code does not, on the other hand, define "adequate assurance of future performance" in situations involving non-shopping center leases. The legislative history indicates, however, that the focus is still on the prejudice to the landlord:
If the trustee is to assume a contract or lease, the courts will have to insure that the trustee's performance under the contract or lease gives the other contracting party the full benefit of his bargain.
House Report at 348 (emphasis added); Senate Report at 59; accord In re U.L. Radio Corp., 19 B.R. 537, 541 (Bankr.S.D.N.Y.1982).
*263 In the absence of any definition of "adequate assurance" courts are counseled to give the phrase a pragmatic construction. In re Fifth Ave. Originals, 32 B.R. 648, 652 (Bankr.S.D.N.Y.1983); In re Evelyn Byrnes, Inc., 32 B.R. 825, 828-29 (Bankr.S.D.N.Y. 1983); In re U.L. Radio Corp., 19 B.R. at 542. At a minimum, the primary focus of adequate assurance concerns the assignee's ability to fulfill the financial obligations under the lease. In re Fifth Ave. Originals, 32 B.R. at 653; In re Evelyn Byrnes, Inc., 32 B.R. at 829; In re Brentano's, Inc., 29 B.R. 881, 883 (Bankr.S.D.N.Y.1983); In re U.L. Radio Corp., 19 B.R. at 542. It is less clear if any other considerations enter the "adequate assurance" test. The shopping center concepts, "including, inter alia, tenant mix and balance and the exclusivity provisions of other leases in the same project, are neither defined nor mandated by the Code" in the non-shopping center setting. In re Evelyn Byrnes, Inc., 32 B.R. at 829. While such factors may also be relevant, courts should afford greater flexibility in the assumption and assignment of non-shopping center leases, and the shopping center considerations assume less importance. Id.; In re Fifth Ave. Originals, 32 B.R. at 653; see In re U.L. Radio Corp., 19 B.R. at 544.
One particularly nagging issue that crops up when considering "adequate assurance" is the enforceability of use clauses that restrict the type of business that the lessee can conduct. At least in the non-shopping center case, "adequate assurance" does not require literal compliance with a use clause:
Section 365 expresses a clear Congressional policy favoring assumption and assignment. Such a policy will insure that potential valuable assets will not be lost by a debtor who is reorganizing his affairs or liquidating assets for distribution to creditors. This policy parallels case law which disfavors forfeiture. [Citations omitted.] To prevent an assignment of an unexpired lease by demanding strict enforcement of a use clause, and thereby contradict clear Congressional policy, a landlord or lessor must show that actual and substantial detriment would be incurred by him if the deviation in use was permitted.
In re U.L. Radio Corp., 19 B.R. at 544 (emphasis added); accord In re Joshua Slocum Ltd., 922 F.2d 1081, 1091 n. 8 (3d Cir. 1990) ("The court's authority to waive strict enforcement of lease provision in the non-shopping center cases will permit deviations which exceed those permitted in shopping center cases."); In re Evelyn Byrnes, Inc., 32 B.R. at 830 (courts must consider "the practical prejudice suffered by the landlord").
The issues squarely raised by the objections center on the use clause in the debtor's lease and the exclusivity provision in the Persuasion lease. The debtor will cure the lease defaults from the closing proceeds, and Feldco has not claimed any other pecuniary injuries that the debtor must satisfy. Further, neither party has challenged Albert Nigri's testimony or the Court's finding regarding Pretty Girl's wherewithal to meet the financial obligations under the lease. However, before reaching the issue of "adequate assurance of future performance," I must resolve the issue of Persuasion's standing to raise it under Section 365.
B. Standing
The issue of standing "is the threshold question in every federal case, determining the power of the court to entertain the suit." Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975). Section 1109(b) of the Bankruptcy Code provides that a party in interest may appear and be heard on any issue in the case. This provision, however, does not confer standing in the absence of a legally protected interest affected by the bankruptcy proceeding, In re James Wilson Assocs., 965 F.2d 160, 169 (7th Cir.1992); In re Caldor, Inc., 193 B.R. 182, 186 (Bankr.S.D.N.Y.1996), and the party asserting standing must show that he is a beneficiary of the bankruptcy provision that he invokes. In re James Wilson Assocs., 965 F.2d at 169; In re Caldor, Inc., 193 B.R. at 186; McLean Indus., Inc. v. Medical Laboratory Automation, Inc. (In re McLean Indus., Inc.), 96 B.R. 440, 444-45 (Bankr.S.D.N.Y.1989). He must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or *264 interests of third parties. In re Caldor, Inc., 193 B.R. at 186 (citing Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 474, 102 S.Ct. 752, 759-60, 70 L.Ed.2d 700 (1982)).
"Party in interest" is to be interpreted broadly to allow those parties affected by the chapter 11 case to be heard. 5 Lawrence P. King, Collier on Bankruptcy ¶ 1109.02, at 1109-27 (15th ed. 1996). Nevertheless, "party in interest" has a particular connotation in bankruptcy, and its meaning depends upon the purposes of the Bankruptcy Code. Roslyn Savings Bank v. Comcoach Corp. (In re Comcoach Corp.), 698 F.2d 571, 573 (2d Cir.1983). One purpose of bankruptcy is to convert the debtor's assets to cash and distribute that cash to the creditors, id.; In re Ionosphere Clubs, Inc., 101 B.R. 844, 849 (Bankr.S.D.N.Y.1989), and hence, a "party in interest" is reserved to the debtor or one who is a creditor of the estate, In re Comcoach Corp., 698 F.2d at 573, or is able to assert an equitable claim against the estate. In re Ionosphere Clubs, Inc., 101 B.R. at 849. Conversely, a creditor of the debtor's creditor is not a "party in interest", In re Comcoach Corp., 698 F.2d at 574; In re Lifeco Inv. Group, Inc., 173 B.R. 478, 487 (Bankr.D.Del.1994); In re Riverside Nursing Home, 43 B.R. 682, 684 (Bankr.S.D.N.Y. 1984); see In re Goldman, 82 B.R. 894, 896 (Bankr.S.D.Ohio 1988), and the term does not encompass a person who is merely "concerned" with the results of the proceeding. In re Goldman, 82 B.R. at 896.
Persuasion, therefore, lacks standing to challenge the proposed assumption and assignment. Section 365 aims to ensure that the landlord receives the benefit of his bargain, and looks, therefore, to the prejudice to the landlord. It does not deal with a third party's benefit of its own bargain with the landlord, and Persuasion's position is analogous to the creditor of a creditor. In this regard, while the shopping center provisions require the court to consider the effect of the proposed assignment on radius, location and exclusivity provisions in the other tenants' leases, as well as tenant mix, the consideration of these factors is directed at their financial effect on the landlord's ability to collect rent. Further, in the non-shopping center situation, the "other tenant" issues assume even less significance.[5]
The notice requirements in the Federal Rules of Bankruptcy Procedure provide additional, indirect support for this conclusion. Rule 6006(c) requires that notice of a motion to assume, assign or reject an unexpired lease must be given "to the other party to the contract or lease [and] to other parties in interest as the court may direct." The only example of a "party in interest" that is provided is the creditor's committee. Lindsey v. Department of Labor (In re Harris Mgmt. Co.), 791 F.2d 1412, 1415 (9th Cir.1986) (citing the advisory committee notes). The Rule neither requires nor suggests that the motion must be served on the landlord's other tenants, even in shopping center cases. This suggests that under the statutory scheme governing the assumption and assignment of leases, they are not entitled to notice, and hence, lack standing.
International Trade Admin. v. Rensselaer Polytechnic Inst., 936 F.2d 744 (2d Cir.1991), does not compel a different conclusion. There, the Court of Appeals ruled that a mortgagee holding a lien on the debtor's ground lease had standing to appeal an order denying the trustee's motion to extend the time within which to assume or reject the ground lease. Id. at 747. While the mortgagee was not a party to the lease, it was a creditor of the debtor, and held a $2 million security interest in the lease. Hence, the rejection would directly and adversely affect its pecuniary interests. Id. By contrast, Persuasion is not a creditor of the debtor, and claims no interest or rights in connection *265 with, or arising under, the debtor's lease. In particular, Persuasion has never argued that it is an intended beneficiary of the use clause.
To reiterate, Persuasion lacks standing to independently object to the assignment. To crystalize Persuasion's lack of standing, one need only ponder whether Persuasion could object to the lease assignment if Feldco had not objected, or a fortiori, affirmatively supported it. As a stranger to the bankruptcy, Persuasion could not object, and Feldco's objection does not change its status or confer standing that does not otherwise exist. Only the landlord can insist on adequate assurance of the future performance, and Persuasion has "piggybacked" on Feldco's rights, lacking its own to assert. Since, however, it has proffered substantially the same evidence as Feldco, I will consider the evidence in connection with Feldco's objection. This does not change the issue before me: does the assumption and assignment of the lease to Pretty Girl, cause "actual and substantial detriment" to Feldco? See In re U.L. Radio Corp., 19 B.R. at 544.
C. Detriment to Feldco
1. The Financial Impact of the Assignment
The evidence failed to demonstrate that the proposed assignment will affect the amount of rent that Feldco collects from Persuasion, or its ability to collect it. The rent under the Persuasion lease does not depend on Persuasion's sales or income. It is fixed. And although Feldco speculates and Persuasion insists that exclusivity is necessary to Persuasion's survival, the clause does not ensure freedom from substantial, direct competition. It merely bars Feldco from renting to a retailer that sells ladies' clothing exclusively. If Pretty Girl also sold children's clothing, or shoes or cosmetics, the exclusivity provision would not even apply.
The threat of increased competition pales in light of actual experience. Cohen conceded that Persuasion has always faced stiff competition in the immediate neighborhood, but has remained in business at the same location for ten years. Cohen's testimony regarding a 20% decline in business during the previous year following the addition of one more competitor there were already several does not imply that Pretty Girl's arrival will herald a similar decline. Retailers lose sales for many reasons other than increased competition, particularly when competition is already robust. In fact, it is equally likely that the addition of Pretty Girl will bring new customers to the neighborhood and the Premises, resulting in an increase in business for Persuasion. See Rockland Ctr. Assocs. v. TSW Stores of Nanuet, Inc. (In re TSW Stores of Nanuet, Inc.), 34 B.R. 299, 303 (Bankr.S.D.N.Y.1983) (stating in dicta that "[c]ompetition among women's apparel and shoe stores in shopping centers is salutary because comparison shopping is beneficial for all the competing stores and more potential customers are brought to the center"). In short, the evidence does not support the claim that the presence of Pretty Girl will adversely effect Persuasion's business, and hence, its ability to pay its rent under the lease.
2. Other Prejudice
I must also consider the possibility that Feldco could face liability for breach of the Persuasion exclusivity provision if I approve the assignment. Here, I tread on shaky ground for I must construe a lease between third parties, and the binding effect of any conclusion that I reach is open to question. See Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir.1993), cert. dismissed, ___ U.S. ___, 114 S.Ct. 1418, 128 L.Ed.2d 88 (1994). Nevertheless, both Feldco and Persuasion have raised this issue before me, and section 365(b)(3), which applies to shopping center leases and arguably guides non-shopping center determinations, permits me to consider the terms of the other tenants' leases in assessing the prejudice to the landlord. Based upon my review, I conclude that Feldco would not be liable to Persuasion because compliance has been rendered legally impossible.
The law excuses performance that has been rendered legally impossible. "Where, after a contract is made, a party's performance is made impracticable without *266 his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary." RESTATEMENT (Second) of Contracts § 261 (1981). In this regard "[i]f the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made." RESTATEMENT (Second) of Contracts § 264 (1981). Under this doctrine, the entry of a judicial order that renders performance legally impossible excuses the party who must perform as long as he did not cause or fail to prevent the entry of the judicial order. RSB Mfg. Corp. v. Bank of Baroda, 15 B.R. 650, 654 (S.D.N.Y.1981); accord Organizacion JD Ltda. v. U.S. Dep't of Justice, 18 F.3d 91, 95 (2d Cir.), cert. denied, ___ U.S. ___, 114 S.Ct. 2679, 129 L.Ed.2d 813 (1994).
The impossibility defense relieves Feldco of liability for breach of the Persuasion lease. The order of this Court approving the assumption of the lease and its assignment to Pretty Girl is a judicial action which makes it impossible for Feldco to comply with the exclusivity provision. Persuasion has not come forward with any evidence to suggest that when the parties entered into the lease, they contemplated the effect of another tenant's bankruptcy, or intended that the risk of such a bankruptcy should fall on Feldco. In addition, Feldco objected to the proposed assignment, and did not participate in or contribute to the dilemma in which Persuasion now seeks to place it. Hence, the court-ordered assignment of the debtor's lease to Pretty Girl will not produce a claim for breach of the exclusivity provision under the Persuasion lease.
I recognize that this may create an exception that always swallows the rule. Nevertheless, when all of the other factors point toward permitting the assignment, the exclusivity provision in another tenant's lease cannot stand in the way. This would grant it a veto power over non-shopping center assignments in a manner that Congress never intended, and contravene the dual policies favoring assumption and assignment and disfavoring forfeiture. Here, the benefit to the estate and the creditors is substantial; the detriment to Feldco is little more than speculative.
For all of the foregoing reasons, the objections to the proposed assignment are overruled and the application seeking the debtor's right to assume and assign the lease at the Premises to Pretty Girl is granted. The foregoing shall constitute my findings of fact and conclusions of law.
NOTES
[1] On July 31, 1996, I rendered a bench decision in this matter, and signed an order approving the assumption and assignment. I stated to the parties that I was rendering a bench decision because the resolution of the issue was time sensitive, but that I intended to issue a written decision in light of the issues involved. This decision supersedes my July 31, 1996 oral decision.
[2] Following the auction, I took testimony from Pretty Girl's president, Albert Nigri. He stated that Pretty Girl operates several ladies' clothing stores in the New York area, and its financial statements showed a net worth of approximately $280,000.00.
[3] The state court action violated the automatic stay, 11 U.S.C. 362(a)(3), even though the debtor was not a party. It interfered with the debtor's ability to assume and assign its lease, and moreover, collaterally attacked the ruling authorizing the assumption and assignment. Cf. 48th Street Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th Street Steakhouse, Inc.), 835 F.2d 427 (2d Cir.1987) (landlord's attempt to terminate prime lease would destroy debtor's sublease, and therefore, violated automatic stay), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988). Persuasion has represented that the state court action has been or will be terminated immediately.
[4] Prior to the 1984 amendments to the Bankruptcy Code, Section 365(b)(3) required adequate assurance that the proposed assignment would not "breach substantially" any radius, location or exclusivity provision in the subject lease or, inter alia, any other lease in the shopping center, 11 U.S.C. § 365(b)(3)(C), or "disrupt substantially any tenant mix, or balance in the shopping center." 11 U.S.C. § 365(b)(3)(D). The 1984 amendments eliminated the concept of "substantiality," and made the prohibitions against breach and disruption absolute.
[5] In U.L. Radio, Judge Galgay made a specific finding that the contemplated use would not have any adverse effect on the other tenants. 19 B.R. at 545. Although Persuasion points to this finding as support for its right to be heard and its arguments considered, I disagree. Rather, Judge Galgay's statement is consistent with the Court's determination of the financial detriment that the landlord may suffer in light of the effect of that assignment on the other tenants. Further, Persuasion has not pointed me to any non-shopping center case in which a court considered the effect on the other tenants apart from its effect on the landlord. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552410/ | 239 B.R. 616 (1999)
In re Paul D. BECHTELHEIMER, Nelda K. Bechtelheimer, Debtors.
Bankruptcy No. 96-02352-8G3.
United States Bankruptcy Court, M.D. Florida, Tampa Division.
July 27, 1999.
*617 Richard B. Feinberg, Patrick R. Smith, Feinberg, Isaak & Smith, P.A., Tampa, Florida, for debtors.
B. Gray Gibbs, Gibbs & Runyan, P.A., St. Petersburg, Florida, for debtors.
John A. Galotto, Trial Attorney, Tax Division, United States Department of Justice, Washington, D.C., for the United States of America.
Charles R. Wilson, United States Attorney, Tampa, Florida, for the United States of America.
Terry E. Smith, Bradenton, Florida, trustee.
ORDER OVERRULING OBJECTION TO THE CLAIM OF DEPARTMENT OF TREASURY INTERNAL REVENUE SERVICE
PAUL M. GLENN, Bankruptcy Judge.
THIS CASE came on for hearing on Objection to the Claim of Department of Treasury Internal Revenue Service filed by Paul D. and Nelda K. Bechtelheimer (the "Debtors") and the Response to Debtors' Objection to Claim filed by the United States of America. The Internal Revenue Service ("IRS") filed an amended proof of claim in the amount of $48,387.23 for unpaid taxes and penalties assessed against the Debtors (Claim No. 18). The claim is both a priority and general unsecured claim. The Debtors object to the claim, specifically because the claim arises from the disallowance of certain income tax deductions for the tax years 1991, 1992, 1993, and 1994.
Background
Paul Bechtelheimer was born in 1935 and raised in Sebetha, Kansas. He met his wife, Nelda, there, and they were married there in 1957. He lived most of his early adult life in Kansas, driving a truck, working in a warehouse in Topeka, working in insurance in Manhattan, working in a bank in Kansas City, and working for a small manufacturing company in Shawnee. He then "tried to make things go" in Florida and "they didn't work," moved to St. Louis, "worked for a company out of Oklahoma for a couple of years," "went back to my original company in Kansas City, ending my employment there in early '88, and at that point in time, we went on the road full time." (Transcript pp. 13, 14).
Since early 1988, the Debtors have been self-employed as artists or crafters. They purchase or cast plaster items, paint them, and sell them at arts and crafts shows. "These pieces are lamps and figurines in the Southwestern motif. We also decorate baskets in the Southwestern theme and we also cut wood in the Southwestern theme." They sell these products "at arts and craft shows where we feel that the market may be conducive to our products." (T. 15). "During the winter months, we do come to Florida normally for about six months, try to anyhow; and then the rest of the time, we're traveling over the country selling our wares." (T. 15). During the years in question, the Debtors traveled to approximately 40 shows a year. (T. 16). Typically, the length of the shows ranged from two to ten days. The shows were held at convention centers, outdoor festivals, and malls. During the tax years in question, the Debtors traveled to shows in Florida, *618 Pennsylvania, New York, Maryland, New Jersey, Ohio, Missouri, and Colorado. (T. 18). Mr. Bechtelheimer recalls that they attended more shows in Florida than in any other state. (T. 19).
In 1989, the Debtors acquired a Pace Arrow motor home. They traveled to the arts and crafts shows in the motor home, and lived in the motor home while participating in the shows. (T. 22). The motor home was 38 feet in length, had a dining area, a kitchen area, a bathroom, and a bedroom. Inside the motor home was a refrigerator, a stove, a microwave, a washer, a dryer, two television sets, a couch, a chair, and a bed. The motor home was heated by propane furnaces attached to the motor home, was air conditioned, received electricity from a generator on the motor home that was powered by gas on the motor home, and had running water from a reservoir tank and battery powered pump that were attached to the motor home. A trailer attached to the motor home was used for storage of their inventory. The motor home was the Debtors' only means of transportation during the years in question after they disposed of their automobile in December, 1992. The Debtors lived and slept in their motor home while attending craft shows and while traveling between craft shows.
Also in 1989, the Bechtelheimers sold their home in Gardner, Kansas.
In early 1990, approximately six months after selling their home in Kansas (T. 23), and after acquiring the Pace Arrow motor home, the Bechtelheimers bought a mobile home and lot at 9101 Kosimo Street, New Port Richey, Florida (the Kosimo property). The mobile home was on blocks, had attached porches in the front and rear, an outbuilding with a washer and dryer, electricity, a pump for water, and a septic tank. The mobile home had a living room, a kitchen-dining area, two bedrooms, and one and one-half bathrooms. The mobile home contained a kitchen table and chairs, a refrigerator and stove, a television, and "it had a mattress on the floor." The Debtors obtained a homestead tax exemption for their mobile home and lot. Mr. Bechtelheimer testified that since the value of the mobile home and lot was less than $25,000, the maximum amount of the homestead tax exemption, they did not pay any property taxes. Also, as Mr. Bechtelheimer explained, "We applied for homestead . . . which means you have to register to vote in that county, have a Florida driver's license, and tag your vehicles there." The Debtors also claimed the mobile home and lot as their homestead on the schedule of exemptions which they filed with their petition.
When the Debtors were at the Kosimo property, however, they parked their motor home in the driveway, connected the motor home to an outdoor electrical outlet, and used the motor home for sleeping. Mr. Bechtelheimer testified that during the tax years in question, when the Debtors were at the Kosimo property, they ate and worked in the mobile home, using it to mold and paint their crafts. They also used it to store their crafts and overstock. (T. 56). "It could have been habitable. We just didn't desire to use it for that." (T. 53). "We used it as a shop, and had we gone in there and cleaned out all the molds and everything, there was no reason in the world why it couldn't have been habitable." (T. 53). In a letter dated April 15, 1996, from the Debtor's accountant to the IRS relating to "1992 Audit Review Information," the following statement signed by the Debtor was included:
Inventory Storage expense. (no deduction taken for this)
House: (2 Bedroom Mobile home) (1969) The house is used for storage as we have no furniture, with the exception of an old kitchen table, misc. folding chairs, gas stove, no LP tank on premises, + a refrigerator that is disconnected. otherwise the house is storage.
The kitchen, dining area + living room area are used for casting some of our products that we sell. This area is also used for drying these castings. The 2 Bedrooms are used for storage of overstock *619 on white ware, Lampshades Misc. Baskets, Christmas Items that will be pulled in November for resale. The front porch is used for storage of out of date white ware + misc. display cases, racks, crates etc. all of which is used occasionally, then returned to the storage area. The house is in need of extensive remodeling because of its age, see photos. We do keep a telephone there for business + personal use when there. When at the house we continue to live in the motor home.
Mr. Bechtelheimer testified that although this letter was written to support his positions in the audit of tax years in question, it contained some mistakes and described the property as it was in 1996 rather than as it was in 1991 through 1994.
The Bechtelheimers have two children, both of whom were adults and were not living with their parents during the tax years in question, and both of whom live in Kansas. Mr. Bechtelheimer also testified that for approximately six months his son lived at the Kosimo property while he looked unsuccessfully for work, and for approximately another six months his daughter lived at the Kosimo property while she looked unsuccessfully for work. "It was not real comfortable for them, I guess, but it was a place for them to stay."
During the tax years in question, the Bechtelheimers received mail at the Kosimo property address, and also maintained a post office box in Kansas.
The following chart shows, for 1992 by month, the number of days which the Debtors were at the Kosimo property:
Number of Days at
Month Kosimo Property
January 8
February 13
March 3
April 0
May 0
June 0
July 4
August 0
September 3
October 7
November 0
December 0
________ __
Total 38
This appears to be typical of the amount of time which the Debtors spent at the Kosimo property during the tax years in question. The Debtors have indicated that they spent 35 to 40 days at the Kosimo property during each of the tax years in question.
It also appears that the Debtors had 247, 240, 248, and 233 actual show days during 1991, 1992, 1993, and 1994, respectively.
The Debtors always traveled together. There was never a time during the four years in question when one of the Debtors stayed at the Kosimo property while the other was away or at a show. (T. 47).
On February 28, 1996, the Debtors filed their Voluntary Petition for Relief pursuant to Chapter 13 of the Bankruptcy Code.
Discussion
Title 26 U.S.C. § 162(a)(2) provides:
162. Trade or business expenses.
(a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including
. . . . .
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.
The only question presented is whether the Kosimo property was the Debtors' home within the meaning of § 162(a)(2), such that the Debtors were "away from home," and thus entitled to the travel expense deduction, while traveling their circuit of arts and crafts shows during the tax years in question.
The United States claims that the Debtors were itinerants whose home traveled *620 with them, and consequently were not entitled to travel expense deductions pursuant to § 162(a)(2) of the Internal Revenue Code.
The United States District Court for the Western District of Louisiana reviewed the law in Whitman v. United States, 248 F.Supp. 845 (W.D.La.1965), dividing the authoritative cases into three categories, (1) commuter cases, in which the taxpayer, for personal reasons, lives in one place and works in another; (2) cases where taxpayers' employment may be located away from their desired residence; and (3) cases where the taxpayer is characterized by the IRS as an itinerant without a permanent or fixed place of abode. Whitman v. United States is often cited for the conclusion that with regard to the many decisions interpreting the "away from home" issue ". . . neither reconciliation nor deduction of a universally applicable rule is possible. . . ." 248 F.Supp. at 850. In Six v. United States, 300 F.Supp. 277, 279 (S.D.N.Y.1969), the District Court stated, "It may well be that the reason for the lack of a clear-cut legal definition of `home' as it is used in 162(a)(2) is that it is not ultimately a legal concept subject to a convenient rule, but is instead a factual matter dependent upon the circumstances of the particular case."
In Deamer v. Commissioner, 752 F.2d 337, 339 (8th Cir.1985), the appellate court, concluding that the taxpayer was an itinerant, cited Michel v. Commissioner, 629 F.2d 1071, 1073 (5th Cir.1980) for the following discussion: "Implicit in the `away from home' requirement, however, is the premise that the taxpayer actually has a `home.' Hence, one who has no principal place of business or a permanent residence is considered an itinerant. . . . An itinerant may not deduct expenses under this section, because he is never considered to be `away from home.'"
The location of a taxpayer's home and whether he or she is "away from home" within the meaning of § 162 ordinarily involves a question of fact upon which the taxpayer bears the burden of proof. Id. at 1073. See also, Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933).
The Debtors are hampered in their assertion that the Kosimo property is their home for purposes of § 162 by several facts. Mr. Bechtelheimer testified that they slept in their motor home even when they stayed at the Kosimo property. Whereas their motor home contained appliances, couch, chair, dining area, two television sets, and bed, the Kosimo property contained appliances, a mattress without box spring or frame, and a kitchen table with chairs. When the Bechtelheimer's were at the Kosimo property, they used it to work in at times, but not to live in. It was also used for storage. In his testimony Mr. Bechtelheimer contends that the Kosimo property could have been habitable, but that they just didn't desire to live in it. From the evidence, the Court concludes that the Debtor's motor home was their "home." It appears that the Kosimo property was many things to the Debtors: workshop, storage facility, campsite and mail drop. Mr. Bechtelheimer testified that the Kosimo property was purchased with the idea that one day it could be their retirement home. The Kosimo property could be considered a potential dwelling place for the Debtors. This potential was never realized, however, since the Bechtelheimers sold the Kosimo property in 1997.
In James v. United States, 308 F.2d 204 (9th Cir.1962), the Court of Appeals affirmed the lower court's decision that the taxpayer was not entitled to a deduction for meals and lodging while away from Reno, Nevada, in pursuit of trade or business. Mr. James spent 30 days a year in Reno, living in hotels and eating in restaurants during this period; the remainder of the year he was traveling across the Midwest as a clothing salesman, living in hotels and eating in restaurants. The Court stated, "To characterize his expenditures for meals and lodging in Reno as personal *621 living expense, and his expenditures for meals and lodging elsewhere as travel expense incurred in the pursuit of business, would be essentially arbitrary." 308 F.2d at 208. The Court based its ruling on the theory that only when the taxpayer has a "home," the maintenance of which involves substantial continuing expenses which will be duplicated by the expenditures which the taxpayer must make when required to travel elsewhere for business purposes, may the travel expense deduction be justified. In Footnote 7, the Court continued, "Moreover, the existence of a `home' sufficiently substantial to make it reasonable to assume that taxpayer would be there by personal preference if not compelled by business to be away provides the only practical guaranty that the travel itself will be undertaken (and hence that on-the-road living expenses will be incurred) only when required by the exigencies of business. A taxpayer with only a nominal `home' and little incentive to return may remain in a tax-deductible travel status beyond the necessities of the job." 308 F.2d at 207.
In connection with the Kosimo property, the Court finds that the Debtors did incur certain some continuous expenses, most notably, mortgage, utility and telephone costs. These expenses do not make the property a "home," however. The Court must determine in connection with these continuing expenses whether the Kosimo property is a home "sufficiently substantial" for the Debtors to reside or merely a "nominal home."
In Rambo v. Commissioner, 69 T.C. 920, 1978 WL 3362 (1978), the Tax Court held that petitioner's simple cabin in Montana constituted his "tax home" so that expenses for meals and lodging incurred at various temporary out-of-state work sites were deductible under 162(a)(2) of the Internal Revenue Code. In its decision the Tax Court stated that ". . . the details of petitioner's lifestyle and his relatively simple accommodations ought not to control the deductibility of expenses incurred at his various work sites." Id. at 925. In Rambo, however, the location of taxpayer's cabin was also his historical home. The Debtors' historical home is in Kansas where their immediate family members reside, they rent a storage unit and they own raw land. In addition, in Rambo, the taxpayer lived for a short period of time and commuted daily to work sites in Montana, prior to his extended period of travel to out-of-state work sites.
The Debtors' situation, although unique, has similarities to Baugh v. Commissioner, T.C.Memo, 1996-70, 1996 WL 72697 (1996). In that situation, the taxpayers, both nuclear power plant workers, traveled from job to job in their motor home while maintaining a duplex in Port Clinton, Ohio. The Baughs rented both apartments in the duplex for a portion of one of the tax years in question. For the remainder of the tax years in question the Baughs used one of the units in the duplex to store their furniture and rented the other unit. The tax court held that the Baughs did not incur additional and duplicate living expenses and were not entitled to deduct any expenses under § 162(a)(2). The court stated that the Baughs failed to present evidence that they established their home at the property in question. The Kosimo property, in light of all the evidence presented by the Debtors, appears to the Court to be similar to the concept of a "nominal home" as the Ninth Circuit Court of Appeals mentioned in James, supra. The continuing expenses incurred by the Debtors do not necessitate a finding by the Court that the Kosimo property was their home. Their personal choice to purchase property in Florida, and to use the property to rest or stop-over for certain days of the year, and thus incur "additional and duplicate" expenses does not establish that the Kosimo property was their home for purposes of § 162(a)(2) of the Internal Revenue Code. See Kroll v. Commissioner, 49 T.C. 557, 562, 1968 WL 1461 (1968).
The Debtors cite several cases, including Charles G. Gustafson, 3 T.C. 998, 1944 WL 144 (1944), in which the Tax Court held *622 that Gustafson, a national representative of the Dry Goods Journal, was entitled to deduct the entire amount spent for meals, lodging, and laundry while traveling 52 weeks a year in 1940. However, by 1966, the Tax Court expressed the view that the Gustafson opinion had been "sapped" of "much, if not all, of its vitality." See Hicks v. Commissioner, 47 T.C. 71, 74, 1966 WL 1103 (1966). The emphasis had shifted to "such continuing and duplicitous expenses . . . to justify the allowance of a deduction for all food and lodging expenses while traveling." Supra, at 75. The Tax Court upheld a deduction for travel expenses incurred away from home for two Ice Follies skaters in 1964 (See Judy L. Gooderham v. Commissioner, T.C.Memo, 1964-158 and Patricia A. Ruby Hall v. Commissioner, T.C.Memo, 1964-157). However, by 1997, under similar facts for a Walt Disney World on Ice stagehand, the Ninth Circuit upheld the disallowance of travel expenses, holding that the worker was an itinerant, and had no tax home as required for the deduction of travel expenses pursuant to 162(a)(2). See Henderson v. Commissioner, 143 F.3d 497 (9th Cir.1998).
Although the facts are different in Whitman, supra, the District Court analyzed whether the claimed place of abode was actually the taxpayer's regular place of abode. Evidence was offered that taxpayer's driver's license, mailing address, car registration and other indications of permanent residence were maintained at he taxpayer's claimed place of abode. All of these contacts were insufficient to support the contention that the claimed place of abode was a "home" that would justify the deduction for travel expenses away from home. Also see, Scotten v. Commissioner, T.C.Memo, 1966-206, 1966 WL 1002 (1966), aff'd, 391 F.2d 274 (5th Cir.1968), Hicks v. Commissioner, 47 T.C. 71, 73, 1966 WL 1103 (1966) and Fisher v. Commissioner, 23 T.C. 218, 1954 WL 330 (1954), aff'd 230 F.2d 79 (7th Cir.1956). Even in the circumstances of fee ownership of a claimed place of abode, there has been disallowance of travel expenses incurred away from home. In Baugh, supra, the ownership of a duplex (half of which was rented out during the tax years in question), and in Whitman, supra, the ownership of a single family residence in which the petitioner's parents resided, were not enough to justify the "substantial and duplicative living expenses" of James, supra. In the above two cases, the taxpayers' "homes" were their motor homes that always traveled with them, and not their other real property claimed as their regular places of abode or "homes." In Debtors' case their motor home, where they slept even when they stayed at the Kosimo property, was their home as such term is used in 26 U.S.C. § 162(a)(2). Therefore, the Debtors were itinerants, never away from home, and not entitled to the travel expense deduction.
Conclusion
"Ultimately, we are convinced that the taxpayer[s'] [motor home] was [their] place of abode in a real and substantial sense, and while [they] resided there [they] were not incurring `traveling expenses . . . while away from home . . .' under section 162(a)(2)." Whitman, 248 F.Supp. at 850.
Accordingly;
IT IS ORDERED that:
1. The Debtors' Objection to Claim of the IRS is overruled.
2. Claim No. 18 of the Internal Revenue Service is allowed as filed in the amount of $48,387.23. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552706/ | 199 B.R. 502 (1995)
In re MacGREGOR SPORTING GOODS, INC., Debtor.
Bruce H. LEVITT, Bankruptcy Trustee for MacGregor Sporting Goods, Inc., now known as M. Holdings, Inc., Paul Swanson Bankruptcy Trustee for MGS Acquisition, Inc., Plaintiffs,
v.
RIDDELL SPORTS, INC., RHC Licensing Corporation, Riddell, Inc., Equilink Licensing Corporation, Macmark Corporation, Ridmark Corporation and NBD Bank, N.A., Frederic H. Brooks, Frederick W. Isaacs, Jr., J. Harrison Beal, Marvin D. Geller, Stuart A. Miller, Hans S. Edersheim, Martin R. Bring, James F. Keegan and Emil W. Solimene, Defendants.
Bankruptcy No. 89-01973 (RG). Adv. No. 95-2261.
United States Bankruptcy Court, D. New Jersey.
November 27, 1995.
*503 *504 *505 *506 Mudge, Rose, Guthrie, Alexander & Ferdon by Edward J. Boccher, Parsippany, NJ, for Trustee.
Skadden, Arps, Slate, Meagher & Flom by Gregg M. Galardi, Newark, NJ, for Defendants Riddell Sports, Inc., RHC Licensing Corporation, Riddell, Inc., Equilink Licensing Corporation, Macmark Corporation and Ridmark Corporation.
Bendit, Weinstock & Sharbaugh by James F. Keegan, West Orange, NJ, pro se.
Orloff, Lowenbach, Stifelman & Siegel by Linda B. Lewinter, Roseland, NJ, for Defendant Emil W. Solimine.
Molton & Meekins by Susan L. Meekins, Upper Montclair, NJ, for Defendant Frederick H. Brooks.
J. Harrison Beal, Knoxville, TN, pro se.
Marvin D. Geller, Allendale, NJ, pro se.
Stuart A. Miller, Pembroke Pines, FL, pro se.
Hans S. Edersheim, New York City, pro se.
Martin R. Bring, New York City, pro se.
Frederick W. Isaacs, Jr., Virginia Beach, VA, pro se.
OPINION
ROSEMARY GAMBARDELLA, Bankruptcy Judge.
There are presently before the Court nine Motions brought by Marvin D. Geller, Stuart A. Miller, Hans S. Edersheim, Martin R. Bring, James F. Keegan, Esq., Frederick W. Isaacs, Jr., J. Harrison Beal, Emil W. Solimine[1], and Frederic H. Brooks (collectively referred to herein as "MacGregor Board Defendants" or "Movants") to Dismiss Count Three of the Plaintiffs' Adversary Complaint and one Motion brought by Frederic H. Brooks (hereinafter "Brooks") to Dismiss Count Four of the Plaintiffs' Adversary Complaint pursuant to Fed.R.Civ.P. 12(b)(6), incorporated by Fed.R.Bankr.P. 7012, for failure to state a claim upon which relief can be granted. Movants are all former directors of MacGregor Sporting Goods, Inc. at the time certain allegedly fraudulent transfers were made. Movant Martin R. Bring filed an affidavit (hereinafter "Bring Affidavit") in support of his motion to dismiss. In support of his motion to dismiss, James F. Keegan (hereinafter "Keegan") filed a brief which incorporated the Bring Affidavit by reference. Movant J. Harrison Beal (hereinafter "Beal") filed a declaration in support of the MacGregor Board Defendants' motions to dismiss. The Trustees filed a brief in opposition to the motions to dismiss. Movants Frederic Brooks and Emil Solimine (hereinafter "Solimine") each filed a reply memorandum in support of the motions to dismiss.
On August 22, 1995, the Court heard argument on the motions to dismiss. The Court reserved the decision on all motions. Subsequent to the hearing, the Court received a series of letter briefs from the parties addressing issues regarding the applicability of certain caselaw cited at the hearing. The following constitutes the Court's findings of fact and conclusions of law.
FACTS
On March 16, 1989, MacGregor Sporting Goods, Inc., now known as M Holdings, Inc. ("MacGregor" or "the Debtor"), filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (Case No. 89-01973). MacGregor is incorporated in Delaware with, at all times relevant herein, its principal place of business in East Rutherford, New Jersey.
On April 1, 1993, the then Debtor-In-Possession and the Official Unsecured Creditors' Committee ("the Committee") filed an adversary proceeding against Riddell Sports, Inc., RHC Licensing Corp., Riddell, Inc., Equilink Licensing Corp., Macmark Corp., Ridmark Corp., and NBD Bank, N.A. (Adv. Pro. No. 93-2214). The Complaint alleged that certain prepetition transactions involving the Debtor, its former subsidiaries and Riddell were voidable as fraudulent transfers under 11 U.S.C. § 554 and § 548(a). The *507 Complaint alleged that sales of assets made by the Debtor to the defendants in April 1988 and February 1989 were fraudulent to MacGregor's creditors because the defendants paid less than "reasonably equivalent value" or "fair consideration" for the assets at the time of the sales. The Complaint further alleged that at such time, MacGregor was insolvent and undercapitalized.
On June 9, 1993, the Committee and the Debtor filed an amended complaint also alleging that the 1988 and 1989 sales were avoidable as fraudulent transfers. Paul Swanson, the Trustee of MGS Acquisition, Inc. ("MGS"), was added as a co-plaintiff. The amended complaint did not name as individual defendants the members of the MacGregor Board of Directors at the time the transactions were negotiated and closed.
Upon reconsideration of a prior denial of defendants' motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and Bankruptcy Rule 7012, this Bankruptcy Court, by written Opinion dated and filed on October 24, 1994, ordered the dismissal of the amended adversary complaint brought by the Debtor and the Committee as time barred under 11 U.S.C. § 546(a)(1) relying on the Third Circuit decision of In re Coastal Group, Inc., 13 F.3d 81 (3d Cir.1994). On that same date, this Court granted the Committee's motion for the appointment of a trustee. Bruce H. Levitt was appointed Chapter 11 Trustee for MacGregor by Order dated November 3, 1994.
The present adversary action was filed on March 10, 1995 by the Trustees for MacGregor and MGS (collectively, "the Trustees"). The Trustees, pursuant to 11 U.S.C. § 548(a), seek to avoid two transactions between MacGregor, its former subsidiaries, and Riddell as fraudulent transfers.
The first transaction ("the 1988 transaction") was closed on April 18, 1988 pursuant to an Asset Purchase Agreement dated April 10, 1988. MacGregor filed a Current Report under Form 8-K with the United States Securities and Exchange Commission ("SEC") on May 16, 1988. A press release was issued through PR Newswire Association, Inc. ("PR Newswire") on April 18, 1988. The second transaction ("the 1989 transaction") was entered into pursuant to a License and Stock Purchase Agreement dated February 2, 1989 among MacGregor, RHC Licensing Corp. and Riddell Sports, Inc. MacGregor filed a Current Report under Form 8-K with the American Stock Exchange on February 14, 1989 and the SEC on February 15, 1989. A press release was issued through PR Newswire on February 10, 1989. Bring Affidavit, Exhibits B-E.
The Trustees' Complaint names as defendants members of the MacGregor Board of Directors. Count Three of the Complaint alleges that the MacGregor Board Defendants breached their fiduciary duty of care, loyalty and good faith to MacGregor, its shareholders and creditors when they approved the 1988 Transactions and 1989 Transactions which sold MacGregor assets for less than reasonably equivalent value or for less than fair consideration.
The MacGregor Board Defendants move to dismiss Count Three of the Trustees' Complaint on the grounds that the action is time barred.
In addition to Brooks' Motion to Dismiss Count Three, Brooks also moves to dismiss Count Four of the Trustees' Complaint, which sets forth a separate claim against Brooks individually for breach of fiduciary duty arising from his conduct in negotiating the 1989 transaction on behalf of both MacGregor and Riddell.
DISCUSSION
I. Applicable Standards
A. Standard for Dismissal Pursuant to Fed.R.Civ.P. 12(b)(6), as Incorporated by Bankruptcy Rule 7012
Bankruptcy Rule 7012(b), which incorporates Federal Rule 12(b)(6), provides for dismissal of any complaint that fails to state a claim upon which relief can be granted. When considering a motion to dismiss, a court must accept as true all allegations in the complaint and all reasonable inferences drawn from those allegations, and view them in light most favorable to the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 1849, 23 L.Ed.2d 404, reh'g denied, *508 396 U.S. 869, 90 S.Ct. 35, 24 L.Ed.2d 123 (1969); Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir.1991). The test for determining when to dismiss under this Rule is whether, under any reasonable reading of the pleadings, the plaintiff may be entitled to relief. See Holder v. Allentown, 987 F.2d 188, 194 (3d Cir.1993). In making this determination, the court accepts the nonmovant's narrative of the facts and any reasonable inferences, but a court does not accept conclusory statements about the legal effect of those assertions. Id. at 194 (citing Wright & Miller, 5A Fed. Practice & Proc., § 1357 at p. 319). Movants are entitled to dismissal if the plaintiff can prove no set of facts in support of their claim that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).
B. Summary Judgment Standard
Federal Rule of Civil Procedure ("Rule") 56, made applicable to Adversary Proceedings by Federal Bankruptcy Rule 7056, provides in pertinent part:
(c) Motion and Proceedings Thereon . . . The judgment sought shall be rendered forthwith 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.Civ.P. 56(c). The party moving for summary judgment ("movant") has the burden of establishing the nonexistence of any "genuine issues of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Fairbanks, Morse & Co. v. Consolidated Fisheries Co., 190 F.2d 817, 824 (3d Cir.1951).
The Court's role is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). In determining the outcome of a summary judgment motion:
the court must view all inferences in a light most favorable to the non-moving party, United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Continental Ins. Co. v. Bodie, 682 F.2d 436, 438 (3d Cir.1982), must resolve all doubt against the moving party, Gans v. Mundy, 762 F.2d 338, 341 (3d Cir.1985), cert. denied, 474 U.S. 1010, 106 S.Ct. 537, 88 L.Ed.2d 467 (1985), and must take as true all allegations of the non-moving party that conflict with those of the movant, Anderson, [477 U.S. at 253-55] 106 S.Ct. at 2513. In addition, a plaintiff seeking summary judgment must demonstrate the absence in the record of a prima facie defense. The evidence must be considered in light most favorable to the defendant. Baker v. Lukens Steel Co., 793 F.2d 509, 511 (3d Cir.1986).
Kronmuller v. West End Fire Co. No. 3, 123 F.R.D. 170, 173 (E.D.Pa.1988).
C. Dismissal and Summary Judgment in the Instant Case
The motions presently before this Court were raised as "motions to dismiss." The Court will evaluate the motions under both a dismissal standard and a summary judgment standard. Rule 12(b) of the Federal Rules of Civil Procedure provides in relevant part:
If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
As explained in 9 Collier On Bankruptcy ¶ 7012.05 (15th ed.1994) (footnotes omitted):
If a motion is made to dismiss a pleading for failure to state a claim, that motion may be treated as one for summary judgment and disposed of pursuant to Civil Rule 56. Such a situation would occur when matters outside of the pleading to which the motion is made, such as an affidavit, are raised by one of the parties and considered by the court. All parties are to be given a reasonable opportunity to *509 present material outside of the pleadings if the motion is to be considered one for summary judgment.
See, e.g., Moran v. Paine, Webber, Jackson & Curtis, 279 F.Supp. 573, 578 (W.D.Pa.1966) (court treated 12(b)(6) motion as one for summary judgment where movant filed matters outside the pleadings and nonmovant had opportunity to reply), aff'd, 389 F.2d 242 (3d Cir.1968); In re Scionti, 40 B.R. 947, 948 (Bankr.D.Mass.1984) (court treated 12(b)(6) motion as one for summary judgment where parties submitted a Stipulation of Facts along with the motion).
In the instant case, both the Trustees and the Movants have submitted matters "outside the pleadings." Movant Martin R. Bring has submitted an affidavit, with exhibits, upon which he and James F. Keegan, Esq. rely in support of their motions to dismiss. Movant J. Harrison Beal submitted a declaration in support of all of the motions to dismiss. The Trustees have submitted a brief in opposition to Bring's Motion to Dismiss. Movants Frederic Brooks and Emil Solimine have each submitted reply briefs, the former with exhibits. The parties have had the opportunity to submit and reply to the submissions, as well to supplement those submissions with letter briefs addressing issues raised at oral argument. Thus, the Court will additionally evaluate the matter under Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Rule 7056 of the Federal Rules of Bankruptcy Procedure.
II. Count Three: Breach of Fiduciary Duty by MacGregor Board Defendants
A. Statute of Limitations
Movants allege that the statute of limitations for bringing the instant action has expired. Plaintiffs, however, assert four separate arguments as to why the action is timely. First, the Trustees assert that the action is timely pursuant to 11 U.S.C. § 546. Second, the Trustees assert that, even if the statute of limitations is governed by state law, there remains a question of fact as to when the cause of action accrued. Next, the Trustees allege that the conduct of the MacGregor Board Defendants serves as a basis to toll the limitations period. Finally, the Trustees maintain that the issue as to whether the statute of limitations has run cannot be resolved in the absence of discovery. Each of these arguments will be examined in turn.
1. Limitations Period of 11 U.S.C. § 546(a)
The Trustees assert that, because the breach of fiduciary duty claims against the MacGregor Board Defendants and the relief sought therein are "inextricably linked (and transactionally identical) to the fraudulent transfer claim against the Riddell defendants, the breach of fiduciary duty claim is timely under the applicable limitations period set forth in 11 U.S.C. § 546." Plaintiffs' Brief in Opposition at 14.
Section 546(a) of the Bankruptcy Code provides:
Limitations on avoiding powers.
(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of
(1) the later of
(A) 2 years after the entry of the order for relief; or
(B) 1 year after the appointment of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or
(2) the time the case is closed or dismissed.
Counts One and Two of the Complaint seek to avoid two transactions as fraudulent transfers, pursuant to 11 U.S.C. § 548.[2] Under 11 U.S.C. § 548, a trustee *510 may avoid any transfer of an interest of the debtor in property if made within one year of filing, and the debtor received less than a reasonably equivalent value in exchange for the transfer and was insolvent.
The Trustees assert that, since the present action is an avoidance action pursuant to § 548, the applicable statute of limitations is set forth in 11 U.S.C. § 546(a). The Trustees, therefore, assert that they may bring an action for fraudulent transfer before the earlier of two years after the appointment of the trustee or the time that the bankruptcy case is closed or dismissed. The MacGregor Trustee was appointed on November 3, 1994. This action was commenced March 10, 1995.
The Trustees here seek to extend the breadth of § 546 to include the breach of fiduciary duty claim against the MacGregor Board Defendants. The Trustees essentially argue that the breach of fiduciary duty claim must also be timely because it is "intertwined and inseparable" from the avoidance action. See Plaintiffs' Brief in Opposition at 14. The Trustees allege that both actions "derive from a common set of facts and compel identical relief. They are complimentary claims arising from identical transactions being pursued in a singular avoidance lawsuit." Id.
The MacGregor Board Defendants argue that Count Three of the Complaint alleges an entirely different cause of action from the avoidance action. The essence of the Trustees' claim, the MacGregor Board Defendants contend, is not a "comprehensive avoidance action" as the Trustees allege, but rather, a claim for breach of fiduciary duty governed by state law. This Court must agree. The Trustees are attempting to mold a breach of fiduciary duty claim into the shape of an avoidance proceeding simply because part of the relief they seek in the Complaint is avoidance. In this manner, the Trustees seek to take advantage of the extended statute of limitations available to trustees pursuant to 11 U.S.C. § 546. However, the relief the Trustees seek on Count Three is not avoidance, but rather, money damages. Because this action is not an avoidance action pursuant to 11 U.S.C. § 548, the statute of limitations is not governed by § 546 of the Bankruptcy Code. Therefore, the action is governed by nonbankruptcy statutes of limitations.
2. Nonbankruptcy Statutes of Limitations
State law governs Plaintiffs' breach of fiduciary duty claim against the MacGregor Board Defendants. MacGregor is incorporated in Delaware with its principal place of business in East Rutherford, New Jersey. MacGregor filed its bankruptcy petition in the District of New Jersey and the instant adversary proceeding was commenced as part of MacGregor's bankruptcy case. Insofar as this Court has determined that state law governs the breach of fiduciary duty claim, the issue before this Court becomes whether the Delaware or New Jersey statute of limitations applies.
a. Choice of Law
A federal court applies the choice of law rules of the forum in which it sits. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941); Shuder v. McDonald's Corp., 859 F.2d 266, 269 (3d Cir.1988). Historically, it was believed that courts sitting in diversity should apply its own procedural law, even if it applied the substantive law of a foreign jurisdiction. Thus, the statute of limitations, ordinarily considered procedural in nature, was controlled by the law of the forum, rather than by the law of the state whose substantive law applies. New Jersey has abandoned *511 such "ritualistic concepts" in favor of a "most significant relationship" standard under which the governmental interests of both jurisdictions are balanced. Heavner v. Uniroyal, Inc., 63 N.J. 130, 141, 305 A.2d 412 (1973).
This court has interpreted Heavner as adopting the "governmental interest approach" to resolving conflicts of law as to statutes of limitation. Henry v. Richardson-Merrell, Inc., 508 F.2d 28, 32 (3d Cir. 1975). That approach involves two steps: "The court determines first the governmental policies evidenced by the laws of each related jurisdiction and second the factual contacts between the parties and each related jurisdiction." Id. . . . [t]he Henry court read Heavner as establishing New Jersey's method of performing the second step in the governmental interest analysis. It requires the balancing of . . . five factors . . . (1) where the cause of action arose; (2) amenability to suit in other states; (3) the substantial interest, if any, of New Jersey in the suit; (4) which state's substantive law will apply; and (5) whether the other state's limitations statute has run.
Republic of the Philippines v. Westinghouse Elec. Corp., 774 F.Supp. 1438, 1448 (D.N.J. 1991) (citing Allen v. Volkswagen of America, Inc., 555 F.2d 361, 362-63 (3d Cir.1977)). This Court must consider the various factors enumerated above to determine which state has the more compelling interest in the outcome of this case. New Jersey conflicts of law principles require the application of the law of the state with the most significant contacts to the dispute.
Counsel for Defendant Brooks asserts that the breach of fiduciary duty claim against the MacGregor Board Defendants should be governed by Delaware's three year statute of limitations.[3] Brooks argues that the liability of corporate directors for breach of their fiduciary duties is governed by the law of the state of incorporation, i.e., in MacGregor's case, Delaware. See Coleman v. Taub, 638 F.2d 628, 629 n. 1 (3d Cir.1981) (law of the state of incorporation applies to claims of breach of fiduciary duty by directors or officers and other matters involving "internal affairs" of the corporation).[4] This rule, however, is not absolute. In Ono v. Itoyama, 884 F.Supp. 892, 894 (D.N.J.1995), the court stated that "[t]he local law of the state of incorporation will be applied `to determine the existence and extent of a director's or officer's liability to its shareholders, in the absence of another state with a more significant relationship'" (quoting Tabas v. Mullane, 608 F.Supp. 759, 764 (D.N.J.1985)) (emphasis added). Accord, In re ORFA Sec. Litig., 654 F.Supp. 1449, 1455 (D.N.J.1987) (New Jersey law applied even though defendant incorporated in Utah).
Brooks asserts that New Jersey's interest in applying its statute of limitations in the present case is "negligible." Brooks' Response, filed Sept. 5, 1995, to Letter from Richard Ballot, at 2. Brooks points out that, *512 while its Chapter 11 case is venued here, MacGregor engaged in operations and business activities in various jurisdictions, and its creditors are located in various jurisdictions. Furthermore, it is argued the transactions sought to be avoided were closed in New York, so New York is arguably the state in which the cause of action arose.
However, two factors contradict Brooks' assertion that New Jersey's interest is negligible: first, MacGregor is a New Jersey domiciliary, with its principal place of business in East Rutherford, New Jersey; second, MacGregor's Chapter 11 bankruptcy petition was filed in New Jersey and this Court has presided over this and other related adversary proceedings for several years. Given those two factors, it is clear that New Jersey has a substantial interest in applying its law to the instant case.
b. New Jersey's Statute of Limitations
New Jersey's six year statute of limitations, pursuant to N.J.S.A. 2A:14-1, applies to breach of fiduciary duty causes of action.[5] New Jersey's statute of limitations is made applicable to the instant case by 11 U.S.C. § 108,[6] which permits a trustee or the debtor to commence any action available to the debtor within the operative nonbankruptcy statute of limitations. The purpose of § 108(a) is to toll the time period within which the prepetition debtor is required to act, in order to enable the trustee to timely take the necessary action so that the estate does not lose the benefit therefrom. Section 108(a) extends any statute of limitation for commencing or continuing an action by the debtor for two years after the date of the order for relief, unless it would expire later.
The MacGregor Board Defendants assert that, regardless of whether New Jersey's six year statute of limitations applies, the instant action was filed more than six years after the causes of action for breach of fiduciary duty accrued. This Court must now determine when the cause of action accrued. In Montag v. Bergen Bluestone Co., 145 N.J.Super. 140, 144, 366 A.2d 1361 (Law Div.1976), the court held that the date on which a cause of action accrues, and hence the date from which the statute of limitations starts to run, is the date upon which the right to institute and maintain suit first arises. See also Hartford Acc. and Indem. Co. v. Baker, 208 N.J.Super. 131, 136, 504 A.2d 1250 (Law Div.1985) (for purposes of N.J.S.A. 2A:14-1, date of vesting of right to institute action for fraud was date of last possible fraudulent act).
Both parties acknowledge that the question of when a cause of action for breach of fiduciary duty accrues is an open one under New Jersey law. The MacGregor Board Defendants allege that the causes of action for breach of fiduciary duty accrued no later than the dates of the allegedly fraudulent transfers, i.e., April 18, 1988, the closing date of the 1988 Transaction and February 2, 1989, the closing date of the 1989 Transaction. Furthermore, the MacGregor Board Defendants allege that, because the transactions were public and disclosed in documents filed with the SEC and American Stock Exchange, Plaintiffs had actual or constructive knowledge of the alleged breach of fiduciary duty on or about the dates of both transactions. *513 The Trustees argue that the closing dates of the transactions are not determinative of the date upon which the cause of action accrued. The Trustees assert that all of the executory agreements that were to be performed pursuant to the 1988 Transaction were not "closed" on any one particular date. The Trustees argue that discovery will shed light upon whether the February 1989 transaction was fully "closed" before March 10, 1989, the critical date for determining whether the fiduciary duty claim relative to that transaction was timely commenced within New Jersey's six year statute of limitations. The trustees argue that there exists a genuine issue of material fact as to whether the transaction was fully closed before March 10, 1989, six years before the complaint was filed, such that summary judgment would be inappropriate. The trustees here note that under New Jersey law, the statute of limitations on a cause of action involving fraud does not begin to run until the date of the last possible fraudulent act. See Hartford Acc. and Indem. Co. v. Baker, 208 N.J.Super. 131, 135-36, 504 A.2d 1250 (Law Div.1985).
3. Equitable Tolling
The Trustees also allege that the applicable statute of limitations may have been tolled in the instant case as a result of the conduct of the MacGregor Board Defendants. State common law tolling doctrines are incorporated by 11 U.S.C. § 108 and are, therefore, applicable in bankruptcy proceedings. Ambrose Branch Coal Co. v. Tankersley, 106 B.R. 462, 465 (W.D.Va.1989); see also Bohus v. Beloff, 950 F.2d 919, 924 (3d Cir.1991) (state tolling principles are used by a federal court when it is applying a state limitations period).
a. Fraudulent Concealment
The Trustees contend that discovery may reveal that the MacGregor Board Defendants engaged in fraudulent concealment of the existence of the cause of action for breach of fiduciary duty. Plaintiffs' Brief in Opposition, at 22. Fraudulent concealment would result in tolling of the New Jersey statute of limitations. Under New Jersey law, fraudulent concealment is established by a showing that the defendants took actions which concealed the existence of the cause of action, and that the plaintiff, exercising reasonable diligence, would not have discovered the wrong. Hauptmann v. Wilentz, 570 F.Supp. 351, 397 (D.N.J.1983), aff'd, 770 F.2d 1070 (3d Cir.1985), cert. denied, 474 U.S. 1103, 106 S.Ct. 887, 88 L.Ed.2d 922 (1986); Foodtown v. Sigma Marketing Systems, Inc., 518 F.Supp. 485, 488 (D.N.J.1980).
Brooks makes three arguments in response. First, Brooks claims that, by virtue of the public filings announcing the transactions, full disclosure of the details of the transaction were known. Second, Brooks asserts that the fraud claim is not based on any statement made by the MacGregor Board Defendants, but rather, it is based primarily upon a March 24, 1988 letter written by David R. Ravin, Esq., counsel for the Creditors' Committee to all unsecured creditors regarding the 1988 Transaction. That letter states that, as a result of the then contemplated 1988 transaction, MacGregor will be able to make payment of 100% of MacGregor's past due trade payables. Finally, Brooks maintains that that statement was in fact true and that 100% payment was made on past due trade payables out of the proceeds of the 1988 Transaction. See Brooks' Reply Memorandum, at 3 (relying on Declaration of J. Harrison Beal, dated Aug. 18, 1995).[7]
All of Brooks' arguments require factual determinations which cannot be resolved in the context of a motion to dismiss or motion for summary judgment. Whether the plaintiff had adequate notice of the existence of a cause of action by virtue of the public filing cannot be resolved on motion to dismiss or a motion for summary judgment. The MacGregor Board Defendants point to the SEC filings as conclusive evidence that *514 plaintiffs were aware of the existence of a cause of action. However, the fact that plaintiffs were aware of the existence of the transaction is not the same as awareness of the alleged fraudulent nature of that transaction, if indeed it was fraudulent. Furthermore, the fact that the Trustees rely on a letter written by counsel for the Creditors' Committee, rather than a statement made by one of the MacGregor Board Defendants, does not preclude the Trustees from demonstrating at trial that the letter contained fraudulent statements for which the MacGregor Board Defendants' are responsible. Finally, the issue of whether those statements were, in fact, fraudulent must be resolved at trial. If, at trial, the court determines that the statute of limitations was tolled, the court would then have to determine how long the Trustees are entitled to the benefits of tolling. But the fact that a statute of limitations is tolled does not mean that it does not exist. Even though the statute of limitations is tolled because of the doctrine of fraudulent concealment, it begins to run as soon as plaintiff, in exercising reasonable diligence knew or should have known of the injury and its causes. Bohus, 950 F.2d at 925-26. This determination cannot be made upon a motion to dismiss or a motion for summary judgment. In sum, there exists genuine issues of material fact, which preclude summary judgment.
In addition, the MacGregor Board Defendants argue that the Trustees have failed to make their allegations of fraud with the particularity required by Rule 9(b), applicable to Bankruptcy Proceedings pursuant to Federal Rule of Bankruptcy Procedure 7009. Keegan's Memorandum of Law in Support of Motion to Dismiss, at 10.
Rule 9(b) provides:
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.
The Court of Appeals for the Third Circuit applies a functional and flexible approach to Rule 9(b), "focusing exclusively on its particularity language is too narrow an approach and fails to take account of the general simplicity and flexibility contemplated by the rules." Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985).
Rule 9(b) requires plaintiffs to plead with particularity the "circumstances" of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior. It is certainly true that allegations of "date, place or time" fulfill these functions, but nothing in the rule requires them. Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegation of fraud.
Id., 742 F.2d at 791; see also Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284 (3d Cir.1992) ("courts should be `sensitive' to the fact that application of the Rule prior to discovery `may permit sophisticated defrauders to successfully conceal the details of their fraud.'") (quoting Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99-100 (3d Cir.1983)), cert. denied, 506 U.S. 934, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992); Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir.1989) ("Particularly in cases of corporate fraud, plaintiffs cannot be expected to have personal knowledge of the details of corporate internal affairs [citation omitted]. Thus, courts have relaxed the rule when factual information is peculiarly within the defendant's knowledge or control."); Saporito v. Combustion Eng'g, Inc., 843 F.2d 666, 674-75 (3d Cir.1988), vacated on other grounds, 489 U.S. 1049, 109 S.Ct. 1306, 103 L.Ed.2d 576 (1989); In re Midlantic Corp. Shareholder Litig., 758 F.Supp. 226, 231 (D.N.J.1990) ("If the pleaded facts and supporting allegations permit the inference of a colorable claim for fraud and afford the defendant notice as to which actions or communications are alleged to have been fraudulent, the complaint will withstand a motion to dismiss."); Kronfeld v. First Jersey Nat'l Bank, 638 F.Supp. 1454, 1463-65 (D.N.J.1986). Courts have also noted that, in the bankruptcy *515 context, Rule 9(b) should be interpreted liberally, particularly when the trustee, a third party outsider to the fraudulent transaction, is bringing the action. In re Hollis & Co., 86 B.R. 152, 156 (Bankr.E.D.Ark.1988); In re O.P.M. Leasing Serv. Inc., 32 B.R. 199, 203 (Bankr.S.D.N.Y.1983).
Rule 9(b) applies to fraudulent conveyance proceedings. See, e.g., Wieboldt Stores v. Schottenstein, 94 B.R. 488, 498 (N.D.Ill.1988) (finding that Rule 9(b) applies in fraudulent conveyance actions, but it must be read in conjunction with Rule 8 which requires only a "short and plain statement of the claim showing that the pleader is entitled to relief."); O.P.M. Leasing, 32 B.R. at 203 ("Although it is true that Rule 9(b) `should be reconciled with Rule 8, which requires a short and plain statement of claims,' . . . more than broad assertions by the plaintiff are required.").
The MacGregor Board Defendants also assert that the complaint fails to make any allegations of fraudulent concealment or self-dealing, much less allegations of such conduct set forth with the required specificity. Keegan's Memorandum of Law in Support of Motion to Dismiss, at 10 n. 8; Letter Brief on behalf of Emil Solimine, filed on Sept. 5, 1995, at 4.
While the complaint does not expressly allege that the Defendants fraudulently concealed the existence of the cause of action, the complaint does allege breaches of fiduciary duty, based on the alleged facts set forth therein. The complaint sufficiently pleads the circumstances of the alleged fraud to survive the instant motions to dismiss and to allow discovery to proceed in this action. The trustees, however, will be directed to amend the complaint within 30 days of the date of this Opinion to plead, the applicability of the equitable tolling doctrine in this matter. See e.g., Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1391 and n. 10 (3d Cir.1994) (In the context of a Rule 12(b)(6) motion to dismiss all that is required of the plaintiff is that she plead the applicability of the doctrine of equitable tolling).
b. Adverse Domination
The Trustees also allege that the statute of limitations may be tolled by the doctrine of adverse domination. Under this theory, a statute of limitations is tolled as long as a corporate plaintiff is controlled by the alleged wrongdoers. As the court in Resolution Trust Corp. v. Farmer explained:
The doctrine [of adverse domination] is based on the theory that the corporation which can only act through the controlling wrongdoers cannot reasonably be expected to pursue a claim which it has against them until they are no longer in control.
865 F.Supp. 1143, 1151 (E.D.Pa.1994). See also Republic of the Philippines v. Westinghouse Elec. Corp., 714 F.Supp. 1362, 1371 n. 3 (D.N.J.1989) (equitable doctrine of adverse domination "tolls the statute of limitations for a corporation's claims against its officers and directors when those in control of the corporation cannot be expected to pursue claims that would result in their undoing") (citing IIT v. Cornfeld, 619 F.2d 909, 929-30 (2d Cir.1980)). The Trustees allege that the MacGregor Board Defendants were in "full, complete and exclusive control" of MacGregor until the appointment of the Trustee on November 3, 1994. Plaintiffs' Brief in Opposition, at 23.
The MacGregor Board Defendants point out that no New Jersey court has expressly adopted the doctrine of adverse domination. The one New Jersey federal court decision on this issue, Republic of the Philippines v. Westinghouse Elec. Corp., 714 F.Supp. 1362, 1371 n. 3 (D.N.J.1989), did not involve a New Jersey statute of limitations issue and the doctrine was found to be factually inapplicable.
Movants further argue that, even if the theory of adverse domination was recognized by New Jersey courts, the Trustees have failed to make a prima facie showing that adverse domination is applicable in the present case. Movants allege that there is no evidence that the MacGregor Board Directors were "wrongdoers." Furthermore, Movants challenge, as a factual matter, the Trustees' assertion that the MacGregor Board Defendants were in "exclusive control" of the company. The Defendants argue that *516 since all claims of MacGregor were transferred to MGS pursuant to an agreement approved by this Court on August 3, 1989,[8] the MacGregor Board Defendants were no longer able to control the actions of the corporation in determining whether to bring an action for breach of fiduciary duty against these Defendants.
Furthermore, Movants also point out that Defendants were not in "exclusive control," as approximately 70% of MacGregor stock is owned by shareholders who are not insiders. Brooks' Reply Memorandum, at 4. These shareholders, it is argued, could have brought a derivative suit if the Board failed to take action upon demand. Brooks' Reply Memorandum, at 4; Letter Brief of James F. Keegan, Esq., filed Sept. 5, 1995, at 2 ("Keegan's Letter Brief").
Finally, Movants point out that equitable tolling does not necessarily result in an extension of the statute of limitations. Keegan's Letter Brief at 2. Under New Jersey law, if the basis for tolling a statute of limitations ceases and there remains a reasonable period of time before the statute of limitations expires, then suit must be brought before the expiration of the statute of limitations. Kaprow v. Board of Education of Berkeley Twp., 131 N.J. 572, 589-90, 622 A.2d 237 (1993); Torcon, Inc. v. Alexian Bros. Hosp., 205 N.J.Super. 428, 437, 501 A.2d 182 (Ch.Div.1985), aff'd 209 N.J.Super. 239, 507 A.2d 289 (App.Div.1986), certif. denied 104 N.J. 440, 517 A.2d 431 (1986). As the court in Kaprow explained:
if after the cessation of any basis for continued reliance by a plaintiff on the conduct of a defendant, there remains a reasonable time under the applicable statute of limitations period to commence a cause of action, the action will be barred if not filed within this remaining time.
131 N.J. 572, 589-90, 622 A.2d 237 (citing Mosior v. Insurance Co. of N. Am., 193 N.J.Super. 190, 197, 473 A.2d 86 (App.Div. 1984)).
Movants assert that the tolling, if any, ceased when the cause of action was sold to MGS in July, 1989. As of July, 1989, there were approximately five years remaining under the New Jersey six year statute of limitations within which this cause of action could have been brought. Keegan's Letter Brief at 2-3.
The tolling principles of fraudulent concealment and adverse domination involve questions of fact which cannot be resolved as a matter of law on a motion to dismiss. As the Court in Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1391 (3d Cir.1994) held, tolling issues relative to the statute of limitations involve factual issues which must be determined on a case-by-case basis, and cannot be decided in the context of a motion to dismiss. The issue of whether a statute of limitations has been tolled necessarily requires factual determinations, and therefore, cannot be resolved before discovery has been conducted. The issue of whether the statute of limitations was tolled involves genuine issues as to material fact, thus precluding summary judgment.
4. Lack of Discovery
The Court finds that the question regarding tolling of the statute of limitations involves factual issues which cannot be resolved in the absence of discovery. The tolling issue cannot be resolved on a motion to dismiss, nor can it be resolved on the basis of affidavits submitted in support of a motion for summary judgment. In Knight v. E.F. Hutton and Co., 750 F.Supp. 1109 (M.D.Fla. 1990), the court held that the issue of whether a statute of limitations was tolled in a particular case generally may not be resolved *517 on a motion to dismiss. In order to prevail on a motion to dismiss, the movant must show that the plaintiff can prove no set of facts which would toll the statute of limitations. Id. at 1112. In Oshiver, the court stated that the issue of whether a statute of limitations was tolled involves issues of fact which could not be resolved on the face of the complaint. 38 F.3d at 1391. Simply, pleading the applicability of a tolling doctrine is sufficient to survive a motion to dismiss. Id. The applicability of an equitable tolling doctrine may not be determined on the basis of affidavits submitted in support of a motion for summary judgment. Wilkerson v. Siegfried Ins. Agency, Inc., 621 F.2d 1042, 1045 (10th Cir.1980). For these reasons, this Court must deny the motions to dismiss Count Three of the Complaint.
III. Count Four: Breach of Fiduciary Duty by Frederic Brooks
Count Four of the Complaint sets forth a separate claim against MacGregor Board Defendant Frederic H. Brooks for breach of fiduciary duty by Brooks arising from his conduct in negotiating the terms of the February 1989 Transaction on behalf of both MacGregor and Riddell.[9] Brooks has moved to dismiss Count Four on the grounds that it is time barred. Brooks argues that the claim is barred by New Jersey's six year statute of limitations. The 1989 Transaction was closed on February 2, 1989. Brooks reasons that the "negotiation" of that transaction ceased upon closing. Thus, since the claim alleges a breach of fiduciary duty arising from his role in negotiating the 1989 Transaction, the statute of limitations runs from the date negotiations ceased, February 2, 1989. The Trustees brought this claim on March 10, 1995, over six years after the closing date. Brooks moves to dismiss Count Four on the grounds that it is time barred.
The Trustees allege, however, that Brooks' breach of fiduciary duty was a continuing breach, by virtue of Brooks' equity interest in both MacGregor and Riddell, that extended beyond the time of the transaction itself.
For the same reasons applicable to Count Three as set forth above, this Court must deny Brooks' motion to dismiss. Whether Brooks engaged in any conduct which would conceal the right to institute a cause of action against him for his role in negotiating the 1989 Transaction involves genuine issues of material fact which precludes dismissal or summary judgment.
CONCLUSION
Defendants' Motions to Dismiss Count Three of the Complaint pursuant to Federal Rules of Bankruptcy Procedure 7012 and Federal Rule 12(b)(6) is hereby DENIED. Frederic Brooks' Motion to Dismiss Count Four of the Complaint is hereby DENIED. The trustees will be directed to amend the Complaint within 30 days of the date of this Opinion to plead the applicability of the equitable tolling doctrine in this matter.
An Order shall be submitted in accordance with this Opinion.
NOTES
[1] The pleadings incorrectly identify Emil W. Solimine as Emil W. Solimene. See Solimine's Motion to Dismiss Count three of the Complaint, at 2.
[2] Section 548 of the Bankruptcy Code provides:
(a) 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 one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily
(1) 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; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(ii) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
11 U.S.C. § 548.
[3] Delaware's statute of limitations is codified at 10 Del.Code § 8106, which provides as follows:
No action to recover damages for trespass, no action to regain possession of personal chattels, no action to recover damages for the detention of personal chattels, no action to recover a debt not evidenced by a record or by an instrument under seal, no action based on a detailed statement of the mutual demands in the nature of debit and credit between parties arising out of contractual or fiduciary relations, no action based on a promise, no action based on a statute, and no action to recover damages caused by an injury unaccompanied with force or resulting indirectly from the act of the defendant shall be brought after the expiration of 3 years from the accruing of the cause of such action; subject, however, to the provisions of §§ 8108-8110, 8119 and 8127 of this title.
Common law claims of mismanagement and breach of fiduciary duty are governed by this section. Dofflemyer v. W.F. Hall Printing Co., 558 F.Supp. 372, 379 (D.Del.1983).
[4] The determination of which state substantive law applies is of great importance, as the Third Circuit had held that the court should borrow the statute of limitations from the state whose substantive law applies. The Third Circuit, in interpreting Heavner, has held that the "critical determination underlying the `borrowing' of a foreign statute of limitations is a determination as to whether a foreign substantive law is to be applied." Republic of the Philippines v. Westinghouse Elec. Corp., 774 F.Supp. 1438, 1449 (D.N.J.1991) (citing Schum v. Bailey, 578 F.2d 493, 495 (3d Cir.1978)). If Delaware substantive law applies in this case, then, under Schum, this court must arguably apply the Delaware statute of limitations.
[5] N.J.S.A. § 2A:14-1 provides:
Every action at law for trespass to real property, for any tortious injury to real or personal property, for taking, detaining, or converting personal property, for replevin of goods or chattels, for any tortious injury to the rights of another not stated in sections 2A:14-2 and 2A:14-3 of this Title, or for recovery upon a contractual claim or liability, express or implied, not under seal, or upon an account other than one which concerns the trade or merchandise between merchant and merchant, their factors, agents and servants, shall be commenced within 6 years next after the cause of any such action shall have accrued.
[6] Section 108(a) of the Bankruptcy Code provides:
Extension of Time.
(a) If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only 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) two years after the order for relief.
[7] In his declaration, J. Harrison Beals, who is and was in 1988 the Chief Financial Officer and a Director of MacGregor, states that:
"To the best of my recollection, all of the past due trade payables of MacGregor that were in existence at the time of the asset sale were paid off out of the proceeds of the asset sale, which took place on April 18, 1988." Declaration, ¶ 4.
[8] On or about July 14, 1989, the Debtor and MGS entered into an Agreement for Purchase and Sale of Assets pursuant to which the Debtor purported to sell to MGS substantially all of its assets, including its statutory avoidance powers. This sale was approved by this Court by the late Honorable Daniel J. Moore, U.S.B.J. on August 3, 1989. Thereafter, the Debtor and MGS entered into a Settlement Agreement pursuant to which the Debtor and the MGS Trustee each have an interest in the claims and have agreed to share the proceeds derived therefrom in a specified manner. See October 24, 1994, Opinion in Official Unsecured Creditors' Committee of MacGregor Sporting Goods, Inc. v. Riddell Sports, Inc., Case No. 89-01973, Adv. No. 93-2214, slip. op. p. 4 n. 2.
[9] Count Four of the Complaint alleges as follows:
71. Plaintiffs repeat and incorporate by reference herein, the allegations set forth in paragraphs 1 through 70 of the complaint as if hereafter fully set forth at length.
72. Brooks owed a fiduciary duty of care, loyalty and good faith to MacGregor, its shareholders and creditors.
73. Brooks breached his fiduciary duty owing to MacGregor, shareholders and creditors, by negotiating the 1989 Transaction for less than reasonably equivalent value or for less than fair consideration.
74. Brooks breached his fiduciary duty owing to MacGregor, its shareholders and creditors, by negotiating the 1989 Transaction on behalf of MacGregor while he was also Chairman of the Board, and Chief Executive Officer of Riddell, Inc. and Equilink, and Chief Operating Officer, President and Director of RSI [Riddell Sports, Inc.] and while he maintained an equity interest in both RSI and MacGregor. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552419/ | 239 B.R. 130 (1998)
INTERNAL REVENUE SERVICE, Appellant,
v.
John Davis ORR, Appellee.
C.A. No. C-97-357.
United States District Court, S.D. Texas, Corpus Christi Division.
January 14, 1998.
*131 *132 Joseph A. Pitzinger, III, Dept. of Justice Tax Division, Dallas, TX, for Appellant.
Ronald A. Simank, Schauer, Simank and Ledbetter, Corpus Christi, TX, for Appellee.
ORDER ON APPEAL FROM ORDER GRANTING SUMMARY JUDGMENT AND DELIMITING THE ATTACHMENT OF APPELLANT'S LIEN TO APPELLEE'S SPENDTHRIFT TRUST
JACK, District Judge.
On this date came on to be considered Appellant Internal Revenue Service's ("IRS") Appeal from the Order Granting Summary Judgment issued by the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division. That Order granted Appellee John Davis Orr's ("Orr") motion for summary judgment, finding that the IRS's federal income tax liens attach only to the distributions which Orr received from his spendthrift trust prior to April 30, 1996. In effect, the Bankruptcy Court found that Orr's prepetition equitable interest in his future spendthrift trust income did not constitute "property" within the meaning of 26 U.S.C. § 6321. This Court reverses.
I. JURISDICTION
The Court has jurisdiction pursuant to 28 U.S.C. § 158(a).
II. PROCEDURAL & FACTUAL HISTORY
In 1965, Orr's grandmother created a spendthrift trust which yields the income that is at issue in the present dispute. This trust provides that "all net income of the trust shall be distributed" to Orr, provided only that Orr is competent and over the age of thirty. (Trust para. 5.) In accordance *133 with the trust, Orr has regularly received payments of the annual income and has also been made a co-trustee. The trust income is granted to Orr unconditionally and permanently, and the trust requires the trustee to disburse all of the income to Orr at least annually.[1]
Between 1984 and 1991, Orr failed to file his federal income tax returns, incurring over $630,000 in tax liabilities. Consequently, in 1993, the IRS properly filed Notices of Federal Tax Liens pursuant to 26 U.S.C. § 6671, thereby securing payment of these tax liabilities. On November 1, 1995, Orr petitioned for bankruptcy relief under Chapter 7, and he received a discharge of personal liability on May 21, 1996. Of course, in accordance with 11 U.S.C. § 524(a)(1), this discharge did not remove the federal tax liens from Orr's prepetition property.
Months prior to receiving his discharge, in February 1996, Orr filed an adversary requesting the Bankruptcy Court to determine precisely to what property interests the federal tax liens had attached. In particular, with respect to the spendthrift trust, Orr wanted to know whether the liens attached only to prepetition income payments, or if the liens attached to his interest in the trust income such that the IRS could also collect its debt from the post-petition disbursements. That is, Orr asked the court to choose between two plausible construals of what constituted Orr's property upon filing for relief: (1) Orr owned only the income already disbursed to him from the spendthrift trust, or (2) Orr owned an interest in the spendthrift trust which was in itself an attachable property interest. Orr preferred the former construal since it would mean that the IRS' liens are dischargeable as to his trust income which is disbursed post-petition. In contrast, the IRS maintained that the federal tax liens had attached to Orr's prepetition interest in the spendthrift trust itself, and therefore the IRS could collect its debts from all of Orr's trust income whether disbursed prepetition or post-petition.
On April 7, 1997, the Bankruptcy Court ruled in favor of Orri.e., that the IRS could satisfy its tax liability only out of trust income distributions made prior to Orr's petition (i.e., through April 30, 1996).[2] In effect, the Bankruptcy Court held that, in these circumstances, Orr's interest in his spendthrift trust income was not attachable property until Orr had the right to alienate the disbursed income, even if he did have exclusive rights to all future income accrued during his life. In making this decision, that court relied on a case from 1945, United States v. Dallas Nat'l Bank, 152 F.2d 582 (5th Cir.1945), modified, 164 F.2d 489 (5th Cir.1947), modified, 167 F.2d 468 (5th Cir.1948), which was subsequently modified twice by the Fifth Circuit and, regardless, does not address the issue before this Court.
III. STANDARD OF REVIEW
This Court has capacity to hear appeals from decisions of a bankruptcy court, See 28 U.S.C. § 158, and it reviews findings of fact by the bankruptcy court *134 under the clearly erroneously standard and decides issues of law de novo. Matter of Haber Oil Co., Inc., 12 F.3d 426, 434 (5th Cir.1994); Matter of Killebrew, 888 F.2d 1516, 1519 (5th Cir.1989).
IV. DISCUSSION
a. The Nature of Federal Tax Liens Issued Pursuant to 26 U.S.C. § 6321
When a person fails to pay federal taxes, all property rights that the person has or acquires thereafter are subject to a federal tax lien immediately and automatically. See 26 U.S.C. § 6321. Such a lien will attach to all property acquired during the life of the lien, including property acquired after its assessment. Glass City Bank of Jeanette, Pa. v. United States, 326 U.S. 265, 66 S. Ct. 108, 90 L. Ed. 56 (1945). While the reach of a § 6321 lien is very broad, it does not apply to property acquired after bankruptcy. In re Connor, 27 F.3d 365, 366 (9th Cir.1994); see e.g., In re Braund, 289 F. Supp. 604 (C.D.Cal.1968), aff'd sub nom, United States v. McGugin, 423 F.2d 718 (9th Cir.), cert. denied, 400 U.S. 823, 91 S. Ct. 44, 27 L. Ed. 2d 51 (1970).
A § 6321 lien is not easily limited. First, such federal tax liens are not subject to any state laws that govern ordinary liens or to any state perfection requirements. See United States v. Security Trust & Sav. Bank, 340 U.S. 47, 51, 71 S. Ct. 111, 113-14, 95 L. Ed. 53 (1950); Leggett v. United States, 120 F.3d 592, 594 (5th Cir.1997). With respect to the operation of such liens, "there is no doubt that the paramount right to collect taxes of the federal government overrides a state statute providing for exemptions." Leuschner v. First Western Bank and Trust Company, 261 F.2d 705, 708 (9th Cir.1958). This means, for example, that barriers against creditorswhich are the hallmark of a spendthrift trusts created under state lawcannot prevent a federal tax lien from attaching to the beneficiary's interests in that trust. United States v. Rodgers, 461 U.S. 677, 683, 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983); United States v. Bess, 357 U.S. 51, 56-57, 78 S. Ct. 1054, 1057-58, 2 L. Ed. 2d 1135 (1958) (once it has been determined that state law has created property interests sufficient for federal tax lien to attach, state law "is inoperative to prevent the attachment" of such liens); see also, Dallas 1, 152 F.2d at 585 ("If [IRS statutes] are in conflict with State law, constitutional or statutory, the latter must yield"). Second, a § 6321 lien is not limited by a discharge in bankruptcy: such a discharge only extinguishes the debtor's personal liability, 11 U.S.C. § 524(a)(1), and does not prevent the enforcement of valid tax liens against the debtor's bankruptcy estate. 11 U.S.C. § 522(c)(2)(B).
Further, § 6321 is intended to be broad in scope and to apply to every interest the taxpayer has in property. See United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S. Ct. 2919, 2923-24, 86 L. Ed. 2d 565 (1985); Leggett, 120 F.3d at 594. The statutory language used in § 6321 "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. . . . `Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes'" National Bank of Commerce, 105 S.Ct. at 2924, citing, Glass City Bank, 326 U.S. at 267, 66 S.Ct. at 110.
In sum, when a federal tax lien is created pursuant to § 6321, it attaches (and remains attached) to all of the debtor's prepetition property interests, notwithstanding state law spendthrift trust restrictions on alienation. Three questions remain for this Court. First, what kind of prepetition property interest did Orr have? Second, does a § 6321 lien attach to such property interests? And, third, what effect, if any, did Orr's filing for bankruptcy have on the lien's prepetition attachment?
b. The Nature of Orr's Property Interest
Property is generally characterized as an aggregate of rights; "the right to dispose *135 of a thing in every legal way, to possesses it, to use it, and to exclude everyone else from interfering with it." Black's Law Dictionary 1095 (5th ed.1979). This so-called "bundle of rights and powers" can be divided among a number of persons, each of whom then possesses an interest that is less than absolute ownership. In re Terwilliger's Catering Plus, Inc., 911 F.2d 1168, 1178 (6th Cir.1990), cert denied, 501 U.S. 1212, 111 S. Ct. 2815, 115 L. Ed. 2d 987 (1991); In re Kimura, 969 F.2d 806, 810 (9th Cir.1992). Thus, there are various types of property interests.
While the Supreme Court mandates a broad scope of attachment to property under § 6321, the section does not define what kind of property interests constitutes an attachable property interest for § 6321 purposes. Instead, in this context, it is left to state law to determine whether a taxpayer has a property interest to which a federal lien may attach. See National Bank of Commerce, 105 S.Ct. at 2925-26; Bess, 357 U.S. at 55, 78 S.Ct. at 1057; Leggett, 120 F.3d at 594. Therefore, the Court must look to Texas law for a characterization of Orr's property interest in the spendthrift trust.
Texas courts have long upheld and enforced spendthrift trust provisions. Burns v. Miller, Hiersche, Martens, 948 S.W.2d 317, 320 (Tex.App.Dallas 1997 writ denied); Dierschke v. Central Nat'l Branch of First Nat'l Bank at Lubbock, 876 S.W.2d 377, 380 (Tex.App.Austin 1994, no writ). Under Texas law, a spendthrift provision generally prohibits a beneficiary from anticipating or assigning his interests in the trust. Id. Spendthrift trusts protect the beneficiary's interest in the trust corpus and income from claims of a beneficiary's creditors simply while the corpus and income remain in the trust and are held by the trustee. Id. The trust code essentially codified Texas common law. TEX.TRUST CODE ANN. § 112.035 (Vernon 1995); see Burns, 948 S.W.2d at 321-2.[3]
While Texas law prohibits creditors from reaching the beneficiary's income from a spendthrift trust, it does not deny that the beneficiary holds an "ownership interest" in the trust. Burns, 948 S.W.2d at 322. In Burns, the Court reasoned that, unless trust beneficiaries had an ownership interest in trust assets, spendthrift provisions preventing the alienation of such assets would be superfluous. Burns, 948 S.W.2d at 322. Thus, while the trustee holds bare legal title and the right to possession of spendthrift trust assets, it is "the beneficiary [who] is considered the real owner of the property, holding equitable or beneficial title." Id.; Hallmark v. Port/Cooper-T. Smith Stevedoring Co., 907 S.W.2d 586, 589 (Tex. App. Corpus Christi 1995, no writ); Dierschke, 876 S.W.2d at 381.
In the present case, it is undisputed that paragraphs 5 and 26 of the trust in question create a spendthrift trust and that Orr is the sole beneficiary. Consequently, under Texas law, Orr had a vested equitable interest in the trust income when the lien attached and when he filed for bankruptcy.
c. Federal Tax Liens Regularly Attach to Equitable Interests
The Court must now determine precisely in what manner a federal tax lien attaches to a beneficiary's equitable interest in a spendthrift trust. As noted above, Congress intended for liens to attach broadly under § 6321, see United States v. National Bank of Commerce, 472 U.S. 713, 719-20, 105 S. Ct. 2919, 2923-24, 86 L. Ed. 2d 565 (1985); Leggett, 120 F.3d at 594, and, accordingly, courts have regularly held that such liens attach to imperfect *136 property interests in general and to equitable property interests in particular. For example, federal tax liens attach to rights under a contract which are dependant upon future performances, Seaboard Surety Co. v. United States, 306 F.2d 855 (9th Cir.1962), to royalties which are contingent on a third party's performance, United States v. Phillips, 715 F. Supp. 81 (S.D.N.Y.1989), to equitable interests in the form of realty contracts, Runkel v. United States, 527 F.2d 914 (9th Cir.1975), and to a beneficiary's equitable interest in a land trust. In re Cavanaugh, 153 B.R. 224, 228 (Bankr.N.D.Ill.1993). As the Cavanaugh court explained: ". . . the beneficial interest in a land trust is clearly property of the beneficiary of the land trust, not the property of the land trustee. Thus, a federal tax lien against a beneficiary of a land trust does not attach to the underlying res in the land trust. However, a federal tax lien can attach to the beneficiary's beneficial interest in the land trust" (citations omitted). Id. at 228.
In the case relied on by the bankruptcy court (Dallas 1, supra), the Fifth Circuit addressed the issue of how a federal tax lien attaches to an equitable interest in a spendthrift trust, but that case is not determinative of the instant issue because this case involves a debtor/beneficiary who has filed for bankruptcy whereas Dallas 1 merely involved a debtor/beneficiary who continued to receive spendthrift trust payments after the lien had attached. Id. In Dallas National Bank, the debtor owed federal taxes and so a lien was declared on her property, including her interest in the income from a spendthrift trust. Dallas 1, at 584. Her interest gave her the right to receive non-discretionary payments of the income generated by real property, and the government wanted to satisfy its debt from those payments as they were disbursed. Id. The Fifth Circuit held that, in accordance with 26 U.S.C. §§ 3670 and 3671, federal liens attach to property acquired after creation of the lien. Id. at 585. Accordingly, Dallas 1 stands for the limited and well-established proposition that, when a federal tax lien attaches to a spendthrift trust, the IRS may collect its debt from all future disbursements of the trust income. Id. at 585.
Orr cites a phrase from Dallas 1 which, when taken out of context, appears to support his position that the lien cannot attach to post-petition disbursements until the moment they are paid. The passage gives this impression because, for its immediate purposes, the Fifth Circuit could treat the question of property rights as a simple "either/or" propositioneither the debtor has full property interests or no property interests at all:
[the debtor] has no title to the corpus of any property other than the profits after they have accrued and have been passed to her account and made available to her by the Trustee. In other words, after the "net revenues" . . . accrue, or are set apart and become payable to her, such net revenues then belong to her and are then subject to the lien . . . and are available as an appropriate res in a proceeding in rem by the Government to have a lien for delinquent taxes declared and enforced against such revenues. Id. at 585.
Although the Fifth Circuit did not need to decide the issue, this passage appears to say that federal tax liens attach to a beneficiary's interest in spendthrift trust income only as those income payments are madein other words, these liens could only attach on a payment-by-payment basis, as if the beneficiary had no property interest in the income until the moment in which she exercised full proprietary powers over the income.
However, such an interpretation of Dallas 1 conflicts with fundamental principles of property law which allow for a "bundle of rights" in any particular piece of property, Terwilliger's, 911 F.2d at 1178, and, further, the Fifth Circuit's subsequent rehearings of this case indicate that Dallas 1 must be read in accordance with these fundamental principles. In Dallas 2 and *137 Dallas 3, the court confirms its holding which is now an established tenet of tax law: that future disbursements from a spendthrift trust are subject to federal tax liens. Dallas 2, at 489; Dallas 3 at 469. In Dallas 2, the debtor asserted that Dallas 1 gave the government only the right to a single income disbursement, and not all subsequent ones. Dallas 2 at 489. In explaining the nature of the government's right of recovery, the Court stated it previously had held that:
the [debtor] had an interest in the trust property, but not an interest that could be sold; but that her share in the income after it accrued and was ready to be paid over to her was fully her property and could be subjected to the tax lien of the United States, and that the lien could be fastened on the future monthly income as it became payable to the taxpayer. Id. (emphasis added).
Thus, the phrasing of the modified opinion clarifies that the debtor had a property interest prior to the disbursements. Similarly, in Dallas 3, Judge Holmes states in his concurrence that the debtor "is the equitable owner for life of an undivided interest in Texas realty." Dallas 3, at 469.
The rehearings confirm that the beneficiary of a spendthrift trust has an equitable interest, and therefore it is inaccurate to read Dallas 1 as saying that such a beneficiary has no interest until paid trust income. Also, these cases confirm that the government can collect from all future payments. What the Dallas cases are really discussing in the phrase cited by Orr is the ability of a lien to extend to future payments and the mechanics of collection of those payments, instead of discussing the way a lien attaches to that equitable interest prior to bankruptcy proceedings. Indeed, Judge Holmes states that Dallas 2 holds that the debtor "had an interest in the trust property but not an interest that could be sold." Id. (concurring, Holmes, J.), and that the previous decision thereby was limiting the manner in which the government could collect its debt: it could collect the payments as they were made, but could not sell the debtor's equitable interest or the corpus itself.[4] Meanwhile, the case does not reach the question of the effect of bankruptcy proceedings on the government's right to collect those payments.
In sum, what can be gleaned from case law is that (1) underlying policy considerations call for broad attachment of federal tax liens to all sorts of property interests, including equitable interests, (2) that federal tax liens attach to an equitable interest in a spendthrift trust, and (3) that such attachment presumes that IRS will be able to collect all future disbursements. What cannot be answered from reading Dallas and the forgoing cases is whether, when a debtor files bankruptcy, the rule that liens attach only to prepetition property will somehow restrict the lien's attachment to only those disbursements made prepetition.
d. The Effect of Filing Bankruptcy on Federal Tax Liens
To determine whether Orr's filing for bankruptcy limits the attachment of the liens to only prepetition payments from the spendthrift trust, the Court must look to analogous situations since there is not a case directly on point. In Orr's case, he had an equitable interest and the federal liens attached to that interest. The question remains as to what (if anything) happened to that lien's attachment when Orr filed bankruptcy. As explained below, the effect of filing bankruptcy in such circumstances depends primarily on *138 the nature of the beneficiary's prepetition property interest: was the right to post-petition payments contingent, or was the right unconditional?
In In re Connor, 27 F.3d 365 (9th Cir. 1994), the IRS noticed a federal lien on the property of a retired supreme court justice of the Alaska Supreme Court ("Conner") pursuant to § 6321. Id. at 365. Two years later, Conner filed for bankruptcy and was discharged of personal liability for the tax debt. Id. at 366. The question in Connor was whether the lien attached to his prepetition beneficial interest in his retirement benefits such that the IRS could satisfy its debt from his post-petition disbursements.
Like Orr, Conner sought a determination that his future payments were "after-acquired property" and thus clear of the lien. Id. The Ninth Circuit noted that this question "turns upon the nature of the rights created by Alaska's judicial retirement system." Id. Finding that the right was not contingent on any future occurrence or service, the Court found that "this unqualified right to receive future payments constituted "property" within the meaning of § 6321." d. The Court noted that it did not make any difference that Conner himself had not made any contributions to the benefits program. Id That is, the court recognized that the relevant issue was simply that Conner's right to the payments was unqualified.
Several bankruptcy courts have also found this inquiry to be the relevant one when determining precisely how federal tax liens attach to prepetition property interests which guarantee the beneficiary post-petition disbursements. For example, in In re Wesche, 193 B.R. 76 (Bankr. M.D.Fla.1996), the court was faced with the issue of whether federal tax liens attach to the debtor's post-petition civil service retirement payments. That court found it "firmly established in case law that a federal tax lien attaches to a then existing right to receive property in the future." See also, Tillery v. United States, 204 B.R. 575 (Bankr.E.D.Okla.1996); Wessel v. United States, 161 B.R. 155 (Bankr. D.S.C.1993).
As with the retirement and civil service payments, Orr's right to the future payments was unqualified and guaranteed at the time the lien was created. Further, as in Connor, it does not matter that Orr made no contribution to the spendthrift trust to earn these future disbursements. Nor does it matter that Orr, like Conner, could not alienate his beneficial interest. What matters here is that Orr had an unconditional right to the income payments for the rest of his life.[5]
In sum, both the applicable statutes and the relevant case law indicate that the § 6321 lien must enable the IRS to collect the tax debt from all of Orr's trust income which is disbursed after April 30, 1996. First, under Texas law, the present right to future spendthrift trust income constitutes an equitable property interest. Second, in accordance with Congress' intent, § 6321 liens normally attach to a broad scope of property interests, including equitable interests. Third, when § 6321 liens attach to equitable property interests which unconditionally guarantee future income, they remain attached to that interest (and thus subject the future income to collection), even when the owner of the interest receives a personal discharge through bankruptcy proceedings. These three principles necessarily support the conclusion that the § 6321 lien attached to Orr's prepetition equitable interest in Trust B and remained attached to the interest after he received his personal discharge.
Finally, there are no extrinsic policy interests which could make the Court deviate from the logical conclusion of these principles. Orr suggests that policies implicit in both state law and the IRS code should temper the lien's attachment to his *139 property. First, with respect to his state law arguments, since § 6321 liens are never subject to state law barriers to collection, there is no reason to expect that the state's purposes in allowing for spendthrift trusts should somehow alter the way a § 6321 lien attaches to an equitable interest. That is, it is irrelevant that state law aims to afford settlors control over the corpus or to ensure the that a beneficiary will not lose the guaranteed income.
Second, Orr's contentions based on the Bankruptcy code are equally unpersuasive. He essentially asserts that, since the Bankruptcy code creates the 180-day window following a debtor's filing of bankruptcy during which new income is included in the bankruptcy estate, the code intends to guarantee that all of debtor's income disbursed after that 180 days must be free of attachmenti.e., all subsequent income must be part of the debtor's "fresh start." Yet it is a matter of settled precedent that, pursuant to § 6321 liens, the IRS collects debts from income disbursed after that 180-day window. Connor, 27 F.3d 365; Wesche, 193 B.R. 76; Tillery, 204 B.R. 575; Wessel, 161 B.R. 155. Orr's contentions are simply attempts to circumvent the critical issues which must decided by looking to federal law on the nature of federal tax liens and to state law on the nature of Orr's property interest.
V. CONCLUSION
For the forgoing reasons, the Court ORDERS that IRS' lien shall attach to all income distributions made to Orr from the spendthrift trust at issue (Trust B of the Unis Chapman Eichelberger Chapman Ranch Trust I), including those distributions made after April 30, 1996. Accordingly, the Court hereby ORDERS that the bankruptcy court's Order Granting Summary Judgment to Orr is OVERRULED.
NOTES
[1] The settlor originally created two trusts for Orr. Trust "A" distributed the principal to Orr in three separate payments when he reached the ages of 30, 35 and 40. Trust "B" is the trust at issue and automatically pays its full net income to Orr from the time he turned 30 years old. Trust "B" includes a spendthrift clause. Thus, in creating Trust B, the settlor explicitly created the exclusive power in Orr to collect the trust's income during his lifetime.
[2] While Orr petitioned for relief on November 1, 1995, Section 541(a)(5)(A) of the Bankruptcy Code creates a 180-day window during which petitioner's new income will be included in the estate subjected to prepetition liabilities. Therefore, Orr's "prepetition" estate effectively included, at the least, all disbursements made through April 30, 1996, rather than through his actual petition date of November 1, 1995. See 11 U.S.C. § 524(a)(5)(A). The Bankruptcy Court properly identified this cut-off date (of course, the identification of this date could be made independently of how the court construed the extent of Orr's property upon filing for bankruptcy).
[3] Of course, as explained above, such state law barriers to creditors do not apply to the IRS.
[4] Indeed, the quoted passage from Dallas 2 could be read as holding that the debtor had an interest prior to disbursement and that the lien could not attach to such an interest. However, it is unreasonable to read the case in that way because the court simply was not deciding that issue: rather, it was deciding at what moment the IRS could collect the money from heri.e., at what moment her property was "subjected" to the lien, and not at what moment the lien attached to her property interest.
[5] Notably, Orr also has testamentary power over the trust corpus. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552438/ | 243 B.R. 288 (1999)
In re Johnny Mack COURSON and Rose Ann Courson, Debtors.
Bankruptcy No. 97-33391.
United States Bankruptcy Court, E.D. Texas, Sherman Division.
October 22, 1999.
David Long, Tyler, TX, Chapter 12 Trustee.
Steve Turner, Austin, TX, for Farm Credit Bank.
James W. Litzler, Sulphur Springs, TX, for NE TX Farmers' Co-op.
*289 Charles A. Newton, Newton & Newton, P.C., Dallas, TX, for Debtors.
OPINION
DONALD R. SHARP, Chief Judge.
Now before the Court for consideration is the Amended Motion for Relief From Order Pursuant To Rule 60(b) Federal Rules of Civil Procedure filed by Farm Credit Bank of Texas (the "Bank"). This opinion constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Bankr.Proc. 7052 and disposes of all issues before the Court.
FACTUAL AND PROCEDURAL BACKGROUND
The Debtors filed a voluntary petition for relief under Chapter 12 of Title 11 and promptly confirmed a Plan of Reorganization. Pursuant to the Order Confirming Debtor's Chapter 12 Plan of Reorganization, the Chapter 12 Trustee was required to pay Farm Credit Bank of Texas and the other creditors holding secured claims pro rata. Farm Credit Bank of Texas asserts Sabine River Federal Land Bank's ("Sabine") interest in the matter. Sabine was provided notices of the filing, the 341, a copy of the Plan and notice of the hearings on the Plan. Farm Credit Bank of Texas's counsel filed a secured proof of claim in the amount of $30,187.23 and Notice of Appearance one day after the notice of the continued hearing on the Plan was served. Although Farm Credit Bank was not served such notice, Sabine was served with that notice. Neither Sabine nor Farm Credit Bank of Texas filed an objection to the Plan and neither appeared at the confirmation hearing. Farm Credit Bank of Texas does not contend that it did not receive notice of the December 10, 1997 confirmation hearing, nor does it contend that it did not receive notice of the Order of Confirmation entered on such date. On November 24, 1998, almost one year post-confirmation, Farm Credit Bank of Texas filed its Motion For Relief From Order Pursuant To Rule 60(b) Federal Rules of Civil Procedure, as amended thereafter on December 1, 1998. The Amended Motion complains that the Plan and order confirming the Plan "are deceptive at the very least." The Amended Motion avers that it is timely because a motion under Rule 60(b) of the Federal Rules of Civil Procedure must be filed within one year after the order complained of was entered or taken. The Amended Motion came on for consideration pursuant to regular setting and was taken under advisement following the time permitted for filing briefs.
DISCUSSION
Fed.R.Civ.Pro. 60(b) states that the Court may relieve a party from a judgment, after notice and hearing, "upon such terms as are just" for reasons of (1) mistake, inadvertence, surprise or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for new trial under Rule 59(b); . . . (6) or any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time, and for reasons (1)(2) and for (3) fraud . . . not more than one year after the judgment, order, or proceeding was entered or taken.
Bankruptcy Rule 9024 limits the applicability of Rule 60 F.R.Civ.P.: "Rule 60 F.R.Civ.P. applies in cases under the Code except that . . . (3) a complaint to revoke an order confirming a plan may be filed only within the time allowed by § 1144, § 1230 or § 1330. F.R.Bankr.P. 9024. 11 U.S.C. § 1230, which applies in this case, is specific:" (a) "On request of a party in interest at any time within 180 days after the date of the entry of an order of confirmation under 1225 of this title, and after notice and a hearing, the court may revoke such order if such order was procured by fraud." Fraud is the only ground upon which the Code permits revocation of an order confirming a plan under Chapter 12 and, even for so serious an infraction, revocation is an option for but *290 the limited period of 180 days. Congress is reluctant to undermine the finality of a confirmation order, for to revoke a confirmation order is a measure that upsets the legitimate expectations of both debtors and creditors. In re Fesq, 153 F.3d 113 (3rd Cir.1998) cert. denied 526 U.S. 1018, 119 S. Ct. 1253, 143 L. Ed. 2d 350 (1999). No fraud has been alleged in the case at bar. The basis of Farm Credit Bank of Texas' (the "Bank") Complaint is that although the Plan dictates pro rata payments for a term of sixty (60) months and "the Plan states that the Bank shall receive `pro rata' monthly payments of $631.20, the shortened amortization for [other secured creditors] causes insufficient funds (out of the monthly payments to the Trustee) to pay the Bank until month 43 of the Plan." See Amended Motion at Paragraphs 4 and 5. Farm Credit Bank of Texas is not receiving payments of $631.20 per month, however, at the end of the confirmed Plan's term it will have received its claim in full. The problem, which was presented to the Court as one of feasibility, is in fact a complaint over lack of adequate protection. The time to have made such a complaint expired upon the Order of Confirmation becoming final and non-appealable.
Farm Credit Bank of Texas offers no evidence of fraud for purposes of complaint pursuant to § 1230 and no evidence of mistake, inadvertence, surprise, excusable neglect or newly discovered evidence for purposes of Rule 60(b) pursuant to which it plead. Failure to understand a Plan of Confirmation and legally protect one's interests in connection with confirmation by a creditor who received proper notice throughout the case does not constitute fraud, especially when the creditor routinely appears in bankruptcy cases and is capable of understanding a plan of reorganization as well as the binding effect of confirmation. It does not rise to the level of fraud even if the plan is, as Farm Credit Bank opines, "confusing at best, deceptive at worst." The time for Farm Credit Bank of Texas to have made its objection to the feasibility or terms of the Plan has passed. Under 11 U.S.C. § 1227, "Except as provided in section 1228(a) of this title, the provisions of a confirmed plan bind the debtor, each creditor, each equity security holder, and each general partner in the debtor, whether or not the claim of such creditor, such equity security holder, or such general partner in the debtor is provided for by the plan, and whether or not such creditor, such equity security holder, or such general partner in the debtor has objected to, has accepted, or has rejected the plan."
CONCLUSION
Farm Credit Bank of Texas has demonstrated no sound legal basis upon which this Court could justify overturning the Order of Confirmation twelve months into the term of the plan. Therefore, its motion must be denied. In addition, Debtor's counsel's oral motion for fees in connection with the Amended Motion For Relief From Order Pursuant to Rule 60(b) must be denied without prejudice to reurging in a properly noticed fee application. To allow such fees would constitute an unauthorized modification of the confirmed Plan. An order will be entered accordingly. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552459/ | 243 B.R. 585 (1999)
Donna MIGNEAULT,
v.
Jeffrey R. MIGNEAULT.
No. 98-CV-498-B.
United States District Court, D. New Hampshire.
May 18, 1999.
*586 Grenville Clark, III, Gray, Wendell & Clark, Manchester, NH, for appellant.
James R. Davis, Bragdon, Berkson, Davis & Klein, P.C., Keene, NH, for appellee.
Timothy P. Smith, Manchester, NH, trustee.
MEMORANDUM AND ORDER
BARBADORO, Chief Judge.
Jeffrey Migneault filed a voluntary Chapter 7 bankruptcy proceeding in the District of New Hampshire Bankruptcy Court on July 22, 1997. Three months later, his ex-wife, Donna Migneault, commenced an adversary proceeding, arguing that a $12,000 debt that her ex-husband owed her pursuant to their divorce decree should be deemed non-dischargeable. The Bankruptcy Court agreed and Migneault's ex-husband has appealed. For the reasons explained below, I affirm the Bankruptcy Court's decision.
I. BACKGROUND[1]
Jeffrey and Donna Migneault were divorced on November 20, 1996, after 11 years of marriage. See Memorandum Opinion of Bankruptcy Court (hereinafter "Order") of June 30, 1998 at 1-2. Under the terms of their divorce decree, primary physical custody of the parties' three minor children, Danielle, Courtney, and Madison, was awarded to Donna Migneault. At the time of the divorce, Jeffrey Migneault was the business manager of an auto dealership, Toyota-Volvo of Keene, earning at least $70,000 per year.
Jeffrey Migneault was initially required by the divorce decree to continue to pay the mortgage, utility, and maintenance expenses on the parties' marital home on Sand Hill Road in Peterborough, New Hampshire, as well as child support payments of $250 per week. After the completion of the school year in June 1997, Donna Migneault and the children were to vacate the marital home, with child support payments increasing to $428 per week, and alimony payments commencing at $450 per month. After several modifications of the divorce decree prompted by Donna Migneault's plans to move out-of-state, and the impending termination of Jeffrey Migneault's employment at Toyota-Volvo of Keene, child support and alimony payments were set at $1,300 per month, and $200 per month respectively.
Jeffrey Migneault also was obligated under the divorce decree to pay a total of $12,600, in 18 monthly payments of $700, to compensate Donna Migneault for her share of the equity in their jointly-held marital home. See Order at 2. At the closing on the sale of the premises, Donna Migneault insisted on and received $3,520 from the broker working for her ex-husband in ex-change for her signature on the deed. She also obtained a $400 payment from her ex-husband on another occasion. Thus, Donna Migneault agrees that the $12,600 debt has been reduced to $8,650.
On July 22, 1997, Jeffrey Migneault filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Donna Migneault filed a complaint on October 20, 1997, objecting to the discharge of the $8,650 divorce-related debt.
Jeffrey Migneault left his position at the auto dealership on October 31, 1997, and is now employed by A.G. Edwards as an investment broker. After three months of training during which he earned a fixed salary of $3,500 per month, Jeffrey Migneault became a licensed stockbroker and began earning a minimum guaranteed base salary of $2,200 per month, plus an unlimited level of commissions.
*587 Donna Migneault was not employed outside the home during the marriage. For a period of time after the divorce, she worked at Nutri-Ceuticals, Inc., in Florida, earning $2,381.50 per month. She currently works as the part-time office manager at a law firm, earning approximately $900 per month.
II. STANDARD OF REVIEW
Bankruptcy Rule 8013 provides that "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Conclusions of law by the Bankruptcy Court are reviewed de novo. See In re Gamble, 143 F.3d 223, 225 (5th Cir.1998); In re Hamilton, 125 F.3d 292, 295 (5th Cir.1997). I apply these standards in ruling on Jeffrey Migneault's appeal.
III. DISCUSSION
The Bankruptcy Court based its dischargeability ruling on 11 U.S.C. § 523(a)(15), which provides that a debt is not dischargeable in bankruptcy if it is a debt
not of the kind described in paragraph (5)[2] that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a government unit unless
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
Although § 523(a)(15) is clumsily worded, it provides an exception to the general rule of dischargeability for debts that are incurred in the course of divorce or separation proceedings and an exception to the exception for cases in which either the debtor lacks an ability to pay the debt or the debtor will obtain a benefit from having the debt discharged that outweighs any harm that the creditor will suffer as a result of the discharge.
In granting Donna Migneault's request that the debt should be deemed non-dischargeable, the court determined that Jeffrey Migneault had the burden of proving that the debt should be discharged because he lacks the ability to pay. The court also relied on its estimation of Migneault's future earning capacity in rejecting his inability to pay argument. Finally, having placed the burden of proof on Donna Migneault with respect to the balance of benefit and harms issue, the court concluded that the harm that Donna Migneault would suffer if the debt was discharged outweighed any benefit that Jeffrey Migneault would obtain from the discharge. Jeffrey Migneault challenges each of these determinations.
A. The Burden of Proof
The bankruptcy court properly placed the burden of proving the applicability of the "Inability to Pay" exception on Jeffrey Migneault. Such a finding is both consistent with the language of § 523(a)(15) and supported by public policy considerations.
Section 523(a)(15) creates an exception to the general discharge in bankruptcy *588 for property settlement awards, and section 523(a)(15)(A) ("Inability to Pay") creates an exception to the exception, making the debt dischargeable in cases where the debtor-spouse is unable to pay. Long established case law holds that "the party claiming the exception to a statutory provision is required to prove the exception." Hill v. Smith, 260 U.S. 592, 595, 43 S. Ct. 219, 67 L. Ed. 419 (1923). Consistent with that understanding, it was Jeffrey Migneault's burden to show his inability to pay under § 523(a)(15)(A), as the bankruptcy court decided.
Allocating the burden of proof on the inability to pay issue to the debtor is also consistent with sound public policy. Such an allocation clearly places the burden of proof on the individual likely to be in possession of the evidence necessary to prove the exception. Thus, requiring the debtor-spouse to prove his "Inability to Pay" properly places the burden of proof on the individual who is seeking to invoke the exception and who is in the best position to uncover the evidence that pertains to the exception.
While I am mindful that the general purpose of bankruptcy is to provide the debtor with a "fresh start," § 523(a)(15) represents a legislative decision by Congress to exempt divorce-related property settlements from discharge in bankruptcy. See In re Jodoin, 209 B.R. 132, 140 n. 22 (quoting Grogan v. Garner, 498 U.S. 279, 287, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991)). I have considered the reasoning of In re Butler, 186 B.R. 371 (Bankr.D.Vt.1995), and the decisions of the other courts which would place the burden on proof on the creditor-spouse, and find their arguments unpersuasive.[3] Accordingly, I conclude that the bankruptcy court properly placed the burden of proving the "Inability to Pay" exception under § 523(a)(15)(A) on Jeffrey Migneault, the debtor-spouse.
B. The Inability to Pay Exception
Jeffrey Migneault testified at the bankruptcy hearing that his monthly income was $2,200 plus commissions, while his monthly expenses totaled more than $3,600. The bankruptcy court, however, considered Jeffrey Migneault's future earning potential as a factor in determining that he had the ability to pay the debt over time. See In re Slover, 191 B.R. 886, 892 (Bankr.E.D.Okla.1996) ("This court may consider the income that the Debtor is capable of producing . . ."); In re McCartin, 204 B.R. 647, 654 (Bankr. D.Mass.1996) (holding that the Debtor's future earning potential is an important factor to be considered); In re Taylor, 191 B.R. 760, 766 (Bankr.N.D.Ill.1996) (holding that proper construction of § 523(a)(15)(A) requires the court to consider a debtor's future ability to pay the claim over time). But see, In re Hesson, 190 B.R. 229, 237 (Bankr.D.Md.1995) (noting that "if the debtor has no `disposable income' to fund payment of the obligation, the debtor prevails, and the exercise is over"); In re Dressler, 194 B.R. 290, 305-06 (Bankr. D.R.I.1996) (noting that evaluating the debtor's circumstances at the time of trial provides for a more accurate analysis of the circumstances); In re Marquis, 203 B.R. 844, 851 (Bankr.D.Me.1997) (same).
Jeffrey Migneault offers several arguments as to why the bankruptcy court erred in relying on his future earning potential *589 in determining his ability to pay under § 523(a)(15)(A), including (1) that because the "Inability to Pay" exception is written in the present tense, only the time of trial can be used in determining the debtor-spouse's ability to pay; and (2) that the use of future earning potential to determine a debtor-spouse's ability to pay, and a subsequent ruling that the debt is non-dischargeable, might subject debtor-spouses to "draconian [contempt] orders" from state divorce courts. I am unconvinced by these arguments.
As another court recently noted in rejecting similar arguments,
"this Court's inquiry . . . is not controlled by a mere `snapshot' of the debtor's financial strength as of a single moment in time. Rather, this inquiry must allow a court to consider the debtor's prospective earning ability. . . . the court has no ability to revisit a debtor's financial circumstances after the conclusion of the trial on the 11 U.S.C. § 523(a)(15) issues. Given the relative ease with which a party could manipulate an inquiry based upon any single moment in time, cases under 11 U.S.C. § 523(a)(15) would be decided solely upon the timing of the filing of the bankruptcy and required complaint, unless a court can weigh the debtor's earning potential. We therefore hold that a Court may consider facts and circumstances concerning a debtor's future earning potential, as well as his or her income as of the date of the trial of the 11 U.S.C. § 523(a)(15) action in determining his ability to pay."
Smither, 194 B.R. 102, 107 (Bankr. W.D.Ky.1996). I agree that taking account of a debtor's earning capacity when evaluating an inability to pay claim both upholds the underlying purpose of 11 U.S.C. § 523(a)(15) and best guards against potential abuses. Accordingly, I conclude that the bankruptcy court properly considered Jeffrey Migneault's potential future income in determining his ability to pay under § 523(a)(15)(A).
The bankruptcy court made the factual determination, based on the evidence and testimony presented at the hearing, that Jeffrey Migneault's future earning potential as a stock-broker was not so speculative and conjectural that it rendered him incapable of paying the $8,650 owed under the property settlement. Because the bankruptcy court properly considered Jeffrey Migneault's future earning potential in determining his "Inability to Pay" under § 523(a)(15)(A), and because the court's subsequent evaluation of the facts and its conclusion that Jeffrey Migneault could pay the property settlement were not clearly erroneous, I affirm.
C. The Greater Benefit Exception
The First Circuit has not determined which party bears the burden of proving the applicability of the "Greater Benefit" exception under § 523(a)(15)(B). The bankruptcy court placed the burden of proof, however, with respect to this issue on Donna Migneault-a position which Jeffrey Migneault, for obvious reasons, did not contest in his appeal.[4] Not withstanding its decision on the burden of proof, the court ultimately ruled in Donna Migneault's favor, finding that the harm she would suffer as a result of the discharge was greater than any benefit that her ex-husband could obtain through a discharge of the debt.
In reaching this conclusion, the court evaluated a number of facts. Specifically, it considered that: (1) Donna Migneault had custody of the couple's three minor children, and was raising them on her own; (2) she could not take a full-time job, because doing so would leave her incapable of attending to the needs of her children; (3) the cost of additional daycare would negate the additional income she *590 might earn from increasing her hours; and (4) her monthly daycare expenses already exceed her monthly income, and her alimony and child support payments have since been reduced. In contrast, the court also determined that Jeffrey Migneault had the ability to pay the debt based upon his future earning capacity. Although I might not reach the same conclusions when reviewing the matter de novo, I cannot say that the bankruptcy court's balancing of harms was clearly erroneous.
Because the bankruptcy court's balancing of harms under § 523(a)(15)(B) was not clearly erroneous, I affirm the court's decision finding that the "Greater Benefit" exception, § 523(a)(15)(B), is inapplicable in this case.
IV. CONCLUSION
The Bankruptcy Court's decision holding that the property settlement debt in the amount of $8,650 is non-dischargeable under § 523(a)(15) and remains due to Donna Migneault is affirmed.
SO ORDERED.
NOTES
[1] Unless otherwise noted, facts are taken from the stipulated-to "Statement of Facts" submitted as part of Jeffrey Migneault's brief to this court.
[2] 11 U.S.C. § 523(a)(5) makes certain alimony, maintenance and support orders non-dischargeable regardless of the debtor's ability to pay. Donna Migneault has not appealed from the Bankruptcy Court's conclusion that the debt at issue is not covered by paragraph (5).
[3] As Jeffrey Migneault argues, many of these courts attempt to distinguish § 523(a)(15) from other non-dischargeable debt provisions under § 523(a), including payment of taxes, § 523(a)(1), and repayment of student loans, § 523(a)(8). As the argument goes, under § 523(a)(15), the creditor-spouse must make a prompt claim of non-dischargeability to prevent the property settlement from being discharged, see Bankr.R. 4007(c), whereas no such prompt claim is required under the other provisions. I find this argument unconvincing, however, because I do not read this "housekeeping detail," which requires creditor-spouses to raise their outstanding property settlement disputes promptly, as evidence of Congress' intent to place the burden of proof under § 523(a)(15)(A) & (B) on the creditor-spouse.
[4] While Donna Migneault notes in her brief that "Appellee respectfully suggests that the Bankruptcy Court incorrectly imposed the burden of persuasion on her relative to § 523(a)(15)(B)," she did not cross-appeal this ruling. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552468/ | 243 B.R. 851 (2000)
In re David Sampson KEACH, Debtor.
David Sampson Keach, Appellant,
v.
John Boyajian, Chapter 13 Trustee, Appellee.
BAP No. RI99-055.
United States Bankruptcy Appellate Panel of the First Circuit.
January 27, 2000.
*852 Peter G. Berman, Raskin & Berman, Providence, RI, on brief, for Appellant.
John Boyajian and Boyajian, Harrington & Richardson, Providence, RI, on brief, for Appellee.
Before: QUEENAN, HAINES, and BOROFF, Bankruptcy Judges.
QUEENAN, Bankruptcy Judge.
A debtor files under Chapter 7, is unsuccessful in an attempt to convince the court that his largest creditor holds a contract claim rather than a nondischargeable fraud claim, and also fails in his efforts to convert the case to Chapter 13. He then files under Chapter 13 to obtain the broader discharge available there for fraud claims. This second filing occurs after his general Chapter 7 discharge enters but while the prior case remains open. In his Chapter 13 plan the debtor proposes to devote all his disposable income to paying priority tax debt in full and a 5% dividend on the fraud claim. Has he proposed the plan in bad faith because of the 5% dividend and the occurrence of one or more of these prior events? That is the question here. It is one which has caused a split among circuits and is unresolved in this circuit. We hold none of these facts is indicative of *853 bad faith. Because the bankruptcy court thought otherwise and denied confirmation, we vacate the court's order and remand.
I. FACTUAL BACKGROUND
The bankruptcy court's findings and the record disclose the following. David Sampson Keach (the "Debtor") operates a home construction business as a sole proprietor. In 1989 he entered into an agreement with Claire L. Kuzniar ("Kuzniar") to remodel her summer cottage and convert it into a year round residence. Before the project was completed, Kuzniar complained of defects in the home's construction and design. She insisted upon their correction. When the parties could not agree, the Debtor walked off the job after having been paid $70,000.
Kuzniar sued in state court under counts for breach of contract and unfair and deceptive trade practices. In the subsequent jury trial the judge instructed the jury it could find the Debtor liable for unfair and deceptive trade practices if it found he had misrepresented his level of expertise and had effectuated a "bait and switch" with respect to the parties' written contract. The jury returned a verdict for Kuzniar on both counts. It awarded aggregate compensatory damages of $76,000 under both counts, and punitive damages of $30,000 under the count for unfair and deceptive trade practices. Judgment entered.
A month later the Debtor and his wife filed a Chapter 7 petition without appealing the judgment. Kuzniar countered by filing an adversary proceeding in the bankruptcy court requesting judgment declaring her debt nondischargeable as a debt for "false pretenses, a false representation, or actual fraud" within the meaning of section 523(a)(2) of the Code. She then filed a motion for summary judgment, urging the court to apply principles of issue preclusion based on the state court trial. Rejecting the Debtor's contention that issue preclusion should not apply because the jury had not found the required scienter, the bankruptcy court granted the motion. See In re Keach, 204 B.R. 851 (Bankr.D.R.I.1996). The Debtor took no appeal. He instead gave notice of conversion of the case to Chapter 13. On Kuzniar's motion, the court entered an order striking the notice to convert on the ground the amount of the Debtor's liabilities at the filing date made him ineligible for Chapter 13. The Debtor unsuccessfully attempted to appeal.[1] His discharge soon entered, discharging him of all debt except the Kuzniar debt and certain federal income tax debt.[2]
The Debtor's attempted appeal of the order denying conversion consumed about a year from the time the court declared the Kuzniar debt nondischargeable. Kuzniar, understandably, declined to wait. She obtained a judgment lien upon the Debtor's home and scheduled a sheriff's sale of the property. On February 11, 1998, shortly before the scheduled sales date, the Debtor commenced the present Chapter 13 case, thereby imposing an automatic stay of the sale. The prior Chapter 7 case had at that time not yet been closed, apparently because of the Debtor's appellate efforts. His Chapter 13 schedules listed the Internal Revenue Service as an unsecured priority claimant in the sum of $28,596 for income taxes owed for 1993 through 1997. Total unsecured debt was scheduled at $188,813, of which $180,000 was the Kuzniar claim, which had grown with interest.[3]
*854 The Debtor's initial Chapter 13 plan, filed on March 5, 1998, proposed to pay the priority federal income taxes in full, through monthly payments of $700, and to make a $13,000 lump sum payment on all other claims.[4] On September 22, 1998, the court denied confirmation because it believed the plan was not feasible and was not proposed in good faith. See In re Keach, 225 B.R. 264 (Bankr.D.R.I.1998). The Debtor then filed an amended plan reflecting an upward adjustment on priority tax debt to $35,769, which was to be paid in full through 60 monthly payments of $600. The amended plan proposed paying nonpriority unsecured debt, including the Kuzniar claim, by a $10,000 payment to the Chapter 13 trustee within three days after confirmation.[5] Kuzniar objected to the amended plan, contending it was not proposed in good faith. The Chapter 13 trustee objected on grounds of lack of good faith and lack of feasibility. At the evidentiary confirmation hearing the trustee withdrew his objection as to feasibility.[6] No party contended the Debtor was not devoting all his projected three year disposable income to plan payments. The court again denied confirmation, this time solely on the ground the plan was not proposed in good faith.
II. BANKRUPTCY COURT'S DECISION
In denying confirmation on bad faith grounds the bankruptcy court in both its decisions considered eleven nonexclusive factors which, as we shall see, a number of courts have employed to test good faith.[7] In its first decision, which the court incorporated into its second, the court emphasized six factors it thought indicative of bad faith:
1. The filing of the Chapter 13 petition before the Chapter 7 case having been closed.
2. The "nominal" dividend.
3. The Debtor's misrepresentation (apparently through counsel) that two judicial liens on his home had been avoided in the Chapter 7 case.
4. The absence of any change in the Debtor's circumstances between the Chapter 7 and Chapter 13 filings.
*855 5. The bulk of the debt being nondischargeable.
6. The Debtor seeking to accomplish in the Chapter 7 and Chapter 13 cases together a result that would not be possible in either alone.
The court particularly focused on the second and fifth factors, stating: "Under his plan, Keach will pay his $35,000 priority tax debt, and the mortgage on his $250,000 house, but will pay virtually nothing to the defrauded creditor, Claire Kuzniar, whose claim exceeds $180,000."[8] The court also expressed displeasure with the Debtor's testimony, saying: "[H]e defers to his accountant and his wife, and we do not have an adequate picture of what is fact and what is fiction when it comes to the Debtor's budget."[9] In criticizing the Debtor's testimony the court did not find the Debtor had misrepresented facts concerning his budget, only that he could not provide these facts.
In summary, prescinding from this testimony and reducing the decision to its essential elements, the bankruptcy court had three grounds for its conclusion that the plan was not proposed in good faith: (1) the nondischargeability of the Kuzniar debt in Chapter 7, (2) the 5% dividend paid on it, and (3) the filing of successive Chapter 7 and Chapter 13 petitions. The Debtor contends these matters are not indicia of bad faith.
III. MEANING OF REQUIREMENT OF "GOOD FAITH" PLAN PROPOSAL
Section 1325 of the Code contains the requirements for confirmation of a chapter 13 plan.[10] Among them is this seemingly innocuous condition: *856 the plan has been proposed in good faith and not by any means forbidden by law. . . .
11 U.S.C.A. § 1325(a)(3) (Law.Co-op.1987).
In the absence of contrary evidence, and there is no relevant legislative history, Congress presumably used the phrase "good faith" in its ordinary sense. Webster says it means "a state of mind indicating honesty and lawfulness of purpose."[11] Black offers this definition: "Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage, and an individual's personal good faith is concept [sic] of his own mind and inner spirit and, therefore, may not conclusively be determined by his protestations alone. . . ."[12] Black notwithstanding, there is one statutory definition which has broad commercial application. The Uniform Commercial Code defines good faith as "honesty in fact in the conduct or transaction concerned."[13]
Decisions under Prior Act
That the good faith mandate of section 1325 imposes a standard of simple honesty is confirmed by decisions under the prior Bankruptcy Act. The prior Act contained a similar requirement of good faith in the proposal of a plan under its Chapter XIII.[14] There is no reported case law construing this good faith confirmation requirement.[15] But many decisions applied the Act's mandate of good faith plan proposal which was contained in other chapters.[16] In all these decisions the courts *857 used the phrase in its ordinary sense of honesty. Occasionally, a party would try to expand its meaning by alleging there was a lack of good faith when a debtor asserted rights under bankruptcy law. In In re Koch,[17] for example, the debtor was accused of bad faith in filing a chapter XI petition for the purpose of terminating the administration of her property by an existing state court receiver. The court flatly rejected this contention, stating "the debtor has a legal right to have her property administered in bankruptcy."[18]
It was well established under the Act, therefore, that the mandate of good faith plan proposal required only honesty in the debtor's conduct related to the plan or the case. Good faith had nothing to do with the debtor's prepetition actions or the debtor's assertion of legal rights.[19]
Collier agrees that the concept of good faith had this limited meaning under the Act.[20] But the fourteenth edition of Collier, published while the Act was in effect, used broad language to describe the Act case law, stating: "Good faith itself is not defined but generally the inquiry is directed to whether or not there has been an abuse of the provisions, purposes, or spirit of Chapter XIII in the proposal or plan."[21] As we shall see, this vague statement has been a source of misdirection in the Code's case law.
Discharge Provisions of the Code
Since its enactment in 1978, the Bankruptcy Code has contained provisions on discharge under Chapter 7 and Chapter 13 which are quite different. No discharge is available in Chapter 7 for certain tax and student loan debt, or debts resulting from fraud, embezzlement, larceny, breach of fiduciary duty or willful and malicious injury to person or property.[22] Except for student loan debt as the result of a recent amendment, all such debt may be discharged in Chapter 13.[23] There is, however, a quid pro quo for the expanded discharge available under Chapter 13. The debtor must devote all his projected disposable income for three years to the plan's payments.[24] The difference between the discharge provisions of the two chapters lies at the heart of the problem here.
Pre-1984 Code Case Law on Nominal Payments or Debt Nondischargeable in Chapter 7
Decisions under the Code have dealt with all of the three essential factors that were persuasive to the bankruptcy court here nondischargeability of debt in Chapter 7, a small dividend and successive filings. Much of the Code case law is confounding, conflicting and disingenuous. And, having started in the wrong direction, *858 it gives insufficient recognition to the effect of two 1984 amendments. With apologies to Thoreau, who admired brevity,[25] these decisions require extensive analysis.
As originally enacted, the Code's only financial requirement for confirmation was that the plan be in the "best interests" of creditors, that is, that it provide creditors with at least what they would get in a Chapter 7 liquidation.[26] There was no mandate that the debtor devote all his projected three year disposable income to plan payments.[27]
When a debtor's plan provided for a zero or nominal dividend, creditors in the early years of the Code contended the proposal was not made in good faith. In Barnes v. Whelan (In re Barnes),[28] the debtor proposed full payment of debts she had cosigned with others and a 1% dividend on other debt. The court saw no lack of good faith. It observed that case law under the Act employed the phrase in its ordinary sense of honesty. The court found nothing in the wording of the Code or its legislative history indicating that section 1325 uses good faith in anything other than this ordinary and historic meaning. It concluded that requiring a certain level of repayment would impose a definition of good faith at odds with the phrase's meaning when Congress enacted section 1325(a)(3).[29]
Most other circuits took a different view of zero or nominal payment plans. The first of these decisions at the appeals court level was Tenney v. Terry (In re Terry).[30] The debtors, whose monthly expenses exceeded their income and who had no secured debt, proposed to pay nothing to their unsecured creditors. Relying on the Collier passage previously referred to and ignoring the Act case law, the court held the plan was an abuse of the "spirit" of Chapter 13 and hence filed in bad faith.
In Goeb v. Heid (In re Goeb),[31] the debtors proposed to pay their secured and priority creditors in full and to pay 1% to unsecured creditors, which was all they could afford. The lower courts thought this was not in good faith. Labeling "good faith" an ambiguous term, the court of appeals found guidance in American United Mutual Insurance Co.,[32] where the Supreme Court ruled a plan was not proposed in good faith when a city's agent for soliciting acceptances of its chapter IX plan had purchased claims for his own account without disclosure of this dual capacity. In holding the solicitation was not conducted in good faith, the Supreme Court spoke of "equity and good conscience," a phrase which the Goeb court thought instructive. The Goeb court also looked to the Collier passage directing an inquiry into "whether or not there has been an abuse of the provision, purpose, or spirit of chapter XIII in the proposal or plan." It fashioned from all this the following standard: "A bankruptcy court must inquire whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner."[33] The bankruptcy court's finding of bad faith had been based solely on the absence of substantial payment to unsecured, nonpriority creditors. In a preview of decisions to come, the court of appeals believed all "militating factors" should be taken into account in *859 the inquiry including, in the case before it, the debtor having no surplus in income after plan payments.[34] It remanded the case to the bankruptcy court for a consideration of all such factors.
Deans v. O'Donnell (In re Deans),[35] another zero payment case, came next. The lower courts had ruled the plan was not proposed in good faith solely because of its zero payment feature. The Fourth Circuit reversed and remanded, saying the proper inquiry should be into the "totality of the circumstances," including not only the plan's zero payment feature but also such factors as "the debtor's financial condition, the period of time payment will be made, the debtor's employment history and prospects, the nature and amount of unsecured claims, the debtor's past bankruptcy filings, the debtor's honesty in representing facts, and any unusual or exceptional problems facing the particular debtor."[36]
Ravenot v. Rimgale (In re Rimgale)[37] was another early court of appeals decision, the first to involve debt which is nondischargeable in Chapter 7. The debtor there proposed a 36 month plan paying 11% on unsecured debt, which included tort debt probably nondischargeable in Chapter 7 because it resulted from fraud or breach of fiduciary duty. The lower courts confirmed the plan. The Seventh Circuit reversed and remanded. Although nondischargeability of the debt in Chapter 7 was clearly what most influenced the court, it phrased the considerations to be taken into account in this manner: "(1) Does the proposed plan state [the Debtor's] secured and unsecured debt accurately? (2) Does it state the debtor's expenses accurately? (3) Is the percentage of repayment of unsecured claims correct? (4) If there are or have been deficiencies in the plan, do the inaccuracies amount to an attempt to mislead the bankruptcy court? (5) Do the proposed payments indicate a fundamental fairness in dealing with one's creditors?"[38] The court elaborated on what it meant by "fundamental fairness," saying the bankruptcy court should "examine the timing of the bankruptcy filings, the proportion of the total unsecured debt that is represented by the [state court] judgment, and the equities of classifying together ordinary consumer debt and a judgment debt arising out of intentionally tortious conduct."[39]
United States v. Estus (In re Estus),[40] also decided in 1982, involved both a zero payment plan and the proposed discharge of student loan debt nondischargeable in Chapter 7. The lower courts found good faith in the plan proposal and confirmed the plan. The United States, as holder of the student loan debt, appealed. The Eighth Circuit looked to a long list of factors which has since been adopted by a number of other courts. It believed a good faith inquiry should consider the following factors, in addition to the percentage of the proposed payment:
(1) the amount of the proposed payments and the amount of the debtor's surplus;
(2) the debtor's employment history, ability to earn and likelihood of future increases in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan's statements of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;
(5) the extent of preferential treatment between classes of creditors;
*860 (6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is nondischargeable in Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;
(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and
(11) the burden which the plan's administration would place upon the trustee.[41]
Estus is the first court of appeals decision to expressly include as an indicator of bad faith a debt's nondischargeability in Chapter 7, which was relevant to the facts before it, and the existence of multiple filings, which was not. The court concluded by stating a "cursory examination of several factors of the plan in the instant case reveals an apparent lack of good faith."[42] The several factors were: (1) the 15 month duration of the plan, (2) the discharge of a debt not dischargeable in chapter 7, and (3) the plan ignoring future income increases that the debtor, a federal employee, would likely receive.[43] Declining, however, to make a de novo determination on the good faith issue, the court reversed and remanded. There were similar court of appeals decisions under the pre-1984 version of section 1325.[44] They employed either the Estus factors or its equivalent the "totality of the circumstances," as the standard.
An early critic of this reasoning emerged in the person of Conrad K. Cyr, then a bankruptcy judge for the District of Maine and now a senior judge on the Court of Appeals of the First Circuit.[45] Pointing out that the best interests test imposed the only (at that time) minimum dividend requirement, Judge Cyr could see no basis for courts creating another minimum requirement out of whole cloth.[46] He believed the established historical meaning of good faith gives no indication Congress intended the phrase to play a critical role in determining a plan's minimal permissible dividend.[47] He was equally harsh on decisions which held, despite the broad discharge available under section 1328(a), that a proposal to discharge debt nondischargeable in Chapter 7 is an indicator of *861 bad faith.[48] Judge Cyr endorsed the proposal of the National Bankruptcy Conference to amend section 1325 by adding a provision requiring the debtor to commit projected three year disposable income to plan payments.
1984 Amendment on Disposable Income
Due largely to efforts of Judge Cyr and the National Bankruptcy Conference, Congress in 1984 inserted subsections 1325(b)(1)(B) and 1325(b)(2).[49] Section 1325(b)(1)(B) now states that upon an objection being made to confirmation the plan shall not be confirmed unless it "provides that all of the debtor's projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan."[50]
After a later amendment concerning charitable contributions, disposable income is now defined as follows:
(2) For purposes of this subsection, "disposable income" means income which is received by the debtor and which is not reasonably necessary to be expended
(A) for the maintenance or support of the debtor or a dependent of the debtor, including charitable contributions (that meet the definition of "charitable contribution" under section 548(d)(3)) to a qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4)) in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made; and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.[51]
Post-1984 Case Law on Nominal Payments and Debt Nondischargeable in Chapter 7
Since enactment of the 1984 amendment, some courts have recognized that a low level of payment can no longer be used as an indicator of bad faith. In Education Assistance Corp. v. Zellner,[52] for example, the court had this to say about present section 1325: "This section's `ability to pay' criteria subsumes most of the Estus factors and allows the court to confirm a plan in which the debtor uses all of his disposable income for three years to make payments to his creditors."[53]
But many post-1984 decisions, particularly those involving debt nondischargeable in Chapter 7, continue to list all the Estus factors, or a similar standard, with no apparent recognition that matters relating to income, expenses and level of payments are now dealt with by express Code language. In Neufeld v. Freeman[54] the debtor, an art and antique dealer, had sold articles consigned to her for sale and had pocketed the proceeds. She initially filed under Chapter 7, but then converted the case to Chapter 13 after one of her consignors filed a complaint seeking to have his debt declared nondischargeable as debt resulting from willful and malicious injury to property. The debtor's Chapter 13 plan proposed to pay about 30% of all unsecured debt. The lower courts rejected the contention of the creditor-consignor that the nondischargeability of his debt in Chapter 7, together with the debtor's discharge in an old Chapter 13 proceeding, indicated the plan was not proposed in *862 good faith. The Fourth Circuit reversed and remanded because the lower courts had "declined to consider" nondischargeability of the debt in Chapter 7 and the debtor's prior discharge under Chapter 13.[55] It reaffirmed its previous decision in Deans, which endorsed the Estus factors. The Neufeld court stated that although the nondischargeability of a debt in Chapter 7 "is not, standing alone, a sufficient basis on which to find bad faith . . . it is a relevant factor to be considered in the § 1325(a)(3) good faith inquiry."[56] The court made little effort, however, to hide its feelings on the matter of dischargeability, going on to say:
Resort to the more liberal discharge provisions of Chapter 13, though lawful in itself, may well signal an "abuse of the provisions, purpose, or spirit" of the Act, especially where a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of these claims under the plan. Similarly, a Chapter 13 plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest that the plan nevertheless represents a good faith effort by the debtor to satisfy his creditors' claims.[57]
In In re Smith,[58] the Seventh Circuit acknowledged the existence of the 1984 amendment on disposable income, but this made no difference in the result. The debtor there had operated a home repair business which "fleeced senior citizens by making repairs which [the debtor] knew were not necessary."[59] The State of Indiana obtained judgment against him on behalf of homeowners, whereupon the debtor filed under Chapter 13. He listed the State as the holder of about half his unsecured debt. Although his plan applied projected three year disposable income to plan payments, unsecured debt received only a 2% dividend. The lower courts found the plan to have been filed in good faith. The Seventh Circuit reversed and remanded. It recognized that under the 1984 amendment good faith "does not require a specific amount or percentage of payments to unsecured creditors."[60] But it nevertheless affirmed the "totality of the circumstances" standard which it had previously enunciated in Rimgale. Without citation of authority, the court stated: "The definition of good faith has historically not been limited to the debtor's accurately disclosing all material information on his plan and intending to fulfill it, but also to [sic] the factors Rimgale sets out, including the `debtor's motive in seeking Chapter 13 relief and `circumstances under which debts were incurred.'"[61]
In Ohio v. Doersam (In re Doersam),[62] the debtor's plan proposed a 19% dividend on unsecured debt, mostly student loan debt which was nondischargeable in Chapter 7 unless its payment imposed an undue hardship on the debtor. The lower courts had denied confirmation, finding bad faith because of the proposed discharge of the student loan debt and because of the debtor's "questionable" budgeting of $400 as a monthly food expense for herself, her working daughter and her grandchild. The Sixth Circuit affirmed based on the Estus factors, with no recognition that many of these factors are now covered by the 1984 amendment on disposable income. The court did not, however, conceal the real reason for its decision. It said: "The bulk of [the debtor's] unsecured indebtedness consists of student loans which would not have been dischargeable under Chapter *863 7. [The debtor] made absolutely no effort to repay these loans despite their long-term character, and despite the fact that they were instrumental in her securing a position paying approximately $24,000.00 per year."[63]
The debtor in Solomon v. Cosby (In re Solomon)[64] was a doctor who had been sued in state court by three former patients alleging sexual misconduct and claiming damages totaling $160 million. This is conduct which if proven would likely establish the debt as nondischargeable in Chapter 7 as debt resulting from willful and malicious injury to the person. The debtor filed under Chapter 13 before the state court suit went to trial. With no reference to the intervening 1984 amendment on disposable income, the court affirmed the "totality of the circumstances" standard set out in its prior decision in Neufeld. It reversed and remanded so the bankruptcy court could consider whether there had been an "abuse of the provisions, purpose, or spirit of Chapter 13," expressing its belief that a good faith inquiry encompasses examination of a debtor's prepetition conduct.[65]
The Third Circuit disagrees with this line of cases. It believes a good faith inquiry should not consider the debtor's prepetition conduct or the nondischargeability in Chapter 7 of debt included under a Chapter 13 plan. In In re Lilley,[66] the United States Secret Service, many years before, had seized the debtor's business assets in the mistaken belief he was a counterfeiter. Although the Service returned the assets when it discovered the mistake, the debtor's business ultimately failed, which he attributed to the seizure. The debtor thereafter refused to pay his federal income taxes. When the tax debt mounted and legal efforts failed, he filed under Chapter 7. He was confronted with a bankruptcy court order declaring the tax debt nondischargeable as debt "resulting from willful tax evasion" within the meaning of section 523(a)(1)(C). The debt limits for eligibility under Chapter 13 had in the meantime been increased, so the debtor soon filed under that chapter. The district court dismissed the case because of the tax debt's nondischargeability in Chapter 7. The Fourth Circuit reversed because it believed the "totality of the circumstances" standard should be employed.[67] Significantly, however, the court rejected the factor concerning nondischargeability of debt in Chapter 7, saying it did so "[i]n light of In re Gathright. . . ."[68] The decision in In re Gathright[69] is a thorough critique of case law employing the Estus factors or the totality of the circumstances standard. The court observed that factors having to do with the debtor's income, expenses and prior filings are inconsistent with Code provisions inserted in 1984, and the factor concerning Chapter 7 nondischargeability conflicts with the broad discharge expressly granted by section 1328(a).[70]
Case Law on Multiple Filings
The bankruptcy court in the present case thought it bad faith for the Debtor to file his Chapter 13 petition after his Chapter 7 filing without experiencing any change of circumstances. The court stated: "The debtor has not incurred new debt nor is it foreseeable his income will be supplemented by a source other than that *864 of his house framing business" [footnote omitted].[71]
As has been seen, included among the Estus factors is "the frequency with which the debtor has sought relief under Bankruptcy Reform Act. . . ."[72] Prior bankruptcy filings are also in the general mix of the "totality of the circumstances" standard.[73] The present case concerns a special category of successive filings, the filing of a Chapter 7 case which discharges all but section 523 nondischargeable debt, followed by the filing of a Chapter 13 case designed to handle the remaining debt. And the Chapter 13 filing here occurred while the Chapter 7 case remained open.
Johnson v. Vanguard Holding Corp. (In re Johnson)[74] is the only court of appeals decision where bad faith was alleged to be present solely because of multiple filings, there the filing of successive Chapter 13 cases. The lower courts had refused to confirm the debtor's Chapter 13 plan because they found bad faith present due to the debtor having commenced the case shortly after her prior Chapter 13 case was dismissed following defaults in plan payments. The Second Circuit rejected the contention that the two filings constituted bad faith per se. The court noted that nothing in the Code (as it then read) precluded repetitious filings. Observing that the debtor asserted she had lost her job since the first filing, the court remanded the case for the bankruptcy court to consider whether she had suffered a change in circumstances justifying her prior defaults and her second filing.
Johnson was handed down before the 1984 legislation. That legislation covered more than the topic of disposable income. It also dealt with multiple filings by adding Code section 109(f), now 109(g), which provides as follows:
(g) Notwithstanding any other provision of this section, no individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if
(1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or
(2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.[75]
In Johnson v. Home State Bank[76] the question before the Supreme Court was whether a debtor can include a mortgage lien in a Chapter 13 plan after the personal obligation secured by the lien has been discharged in a prior Chapter 7. The Court first concluded that such a mortgage lien is a "claim" subject to inclusion in a Chapter 13 plan.[77] It then dealt with the contention that even though a nonrecourse lien might normally be considered a claim, it should not be so considered when it is merely the remainder of an obligation for which the debtor's personal liability has been discharged in a prior Chapter 7 case. Serial filings under Chapters 7 and 13, the mortgagee asserted, evade the limits Congress intended to place on these remedies.[78] The Court noted the express filing prohibition contained in section 109(g). It also referred to section 727(a)(8) and section 727(a)(9), which place limits on successive discharges under Chapter 7. The Court believed that the absence of a like statutory prohibition against successive *865 Chapter 7 and Chapter 13 filings indicates Congress did not wish to categorically foreclose the benefit of Chapter 13 to one who has previously received relief under Chapter 7.[79] The Court was careful to observe, however, that creditors have the benefit of all the various requirements for the confirmation of a Chapter 13 plan, including the provisions on best interests of creditors, disposable income, good faith and feasibility. The Court declined to deal with the issues of good faith and feasibility because the lower courts had not addressed them, leaving these questions for consideration on remand.[80]
Prior to the Court's decision in Johnson v. Home State Bank, courts of appeal had differed on whether a mortgage lien remaining after discharge of the underlying obligation in Chapter 7 is a "claim" subject to being dealt within a subsequent Chapter 13.[81] In two of these decisions, In re Saylors[82] and In re Metz,[83] it was also contended the Chapter 13 plan was not proposed in good faith. Both cases involved only mortgage debt, with no complication of nondischargeability under Chapter 7. In both, the bankruptcy court found good faith and the court of appeals left this undisturbed. Neither the Saylors nor Metz court could find any statutory prohibition against the successive filings. In Saylors the district court had found bad faith as a matter of law because the debtor filed his Chapter 13 case while the Chapter 7 case remained open but after the discharge had entered. The court of appeals saw no bad faith in this. It recognized that for practical reasons there is often a delay in closing a Chapter 7 case. In its view, to prevent a debtor from filing a Chapter 13 petition during the period of delay collides with the intent of Congress to make Chapter 13 available to eligible debtors.[84] In upholding the bankruptcy court's decision, the Saylors court used the Estus factors and the Metz court employed the "totality of the circumstances" test.
The bankruptcy court in the present case thought it was indicative of bad faith that not only did the Debtor file a Chapter 13 case following a Chapter 7 filing, but also that he did so while the Chapter 7 case remained open, albeit after the Debtor's general Chapter 7 discharge had entered. Although not always treating the question in terms of good faith, courts have split on whether it is permissible for a debtor to file a new case while his prior case remains open.[85] Some courts permit the second filing if a discharge has not *866 issued in the first case.[86] They distinguish the Supreme Court's decision in Freshman v. Atkins.[87] There, the debtor's discharge in his first case was contested. The contest was still pending when he filed a second petition requesting a discharge of new debts as well as those included in his first petition. The lower courts had denied a discharge as to the old debts and granted it as to the new debts. The Supreme Court affirmed, stating: "Denial of a discharge from debts provable, or failure to apply for it within the statutory time, bars an application under a second proceeding for discharge from the same debts."[88]
A number of decisions deal with a more common problem the filing of a Chapter 13 petition in order to discharge debt which was not dischargeable in the debtor's prior Chapter 7 case. Most look to the Estus factors or their equivalent, the "totality of the circumstances." But the nondischargeability of debt in Chapter 7 is obviously the factor which is most important to these courts. In Pioneer Bank v. Rasmussen (In re Rasmussen),[89] a decision cited by the bankruptcy court in the present case, the bankruptcy court had ruled that a $25,000 debt owed a bank was nondischargeable as a debt due to fraud. Some $75,000 of other unsecured debt was discharged. The debtor filed a Chapter 13 petition weeks after his Chapter 7 case was closed and proposed to pay a 1.5% dividend to the bank, then his only unsecured creditor. Finding good faith, the bankruptcy court confirmed the plan. The district court affirmed, but the Tenth Circuit reversed. It referred to the eleven Estus factors, although it recognized the Estus circuit had modified those factors in light of the 1984 amendment.[90] Stating it was applying a standard of "totality of the circumstances," the court concluded that the plan had not been proposed in good faith. It said:
We reach this conclusion because the Chapter 13 filing was a manipulation of the bankruptcy system in order to discharge a single debt for de minimus payments under a Chapter 13 plan which was ruled not dischargeable under an immediately previous Chapter 7 filing, when the debtor could not originally meet the jurisdictional requirements [as to debt limits] of Chapter 13.[91]
After Rasmussen, bankruptcy appellate panel decisions in the Tenth Circuit have gone both ways on similar facts, depending on the initial "finding" of the bankruptcy judge as to good faith.[92]
The bankruptcy court in the present case also cited In re Cushman,[93] which did not involve debt nondischargeable in Chapter 7. The debtor's problem there was a $15,845.17 claim owed Ford Motor Credit Company secured by her car. The discharge in the debtor's Chapter 7 case left her with only this lien. She soon filed a Chapter 13 petition, saying she had stopped making her car payments because of upcoming dental expenses.[94] Her Chapter 13 plan proposed to pay Ford $9,263, *867 the value she placed on the car, over 48 months. Although no party claimed the debtor was not devoting all her disposable income to the plan (the Chapter 13 trustee recommended confirmation), the court voiced its doubts on this.[95] The court also believed she or her counsel had planned the subsequent filing of the Chapter 13 petition when she commenced her Chapter 7 case.[96] It made no mention of the effect of the 1984 legislation upon the Estus-type factors. Although conceding that a so-called "Chapter 20" case is not "prohibited per se," the court believed such a case is "not favored and must be closely scrutinized."[97] It set forth a list of factors which it thought were relevant to Chapter 20 cases. These factors were also referred to by the bankruptcy court below.[98] Most troubling to the Cushman court was the debtor's attempt "to accomplish through a chapter 20 what simply is not permitted in either chapter standing alone," namely, stripping down Ford's lien to its replacement value. The court was also concerned with the absence of any change in the debtor's circumstances between the two filings, as well as the zero payment to unsecured creditors (because none existed).[99] In light of all this, the court found bad faith.[100]
A "Chapter 20" case seems to have the best chance of success if it involves no question of Chapter 7 nondischargeability, no strip-down of a lien and no initial design on the part of the debtor to file both cases.[101] The presence of any one or more of these circumstances can be fatal to the debtor.[102] Some courts, however, are not troubled by a Chapter 13 case involving debt nondischargeable in Chapter 7. In In re Dickerson[103] the court observed that under Johnson v. Home State Bank there is no categorical bar to successive filings. The court saw nothing wrong with the debtor taking advantage of the broader discharge available in Chapter 13.[104] The vague parameters of the "totality of the circumstances" standard, which was controlling under circuit precedent, allowed the court to find good faith by considering such matters as the debtor's conservative life style.
IV. CONCLUSION
The conclusion from all this seems inescapable. The meaning of the term "good faith" has gone far afield from that intended by the drafters of the Bankruptcy Code. Applying individualized standards of moralistic decision-making reserved only for Congress, many courts have interpreted "good faith" to mean fairness to creditors as determined by the court. But fairness is a relative term, and there is no evidence that Congress intended that *868 courts apply such a fairness standard to each Chapter 13 plan. To the contrary, as pointed out by the writers,[105] many of the factors employed in the case law have been preempted by contrary judgments explicitly made by Congress.
We begin with basics. The meaning of good faith is simple honesty of purpose. This is the phrase's common English meaning. It is also how the phrase is used in commercial law. And, if there can be any doubt that this was its meaning intended by Congress when it passed the Code, that doubt is resolved by examination of decisions under the prior Act. In applying the same good faith requirement under the prior Act, courts looked only to the honesty of the debtor's postfiling conduct. They did not concern themselves with the debtor's prefiling conduct or the "purpose or spirit" of bankruptcy law. If Congress intended to change this pre-Code approach, we must presume Congress would have expressed that intent.[106]
The contrary view of good faith, so prevalent in the case law, is blatantly inconsistent with a debtor's clear statutory rights. Section 1328 expressly grants a debtor a discharge even if the debts result from conduct such as fraud and hence are nondischargeable in Chapter 7. Section 1325 expressly requires a debtor only to devote all projected three year disposable income to the plan and provide creditors with at least what they would get in Chapter 7. And the Code contains no prohibition against the debtor filing a Chapter 13 petition after a Chapter 7 case, not even a prohibition against filing while the Chapter 7 case remains open.
No theory of statutory interpretation, not the textualist school, not the intentionalist school nor any other, supports a contrary reading of these Code sections. The Estus line of decisions represents pure judicial legislation. One might disagree with the policy choices made by Congress in permitting a broad discharge under Chapter 13, or in placing only limited restrictions on successive filings. But those choices having been made and clearly expressed, courts are bound to enforce them. Any contrary interpretation would establish nonstatutory eligibility requirements for Chapter 13.[107]
This case is reminiscent of what was before the Supreme Court in Toibb v. Radloff.[108] The debtor there was an unemployed consultant who had converted his Chapter 7 case to Chapter 11. It was contended that to qualify for relief under Chapter 11 a debtor must have business operations. Apparently divining the "spirit" of Chapter 11, some courts had so held.[109] But the Supreme Court found no provision in the Code requiring the presence of a business for eligibility under Chapter 11. It noted the availability of Chapter 11 to a "person."[110] It regarded the "plain language" of the statute as compelling.[111] References in legislative history to debtors engaged in business were unpersuasive to the Court. It believed *869 these reflected no more than a congressional expectation that parties engaged in business would constitute the bulk of Chapter 11 debtors.[112] Much the same can be said of the reference in the Code's legislative history to the bankruptcy policy favoring a fresh start for the "honest" debtor, a reference which has been seized upon by some courts to deny Chapter 13 relief for a debtor guilty of prefiling misconduct.[113]
The decisions finding bad faith from circumstances such as those present in this case do so in a fashion which attempts to obscure their true basis, usually disapproval of the debtor's conduct which created the debt. Courts use the Estus factors as a screen for their real rationale. And they call the good faith issue a question of fact. They employ the clearly erroneous rule to affirm or reverse, whichever is consistent with their notion of the desirable result.[114] But matters such as the scope of a discharge or the minimum permissible dividend do not involve factual issues. They concern legal rights.
There is a further defect in the standard consisting of the Estus factors. In employing diverse factors and permitting a court to rely upon any one or more of the factors, the standard provides little guidance, *870 as has been observed.[115] One court has described working under the Estus standard this way: "The trick seems to be in not placing too much weight on any single factor, but in the court's looking at how a number of factors in any given case operate together to betray a plan proposed in bad faith."[116] The public and the bar deserve something better then this legerdemain. To the extent the nature of a question allows, the rule of law should be a law of clear rules.[117]
It was error for the bankruptcy judge here to take a jaundiced view of the Debtor's second filing because it was made while the prior Chapter 7 case remained open. The Code contains no mandate against such a second filing. There is no indication in the record, moreover, that at the time of the Chapter 13 filing property claimed as property of the Chapter 13 estate was still property of the Chapter 7 estate. And, as we have seen, many courts permit such a filing if it is made after the discharge enters in the prior case, which is our situation. There is no question here, as there was in Freshman v. Atkins,[118] of a debtor attempting to relitigate in his second filing a pending contest over the discharge of debts included in his first filing. As we have also seen, some courts, like the bankruptcy court here, require a change in circumstances to justify the second filing. Such a requirement satisfies the concern that a debtor have an honesty of purpose in filing the second case. The Debtor here did have a change in circumstances, although the bankruptcy court thought otherwise. In fact, he had two changes of circumstances between the first and the second filing. Kuzniar was about to have the sheriff sell the Debtor's home. And the Kuzniar debt had been declared nondischargeable under section 523(a)(2)(A). There is therefore no lack of good faith because of this second filing even under an expansive view of good faith. Moreover, the Debtor did his best to avoid the second filing by attempting to convert the Chapter 7 case to Chapter 13. His second filing is thus quite different from the situation where a debtor files a second time in order to obtain reimposition of the automatic stay after having unsuccessfully opposed a lifting of the stay in the prior case.[119]
It was also error for the bankruptcy judge here to see bad faith in the Debtor's Chapter 13 plan because it promised creditors less than what the bankruptcy judge thought they deserved on account of the Debtor's prefiling conduct. In Section 1325, Congress set the minimum dividend by employing the disposable income and the best interests tests. Congress having spoken, no judge may raise the bar.
And it was error for the bankruptcy judge to treat as an indicator of bad faith the proposed discharge of debt which was nondischargeable in the Debtor's Chapter 7 case. Congress has spoken clearly in Section 1328 by providing for the discharge of debt deemed not dischargeable in Chapter 7. No judge may override Congress's decision to do so, regardless of the judge's distaste in participating in the discharge of a debt immorally incurred. Right and wrong are the province of *871 judges, but only within the parameters set by the legislative branch.
We do not hold today that an examination of the surrounding circumstances is inappropriate in determining whether a debtor has met the good faith requirement of section 1325. Even the simplistic word "honesty" can be elastic in its perception and application, subsuming as it does the elusive element of "intent" which can be judged only by examining surrounding circumstances such as the debtor's candor with creditors and the court. But we do say that courts must be very careful not to allow the freedom of such an examination to seduce them into a moralistic override of Congress' determinations. A review of the surrounding circumstances should and must be limited to an examination of only those circumstances which are relevant. The impact of the debtor's prefiling conduct upon the dischargeability of debt had the case been filed under Chapter 7 is not a factor which is relevant to good faith. Nor is the filing of a Chapter 13 case after a prior Chapter 7 case and following a change of circumstances, such as a change in the debtor's financial circumstances or a ruling of nondischargeability in the Chapter 7 case.
Here, the bankruptcy judge wove impermissible considerations into his findings. We are inclined to say that, absent those considerations, there is no remaining obstacle to confirmation. Yet, the record is not sufficiently clear for us to make that determination. We therefore VACATE the bankruptcy court's order denying confirmation of the Debtor's plan and REMAND the case to that court for further proceedings consistent with this decision.
SO ORDERED.
NOTES
[1] The appeal was initially unperfected, which resulted in a dismissal. A later attempt to appeal was withdrawn.
[2] See 11 U.S.C.A. § 523(a)(1) (Law.Co-op. 1997).
[3] The other claims listed were municipal excise tax claims and federal income tax debt. The schedules listed none of the claims discharged in the prior Chapter 7, including two small claims secured by judicial liens on the Debtor's home.
[4] The Chapter 13 trustee's fees were to come from both of these payments.
[5] The amended plan also indicated that $3,500 had been paid to the Chapter 13 trustee prior to the plan's filing, through monthly payments under the prior plan, which the Debtor wished to be applied toward the trustee's fee. Both the initial and amended plan proposed direct monthly payments to the two holders of mortgages on the Debtor's home.
[6] The Debtor had in the meantime filed amended schedules I and J concerning expenses and income. Although the record does not contain these amended schedules, the transcript of the confirmation hearing indicates income was increased, primarily through earnings of the Debtor's wife who had previously not worked outside the home. The source of the $10,000 lump sum payment was a loan from a friend of the Debtor which the friend had committed conditional on confirmation. He required the Debtor to make no payment on this loan until completion of plan payments.
[7] The bankruptcy court considered the following eleven factors: 1. The proximity in time of the Chapter 13 filing to the Chapter 7 filing. 2. The percentage of proposed repayment. 3. The debtor's past bankruptcy filings. 4. The debtor's honesty in representing facts. 5. Any unusual or exceptional problems facing the debtor. 6. The nature and amount of unsecured claims. 7. Whether a major portion of the claims sought to be discharged arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of those claims. 8. Whether, despite the most egregious pre-filing conduct, the plan represents a good faith effort to satisfy creditors' claims. 9. Whether the debtor has incurred some change in circumstances between the filings that suggests a second filing was appropriate and that the debtor will be able to comply with the terms of a Chapter 13 plan. 10. Whether the two filings accomplish a result that is not permitted in either Chapter standing alone. 11. Whether the two filings are an attempt to manipulate the bankruptcy system or are an abuse of the purpose and spirit of the Bankruptcy Code.
[8] Decision of March 16, 1999, p. 4.
[9] Id.
[10] Section 1325 provides:
(a) Except as provided in subsection (b), the court shall confirm a plan if
(1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title;
(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;
(3) the plan has been proposed in good faith and not by any means forbidden by law;
(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 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; and
(6) the debtor will be able to make all payments under the plan and to comply with the plan.
(b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor's projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
(2) For purposes of this subsection, "disposable income" means income which is received by the debtor and which is not reasonably necessary to be expended
(A) for the maintenance or support of the debtor or a dependent of the debtor, including charitable contributions (that meet the definition of "charitable contribution" under section 548(d)(3) to a qualified religious or charitable entity or organization) (as that term is defined in section 548(d)(4)) in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made; and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
(c) After confirmation of a plan, the court may order any entity from whom the debtor receives income to pay all or any part of such income to the trustee.
11 U.S.C.A. § 1325 (Law. Co-op.1987 & Supp.1999).
[11] WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 978 (Merriam-Webster Inc. 1986).
[12] BLACK'S LAW DICTIONARY 623 (5th ed.1979).
[13] U.C.C. § 1-201(19). In a sales transaction involving a merchant, the Uniform Commercial Code contains a definition of good faith having both subjective and objective elements: "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." U.C.C. § 2-103(b).
[14] See 11 U.S.C. § 1056(a)(4) (repealed 1978) (requiring court to be satisfied that "the proposal and its acceptance are in good faith and have not been made or procured by any means, promises or acts forbidden by this Act.") See also 11 U.S.C. § 1051 (repealed 1978) (containing same confirmation requirement).
[15] See 8 LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY ¶ 1325.LH[1][a] at 1325-62.3 (15th ed. rev.1999).
[16] See, e.g., American United Mut. Life Ins. Co. v. City of Avon Park, 311 U.S. 138, 144-45, 61 S. Ct. 157, 85 L. Ed. 91 (1940) (when city's agent for solicitation of acceptances of its Chapter IX plan purchased claims on his own account without disclosure of this dual capacity, and then voted those claims in acceptance of plan, conduct deemed not in good faith); Gonzalez Hernandez v. Borgos, 343 F.2d 802, 805-06 (1st Cir.1965) (Chapter XII plan not proposed in good faith if plan is vehicle to place debtor's assets beyond reach of his dependent children); Texas Hotel Sec. Corp. v. Waco Dev. Co., 87 F.2d 395, 399-400 (5th Cir.1936), cert. denied, 300 U.S. 679, 57 S. Ct. 671, 81 L. Ed. 883 (1937) (no bad faith in voting of purchased claims in rejection of plan in order to advance business interest of claim purchaser to acquire lease rights in debtor's hotel); In re Norman Fin. & Thrift Corp., 298 F. Supp. 336, 338 (W.D.Okla.1969) (finding no evidence that acceptances of Chapter XI plan "were obtained by fraudulent or other means violative of the provisions, purpose or spirit of Chapter XI"); In re Stanley Karman, Inc., 279 F. Supp. 828 (S.D.N.Y. 1967) (no good faith in proposal of plan by Chapter XI debtor in possession in light of debtor's postpetition failure to take action to enhance estate such as setting aside debtor's prepetition fraudulent transfers); In re Village Men's Shops, Inc., 186 F. Supp. 125, 129 (S.D.Ind.1960) (declining to find bad faith in conduct of parties soliciting and accepting plan and observing that "specific inquiry should be whether, under the circumstances of the case, there has been an abuse of the provision, purpose, or spirit of the chapter in the proposal and acceptance of the arrangement [under Chapter XI]," citing ¶ 9.20 of the 14th edition of Collier containing same language); In re Morris, 246 F. 1021 (D.Mass. 1917) (composition not proposed by debtor in good faith where value of assets far exceeded amount offered creditors and debtor misled creditors by placing low value on assets in bankruptcy schedules).
[17] 116 F.2d 243 (2d Cir.1940), cert. denied, 313 U.S. 565, 61 S. Ct. 941, 85 L. Ed. 1524 (1941).
[18] Id. at 246.
[19] Matter of Nathanson, 50 AM.B.R. 465, 471 (1941) ("good faith has to do with the proposal of the arrangement and its acceptance and . . . [that] the matter of the conduct of the debtor, prior to the commencement of these proceedings, is not involved.").
[20] See 9 JAMES WM. MOORE, COLLIER ON BANKRUPTCY ¶ 9.20 n. 8 (14th ed. 1978); See also 8 LAWRENCE P. KING, COLLIER ON BANKRUPTCY ¶ 1325LH[a] (15th ed. rev.1999) ("In general, cases finding a lack of good faith under the Bankruptcy Act involved debtor misconduct, such as fraudulent misrepresentations or serious nondisclosures of material facts" [footnotes omitted]).
[21] 10 JAMES WM. MOORE, COLLIER ON BANKRUPTCY ¶ 29.06[6], at 339 (14th ed. 1978).
[22] See 11 U.S.C.A. § 523(a) (Law. Co-op.1997 & Supp.1999).
[23] See 11 U.S.C.A. § 1328 (Law. Co-op.1987 & Supp.1999). Debts for alimony or child support, and certain other debts, are not dischargeable in either chapter. See 11 U.S.C.A. §§ 523(a), 1328(a) (Law. Co-op.1987 & Supp. 1999).
[24] See 11 U.S.C.A. § 1325(b) (Law. Co-op. 1987 & Supp.1999).
[25] In a letter to a friend, Thoreau said: "Not that the story need be long, but it will take a long time to make it short." THE OXFORD DICTIONARY OF QUOTATIONS 550:26 (3d ed.1979).
[26] See Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 stat. 2549 (1978) (§ 1325(4)).
[27] See id.
[28] 689 F.2d 193 (D.C.Cir.1982).
[29] See id. at 199.
[30] 630 F.2d 634 (8th Cir.1980).
[31] 675 F.2d 1386 (9th Cir.1982).
[32] 311 U.S. 138, 61 S. Ct. 157, 85 L. Ed. 91.
[33] 675 F.2d at 1390.
[34] See id. at 1390-1391.
[35] 692 F.2d 968 (4th Cir.1982)
[36] Id. at 972.
[37] 669 F.2d 426 (7th Cir.1982).
[38] Id. at 432-33 [footnotes omitted].
[39] Id. at 433 n. 22.
[40] 695 F.2d 311 (8th Cir.1982).
[41] Id. at 317.
[42] Id.
[43] See id.
[44] See, e.g., Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326 (10th Cir.1993) (no error in bankruptcy court finding bad faith plan proposal under Estus factors where debtor failed to discharge section 523(a)(6) debt in Chapter 7 and attempted to discharge same debt in Chapter 13); Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030 (6th Cir.1988) (dealing with debt resulting from "questionable conduct" of debtor in not recording creditor's lien and permitting finding of bad faith based not on this conduct alone but on "totality of circumstances" including a prior bankruptcy filing); In re Chaffin, 816 F.2d 1070 (5th Cir.1987), vacated, 836 F.2d 215 (5th Cir.1988) (payment of 2% dividend debt resulting from nondischargeable fraud warrants finding of bad faith when considered in conjunction with other factors under standard of "totality of circumstances"); Public Fin. Corp. v. Freeman, 712 F.2d 219 (5th Cir.1983) (affirming finding of good faith in proposal of zero payment to unsecured creditors under standard of "totality of circumstances"); Flygare v. Boulden, 709 F.2d 1344 (10th Cir.1983) (remanding under Estus factors because in denying confirmation bankruptcy court had placed emphasis on minimal payment feature of debtor's 3% plan); Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir.1983) (remanding under Estus factors question of confirmation of 10% plan in view of record's indication of debtors' underestimation of income and overestimation of expenses).
[45] See Conrad K. Cyr, The Chapter 13 "Good Faith" Tempest: An Analysis and Proposal for Change, 55 AM.BANKR.L.J. 271 (1981).
[46] See id. at 274.
[47] See id. at 275-77.
[48] See id. at 278.
[49] Bankruptcy Amendments & Federal Judgeship Act of 1984, Pub.L. No. 98-353, 99 stat. 333 (codified as amended in scattered sections of 11 U.S.C. and 28 U.S.C.).
[50] 11 U.S.C.S. § 1325(b)(1)(B) (Law. Co-op. 1987 & Supp.1999).
[51] 11 U.S.C.S. § 1325(b)(2) (Law. Co-op.1987 & Supp. 1999).
[52] 827 F.2d 1222 (8th Cir.1987).
[53] Id. at 1227.
[54] 794 F.2d 149 (4th Cir.1986).
[55] See id. at 153.
[56] Id. at 152.
[57] Id. at 153.
[58] 848 F.2d 813 (7th Cir.1988).
[59] Id. at 814.
[60] Id. at 820.
[61] Id. at 821.
[62] 849 F.2d 237 (6th Cir.1988).
[63] Id. at 240.
[64] 67 F.3d 1128 (4th Cir.1995).
[65] Id. at 1134.
[66] 91 F.3d 491 (3d Cir.1996).
[67] See id. at 496.
[68] See id. at 496 n. 2.
[69] 67 B.R. 384 (Bankr.E.D.Pa.1986).
[70] See also Nelson v. Easley (In re Easley), 72 B.R. 948 (Bankr.M.D.Tenn.1987) (not bad faith for debtor to file chapter 7 case, convert case to Chapter 13 after debt is declared nondischargeable, and then propose to discharge same debt under Chapter 13).
[71] Decision of September 22, 1998, p. 8.
[72] Estus, 695 F.2d at 317.
[73] See, e.g., Neufeld, 794 F.2d at 152.
[74] 708 F.2d 865 (2d Cir.1983).
[75] 11 U.S.C.S. § 109(g) (Law. Co-op. 1997).
[76] 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991).
[77] See id. at 82-87, 111 S. Ct. 2150.
[78] See id. at 87, 111 S. Ct. 2150.
[79] See id.
[80] See id. at 88, 111 S. Ct. 2150.
[81] Compare Home State Bank v. Johnson (In re Johnson), 904 F.2d 563 (10th Cir.1990), rev'd, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991) (lien not a "claim"), with Jim Walter Homes, Inc. v. Saylors (In re Saylors), 869 F.2d 1434 (11th Cir.1989), and Downey Sav. & Loan Ass'n v. Metz (In re Metz), 820 F.2d 1495 (9th Cir.1987) (lien a "claim").
[82] 869 F.2d 1434 (11th Cir.1989).
[83] 820 F.2d 1495 (9th Cir.1987).
[84] See Saylors, 869 F.2d at 1438.
[85] See, e.g., Turner v. Citizens Nat'l Bank (In re Turner), 207 B.R. 373 (2d Cir. BAP 1997) (leaving aside question of bad faith, filing of Chapter 13 case to obtain stay of foreclosure while prior Chapter 7 case remains open and no discharge has issued, rather than converting Chapter 7 case, creates cause for dismissal); In re Cowan, 235 B.R. 912 (Bankr. W.D.Mo.1999) (where chapter 7 trustee demanded car and to retain car debtor filed Chapter 13 while Chapter 7 case remained open but after chapter discharge had issued, second filing not cause for dismissal); Norwalk Sav. Society v. Peia (In re Peia), 204 B.R. 310 (Bankr.D.Conn.1996) (second filing, where discharge has previously entered, deemed a factor in inquiry on good faith); In re Spectee Group, Inc., 185 B.R. 146 (Bankr. S.D.N.Y.1995) (same); In re Aichler, 182 B.R. 19 (Bankr.S.D.Tex.1995) (same); In re Keen, 121 B.R. 513 (Bankr.W.D.Ky.1990) (per se prohibition of second filing); In re Bodine, 113 B.R. 134 (Bankr.W.D.N.Y.1990) (same); In re Heywood, 39 B.R. 910 (Bankr.W.D.N.Y. 1984) (same).
[86] See, e.g., In re Cowan, 235 B.R. 912 (Bankr.W.D.Mo.1999).
[87] 269 U.S. 121, 46 S. Ct. 41, 70 L. Ed. 193 (1925).
[88] Id. at 123, 46 S. Ct. 41.
[89] 888 F.2d 703 (10th Cir.1989).
[90] See id. at 704.
[91] Id. at 706.
[92] Compare Davis v. Mather (In re Davis), 239 B.R. 573 (10th Cir. BAP 1999) (bankruptcy court finding of bad faith in case involving debt nondischargeable in prior Chapter 7 upheld as not clearly erroneous against contention that bankruptcy court considered only the factor relating to successive filings), with Mason v. Young (In re Young), 237 B.R. 791 (10th Cir. BAP 1999) (bankruptcy court's finding of good faith upheld as not clearly erroneous under totality of circumstances standard, notwithstanding presence of debt nondischargeable in prior Chapter 7).
[93] 217 B.R. 470 (Bankr.E.D.Va.1998).
[94] See id. at 473.
[95] See id. at 473-74, 477-78.
[96] See id. at 473.
[97] Id. at 476.
[98] These are:
1. The proximity in time of the chapter 13 filing to the chapter 7 filing.
2. Whether the debtor has incurred some change in circumstances between the filings that suggests a second filing was appropriate and that the debtor will be able to comply with the terms of a chapter 13 plan.
3. Whether the two filings accomplish a result that is not permitted in either chapter standing alone.
4. Whether the two filings treat creditors in a fundamentally fair and equitable manner or whether they are rather an attempt to manipulate the bankruptcy system or are an abuse of the purpose and spirit of the Bankruptcy Code.
[99] See Cushman, 217 B.R. at 479.
[100] See also In re Craig, 222 B.R. 266 (Bankr. E.D.Va.1998) (finding bad faith in strip-down Chapter 20 case for similar reasons).
[101] See, e.g., In re Waters, 227 B.R. 784 (Bankr.W.D.Va.1998) (finding good faith).
[102] See, e.g., In re Jahnke, 146 B.R. 830 (Bankr.E.D.Cal.1992) (bad faith found based on zero payment on claim ruled nondischargeable in prior Chapter 7 case).
[103] 232 B.R. 894 (Bankr.E.D.Tex.1999).
[104] See id. at 897.
[105] See 8 LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY ¶ 1325.04 (15th ed. rev. 1999); 1 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY §§ 5.14-5.18 (1992); Bradley M. Elbein, The Hole in the Code: Good Faith and Morality in Chapter 13, 34 SAN DIEGO L.REV. 439 (1997); Ellen M. Horn, Good Faith and Chapter 13 Discharge: How Much Discretion is Too Much?, 11 CARDOZO L.REV. 657 (1990).
[106] Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 501, 106 S. Ct. 755, 88 L. Ed. 2d 859 (1986).
[107] Indeed, the identical standard is also employed to determine whether a Chapter 13 case should be dismissed for a bad faith filing. See, e.g., In re Love, 957 F.2d 1350 (7th Cir. 1992) (applying standard of "totality of the circumstances").
[108] 501 U.S. 157, 111 S. Ct. 2197, 115 L. Ed. 2d 145 (1991).
[109] See, e.g., Wamsganz v. Boatmen's Bank, 804 F.2d 503 (8th Cir.1986).
[110] See Toibb, 501 U.S. at 160-61, 111 S. Ct. 2197.
[111] See id. at 160, 111 S. Ct. 2197.
[112] Courts continue, however, to dismiss Chapter 11 cases as bad faith filings if the debtor has no on-going business operations. See, e.g., In re Double W Enters., Inc., 240 B.R. 450 (Bankr.M.D.Fla.1999).
[113] See, e.g., Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346, 1352 (8th Cir.1990).
[114] Perhaps the most striking example of this misuse of the clearly erroneous rule is the Eighth Circuit's en banc decision in In re LeMaire, 898 F.2d 1346 (8th Cir.1990), which vacated a previous decision by a divided panel of the same court, Handeen v. LeMaire (In re LeMaire), 883 F.2d 1373 (8th Cir.1989). The debtor's Chapter 13 filing, his only filing, was prompted by a $50,000 civil judgment resulting from conduct for which he was criminally convicted of aggravated assault. The debtor's plan proposed to pay the judgment, and other unsecured debt, through $500 monthly installments over five years, which amounted to a dividend of 42.3%. The bankruptcy court examined the Estus factors and, in light of the broad discharge available under section 1328, found the plan to be proposed in good faith. It observed that the debtor had served a criminal sentence, was getting back on his feet professionally and financially, and was entitled to a fresh start, the cornerstone of bankruptcy law. In the panel decision, a majority of the panel believed the bankruptcy court's "factual findings support its conclusion that [the debtor's] proposed plan was not an abuse of the bankruptcy laws." 883 F.2d at 1380.
The en banc court disagreed. Although recognizing that the 1984 legislation on disposable income had modified the process of determining good faith, the court believed there was still "preserved the traditional `totality of circumstances' approach with respect to the Estus factors not addressed by legislative amendments." 898 F.2d at 1349. The court acknowledged that the bankruptcy court had examined in detail each of the eleven Estus factors. But the court expressed particular concern about two of these factors the nondischargeability of the debt in Chapter 7 and the debtor's "motivation and sincerity in seeking Chapter 13 relief." Id. at 1350. The court observed that in evaluating the debtor's motivation and sincerity the bankruptcy court had balanced the victim's desire for compensation against the debtor's desire for a fresh start, and had found the latter to outweigh the former. The court thought this analysis "fails to properly consider the strong public policy factors, inherent in the Bankruptcy Code, which are implicated in discharging this debt and gives undue emphasis to the fact that the statutory terms governing Chapter 13 petitions do not expressly make a debt resulting from a willful and malicious injury nondischargeable." Id. at 1351. It concluded the bankruptcy court's finding of good faith "was clearly erroneous because the evidence before the court regarding [the debtor's] good faith was so `implausible on its face that a reasonable factfinder would not credit it.'" Id. The court denied that its decision rested on policy grounds alone. See id. at 1352. It believed the decision to be consistent with the bankruptcy policy favoring a fresh start for the "honest" debtor. Id. Three dissenters correctly asserted the court was actually holding, under the guise of the clearly erroneous rule, that a plan proposing payment on debt resulting from a heinous crime is not, as a matter of law, proposed in good faith. See id. at 1354. The dissenters observed that section 1325 requires only that the plan be proposed in good faith, not that the debt be incurred in good faith.
[115] See Richard E. Coulson & Alvin C. Harrell, 1995 Consumer Bankruptcy Developments, 51 BUS.LAW. 957, 967 (1996) (standard of "totality of circumstances" provides little meaningful guidance).
[116] In re McLaughlin, 217 B.R. 772, 775-76 (Bankr.W.D.Tex.1998).
[117] See, e.g., Antonin Scalia, The Rule of Law as a Law of Rules, 56 U.CHI.L.REV. 1175 (1989) (criticing "totality of the circumstances" as legal standard in various contexts).
[118] 269 U.S. 121, 46 S. Ct. 41, 70 L. Ed. 193 (1925).
[119] See, e.g., Turner v. Citizens Nat'l Bank (In re Turner), 207 B.R. 373 (2d Cir. BAP 1997) (finding cause for dismissal of second filing where purpose of filing was reimposition of stay whose lifting debtor had unsuccessfully opposed in first case). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552499/ | 243 B.R. 40 (1999)
In re Samuel O. & Lorraine B. STONE, Debtors.
Samuel O. & Lorraine B. Stone, Plaintiffs,
v.
Rubidell Resort Condominium, Defendant.
Bankruptcy No. 98-35482-7. Adversary No. 99-3090-7.
United States Bankruptcy Court, W.D. Wisconsin.
December 6, 1999.
Catherine J. Gloeckler, Janesville, WI, for plaintiffs.
JoAnne L. Krabbe, Stupar, Schuster & Cooper, S.C., Milwaukee, WI, for defendant.
MEMORANDUM DECISION
ROBERT D. MARTIN, Chief Judge.
The facts for this adversary proceeding are not in dispute. The parties have stipulated that: The debtors, Samuel and Lorraine Stone, filed a Chapter 7 petition on November 3, 1998. On February 10, 1999, the debtors were granted a discharge. The case was closed February 26, 1999, and reopened April 27, 1999, on the debtor's motion.
On May 25, 1986, the debtors entered into a land contract with Rubidell Recreation, Inc. to purchase a campsite described *41 as Unit 362 for $15,800. On October 29, 1991, Rubidell Recreation, Inc. assigned the land contract to Lantana Resorts, Inc. The debtors surrendered their interest in Unit 362 to Lantana Resorts, Inc. by quit claim deed on June 15, 1999.
The debtors' ownership and use of Unit 362 was pursuant to the Declaration of Condominium of Rubidell Resort Condominium under the Condominium Act, Chapter 703, Wis.Stats. The Bylaws, Article V of the Declaration at subparagraph B, provide for the ongoing assessment of condominium maintenance fees, the manner in which they are established and the rules for payment. Maintenance fees on the debtors' unit were $39.46 per month. When the debtors transferred the property to Lantana Resorts, the debtors owed $276.22 in post-petition maintenance fees and interest. The fees incurred pre-petition were discharged in the bankruptcy.
Unit 362 was not a dwelling unit. At the time of filing of the bankruptcy and subsequent to the bankruptcy, the debtors never physically occupied the unit. Furthermore, the debtors never rented Unit 362 to a tenant, either before or after filing bankruptcy.
On January 26, 1999, Rubidell's lawyer sent a letter to the debtors' lawyer, claiming nondischargeability of post-petition maintenance fees and suggested that debtors' counsel confer with her clients concerning the payment of future maintenance fees. This letter contained language required by the Fair Debt Collection Act, but did not specifically demand an amount to be paid or a date upon which payment of the post-petition fees would be due.
The debtors brought this adversary proceeding to determine that the post-petition maintenance fees are discharged. According to the debtors, the debt for post-petition condominium fees existed in an unliquidated, contingent form when the debtors filed their bankruptcy petition. The debtors also seek sanctions against Rubidell for violating the automatic stay by attempting to collect a debt against the debtors which arose before the commencement of the case. Rubidell defends by arguing that the debtors' post-petition maintenance fees are not dischargeable because the right to payment did not arise until post-petition, and that the letter from their lawyer to the debtors' lawyer was neither a demand for payment of a specific amount, nor an effort to collect a pre-petition debt.
First, we must determine whether the § 523(a)(16) exception to discharge applies to these facts. The parties seem to agree that it does not, and so do we. Section 523(a)(16) provides:
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 . . . 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 dwelling unit that has condominium ownership or in a share of a cooperative housing corporation, but only if such fee or assessment is payable for a period during which . . . the debtor physically occupied a dwelling unit in the condominium or cooperative project; or . . . the debtor rented the dwelling unit to a tenant and received payments from the tenant for such period, 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). In In re Lozada, 214 B.R. 558, 563 (Bankr.E.D.Va.1997, J. Mitchell) aff'd In re Lozada, 176 F.3d 475, 1999 WL 190279 (4th Cir.1999), the bankruptcy court discussed the scope of § 523(a)(16). Based on the U.S. Supreme Court holding in Patterson v. Shumate, the court stated that it was bound by the rule that "when a statute is clear and unambiguous on its face, the court must apply the plain meaning of the statute and enforce it according to its terms." Id. *42 citing Patterson v. Shumate, 504 U.S. 753, 757, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992). The court then determined that § 523(a)(16) was clear and unambiguous on its face:
Here, this court finds that § 523(a)(16) is clear and unambiguous on its face, and correspondingly, the court need not look behind the statute to consider legislative history. Congress in enacting § 523(a)(16) drafted a very precise and specific section. Had it intended to include homeowner's association assessments, it easily could have done so. But it did not . . . [I]t is not this court's dutyor province to rewrite Congress's enactments . . . Accordingly, this court holds that post-petition property owner's homeowner's assessments and fees do not fall within the provisions of § 523(a)(16).
Id.
Although our case does involve condominium fees, the debtors never physically occupied the unit, nor did they rent the unit or receive rent from the unit. Based on the stipulated facts, the clear and unambiguous language of § 523(a)(16) has not been met for three reasons: (1) the unit is not a dwelling unit; (2) the debtors never physically occupied the unit; and (3) the debtors never rented or received rent from the unit.
Thus, the post-petition condominium maintenance fees may only be discharged in the debtors' bankruptcy if this court finds that they arose pre-petition. The Seventh Circuit has held that postpetition assessments are dischargeable as pre-petition debt. In the Matter of Rosteck, 899 F.2d 694, 697 (7th Cir.1990). The court concluded that debt for future assessments based on a pre-petition contract to pay arose pre-petition, and was discharged in the debtors' Chapter 7 bankruptcy. Id. In reaching its decision, the Seventh Circuit relied on the definitions of "debt" and "claim" under the Bankruptcy Code:
The Code defines "debt" as a "liability on a claim." 11 U.S.C. § 101(11). The Code, in turn, defines a "claim" in pertinent part as a: (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 11 U.S.C. § 101(4). . . . Under those broad definitions of claim and debt, the Rostecks had a debt for future condominium assessments when they filed their bankruptcy petition. It is true that the Rostecks did not actually owe money to Old Willow for assessments beyond those Old Willow had assessed before bankruptcy. But the condominium declaration is a contract . . . and by entering that contract the Rostecks agreed to pay Old Willow any assessments it might levy. Whether and now much the Rostecks would have to pay in the future were uncertain, depending upon, among other things, whether the Rostecks continued to own the condominium and whether Old Willow actually levied assessments. But, as we have seen, contingent, unmatured, unliquidated, and unfixed debts are still debts.
Id. at 696-697. This reasoning of the Seventh Circuit controls our analysis.
This reasoning was relied and elaborated upon by the bankruptcy court in In the Matter of Mattera, 203 B.R. 565, 571 (Bankr.D.N.J.1997, J. Wizmur) in a Chapter 13 context, which found that under a plain reading of the statutory definition of "claim," claim is defined in the broadest possible way. The court stated: "The Supreme Court has noted that Congress intended to adopt the `broadest possible' definition of a `claim', and that the Code `contemplates that all legal obligations of the debtor, [no matter how remote or contingent,] will be able to be dealt with in the bankruptcy case.'" The Mattera court further relied on the legislative history of § 523(a)(16) in determining that Rosteck was still good law:
*43 This section amends section 523(a) of the Bankruptcy Code to except from discharge those fees that become due to condominiums, cooperatives or similar membership associations after the filing of a petition, but only to the extent that the fee is payable for time during which the debtor either lived in or received rent for the condominium or cooperative unit. Except to the extent that the debt is nondischargeable under this section, obligations to pay such fees would be dischargeable. See Matter of Rosteck, 899 F.2d 694 (7th Cir.1990).
Id. at Footnote 9 citing H.R.Rep. 103-835, 103rd Cong., 2nd Sess. 41, U.S.Code & Admin.News 1994, pp. 3340, 3349-3350 (Oct. 4, 1994). Therefore, even though Congress subsequently amended the Bankruptcy Code, it indicated in the legislative history that In re Rosteck was still good law. In re Rosteck states the controlling law in the Seventh Circuit.
The defendants have argued that this court should not follow the Seventh Circuit, but rather should adopt the holding of the Fourth Circuit in In re Rosenfeld, 23 F.3d 833, 837 (4th Cir.1994). That may be a nice try, but this court is bound by the holdings of the Seventh Circuit when, as in this case, the facts are not distinguishable. The condominium maintenance fees that accrued post-petition were discharged in the debtors' Chapter 7 bankruptcy because under the contract, the debt was incurred pre-petition, although contingent and unliquidated at the time of filing.
The debtors urge us to sanction Rubidell under § 362(h). According to the debtors, the letter Rubidell's lawyer sent to debtors' lawyer was a willful violation of the automatic stay because it included an attempt to collect a debt for post-petition maintenance fees. Sanctions are not appropriate in this instance. "[A]s many courts have expressed, the widespread and legitimate disagreement among courts on the subject of the opportunity to discharge post-petition assessments precludes the imposition of sanctions." Mattera, 203 B.R. at 573. The defendants in this case made a strained but legitimate argument supported by case law that the debtors' post-petition assessments were nondischargeable. If Rubidell's counsel attempted to collect any debt from the debtors, they apparently did so in the good faith belief that the debt was nondischargeable and that the automatic stay did not apply.
ORDER
The court having this day entered its memorandum decision in the above-entitled matter,
IT IS HEREBY ORDERED that the plaintiffs' motion for summary judgment is GRANTED.
IT IS HEREBY FURTHER ORDERED that the plaintiffs' motion for sanctions is DENIED. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552498/ | 243 B.R. 528 (1999)
In re The ELI WITT COMPANY, Debtor.
The Eli Witt Company, Plaintiff,
v.
The State of Florida, Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco, Defendant.
Bankruptcy No. 96-15441-8P1. Adversary No. 98-174.
United States Bankruptcy Court, M.D. Florida, Tampa Division.
August 27, 1999.
Robert A. Soriano, Tampa, FL, for plaintiff.
Eric H. Miller, Tallahassee, FL, Scott R. Fransen, Tallahassee, FL, for defendant.
John Emmanuel, Tampa, FL, for American Home Assurance Company.
*529 Robert A. Schatzman, Miami, FL, Stuart Hertzberg, Detroit, Michigan, for Creditors Committee.
ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (DOCKET NO. 28)
ALEXANDER L. PASKAY, Chief Judge.
THIS CAUSE came on for consideration in Plaintiff, The Eli Witt Company's (Debtor) confirmed Chapter 11 case upon the Debtor's Motion for Summary Judgment. The Debtor seeks interest on the amount it overpaid to the Defendant, the State of Florida, Department of Business and Professional Regulation, Division of Alcoholic Beverages and Tobacco (Division), on a claim the Division made in the Debtor's bankruptcy case. The parties agree that the facts are undisputed; therefore, the issue regarding the interest on the over-payment of $1,526,365.84 is ripe for determination as a matter of law.
On November 12, 1996, the Debtor filed a voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. The Division filed several proofs of claim totaling $13,360,928.31 for pre-petition cigarette taxes. Between January and May of 1997, the Debtor filed several Applications for Refund or Credit with the Division concerning the Defendant's cigarette tax claims.
The Debtor obtained surety bonds through American Home Assurance Company (AIG) guaranteeing payment of the cigarette taxes to the Division. On March 20, 1997, AIG paid the Division $6,000,000 under these surety bonds as partial payment of the Debtor's cigarette taxes. On August 15, 1997, the Division filed suit against AIG for the balance of the cigarette taxes due from the Debtor.
On December 23, 1997, the Debtor's Reorganization Plan was confirmed by this Court. On January 23, 1998, pursuant to its Reorganization Plan, the Debtor paid the Division $7,376,287.35 which represented the balance of the Division's claims for cigarette taxes. In February of 1998, the Division notified the Debtor that it had overpaid the Division by $1,526,365.84 on the cigarette tax claims and that a refund of this overpayment would be made by the Division.
On February 9, 1998, AIG claimed the right to a refund of the over-payment in a letter to the Division. (Exhibit A to the Debtor's Motion for Summary Judgment, Docket No. 28.) On February 25, 1998, the Debtor also demanded a refund of the over-payment. (Exhibit B to the Debtor's Motion for Summary Judgment, Docket No. 28.) On February 26, 1998, due to the conflicting claims of AIG and the Debtor for the refund of the admitted over-payment on the Division's claim, the Division filed an Interpleader in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida. On March 11, 1998, the Circuit Court authorized the Division to deposit the amount of the over-payment with the Clerk of the Circuit Court and provided that the Clerk should deposit the funds in an interest bearing account. (Exhibit C to the Debtor's Motion for Summary Judgment, Docket No. 28.) However, the Division did not make the authorized deposit with the Clerk of the Circuit Court. In April of 1998, the Circuit Court once again authorized the Division to deposit the amount of the refund with the Clerk of the Circuit Court or a financial institution provided that the deposit was in an interest bearing account. (Exhibit C to the Debtor's Motion for Summary Judgment, Docket No. 28.) Once again, the Division did not deposit the amount of the over-payment in an interest bearing account.
On April 1, 1998, the Debtor brought Adversary Proceeding number 98-174 against the Division in this Court seeking recovery of the over-payment and interest on the amount of the over-payment until the time that the Division refunded it to the Debtor. (Docket No. 1.) On April 30, 1998, the Division answered the Debtor's *530 Complaint and raised the affirmative defense of sovereign immunity. (Docket No. 3.)
Although the Debtor had filed several Applications for refund or credit regarding these taxes with the Division prior to the Confirmation of the Debtor's Reorganization Plan, the question of whether the Division or the Debtor should have acted on or acted to ensure that these claims were adjusted to reflect the correct amount prior to Confirmation of the Debtor's Reorganization Plan is irrelevant. The question is whether the Division may be charged interest on the amount of the over-payment which the Division held in its possession from January of 1998 until the settlement with AIG and the Debtor was reached in May of 1999 and the Division refunded the amount of the over-payment to the Debtor on May 24, 1999.
The Division argues that a claim for interest on the over-payment is barred by the doctrine of sovereign immunity. As a general proposition, the longstanding English common law doctrine of sovereign immunity as well as the Eleventh Amendment bars individuals from suing the States. In two recent cases, the Supreme Court of the United States held that Congress does not have the power under Article I of the United States Constitution to abrogate the States' sovereign immunity. Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 73, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996); Alden v. Maine, 527 U.S. 706, 119 S. Ct. 2240, 144 L. Ed. 2d 636 (1999). However, a State may waive its sovereign immunity by consent or by legislative act pursuant to the State's constitution. Id.
States routinely file proofs of claim in bankruptcy cases and often these claims are substantial, as in the instant case. It cannot be gainsaid that the power to allow or disallow claims in a bankruptcy case is a "core" procedure under 28 U.S.C. § 157(b)(2)(B). Concomitant with this power is the power of the bankruptcy court to determine the amount of all claims ultimately allowable in a given bankruptcy case. If the bankruptcy court did not have the power to rule on claims made by parties in interest, including claims filed by States, then the efficiency of the bankruptcy system would be seriously impaired, and all debtors and creditors, including States, would incur significantly greater costs in bankruptcy by either forcing litigation of the allowance of some claims in different forums or, as in the instant case, the Debtor would experience a loss because it would be left powerless to challenge the validity of a State's claim due to the doctrine of sovereign immunity.
By filing a proof of claim in a bankruptcy case, the courts have uniformly held that a State has submitted to the jurisdiction of the bankruptcy court at least in regard to that claim. See e.g., In re Straight, 209 B.R. 540, 555 (D.Wyo. 1997), judgment aff'd, 143 F.3d 1387, 1388-89, cert. denied, ___ U.S. ___, 119 S. Ct. 446, 142 L. Ed. 2d 400 (1998). Some courts have found that the submission of a claim by a State in a bankruptcy case is a waiver of the State's sovereign immunity and a waiver of the State's protection under the Eleventh Amendment. Id. Other courts have held that when a State files a proof of claim in a bankruptcy proceeding, the bankruptcy court has in rem jurisdiction with respect to the State's claim. See e.g., State of Maryland v. Antonelli Creditors' Liquidating Trust, 123 F.3d 777, 787 (4th Cir.1997). The court in In re Mitchell, held that in rem jurisdiction could be exercised over a State's claim to enable a discharged debtor to assert its discharge order as an affirmative defense to a State's collection claim, for an adjudication of dischargeability if the State itself filed an adversary proceeding which would thereby give rise to a constructive waiver, or to allow the issuance of an order confirming a chapter 11 plan if the State did not object to the confirmation plan. In re Mitchell, 222 B.R. 877, 883 (9th Cir. BAP 1998).
The allowance of the Division's claim and the Debtor's right to a refund of the *531 over-payment are without dispute or controversy. However, what is disputed is the Debtor's claim to interest on the refund of the over-payment which was withheld by the Division for 15 months. The Division contends that the Debtor's claim for interest on the refund of the over-payment is a freestanding claim that is separate and apart from the refund; therefore, the Division contends the Debtor's claim for interest is barred by sovereign immunity. However, the dispute regarding interest on the refund of the over-payment is so obviously intertwined with the Division's claim in the Debtor's bankruptcy case that it is in fact indisputably part of the claim. Clearly, but for the overpayment there would not be an issue concerning interest on the refund, and as previously discussed, the Division waived its sovereign immunity when it filed a claim in the Debtor's bankruptcy case. For the foregoing reasons, this Court rejects the Division's argument that the Debtor's claim for interest is barred by the affirmative defense of sovereign immunity as specious.
Furthermore, it is clear under 11 U.S.C. § 106(b) that a governmental unit that files a claim in a bankruptcy case waives its sovereign immunity with respect to that claim and any claim against such governmental unit that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose. The court considered an argument by the IRS that sovereign immunity barred the recovery of an excess distribution by the bankruptcy Trustee in In re R & W Enterprises, 181 B.R. 624, 637 (Bkrtcy.N.D.Fla.1994). The court in In re R & W Enterprises held that the IRS waived its protection of sovereign immunity by filing a claim against the Debtor in bankruptcy. Id. at 637-645.
As a result of the Division's withholding of the refund of the over-payment for fifteen months, the value of the refund of the over-payment to the Debtor clearly has diminished due to inflation and the Debtor has experienced a loss of the earning power of its property for fifteen months. In order to compensate the Debtor for wrongfully withholding the over-payment, the Division should pay the Debtor interest at the Federal rate of 4.966 percent compounded annually from the date that the Circuit Court authorized the Division to deposit the refund with the Clerk of the Circuit Court on March 11, 1998 until the Division made the refund as approved under the Settlement Order on May 24, 1999.
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Debtor's Motion for Summary Judgment is hereby granted. It is further
ORDERED, ADJUDGED AND DECREED that the Division will pay the Debtor interest in the amount of $91,930.02 computed at the Federal rate of 4.966 percent compounded annually on the amount of the refund of the over-payment of $1,526,365.84 from the date that the Circuit Court authorized the Division to deposit the refund with the Clerk of the Circuit Court on March 11, 1998 until the Division made the refund as approved under the Settlement Order on May 24, 1999. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552520/ | 243 B.R. 830 (2000)
In re Gerald P. BOUGHTON, Debtor.
Bankruptcy No. 98-10235-3P1.
United States Bankruptcy Court, M.D. Florida, Jacksonville Division.
January 18, 2000.
*831 Bruce Russell, Washington, D.C., for Internal Revenue Service.
Gerald P. Boughton, Orange City, Florida, debtor pro se.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
GEORGE L. PROCTOR, Chief Judge.
This case came before the Court upon Debtor's Objection to Claim 3 filed by the Internal Revenue Service ("IRS") and upon the IRS' Motion to Dismiss. (Docs. 15, 32.) The Court consolidated the matters and after hearings on July 1 and August 10, 1999, the Court makes the following Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
1. On July 27, 1998 the IRS assessed individual income taxes against Debtor for 1992, 1993, and 1994. (IRS Ex. 1.)
2. On November 6, 1998 the IRS filed a Notice of Federal Tax Lien against Debtor in Volusia County, Florida for the 1992, 1993, and 1994 taxes in the amount of $545,412.18. (Id.)
3. On December 2, 1998 Debtor filed a petition under Chapter 11 of the Bankruptcy Code. (Doc. 1.)
4. On February 22, 1999 the IRS filed a Proof of Claim in the amount of $737,446.50, which it designated as secured in the amount of $561,943.92 for the 1992, 1993, and 1994 taxes, calculated as follows:
1992 1993 1994
Tax: $56,773.00 $72,823.00 $75,562.00
Penalty to Petition
Date: $70,727.19 $59,709.69 $62,859.86
Interest to Petition
Date: $57,307.75 $59,719.03 $46,462.40
The proof of claim also included an unsecured priority claim of $97,300.11 and an unsecured general claim of $78,202.47 for 1995, 1996, and 1997 individual income taxes. The Clerk designated the claim as Claim 3. (IRS Ex. 1.)
5. Debtor filed an Objection to Claim 3. Debtor contends that the IRS' secured claim for 1992, 1993, and 1994 can not exceed the amount of his assets. Debtor also contends that the IRS' claim for 1995, 1996, and 1997 does not take into account his 1995, 1996, and 1997 returns which were filed on January 21, 1999. (Doc. 15.)
6. On June 24, 1999, the IRS filed a Motion to Dismiss for Lack of Good Faith.
7. The Court consolidated Debtor's Objection to Claim 3 and the IRS' Motion to Dismiss and held hearings on July 1, 1999 and August 10, 1999.
8. Debtor litigated his 1992, 1993, and 1994 tax liabilities in the United States Tax Court. On March 10, 1998 the Tax Court issued an opinion which found that Debtor filed fraudulent documents with the Secretary of State of Florida and Clerk of Volusia County in order to cloud the title of his residence, office building, and vehicles. Also, the court found that he placed ownership of his real and personal property, including all bank accounts, in the names of nominees. The court found that the purpose of Debtor's actions was to "conceal, mislead or otherwise prevent the collection of federal income tax due and owing from him." (IRS Ex. 51 at 97-98.) The Tax Court decision was affirmed by the Eleventh Circuit Court of Appeals on May 11, 1999. (IRS Ex. 52.)
9. Debtor opened the Boughton Chiropractic Center in Orange City, Florida in 1989. (Gerald P. Boughton June 15, 1999 Dep. at 9.) Debtor purchased the property upon which the business was located ("business property") with a $172,500 mortgage from John Krebs. (IRS Ex. 12.) Debtor engaged in the following transactions as to the business property.
10. On July 19, 1992 Debtor filed a Declaration of Trust for the Boughton Family Trust in the public records of Volusia County, Florida. The Declaration provided, *832 among other things, that Debtor and Madelyn Boughton, Debtor's former wife, ("former wife") were not citizens of the United States or of Florida but were merely sojourning in Florida and that they were not taxpayers. Debtor and former wife were the trustees and former wife was the sole beneficiary of the trust. (IRS Ex. 3.)
11. On March 12, 1993 Debtor transferred the business property to Michael Norris ("Norris") for no consideration. (IRS Ex. 12.)
12. On March 15, 1993 Norris transferred the business property to the Boughton Family Trust for no consideration. (IRS Ex. 14.)
13. On December 8, 1993 the United States filed a Notice of Federal Tax Lien against the Boughton Family Trust as the nominee of Debtor and former wife for 1991 taxes owed by Debtor and former wife. (IRS Ex. 17.) The lien attached to the business property, the personal residence, and any motor vehicles owned by and titled to the Boughton Family Trust.
14. On April 4, 1994 Debtor transferred the business property from the Boughton Family Trust to the Brisco Management # 4 Holding Trust for no consideration. (IRS.Ex.21.)
15. Despite the April 4, 1994 transfer, Debtor made monthly mortgage payments to John Krebs in the amount of $2,279.60 toward the mortgage until the end of 1997. (IRS Ex. 53.)
16. A Final Judgment of Dissolution of Marriage between Debtor and former wife was entered on April 4, 1997 in the circuit court in Volusia County. The circuit court identified Debtor as the owner of the business property and awarded sole ownership to him. Former wife executed a quit claim deed to the property. (IRS Ex. 24.)
17. On December 17, 1997 Norris executed a warranty deed transferring the business property to Debtor and former wife as co-trustees of the Boughton Family Trust dated July 19, 1992. (IRS Ex. 29.)
18. On December 18, 1997 Debtor and former wife executed a document entitled Memorandum of Trust which referred to the business property and provided that the Boughton Family Trust dated July 19, 1992 was in full force and effect, that Debtor and former wife were trustees, and that former wife was the sole beneficiary of the trust. (IRS Ex. 31.)
19. On December 18, 1997 Debtor and former wife individually, and as trustees of the Boughton Family Trust dated July 19, 1992 transferred the business property to Debtor as Trustee of the Brisco Management Trust dated April 4, 1994. (IRS Ex. 30.)
20. On December 18, 1997 Debtor executed a warranty deed transferring the business property back to Norris. (IRS Ex. 28.)
21. Both the Memorandum of Trust and the warranty deed transferring the property to Norris were recorded in the public records of Volusia County on January 8, 1998. (IRS Exs. 28, 31.)
22. On January 2, 1998 Debtor executed an Affidavit of Trust which provided that Debtor was the only Trustee of the Brisco Management Trust dated April 4, 1994. (IRS Ex. 33.) Debtor also filed an Affidavit of Trustee on January 2, 1998 which provided that the only asset of the Brisco Management Trust dated April 4, 1994 was the business property and that the Brisco Management Trust dated April 4, 1994 was the same trust as the Brisco Management # 4 Holding Trust. (IRS Ex. 34.) The purpose of the Affidavits was to obtain a mortgage loan as to the business property from Fidelity Bank of Florida.
23. On January 2, 1998 Debtor, not individually, but as Trustee of the Brisco Management Trust dated April 4, 1994 obtained a $120,000.00 mortgage loan from Fidelity Bank of Florida which encumbered *833 the business property.[1] (IRS Ex. 35.)
24. With the proceeds of the mortgage loan from Fidelity Bank, Debtor satisfied the Krebs mortgage on January 5, 1998. (IRS Ex. 36.) The satisfaction was recorded on January 30, 1998.
25. Debtor resigned as Trustee of Brisco Management Holding Trust # 4 by letter dated December 10, 1998 to the Board of Trustees of the Brisco Management Holding Trust # 4. (IRS Ex. 42.)
26. On December 16, 1998 Debtor appointed a successor Trustee, Eileen Hines ("Hines") who allegedly resides in Hawaii. (Id.)
27. On December 21, 1998 Hines transferred the property to Richard Beauregard ("Beauregard") by warranty deed. (IRS Ex. 43.) The documentary stamp tax was $1,134.00. On that day Beauregard obtained a $160,000.00 mortgage loan secured by the business property from First Community Bank of Florida. (IRS Ex. 44.)
28. On December 30, 1998 Debtor's mortgage to Fidelity Bank was satisfied. (IRS Ex. 41.) The satisfaction of mortgage was recorded on February 10, 1999.
29. Debtor's resignation as Trustee of the Brisco Management Holding Trust # 4, appointment of a successor Trustee, transfer of the property to a third party, and satisfaction of the Fidelity Bank mortgage were subsequent to the filing of the bankruptcy petition.
30. None of the transactions as to the business property were listed on Debtor's statement of financial affairs. (Doc. 2, Tr. July 1, 1999 at 80.)
31. Debtor's bankruptcy schedules do not disclose an interest in any trust. (Doc. 2.)
32. At his deposition, Debtor testified that he does not believe that the gross receipts from his chiropractic practice were taxable as a matter of law. (Gerald P. Boughton June 15, 1999 Dep. at 54.)
33. At his deposition and at the July 1, 1999 hearing on Debtor's Objection to Claim, Debtor refused to answer questions regarding the various trusts he established or the assets contained therein, citing a Covenant of Silence and the Fifth Amendment. Debtor also testified at the July 1, 1999 hearing that he invoked the Fifth Amendment after being told to do so over the phone by an attorney he found in the telephone book during a break in the deposition.[2]
CONCLUSIONS OF LAW
IRS' Motion to Dismiss
The Court initially addresses the IRS' Motion to Dismiss. The IRS contends that Debtor's pre-petition and post-petition conduct including the establishment of sham trusts to conceal his income and assets, failure to report the trusts on his bankruptcy schedules, transfer of estate *834 property after the filing of the petition, and failure to cooperate with the IRS' discovery efforts constitute bad faith and are grounds for dismissal of the case. Debtor argues that the IRS has not proven that he engaged in any fraudulent activity and that to the contrary, he has been cooperative, honest, and straightforward.
A Chapter 11 case may be dismissed for cause pursuant to § 1112 of the Bankruptcy Code which provides in relevant part: ". . . the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause . . ." 11 U.S.C. § 1112(b) (West 2000). Section 1112(b)'s list of ten grounds which constitute cause for dismissal is not exhaustive. In re Jacksonville Riverfront Dev. Ltd., 215 B.R. 239, 242 (Bankr.M.D.Fla.1997). The Eleventh Circuit has firmly established that good faith is an implicit prerequisite to filing a Chapter 11 bankruptcy petition. In re Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670 (11th Cir.1984). Lack of good faith also constitutes cause for dismissal pursuant to § 1112(b). In re Double W Enterprises, Inc. 240 B.R. 450, 453 (Bankr.M.D.Fla. 1999) (citing In re Albany Partners); In re Wells, 227 B.R. 553, 560 (Bankr. M.D.Fla.1998); Jacksonville Riverfront, 215 B.R. at 243. Although there is no particular test for determining whether a debtor has filed a petition in bad faith, courts may consider any factors which evidence "an intent to abuse the judicial process of the reorganization provisions" or, in particular, factors which evidence that the case was filed "to delay or frustrate the legitimate efforts of secured creditors to enforce their rights." Wells, 227 B.R. at 560 (citing In re Phoenix Piccadilly, Ltd., 849 F.2d 1393, 1394 (11th Cir.1988)) (citation omitted).[3]
Although this Court has previously held that the factors enunciated by Phoenix Piccadilly are no longer applicable in single asset real estate cases, the Court continues to employ the Phoenix Piccadilly factors in multiple asset cases. Jacksonville Riverfront, 215 B.R. at 244; Wells, 227 B.R. at 561. Although the extent of Debtor's assets is unclear, it is clear that this is not a single asset real estate case.
Claims of Unsecured Creditors in relation to the claims of Secured creditors
An analysis of this factor requires a comparison of the claims of secured creditors to those of unsecured creditors and thus, a preliminary determination of the amount of the IRS' secured claim. Read together, 26 U.S.C. § 6321 and 11 U.S.C. § 506(a) provide that a claim for unpaid taxes for which a tax lien has been filed by the United States is secured to the extent of a debtor's assets.[4] Debtor argues that *835 he has total assets of $11,416.07 and that the secured claim of the IRS is therefore $11,416.07. The IRS contends that it has been unable to determine the amount of Debtor's assets and the amount of its secured claim because of Debtor's creation of numerous sham trusts into which he placed his assets, and by his refusal to answer questions concerning the trusts. The Court makes no determination of the amount of Debtor's assets and the value of the secured claim of the IRS. Debtor's repeated transfers and concealment of his assets make such a task daunting, if not impossible. It is clear however, that Debtor has few unsecured creditors whose claims are small in relation to the claim of the IRS and the other secured creditors.[5]
Nature of the Dispute and Timing of the Petition
Debtor's financial problems essentially involve a dispute between Debtor and the IRS which can be resolved outside of the bankruptcy court. The timing of Debtor's petition evidences an intent to frustrate the legitimate efforts of the IRS to enforce its rights. Debtor filed the petition shortly after the IRS filed a Notice of Federal Tax Lien for Debtor's 1992, 1993, and 1994 taxes.
Covenant of Silence and the Fifth Amendment
Debtor refused to cooperate with the IRS in its discovery efforts citing a purported Covenant of Silence which allegedly prevented him from disclosing any information concerning the trusts he set up. Debtor refused to name any party with whom the Covenant was entered into. Debtor also invoked the Fifth Amendment privilege against self-incrimination as a basis for his refusal to answer questions about the trusts. Debtor's assertion of a Covenant of Silence is preposterous. With respect to Debtor's Fifth Amendment privilege against self-incrimination, the Court initially notes that it finds incredible Debtor's explanation as to how he obtained legal advice to invoke the privilege.[6]
The Court now turns to the merits of the assertion of the privilege. The protection against self-incrimination conferred by the Fifth Amendment applies in bankruptcy cases. In re McCormick, 49 F.3d 1524, 1526 (11th Cir.1995); Scarfia v. Holiday Bank, 129 B.R. 671, 675 (M.D.Fla. 1990). However, a debtor's mere statement that the requested information may tend to incriminate him is not sufficient to enable him to invoke the Fifth Amendment. Scarfia, 129 B.R. at 674; In re Wincek, 202 B.R. 161, 165 (Bankr.M.D.Fla. 1996). A debtor must offer credible reasons why answering the questions would pose a real threat of incrimination. Wincek, 202 B.R. at 165 (citing In re Connelly, 59 B.R. 421, 434-435 (Bankr.N.D.Ill.1986)). Despite the Court's repeated requests, Debtor failed to come up with any credible *836 reasons why answering the questions would pose a real threat of incrimination.[7] Debtor's assertion of the Fifth Amendment right against self-incrimination is misguided.
The Court finds that Debtor's refusal to comply with the government's discovery requests is due to his continued attempts to prevent the government from determining the value of his assets, determining the amount of its secured claim, and from collecting the amount he owes, rather than his fear of incrimination.
CONCLUSION
The evidence of Debtor's bad faith in filing and maintaining this case is ample. Debtor has not paid any income taxes for the 1992-1997 tax years. Debtor set up numerous sham trusts to conceal his assets. Debtor refused to answer questions about the trusts at his deposition and at trial. Debtor purposely omitted property on his bankruptcy schedules. Debtor transferred property of the estate after the petition was filed. Based upon the foregoing factors, it is clear that Debtor filed and maintained this bankruptcy petition in bad faith and for the sole purpose of preventing the government from collecting the taxes owed. Accordingly, the Court will dismiss the case. Because the Court's dismissal of the case will render Debtor's Objection to Claim moot, the Court need not address it. A separate order of dismissal will be entered in accordance with these Findings of Fact and Conclusions of Law.
NOTES
[1] Debtor obtained the loan despite the federal tax lien which attached to the business property by virtue of the Notice of Federal Tax Lien filed on December 8, 1993 against the Boughton Family Trust, the trust into which Norris transferred the business property on March 15, 1993.
[2] The following exchange took place between Debtor and the Court:
A: Plus during my break, I had gone out, and I called counsel. And they told me to use the Fifth, so that's what I did.
Q: Are you represented by?
A: I'm not, no.
Q: Is that your counsel?
A: No, I had just called the phone book just to get some advice.
Q: You took a recess, you went out, and you called someone who was listed in the phone book?
A: Right. And I just over the phone, he-he just gave me free counsel, per se, and just
Q: And you did not pay anything for that?
A: No.
Q: That lawyer had never been retained?
A: No.
Q: And did he not know you?
A: Right.
Tr. July 1, 1999 at 94-95.
[3] In Phoenix Piccadilly, the Eleventh Circuit Court of Appeals affirmed the district court's decision affirming this Court's dismissal of a case for cause pursuant to § 1112(b) based on the following factors:
(i) The debtor has only one asset, the property, in which it does not hold legal title;
(ii) The debtor has few unsecured creditors whose claims are small in relation to the claims of the secured creditors;
(iii) The debtor has few employees;
(iv) The property is the subject of a foreclosure action as a result of the arrearages on the debt;
(v) The debtor's problems involve essentially a dispute between the debtor and the secured creditors which can be resolved in the pending state court action; and
(vi) The timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights.
[4] 26 U.S.C. § 6321 provides in pertinent part:
If any person liable to pay tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property, whether real or personal belonging to such person.
26 U.S.C. § 6321 (West 2000)
11 U.S.C. 506(a) provides in pertinent part:
"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. § 506(a) (West 2000)
[5] Outside of the Internal Revenue Service, Debtor listed the following debts on his bankruptcy schedules:
Secured Claims:
SunTerra Resorts-$8,500.00-represents a jointly owned time share in Gatlinburg Tennessee
SunTrust Bank Central Florida-$6,308.93-represents the balance due on a Ford F-150 Truck
Unsecured Priority Claims:
Clerk of Court of Volusia County-$2,300.00-represents past due child support
Madelyn Boughton-$700.00-represents past due alimony
Unsecured Nonpriority Claims:
First Union Commercial Card-$2,300.00-represents a Visa credit card
Lowe's Business Account $190.53
Shepard, Filburn, & Goodblah-$7,300.00-represents attorney's fees incurred in dissolution proceedings
[6] See supra, note 2
[7] Court:
And I say if you're fearful of an indictment, if you're fearful of an information, if you've received any type of letter that would indicate that, if anyone has told you that in discussions, fine, tell us that. And then the Court will make a ruling in that regard. But you just cannot sit back and say, "No I'm not going to answer that question because it may jeopardize me under the Fifth Amendment." It would be a nice thing. Everybody would do that anytime they had a case. They'd just say. "I'm not going to answer the questions."
(Tr. July 1, 1999 at 94-95.) | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552521/ | 243 B.R. 899 (2000)
In re RICHMOND HEALTH CARE, INC. d/b/a Sunrise Health and Rehabilitation Center FEI: XX-XXXXXXX, Debtor.
Hillard Development Corporation, d/b/a Pilgrim Manor Nursing Home, d/b/a Provident Nursing Home, FEI: XX-XXXXXXX, Debtor.
Hillard Development Corporation, d/b/a Pilgrim Manor Nursing Home, d/b/a Provident Nursing Home, Plaintiff,
v.
Barbara Erban Weinstein, Commissioner, William D. O'leary, Secretary, and John Daley, Executive Secretary, The Commonwealth of Massachusetts, Executive Office of Health and Human Services, Division of Health Care Finance and Policy; Michael Berolini, Director, Audit, Compliance and Evaluation Group, The Commonwealth of Massachusetts, Executive Office of Health and Human Services, Division of Health Care Finance and Policy; Bruce M. Bullin, Director, Massachusetts Division of Medical Assistance; Rachel Richards, Director of Claims Operations, Division of Medical Assistance, The Commonwealth of Massachusetts; Stanford I. Chesler, as Attorney for the Division of Health Care Finance and Policy and Division of Medical Assistance, The Commonwealth of Massachusetts; and/or their Successors in Office, Defendants.
Bankruptcy Nos. 9825060-BKC-AJC, 98-25061-BKC-AJC. Adversary No. 98-2370-BKC-AJC-A.
United States Bankruptcy Court, S.D. Florida, Fort Lauderdale Division.
January 26, 2000.
*900 James B. Boone, Fort Lauderdale, FL, for plaintiff.
Thomas O. Bean, Special Assistant Attorney General, Nutter, McClennan & Fish, Boston, MA,
Gregory S. Gilman, Assistant Attorney General, Boston, MA.
ORDER DENYING DEFENDANTS' MOTION TO DISMISS
A. JAY CRISTOL, Chief Judge.
THIS CAUSE came to be heard at a non-evidentiary hearing before this Court *901 on Defendant's Motion to Dismiss and Plaintiff's Response in Opposition to Defendant's Motion to Dismiss. The Court having reviewed the file, heard the arguments of counsel and being fully advised in the premises, denies the motion to dismiss.
Background
The Court is quite familiar with the parties involved in the instant Motion to Dismiss, the unfortunate chain of events surrounding the filing of this adversary proceeding, and the Commonwealth's conduct which appears to thwart the debtor's numerous attempts to achieve a fresh start under the Bankruptcy Code.
Hillard Development Corporation ("Hillard" or "Plaintiff") initially appeared before this Court in a Chapter 11 case, Case No. 90-27588-BKC-AJC and in related adversary proceedings. Various state agencies of the Commonwealth of Massachusetts (the "Commonwealth" or "Commonwealth Agencies" or "Defendants") also appeared before this Court in that case. The Defendants were creditors of Hillard in Case No. 90-27588-BKC-AJC and filed proofs of claim with the Court. The Commonwealth waived any claim of sovereign immunity in that case under 11 U.S.C. § 106(a) by filing proofs of claim[1].
Hillard, with corporate headquarters in Sunrise, Florida, owns and operates two nursing homes in Massachusetts. Hillard commenced several adversary proceedings against the Commonwealth. The adversary proceedings were initiated against the Massachusetts Division of Medical Assistance ("DMA"), the Massachusetts Division of Healthcare Finance and Policy, successor agency to the Massachusetts Rate Setting Commission (the "DHCFP") and certain present and former commissioners of DMA and the DHCFP (collectively, the "Commonwealth Agencies").
The first adversary proceeding against the Commonwealth Agencies was Adv. No. 91-1197-BKC-AJC-A. On March 23, 1993, the Court entered an agreed order (the "Agreed Order") approving a settlement between the parties (the "Stipulation"), in Adv. No. 91-1197-BKC-AJC-A.
On May 27, 1994, Hillard filed a second adversary proceeding against the Commonwealth Agencies in Adv. No. 94-0467-BKC-AJC-A. Hillard's complaint alleged that the Commonwealth Agencies violated the Agreed Order in Adv. No. 91-1197-BKC-AJC-A. The Court conducted an evidentiary hearing and concluded that the Commonwealth Agencies had, as alleged, breached both the Stipulation and the Agreed Order. Thereafter, on October 6, 1996, the Court entered an Order on Evidentiary Hearing in Adv. Pro. No. 94-0467-BKC-AJC-A, which stated the Commonwealth violated the Stipulation entered into between the parties on March 18, 1993, as well as the Agreed Order entered by the Court. In addition, the Court held that the Commonwealth willfully and intentionally violated the Stipulation. Accordingly, the Court assessed damages in the amount of $1,004,340.98 and awarded sanctions in the amount of $1,004,340.98, with said sums to increase at the rate of $82,000.00 each month until paid in full. The Court thereupon entered a Final Judgment against the Commonwealth on October 30, 1996. The Commonwealth Agencies appealed the Final Judgment to the United States District Court for the Southern District of Florida and the United States District Court entered an order granting the Commonwealth Agencies' motion for stay pending appeal.
Subsequent to entering the Order on Evidentiary Hearing and the Final Judgment in Adv. No. 94-0467-BKC-AJC-A, the Court ordered the parties to attend mediation. Between August 1997 and November *902 3, 1997, the parties had numerous conferences with Jeffrey Beck, Esq., the Court-appointed mediator for this case.
As a direct result of the mediation, several events occurred in late 1997 which ultimately formulated the basis of the instant adversary proceeding. On November 3, 1997, Hillard filed Plaintiff's Emergency Motion for Authorization to Enter Into Settlement Agreement and Request for Emergency Hearing (if Required by Court) (C.P. # 269 of Adv. No. 94-0467-BKC-AJC-A). The emergency motion explained the parties' desire to enter into a settlement agreement that would dispose of all claims which could have been raised by either litigant against the other arising out of events occurring at any time on or before November 3, 1997 (the "Settlement Agreement"). Specifically, the Settlement Agreement contained two basic components. First, the Commonwealth was required to pay $1,500,000.00 to an escrow agent, which sum would be released to the Debtor under certain terms. Second, the Commonwealth agreed to pay to Hillard the Medicaid claims submitted by the nursing homes in the ordinary course; these Medicaid claims were to be paid under specifically agreed upon case mix category ("CMC") rates, as set forth in the Settlement Agreement. An emergency hearing was held on November 3, 1997 and the Court entered an Order Granting Plaintiff's Emergency Motion for Authorization to Enter Into Settlement Agreement (C.P. # 270 of Adv. No. 94-0467-BKC-AJC-A). Prior to the Commonwealth executing the Settlement Agreement, the parties filed a Joint Motion for Dismissal (C.P. # 271 of Adv. No. 94-0467-BKC-AJC-A). An Agreed Order of Dismissal (C.P. # 272 of Adv. No. 94-0467-BKC-AJC-A) was entered on November 13, 1997. The Commonwealth thereafter executed the Settlement Agreement on or about November 19, 1997. The Settlement Agreement contained an Escrow Agreement, signed by the parties, which set forth certain requirements to be met by all parties with regard to the Settlement Agreement. Despite the specific requirements under the Settlement Agreement, the Commonwealth failed to remit the funds. Although Hillard complied with all of its requirements under the Escrow Agreement, the Commonwealth failed to make the escrow check payable to the escrow agent, costing Hillard $225.00 per day, and it failed to send the appropriate release letter to the escrow agent so that the agent could make the $1,500,000 payment to Hillard. Therefore, on November 26, 1997, the Debtor filed an Emergency Motion to Compel Turnover of Funds Pursuant to Escrow Agreement, Motion for Sanctions, or Alternatively, Motion for Order to Show Cause Why Defendants and Their Counsel Should Not be Held in Contempt of Court (Emergency Hearing Requested). (C.P. # 273 of Adv. No. 94-0467-BKC-AJC-A). The motion sought to compel the Commonwealth to provide Jeffrey Beck, Esq., escrow agent, with the requisite letter authorizing the release to Hillard of the $1,500,000 escrow funds. Hillard incurred legal fees in filing the emergency motion and appearing at an emergency hearing in order to compel the Commonwealth to do what it had already agreed to do in the Settlement Agreement. It appeared to the Court that the Commonwealth was again thwarting Debtor's attempts to reorganize its business under the Bankruptcy Code by refusing to make the agreed payment to Debtor. At the emergency hearing held on November 26, 1997, the Court ordered the turnover of the $1,500,000 escrow funds to Hillard.
During the course of Court-ordered mediation which resulted in the execution of the Settlement Agreement, the Debtor asserts Stanford I. Chesler, Esq., general counsel to the Division of Medical Assistance, assured Hillard the 1993 cost report would not be utilized as a base year for setting rates in the 1998 rate year. Prior to executing the Settlement Agreement, the Debtor claims that, based upon Mr. Chelser's representations, it instructed its accountants, Mullen and Company, to calculate *903 Medicaid rates for 1998 by utilizing the 1996 cost reports as amended. Hillard maintains that it was only after reviewing the accountants' calculations, which were based upon the rate calculations Attorney Chesler represented, did Hillard execute the Settlement Agreement.
But the Commonwealth continued to engage in shenanigans. On May 14, 1998, the Court held a hearing on Plaintiff's Emergency Motion for Relief from Orders, Motion for Sanctions, and Request for Emergency Hearing (C.P. # 276 of Adv. No. 94-0467-BKC-AJC-A) and Defendants' Opposition to Plaintiff's Emergency Motion for Relief from Orders and for Sanctions (C.P. # 278 of Adv. No. 94-0467-BKC-AJC-A). The Debtor asked the Court to vacate the orders entered on November 3, 1997 (Order Granting Plaintiff's Emergency Motion for Authorization to Enter Into Settlement Agreement, C.P. # 270 of Adv. No. 94-0467-BKC-AJC-A) and November 13, 1997 (Agreed Order of Dismissal, C.P. # 272 of Adv. No. 94-0467-BKC-AJC-A). Debtor asserted it was induced by fraud to enter into the Court-approved Settlement Agreement. The Plaintiff explained that by virtue of enacting specific legislation addressed to those matters contained in the Settlement Agreement, the Commonwealth of Massachusetts circumvented the obligations and compromises it agreed to under the Settlement Agreement. At the May 14, 1998 emergency hearing, Plaintiff attempted to admit into evidence certain statements made by Stanford I. Chesler, Defendant's attorney and mediation representative. However, the Court disagreed with the Plaintiff's interpretation of F.R.E. Rule 408 and determined that, under Rule 919 of the Local Rules of the United States Bankruptcy Court for the Southern District of Florida, Mr. Chesler's statements were inadmissible. The Court declined to set aside its orders based on these statements. Notwithstanding the inadmissibility of the statements and the Court's inability to grant Plaintiff the relief requested, the Court entered the Order Denying, Without Prejudice, Plaintiff's Motion for Relief from Orders and for Sanctions (C.P. # 280 of Adv. No. 94-0467-BKC-AJC-A) on May 29, 1998. The order denied the relief Plaintiff sought, but detailed the egregious conduct of the Commonwealth. In re The Hillard Development Corporation, 221 B.R. 282, 283-284 (Bankr.S.D.Fla.1998). In particular, the Court stated:
In an obviously evil attempt to circumvent what was to be a good faith resolution of the disputes between the parties, the Defendant enacted legislation which effectively cut the guts, the legs and the teeth out of the Settlement Agreement, and throws the Plaintiff right back to where it was before Plaintiff thought it had negotiated a deal with which it felt it could live. Throughout these proceedings the Defendant has acted with nothing less than malevolence and ill-will toward the Plaintiff, and the conduct of the Defendant at this stage can best be characterized as bad faith.
Enacting legislation which circumvents the substance and intent of the Settlement Agreement has once again placed the Plaintiff in the position of financial ruin and possibly the end of its existence. Such legislation, apparently enacted after the settlement for the specific purpose of eliminating the benefits of the Settlement Agreement, has crushed this Debtor. . . .
221 B.R. at 283. The order suggested alternative remedies available to the Debtor, including the possibility of filing an adversary proceeding or filing a new bankruptcy case for the purpose of avoiding the Settlement Agreement as an executory contract.
The rate-setting legislation at issue, Massachusetts General Laws Chapter 99, Section 22 states, in pertinent part:
Notwithstanding the provisions of any general or special law to the contrary, nursing facility prospective rates of payment established by the division of *904 health care finance and policy for 1998 may be established as of a different date than January 1 and may be developed using the costs of any year which said division, at its discretion and after public hearing, shall determine appropriate; provided, however, that in order to allow said division necessary time to complete its development and promulgation of the rate methodology for 1998, prospective rates of payment of nursing facility services established by said division for 1997 under 114.2 CMR 5.00 and such rates established for the period including 1997 under a settlement agreement, shall remain in effect for 1998 until 1998 rates shall be promulgated; and provided further, that said 1998 rates shall be paid for nursing facility services provided on or after February 1, 1998. (Emphasis added.)
It is not difficult to surmise the legislation was enacted to affect this particular debtor.
Subsequent to the Court's May 29, 1998 order, Debtor filed a new Chapter 11 case on July 20, 1998, Case No. 98-25061-BKC-AJC. Thereafter, Debtor filed a Motion to Reject the Settlement Agreement as an Executory Contract. The Commonwealth objected on jurisdictional grounds.
The Debtor initiated Adv. No. 98-2370-BKC-AJC-A against the Commonwealth on November 3, 1998. The Commonwealth did not file an answer to the adversary complaint. It has not filed any proofs of claim in this proceeding and has stated on the record there is no intention to do so. (C.P. # 11 of Adv. No. 98-2370-BKC-AJC-A, p. 7, lines 11-13). Instead, the Commonwealth filed a Limited Appearance of the Commonwealth of Massachusetts and Motion to Dismiss (C.P. # 5 in Adv. No. 98-2370-BKC-AJC-A) together with a Limited Appearance of the Commonwealth of Massachusetts and Memorandum of Law in Support of Motion to Dismiss (C.P. # 6 in Adv. No. 98-2370-BKC-AJC-A). Although the Commonwealth has vigorously defended itself for almost one decade in this Court, and there exists no new substantive facts, the Commonwealth suddenly contends this Court lacks jurisdiction to grant any of the relief requested in Hillard's complaint. The Commonwealth asserts its immunity under the Eleventh Amendment to the United States Constitution and seeks to have the adversary proceeding dismissed.
Because the Court found the two cases to be so closely related, the Court reopened Case No. 90-27588-BKC-AJC and consolidated it with the Case No. 98-25061-BKC-AJC. The Court thereupon asserted jurisdiction over the Commonwealth, granted Debtor's motion to reject the Settlement Agreement and reinstated the Final Judgment. The Order Reopening Case No. 90-27588-BKC-AJC, Administratively Consolidating Cases and Reinstating Prior Judgment (C.P. # 284 in Adv. No. 94-0467-BKC-AJC-A) was entered on January 5, 1999.
The matter now before the Court is Defendant's motion to dismiss, argued on January 5, 1999. The Commonwealth insists this Court lacks jurisdiction to adjudicate this adversary proceeding because the Commonwealth has not filed any proofs of claim in Case No. 98-25061-BKC-AJC and has not otherwise made a formal appearance in the case. However, this Court disagrees with the Commonwealth's assertion of a lack of jurisdiction. The Court determines that jurisdiction does exist and accordingly, will deny the Motion to Dismiss.
Discussion
The Defendants appeared before this Court as a creditor of this Debtor in Case No. 90-27588-BKC-AJC. The Commonwealth filed proofs of claim and waived any claim of sovereign immunity under 11 USC § 106 by filing those proofs of claim. The sole reason for the latest filing is due to alleged acts conducted by the Commonwealth in contravention of the terms of the Settlement Agreement, which have placed *905 the Debtor in a precarious financial position. Because the issues in Case No. 98-25061-BKC-AJC are inextricably intertwined with the issues in Case No. 90-27588-BKC-AJC, the Court found cause to reopen Case No. 90-27588-BKC-AJC and consolidate it with Case No. 98-25060-BKC-AJC and Case No. 98-25061-BKC-AJC on January 5, 1999. The principal defense of the Commonwealth is that it is protected by virtue of the sovereign immunity of the United States which it asserts has not been waived. The Commonwealth concedes that 11 U.S.C. § 106 operates to waive the government's right to sovereign immunity only when the government has filed a proof of claim. As a result of the Commonwealth filing timely proofs of claims against the Debtor's estate in Case No. 90-27588-BKC-AJC, the Court concludes that the Commonwealth has effectively waived its sovereign immunity and has determined that waiver is applicable to these jointly administered cases.
I. Failure to State a Claim.
Standard of Review. To state a claim for relief, FRCP 8(a), made applicable to adversary proceedings under FRBP 7008, requires, inter alia, "a short and plain statement of claim showing that the pleader is entitled to relief." The court must "take the material allegations of the complaint and its incorporated exhibits as true, and liberally construe the complaint in favor of the Plaintiff." Burch v. Apalachee Community Mental Health Services, Inc., 840 F.2d 797, 798 (11th Cir.1988) (citations omitted), aff'd, 494 U.S. 113, 110 S. Ct. 975, 108 L. Ed. 2d 100 (1990). At this initial stage of litigation, the Plaintiff is not required to prove its case or to identify its evidence. The "accepted rule" in the Eleventh Circuit applied to motions to dismiss appraises the sufficiency of the complaint. A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. SEC v. ESM Group, Inc., 835 F.2d 270, 272 (11th Cir.1988), quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957), cert. denied, 486 U.S. 1055, 108 S. Ct. 2822, 100 L. Ed. 2d 923 (1988). The Court disagrees with the Commonwealth's assertion that Plaintiff failed to state a claim upon which relief can be granted because the complaint complies with the test for sufficiency of a complaint in this circuit. Moreover, the Court rejects the Commonwealth's attempts to interpose new arguments at the hearing, including abstention and failure to plead fraud with specificity. The Court notes that at the hearing on the Motion to Dismiss counsel for the Commonwealth admitted Hillard is entitled to its day in Court, but argued the litigation should not occur in this Court. In any event, the additional matters brought by the Commonwealth at the hearing on the motion to dismiss should have been pled properly, pursuant to FRBP 7012.
Fraudulent Intent. The Commonwealth contends that the Plaintiff did not plead properly there was actual fraudulent intent by the Defendant. There is no dispute that in order to prevail at trial, Plaintiff must prove the Commonwealth intended to commit the acts that constituted the alleged fraud on the Debtor and/or the Court. Although the circumstances constituting fraud must be plead with particularity, FRCP 9(b) requires only that intent be averred generally. The language of Hillard's complaint satisfies FRCP 9(b). The Complaint provides sufficient allegations against which the Defendant may frame a response to the complaint.
Turnover. The second count of the adversary complaint concerns the turnover of property of the estate. The Plaintiff previously filed a motion for turnover of property. However, the Court entered an Order Denying Motion for Turnover Without Prejudice on September 29, 1998, which states, in pertinent part: "Therefore while this Court is denying the Motion, it is without prejudice to the commencement *906 of an adversary proceeding seeking turnover or seeking to compel a state officer, agent or employee to comply with the provisions of the Bankruptcy Code." This order was not appealed and became a final order.
The Defendant contends that the forum selection clause contained in the Settlement Agreement requires any claim for turnover to be litigated in Massachusetts. In particular, the Commonwealth quotes paragraph seven of the Settlement Agreement:
Hillard and the Commonwealth Agencies reserve and retain any and all rights they may have under applicable law with respect to the submission, review and payment . . . of any and all Medicaid claims filed by Hillard with DMA on or before the date hereof; provided, however, that such rights will extend only to claims for services rendered on or after January 1, 1997.
However, the Court does not consider that language applicable to the turnover claim. The Count for turnover does not involve the construction, enforcement or resolution of any disputes arising out of or related to the agreement but concerns non-payment for services rendered. The Debtor does not challenge the rate of reimbursement it received during 1997, but asserts that the Commonwealth failed to pay certain claims due and owing between January 1, 1997 and December 31, 1997. Because no answer has been filed, these allegations must be taken as true. As previously noted by the Court, unless Debtor receives the payments to which it is entitled in the correct amount and in a timely fashion the likelihood of this Debtor's successful reorganization is dubious at best. The health, welfare and well-being of several hundred elderly residents of the two nursing homes of the Debtor may be affected by the outcome of this adversary proceeding.
II Sovereign Immunity.
The Eleventh Amendment and State Sovereign Immunity. A perplexing issue regarding the Eleventh Amendment arises when actions are filed against state officers and contested on the grounds that these actions violate the state's sovereign immunity. The Eleventh Amendment emerged in 1798 to assure the proper respect for state sovereign immunity under the United States Constitution.[2] Courts' interpretation of the Eleventh Amendment has effectively and consistently ensured immunity when suits are against the states themselves; however, the federal judiciary has constructed limited applicability of sovereign immunity when individuals bring actions against state officials. The Eleventh Amendment lies at the center of the tension between state sovereign immunity and the need to have in place mechanisms for the effective vindication of federal rights. While the Eleventh Amendment by its terms does not bar lawsuits against a state by its own citizens, the Supreme Court has consistently held that an unconsenting state is immune from lawsuits brought in federal courts by its own citizens, as well as by citizens of another state. Edelman v. Jordan, 415 U.S. 651, 662, 94 S. Ct. 1347, 1355, 39 L. Ed. 2d 662 (quoting Hans v. Louisiana, 134 U.S. 1, 10 S. Ct. 504, 33 L. Ed. 842 (1890)).
The statutory commands under the Bankruptcy Code relating to turnover (for example, that one in possession of estate property is required to turn over such property to a trustee or, as here, to the Chapter 11 debtor-in-possession) implicate the Ex parte Young doctrine. That legal fiction has been recognized in a similar case involving the turnover of Medicaid payments withheld from a debtor. See Guiding Light Corporation v. Louisiana (In re Guiding Light Corporation), 213 B.R. 489, 493 (Bankr.E.D.La.1997). The *907 Guiding Light court held that the Ex parte Young exception to the Eleventh Amendment immunity allowed a Chapter 11 debtor/Medicaid provider to bring a cause of action against a state official.
Ex parte Young. The Supreme Court decision early this century in Ex parte Young, 209 U.S. 123, 160, 28 S. Ct. 441, 52 L. Ed. 714 (1908) evolved into the link between state sovereign immunity and the vindication of federal rights. The Ex parte Young doctrine permits federal courts to entertain actions seeking prospective injunctive relief against state officials who violate federal law. In Ex parte Young, the ultimate question was whether the State's attorney general could enforce a state rate-setting scheme that the objecting shareholders of railroad companies claimed was unconstitutional. The shareholders sought a federal injunction against Attorney General Young, prohibiting enforcement of the rate scheme. Attempting to show the lack of necessity for federal intervention, Young maintained the shareholders could wait until a state enforcement proceeding was brought against the railroads and then test the law's validity by raising constitutional defenses. The Supreme Court rejected that argument, first because a single violation might not bring a prompt prosecution; and second because the penalties for violations were so severe that a railroad official could not test the law without grave risk of heavy fines and imprisonment. The Court stated that a federal suit for injunctive relief would be "undoubtedly the most convenient, the most comprehensive and the most orderly way in which the rights of all parties can be properly, fairly and adequately passed upon." Young, 209 U.S. at 166, 28 S.Ct. at 456. The Supreme Court held that federal courts may exercise jurisdiction over a state official alleged to be acting in violation of federal law on the theory that the official's conduct stripped him ". . . of his official or representative character and . . . subjected him in his person to the consequences of his individual conduct". Id. Although the Ex parte Young doctrine has eroded a bit over the years, i.e. Edelman v. Jordan, 415 U.S. 651, 664-67, 94 S. Ct. 1347, 39 L. Ed. 2d 662 (1974) (Ex parte Young doctrine inapplicable to claims for retroactive relief or damages against the state treasury and limited to actions for prospective relief) the rate-setting scheme in this proceeding is similar to the facts in Ex parte Young, and the Court has determined the Ex parte Young doctrine applies to the instant proceeding.
Recent Supreme Court Cases. In considering the doctrine of sovereign immunity and, in particular, determining whether the application of Ex parte Young is appropriate in this adversary proceeding, this Court has relied on two recent Supreme Court cases. These cases are not dispositive of the issues herein, but are certainly helpful to the Court's decision. In 1996, the Supreme Court addressed the appropriateness of legal action against state officials in Seminole Tribe v. Florida, 517 U.S. 44, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996). More recently, in 1997, the Supreme Court carved out another exception to the Ex parte Young doctrine in Idaho v. Coeur d'Alene Tribe, 521 U.S. 261, 117 S. Ct. 2028, 138 L. Ed. 2d 438 (1997).
The Seminole Case. The Seminole decision arguably provides a general rule that courts will not grant Ex parte Young jurisdiction in all similar suits if a comprehensive remedial scheme exists. 517 U.S. at 74-75, 116 S. Ct. 1114. Quoting Blatchford v. Native Village of Noatak, 501 U.S. 775, 779, 111 S. Ct. 2578, 115 L. Ed. 2d 686, the Court stated, "we have understood the Eleventh Amendment to stand not so much for what it says, but for the presupposition . . . which it confirms." Seminole, 517 U.S. 44, 53-54 116 S. Ct. 1114, 1122 (1996). This presupposition, that each state is a sovereign entity in our federal system, and that "[i]t is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent" was first stated by the Supreme *908 Court in 1890 in Hans v. Louisiana, 134 U.S. 1, 10 S. Ct. 504, 33 L. Ed. 842 (1890). The Seminole Court held Ex parte Young inapplicable both because Congress had provided for an alternative statutory remedial scheme for tribes under the Indian Gaming Regulatory Act which enables tribes to petition the Secretary of the Interior for alternative relief and because it was not clear that Congress intended Ex parte Young to apply. See Seminole, 116 S.Ct. at 1132-33 (deeming Young a "narrow" exception to the Eleventh Amendment). A qualifying footnote, footnote 17, accompanying this language seems to limit the Seminole holding because it states: "[The Court] find[s] only that Congress did not intend [to grant jurisdiction under Ex parte Young] in the Indian Gaming Regulatory Act." Seminole, 517 U.S. at 75 n. 17, 116 S.Ct. at 1132-33 n. 17. In addition, the Supreme Court focused on the language of the statute and on whether it is directed at a "state" or a "state official". Id. The Court found this distinction significant because it indicated that Congress' intent in the Indian Gaming Regulatory Act was not to permit suits against state officials.[3]Id. at 75-76, 116 S. Ct. 1114. The only authority the Supreme Court relied on to support that theory is State ex rel Stephan v. Finney, 251 Kan. 559, 836 P.2d 1169 (1992). Finney, which arose from the Kansas Supreme Court, only addressed whether Kansas' governor had the ability to bind the state in a contract entered into with an Indian tribe under the Indian Gaming and Regulatory Act. The Kansas Supreme Court did not inquire into statutory construction or interpretation, and it only analyzed the policy of the State of Kansas with regard to actions of its officials. Thus, the Supreme Court's holding relied on a state court decision that is tenuously based to evidence Congress' intent not to allow a suit under Ex parte Young. The Court's use of this sole case, and the fact that the Court did not cite additional authority, are further support that the holding of Seminole is applicable only to suits brought under the Indian Gaming and Regulatory Act.
Idaho v. Coeur d'Alene Tribe of Idaho. In the Coeur d'Alene case, the Supreme Court explained that sometimes the exercise of a federal court's equitable jurisdiction is necessary to avoid "excessive and oppressive penalties, [the] possibility of [a] multiplicity of suits causing irreparable damage, or [the] lack of proper opportunities for [state] review." 521 U.S. at 273-74, 117 S.Ct. at 2036 (quoting, Warren, Federal and State Court Interference, 43 Harv.L.Rev., 345, 377-378 (1930)). In this case, a federally-recognized Indian tribe and individual tribal members brought an action against the state of Idaho and various state officials and agencies alleging ownership in submerged lands, in a lakebed and its tributaries, as all were contained within the boundaries of the reservation. The Supreme Court held that an action, which was the functional equivalent of a quiet title action, did not come within the doctrine of Ex parte Young and therefore was barred by the Eleventh Amendment. Specifically, this case held that an exception to Eleventh Amendment sovereign immunity under doctrine of Ex parte Young does not permit federal court action to proceed in every case where prospective declaratory and injunctive relief is sought against a State officer named in his official capacity.
Although the Supreme Court ruled that the Eleventh Amendment barred the tribe from bringing suit, the Coeur decision provides two useful insights. First, even if there is a prompt and effective remedy in a state forum, an instance in which Ex parte Young may serve an important interest is when the case calls for the interpretation of federal *909 law. This reasoning, which is described as the interest in having federal rights vindicated in federal courts, can lead to expansive application of the Ex parte Young exception. See, e.g., Green v. Mansour, 474 U.S. 64, 68, 106 S. Ct. 423, 426, 88 L. Ed. 2d 371 (1985) (explaining that Young furthers the federal interest in vindicating federal law); Pennhurst, 465 U.S., at 104, 104 S.Ct., at 910 ("[T]he Young doctrine has been accepted as necessary to permit the federal courts to vindicate federal rights."). For purposes of the Supremacy Clause, it is simply irrelevant whether the claim is brought in state court or federal court. However, this Debtor's ability to successfully reorganize its business and enjoy the fresh start afforded to it under the Bankruptcy Code and the issue of whether several hundred elderly residents could be turned away, as well as judicial economics, dictates that this Court is the appropriate forum in which this adversary proceeding should be commenced. Second, the Supreme Court has permitted federal actions to proceed even though a state forum was available to hear the plaintiff's claims. In fact, Ex parte Young itself relied on two such cases, both of which involved challenges to state enforcement of railroad rates. See, Reagan v. Farmers' Loan & Trust Co., 154 U.S. 362, 14 S. Ct. 1047, 38 L. Ed. 1014 (1894) and Smyth v. Ames, 169 U.S. 466, 18 S. Ct. 418, 42 L. Ed. 819 (1898). In both Reagan and Smyth, like Ex parte Young, the Court permitted the federal suit to proceed. The fact that the states had waived immunity in their own courts was not the sole basis for permitting the federal suit to proceed.
It is clear that the Supreme Court focused its energies in Seminole and Coeur d'Alene to prohibit tribes from bringing suit. The Court may have intended a narrow construction of these two cases to apply only in tribal actions. A majority of courts have not yet applied this new approach, so the more limited interpretation, that these cases apply only to suits under the Indian Gaming Regulation Act or regarding submerged lands, is certainly a plausible reading of the law, as is the contention that the ever changing federal policy with respect to Indian tribes continues to evolve. Clearly, the Ex parte Young decision arose out of a need to protect federal rights, a need which emanated from the decision in Hans v. Louisiana. Until the Supreme Court overrules or otherwise disposes of Hans, the preservation of the Ex parte Young doctrine is necessary to assure that the states do not override the interests of the federal government and individuals.
III. Subject Matter Jurisdiction.
Notwithstanding the foregoing waiver of sovereign immunity and constitutionality of 11 U.S.C. § 106(a), the Commonwealth further suggests that this Court lacks subject matter jurisdiction and venue to consider any claims that arise out of or are related to the Settlement Agreement. This argument is completely specious to the present case. The gist of the Complaint is that the Commonwealth engaged in fraud against the Plaintiff and fraud upon the Court and appropriate relief is sought under FRCP 60(b), made applicable to this proceeding under FRBP 9024, to set aside the orders authorizing the Debtor to enter into the Settlement Agreement and approving the Settlement Agreement itself. The Commonwealth has failed to cite a single case in which a court order was required prior to the entry of a settlement agreement by the parties and a court order was required approving the settlement agreement. The cases cited by the Commonwealth are contract law cases that have no relevance to this particular adversary proceeding. The entire process surrounding the Settlement Agreement, including not only the execution of the Settlement Agreement but the obtaining of the orders through the Bankruptcy Court is, as alleged in the Complaint, a result of the fraud committed by the Commonwealth Defendants. Because the entire Settlement Agreement is alleged to be a product of fraud, it follows that the alleged *910 forum selection clause contained in the Settlement Agreement would also be the product of fraud. Therefore, evidence concerning the fraud is admissible in this Court. Assuming the truth of the allegations of fraud as set forth in the Complaint and because the Settlement Agreement has been avoided as an executory contract and state courts do not have a remedy which allows debtors in bankruptcy to avoid executory contracts, no portion of that Settlement Agreement, including the forum selection clause, can be enforced at this time. It is
ORDERED AND ADJUDGED that the Defendants' Motion to Dismiss is DENIED, and the Defendants shall answer the Complaint within twenty (20) days of the date of is Order.
NOTES
[1] 11 U.S.C. § 106(a) provides that "[a] governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental unit's claim arose."
[2] The Eleventh Amendment provides: "The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens or Subjects of any Foreign State." U.S. Const. Amend. XI.
[3] However, the Court's dissenter noted that such a distinction is unprecedented. Seminole, 116 S.Ct. at 1122 (Souter, J., dissenting). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552536/ | 228 B.R. 264 (1998)
In re William Oren HOUGH, Jr. and Barbara Irene Hough, Debtors.
Robert A. Fry and Elizabeth G. Fry, husband and wife, dba Gem Physical Therapy Clinic, and Chip Sands, an individual, Plaintiffs,
v.
Barbara Irene Hough, Defendant.
Bankruptcy No. 98-01101, Adversary No. 98-6172.
United States Bankruptcy Court, D. Idaho.
December 18, 1998.
Cathleen M. Morgan, Quane, Smith, Boise, ID, for plaintiffs.
Jake W. Peterson, Boise, ID, for defendant.
MEMORANDUM OF DECISION
JIM D. PAPPAS, Chief Judge.
Background and Facts.
This action presents an issue of first impression in this District. The parties submit, and the Court agrees, that no issues of material *265 fact remain for trial, and that the question presented in purely one of law involving the interpretation of a relatively new provision of the Bankruptcy Code.
Defendant Barbara Hough filed a Chapter 7 bankruptcy petition with this Court on April 8, 1998. Plaintiffs Robert and Elizabeth Fry (d/b/a Gem Physical Therapy Clinic) and Chip Sands are included among her creditors. It seems that in June, 1995, Defendant sued Plaintiffs in state court. She alleged that she retained Plaintiff Chip Sands, an Emmett physical therapist employed in a clinic owned and operated by Plaintiffs Fry, and that during a treatment session, she was injured as a result of Sands' negligence. The state district court disagreed with Defendant, granted Plaintiffs summary judgment, and awarded them approximately $1,600 in costs against Defendant.
Defendant appealed to the Idaho Supreme Court. That court not only affirmed the district court's decision, but in addition awarded Plaintiffs another $4,600 in attorney fees and costs incurred on appeal under Idaho Code § 12-121. In making the award, the court found that Defendant's appeal had been "frivolous, unreasonable and without foundation." Hough v. Fry, 98.7 I.S.C.R. 244, 245.
Plaintiffs commenced this adversary proceeding seeking to obtain a declaration from this Court that the debt represented by the awards of fees and costs they obtained against Defendant are excepted from discharge in bankruptcy under 11 U.S.C. § 523(a)(17). Defendant disputes this contention, and Plaintiffs have now moved for summary judgment. The Court conducted a hearing on Plaintiffs' motion on December 10, 1998, the parties have briefed the issue, and the question is now ripe for decision.
Applicable Law and Disposition of the Issue.
Section 523(a)(17) excepts from discharge in a Chapter 7 bankruptcy any debt:
for a fee imposed by a court for the filing of a case, motion, complaint, or appeal, or for other costs and expenses assessed with respect to such filing, regardless of an assertion of poverty by the debtor under § 1915(b) or (f) of title 28, or the debtor's status as a prisoner, as defined in section 1915(h) of title 28. . . .
11 U.S.C. § 523(a)(17). This provision was enacted by Congress as part of the Prisoner Litigation Reform Act of 1995, Pub.L. 101-140, 110 Stat 1327, HR3019 (May 3, 1996). One court has observed, in one of the very few reported decisions dealing with this new law, that in adopting the Prison Reform Act of 1995, that:
Congress substantially revised the federal in forma pauperis statute, 28 U.S.C. § 1915, to require prisoner-litigants to pay the full amount of court filing fees, notwithstanding the language in § 1915(a) that authorizes a federal court, upon proper showing, to allow the commencement, prosecution, defense, or appeal of a civil or criminal action in federal court without prepayment of fees. See Prison Litigation Reform Act § 804(a). Although the statute, as amended, now requires prisoner-litigants to pay court fees in full, it permits them to make installment payments. In addition to revising 28 U.S.C. § 1915, Congress amended the Bankruptcy Code by adding 11 U.S.C. § 523(a)(17). Id. § 804(b).
In re Tuttle, 224 B.R. 606, 609 (Bankr. W.D.Mich.1998). Through this legislation, while prisoners may make payment of filing fees in installments, under the new law, their obligation to pay fees in connection with the actions in which they participate is not subject to discharge in a liquidation bankruptcy.
Plaintiffs in this action, however, remind the Court that the statute is not limited by its terms to litigation fees and costs incurred by or imposed against "IFP" prisoners. Defendant counters that the statute must be read in light of its purpose in enactment, and narrowly construed to promote the "fresh start" policy of bankruptcy relief, so that awards of litigation costs in a personal injury action against a non-prisoner debtor remain dischargeable. As of this date, only two reported decisions analyze the meaning of the new statute, and both would seem to favor Defendant's approach. See In re Tuttle, supra; South Bend Community *266 School Corp. v. Eggleston, 215 B.R. 1012 (N.D.Ind.1997). While this Court appreciates the thoughtful opinions expressed in those decisions, it is constrained to apply the plain language of the statute to the facts of this case. When it does, it must conclude the Plaintiffs' claim against Defendant has been excepted by Congress from discharge.
The Court finds no fault with the observation of the Defendant and the two courts noted above that Section 523(a)(17) was adopted by Congress as a complementary provision to the package of laws designed to curb frivolous lawsuits initiated and pursued by prisoners without the sobering deterrent of payment of litigation expense. Congress' purpose in this regard seems apparent enough. Whether it had other goals in mind in creating the new exception to discharge is less clear. And more importantly, the suggestion that Congress may have utilized, in Section 523(a)(17), language that was too broad to accomplish its narrow goal is not a valid basis to suspend the application of the unambiguous language used in the law. If Congress preferred a restricted approach, it could have limited the operation of the exception to "fees imposed by a court against a prisoner." It failed to do so and while it may have constructed a tiger-pit to trap a mouse, only Congress can properly remedy the error.
This Court is compelled to apply the plain meaning of the statute. 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)). By the same token, a party seeking to defeat the plain meaning of the text of the Bankruptcy Code bears an "exceptionally heavy burden." Patterson v. Shumate, 504 U.S. 753, 760, 112 S. Ct. 2242, 2248, 119 L. Ed. 2d 519 (1992). Section 523(a)(17) applies, on its face, to any debts imposed by a court for filing fees, or for other expenses assessed with respect to a case. These debts are excepted from discharge in bankruptcy regardless of whether the debtor is (or is not) impoverished as defined by subsections (b) or (f) of the Federal in forma pauperis statutes,[1] and regardless of the debtor's status as a prisoner (or not) as discussed in subsection (h) of those statutes. Affording the language used by Congress in the Bankruptcy Code provision its plain meaning, then, attorneys fees and costs assessed by a court against a nonprisoner litigant, who later seeks bankruptcy relief, are clearly excepted from bankruptcy discharge. Having read the statute in this natural, unambiguous fashion, the Court's interpretive responsibilities are fulfilled. It is simply unnecessary to go to the lengths engaged in by the courts in Tuttle and South Bend to interpret away this straightforward, albeit arguably unintended, meaning of this enactment. In other words, it is not the province of this Court to judicially amend clearly worded statutes.
The Court is mindful that bankruptcy courts should construe exceptions to discharge narrowly in favor of the debtor as a matter of policy. Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996); Hayhoe v. Cole (In re Cole), 226 B.R. 647, 653 (9th Cir. BAP 1998). On the other hand, "the fact that Congress may not have foreseen all the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning." Union Bank v. Wolas, 502 U.S. 151, 157-158, 112 S. Ct. 527, 530-531, 116 L. Ed. 2d 514 (1991).
Moreover, even were the Court inclined to stray from its proper role, it may not so easily be assumed that in adopting the language of the new discharge exception, Congress did not intend it to apply to nonprisoner litigants under any circumstances. For example, in this action, the attorney fees awarded to Plaintiffs by the Idaho Supreme Court were in furtherance of the policy adopted by Idaho's legislature that parties *267 who engage in litigation which is frivolous, unreasonable, and without foundation must pay the costs incurred by those they sue. Even if Congress targeted vexatious prisoner legal actions as its reason for a new exception to discharge, must it also be assumed that similar meritless, but costly, lawsuits brought by private parties should be subject to discharge? In other words, the result of the reading of the statute literally is arguably too broad, but certainly not "patently absurd." See INS v. Cardoza-Fonseca, 480 U.S. 421, 452, 107 S. Ct. 1207, 1223, 94 L. Ed. 2d 434 (1987) (Scalia, J., concurring). Nor can application of the statute to facts such as these be characterized as "demonstrably at odds with the intentions of the drafters." United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 249, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989). A literal construction of the statute still accomplishes what Congress intended, even if on somewhat larger scale.
In sum, Congress can amend the statute if the approach it has taken is too severe for the problem sought to be addressed.[2] The Court will not, nor should it, judicially legislate what some may see as a solution in the interim.
Plaintiffs' Motion for Summary Judgment will be granted by separate order.
NOTES
[1] That the statute as written applies to nonprisoner debtors is unmistakable. 28 U.S.C. § 1915(f)(1) allows a court to impose costs against an IFP party under some circumstances without regard to whether that person is a "prisoner," defined in subsection (h) as someone incarcerated or detained. Subsection (f)(2) authorizes awards of costs only against prisoners. The reference in Section 523(a)(17) to persons who are impoverished as referred to in subsection (f) simply can not, therefore, be seen as solely referring only to prisoners.
[2] In fact, legislation to narrow the scope of this exception to discharge was included in bankruptcy reform legislation which passed the Senate. See S.1301, Consumer Bankruptcy Reform Act of 1997, Section 414, ¶ 5 (proposal to strike "by a court" and replace with the insertion of "on a prisoner by any court"). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552788/ | 199 B.R. 25 (1996)
Brian Strathearn WOOD, Appellant,
v.
DEALERS FINANCIAL SERVICES, INC., Appellee.
In the Matter of DEALERS FINANCIAL SERVICES, INC., Plaintiff,
v.
Brian Strathearn WOOD, Defendant.
Civil Action No. 95-40447. Bankruptcy No. 95-44081-R. Adversary Proceeding No. 95-4647-R.
United States District Court, E.D. Michigan, Southern Division.
July 31, 1996.
Alan C. Harnisch, Harnisch & Hohauser, Bingham Farms, MI, for Dealers Financial Services, Inc.
*26 Danette P. Gambrell, UAW-GM Legal Services Plan, Warren, MI, for Brian Strathearn Wood.
ORDER
GADOLA, District Judge.
In 1987, the appellee, Dealer Financial Services, Inc. (hereinafter "DFS"), filed a complaint in the Oakland County Circuit Court alleging conversion, misappropriation, fraud and conspiracy to defraud against the appellant, Brian Strathearn Wood. Wood failed to answer this complaint, and a default judgment was entered against Wood on or about April 15, 1988.
Approximately six years later in 1994, Wood filed a motion to set aside default and quash writs of garnishment in the Oakland County Circuit Court. This motion was denied. Wood then filed for Chapter 7 bankruptcy on April 19, 1995. DFS initiated an adversary proceeding arguing that its default judgment was nondischargeable pursuant to 11 U.S.C. § 523.[1] DFS then filed a motion for summary judgment arguing that Wood was collaterally estopped from litigating issues underlying the previous default judgment. The bankruptcy court agreed with DFS and granted summary judgment on December 8, 1995. The court held that Wood was collaterally estopped from litigating the issue of whether the debt was based upon fraud, and accordingly, that the debt was nondischargeable as a matter of law. On December 18, 1995, Wood filed an appeal from the bankruptcy court's final order granting summary judgment. For the following reasons, this court will reverse and remand the present case for further proceedings consistent with this opinion.
I. Statement of Facts
In 1986, the appellee, DFS, discovered an apparent scheme by one of its employees to defraud it. The employee was allegedly fraudulently obtaining checks drawn from DFS's account and giving them to Wood for his personal use. DFS found one fraudulent check made out to Wood for $300. Based on this, in 1986 DFS included Wood in an action to recover the misdirected funds.
DFS attempted to serve the complaint upon Wood by mailing it to his father. Wood's father, in a sworn affidavit, stated that his son did not live there any longer, and was living somewhere "up north" with friends. However, Wood's father later spoke with his son by telephone and informed him that attempts to serve Wood were being made. The Oakland County Circuit Court found this phone call sufficient notice of the complaint to enter the default judgment.
DFS was unable to locate Wood to collect on the default judgment from 1988 through 1994. However, in 1994, Wood filed a motion to set aside the default judgment and quash writs of garnishment after discovering that his bank account had been garnished. On December 7, 1995, the Oakland County Circuit Court denied Wood's motion after a full hearing, finding that Wood had notice of the lawsuit and had waived his right to defend that action. Wood then filed for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code. In response, DFS initiated an adversary proceeding objecting to the discharge of its default judgment, followed by the motion for summary judgment which was granted by the bankruptcy court.
II. Discussion
The issue is whether a bankruptcy court may apply collateral estoppel principles to a default judgment obtained pursuant to Michigan law. As the court in In re Kurtz, 170 B.R. 596 (Bankr.E.D.Mich.1994) recognized, "[t]here has been great controversy concerning whether collateral estoppel bars the relitigation of issues, previously determined pursuant to a state court default judgment, necessary to support nondischargeability actions under § 523." In re Kurtz, 170 B.R. 596, 597 (Bankr.E.D.Mich.1994).
*27 In this case, the bankruptcy court held that 28 U.S.C. § 1738[2] required it to follow the state law of Michigan in determining the preclusive effect of a Michigan Circuit Court default judgment. The bankruptcy court then concluded that under Michigan law, collateral estoppel precluded the parties from relitigating the allegations made in the complaint from which the default judgment was granted.
A. 28 U.S.C. § 1738
Article IV, section 1 of the Constitution requires that each state give full faith and credit to the public acts, records, and judicial proceedings of every other state. Similarly, 28 U.S.C. § 1738 imposes a statutory duty upon federal courts to accord full faith and credit to the judicial proceedings of state courts. In the context of determining the preclusive effect to be given the judgment of a state court, § 1738 "directs a federal court to refer to the preclusion law of the State in which judgment was rendered" unless there is an exception to § 1738. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380-81, 105 S. Ct. 1327, 1331-32, 84 L. Ed. 2d 274 (1985) reh'g denied, 471 U.S. 1062, 105 S. Ct. 2127, 85 L. Ed. 2d 491 (1985); In re Kurtz, 170 B.R. 596, 598 (Bankr.E.D.Mich.1994). Thus, the first issue this court must decide is whether an exception to § 1738 exists for the determination by a bankruptcy court of the dischargeability of a debt under § 523. In other words, must a bankruptcy court, in determining the dischargeability of a debt, use state law to decide whether to give preclusive effect to a state default judgment.
In holding there was not an exception to § 1738 for bankruptcy courts determining the issue of dischargeability, the bankruptcy court in the present case relied on In re Eadie, 51 B.R. 890 (Bankr.E.D.Mich.1985). Eadie directly relies on In re Byard, 47 B.R. 700 (Bankr.M.D.Tenn.1985), which expressly held that no such exception exists. The Byard court stated that "there is no compelling statement of federal bankruptcy law which expressly or impliedly excepts to the normal operation of § 1738 where the state court judgment for which issue preclusive effect is sought is a default judgment." Byard, 47 B.R. at 707. See also In re Nourbakhsh, 162 B.R. 841 (9th Cir. BAP 1994). In relying on these cases, however, the bankruptcy court ignored more controlling, and more persuasive, precedent holding that bankruptcy courts making dischargeability determinations are excepted from § 1738's requirement that they follow state preclusion law.
In discussing whether res judicata applies to dischargeability actions, the Supreme Court in Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 60 L. Ed. 2d 767 (1979), generally stated that dischargeability proceedings should be decided by federal bankruptcy courts. Brown, 442 U.S. at 135-36. In its discussion of the 1970 amendment to § 17 (now § 523), the Brown Court found that "[b]y the express terms of the Constitution, bankruptcy law is federal law, U.S. Const, Art I, s 8, cl 4, and the Senate Report accompanying the amendment described the bankruptcy court's jurisdiction over these § 17 claims as exclusive. S Rep No. 91-01173, p 2 (1970)." Id. "If a state court should expressly rule on § 17 questions, then giving finality to those rulings would undercut Congress' intention to commit § 17 issues to the jurisdiction of the bankruptcy court." Id. Brown can reasonably be interpreted as suggesting that bankruptcy courts should not be forced by state preclusion law to give preclusive effect to state court judgments with respect to dischargeability issues.
The Sixth Circuit embraced Brown's view that dischargeability determinations are the exclusive jurisdiction of federal bankruptcy courts in Spilman v. Harley, 656 F.2d 224 (1981). "The power to determine dischargeability was granted to bankruptcy courts by the 1970 Amendments to the Bankruptcy Act. Congress intended to take the determinations governed by 11 U.S.C. § 523(c) away *28 from state courts and grant exclusive jurisdiction in the bankruptcy courts." Spilman, 656 F.2d at 226 (citing Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 60 L. Ed. 2d 767 (1979)).
The Spilman court then went on to conclude that collateral estoppel may apply to dischargeability determinations based on state court judgments as long as certain requirements are met. The court made this determination based solely on federal law, and without any discussion of § 1738's requirement that state law apply. In doing so, Spilman excepted dischargeability determinations from § 1738. "The Sixth Circuit in Spilman v. Harley, 656 F.2d 224 (6th Cir. 1981) apparently recognizing that federal courts may choose not to grant full faith and credit, did not grant full faith and credit to the state court's findings. . . ." In re Kurtz, 170 B.R. at 599.
The Sixth Circuit followed the Spilman criteria in Wheeler v. Laudani, 783 F.2d 610 (6th Cir.1986), which reversed the bankruptcy court's granting of collateral estoppel in a dischargeability action, sending it back for review of the entire record. In Wheeler, the Sixth Circuit had the opportunity to follow the holdings of In re Eadie and In re Byard, relied on by the bankruptcy court in this action, but instead reaffirmed the principles set forth in Spilman. Accordingly, while Spilman did not expressly state an exception to § 1738 for dischargeability determinations, the holding further supports a conclusion that such an exception exists.
Other courts have also held that § 1738 does not apply to state court proceedings used as the basis for dischargeability actions. The court in In re Kurtz expressly held that there is such an exception. "Despite the arguments to the contrary, this court finds that there is a judicially created exception to § 1738 for dischargeability actions." In re Kurtz, 170 B.R. at 599. Kurtz also interpreted Brown, supra, as granting bankruptcy courts exclusive jurisdiction over dischargeability actions. Furthermore, the court found itself bound by the Sixth Circuit's ruling in Spilman, and thus, did not apply state law in determining the dischargeability question. A similar result occurred in In re Calvert, 177 B.R. 583 (Bankr.W.D.Tenn. 1995). In re Calvert considered and rejected the arguments presented in In re Byard, instead following Brown and Spilman in holding that bankruptcy court's have exclusive jurisdiction over dischargeability determinations. In re Calvert, 177 B.R. at 586.
In re Hall, 95 B.R. 553 (Bankr.E.D.Tenn. 1989) like the present case, concerned a bankruptcy court's application of collateral estoppel to a state court default judgment with respect to a dischargeability determination. The Hall court considered Marrese, Brown, and Spilman and concluded that an exception did exist to the general rule that state law governs the preclusive effect of a state court default judgment. In re Hall, 95 B.R. at 555-58. The court stated that, "[t]he policy is that neither a creditor nor a debtor should be required to have dischargeability issues tried in a prebankruptcy lawsuit." Id. at 557. Furthermore, "[r]equiring either the debtor or creditor to litigate before bankruptcy in order to preserve the question of dischargeability of the alleged debt is contrary to the policy of the bankruptcy law as pointed out in Brown v. Felsen." Id. at 558.
In light of this precedent, this court concludes that there is a judicially created exception to § 1738 for dischargeability determinations in bankruptcy courts. Thus, a bankruptcy court is not bound by state law when deciding whether to give preclusive effect to state court judgments relating to § 523 dischargeability issues. However, having decided that state law is not controlling, this court still must determine the preclusive effect to be given to prior state court decisions by bankruptcy courts making dischargeability determinations.
B. Spilman v. Harley
The Sixth Circuit set out the standard under federal law for determining the preclusive effect of state court judgments on dischargeability actions in Spilman, supra. In Spilman, the court refused to apply the doctrine of collateral estoppel to a state court judgment because it was unclear whether the matters underlying the state court judgment had been "actually litigated." Spilman, 656 F.2d at 228. The court ruled "[c]ollateral estoppel requires that the precise issue in the *29 later proceedings have been raised in the prior proceeding, that the issues were actually litigated, and that the determination was necessary to the outcome." Id.[3] The Spilman court also stated in its discussion of the actually litigated requirement that, "[i]f the important issues were not actually litigated in the prior proceeding, as is the case with a default judgment, then collateral estoppel does not bar relitigation in the bankruptcy court." Spilman, 656 F.2d at 228. Spilman, however, did not involve a default judgment, but rather a summary judgment. Nonetheless, taken literally, Spilman seemingly precludes satisfaction of the "actually litigated" requirement by any state court default judgment as a matter of law. This was the holding of In re Kurtz, in which a party argued that a state default judgment precluded relitigation of a dischargeability issue. "On balance, proper respect for precedent, and in particular, the literal words of the Sixth Circuit requires this court to therefore conclude that default judgments per se cannot be the basis for collateral estoppel." In re Kurtz, 170 B.R. at 601.
In In re Calvert, a case with facts similar to Kurtz and the present case, the court adopted the "actually litigated" standard of Spilman, but rejected the per se rule of Kurtz, stating "[t]his court is of the view that it is difficult, though not entirely impossible, for a prior state court default judgment to satisfy the "actually litigated" requirement to invoke the doctrine of collateral estoppel in a subsequent bankruptcy." In re Calvert, 177 B.R. at 587. However, in Calvert, the plaintiff failed to satisfy the "actually litigated" standard.
This court need not decide whether all default judgments necessarily fail the "actually litigated" standard. In the present case, there is absolutely no evidence of any actual litigation in support of the underlying nondischargeability issues. The record before this court cannot support a finding that the § 523 nondischargeability issues raised by appellee DFS were actually litigated in the state circuit court. The only issues apparently addressed were whether service was proper, and whether the appellant had actual notice. As to those two issues, the matter is clearly settled-service was proper and Wood had notice. However, there is no indication that any discussion or ruling was issued on the merits of the complaint, i.e. the allegations of fraud. Thus, DFS fails to satisfy the "actually litigated" requirement set forth in Spilman.
Put simply, DFS has failed to satisfy the requirements set forth in Spilman. Therefore, this court finds that the appellant's default judgment has no preclusive effect on the bankruptcy court. Accordingly, the bankruptcy court's ruling granting the plaintiff's motion for summary judgment is reversed.
ORDER
Therefore, it is hereby ORDERED that the bankruptcy court's decision is REVERSED and hereby REMANDED for further proceedings consistent with this opinion.
SO ORDERED.
NOTES
[1] 11 U.S.C. § 523 provides in part:
(a) A discharge under section 727, 1141, 1228(a), 1228(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.
[2] The relevant portion of § 1738 provides that:
Such Acts, records and judicial proceedings or copies thereof, so authenticated, shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken.
[3] A footnote in Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 60 L. Ed. 2d 767 (1979), foreshadows and further supports the "actually litigated" standard set forth in Spilman. The Brown Court noted "[i]f, in the course of adjudicating a state-law question, a state court should determine factual issues using standards identical to those of § 17, then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in the bankruptcy court." Brown, 442 U.S. 127, 139 n. 10, 99 S. Ct. 2205, 2213 n. 10, 60 L. Ed. 2d 767 (1979). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552865/ | 48 B.R. 767 (1985)
OKLAHOMA NATURAL GAS COMPANY, a DIVISION OF ONEOK INC., a Delaware corporation, Plaintiff,
v.
MAHAN & ROWSEY, INC., Reda N. Manes, Doyle E. Manes, Norma Pond Dillard, Imo Longfellow Van Buskirk nee Davies, David H. Loeffler, Ella B. Shaw, Sneed Company, Heirs of Leota Pond Hancock a/k/a Leota Pond Hancox, Bill E. Johns, N.F. Wilder, Heirs of W.A. Martin, Equitable Royalty Corporation, Kenneth H. Goetzke, George D. Goetzke, Ed Kerr, Inc., Visa Exploration Company, Edgar Tenent, Dan Turley, John Reynolds, Clyde Towery, Bess Harrington, O.B. Hayhurst, Clara Turnbull, Mrs. James A. McDonald, Margaret Turnbull, K.L. Turnbull, Wendel H. Turnbull, Mrs. Noel D. Moore, Rainey Oil Company, and Trend Resources, Limited, Defendants.
Bankruptcy No. 82-01390, Adv. No. 82-0298.
United States District Court, W.D. Oklahoma.
March 20, 1985.
*768 *769 Thomas J. Kirby, Huffman, Arrington, Kihle, Gaberino & Dunn, Tulsa, Okl., Charles Nesbitt, Oklahoma City, Okl., for plaintiff.
Paul Degraffenreid, James W. George & Associates, Gerald E. Durbin, II, Durbin, Larimore & Bialick, Murray Cohen, Paul Kendall Tobin, Cohen Pluess & Tobin, James Kirk, Kirk & Chaney, Oklahoma City, Okl., for defendants.
MEMORANDUM OPINION
DAVID L. RUSSELL, District Judge.
The Plaintiff Oklahoma Natural Gas (ONG) initiated this action as an adversary proceeding in the Bankruptcy Court of this judicial district against three Defendants, one of whom, the Defendant Mahan & Rowsey, Inc. (MRI), is a debtor in bankruptcy litigation conducted pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101-1174 (1982). ONG subsequently amended its Complaint to add as Defendants numerous parties alleged to be fractional interest holders in the MRI wells that are the subject of this litigation. Rainey Oil and Trend Resources were allowed to intervene as parties Defendant on July 6, 1983. Shortly thereafter, the Bankruptcy Court dismissed two of the original Defendants, Kerr-McGee and Warren Petroleum, thus giving the adversary proceeding the current array of parties set forth above.[1]
In its Complaint, ONG alleged that MRI drilled two natural gas wells, the Manes No. 1 and the Manes No. 3 ("the Manes wells"), into ONG's underground natural gas storage reservoir ("the Depew reservoir") maintained in a depleted formation underlying Creek County.[2] ONG further alleged that MRI was producing natural *770 gas belonging to ONG from the reservoir and selling it to Kerr-McGee and Warren Petroleum. As a remedy ONG sought three types of relief: (1) damages in the amount of $542,000, representing the gas produced by and sold from the Manes wells; (2) a temporary restraining order and preliminary injunction prohibiting the payment of proceeds of the gas sales to MRI pending the outcome of the litigation; and, (3) a temporary restraining order, preliminary injunction and permanent injunction prohibiting MRI from producing any natural gas from the Manes wells. The pertinent temporary restraining order was initially granted by agreement of the parties, but was subsequently dissolved on September 20, 1982 when the Bankruptcy Court denied ONG's application for a preliminary injunction. As a practical matter, however, ONG received the injunctive relief it desired, as the wells were shut in when Kerr-McGee and Warren Petroleum ceased purchasing natural gas from MRI on October 22, 1982. Further, the amount held by those parties attributable to gas production from the Manes wells was deposited into an escrow account which is now held by the Clerk of the Bankruptcy Court pending the outcome of this proceeding.
The adversary proceeding reached its trial on the merits before the Bankruptcy Court November 21-25, 1983. On November 29, 1983 the Bankruptcy Court entered verbal findings of fact and conclusions of law into the record. On December 7, 1983 an order was issued summarizing these findings and conclusions.[3] The Bankruptcy Court found that ONG had prevailed on its claim against MRI and was therefore entitled to a permanent injunction and disbursement of the funds held in escrow. These findings and conclusions were forwarded to this Court for consideration in accordance with the District Court Rule on Referral of Bankruptcy Cases, Misc. Order No. 9 (W.D.Okla. Dec. 22, 1982) of the W.D.Okla.R.P. ("the referral rule").[4]
Almost immediately MRI motioned this Court to disapprove the proposed findings of fact and conclusions of law forwarded by the Bankruptcy Court. ONG responded in opposition to MRI's motion, supporting the findings and conclusions of the Bankruptcy Court. Oral argument was conducted on May 7, 1984 and the Court at that time took under advisement both MRI's motion and the Bankruptcy Court's proposed findings of fact and conclusions of law. A final round of briefing has been completed, and the Court is now prepared to enter its findings of fact and conclusions of law as required by the referral rule. Cf. 28 U.S.C. § 157(c)(1)(Supp.1984). For that purpose the Court issues this Memorandum Opinion. See Fed.R.Civ.P. 52.
I.
The first issue that the Court must address concerns the standard of review to be applied to the findings of fact made by the Bankruptcy Court. ONG contends that the Court should apply the "clearly erroneous" standard set forth in Fed.R.Bankr.P. 8013, 11 U.S.C.A. (West 1984), by which the Court would be required to accept the Bankruptcy Court's factual finding unless clearly erroneous. MRI, on the other hand, asserts that the Court should apply the standard of review set forth in the referral rule, § (e)(2)(B), which would permit the Court to give the Bankruptcy Court's findings whatever weight it found appropriate. *771 MRI contends that the findings deserve no weight and that a de novo review is in order in this case.
The review issue in this case is part and parcel of the jurisdictional morass created by the decision of the United States Supreme Court in Northern Pipeline Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982). In Marathon Pipeline, the Supreme Court invalidated the "broad grant of jurisdiction to the bankruptcy courts," concluding that the jurisdictional portion of the Bankruptcy Act of 1978, 28 U.S.C. § 1471 (1982), impermissibly vested attributes of an Article III federal court in a legislatively created bankruptcy court not protected by the provisions of Article III. 458 U.S. at 87, 102 S.Ct. at 2880. Thus, many of those matters formerly thought to be within the purview of the Bankruptcy Court are now within this Court's province, most notably those matters involving state created rights and remedies. To alleviate the jurisdictional chaos left in the wake of Marathon Pipeline, this Court adopted the referral rule, which permits referral to the Bankruptcy Court of certain matters within this Court's jurisdiction which are nevertheless related to bankruptcy proceedings. However, the referral rule reflects the impact of Marathon Pipeline; while such matters may be referred to the Bankruptcy Court, it is incumbent upon this Court to render a final decision on all matters which exceed the jurisdictional limits of the Bankruptcy Court as modified by Marathon Pipeline.
It is with this scheme in mind that the Court must determine the proper standard of review to be applied in this case. As the dispute herein involves a state created right and remedy, it is a matter outside the jurisdiction of the Bankruptcy Court. However, as this Court has previously noted, the Bankruptcy Court is empowered to hear such disputes under the referral rule. Oklahoma Natural Gas v. Mahan & Rowsey, Inc., Adv. No. 82-0298 (W.D.Okla. June 29, 1983). Because the Bankruptcy Court's power to hear the adversary proceeding herein arises solely from the referral rule, it is the Court's opinion that the standard of review prescribed by that rule should be applied in favor of the now questionable bankruptcy rule. Thus, the Court's review of the Bankruptcy Court's proposed findings of fact must be in accordance with the referral rule, which provides in pertinent part:
In conducting review, the district judge may hold a hearing and may receive such evidence as appropriate and may accept, reject, or modify, in whole or in part, the order or judgment of the bankruptcy judge, and need give no deference to the findings of the bankruptcy judge.
Referral Rule, Mis. No. 9(e)(2)(B)(W.D.Okla. December 22, 1981). Cf. 28 U.S.C. § 157(c)(1)(Supp.1984).
Ordinarily this Court would give great deference to the findings made by the Bankruptcy Court, perhaps such deference as would create a de facto "clearly erroneous" standard of review such as that provided by Fed.R.Bankr.P. 8013. The Bankruptcy Court performed an invaluable service in hearing this matter and deliberating on evidence that was both controversial and highly technical, and this Court appreciates the careful consideration and keen understanding exhibited by that court. However, there is some question of the propriety of the Bankruptcy Court's consideration of a learned treatise which had previously been ruled inadmissible. Rather than become involved in the merits of this hotly contested issue, involving constitutional implications, the Court simply chooses to review the record de novo and to make its own findings of fact and conclusions of law.[5] To that extent MRI's Motion to the District Court Not to Approve or Endorse Proposed Findings of Fact and *772 Conclusions of Law By the Bankruptcy Court is granted.
II.
Much of the factual background of this case is not in dispute. The area in question is the Depew gas field in Creek County, Oklahoma, which began production of native natural gas in the early 1920's but reached the stage of primary depletion by the end of the 1940's. In 1950, ONG obtained permission to use the depleted Dutcher sandstone formation underlying the Depew field for underground storage of extraneous natural gas produced elsewhere by ONG.[6] ONG then began storing natural gas in the formation and has done so to date, using approximate six month cycles of injection during low demand periods and withdrawal during high demand periods.
In the early 1960's the Depew storage began to reflect the loss of substantial quantities of the stored natural gas. In an effort to determine the cause and location of a leak, ONG drilled eight observation wells between 1964 and 1968. It was determined that the gas was escaping to the northeast of the storage area, and ONG drilled a series of water injection wells to inject water into the storage area to block the loss.[7] This procedure was apparently successful, as ONG recorded no further gas loss from the storage area until May of 1982, when full scale production from the Manes wells began.
In 1981 MRI obtained mineral leases and began drilling wells in an area some three miles to the south of the active storage area. Two of the wells, the Manes No. 1 and the Manes No. 3, produced natural gas. A third well, the Manes No. 2, resulted in a dry hole. The producing wells were shut in, however, because MRI lacked a market for the gas. In February of 1982 a market was obtained when MRI concluded gas sales agreements with Kerr-McGee and Warren Petroleum. Production began again in April of 1982, continuing until October of that year, when the buyers ceased purchasing the natural gas. The wells were shut in at that time and remain so to date.
The geographical location of the Manes wells, in relation to the location of the storage area and several of the observation wells, is extremely important in this case. Observation Well No. 1 is at the far northern extremity of the storage area. Directly to the south is the M. Lewis well, an injection and withdrawal well inside the storage area. To the southwest of the Lewis, also within the storage area, is a second injection and withdrawal well, the Big Pond. To the south and slightly to the east of the Lewis, approximately four thousand feet from the active storage area, is Observation Well No. 2. Due south of the Lewis, approximately eight thousand feet from the active storage area, is Observation Well No. 4. Due south of Observation Well No. 4 is Observation Well No. 6, some fifteen thousand feet from the active storage area. The Manes wells are to the west of Observation Well No. 6, almost due south of the active storage area. The close proximity of the Manes wells to Observation Well No. 6 is significant in this case.
Also significant is the positioning of the Dutcher sandstone formation, the underground formation into which ONG pumps its extraneous natural gas. This formation, which is ONG's underground storage reservoir, is found below all of the wells *773 mentioned above; indeed, with but one exception, the parties agree that all those wells are completed in the Dutcher sandstone.[8] An extremely important aspect of the Dutcher is that, as it extends south from Observation Well No. 1, the Dutcher occurs deeper with respect to sea level altitude; at the Manes wells the Dutcher is some one hundred twenty feet lower than the main storage area. The significance of this fact, in light of the positioning of the various wells in the area, will be discussed below.
III.
ONG's theory of the case requires it to prove three major factual contentions: (1) That the Manes wells are completed in the Dutcher sandstone, the formation in which the Depew storage reservoir is found and in which Observation Well No. 6 is completed; (2) That the Manes wells are in gas communication with Observation Well No. 6; and, (3) That the system of wells comprised of the Manes wells and Observation Well No. 6 is in gas communication with the Depew storage area. Only this last factual issue was hotly contested at trial; however, the Court will consider each factual issue seriatim.
A.
MRI does not seriously debate that the Manes wells are completed in the Dutcher sandstone, the same formation in which Observation Well No. 6 is completed. However, the testimony of MRI's geology expert does raise a factual issue in this regard, and for the record the Court finds that the three wells are all completed in the Dutcher sandstone formation.
This issue arises because there exist two sandstone formations underlying the area in question. One is the Dutcher, which has previously been mentioned. It is undisputed that the storage reservoir lies within the Dutcher, and that all of ONG's wells, including Observation Well No. 6, are completed in this formation. The second is the Morrow, an older formation deposited at an earlier time in history, which is found beneath the Dutcher formation.[9] MRI's geologist testified that the Manes wells are completed in the Morrow formation, and are isolated from ONG's storage reservoir, and therefore Observation Well No. 6, by an impenetrable shale barrier. ONG's experts, however, testified that the Manes wells are completed in the Dutcher formation.
The Court finds more believable the testimony of ONG's geology experts. The first expert, a consulting geologist, testified that the Dutcher is continuous from the storage area to the Manes wells, and that the Manes wells are completed in that formation. He also testified that, while there is some evidence that the Morrow exists below Observation Well No. 6, that well is not deep enough to be completed in the Morrow. He further testified that the Morrow does not exist below the Manes wells.
ONG's second witness, a paleontologist and biostratigrapher, offered testimony that is consistent with and supportive of the geologist's testimony. He opined, as did the geologist, that there is no Morrow formation beneath the Manes wells.
MRI's geology expert, on the other hand, testified that the Morrow does indeed exist below the Manes wells, and that those wells are completed in the Morrow. The Court finds this expert's testimony unpersuasive for two reasons. First, his charts were demonstrated to be flawed at trial, casting some doubt on the validity of those exhibits prepared by him and relied on in his testimony. Second, his testimony in many respects conflicted with that of *774 MRI's other experts. For example, as noted above, he testified that an impenetrable shale barrier isolates the Morrow from the Dutcher; however, it was overwhelmingly demonstrated by ONG, and acknowledged by MRI's engineering experts, that the Manes wells were in some form of communication with Observation Well No. 6. This of course negates the idea that an impenetrable barrier exists, as those wells could not communicate at all unless the structures between the Dutcher and the Morrow are at least permeable to water.[10]
While the testimony of MRI's geologist was helpful and instructive for the Court, it is simply not as believable as that provided by ONG's experts on this issue. Accordingly, the Court finds that the Manes wells are completed in the Dutcher sandstone formation, the same formation in which Observation Well No. 6 and the Depew storage reservoir are found.
B.
Another factual issue not causing serious controversy is whether the Manes wells are in gas communication with Observation Well No. 6. MRI admits the existence of pressure communication between the wells, as indeed it must in light of the overwhelming evidence of the pressure relationship between the wells. While pressure communication does not necessarily enable natural gas to migrate from one well to another, MRI does not seriously dispute the existence of gas communication, either. Indeed, it is MRI's theory that the Manes wells and Observation Well No. 6 are in a separate reservoir of native natural gas and not in the Depew Storage reservoir, and gas communication between those wells is therefore not only possible but also likely.[11] MRI's engineering experts offered no opinion concerning the existence of gas communication between these wells, but seemed willing enough to admit that it does occur. The same can be said for the Bankruptcy Court's independent expert. Thus, the Court concludes that the Manes wells and Observation Well No. 6 are in gas communication.
There is ample evidence to support such a finding. First, there is a striking pressure relationship between the wells. Second, as noted above, the wells are in close proximity, completed in the same formation, and are nearly equal in depth. Third, studies of gas samples from the Manes and from Observation Well No. 6 indicate that the wells produce strikingly similar, if not identical, gas. Given this persuasive evidence, and the absence of evidence to the contrary, the Court finds that there is gas communication between the Manes wells and Observation Well No. 6.
C.
The final factual issue, whether the Manes-Observation Well No. 6 system is in gas communication with the Depew storage reservoir, is the most hotly contested question of the litigation. ONG contends, and bears the burden of proving, that the gas in its storage reservoir migrates through the Dutcher formation to the Manes wells; thus, ONG asserts that MRI is producing ONG's extraneous natural gas injected into the Dutcher for storage purposes. MRI, on the other hand, asserts that the storage reservoir is separated from the system of wells comprised of the Manes wells and Observation Well No. 6 by a continuous body of water, which blocks the migration of natural gas from the storage area. Thus, while MRI admits the existence of pressure communication between the storage area and the Manes area, it vehemently denies that gas is communicated from the storage area to the Manes area.
*775 MRI's opposition to ONG's theory of gas communication is well based. Noting that the Dutcher moves downward with respect to sea level from north to south, MRI contends that the existence of a water table in the storage reservoir prevents the existence of a continuous gas channel between the storage area and the Manes area. MRI believes this to be the case because water, being heavier than gas, would displace any gas in the Dutcher outside the storage area, forcing that gas into the structurally higher storage area rather than into the structurally lower channel of the Dutcher between the storage area and the Manes. More simply put, MRI contends that because water seeks its own level there can be no gas in the Dutcher outside the storage area, as the storage area is a structural high in the region in which a water table exists. Thus, concludes MRI, the gas in the storage area and the gas found in the Manes wells and Observation Well No. 6 are separated by a solid column of water, causing the wells to exhibit a pressure relationship but not allowing communication of natural gas. MRI believes that the gas found in the Manes area is native natural gas occurring in the Dutcher naturally rather than by injection by ONG and migration down structure through the Dutcher.
MRI's theory is well chosen in that it depicts the natural conditions of the Dutcher sandstone at equilibrium; that is, in the undisturbed state of nature MRI's theory would no doubt be valid. However, ONG's case focuses on the assertion that the Dutcher is not in equilibrium, after over thirty years of injection and withdrawal of natural gas and injection of water. Indeed, MRI's experts confirm that the area is not in equilibrium. ONG contends that in this disturbed state a tilted water table, which would permit gas communication down structure, has occurred in the Dutcher.
The concept of a tilted water table is difficult to grasp because it is rare in nature; however, it is apparently a physical possibility notwithstanding its rarity. In essence, ONG contends that, rather than a flat water table in the Dutcher, the water table slopes downward to the south, leaving an unfilled portion of the formation through which natural gas can migrate from the storage area to the Manes wells.
ONG presents a strong evidentiary basis in support of this theory. Its engineering expert testified that the cyclical pressure changes, occasioned by the injection and withdrawal cycle, would cause natural gas in the storage area to finger out from the storage area and down the Dutcher, displacing water as it moves. This occurrence is known as gravity override, as gravity is defied when the lighter gas moves downward to displace the heavier water.
While gravity override is apparently a very unusual natural phenomenon, ONG's engineering witness opined that such a phenomenon had occurred in the Dutcher formation. This opinion spawned immediate and heated controversy; MRI's engineering experts, one of whom is apparently an expert on gravity override, vehemently denied that gravity override could occur in a system such as the Dutcher formation due to lack of volume of moving gas and a low rate of flow. MRI contends that, absent gravity override, there can be no tilted water table and therefore no gas communication.
Whether or not the existence of a tilted water table in the Dutcher may be properly attributed to the phenomenon of gravity override, the evidence presented at trial does support that the Dutcher's water table exhibits a downward tilt toward the south. Observation Well No. 1, at the extreme north edge of the storage area, has a gas-water contact point 2458 feet below sea level. Farther south, Observation Well No. 2 has a gas-water contact point at 2472 feet below sea level. Observation Well No. 4, still farther south, has its gas-water contact point at 2540 feet below sea level. And Observation Well No. 6, the well farthest south of all and in close proximity to the Manes wells, has a gas-water contact point at 2584 feet below sea level. Thus, it is clear that the water table in the Dutcher has not reached its own level, and that the *776 Dutcher is not water saturated continuously between the storage area and the system of wells comprised of the Manes and Observation Well No. 6. ONG argues that this reflects a continuous layer of natural gas above the connate water in the Dutcher, connecting the storage area and Observation Well No. 6 and, through this connection, the Manes wells.
The existence of gas in the Observation Wells between the storage area and the Manes wells tends to negate MRI's assertion that the Dutcher is completely water saturated between those points and therefore cannot convey gas from the storage area to the Manes wells. MRI does, however, offer an explanation of the presence of gas in those wells which is not inconsistent with its noncommunication theory. Specifically, MRI's experts testified that each of the observation wells might be drilled into a gas trap, a structural anomaly underground in which natural gas is trapped in such a way that it cannot be displaced up the structure by heavier water. Thus, while the normal pattern would be for the gas to move up structure, and the water down structure, the existence of a trap causes an isolated miniature reservoir around each of the observation wells.
This explanation, although supported by the opinion testimony of MRI's experts, is much less believable than ONG's theory of a tilted water table and strikes the Court as rather contrived. Indeed, it strains credulity to dismiss as mere happenstance the fact every one of the observation wells was drilled into a gas trap; surely one of those wells should have encountered a portion of the Dutcher not characterized by a rare structural anomaly. Thus, the Court declines to adopt such an unlikely theory; rather, the Court concludes that the Dutcher is characterized by a tilted water table, over which gas from the storage area may pass to Observation Well No. 6 and to the Manes wells.[12] Accordingly, the Court finds that the system of wells comprised of the Manes wells and Observation Well No. 6 is in gas communication with the storage area.
D.
As there is gas communication between the storage area and the Manes wells, it follows that the gas produced by the Manes wells is ONG's extraneous storage gas and not, as MRI contends, native natural gas. There is ample evidence to support such a conclusion. ONG's engineering expert testified to his opinion that the gas produced by the Manes wells is not native natural gas because: (1) helium is found in the gas in appreciable quantities, and helium occurs only rarely, if at all, in Creek County gas fields; (2) certain organic compounds normally found in native natural gas are absent from the gas produced by the Manes wells, indicating that the gas has been previously produced and processed; (3) the gas produced by the Manes wells is dissimilar in composition from native natural gas produced by other wells in the area; and, (4) the bottom hole pressures encountered in the Manes wells do not exhibit the characteristics expected from a native natural gas reservoir. While each of these factors was disputed at trial, the Court finds credible the testimony of ONG's experts in this respect. Thus, the Court finds that the Manes wells are producing extraneous natural gas belonging to ONG and injected for storage into the Depew storage reservoir, rather than native natural gas from an isolated reservoir in the Dutcher.
E.
A final word is in order concerning the quality of the expert testimony presented *777 at trial by the parties. The Bankruptcy Court heard evidence from an impressive array of experts, all of whom boasted impeccable credentials in the areas of education and experience. The quality of the expert testimony was consistently excellent and provided invaluable assistance and enlightenment to the Bankruptcy Court and to this Court on review.
The excellence of the expert testimony does not ease the difficulty of the Court's fact finding process. The Court is required to weigh sharply conflicting testimony concerning matters well outside its area of expertise. Conditions several thousand feet below the surface are not capable of absolute and unflawed discernment; as this litigation profoundly demonstrates, even the experts disagree as to what is occurring underground. The Court is not a font of wisdom with the oracular ability to divine that which cannot be shown in concrete terms; rather, the Court is required to consider the evidence and determine that which has been proven by a preponderance of the evidence under the rules of law. Thus, in the final analysis, the outcome of this case turns on the credibility of the witnesses, and because the Court finds the testimony of ONG's witnesses, taken as a whole, to be more believable than that of MRI's witnesses, the Court concludes that ONG has sustained its burden of proof.
IV.
ONG is a natural gas utility which is charged with providing natural gas to a large number of customers. To facilitate this function, ONG maintains the Depew storage reservoir, which prevents natural gas shortage in months of high demand. As the Manes wells are producing ONG's natural gas from the Depew storage, ONG suffers irreparable harm to its ability to provide service to its customers, harm for which there is no adequate remedy at law. ONG is therefore entitled to a permanent injunction prohibiting MRI from producing any more natural gas from the Manes wells. Likewise, ONG is entitled to receive all amounts currently held by the Clerk of the Bankruptcy Court, as those amounts are the proceeds of ONG's natural gas produced and sold by MRI.
Accordingly, an appropriate form of judgment, with a permanent injunction, shall be issued by this Court in accordance with this Memorandum Opinion.
V.
The last issue to be addressed is MRI's counterclaim for abuse of process. This counterclaim was not tried during the adversary proceedings; thus, neither party is entitled to judgment thereon. However, the Court is persuaded that ONG is entitled to have the counterclaim dismissed. As the Bankruptcy Court noted, ONG has committed no abuse of process simply by pursuing this litigation to a judgment in its favor, a judgment to which it is entitled. Given the outcome of the adversary proceeding, the Court can discern no unlawful purpose in ONG's maintenance of this action. Use of process for an unlawful purpose is essential to an abuse of process claim. 1 Am.Jur.2d Abuse of Process § 4 (1962). See also Blue Goose Growers, Inc. v. Yuma Groves, Inc., 641 F.2d 695, 696-7 (9th Cir.1981). As MRI's counterclaim is premised on ONG's alleged use of this litigation for unlawful means, it is clear that there is no set of facts imaginable which would entitle MRI to the relief it seeks. Accordingly, MRI's counterclaim for abuse of process is dismissed. See Fed.R.Civ.P. 12(b)(6).
VI.
In summary, the Court reaches the following conclusions in this action:
1. MRI's Motion to the District Court Not to Approve or Endorse Proposed Findings of Fact and Conclusions of Law By the Bankruptcy Court is granted;
2. ONG has prevailed on its claim for relief and judgment shall be entered accordingly, as noted above; and,
3. MRI's counterclaim for abuse of process is dismissed for failure to state a claim upon which relief can be granted.
NOTES
[1] Because of the identity of interests among the numerous parties Defendant, the Court will in the interest of clarity refer to the Defendants collectively as MRI. However, it should be noted that the remaining parties Defendant are working interest owners, royalty interest owners, or overriding royalty interest owners in the Manes wells whose rights are affected by this litigation.
[2] In fact MRI drilled three wells in the disputed area. However, the Manes No. 2 well produced a dry hole and is therefore of no interest to this litigation.
[3] The Bankruptcy Court also issued its findings of fact and conclusions of law concerning MRI's counterclaim for abuse of process. This counterclaim was maintained only by the individual Defendant MRI; no other parties Defendant joined. Just before trial on the merits MRI persuaded the Bankruptcy Court to bifurcate the proceedings, reserving trial on the counterclaim until after completion of trial on ONG's claim. However, after finding in favor of ONG on its claim, the Bankruptcy Court proceeded to dispose of MRI's counterclaim as well.
[4] As the Court will be making its own findings of fact and conclusions of law, see infra at 771, those made by the Bankruptcy Court will be neither recounted nor summarized. However, those findings and conclusions were both meticulous and detailed and reflect the careful consideration given to the evidence by the Bankruptcy Court.
[5] In this regard the Court simply chooses to avoid any possible chance that the Bankruptcy Court's consideration of the treatise was erroneous. Still, the Court must note that, were it required to address the merits of this proposition, the Court would be inclined to conclude that any error committed was most likely harmless error. See Fed.R.Civ.P. 61.
[6] Such permission was obtained by Order No. 67796 of the Oklahoma Corporation Commission. Further, ONG has acquired gas storage agreements authorizing the use of the area for storage from surface owners and mineral interests owners in the area. Indeed, ONG has such agreements with all surface owners and mineral interests owners underlying the Manes No. 3 well, and all surface owners and one third of the mineral interest owners underlying the Manes No. 1 well. There is thus no dispute that ONG is authorized to store gas in the area in which the Manes wells are located; the only dispute is whether those wells are producing ONG storage gas or native natural gas not belonging to ONG.
[7] Actually, two of the observation wells, No. 3 and No. 8, were converted into water injection wells in addition to those wells drilled exclusively for the purpose of water injection.
[8] MRI's geology expert testified that the Manes wells are completed in a formation underlying the Dutcher. However, as will be noted, the formation into which the Manes wells are completed is relatively insignificant to the outcome of this litigation and was not seriously contested at trial.
[9] MRI's experts referred to the Dutcher as the Atoka sandstone and the Morrow as the Pennsylvania unconformity sandstone. In the interest of clarity the Court chooses to use the terminology used by ONG's experts: The Dutcher and the Morrow.
[10] The speculation that such communication might occur notwithstanding the impenetrable barrier through a fault or leaky well strikes the Court as somewhat contrived; in any event, it is mere speculation.
[11] This theory explains why the formation issue mentioned above is relatively unimportant to MRI's case. It is MRI's contention that, regardless which formation the Manes wells are in, those wells produce from a native natural gas reservoir which includes Observation Well No. 6, not from the Depew Storage reservoir.
[12] The Court declines to usurp the role of the petroleum engineer by determining the engineering principle which explains the existence of the tilted water table. Rather, the Court simply concludes that it exists, a conclusion well supported by evidence, as noted above. Whether it occurred through gravity override or, for example, because of variable permeability in the Dutcher sandstone, is beyond the expertise of the Court to determine; however, the fact of the tilted water table's existence is well within this Court's expertise given the evidence presented at trial. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1553282/ | 57 B.R. 163 (1986)
In re KNOWARE, INC., Debtor.
Robert CATALDO, Trustee, Plaintiff,
v.
CASEY & HAYES, INC., Defendant.
Bankruptcy No. 84-1318-JG, Adv. No. A84-346-JG.
United States Bankruptcy Court, D. Massachusetts.
January 17, 1986.
*164 Robert Cataldo, trustee.
Patrick P. Dinardo, Boston, Mass., for plaintiff.
George Desmond, Framingham, Mass., for defendant.
MEMORANDUM
JAMES N. GABRIEL, Bankruptcy Judge.
This adversary proceeding came before the Court for trial on the Complaint of the chapter 7 trustee, Robert Cataldo ("the trustee") seeking a determination of the nature and extent of a warehouseman's lien on property of the debtor, Knoware Inc., ("the debtor") asserted by the defendant, Casey & Hayes, Inc., ("Casey & Hayes") for moving and storage charges in the sum of $6127.28 rendered to the debtor prior to the filing of the bankruptcy petition. The trustee asserts that the defendant has no warehouseman's lien because it did not deliver a warehouseman's receipt to the debtor before bankruptcy.
Prior to trial the parties stipulated that Casey & Hayes would turn over the property to the trustee, and that the trustee would hold in escrow the disputed amount ($6127.28) pending resolution of the dispute. Based upon the stipulated facts, testimony, and documentary evidence, the Court makes the following findings of fact and conclusions of law, in accordance with Bankruptcy Rule 7052.
The debtor filed a voluntary chapter 7 petition on October 9, 1984. Prior to the filing, in accordance with an agreement, on September 27, 28 and October 1, 1984 Casey & Hayes moved all of Knoware's equipment, office furniture, files and other personal property from Vaser Street to Bent street in Cambridge, Massachusetts. Casey & Hayes also moved a portion of the property to its warehouse when a sale of the items by Knoware was cancelled. Casey & Hayes sent two invoices to the debtor for services rendered, which remain unpaid. Katherine Durham, an employee of Knoware, made arrangements with Casey & Hayes and supervised the move. In October she received by mail two invoices and a xerox copy of a 5 page inventory of items moved from Casey & Hayes, but did not receive the formal warehouse receipt until after the bankruptcy petition was filed. Brian O'Leary the comptroller of Casey & Hayes prepared a non-negotiable warehouse receipt for Knoware, together with an inventory. He deposited an envelope containing the warehouse receipt and inventory in the company's out going mail bin. It is unknown whether the receipt *165 was deposited in the U.S. mails. The carbon copy introduced into evidence was not delivered to Knoware, as the acknowledgment space remains blank. The trustee contends that Casey & Hayes does not have a valid warehouseman's lien because it did not perfect the lien before bankruptcy by delivering a warehouse receipt to the debtor. Casey & Hayes argues that a warehouse receipt need not be delivered to the customer, but that the warehouseman need only issue the receipt.
The issue presented is whether Casey & Hayes has a valid warehouseman's lien where the receipt was retained by the warehouse company and was not mailed to the debtor until after the filing of the bankruptcy petition?
Section 545 of the Bankruptcy Code provides in pertinent part:
The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien ...
(2) is not perfected or enforceable at the time, of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists; ...
11 U.S.C. § 545(2) (Supp.1984).
A warehouseman has a statutory lien for unpaid charges on goods for which a warehouse receipt has been issued. M.G.L. c. 106 § 7-209(1) provides in pertinent part:
A warehouseman has a lien against the bailor on the goods covered by a warehouse receipt or on the proceeds thereof in his possession or charges for storage or transportation (including demurrage and terminal charges), insurance, labor, or charges present or future in relation to the goods, and for expenses necessary for preservation of the goods or reasonably incurred in their sale pursuant to law (emphasis added).
M.G.L. c. 106 § 7-209(1)(1958).
A warehouse receipt is "a receipt issued by a person engaged in the business of storing goods for hire."
M.G.L. c. 106 § 1-201(45) (Supp.1979).
The warehouseman's lien is expressly dependent upon the issuance of such a document. The term "issued" is not defined in the general definitions section or the section concerning warehouse receipts of The Uniform Commercial Code, and there appears to be no Massachusetts decisions defining the term. I have found two cases which have attempted to define the word "issued". In Grundly v. Clark Transfer Co., 42 N.C.App. 308, 256 S.E.2d 732, 27 U.C.C.Rep. 530 (1979) the Court ruled that "issuance" requires mailing of the warehouse receipt as the plain meaning of the verb to issue is to send forth or emit. The Court noted however that actual delivery of the receipt to the bailor was not essential. In that case, since factual question existed as to whether the receipt had been mailed to an improper address, summary judgment for the customer on his Complaint for return of the goods was inappropriate. Id., 27 U.C.C.Rep. at 535. In Richwagen v. Lilienthal, 386 So. 2d 247, 29 U.C.C.Rep. 964 (Fla.App.1980) the Court declared a sale of a customer's goods by a warehouse invalid since no receipt had been issued. The warehouse's internal office ledger containing the owner's name, the item stored, and the charge did not constitute an issued warehouse receipt.
This Court concurs with the view that issuance of a warehouse receipt requires mailing of the receipt to the customer. The warehouseman cannot claim issuance by mere completion of the form while he retains possession of the receipt thereafter. Such a rule comports with well-settled principles of contract law that posting of a letter of acceptance completes a contract, even if the document becomes lost. See L. Simpson Contracts, § 37, at 54-5 (2d Ed.1965). Depositing the warehouse receipt in the U.S. mails is at the very least, required to meet the element of issuance.
Applying this standard to the instant case, it is clear that the warehouseman does not have a valid lien. There was no evidence that Casey & Hayes mailed the warehouse receipt to the debtor before *166 bankruptcy. The sole evidence was that the form was deposited in the company's box for outgoing mail.
Accordingly, since no warehouse receipt was issued by Casey & Hayes, its lien is invalid, and is not enforceable against the trustee. Judgment is granted for the plaintiff in this adversary proceeding. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552567/ | 228 B.R. 674 (1998)
In re Jeffery Gayle SOMMER, Debtor.
Bankruptcy No. 97-83148.
United States Bankruptcy Court, C.D. Illinois.
March 13, 1998.
*675 Conrad Knuth, Ohio, IL, for Debtor.
Gary Rafool, Peoria, IL, for Trustee.
OPINION
WILLIAM V. ALTENBERGER, Chief Judge.
The Debtor is a 38 year old quadriplegic who lives with his parents. His father is an over the road truck driver, who earns a reasonable income. His mother stopped working at a department store to stay at home and take care of her son. The parents modified their home so the Debtor could live with them. The Debtor receives approximately $700 per month as a social security disability payment, which is used to pay his personal expenses and help to pay the expenses of the home.
At the time the Debtor filed his Chapter 7 case in Bankruptcy he was the insured under two life insurance policies with cash values totaling $6,881.60 and the parents being the beneficiaries. The Debtor claimed the interests in the policies as exempt and the Bankruptcy Trustee objected.
At issue is the interpretation and application of § 12-1001(f) of the Illinois Code of Civil Procedure, which provides an exemption for:
All proceeds payable because of the death of the insured and the aggregate net cash value of any or all life insurance and endowment policies and annuity contracts payable to a wife or husband of the insured, or to a child, parent, or other person dependent upon the insured. . . .
735 ILCS 5/12-1001(f). The Trustee objected to the Debtor's claim of exemption in the life insurance policies on the grounds the Debtor's parents are not dependent upon him. The Debtor argued that the statute creates separate classes for spouses, children and parents, with no dependency requirements and for other persons dependent on the insured. Both the Trustee and the Debtor cite authority in support of their positions.
The Debtor relies on In re Heck, 212 B.R. 314 (Bkrtcy.C.D.Ill.1997), where J. Lessen, a fellow Bankruptcy Judge for the Central District of Illinois, allowed an exemption where the Debtor's non-dependent children were the beneficiaries, stating:
Both parties have offered credible interpretations of the exemption statute. The Trustee argues that the Illinois General Assembly has required that life insurance benefits "be payable `to' one class (spouses), and then has designated an alternate class by using the term `or' followed by `to' and the listing of the members of that class". The Trustee suggests that if the legislature intended to exempt all insurance policies payable to children or parents, then it would have drafted the exemption as "payable to a wife or husband of the insured, or to a child or parent, or to any other person dependent upon the insured" or "payable to a wife, husband, child or parent of the insured, or to any other person dependent upon the insured".
The Debtor argues that the word "dependent" is a qualifying word, and, under the rules of statutory construction, it is to be applied to the words or phrases immediately preceding it, and not extended to other words, phrases or clauses more remote, unless the intent of the legislature required such an extension. In re Rhodes, 147 B.R. 443, 446 (Bankr.N.D.Ill.1992). The Debtor further argues that it is significant that the legislature placed the disjunctive word "or" before the phrase "other person dependent", thereby separating "other person" from the rest of the sentence. *676 Finally, the Debtor suggests that if the legislature intended for relatives of the debtor to be dependent as well as any other person, it would have placed its comma after person and before dependent, i.e., the statute would have read "payable to a wife or husband of the insured, or to a child, parent or other person, dependent upon the insured".
Determining the plain meaning of a statute is almost always a tricky procedure. As one commentator has observed, "Lawyers are paid to disagree; it is the very nature of our adversarial system. Five lawyers worth their salt can come up with five different meanings for `Mary had a little lamb'". Palmer, What will Dewsnup Do to 1322(b)(2) Or The Lien Splitter Meets the Tin Woodman, NACTT Quarterly, Vol. 5, No. 3, p. 25 (April 1992). In this case, both parties maintain that the plain meaning of the statute supports their position and both parties have suggested alternate wording or punctuation which the legislature would or should have used if it intended the interpretation advanced by the other side.
Statutes should be construed to give them a reasonable meaning and to prevent an absurd result. In re Rhodes, supra, 147 B.R. at 446. The court believes that there is a fundamental difference in a debtor's relationship to a spouse, parent or child, and a debtor's relationship to an "other person". The family ties of a debtor or to a spouse, parent or child limit the scope of the exemption. Clearly, there must be some sort of limitation on "other person" or the exemption would be so broad that it would be absurd. The Court believes that the qualifying language "dependent upon the insured" was intended by the legislature to modify "other person", not spouse, parent or child. This holding is consistent with the liberal construction of exemption statutes in favor of debtors mandated by the Seventh Circuit. In re Barker, supra, 768 F.2d at 196.
Judge Lessen did not cite or discuss In re Rigdon, 133 B.R. 460 (Bkrtcy.S.D.Ill.1991), which is relied on by the Trustee and which addressed the issue in a detailed analysis. In Rigdon, the debtors, married adults, claimed an exemption in benefits payable by reason of the death of their fourteen-year old son. Determining that the statute required the parents to be dependent upon their son, the court stated:
The court in In re Schriar, 284 F.2d 471 (7th Cir.1960) interpreted an identical phrase found in the exemption provision of the Illinois Insurance Code. The issue was whether the debtor could claim as exempt the cash surrender value of life insurance policies payable to his nondependent adult children. Id. at 472. The court held that "dependent" modified both "child" and "parent" in the statute. Like the court in Schriar, this court finds that "dependent" modifies "child" and "parent" in § 12-1001(f) such that a child or parent must be dependent upon the insured in order to benefit from the exemption.
Quoting from the Schriar case in a footnote, the court stated:
It is a "cardinal rule" in construction of a statute that effect should be given, if possible, to each word, clause and sentence. The instant statute limits the beneficiaries "to a wife or husband of the insured, or to a child, parent or other person dependent upon the insured." The legislature used the words "or other person dependent upon the insured," not just or person dependent upon the insured. The word "other" cannot be discarded. The legislature clearly anticipated that child and parent were in the same class as "other person dependent upon the insured." The legislature must have intended that "dependent upon the insured" should modify child and parent, as well as "other person." Furthermore, this interpretation gives effect to the chief objectives of the exemptions laws, in that it protects the debtor in his subsistence, his family to whom he is obligated to support, and the public. Interpreting this statute liberally neither requires nor permits us to read into the statute that a beneficiary may be an adult son or daughter not dependent upon the debtor, where such meaning is simply not there.
*677 Schriar, 284 F.2d at 474 (citation omitted).
Turning to the issue of whether the debtors were actually dependent on their minor son for purposes of the exemption statute, the court noted the absence of a definition of "dependent" in the personal property exemption provisions of the Illinois Code of Civil Procedure and explored the meaning given the term by federal courts in the bankruptcy context. The court concluded:
This Court agrees with the reasoning and analysis used in [In re] Tracey [66 B.R. 63 (Bkrtcy.D.Md.1986)] and Dunbar [99 B.R. 320 (Bkrtcy.M.D.La.1989)]. Congress has not defined "dependent" in the Bankruptcy Code, and the Illinois legislature has not defined "dependent" for purposes of the exemption statute. Both legislative bodies, however, have intricately defined "dependent" in other statutes when they though such a definition was necessary. Since neither Congress nor the Illinois legislature has deemed it necessary to define "dependent" for purposes of the issue before the Court, the Court concludes that the ordinary and common meaning of the word will suffice. It should be noted that the purpose of the exemption statutes is to give the debtor enough property and income to subsist and obtain a fresh start. In the Matter of Barker, 768 F.2d 191, 195 (7th Cir.1985); In Re Van Iperen, 819 F.2d 189, 191 (8th Cir.1987); see In re Johnson, 57 B.R. 635, 639 (Bankr.N.D.Ill.1986); In re Dipalma, 24 B.R. 385, 392 (Bankr.D.Mass.1982). Such statutes are to be liberally construed in the debtor's favor. Barker, 768 F.2d at 196; Schriar, 284 F.2d at 473. With this in mind, the Court holds that a "dependent," for purposes of § 12-1001 of the Illinois Code of Civil Procedure, is an individual who is supported financially, either directly or indirectly by another, and who reasonably relies on such support. This is a broad definition, and a factual finding of dependency will thus have to be made, after a hearing, on a case by case basis.
Because the parties had not addressed this issue, the court scheduled a hearing to give the debtors an opportunity to show that they were financially dependent on their son prior to his death.
The court in Rigdon noted that the bankruptcy courts had adopted a broad definition of "dependent". One of the cases discussed by the court in Rigdon, supra, is In re Collopy, 99 B.R. 384 (Bkrtcy.S.D.Ohio 1989), which the court characterized as putting a "somewhat different twist" on the interpretation of dependency. Discussing the case, the court stated:
[I]n that case, the trustee objected to an exemption claimed by the Chapter 7 debtor. The debtor claimed the cash surrender value of a life insurance policy, of which her 85-year-old mother was the beneficiary, as exempt under an Ohio statute which exempted from the claims of creditors of the insured person any policy in which the beneficiary was "`any relative dependent upon such person.'" (Citation). The trustee argued that the beneficiary-mother was not dependent upon the debtor.
The parties in Collopy agreed that the debtor's mother was not financially dependent upon the debtor. The court emphasized, however, that the mother was "entirely dependent upon her daughter in a physical sense." Id. The mother had glaucoma, so the daughter provided "transportation for marketing, banking and medical attention." Id. The court stated it was "a fair inference that the purpose of the life insurance policy [was] to make some provision for the physical needs of the mother in the event that debtor should predecease her." Id. Applying the principle that exemption statutes are to be liberally construed in the debtor's favor, the court concluded:
[T]he word "dependent" [in the Ohio exemption statute] is not limited to financial dependence, but extends as well, at least in circumstances such as those present in this case, to a situation where the purpose of the insurance is to provide for a substitute means of caring for a dependent. To adopt the narrow interpretation of "dependent" urged by the trustee in this case would be to ignore the financial implications which *678 would follow in the event that the insured here died and the beneficiary collected the proceeds of the policy.
Id.
For the reasons stated in Rigdon, this Court agrees with that court's interpretation of the Illinois exemption provision. The provision is clearly based upon a dependency requirement. In the situation of a husband and a wife, it is a given that there is a mutual dependency and there was no need for the Illinois legislature to add that requirement to the provision in so many words. As to the relationship between parents and a child, at some point there is normally an emancipation, where the child begins to live an economically independent life. There would be no need to protect insurance proceeds in such a situation. It is only where the parent or the child is a dependent, similar to another class of relative or friend, who is dependent on the insured, that protection of insurance proceeds makes sense under the exemption provision.
The next issue to be decided is whether the Debtor's parents are financially dependent upon him. They are not. He is dependent upon them. His father is working and is earning a good salary, sufficient to support himself and his wife. There are certain additional expenses associated with the Debtor living with his parents. However, those expenses are being covered by the Debtor contributing all or part of his monthly disability payment towards them.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552693/ | 199 B.R. 347 (1996)
In re CCR FINANCIAL PLANNING, LTD., Debtor.
Mr. and Mrs. James W. MANN, Plaintiffs,
v.
CCR FINANCIAL PLANNING, LTD. a/k/a Robert A. McKoy, Defendant.
Adv. No. 96-1028. Bankruptcy No. 95-14732.
United States Bankruptcy Court, E.D. Virginia, Alexandria Division.
August 12, 1996.
*348 Bennett A. Brown, Fairfax, Virginia, for Debtor.
Stephen T. Gannon, Paula S. Beran, LeClair Ryan, P.C., Richmond, Virginia, for Plaintiffs.
MEMORANDUM OPINION
MARTIN V.B. BOSTETTER, Jr., Chief Judge.
Today we consider the motion of the debtor, CCR Financial Planning Ltd., to dismiss the complaint of Mr. and Mrs. James Mann to determine the dischargeability of a debt. In response to the debtor's motion, the Mann's filed a motion to amend their complaint to substitute Robert A. McKoy, individually, as the defendant in this proceeding and deem the complaint timely filed in Mr. McKoy's individual bankruptcy. The sole issue before us is whether this court has any discretion under the applicable Federal Rules of Bankruptcy Procedure to permit the creditor to amend its § 523 complaint pursuant to Rule 7015 to avoid the strict application of Rule 4007(c). For the reasons stated below, and on the specific facts of this case, we find that we do not.
I. PROCEDURAL BACKGROUND.
In September, 1995, the Manns obtained a judgment in the amount of $192,000 against both Robert A. McKoy ("McKoy") personally and CCR Financial Planning, Ltd. ("CCR Financial"). On October 24, 1995, CCR Financial, a financial planning business, filed a Chapter 7 bankruptcy, Case No. 95-14732. McKoy was the president and 100% sole shareholder of CCR Financial. Also on October 24, 1995, McKoy filed an individual Chapter 7 bankruptcy, Case No. 95-14731. On the petition filed in the corporate case, CCR Financial listed "Robert A. McKoy" in the space provided for "all other names used by the debtor in the last 6 years (include married, maiden and trade names)." On the petition filed in the individual case, McKoy listed "CCR Financial Planning, Ltd." as his "other name used by the debtor in the last 6 years."
The computer system used by the clerk's office requires a case administrator to describe the "other name" provided by a debtor as "formerly known as," "also known as," "doing business as" or "trading as." In each case, the case administrator chose the abbreviation that best described the debtor's "other name." Thus, on the court's computer system the caption in the individual case reads "Robert A. McKoy DBA CCR Financial Planning, Ltd." and the caption in the corporate case reads "CCR Financial Planning, Ltd. AKA Robert A. McKoy."
On November 1, 1995, the clerk's office issued a form "Notice of Commencement of Case under Chapter 7" in both Case No. 95-14731 and Case No. 95-14732. The Notice issued in the corporate case lists the debtor as "CCR Financial Planning, Ltd., AKA Robert A. McKoy." The Notice also contains the corporation's federal employer identification number and states that it is a "Corporation/Partnership No Asset Case." The Notice in the individual case lists the debtor as *349 "Robert A. McKoy DBA CCR Financial Planning, Ltd." That Notice contains McKoy's social security number and states that it is an "Individual or Joint Debtor No Asset Case."
The Notice issued in the individual bankruptcy established the last day for filing objections to discharge and exception to dischargeability of debts as January 29, 1996. The Notice issued in the corporate bankruptcy does not set such a deadline because corporate debtors do not receive a discharge under § 727. The Manns are listed as creditors on the debtors' schedules in both bankruptcies. The certificate of service filed by the clerk's office in each case indicates that the Manns were among the creditors to whom notice was mailed on November 1, 1995.
On January 29, 1996, the last day to file complaints under § 523 or § 727, the Manns filed a complaint in case number 95-14732, the corporate case, seeking an exception to discharge under § 523. The complaint lists the debtor as "CCR Financial, Ltd. a/k/a Robert A. McKoy." On February 14, 1996, because no complaint had been filed in McKoy's individual bankruptcy, McKoy received his discharge pursuant to § 727 of the Code. Subsequently, on February 29, 1996, McKoy's individual case was closed.
On March 8, 1996, the corporate debtor, CCR Financial, filed a motion to dismiss the adversary asserting that because a corporate debtor does not receive a discharge in a Chapter 7 proceeding, any claim of non-dischargeability under § 523 against it would be moot. In response, the Manns moved to amend their complaint to substitute McKoy as the defendant, to change the case number to McKoy's individual bankruptcy filing and requesting that the amended complaint relate back to the original filing. Also, on April 9, 1996, the Manns moved to reopen McKoy's individual bankruptcy.
II. CONCLUSIONS OF LAW.
Federal Rule of Bankruptcy Procedure 4007(c) is entitled "Time for Filing Complaint under § 523(c) in Chapter 7 Liquidation," and provides that:
A complaint to determine the dischargeability of any debt pursuant to § 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a) . . . On motion of any party in interest after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be made before the time has expired.
Rule 9006, which governs the enlargement of time limitations contained in the rules, provides no assistance to a party that has missed the deadline contained in Rule 4007. Rule 9006(b)(3) explicitly provides that a court may enlarge the time for taking action under 4007(c) "only to the extent and under the conditions stated in those rules." The limitation contained in Rule 9006(b)(3) precludes the consideration of untimely motions under the excusable neglect standard of Rule 9006(b)(1). Hartford Accident & Indemnity Co. v. Mulvaney (In re Mulvaney), 179 B.R. 806, 808-09 (Bankr.E.D.Va.1995) (Adams, J.); Bradco Supply Corp. v. Lane (In re Lane), 37 B.R. 410, 414 (Bankr. E.D.Va.1984) (Shelley, J.). Thus, the provisions of Rule 4007(c) are mandatory and do not allow the Court any discretion to allow a late filed dischargeability complaint or grant a late filed motion for enlargement of time to file such a complaint, even for excusable neglect. In re Lane, 37 B.R. at 414.
We have reviewed the limited exceptions to the strict time limits of Rule 4007(c) and find that they have no application here. The Manns and their counsel concede that they had notice of both bankruptcy filings, and that they mistakenly filed their complaint in the wrong case. They contend that they were confused by the designations "AKA" and "DBA." We recognize the possible confusion the captions of the cases may have caused, but we cannot find that the confusion was caused either by any misconduct on the part of the debtor or any mistake made by the bankruptcy court.
In this case, the Manns have not requested an extension of time to file their complaint in McKoy's individual case, but rather have moved to amend their original complaint filed in the corporate bankruptcy pursuant to Rule *350 7015 to substitute McKoy as the defendant and deem their adversary proceeding timely filed in case number 95-14731 rather than 95-14732. The Manns argue that Federal Rule of Civil Procedure 15 and its underlying policy of liberally allowing amendments supports its motion. However, we cannot find that on these facts the Rule 15 policy of liberally allowing amendments can override the Rule 4007 limitation designed to further the "fresh start" goals of bankruptcy relief. See Columbia First Federal Savings and Loan Assoc. v. Rae (In re Rae), 115 B.R. 6, 7 (Bankr.D.C.1990) (dismissing untimely complaint and noting that "[t]he result may be inequitable and harsh but reflects a policy determination of the rulemakers favoring prompt finality concerning the debtor's fresh start which this Court may not override.")
Having carefully considered the arguments articulated by the Manns and the cases cited in support of their motion to amend, we are not convinced that the time limits of Rule 4007(c) can be circumvented by a motion to amend under Rule 7015. The mistake made by the Mann's counsel is regrettable, but we do not believe that we have the power to remedy it under these circumstances. See H.T. Paul Co., Inc. v. Atteberry (In re Atteberry), 194 B.R. 521, 523-24 (D.Ks.1996) (holding that bankruptcy court does not have the power to allow a creditor to amend a late filed complaint seeking to establish exception to dischargeability in Chapter 7 case, under the bankruptcy rules, so as to render it timely filed).
We have discovered only two cases with facts similar to those in the instant case, and although those cases are not binding on this Court, we agree with the reasoning and conclusions reached by those courts. See In re Atteberry, 194 B.R. 521 (D.Ks.1996) (creditor's complaint dismissed as untimely and denied leave to amend where motion for extension was mistakenly filed in related corporate Chapter 11 case, rather than individual debtor's Chapter 7 case); Household Finance Co. v. Beam (In re Beam), 73 B.R. 434 (Bankr.S.D.Ohio 1987) (creditor's complaint dismissed as untimely where motion for extension was filed in an unrelated case because the caption contained the wrong name and number).
III. CONCLUSION.
Accordingly, the motion of CCR Financial to dismiss the complaint is granted. Consequently, the Mann's motion to amend their complaint filed in case no. 95-14732 and their motion to reopen bankruptcy case no. 95-14731 are denied. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552694/ | 199 B.R. 60 (1996)
In re Jeff GEORGE and Gina George, Debtors.
Bankruptcy No. 95-03996-C.
United States Bankruptcy Court, N.D. Oklahoma.
July 29, 1996.
*61 James Conrady and Laurence Donahoe, Okmulgee, OK, for Debtors.
Scott P. Kirtley, Tulsa, OK, for Trustee.
MEMORANDUM OPINION
STEPHEN J. COVEY, Bankruptcy Judge.
This matter came on to be heard upon the motion of the Trustee, Scott P. Kirtley, requesting that debtors Jeff George and Gina George ("Debtors") turn over property of the estate pursuant to 11 U.S.C. § 542 and Federal Rule of Bankruptcy Procedure 7001. This Court, having conducted a full and complete evidentiary hearing on May 8, 1996, having examined the documentary evidence, having heard the arguments of counsel, and now being fully advised in the premises, hereby finds as follows:
STATEMENT OF FACTS
Debtors filed their voluntary petition for relief under Chapter 7 of the Bankruptcy Code on December 19, 1995. Debtors are a married couple with two minor children residing in their household. Debtors received an income tax refund for tax year 1995 in the amount of $3,111.00. Of the $3,111.00 refund, only $1.00 is a return of withheld wages and $3,110.00 is an earned income tax credit.
Scott P. Kirtley is the duly appointed, qualified and acting trustee (the "Trustee") of this bankruptcy estate.
CONCLUSIONS OF LAW
The first issue before the Court is whether Debtors' earned income tax credit is property of the estate pursuant to § 541 of the Bankruptcy Code. Section 541 provides in part as follows:
(a) The commencement of a case . . . creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) [A]ll legal or equitable interests of the debtor in property as of the commencement of the case.
11 U.S.C. § 541(a)(1). Pursuant to these provisions, an earned income tax credit is property of the estate. In re Goldsberry, 142 B.R. 158, 159 (Bankr.E.D.Ky.1992); In re Buchanan, 139 B.R. 721, 723 (Bankr.D.Idaho 1992); In re Davis, 136 B.R. 203, 205 (Bankr.S.D.Iowa 1991). The Court in In re Davis analyzed the nature of an earned income credit as follows:
An earned income credit is a refundable tax credit provided for low income workers who have dependent children and maintain a household. The credit is based on earned income which includes wages, salaries, and other employee compensation, plus earnings from self-employment. See 26 U.S.C. Sec. 32 (1988). The earned income credit is a refundable credit that is treated as a payment of tax. The credit is refunded as if it were part of a tax overpayment. 26 U.S.C. Sec. 6401(b)(1988).
* * * * * *
This Court is persuaded that an earned income credit constitutes property of the estate. Section 541(a)(1) was intended to be broad in scope and it encompasses property needed by a debtor to ensure a "fresh start." . . . If an individual meets the eligibility requirements set forth in 26 U.S.C. Sec. 32, he or she may file a tax return in order to recover the earned income credit and in some cases may seek advance payment of the credit. The debtor clearly has an interest in the credit and it is property of the estate. Sec. 541(a)(1).
In re Davis, 136 B.R. at 205. See Kokoszka v. Belford, 417 U.S. 642, 648, 94 S. Ct. 2431, 2435, 41 L. Ed. 2d 374 (1974); Segal v. Rochelle, *62 382 U.S. 375, 380, 86 S. Ct. 511, 515, 15 L. Ed. 2d 428 (1966) (cases holding that a tax refund is property of the estate).
The next issue is whether Debtors can claim the earned income tax credit as exempt property. Oklahoma statues provide an exhaustive list of property that debtors may claim as exempt from the claims of creditors. See 31 O.S., 1996 § 1.
Oklahoma statutes do not include a specific exemption for a public assistance benefit. However, 31 O.S., 1996 § 1(A)(19) provides an exemption for "alimony, support, separate maintenance or child support payments." Paragraph 19 provides:
19. Such person's right to receive alimony, support, separate maintenance or child support payments to the extent reasonably necessary for the support of such person and any dependent of such person[.]
31 O.S., 1996 § 1(A)(19). Ordinarily, payments for alimony, support, maintenance, or child support would arise from a divorce decree. However, the statute does not limit the exemption to payments arising from a divorce decree. In addition, the Oklahoma Supreme Court has held that Oklahoma exemption statutes are to be construed broadly. Filtsch v. Curtis, 205 Okla. 67, 70, 234 P.2d 377, 380 (1950) (citing Oklahoma ex rel. Freeling v. Brown, 92 Okla. 137, 140, 218 P. 816, 819 (1923) & Field v. Goat, 70 Okla. 113, 114, 173 P. 364 (1918)).
As stated above, the purpose of the earned income tax credit is to provide support for low income workers who have dependent children and maintain a household. An earned income tax credit is in the nature of a payment for the support of a family with dependent children. These types of payments are exempt from the claims of creditors "to the extent reasonably necessary for the support of such person and any dependent of such person" under Oklahoma law. This Court finds that the earned income tax credit in this case is reasonably necessary for the support of Debtors and their dependent children. Accordingly, Debtors' earned income tax credit is exempt from the claims of creditors and exempted from the Debtors' bankruptcy estate.
The Court will enter a separate judgment order consistent with this Memorandum Opinion. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552692/ | 199 B.R. 639 (1996)
In re Thomas J. WIEGAND, d/b/a Woodsmen Distributors, f/d/b/a The Grainery, The Bookmark, Evening Star Entertainment and Melinda S. Wiegand, Debtors.
Thomas J. WIEGAND and Melinda S. Wiegand, Appellants,
v.
TAHQUAMENON AREA CREDIT UNION, Appellee.
Bankruptcy No. HM 95-90099. No. 2:96-CV-121.
United States District Court, W.D. Michigan, Northern Division.
August 6, 1996.
*640 David E. Bulson, Atty. Rudyard Twp., David E. Bulson, P.C., Sault Ste. Marie, MI, for Appellants.
Donald W. Bays, Osstyn, Bays, Ferns & Quinnell, P.C., Marquette, MI, for Appellee.
OPINION
QUIST, District Judge.
This is an appeal of a final Order entered by the United States Bankruptcy Court on March 20, 1996. The debtors, Thomas and Melinda Wiegand ("Wiegands"), are requesting reversal of the Bankruptcy Court's Order dismissing the Wiegands' motion to hold Tahquamenon Area Credit Union ("Credit Union") in contempt for not turning over funds to the Wiegands held in a Credit Union account. The Bankruptcy Court held that Credit Union had a right of setoff against the Wiegands' account despite the discharge of the Wiegands' debt and despite the account's exempt status.
Facts
The Wiegands filed a Chapter 7 petition with the Bankruptcy Court on March 15, 1995. The Wiegands listed Credit Union as an unsecured creditor with a claim of $2,852.22. The Wiegands claimed a $900.00 account they held at Credit Union as exempt property. Credit Union filed no objection to this claim of exemption. On June 13, 1995, the Bankruptcy Court entered an Order of Final Discharge, and on July 18, 1995, the case was closed. When the Wiegands attempted to withdraw their account, Credit Union refused to release the funds. On September 25, 1995, the Wiegands filed a motion to hold Credit Union in contempt and to order Credit Union to release to the Wiegands the funds held in their account. On March 20, 1996, the Bankruptcy Court entered an Order dismissing the Wiegands' motion.
The Wiegands' appeal concerns whether a creditor's right of setoff may be exercised against exempt property. Whether Credit Union possesses a right of setoff and whether a creditor may setoff discharged debt must also be addressed.
Standard of Review
On appeal from the bankruptcy court, a district court applies a clearly erroneous standard to findings of fact, but a de novo review to questions of law. In re Charfoos, 979 F.2d 390, 392 (6th Cir.1992). The party seeking review of the bankruptcy court's determination bears the burden of proof. In re Van Rhee, 80 B.R. 844, 846 (W.D.Mich.1987) (citations omitted).
Discussion
I. Credit Union Possesses Right of Setoff Under Michigan Law
Before considering a conflict between the Wiegands' right of exemption and Credit Union's right of setoff, this Court must first determine (1) whether the Wiegands' property is exempt, and (2) whether Credit Union possesses a right of setoff.
The Wiegands declared their account exempt under 11 U.S.C. § 522 upon filing their bankruptcy petition. Credit Union did not object to this exemption claim. The Wiegands' account is therefore exempt under federal law for the purposes of this bankruptcy proceeding.
*641 Whether the Credit Union possesses a right of setoff is not as straightforward a question. The Bankruptcy Code does not create a right of setoff. The Bankruptcy Code provides that, with certain exceptions not relevant here, whatever right of setoff otherwise exists in state or federal law is preserved in bankruptcy. 11 U.S.C. § 553(a); Citizens Bank of Maryland v. Strumpf, ___ U.S. ___, ___, 116 S. Ct. 286, 289, 133 L. Ed. 2d 258 (1995). Thus, for Credit Union to possess a right of setoff in bankruptcy, it must possess a right of setoff either under Michigan law, or elsewhere under federal law. See In re Miel, 134 B.R. 229, 234 (Bankr.W.D.Mich.1991) (holding that the I.R.S. has right under § 6402 of the Tax Code to setoff prior tax liability with tax refund); In re Swickard, 133 B.R. 902, 905 (Bankr.S.D.Ohio 1991) (holding that a credit union has right to setoff under Ohio law).
Under Michigan law, Credit Union possesses the right to setoff a customer's account against that customer's defaulted loan. Check Reporting Servs., Inc. v. Michigan Nat'l Bank-Lansing, 191 Mich.App. 614, 627, 478 N.W.2d 893 (1991) (holding that where a bank did not waive its common-law right of setoff, it had right to use funds on deposit in customer's account as setoff against customer's obligations), appeal denied, 440 Mich. 887, 487 N.W.2d 469 (1992). Section 553(a) of the Bankruptcy Code preserves this right for a bankruptcy proceeding. Therefore, Credit Union possess a right to setoff for the purposes of this bankruptcy proceeding.
II. Discharge Does Not Bar a Creditor's Valid Right of Setoff
The Wiegands first argue that the effect of a discharge order is to bar a creditor from exercising a right of setoff against a debtor's discharged debt. The Wiegands assert that because their debt was discharged by the bankruptcy court's final discharge order, there was no liability which could be setoff by Credit Union.
Title 11 U.S.C. § 524 bars the postdischarge collection of discharged debt.[1] Title 11 U.S.C. § 553(a), however, preserves for the creditor the right to setoff after discharge.[2] Except for limited exceptions not relevant here, the Bankruptcy Code "does not affect any right of a creditor to offset a mutual debt." Id. Thus, Sections 524 and 553(a) appear to be in conflict.
The Sixth Circuit has not considered whether setoff may be exercised against discharged debt. Although there is not total agreement on this issue, a majority of courts have held that a creditor's right to setoff survives the bankruptcy court's final discharge of the bankrupt's debts, provided that a right to setoff existed at the time the bankruptcy petition was filed. In re De Laurentiis Entertainment Group Inc., 963 F.2d 1269, 1276 (9th Cir.1992), cert. denied sub nom. 506 U.S. 918, 113 S. Ct. 330, 121 L. Ed. 2d 249 (1992); In re Buckenmaier, 127 B.R. 233, 236-37 (9th Cir. BAP 1991); In re Davidovich, 901 F.2d 1533, 1539 (10th Cir. 1990). But see In re Dezarn, 96 B.R. 93 (Bankr.E.D.Ky.1988) (holding that the effect of discharge is to extinguish debt by enjoining creditors from all collection efforts, including setoff); In re Johnson, 13 B.R. 185 (Bankr.M.D.Tenn.1981) (holding that setoff cannot be asserted after discharge). This Court believes the majority view to be better reasoned.
Because "setoffs in bankruptcy have long been `generally favored,' [] a presumption in favor of their enforcement exists." De Laurentiis, 963 F.2d at 1277 (quoting Buckenmaier, 127 B.R. at 237). Moreover, the primacy of setoffs is essential to the equitable treatment of creditors. Id. It would be unfair to deny a creditor the right to recover *642 a debt from a debtor while at the same time requiring the creditor to fully satisfy a debt to the debtor. It was to avoid this unfairness to creditors that setoffs were allowed in bankruptcy in the first place. Id.
Further, the primary purpose of discharge is to prohibit post-bankruptcy debt collection. Credit Union did not collect its debt from Wiegand. It merely offset its obligation to the Wiegands with that of Wiegands to Credit Union. The primary purpose of discharge in bankruptcy is not disserved. Thus, it was proper for the bankruptcy judge to allow setoff against discharged debt.
III. Exemption is No Bar to a Creditor's Valid Right of Setoff
The Wiegands base their appeal on their right under 11 U.S.C. § 522 to declare property exempt from pre-petition liability. Property exempted under this section "is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case. . . ." 11 U.S.C. § 522(c). The Wiegands rely on a number of bankruptcy court opinions, including one from this district, holding that setoff cannot be exercised against exempt property. See, e.g., In re Miel, 134 B.R. 229, 236 (Bankr. W.D.Mich.1991); In re Thompson, 182 B.R. 140, 153-154 (Bankr.E.D.Va.1995); In re Davies, 27 B.R. 898, 901 (Bankr.E.D.N.Y.1983); In re Monteith, 23 B.R. 601, 604 (Bankr. N.D.Ohio 1982). Courts, however, are sharply divided on this issue. See, e.g., Posey v. I.R.S., 156 B.R. 910, 917 (W.D.N.Y.1993) (holding that the I.R.S. may setoff debtor's exempt income tax refund against debtor's tax liability); In re Runnels, 134 B.R. 562 (Bankr.E.D.Tex.1991); Eggemeyer v. I.R.S., 75 B.R. 20, 22 (Bankr.S.D.Ill.1987). This Court believes the latter cases to be better reasoned and therefore holds that a creditor may exercise its right of setoff against exempt property.
The key to resolving the apparent conflict between Sections 522(c) and 553(a) of the Bankruptcy Code is found in the distinction between offsetting a mutual obligation and collecting on a unilateral debt. The right to setoff under 11 U.S.C. § 553 allows parties that owe money to each other to assert amounts owed, subtract one from the other, and pay only the balance, "thereby avoiding `the absurdity of making A pay B when B owes A.'" Strumpf, ___ U.S. at ___, 116 S.Ct. at 289 (quoting Studley v. Boylston Nat. Bank, 229 U.S. 523, 528, 33 S. Ct. 806, 808, 57 L. Ed. 1313 (1913)). In this case, Credit Union did not collect on the Wiegands' loan. Credit Union merely offset their obligation to the Wiegands with that of the Wiegands to Credit Union.
It is well settled that the application of setoff in a bankruptcy setting is permissive and lies within the equitable discretion of the trial court. In re Southern Industrial Banking Corp., 809 F.2d 329, 332 (6th Cir.1987). As discussed in the previous section, for reasons of fairness there is a presumption in favor of allowing setoffs in bankruptcy. De Laurentiis, 963 F.2d at 1277. Courts have declined to permit setoffs when their allowance would violate the purposes of the Bankruptcy Code. For example, setoff has not been allowed when a creditor created a right of setoff for the inequitable purpose of placing himself in a better position than other creditors, thereby violating the fundamental principle of bankruptcy law that distribution among creditors must be equal. See Southern Industrial, 809 F.2d at 332; In re Union Cartage Co., 38 B.R. 134, 138-40 (Bankr.N.D.Ohio 1984).
Allowing setoff against exempt property would not undermine the general policy behind the Bankruptcy Code[3] because a debtor will not be denied the ability to hold property exempt from liability for pre-petition debts. Only creditors who possess a valid setoff right can offset their obligation with a debtor's exempt property. Under 11 U.S.C. § 522, debtors can still exempt property from the reach of all other creditors possessing pre-petition claims.
*643 Finally, it should be noted that the Bankruptcy Code allows a creditor with a valid setoff right to retain exempt property during the bankruptcy proceeding, rather than turning the property over to the trustee. 11 U.S.C. § 542(b). "[I]t necessarily follows that when the proceeding is over, a creditor with a valid setoff right also may retain property claimed as exempt." Posey, 156 B.R. at 916; see Eggemeyer, 75 B.R. at 22. Therefore, if a creditor's setoff right is not defeated by exemption pursuant to § 542(b) while a bankruptcy proceeding is in progress, then a creditor's setoff right is not defeated by exemption pursuant to § 553(a) after a bankruptcy proceeding is over. Posey, 156 B.R. at 916.
For the above reasons, this Court concludes that the Bankruptcy Court did not err in ruling that the creditor's setoff rights may be exercised against exempt property.
Conclusion
The Bankruptcy Court correctly concluded that Credit Union was not in contempt when it exercised its valid right of setoff against the Wiegands' account, notwithstanding the discharge of the Wiegands' debt or the account's exempt status. Therefore, the United States Bankruptcy Court's decision must be affirmed. An Order consistent with this Opinion will be entered.
NOTES
[1] 11 U.S.C. § 524 provides: "(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 such debt as a personal liability of the debtor . . ." 11 U.S.C. § 524 (emphasis added).
[2] 11 U.S.C. § 553(a) provides: "except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title. . . ."
[3] The Wiegands focus on the Bankruptcy Code's purpose of affecting the rebuilding of the debtor. This, however, is not the exclusive goal of the Code. Another important purpose is the equitable treatment of creditors in determining how the insufficient assets of the debtor are to be divided. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552722/ | 199 B.R. 148 (1996)
In re GENERAL HOMES CORPORATION.
The UNSECURED CREDITORS COMMITTEE, Appellant,
v.
GENERAL HOMES CORPORATION, Appellee.
Civil Action No. H-91-1250.
United States District Court, S.D. Texas.
June 5, 1996.
*149 Leon V. Komkov, Austin, Texas, for Plaintiff.
John F. Higgins, IV, Houston, Texas, for Defendant.
*150 OPINION ON APPEAL
HUGHES, District Judge.
1. Introduction.
Three creditors filed an involuntary petition against a debtor under Chapter 11 of the Bankruptcy Code. During the gap, after the creditors had filed their petition but before the court had ordered relief, the directors of the debtor substantially increased salary and severance benefits for the three principal officers. Two of the three directors were among the officers. Fifty-nine days after approving the new employment contracts, the debtor asked for court approval. More than four months later, the bankruptcy court approved the revised employment contracts over the creditors' objections. The creditors dispute the court's approval of the contracts.
2. Background.
On July 10, 1990, S.N. Phelps & Co., Howard Leppla, and Eleanora Crosby filed an involuntary bankruptcy petition for reorganization against General Homes Corporation (General). The court entered an order for relief on August 14. During the gap between these two events, James Olafson, William LeSage, and Terry Hartzell, who were the directors of General, resolved without a meeting to enter new employment agreements with James Olafson, William LeSage, and James Alexander, who were the senior officers. The new employment contracts were titled "August 1 Employment Agreements." The new contracts increased the officers' salaries by amounts ranging from one-fifth to over one-third. Additionally, the contracts significantly increased the officers' severance benefits regardless of the reason for termination. The board approved the new agreements on August 1. The pay raises took effect immediately. On September 28, General moved the bankruptcy court to approve the August 1 agreements. The unsecured creditors committee and the bank group objected. Through the board, General then negotiated with the bank group, its largest creditor, and resubmitted the contracts to the court as the "Restated Employment Agreements," having modified the terms slightly. As part of the negotiations, the bank group agreed to subordinate its claims, up to $2 million, to employee-related expenses. The board approved the restated agreements on December 7. After a hearing, the court approved the restated agreements on December 20.
3. Before Court Approval.
A. Executory Contracts.
Contracts that do not exist at the time the petition is filed cannot be executory contracts. An executory contract is one "on which performance remains due to some extent on both sides." Tonry v. Hebert (In re Tonry), 724 F.2d 467, 468 (5th Cir.1984). See also S.REP. No. 989, 95th Cong., 2nd Sess. 58, reprinted in 1978 U.S.C.C.A.N. 5787, 5844. An executory contract is "a contract under which the obligations of both the bankrupt and the other party to the contract are so unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." V. Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L.REV. 439, 460 (1973); Jenson v. Continental Financial Corp., 591 F.2d 477, 481 (8th Cir.1979). The date the bankruptcy petition is filed not the date the motion for assumption is filed determines whether a contract is executory. In re Fryar, 99 B.R. 747, 748-49 (Bankr.W.D.Tex.1989). Thus, the contract must exist before the petition is filed. Neither the August 1 agreements nor the December 20 agreements predate the petition. Rather, the directors proposed both sets of contracts in response to the petition. They improved the officers' financial positions in the face of reorganization. 11 U.S.C. § 365 (1996); In re Tonry, 724 F.2d at 468; 2 COLLIER ON BANKRUPTCY § 365.02 (Lawrence P. King ed., 15th ed. 1996); JOHN C. ANDERSON, CHAPTER 11 REORGANIZATION § 9.13 (1995). See also In re American Magnesium Co., 488 F.2d 147 (5th Cir.1974).
B. Ordinary Course of Business.
Employment contracts that substantially increase officers' salaries and severance benefits are extraordinary, falling outside the course of business. Both the August 1 and December 20 agreements increased the salaries of Olafson, LeSage, and Alexander by *151 amounts ranging from one-fifth to over one-third. Olafson received a 20% raise, LeSage received a 37.5% raise, and Alexander received a 34.5% raise. Similarly, their severance benefits increased drastically, including severance pay for termination with cause and an automatic payment at the end of the term. These deals are not ordinary contracts, and officers are not ordinary employees. 11 U.S.C. § 363 (1996).
C. Self-Dealing.
The directors' substantially increasing their salaries and severance pay as officers is pure self-dealing. General had three remaining directors and three officers. Olafson and LeSage served as both directors and officers. In light of the pending reorganization, Olafson, LeSage, and Hartzell approved increases in severance and pay for Olafson, LeSage, and Alexander.
Because the new contracts extended the officers' existing employment contracts only two weeks, the debtor did not contract to secure employment of essential people through the reorganization to benefit the corporation. To the contrary, the directors approved these new employment contracts out of self-interest, in complete disregard for the corporation's best interest, and without a board of directors' meeting. Reorganization imposes on the debtor a new set of obligations. These obligations include minimizing operating costs, maximizing the value of the corporate assets, placing the duties to the corporation above self-interest, and abiding by limitations on self-compensation. The directors ignored these obligations. See In re Herberman, 122 B.R. 273, 281-82, 285 (Bankr.W.D.Tex.1990).
Further evidence of the self-interest is the surreptitious manner that the contracts were passed. The directors authorized the new contracts without a formal board meeting. Texas law requires that directors both act as a board in setting compensation and pass a formal resolution before the services are rendered. A mere understanding among the directors is insufficient. Because the directors authorized this compensation by casual consent, without a formal meeting, and after part of the services had been rendered, the employment contracts cannot stand even if they were devoid of self-interest. Dowdle v. Texas Am. Oil Corp., 503 S.W.2d 647, 652 (Tex.Civ.App. El Paso 1973, no writ).
Additionally under Texas law, courts weigh the substance of the officers' conduct more heavily than the form of the device used. Milam v. Cooper Co., 258 S.W.2d 953, 956 (Tex.Civ.App. Waco 1953, writ ref'd n.r.e.). Officers must avoid not only impropriety, but also the appearance of impropriety. As fiduciaries, officers must commit themselves to exercising uncorrupted judgment and serving the best interest of the corporation. Indep. Ins. Co. v. Republic Nat'l Life Ins. Co., 447 S.W.2d 462, 470 (Tex.Civ.App. Dallas 1969, writ ref'd n.r.e.). Of course, once a petition is filed in bankruptcy, the debtor-in-possession has these obligations to the equity owners and to the creditors.
The argument that the officers needed an incentive to stay with General during this time fails because (1) the new contracts did not substantially extend the officers' employment, (2) General was reorganizing as opposed to liquidating, and (3) General showed no evidence that the incentives were necessary that, say, the officers had employment offers elsewhere. As directors, Olafson and LeSage acted with self-interest, in disregard for the corporation, and in spite of the pending reorganization when they proposed and approved the new contracts.
D. Business Judgment.
Although courts often defer to the business decisions of a board in deciding how a corporation should be run, this "business judgment" rule does not apply when the actions involve self-dealing or agreements outside the ordinary course of business. The business judgment rule "extends only as far as the reasons which justify its existence. Thus, it does not apply in cases . . . in which the corporate decision lacks a business purpose, is tainted by a conflict of interest, is so egregious as to amount to a no-win decision, or results from an obvious and prolonged failure to exercise oversight or supervision." Resolution Trust Corporation v. Acton, 844 F. Supp. 307, 314 (N.D.Tex.1994). Moreover, while the business judgment rule may apply to the decisions of solvent corporations, it has *152 no consequence in the context of a conservatorship. Askanase v. Fatjo, No. H-91-3140, 1993 WL 208440, at *5 (S.D.Tex. April 22, 1993). "[T]he standard to be applied should be whether a fully informed, wholly disinterested, reasonably courageous director would dissent from the board's act in any material part. The subjective good faith of the participants is irrelevant; it is rational and objective fidelity by which they shall be judged." Southdown, Inc. v. Moore McCormack Resources, Inc., 686 F. Supp. 595, 602 (S.D.Tex. 1988). Because the directors were interested in the decision and acted outside the ordinary course of business, they do not have the protection of the business judgment rule.
E. Best Interest.
Aside from these defects, the board's approval of the new employment contracts disregarded the best interest of the corporation. The old employment contracts with Olafson and LeSage already secured their employment through July 19. The corporation did not benefit from the new contracts, extending their employment only another two weeks through July 31. Remember, General was negotiating a reorganization plan and not a liquidation. In preparing an adequate reorganization plan, the directors could legitimately secure their future employment. While restructuring the corporation, it is very important for the directors to keep operating costs as low as possible in an effort to reduce the burdens on the corporation. Ignoring this responsibility, the directors looted the corporate assets during the critical time of reorganization. The directors disregarded the best interest of the corporation.
Despite having been in control as General foundered, the directors were left in charge during the reorganization. Under the guidance of these directors, General's debt grew from $19 million at the end of 1987 to $155 million at the end of 1990 while their salaries steadily increased. In 1986 LeSage received $100,000 for his services. By 1989 LeSage's salary had doubled. The post-petition contracts further increased his salary to $275,000. The directors reduced the aggregate salaries of the other employees by $500,000 a month at the same time they negotiated their substantial raises. These two acts are clearly inconsistent, revealing the directors' true motivation.
In hindsight, the severity of the directors' actions is further illuminated. A few weeks after the December hearing approving the new employment contracts, General filed its proposed plan of reorganization. According to the plan, the bondholders were to receive zero. The General insiders received their substantial pay raises and severance benefits while over $190 million in bond indebtedness remained wholly uncompensated. In approving new employment contracts for the benefit of three officers, the board of directors ignored the best interest of the corporation and the need for uncorrupted business judgment during the reorganization.
4. Court Approval.
The court's conclusion that the new employment contracts served the best interest of the corporation is clearly erroneous. The bankruptcy court reasoned that it was in the corporation's best interest for the officers to guide the corporation through the reorganization process. While this may be true, there was no evidence to suggest that these lucrative new contracts were necessary to ensure that the officers would stay. The evidence about the compensation solvent corporations pay their directors has no relevance. If General were not insolvent then maybe the officers' performances would warrant parallel compensation, but General was insolvent.
The court also examined evidence that General's largest creditor, the bank group, agreed to subordinate its claims, up to a maximum of $2 million, for the benefit of the new employment contracts, thus sheltering other creditors from loss associated with the new contracts. A creditor's securing inappropriate, self-defeating transactions does not constitute harmless error, validating the transactions. The bank group offered its guarantee after General submitted the August 1 agreements to the court for approval at which time the bank group objected. The bank group then negotiated with the directors, yielding the December 20 agreements and the bank group's guarantee. The new employment agreements were tainted with self-dealing from their inception, a condition *153 that the bank group's guarantee could not overcome. The bankruptcy court's approval of the new contracts overlooked these improprieties and is clearly erroneous. Cf., In re Barclay Indus., Inc., 736 F.2d 75, 80 (3rd Cir.1984).
5. Conclusion.
The excess payments made to the officers before court approval are to be returned to the estate as the board of directors lacked authority to act without court approval. Additionally, the court erroneously approved the new employment agreements. The evidence reveals the directors' self-dealing and their disregard for their duties as fiduciaries and for the pending reorganization. For payments after the December 20 court approval, the agreement of July 20, 1989, governs compensation for Olafson and LeSage through September 1991. Excess payments made to Olafson and LeSage after December 20, 1990, are to be returned to the estate. Because Alexander did not have a formal employment agreement with General before August 1, 1990, the most recent of the letter agreements stating his employment conditions for the earlier four years will apply through September 1991. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552723/ | 199 B.R. 720 (1996)
In re BELOZER FARMS, INC., Debtor.
STATE OF OREGON, OREGON FRYER COMMISSION, Appellant,
v.
ROBERT K. MORROW, INC., Trustee, Appellee.
BAP No. OR-96-1125-JHV. Bankruptcy No. 394-31786-dds7.
United States Bankruptcy Appellate Panel of the Ninth Circuit.
Argued and Submitted May 23, 1996.
Decided August 2, 1996.
*721 Tim D. Nord, Salem, OR, for Appellant.
Jon R. Summers, Portland, OR, for Appellee.
Before: JONES, HAGAN, and VOLINN, Bankruptcy Judges.
*722 OPINION
JONES, Bankruptcy Judge:
SUMMARY
The Oregon Fryer Commission filed a proof of claim listing its debt, which was based upon unpaid assessments, as an unsecured priority tax claim. The trustee objected. The bankruptcy court upheld the objection, ruling that the unpaid assessments were not entitled to priority because the Commission was not a "governmental entity," nor was its claim a "tax." We AFFIRM.
I. FACTS
Oregon has a statutory agricultural marketing scheme. Or.Rev.Stat. tit. 47, chs. 576 et seq. (1995). Pursuant to that scheme, a large number of commodity commissions have been created. These commissions have been created in three different ways. First, as part of the laws which created the agricultural marketing scheme, the state legislature specifically created four commodity commissions: the Oregon Beef Council, the Oregon Sheep Commission, the Oregon Wheat Commission, and the Oregon Potato Commission. Each of these four commissions has a lengthy set of statutory guidelines dictating the reason for their creation, the qualifications and terms of their members, the duties and powers of the commission, and budgetary guidelines.
Second, the legislature enacted a statutory scheme whereby, "[a]ny 25 or more persons interested in the production of a particular commodity" could file a petition with the Oregon Department of Agriculture and request a referendum be held among the producers of that commodity on the question of whether a commodity commission should be established. Or.Rev.Stat. § 576.055(1) (1995). If the referendum results in an affirmative vote, the Oregon Department of Agriculture then holds hearings to determine if there is a need for the creation of that particular commodity commission. Id. §§ 576.075, 576.085. Using this process, numerous industries have successfully petitioned to have a commodity commission created, including the Chewings Fescue and Creeping Red Fescue Commission, the Oregon Clover Commission, the Oregon Processed Vegetable Commission, and the appellant herein, the Oregon Fryer Commission. All commodity commissions created in this manner are subject to general commodity commission guidelines laid out in Oregon Revised Statutes ("ORS") §§ 576.051 through 576.584. These general guidelines contain many similarities to the specific guidelines for the Beef Council and the Sheep, Wheat, and Potato commissions, but they differ in many respects as well.
Finally, the Oregon legislature created five commodity commissions the Oregon Dairy Products Commission, the Oregon Filbert Commission, the Oregon Dungeness Crab Commission, the Oregon Salmon Commission, and the Oregon Grains Commission stating that these commissions "shall be considered to have been created in all respects pursuant to ORS 576.051 to 576.584 and [are] vested with all the rights and liabilities of commissions created pursuant to ORS 576.051 to 576.584." Id. § 576.155.
Members of the fryer chicken industry in Oregon sought and obtained approval to establish a commodity commission pursuant to ORS § 576.055(1). The resulting commission the Oregon Fryer Commission (the "Commission") levies assessments on the initial purchaser of fryer chickens. The assessments are based upon the weight of the fryers. Debtor Belozer Farms purchases and processes fryers. From January 1993 through February 1994, Belozer Farms failed to pay its assessments. After Belozer Farms filed bankruptcy, the Commission filed a proof of claim for $42,822.78, representing the unpaid assessments.[1] The Commission characterized its claim as an unsecured priority tax debt pursuant to § 507(a)(8)(C).[2]
*723 The bankruptcy trustee objected to the claim, arguing that it was not entitled to priority status. The bankruptcy court agreed. In its decision, the bankruptcy court ruled first that the assessments did not fit within the four-part definition of a tax as outlined in In re Lorber Industries of California, Inc., 675 F.2d 1062 (9th Cir.1982). In addition, the bankruptcy court held that the fryer assessments did not satisfy the "duck" test of In re Camilli, 182 B.R. 247 (9th Cir. BAP 1995). Finally, the bankruptcy court held that even if the assessments were a "tax," the Commission was not a "governmental unit" and therefore its claim is not entitled to priority. The Commission appeals.
II. ISSUES
1. Is the assessment levied on fryer purchasers by the Commission a "tax" within the meaning of § 507(a)(8)(C)?
2. Is the Commission a "governmental unit" within the meaning of § 507(a)(8)?
III. STANDARD OF REVIEW
Whether the assessments are a "tax" is a question of federal law. Camilli, 182 B.R. at 249. Whether an organization is a "governmental unit" within the meaning of the Bankruptcy Code is also a question of law. In re Wade, 948 F.2d 1122, 1123 (9th Cir.1991). We review questions of law de novo.
IV. DISCUSSION
The Commission seeks priority for the unpaid assessments under § 507(a)(8)(C), which grants priority to a governmental unit's unsecured claim if that claim is "a tax required to be collected or withheld and for which the debtor is liable in whatever capacity." 11 U.S.C. § 507(a)(8)(C) (1994). The parties do not dispute that the debtor was liable for collection and payment of the fryer assessments. At issue is whether the assessments are a tax owed to a governmental unit.
A. Are the Assessments a Tax?
Whether an assessment is a tax does not turn on whether the assessment is characterized as a tax or not, "especially when the term is applied to an elaborate statutory scheme such as that created by the Bankruptcy Code." Camilli, 182 B.R. at 249 (citing Union Pacific R. Co. v. Public Utility Comm'n, 899 F.2d 854, 861 (9th Cir.1990)). Therefore, "[w]e look to federal law to determine whether a debt is a tax entitled to priority in bankruptcy." Id. (citing New York v. Feiring, 313 U.S. 283, 285, 61 S. Ct. 1028, 1029, 85 L. Ed. 1333 (1941)). The seminal case in the Ninth Circuit on what constitutes a tax for purposes of priority in bankruptcy is In re Lorber Industries of California, Inc., 675 F.2d 1062 (9th Cir. 1982).[3]
As Lorber succinctly stated, whether or not an assessment is a fee or a tax can be a "close question." Lorber, 675 F.2d at 1067. In order for an assessment to be considered a tax, it must be:
(a) An involuntary pecuniary burden, regardless of name, laid upon individuals or property;
(b) Imposed by, or under authority of the legislature;
(c) For public purposes, including the purposes of defraying expenses of government or undertakings authorized by it;
(d) Under the police or taxing power of the state.
Id. at 1066.
1. Are the Assessments an Involuntary Pecuniary Burden?
According to Lorber, an assessment is "involuntary" if it is "a non-contractual obligation imposed by state statute upon taxpayers who had not consented to its imposition." Lorber, 675 F.2d at 1066. The Commission argues that the assessment is involuntary because Belozer Farms cannot conduct its business without incurring the assessment. Belozer Farms argues that the assessment is voluntary because the fryer industry has consented to its imposition.
*724 The case in which the Lorber test first made its appearance was In re Farmers Frozen Food Co., 221 F. Supp. 385 (N.D.Cal. 1963), aff'd, Dungan v. Dept. of Agriculture, State of California, 332 F.2d 793 (9th Cir. 1964), a case involving interpretation of the California Marketing Act of 1937. This act authorized the Director of the California Department of Agriculture to enter Marketing Orders for the purpose of levying assessments on agricultural commodity processors. However, before a Marketing Order could be entered, the Director had to receive the consent of a majority of that commodity's processors. In Farmers Frozen Food, the Director had received the consent of strawberry processors to enter a Marketing Order and levy assessments. The debtor filed bankruptcy after falling behind on the assessments. The court stated that even though a majority of the processors had to consent to entry of the Marketing Order, the assessments were nonetheless involuntary. "The distinction between a voluntary and an involuntary pecuniary burden in tax law hinges on a decision whether the nature of the particular imposition is contractual or statutory." Id. at 387. Under Farmers Frozen Food, therefore, the statutorily authorized fryer assessment would seem to be involuntary.
However, the contractual-statutory distinction in Farmers Frozen Food has been rejected by many courts. In In re S.N.A. Nut Co., 188 B.R. 392 (Bankr.N.D.Ill.1995), the court stated that "contrary to the Farmers Frozen Food decision, courts under the Code have not hesitated to determine certain assessments to be `fees,' despite the fact that they stemmed from statutory obligations." Id. at 395. In addition, the sewer use assessment in Lorber, which the Ninth Circuit held was a non-tax fee, was a statutorily-authorized assessment. Lorber, 675 F.2d at 1064. Therefore, the simple fact that an assessment is authorized by statute does not require a finding that it is "involuntary."
In Lorber, the Los Angeles County Sanitation District operated sewer lines used by both domestic and industrial users. The District funded its operations through two separate types of assessment. One assessment was made on every user domestic or industrial of the sewer. This assessment was based strictly upon the value of the user's property, and therefore bore no relation to how much wastewater the user actually discharged into the sewer. The District also made a second assessment against industrial users. This "surcharge" was based upon the amount of wastewater that the user discharged into the sewer. The court held that this surcharge was a fee, not a tax, because the user was free to increase or decrease the amount of discharge, thereby increasing or decreasing the surcharge.
The Sanitation District argued that the surcharge was involuntary because the user had no other practical or economic choice but to use the County sewer system. The court stated, however, that it "[was] not free to consider the practical and economic factors which constrained [the person] to make the choices it did. The focus is not upon [the person's] motivation, but on the inherent characteristics of the charges." Lorber, 675 F.2d at 1066. The court also noted that the first assessment was a uniform tax based upon the value of the user's property, while the surcharge was a non-uniform assessment based upon the amount of wastewater the user discharged into the sewer.
The fryer assessment fails the "involuntary" prong of the Lorber test for the following reasons. First, the assessment is imposed on people who have consented to its imposition. As noted by the bankruptcy court, the Commission was an organization created voluntarily by its members, who can elect its own members and determine the amount of the assessment, and who knew that such an organization meant that it would have to levy assessments in order to fund itself. In addition, the fryer producers can hold a referendum on discontinuing the Commission at any time after five years from the date it was created, without consent of the legislature. Or.Rev.Stat. § 576.505 (1995).
Second, under the Oregon statutory scheme, the first purchaser of a fryer is responsible for reporting and paying an assessment based upon the weight of the fryers purchased. Id. §§ 576.325(4), 576.335(1). This assessment is analogous to the surcharge *725 in Lorber which was based upon the amount the person used the sewer and which arose out of the voluntary use of the sewer and in contrast to the first assessment in Lorber which was a uniform "tax" based upon the value of the user's property.
Finally, as the court in Lorber noted, the practical or economic reasons as to why the person makes the choice to incur the assessment are not relevant. Therefore, the Commission's argument that Belozer Farms could not operate its business without incurring the assessment does not require a finding that the assessment is "involuntary."
2. Are the Assessments Imposed By, or Under Authority of the Legislature?
This prong is typically met, S.N.A. Nut Co., 188 B.R. at 394, because most cases involve an assessment which is clearly imposed by a governmental unit. As a result, the caselaw on whether an assessment is imposed by or under the authority of the legislature is sparse.
According to Oregon law, all commodity commissions (whether created voluntarily by producers of that commodity or created by the state legislature) are excluded from the definition of "state agency." Or.Rev.Stat. § 291.050(3) (1995). In addition, for purposes of Oregon tax court jurisdiction, the section of the ORS which provides for creation of commodity commissions at the request of the producers of that commodity is not considered a "tax law" of the State of Oregon. Id. § 305.410.
However, the statutory scheme which provides for the creation of commodity commissions does provide some level of state control over certain of the commodity commissions' functions. For example, commodity commissions have the authority to prosecute lawsuits for collection of assessments "in the name of the State of Oregon." Id. § 576.305. The rules applicable to the commodity commissions when interviewing and hiring independent contractors were imposed by the Oregon Department of Administrative Services and the Oregon Department of Agriculture. Commodity commissions may also request from the Department of Administrative Services such things as supplies and equipment, printing services, accounting services, central telephone and mail services, repair and maintenance, motor vehicles, and clerical and stenographic pool services. Id. § 576.307. The statutory scheme provides the maximum assessment that can be levied by a commodity commission. Id. § 576.325(2). Finally, the budget of each commodity commission has to be filed with the Oregon Department of Agriculture and approved by its Director. Id. § 576.415.
On the other hand, commodity commission employees are not subject to the state personnel compensation plans established by the Oregon Department of Administrative Services. Id. § 576.320. Oregon has expressly disavowed any liability for the acts or omissions of the commodity commissions and their agents. Id. § 576.405. In addition, the assessments collected are not placed into Oregon's general fund, but are kept in accounts registered to the commodity commission and are used "only for the payment of the expenses of the commission in carrying out the powers conferred on the commission." Id. § 576.375. If the state provides printing services, any printing which advertises or promotes that commodity's products is not considered "state printing." Id. § 576.307(1)(b). Finally, commodity commissions must reimburse the state for the cost of any of the aforementioned administrative services that the state is requested to provide. Id. § 576.307(2).
As indicated by the Commission, the Oregon court of appeals has stated that the Oregon Sheep Commission is a "public body" and that its assessments are "public funds" (which therefore could not be donated to a political action committee). Oregonians Against Trapping v. Oregon State Dept. of Agriculture, 56 Or.App. 78, 81, 641 P.2d 72, 73 (Or.Ct.App.1982). However, as pointed out by the bankruptcy court, the Sheep Commission was specifically created by the state legislature under its police power for the protection of the public health and welfare. Or.Rev.Stat. § 577.705 (1995). On the other hand, the Fryer Commission was created at the request of the fryer producers and in their own interest.
*726 There are other differences between the legislature-created commissions and the voluntarily created commissions. For example, the Director of Agriculture picks the members of the Sheep Commission. Id. § 577.710. By contrast, the petitioners seeking to create a commodity commission may include provisions for the election of their own members by the producers of that commodity. Id. § 576.055(2).
Whether or not the Commission has sufficient ties with the state government to justify a finding that its fryer assessments are imposed under the authority of the legislature is a close question. The court's reasoning in Farmers Frozen Food seems to dictate an affirmative answer to this question. Even the court in S.N.A. Nut Co., which held that California Walnut Commission was a "trade association" whose assessments were not a tax, seemed to assume that the Walnut Commission satisfied this prong. See S.N.A. Nut Co., 188 B.R. at 394. However, we need not answer this question since we hold that other elements of the Lorber test are not satisfied.
3. Are the Assessments Imposed For a Public Purpose?
The determination of the ultimate purpose for an assessment goes to the heart of distinguishing a "fee" from a "tax." "While a tax is an exaction for a public purpose, a fee relates to an individual privilege or benefit to the payer." Camilli, 182 B.R. at 253 (Jones, J., dissenting) (citing In re Chateaugay Corp., 153 B.R. 632, 638 (S.D.N.Y.1993)). As stated by the U.S. Supreme Court, if the agency exacting the charge "bestows a benefit on the applicant [which is] not shared by other members of society," then the charge is a fee, not a tax. National Cable Television Assoc. v. U.S., 415 U.S. 336, 340-41, 94 S. Ct. 1146, 1148-49, 39 L. Ed. 2d 370 (1974). The issue, therefore, is whether the Commission uses the assessments "for the primary benefit of the payer," S.N.A. Nut Co., 188 B.R. at 394, or whether the benefits of those assessments inure primarily "to the general public welfare." In re Suburban Motor Freight, Inc. (Suburban II), 36 F.3d 484, 489 (6th Cir.1994).
The Commission argues that the primary purpose of the Commission is to defray the expenses of the state in promoting and protecting the agricultural industry of Oregon. Belozer Farms argues that the primary purpose of establishing the Commission and in collecting the assessment is to enable the fryer industry to pool its resources in order to receive the benefits of joint marketing, product research, public relations, and effective lobbying. In that way, it argues, the Commission is in effect a trade association.
In creating the Beef Council, Sheep Commission, Wheat Commission, and Potato Commission, the Oregon legislature specifically stated that the purpose of these organizations is to further the public interest, health and welfare of its citizens. See Or. Rev.Stat. § 577.120(1) (1995) (Beef Council); id. § 577.705(1) (Sheep Commission); id. § 578.020 (Wheat Commission); id. § 579.020 (Potato Commission). In contrast, the decision on whether or not to allow the producers of other commodities to petition for the creation of their own commodity commission is based upon "whether or not there is need for the creation of a commission in the interest of the general welfare of the producers of the commodity. . . ." Id. § 576.085 (emphasis added).
There is no requirement in the Oregon statutory scheme that the assessments which a voluntarily organized commodity commission may impose have to be used for a public purpose. In fact, these commissions have broad authority to further their own interests, including the authority (1) to conduct research in order to "discover and develop the commercial value" of the commodity; (2) to disseminate information "showing the value of the commodity and its products for any purpose for which they may be found useful and profitable"; (3) to "represent and protect the interests of the commodity industry" with respect to state and federal tariffs, duties, trade agreements, and legislation; and (4) borrow money "so that the [commodity] responsible for the accumulation of funds may receive the benefits of the efforts for which the funds are used." Id. § 576.305. Under a similar statutory scheme, a court found that the California Walnut Commission was a *727 trade association which promoted its own interests, not the interests of the public at large.
The degree to which this assessment can be considered private is exacerbated by the activities for which the assessment is used. The assessment funds are utilized to create a common pool fund for the advertisement, marketing, and promotion of walnuts activities which bestow a discrete, private benefit to the walnut industry.
S.N.A. Nut Co., 188 B.R. at 395.
Although the Commission argues that the primary purpose of Oregon's statutory agricultural marketing scheme is to benefit the public interest, it provides no convincing support for this contention. Under the plain language of the statutory scheme, the main purpose and function of the Commission is to promote the interests of the fryer industry in Oregon. Giving the Commission priority in bankruptcy would in effect be placing the interests of the Oregon fryer industry over that of similarly situated unsecured creditors. The Sixth Circuit in In re Suburban Motor Freight, Inc. (Suburban I), 998 F.2d 338 (6th Cir.1993) and In re Suburban Motor Freight, Inc. (Suburban II), 36 F.3d 484 (6th Cir. 1994), held that the test for determining whether an assessment should be given priority as a tax should take into consideration whether the assessment's benefit inures "to the general public welfare," and not to someone's discrete benefit. Suburban II, 36 F.3d at 489; see also Lorber, 675 F.2d at 1066 (holding that even if an assessment is a "tax," it must also be consistent with the policy behind the priority scheme in order to receive priority). Under the Oregon statutory scheme, the primary purpose of the Commission's assessments is to benefit the interests of the fryer industry. The government connection, through budget approval and oversight, seems only to ensure that the collected assessments are not misused by the Commission.
4. Are the Assessments Imposed Under Oregon's Police or Taxing Powers?
A state has broad police powers to enact laws that are related to the "health, safety, morals, or general welfare" of its citizens. Lochner v. New York, 198 U.S. 45, 53, 25 S. Ct. 539, 541, 49 L. Ed. 937 (1905); see also Barnes v. Glen Theatre, Inc., 501 U.S. 560, 569, 111 S. Ct. 2456, 2462, 115 L. Ed. 2d 504 (1991). States also have broad powers to impose and collect taxes in order to raise revenue. Allegheny Pittsburgh Coal Co. v. County Comm'n of Webster County, West Virginia, 488 U.S. 336, 344, 109 S. Ct. 633, 638, 102 L. Ed. 2d 688 (1989). When creating the Beef Council and the Sheep, Wheat, and Potato commissions, the Oregon legislature stated that the commissions were being created pursuant to its police powers. Or.Rev. Stat. § 577.120(1) (1995) (The Oregon Beef Council was created pursuant to the state's authority to protect and further "the public health and welfare."); id. § 577.705(1) ("It is a legislative finding that the sheep industry of this state is affected with a public interest in the following respects. . . ."); id. § 578.020 ("It is the purpose of this chapter, in the exercise of the police power, to promote the public health and welfare by providing the means for the protection and stabilization of the wheat industry in this state."); id. § 579.020 ("It is to the interest of all the people of the state that the soil resources of Oregon be developed to the fullest extent consistent with available market outlets for the products of the soil. It is also to the interest of all the people that consumers of the state be provided with an abundant supply of food of the best quality obtainable and that prices for that food are reasonable."). It is therefore unquestionable that Oregon created these four commissions under its police powers.
However, the Oregon legislature's basis for allowing the voluntary creation of other commodity commissions like the Oregon Fryer Commission is stated differently.
(1) After the hearings provided for in ORS 576.075, the [State Department of Agriculture] shall determine upon the facts presented and other relevant data and information available to it whether or not there is need for the creation of a commission in the interest of the general welfare of the producers of the commodity sufficient to *728 justify the holding of a referendum thereon. . . .
. . . .
(3) The [State Department of Agriculture's] determination of need for the creation of a commission shall be based upon a consideration of the following factors as they may be applicable to any commodity:
(a) The current market price to producers.
(b) The costs of production, including all elements of cost.
(c) Market price trends.
(d) Stability of prices.
(e) Relationship between the factors set forth in paragraphs (a), (b), (c) and (d) of this subsection.
(f) Commodity utilization and the possibility of increasing commodity utilization by research, promotive advertising, improved marketing practices, and improving time or place utility.
Id. § 576.085 (emphasis added). Nowhere in the voluntary commodity commission scheme does the state legislature state that these commissions will only be allowed if they act in the furtherance of the health, safety, morals, or general welfare of the state. In fact, the legislative scheme does not even mention the public welfare as a factor to be considered in deciding whether or not to allow the establishment of a commodity commission. The only interest referenced in the statute is the interest of the producers of that commodity. Although the actions of such commissions might benefit the public health, safety, and welfare, the state legislature did not base the creation of the commissions on those grounds. Based upon this, the bankruptcy court held that the Oregon Fryer Commission's assessments were not levied under Oregon's police or taxing powers.
The Commission argues that the statute allowing producers of a particular commodity to create a commodity commission was enacted for the same reasons that the specific commodity commission were created. Since the statutory guidelines for the Beef Council and the Wheat, Sheep, and Potato commissions are similar to the general guidelines for the voluntarily created commodity commissions, there is some merit to this argument. However, the statute does state that the above four commissions were created under the state's police powers for the public welfare, yet states that the creation of other commissions is based upon the interests of the producers of that commodity. In addition, the legislature did not create the Fryer Commission it merely passed a statute which allowed the Fryer Commission to be organized by, and for the benefit of, private commercial organizations. For this reason, we affirm the bankruptcy court's finding that the Fryer Commission was not created under the state's police power.
B. Is the Oregon Fryer Commission a Governmental Unit?
The mere fact that a governmental unit makes an assessment does not mean that the assessment is automatically a "tax." See National Cable Television Assoc., 415 U.S. at 340-41, 94 S.Ct. at 1148-49 (distinguishing between governmental "fees" and "taxes"). Therefore, our holding that the assessments are a fee renders moot the question of whether the Commission is a governmental unit.
V. CONCLUSION
The bankruptcy court held that the fryer assessments are a non-tax "fee" and are not entitled to priority in bankruptcy. We AFFIRM.
NOTES
[1] The original proof of claim also sought tax priority status for the penalties associated with the unpaid assessments. However, the bankruptcy court ruled that even assuming the assessments were "taxes," tax penalties are not entitled to priority status. The Commission does not appeal this ruling.
[2] Unless otherwise indicated, all references to Chapters, Sections and Rules are to the Bankruptcy Code, 11 U.S.C. §§ 101, et seq. and to the Federal Rules of Bankruptcy Procedure, Rules 1001, et seq.
[3] Although Lorber was decided under § 64(a) of the Bankruptcy Act, its analysis has been adopted with respect to § 507 of the Bankruptcy Code. Camilli, 182 B.R. at 250. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552739/ | 199 B.R. 175 (1996)
In re Burma Jean MARTIN.
Bankruptcy No. 95-42745 S.
United States Bankruptcy Court, E.D. Arkansas, Little Rock Division.
July 18, 1996.
*176 Keith Grayson, N. Little Rock, AR, for Debtor.
James F. Dowden, Little Rock, AR, for Trustee.
Richard Cox, Trustee, Hot Springs, AR.
ORDER DENYING MOTION FOR STAY OF PROCEEDINGS
MARY D. SCOTT, Bankruptcy Judge.
THIS CAUSE is before the Court upon the debtor's Motion for Stay of Proceedings Pending Appeal, filed on July 11, 1996. Although represented by counsel, after failing in her attempt to dismiss this Chapter 7 case,[1] the debtor filed a pro se motion to convert the case to Chapter 13 of the Bankruptcy Code. The trustee and a creditor objected to the motion to convert asserting that extreme circumstances exist in this case which preclude conversion, and that the debtor is ineligible to be a debtor under Chapter 13 because the motion to convert was filed in bad faith. The Objectors further asserted that the debtor does not have regular income and is unable to submit a feasible plan.
Trial on the Motion to Convert was held on June 28, 1996, at the conclusion of which the Court made oral findings of fact and conclusions of law, denying the debtor's motion. The debtor timely filed a Notice of Appeal and has asked this Court to stay all proceedings pending appeal of the Order denying the Motion to Convert, entered on July 3, 1996.
The bankruptcy court has discretion to grant a stay on such terms as are just, pursuant to Rule 8005, Federal Rules of Bankruptcy Procedure. However, the moving party must demonstrate:
(1) she is likely to prevail on the merits of the appeal;
(2) she will suffer irreparable injury if the stay is denied;
(3) the other party will not be substantially harmed by the stay; and
(4) the public interest will be served by the granting of the stay.
Community Federal Savings and Loan Assoc. v. Stratford Hotel Company (In re Stratford Hotel Company), 120 B.R. 515, 516-17 (E.D.Mo.1990) (affirming bankruptcy court's determination that stay pending appeal of order lifting stay was not merited). The factual determinations of the bankruptcy court will be upheld unless they are clearly erroneous. In re Apex Oil Company, 884 F.2d 343 (8th Cir.1989).
In the instant case, the debtor has failed to adequately assert grounds for a stay of the proceeding. Indeed, the only grounds raised are that the adversary proceedings against her will be moot and that the property of the estate would vest in her if this court *177 is reversed by the district court. While these may address the third prong of the test, the remainder of the elements are neither addressed nor met. The failure to even address these elements for the relief requested is sufficient reason to deny the motion for stay.
Even were the issues addressed, no grounds exist for a stay of the proceeding because the opposing party will be prejudiced by the stay, and the public interest mandates that this case proceed under Chapter 7 of the Bankruptcy Code without delay. The most compelling reason for denying the stay, however, is that there is no probability of success on the merits. At the trial on the merits, held on June 28, 1996, the Court made extensive findings of fact, many of which were based upon the credibility of the debtor as well as upon the many admissions of the debtor evidencing bad faith. In light of the intensely factual nature of the findings, the admitted fraudulent and/or criminal acts of the debtor, and the attendant burden to be met by the debtor on appeal, there is little probability of success on the merits of the appeal of the motion to covert.
While the debtor asserted that she has an absolute right to convert to Chapter 13 under section 706(a), this is true only if she is otherwise eligible for Chapter 13. 11 U.S.C. § 706(d); Bobroff v. Continental Bank (In re Bobroff), 766 F.2d 797, 803 (3d Cir.1985). Accordingly, Martin must meet all eligibility requirements for filing a Chapter 13 case, including the requirement of good faith. The Eighth Circuit has set forth guidance on the issue of good faith in the Chapter 13 setting. In Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346 (8th Cir.1990) (en banc), the Eighth Circuit sets forth several factors, modified from the factors initially stated in In re Estus, 695 F.2d 311, 316 (8th Cir. 1982).[2]LeMaire advised that good faith depends upon,
[W]hether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code.
LeMaire at 1349. The Eighth Circuit reaffirmed the "totality of the circumstances" test and set forth the "particularly relevant" factors to be applied in light of the purposes of Chapter 13:
The type of debt sought to be discharged and whether the debt is nondischargeable in Chapter 7, and the debtor's motivation and sincerity in seeking Chapter 13 relief.
Id. at 1349. At the conclusion of trial, the Court found that the debtor has not only inaccurately stated her debts and expenses and attempted to mislead the court, but has unfairly manipulated the Bankruptcy Code. Thus, applying any of the three alternate standards, the first prong of the test set forth in LeMaire is met.
Additional factors indicate that the motion to convert to Chapter 13 is filed in bad faith such that the debtor is ineligible for relief under Chapter 13 of the Bankruptcy Code. The schedules in this case are not merely inaccurate, they are false. The debtor not only failed to list any income at all, including child support income she receives, but failed to coherently explain how she manages to subsist. There was evidence of checks and monies she received and endorsed, but merely claims it is "not mine." Although she has or had bank accounts, they are not listed on the schedules. She also fails to list her debts with any measure of accuracy. She claims that all of the property currently and formerly titled in her name belongs to her parents, but discloses little of that information on the schedules. She not only fails to list property titled in her name, she fails to list transfers of property to her parents.
Another important mark of bad faith is the debtor's manipulation of the schedules to conform to the relief sought. For purposes of Chapter 7 the debtor has no income. For purposes of Chapter 13, the debtor has commission income derived from a funeral home. These mutations not only indicate the falsity of the schedules, ground for denial of the *178 discharge, but are direct evidence of an attempt to unfairly manipulate the Bankruptcy Code. A debtor may not alter her financial information for purposes of obtaining particular relief. She has an affirmative duty to list all income, all expenses, and open all financial transactions to the trustee, Court, and creditors. The blatant and fraudulent manipulation of information on the schedules to obtain a particular result is an unfair and insidious abuse of the bankruptcy process.
LeMaire stated other factors to be analyzed by the Court in determining the good faith of a debtor, including the type of debt to be and the debtor's motivation and sincerity in seeking Chapter 13 relief. LeMaire, 898 F.2d at 1349. These factors should be examined in light of the purposes of Chapter 13. Id. at 1353. The Court file in this case, the testimony and demeanor of the debtor, and the documentary evidence submitted indicates that the debtor's motivations in seeking Chapter 13 are improper. The debtor's express reason for filing this Chapter 7 petition in bankruptcy was to remove pending Texas state court litigation to the Bankruptcy Court.[3] This is not a good faith reason for filing any bankruptcy, much less a Chapter 13 case. Compare Noreen v. Slattengren, 974 F.2d 75 (8th Cir.1992) (plan filed in bad faith where filed to avoid having civil sexual abuse case go to trial); In re Anderson, No. 92-10345, 1992 WL 170682, 1992 U.S.Dist. Lexis 10339 (D.Mass. July 1, 1992) (case properly dismissed where sole purpose was to avoid complying with orders of state court). Had the debtor been sincere in her effort to repay debts under a Chapter 13 plan, she would have honestly provided all required information on her schedules. Further, if the debtor's intentions had been honest, she would have filed a Chapter 13 in the first instance. There is no evidence that the debtor's actual circumstances changed in any manner from the date the petition was filed to present. Like her previous Chapter 13 case filed in Texas, admittedly filed solely for purposes of delay, the evidence before the Court is that her motions are merely ploys to stall and confound other litigation and her other creditors. Although she admits to this improper purpose for filing the bankruptcy case, the debtor continues to attempt to manipulate not only the state court litigation, but also this Court. It was not until after the Chapter 7 was filed that the debtor realized that not only were her maneuvers unsuccessful, her finances would be examined and her assets administered by a trustee. The debtor then attempted to shed the Chapter 7 altogether, moving to dismiss her case when her finances were being examined. When she could not dismiss her case, in a further attempt to regain control of her assets and remove her finances from view, she moved to convert to Chapter 13. These maneuvers, improper and vexatious, so clearly evidence bad faith that there is little probability of success of her appeal.
The debtor cannot maintain a Chapter 13 case in good faith as demonstrated by her complete inability to act in conformity with the law, title 18 as well as the Bankruptcy Code. Indeed, the debtor is not only unable to control her finances on a straightforward basis, she is unable to control herself. Few cases in the history of bankruptcy cry so loudly for administration by a trustee. She continually filed documents pro se despite the fact that she was represented by counsel and had been directed by the Court to discontinue the practice of filing improper pleadings. She created documents for signature by her previous counsel, continually ignored Court directives, and changed her schedules to suit her purposes. She admitted to submitting false financial statements to financial institutions, alone and in a conspiracy with others. Although she has failed to file tax returns for a number of years, she created, but did not file, a false or "dumied" tax return to submit to a financial institution in order to fraudulently obtain a loan. She has filed false applications for welfare in three different states. She has improperly paid unsecured creditors during the pendency of this case. Amazingly, during trial the debtor was not even able to give direct or consistent answers when asked where she *179 has lived and where she received mail. In light of her inability to maintain herself within any margin of the law, permitting this debtor to conduct a Chapter 13 as a debtor-in-possession would be an abuse of this Court's obligations under the Bankruptcy Code.
The debtor is also not eligible for bankruptcy relief because she has failed to demonstrate that she has regular income. Purportedly, the debtor has had no income since 1987, nearly a ten-year period of time. Although this assertion is clearly false, the debtor has the burden of demonstrating eligibility, which requires some specificity as to her amount of income and expenses. The amounts on her various schedules as well as her testimony are so riddled with falsehoods that the Court cannot accept any of those figures. To the extent she has income, or the ability to obtain income, that evidence is also insufficient to support a finding of eligibility. Although she asserts she intends to become licensed, enrolling to take a real estate broker's examination does not create income for purposes of Chapter 13.[4]
Finally, this debtor is not eligible for Chapter 13 because she cannot propose a feasible plan. The debtor has not filed her federal income tax returns for many years such that she has no conception of what her tax liability may be. Although she claims she has no income and that all monies she receives belong to her parents, the evidence is uncontroverted that monies in fact flow through her hands. In contrast to the debtor's assertions, her parents have not filed income tax returns because they claim the monies flowing to the debtor belong to the debtor. This dispute as to who should claim the income apparently prevented all of them from filing their income tax returns. In light of this dispute, the debtor cannot determine her tax liability and thus, cannot determine what may be a very large debt. If she is unaware of the extent of the debt, she cannot propose a plan to pay those taxes which constitute a priority debt and must be paid through a Chapter 13 case.
The debtor asserts that she has the means and desire to pay her debts in her Chapter 13 plan. The debtor's demeanor and testimony at trial evidence the opposite. Neither her schedules nor her demeanor were consistent with truthfulness much less the relief Chapter 13 was meant to provide for honest debtors. Having filed the motion to convert in bad faith, she is not eligible for Chapter 13 relief. In light of these facts, there is little probability of success on the merits of this appeal such that the motion for stay pending the appeal must be denied.
The Court also finds that the public interest and the interest of the trustee require that this Chapter 7 case proceed without delay. In light of the debtor's previous actions, it is imperative that her finances be investigated and her assets remain under the control of a trustee. The numerous admissions of fraudulent activity compel maintenance and oversight by an independent trustee and that he proceed without interference or delay.
ORDERED that the debtor's Motion for Stay of Proceedings Pending Appeal, filed on July 11, 1996, is DENIED.
IT IS SO ORDERED.
NOTES
[1] The Court denied the motion to dismiss on March 18, 1996. Although Martin appealed that Order, she never prosecuted the appeal and later dismissed it.
[2] The Estus factors were subsumed by the addition of section 1325(b) of the Bankruptcy Code in 1984. LeMaire, 898 F.2d at 1349.
[3] The attempted removal of those non-core, Texas law matters, was unsuccessful. The matters were remanded.
[4] The Court cannot conceive that this debtor would receive a real estate license. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552768/ | 199 B.R. 153 (1995)
In re Theresa Mae WILLIS a/k/a Theresa Mae Beck, Debtor.
Bankruptcy No. 94-33113(2)13.
United States Bankruptcy Court, W.D. Kentucky.
July 14, 1995.
Dennis E. Kurtz, Louisville, Kentucky, for Debtor.
William W. Lawrence, Trustee, Louisville, Kentucky.
MEMORANDUM-OPINION
J. WENDELL ROBERTS, Chief Judge.
This matter comes before this Court on the Objection of Debtor, Theresa Mae Willis ("Debtor"), to the claim of Creditor, Mark Gibson ("Creditor"). Debtor objects to the claim on the basis that it includes interest accumulated not only since the date of the creation of the lien, but also includes interest accumulated since a prior bankruptcy action filed by Debtor in 1982. Having reviewed the briefs of both parties, as well as having conducted its own independent research, this Court overrules Debtor's Objection for the reasons set forth below.
FACTS
Creditor obtained a judgment lien against Debtor on December 17, 1981. That lien was recorded on December 28, 1981, in Lis Pendens Book 34, at Page 626. Thereafter, on September 27, 1982, Debtor filed for protection under Chapter 7 of the Bankruptcy *154 Code. However, Debtor took no action to avoid Creditor's judicial lien. In March of 1983, Debtor's case was discharged.
Twelve years later, on October 24, 1994, Debtor filed for bankruptcy again, this time under Chapter 13 of the Bankruptcy Code.
Creditor's original judgment against Debtor was in the amount of $5,000.00. That judgment additionally provided for interest at the rate of 8.5% per annum from the date of judgment until paid. The balance owed to Creditor as of the date of the filing of his proof of claim in this Chapter 13 action includes the original principal of $5,000.00, and accumulated interest of $9,173.08.
On January 19, 1995, Debtor filed an Objection to Creditor's claim and a hearing was held. Debtor argued at that hearing that she should be allowed to reopen her 1982 bankruptcy action so that she might file a motion to avoid the Creditor's lien. The Court rejected Debtor's request on the basis that too great a time had elapsed for the reopening of that action.
Upon failure of that avenue of relief, Debtor now seeks to have this Court declare that interest ceased to accrue on Creditor's secured debt upon the filing of Debtor's 1982 bankruptcy action. This Court rejects Debtor's argument, finding that interest did in fact continue to accrue following the filing of that action.
LEGAL DISCUSSION
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 proceedings, 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).
Thus, the discharge granted to Debtor in her 1982 Chapter 7 bankruptcy action relieved her only from any personal obligation to Creditor. In re Lindsey, 823 F.2d 189 (7th Cir.1987). The lien at issue was neither disallowed nor avoided. Accordingly, Creditor's lien "rode through" Debtor's previous bankruptcy action unaffected.
The parties concede that the value of Debtor's equity in the real property to which the lien has attached is greater than Creditor's claim. The Sixth Circuit has held that Section 506(b) of the Bankruptcy Code provides for interest ". . . on all allowed secured claims where the value of the security is greater than the claim." In re Colegrove, 771 F.2d 119, 122 (6th Cir.1985); See also In re Bormes, 14 B.R. 895, 898 (Bankr.D.S.D. 1981); In re Henzler Mfg. Co., 55 B.R. 194, 196 (Bankr.N.D.Ohio 1985); Matter of Schwartz, 77 B.R. 177, 182 (Bankr.S.D.Ohio 1987), aff'd 87 B.R. 41 (1988). Consequently, Creditor's claim includes interest. Because Creditor's lien "rode through" Debtor's 1982 bankruptcy action unaffected, Creditor is entitled to recover interest not only from the date of the creation of the lien, but from the prior bankruptcy, as well.
CONCLUSION
For the above-stated reasons, this Court overrules Debtor's Objection to Creditor's claim, holding that Creditor is entitled to interest in the amount of $9,173.08 on his $5,000.00 claim. Debtor shall be granted 20 days in which to amend her Chapter 13 Plan to provide for the payment of Creditor's lien with the interest. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552769/ | 199 B.R. 188 (1996)
In re April Denise HECKATHORN, Debtor.
April Denise HECKATHORN, Plaintiff,
v.
UNITED STATES of America ex rel. U.S. DEPT. OF EDUCATION; Hemar Service Corporation of America; Hemar Insurance Corporation of America; Student Loan Marketing Association; IT Network; University of Tulsa; Eduserv Technologies, Inc.; and Northstar Guaranty, Inc., Defendants.
Bankruptcy No. 95-03541-W. Adv. No. 95-0376-W.
United States Bankruptcy Court, N.D. Oklahoma.
August 9, 1996.
As Corrected August 16, 1996.
*189 Sheldon E. Morton, Tulsa, OK, for Plaintiff.
R. Michael Cole, Crowe & Dunlevy, Tulsa, OK, for HEMAR Insurance Corporation of America.
Mac D. Finlayson, Flowers & Finlayson, P.C., Tulsa, OK, for Northstar Guaranty, Inc.
MEMORANDUM OPINION AND ORDER
MICKEY DAN WILSON, Chief Judge.
This adversary proceeding under 11 U.S.C. § 523(a)(8)(B) was tried to the Court and briefed, and thereafter taken under advisement. Upon consideration of stipulations of fact and documents, evidence introduced and received, statements and arguments of counsel, and written briefs, and of the record herein, this Court, pursuant to F.R.B.P. 7052, now finds, concludes and orders as follows. Procedural history of the matter is included among "Findings of Fact."
FINDINGS OF FACT
Plaintiff is April Denise Heckathorn ("April;" "Heckathorn"). She was formerly married and known as April Denise Dormont; but she is now divorced. She has one child, an 8-year-old son, who lives with her three and a half days per week pursuant to a joint custody arrangement. She neither receives nor pays child support, and there is no evidence that she either receives or pays spousal support, alimony, property division, or the like, from or to her former spouse.
In 1987, Heckathorn graduated from Northeastern State University ("Northeastern") with a B.S. degree. Heckathorn and her parents paid her way through Northeastern; no student loans were involved. After graduating from Northeastern, Heckathorn remained out of school for about one year (perhaps because of the birth of her son, which would have occurred at about this time).
In August 1988, Heckathorn entered the University of Tulsa Law School. Heckathorn's law school expenses were financed by a number of student loans.
By "student loans" this Court means loans made to finance educational benefits pursuant to the Guaranteed Student Loan Program established by the Higher Education Act of 1965. Under this program, the United States government does not directly provide funds for loans, but reinsures loans for educational purposes which are guaranteed by State or nonprofit agencies and made in the first instance by commercial lenders. As a result, the "lender" or loan obligee is a diffuse and shifting target. The program is supervised and ultimately backed by the United States of America ex rel U.S. Department of Education ("U.S.A."). In the present instance, the loans were guaranteed in part by Northstar Guaranty, Inc. ("Northstar") and in part by Hemar Insurance Corporation of America ("Hemar"). The loans were initially made by Norwest Bank of South Dakota, N.A. ("Norwest Bank"), to whom Heckathorn gave a number of promissory notes. The loans were apparently serviced by various intermediary entities, including EduServe Technologies Inc. of Utah ("EduServe") and Student Loan Marketing *190 Association ("Student Loan Marketing"). The notes were eventually assigned to the guarantors, Northstar and Hemar. For present purposes, Heckathorn's borrowings may be considered as constituting two series of transactions, one of which consists of notes guaranteed by and later assigned to Northstar, the other of which consists of notes guaranteed by and later assigned to Hemar.
In one series of transactions, from June 1988 through October 1990 Heckathorn borrowed an original total principal amount of $34,500.00 at interest rates ranging from 8%-10%, evidenced by six (6) notes given to Norwest Bank. By late 1994, these loans were being serviced by EduServe. From September 26, 1994 through April 10, 1995, EduServe assigned these 6 notes to Northstar.
In another series of transactions, from June 1988 through August 1990 Heckathorn borrowed an original total principal amount of $20,015 at variable interest rates, evidenced by three (3) notes (in the face amount of $33,500) given to Norwest Bank. By late 1995, these loans were being serviced by Student Loan Marketing. On October 12, 1995, Student Loan Marketing assigned these 3 notes to Hemar.
The nine (9) notes total an original principal amount of $68,000.00, of which some $54,515.00 was actually distributed to Heckathorn. All of this money was used by Heckathorn to pay her tuition and other costs of attending the University of Tulsa Law School and to support herself meanwhile by paying necessary expenses such as for lodging, food, and transportation including car payments.
In February 1991, when she was still in law school, Heckathorn began working in the office of the Tulsa County District Attorney. In May 1991, Heckathorn graduated from the University of Tulsa Law School with a J.D. degree; and in September 1991 she was admitted to practice law in the State of Oklahoma. In October 1991 she was not re-hired by the District Attorney's office, and for some nine (9) months was self-employed as a sole practitioner. From July 1992 through December 1993, she was employed as an attorney by Allen Mitchell, Inc. at a salary of $3,000 per month or $36,000 per year. From December 1993 through March 1994, she worked for FBG Realty, Inc. at a salary of $12 per hour or approximately $2,000 per month or $24,000 per year. After March 1994, she returned to the private practice of law as a sole practitioner. She currently represents mostly criminal misdemeanor clients, with some small claims and corporate work.
Since leaving the Tulsa County District Attorney's office, Heckathorn has applied for work at the District Attorney's offices in Okmulgee and Miami, Oklahoma, for Rogers and Creek Counties, Oklahoma, and again for Tulsa County; at the Tulsa Police Department and the Oklahoma City Police Department; at the Oklahoma State Bureau of Investigation and the Oklahoma Employment Service; at the police department for Seattle, Washington; at the Federal Bureau of Investigation, the U.S. Air Force Judge Advocate General (J.A.G.) Corps, the U.S. Department of Justice, the Environmental Protection Agency, and various Federal jobs in Connecticut, New York, Colorado, Texas, Wyoming and Montana; and at various private law firms and insurance companies all without job offers.
The notes assigned to Northstar required monthly installment payments commencing at various times, with the first due on January 1, 1992. Her original repayment terms required installments of $463.57 per month. Heckathorn made the first few payments. Then, between August 1, 1992 and July 31, 1994, she was granted twenty-four (24) months of forbearance on various installments. Even so, she was in default as early as February 1, 1994. In all, Heckathorn repaid $4,351.72 on Northstar's notes. But by the end of October 1995, she owed Northstar principal and interest totalling $49,552.04.
Much the same thing happened regarding the notes assigned to Hemar. In all, Heckathorn repaid $1,055.24 on Hemar's notes, but defaulted in January 1995. By the end of October 1995, she owed Hemar principal and interest totalling $32,500.35.
*191 The total principal and interest which Heckathorn owed to Northstar and Hemar on the student loans as of the end of October 1995 was $82,052.39. The notes assigned to Northstar also provide for payment of Northstar's reasonable attorney fees and collection costs incurred in enforcing the obligations. The notes assigned to Hemar also provide for payment of attorney fees and collection costs, and for late fees.
On November 8, 1995, Heckathorn filed her voluntary petition for relief under 11 U.S.C. Chapter 7 in this Court. Gerald R. Miller was appointed and continues to serve as Trustee ("the Trustee") of Heckathorn's bankruptcy estate.
With her petition, Heckathorn filed schedules and statements as required by bankruptcy statutes and rules, disclosing her financial status and recent financial history.
In her Schedules A, B and D, Heckathorn reported owning the following property: her home, valued at $60,000.00 (subject to a first mortgage held by Mid-Continent Federal Savings Bank to secure debt of $58,000.00); one 1992 Ford Taurus automobile, valued at $8,525.00 (subject to a security interest held by Ford Motor Credit Company to secure debt of $10,000.00); one television set, valued at $1,230.00 (subject to a security interest held by Sears, Roebuck and Co. to secure debt of $1,230.24); various other items of personalty, including one 1994 Packard-Bell 486 computer, some office furnishings, a VCR and stereo, other furniture, clothing, jewelry, and one Browning pistol, valued at a total of $4,495.00; and accounts receivable valued at $20,000.00.
In her Schedule C, Heckathorn claimed all of her property exempt. The accounts receivable are patently not exempt under Oklahoma law, see 31 O.S. § 1(A); and the exempt status of some of the other items is questionable, see e.g. In re McKaskle, 117 B.R. 671, 676 (B.C., N.D.Okl.1990). Nevertheless, the Trustee apparently concluded that such items were of no value to the estate, for he filed no objection to the claims of exemption pursuant to 11 U.S.C. § 522(1), F.R.B.P. 4003(b); and reported no assets available for liquidation and distribution to creditors, see docket # 13. On the dubious practice of claiming groundless exemptions, see Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992).
In her Statement of Intention, Heckathorn declared her intention to reaffirm all her secured debts. She has in fact performed her intention, see reaffirmation agreements docket ## 9, 11, 19. Her agreement with Mid-Continent Federal Savings Bank obligates her to repay $55,603.04 at $570.00 per month, docket # 19. Her agreement with Ford Motor Credit Company obligates her to repay $10,684.83 at $397.51 per month. Her agreement with Sears, Roebuck and Co. obligates her to repay $1,230.24 at $35.00 per month.
In her Schedules E and F, Heckathorn reported owing no taxes or other priority debts, but owing $152,465.04 (later amended to $152,665.04) in general unsecured debts. Heckathorn's unsecured debt consists almost entirely of student loans, except for a couple of thousand dollars owed for telephone services, another couple of thousand owed on credit cards, and a few hundred owed on medical bills. The enormous total of student loans consists in part of duplicative listings of the many entities who may have been obligees on the debts now assigned to Northstar and Hemar.
In her Statement of Financial Affairs, Heckathorn reported her total gross income for 1993 as $18,000.00, for 1994 as $8,036.00, and for 1995 as $3,165.00, all of it "wages". In her Schedule I, Heckathorn reported regular income of $1,200 per month from wages, with "NONE" from any other sources, save "financial aid/gifts from her parents on an `as needed' basis to supplement her income" in unspecified amounts. In her Schedule J and an attachment thereto (which in fact was appended to Schedule I), Heckathorn reported expenses of $2,762.51 per month, including $570 in home mortgage payment, $397.51 in car payment, $175 for utilities, $250 for food, $150 in miscellaneous other personal expenses, and $1,120 in business expenses, the latter including $300 per month for advertising (the largest single business expense), $275 for office rent, $205 for office utilities and telephone, $115 for "cellular phone and *192 pager," $125 in miscellaneous other business expenses, and $100 per month for "[t]ravel and entertainment". Except for the unspecified "financial aid/gifts from her parents," the net result was a deficit of income under expenses of -$1,562.51 per month or -$18,750.12 per year.
With her petition, Heckathorn also filed her complaint commencing this adversary proceeding, wherein she seeks discharge under 11 U.S.C. § 523(a)(8) of "various student loans in the principal sum of approximately $80,000.00," complaint ¶ 2, on the ground that
she has insufficient current or anticipated income or other sources of funds to support herself and her dependent, and excepting the student loans from discharge will impose an undue hardship on them[,]
id. ¶ 3. She admitted being uncertain of how much she owed and to whom, and sought to "place the burden of proof of each claim on the holder," id. ¶ 2. Heckathorn apparently listed and served as a defendant every entity she knew of who might be a student loan creditor; and in addition, Hemar joined itself as a defendant, see adv. docket ## 17, 19. No defendants answered save Northstar and Hemar; with their answers, Northstar and Hemar counterclaimed for amounts due under the notes, including interest, fees and costs.
On April 3, 1996, Heckathorn and Northstar filed their "Joint Stipulations of Facts and Documents ..." On April 8, 1996, the matter came on for trial to the Court. Heckathorn appeared in person with her attorney, Sheldon E. Morton; Northstar appeared by its attorney Mac D. Finlayson; and Hemar appeared by its attorney R. Michael Cole. Evidence was introduced and received, including documents and the testimony of witnesses; and statements and arguments of counsel heard. After trial, the Court allowed time for briefing. Heckathorn filed her "... Suggested Findings of Fact, Suggested Conclusions of Law and Brief in Support;" Northstar filed its "Trial Brief ...;" and Hemar filed its "Brief in Objection ..." Thereafter, the Court took the matter under advisement.
In her stipulations and testimony at trial, Heckathorn declared that her gross income after March 1994 has been approximately $1,200.00 per month or $14,400 per year. Heckathorn also estimated the "financial aid/gifts from her parents" to be at least $8,000.00 per year and probably more. Her mother, Nancy Heckathorn, testified that such "financial aid/gifts" amounted to about $500.00 $650.00 per month. It appeared that, over an 18-month period before trial, Heckathorn's parents had from time to time paid for Heckathorn's mortgage payments, her car insurance, and her groceries.
Heckathorn's tax return for the year 1995 reported gross income from her law practice of $27,125.00 and expenses of $20,496.00 for a net of $6,629.00. Heckathorn's profit-loss statement for January 1, 1996 through April 5, 1996 reported gross income from her law practice of $7,679.43 and expenses of $7,839.20 for a net loss of -$159.77. The expenses reported during the period include $325.00 for "Entertainment" and $165 unspecified "Other Exp[enses]." Heckathorn testified that the "entertainment" consisted of taking other lawyers to lunch. She had no explanation for the "other expenses".
It is stipulated that neither Heckathorn nor her son suffers from any chronic physical, medical or mental disability.
CONCLUSIONS OF LAW
This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), (O), 11 U.S.C. § 523(a)(8)(B).
Heckathorn is plaintiff in this adversary proceeding, and as such bears the burden of establishing the dischargeability of debts in some definite amount. Her attempt to shift the burden of proof to her creditors is ineffective. However, Northstar and Hemar are counter-claimants for amounts due on their notes, and as such bear the burden of establishing the amounts due. Without serious contest, Northstar and Hemar have proven that they are owed a total of $82,052.39 as of the date Heckathorn filed bankruptcy, plus interest since accrued at various ascertainable rates.
The crux of this adversary proceeding is not the amount, but the (non)dischargeability, of the student loan debts. Heckathorn *193 asserts that payment of these debts would "impose an undue hardship" on her and her son within the meaning of 11 U.S.C. § 523(a)(8)(B). "Undue hardship" is not defined by the Bankruptcy Code, but is left to the courts to determine.
As this Court has previously held, "undue hardship" in § 523(a)(8)(B) means
... something more than "a tight budget or present inability to pay;" but this "something more" cannot be reduced to rigid rule or simple formula, but depends on "the totality of the circumstances involved" in light of Congressional intent and policies in administering both bankruptcy relief and the student loan program[,]
In re Claxton, 140 B.R. 565, 568 (B.C., N.D.Okl.1992) (emphasis original) quoting In re Johnson, 121 B.R. 91, 93 (B.C., N.D.Okl. 1990). The Congressional policy of promoting enterprise by providing honest but unfortunate debtors in bankruptcy with a "fresh start," is qualified by the Congressional policy of promoting higher education by means of student loans whose repayment may be delayed or modified but is seldom discharged. It is Congress' policy to provide higher education; it is not Congress' policy to provide it free.
The extraordinary importance placed by Congress on repayment of educational loans impels this Court to place a heavy burden on debtors who would have such loans discharged[,]
In re Claxton, 140 B.R. p. 569. Debtors must show, of course, that they cannot reasonably be expected to make payments on their student loans now, at the time of bankruptcy. Some courts look no further, focusing entirely on circumstances "at present," In re Skaggs, 196 B.R. 865, 868 (B.C., W.D.Okla.1996). But this Court expects debtors to show also that they cannot reasonably be expected to make payments on their student loans in the foreseeable future.
"The totality of circumstances" includes both circumstances at commencement of the case and circumstances thereafter. Designating any particular "time" for determination of undue hardship as a matter of law is unrealistic and must disregard some relevant circumstances[,]
id. pp. 568-569. Indeed, future prospects may be even more important than present conditions. Few people step directly from graduation into a high-paying job; for most, the full economic benefits of higher education may be reaped only after a further post-graduate period of accumulating experience and deepening maturity. During this post-graduate period of continuing education in the school of hard knocks, it is normally to be expected that the repayment of student loans incurred over a number of years in substantial amounts would present considerable hardship. If this is "undue hardship," then most student loans will be dischargeable. But Congress did not intend most student loans to be dischargeable. Therefore, present inability to pay may, in many or most cases, be taken as mere "normal" hardship; determination of "undue" hardship for purposes of § 523(a)(8)(B) requires consideration of future prospects too.
Here, Heckathorn has proven to this Court's satisfaction that (despite various irregularities in her statements and schedules, including overstatement of her debt, some inflation of expenses, and understatement of income, especially of contributions from her parents) she cannot reasonably be expected to make any repayments on her outstanding student loans at this time. On the other hand (despite her considerable list of failed or refused employments) Heckathorn has not persuaded this Court that she cannot reasonably be expected to make any repayments on her outstanding student loans in the foreseeable future. She is a highly educated professional in a highly practical field, now with some five years of experience. There is no evidence that her unemployability is incurable. There is no evidence that her continued self-employment will remain unremunerative. However, it is clear that, the longer repayment is delayed, the more will have to be repaid, due to the accumulation of interest.
What, then, is to be done in a case such as this, where the ability to repay may improve in future, but the amount to be repaid will increase in future?
Some courts have held that (non)dischargeability of student loan debts is an allor-nothing *194 proposition. As one such court explained,
On its face [§ 523(a)(8)(B)] is clear, unambiguous and does not conflict with the overall scheme of the Bankruptcy Code. "Debt" is defined in [§ ] 101(12) of the Bankruptcy Code as "liability on a claim." Plainly understood, "liability on a claim" encompasses the entire liability, not merely some portion of the debt or merely selected terms of repayment. Congress might have used language to authorize the discharge of partial liability or the modification of conditions of liability but did not. [§ ] 523(a)(8)(B) itself limits a court's power to act only on the entire student loan obligation.
This court recognizes that some other bankruptcy courts have been willing to modify student loan terms or discharge portions of the debt. These courts have interposed broad equitable powers when applying [§ ] 523(a)(8)(B), stating their disapproval of the "inequity" which can result from a strict application of [§ ] 523(a)(8)(B). The perceived inequity, according to these courts, is the rewarding of irresponsible debtors who create their own hardship by borrowing excessively and unrealistically for their education by discharging their student loans, while punishing the debtor who has borrowed more frugally and for whom, therefore, repayment is not an "undue hardship."
Although the policy argument that an irresponsible debtor should not be rewarded is interesting, it is an argument better made to Congress than to the courts. The courts are not granted power to remedy perceived defects in legislation by the failure of Congress to legislate precisely or equitably. If application of statutory provisions as written causes "untoward, unwelcome, arbitrary or fortuitous results it is for Congress to deal with any perceived bad policy." ...
So the court's authority to determine dischargeability of student loans is limited strictly to a determination of whether a discharge of the entire debt is required[,]
In re Skaggs, 196 B.R. pp. 866-867 quoting In re Horwitz, 167 B.R. 237, 240 (B.C., W.D.Okl.1994).
This Court respectfully disagrees, for several reasons.
A statute must be read in context; and § 523(a)(8)(B) has an extensive context. The Bankruptcy Code is embedded in equity and must be read accordingly:
Good sense and legal tradition alike enjoin that an enactment of Congress dealing with bankruptcy should be read in harmony with the existing system of equity jurisprudence of which it is a part[,]
Securities & Exchange Comm. v. United States Realty & Improvement Co., 310 U.S. 434, 457, 60 S. Ct. 1044, 1054, 84 L. Ed. 1293, 1304 (1940). Certain provisions of the Code are not merely "embedded in" but grow directly from equity and equitable remedies. In particular, the bankruptcy discharge is an injunction, 11 U.S.C. § 524(a)(2); and provisions relevant thereto, in particular §§ 523, 727 which effectively shape the injunction, should be read as an expression of the equitable nature, function, and (it necessarily follows) behavior of the injunctive remedy, In re Szafranski, 147 B.R. 976, 980-981 (B.C., N.D.Okl.1992). It is therefore entirely proper to read the exceptions to discharge in § 523(a), including (8)(B) thereof, in light of equity.
While a bankruptcy court cannot, because of its own notions of equitable principles, refuse to award the relief which Congress has accorded the bankrupt, the real question is, what is the relief which Congress has accorded the bankrupt ...?
Securities & Exchange Comm. v. United States Realty & Improvement Co., 310 U.S. p. 457, 60 S.Ct. p. 1054, 84 L.Ed. p. 1304.
In determining "what ... relief ... Congress has accorded ...," the court begins with the statutory language. In § 523(a)(8)(B), the operative term "undue hardship" is undefined. Although the words "undue" and "hardship" are common English words, their combination in this statute obviously constitutes a term of art, i.e., a phrase with a particular legal meaning and function, which is based on but may be more specialized *195 than common usage. (Compare "fiduciary capacity" in § 523(a)(4), which has long been given a meaning narrower than common usage, see In re Turner, 134 B.R. 646, 648-656 (B.C., N.D.Okl.1991); and the term "malicious" in § 523(a)(6), which has been given a meaning broader than the common understanding of "with desire to do harm," see In re Culp, 140 B.R. 1005, 1014-1015 (B.C., N.D.Okl.1992).) A statute whose operative term is undefined is often not "clear [and] unambiguous." The meaning must be determined; making such determination is the proper function of the courts; and the courts do their job by looking to
considerations growing out of the public policy of the Act found both in its legislative history and in an analysis of its terms, and of the authority of the court clothed with equity powers and sitting in bankruptcy to give effect to that policy[,]
Securities & Exchange Comm. v. United States Realty & Improvement Co., 310 U.S. p. 448, 60 S.Ct. p. 1049, 84 L.Ed. p. 1299. As long as the policy considered is that of Congress (not of the judge), the court is performing its proper role in our system of separated powers.
The words "undue hardship" suggest a matter of degree. Financial hardship is not all-or-nothing, but is more or less. The load may be made bearable by reducing, rather than eliminating, it.
Legislative history includes not only "the scheme of the Bankruptcy Code" but the "scheme" of several higher-education acts as well, at least from the Higher Education Act of 1965 to the present, 3 Collier on Bankruptcy (15th ed. 1996) ¶ 523.18. That legislative history reveals increasing Congressional concern with two separately-desirable but mutually-conflicting goals: the debtor's "fresh start" versus the funding of student loans. In its latest expression of law on the subject, Congress sought to reconcile these goals under the rubric of "undue hardship". Reconciliation is not all-or-nothing; it often requires mutual concession and adjustment. The partial dischargeability or other modification of a student loan debt, to the extent its payment is an undue hardship, but no further, accomplishes both Congressional purposes of providing debtors with a "fresh start" while maximizing student loan repayment. Insisting on complete discharge or complete repayment unnecessarily sacrifices one policy to the other.
It is true that a court may not revise a statute merely because the judge finds the statutory result "`untoward [or] unwelcome,'" In re Skaggs, 196 B.R. p. 867 quoting In re Horwitz, 167 B.R. p. 240. It is not true that a court must apply the literal words of a statute even when the result is "`arbitrary or fortuitous,'" id. It is an established canon of statutory construction and interpretation that a court need not, and indeed should not, read and apply a statute in a manner which leads to an "absurd" result meaning a result which furthers no purpose, i.e. is "arbitrary or fortuitous."
What is the test of absurdity? The contradiction of reason, it may be said, and to make an immediate application to legislation, the contradiction of the reason which grows out of the subject matter of the legislation and the purpose of the legislators[,]
Pirie v. Chicago Title & Trust Co., 182 U.S. 438, 451, 21 S. Ct. 906, 911, 45 L. Ed. 1171, 1179 (1901). The correct rule is stated elsewhere in In re Skaggs itself: a court should not read and apply a statute in a manner "`demonstrably at odds' with the legislative scheme," 196 B.R. p. 866. See e.g. Conroy v. Aniskoff, 507 U.S. 511, 516-518 and n. 12, 113 S. Ct. 1562, 1566-1567 and n. 12, 123 L. Ed. 2d 229, 237 (1993); Wisconsin Public Intervenor v. Mortier, 501 U.S. 597, 610 n. 4, 111 S. Ct. 2476, 2484 n. 4, 115 L. Ed. 2d 532 (1991); Public Citizen v. U.S. Dep't of Justice, 491 U.S. 440, 454-455, 109 S. Ct. 2558, 2567, 105 L. Ed. 2d 377, 391-393 (1989); U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242, 109 S. Ct. 1026, 1030, 103 L. Ed. 2d 290, 298-299 (1989); Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S. Ct. 3245, 3250, 73 L. Ed. 2d 973, 980-981 (1982); Perry v. Commerce Loan Co., 383 U.S. 392, 399-400, 86 S. Ct. 852, 856-857, 15 L. Ed. 2d 827, 833-834 (1966); Commissioner v. Brown, 380 U.S. 563, 571, 85 S. Ct. 1162, 1166, 14 L. Ed. 2d 75, 82 (1965); U.S. v. American Trucking Associations, Inc., 310 U.S. 534, 544 and nn. *196 19, 20, 60 S. Ct. 1059, 1064 and nn. 19, 20, 84 L. Ed. 1345, 1351 (1940); Church of the Holy Trinity v. U.S., 143 U.S. 457, 459-462, 12 S. Ct. 511, 512-513, 36 L. Ed. 226, 228-229 (1892); Dalton v. Internal Revenue Service, 77 F.3d 1297, 1299 (10th Circ.1996); U.S. v. Gonzales, 65 F.3d 814, 819-820 (10th Circ. 1995); U.S. v. Killion, 7 F.3d 927, 935-936 (10th Circ.1993); In re Investment Bankers, Inc., 4 F.3d 1556, 1564 (10th Circ.1993); Ewing v. Rodgers, 826 F.2d 967 (10th Circ.1987); In re Rodman, 792 F.2d 125 (10th Circ.1986).
The policy underlying § 523(a)(8)(B) is dual. It requires accommodating both the discharge of debt in furtherance of debtor's "fresh start" and the exception from discharge of student loan debts which may be repaid. It is demonstrably at odds with this dual purpose to require in all cases either complete discharge or complete nondischarge of the student loan debt. Such all-or-nothing rule would in some cases result in insufficient repayment, in others in insufficient discharge, regardless of a debtor's particular circumstances including degree of hardship and future prospects a result which would be "arbitrary and fortuitous" and, for purposes of § 523(a)(8)(B), absurd.
Accordingly, this Court declines to insist on such result. The Congressional scheme is better carried out by permitting partial discharge or other modification of the student loan debt, according to the circumstances. Under § 523(a), complete discharge or nondischarge is the usual rule, and the same shall remain so under § 523(a)(8)(B); but under the latter statute, some variance from the general rule may be permitted, especially where such variance merely reflects an actual situation wherein present inability to pay need not continue indefinitely. Accord, Griffin v. Oklahoma State Regents for Higher Education, et al., 197 B.R. 144 (B.C., E.D.Okl.1996) and cases cited therein; In re Mayes, 183 B.R. 261 (B.C., E.D.Okl.1995); unpublished "Order" on appeal in Case No. 91-C-0974-E United States of America v. Jack Leroy David (N.D.Okl. 3/23/93).
Here, Heckathorn can only be expected to repay her student loans in future; but in future, the continuing accumulation of interest will increase the size of the debt to be repaid. The solution is to abate the threat of collection and the accumulation of interest long enough to enable Heckathorn to improve her repayment capacity.
This Court determines and concludes that Heckathorn's debts, of $49,552.04 as of the end of October 1995 plus interest to date owed to Northstar and $32,500.35 as of the end of October 1995 plus interest to date owed to Hemar, are not discharged (or are excepted from discharge) pursuant to 11 U.S.C. § 523(a)(8)(B), provided, however, as follows: that no execution on said debts shall issue for a period of five (5) years from the date of filing of this order; that no further interest shall accrue on said debts during a period of three (3) years from the date of filing of this order, and thereafter shall accrue only from the end of said three-year period forward; that upon the expiration of said three-year period, Heckathorn shall pay to each of Northstar and Hemar the sum of Five hundred dollars ($500.00) per month for a further period of two (2) years; and that upon the expiration of said two-year period, or a total period of five (5) years from the date of filing of this order, let execution issue. Judgment shall be entered accordingly. Northstar and Hemar shall prepare and submit, jointly or separately at their option, the appropriate form(s) of judgment.
AND IT IS SO ORDERED. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552707/ | 199 B.R. 434 (1996)
In re James C. HARRIS, Debtor.
Bankruptcy No. 95-11484-MWV.
United States Bankruptcy Court, D. New Hampshire.
August 16, 1996.
*435 Timothy P. Smith, Manchester, NH, for debtor.
Peter V. Doyle, Shaines & McEachern, Portsmouth, NH, for Citicorp Mortgage.
Lawrence P. Sumski, Trustee, Amherst, NH.
MEMORANDUM OPINION
MARK W. VAUGHN, Bankruptcy Judge.
The Court has before it the confirmation of the Chapter 13 plan of James Harris ("Debtor"). The Court took the matter under advisement at the close of the continued confirmation hearing held on July 12, 1996, in order to address three issues: (1) whether the plan is feasible given its balloon payment provision; (2) whether the lien held by Citicorp Mortgage, Inc. ("Citicorp") survives with respect to a nonfiling co-debtor; and (3) whether the plan provides Citicorp the full value of its collateral since the plan lacks a provision relating to the assignment of rents.
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Facts
The Debtor filed his Chapter 13 petition on June 20, 1995. In Schedule A he listed his two-family home as jointly owned and having a market value of $60,000. Citicorp Mortgage filed a proof of claim in the amount of $90,614.22. In his plan, the Debtor proposes to bifurcate Citicorp's mortgage. Accordingly, the Debtor will treat $60,000 as an allowed secured claim, the value the Court attributed to the property at a confirmation hearing held on June 14, 1996, and the balance as an unsecured claim. The Debtor will pay $644.77 per month to Citibank which represents the required payment to amortize the debt over a fifteen year period at an interest rate of ten percent. At the end of *436 the sixty month plan period the Debtor proposes to make a balloon payment to Citibank in the approximate amount of $48,792.
Discussion
I. Balloon Payment
The first issue before the Court is whether the balloon payment proposed by the Debtor complies with 11 U.S.C. § 1325(a)(6). Section 1325(a)(6) provides that the Debtor must be "able to make all payments under the plan and to comply with the plan." Thus, the Court must determine the feasibility of the Debtor's plan.
According to Judge Lundin, "any Chapter 13 plan that proposes a balloon payment at some time in the future is suspect of confirmation unless there is proof of some special circumstance likely to produce a bucket of cash at just the right time to make the payment." 2 Keith M. Lundin, Chapter 13 Bankruptcy § 5.56 (2d ed. 1994). Many courts have adopted this view.
In In re Brunson, 87 B.R. 304, 312 (Bankr.D.N.J.1988), the court stated that "[a] plan that depends on the receipt of funds from unidentified and uncertain sources during the last month of a sixty-month plan must be scrutinized carefully. In this context, feasibility means `that a reviewing court should confirm a plan only if it appears under all the circumstances that the plan has a reasonable likelihood of success.'" The court enumerated several factors to be considered in balloon payment cases:
1) the equity in the property at the time of filing;
2) the future earning capacity of the debtor;
3) the future disposable income of the debtor;
4) whether the plan provides for the payment of interest to the secured creditor over the life of the plan;
5) whether the plan provides for payment of recurring charges against the property, including insurance, local property taxes and utility charges; and
6) whether the plan provides for substantial payments to the secured creditor which will significantly reduce the debt and enhance the prospects for refinancing at the end of the plan.
Id. After examining these factors, the Brunson court found that the debtor's plan could not be confirmed.
The court in In re Endicott, 157 B.R. 255, 263 (W.D.Va.1993), expressed reluctance in confirming a plan that requires the payment of a large sum at the end with no source of income for the payment in sight. The court explained that an analysis of the six Brunson factors is one method for determining whether a plan with a balloon payment is feasible.
In In re Groff, 131 B.R. 703 (Bankr. E.D.Wis.1991), the court was faced with a plan containing an $18,000 balloon payment and the issue of whether such a plan was feasible. In confirming the debtors' plan, the court placed some weight on the fact that a bank had expressed some willingness to finance the debtors' balloon payment. Id. at 709.
In In re Gregory, 143 B.R. 424, 426 (Bankr.E.D.Tex.1992), the court stated "the inclusion of a balloon payment scheme in a plan is not dispositive of a plan's feasibility. Instead, a bankruptcy court must consider the propriety of the balloon payment under the totality of the circumstances." In that case, the balloon payment to the IRS was to be funded from the sale of the debtors' unencumbered home, and the court found that such a payment was not so speculative under the circumstances to render the plan unconfirmable. Id.
The Court finds, after reviewing the facts of this case, that the Debtor's plan is too speculative and, therefore, not feasible. First, the Debtor provided no evidence that he has a relationship with a bank that would be willing to finance the balloon payment. While Debtor's counsel suggested that by the end of the plan a bank or refinancer would have four years of payment history by which to judge the Debtor's ability to finance the balloon payment, this does not make the Debtor's plan less speculative today. Second, the Debtor's property lacked equity at the time of the bankruptcy filing and after bifurcation. At the completion of the Debtor's *437 plan, there will be less than twenty percent equity in the Debtor's home, assuming the value of the property remains constant. Third, the Debtor offered no evidence showing a change in future income and the only evidence offered to show an increase in future disposable income was the reduction in his mortgage payment, provided he can obtain a mortgage. Under the plan, the Debtor would pay $644.77 per month while the balloon payment would only require payments of $537 per month. Last, the Court notes that the Debtor's plan is inconsistent with paragraph 14 of his divorce stipulation which requires the Debtor to refinance the house within three years of the divorce or place it on the market to be sold.
II. Mortgage Lien
The Debtor's former wife is a co-debtor on Citicorp's note and mortgage and has not filed bankruptcy.[1] The Debtor's divorce stipulation provides that "the [Debtor] is awarded the parties' residence located at 602 Hall Street, Manchester, New Hampshire."[2] However, no deed transferring the property has been prepared or filed and the Debtor has listed the property as jointly owned on his bankruptcy schedules. At issue before the Court is whether Citicorp's mortgage lien will survive the Debtor's bankruptcy in spite of the plan's cram down provision given the nonfiling co-debtor.
The Debtor cites two cases in support of his position that the mortgage should be discharged: Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) and In re Lumpkin, 144 B.R. 240 (Bankr.D.Conn.1992). In Johnson, the issue before the Supreme Court was whether the mortgage lien that secured an obligation for which the debtor's personal liability had been discharged in Chapter 7 liquidation was a claim subject to inclusion in a Chapter 13 plan. The Supreme Court found that such a mortgage interest was a claim within the terms of 11 U.S.C. § 101(5). "Even after the debtor's personal obligations have been extinguished, the mortgage holder still retains a `right to payment' in the form of its right to the proceeds from the sale of the debtor's property." Johnson v. Home State Bank, 501 U.S. at 84, 111 S.Ct. at 2154. In In re Lumpkin, the bankruptcy court cited Johnson to support its holding that a Chapter 13 plan may deal with a claim where there is no personal liability, no matter what circumstances underlay the lack of personal liability. In that case, the Chapter 13 debtor was not the maker of the mortgage note and did not assume the mortgage upon the transfer of the property from her mother, the maker of the note.[3]
While both of these cases highlight the distinction between in personam claims and in rem claims and hold that a Chapter 13 plan may include in rem claims, neither case addresses the issue before the Court. This case involves a debtor who seeks to discharge both in personam and in rem claims through his Chapter 13 plan. Clearly, through his plan, the Debtor's personal liability on the *438 mortgage note in excess of $60,000 would be discharged and the in rem claim of Citicorp against the Debtor's interest in the premises would be limited to $60,000. See Gibbons v. Opechee Distribs., Inc. (In re Gibbons), 164 B.R. 207, 208 (Bankr.D.N.H.1993).
Citicorp argues, however, that the Debtor's nonfiling co-debtor can not avoid the bargained for obligations imposed by her mortgage, the mortgage covenants, and the assignment of leases and rents, without becoming a debtor in bankruptcy, with or without conveyance of the underlying real estate, simply by having her co-debtor file bankruptcy. The Court agrees with Citicorp.
This Court cannot find that either the nonfiling co-debtor's personal liability to Citicorp or the in rem claim of Citicorp against the interest of the nonfiling co-debtor is in any way affected by the Chapter 13 filing of the Debtor, other than by the effects of the co-debtor stay provisions of the Code. Because both Johnson and Lumpkin involve a debtor's interest, not a nonfiling co-debtor's interest, they do not mandate a different result in this case.
III. Assignment of Rents
The last issue before the Court is whether the plan provides Citicorp the full value of its collateral since the plan lacks a provision relating to the assignment of rents. At the confirmation hearing held on June 14, 1996, Citicorp had in its possession an appraisal of the property at a value of $66,000. The Debtor's attorney objected to its introduction into evidence as the appraiser was not present to testify. The Debtor's attorney made an offer of proof that the Debtor, who was present in the courtroom, would testify that the property was worth $60,000. As there was no evidence to the contrary before it, the Court found the value of the premises to be $60,000.
Without more valuation evidence before it, the Court is unable to determine whether the plan provides Citicorp the full value of its collateral. Because the plan is not feasible, this issue is moot. The Court notes, however, that if the appraisal of the property were based on the income approach, the rent would be included in the value. Even under a sales approach, the rent may also be subsumed in the value of the Debtor's property.
Conclusion
Because the Debtor's plan is not feasible, confirmation is denied. This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order consistent with this opinion.
NOTES
[1] At the continued confirmation hearing, the Court noted that Citicorp could get relief from the co-debtor stay imposed by 11 U.S.C. § 1301 in order to collect immediately from the Debtor's former wife. Citicorp has not yet sought such relief.
[2] The decree further provides:
That the residence shall be refinanced within 3 years of the effective day of the parties' divorce or the house shall be placed on the market for sale. Any deficiency shall be paid by the [Debtor] and the [Debtor] agrees to hold the Plaintiff harmless for same and indemnify the Plaintiff as an alimony obligation for any indebtedness she incurs as a result of the parties' ownership of said residence. That in the event that [Debtor] refinances said residence the Plaintiff shall execute a quit claim deed transferring all right, title and interest in said residence to the [Debtor].
(Ct.Doc. 20 at ¶ 14.)
[3] Lumpkin has been criticized by Ulster Sav. Bank v. Kizelnik (In re Kizelnik), 190 B.R. 171, 179 (Bankr.S.D.N.Y.1995), which noted that the results in Lumpkin "offend traditional commercial and contract law precepts, based upon a misinterpretation and misapplication of the Supreme Court's holding in Johnson." The Court notes that in Green v. Arlington Trust Co. (In re Green), 42 B.R. 308 (Bankr.D.N.H.1984), a pre-Johnson case with different facts than Johnson, this Court granted relief from the automatic stay to a trust company to permit foreclosure of its mortgage because the debtors, as purchasers of the property, had no debtor-creditor relationship with the trust company and were not personally liable on the note. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552815/ | 48 B.R. 916 (1985)
In re Todd W. LINKLATER, Debtor.
BOND'S JEWELERS, INC., doing business as Gordon's Jewelers, Plaintiff,
v.
Todd W. LINKLATER, Defendant.
Bankruptcy No. BK-LV-83-0697, Adv. No. 83-0628.
United States Bankruptcy Court, D. Nevada.
April 17, 1985.
*917 Robert K. Dorsey, Las Vegas, Nev., for plaintiff.
William L. McGimsey, Las Vegas, Nev., for defendant.
MEMORANDUM DECISION
ROBERT CLIVE JONES, Bankruptcy Judge.
Plaintiff, Bond's Jewelers, Inc. (Bond), brought this adversary proceeding against the debtor, Todd W. Linklater, to determine the dischargeability of a debt under 11 U.S.C. § 523(a)(6) (Bankruptcy Code). The Court must determine whether a perfected purchase money security interest in consumer goods was lost when two or more retail installment contracts were consolidated. The Court must then decide whether the debtor's sale of those consumer goods and conversion of the proceeds was willful and malicious and, thus, nondischargeable under Code § 523(a)(6).
*918 On May 10, 1982, Bond sold the debtor several items of jewelry by retail installment contract. Under the terms of the contract, Bond retained title to each item until the full purchase price of the respective item was paid. In addition, the contract provided that:
All add-on purchase balances will be added to the buyers existing contract in accordance with the terms thereof. Payments on any add-on consolidation balance will be allocated to sales as they occurred and security interest of seller is released with respect to any goods paid for.
The debtor then executed a security agreement and financing statement covering the items purchased. Neither the security agreement, nor the financing statement was filed of record.
On October 21, 1982, the debtor returned and received credit for one of the items purchased on May 10. The debtor also purchased two additional items of jewelry under a retail installment contract. The language from the May 10 contract, quoted above, is also contained in the October 21 contract.
The two contracts were then consolidated for accounting purposes, the balance of the May 10 contract being added to the October 21 contract. Again, the debtor executed a security agreement and financing statement, neither of which was filed.
The debtor has not made any payments on the consolidated October 21 contract. In addition, the debtor sold the jewelry and subsequently filed his bankruptcy petition.
Bond contends that it holds a perfected purchase money security interest in the consumer goods purchased on May 10 and on October 21. Bond argues that the debtor sold the goods in contravention of the security interest and converted the proceeds and, therefore, the debt should not be discharged.
The debtor contends that the purchase money security interest in the goods purchased on May 10 was lost when the respective contracts were consolidated on October 21. The debtor argues that after consolidation, the items purchased on May 10 secured not only their own price, but also the price of the items purchased on October 21. Therefore, Bond's security interest in the consumer goods purchased on May 10 became a non-purchase money security interest. Since no financing statement was filed, Bond's security interest in the consumer goods was unperfected, and thus, avoidable under Code § 522(f)(2)(A). The debtor concludes that Bond had no perfected purchase money security interest in the jewelry when it was sold and, thus, was effectively an unsecured creditor. Therefore, Bond was not injured by the debtor's sale of the jewelry.
The Bankruptcy Code does not define the term "purchase money security interest". Therefore, the Court must look to state law for a definition. The Nevada Uniform Commercial Code (U.C.C.) states that "A security interest is a `purchase money security interest' to the extent that it is taken or retained by the seller of the collateral to secure all or part of its price." N.R.S. 104.9107(1). It is not necessary to file a financing statement to perfect a purchase money security interest in consumer goods. N.R.S. 104.9302(1)(d). "Consumer goods" are goods used or bought primarily for personal, family or household purposes. N.R.S. 104.9109(1). Bond and the debtor agree that jewelry is a consumer good. The parties also agree that Bond had a perfected purchase money security interest in the jewelry purchased on May 10. However, the parties dispute, and the Court must decide, whether a perfected purchase money security interest in consumer goods is lost when two or more retail installment contracts are consolidated.
A number of courts have decided this issue, and two "rules" have emerged: the "transformation rule" and the "dual status rule".
The transformation rule states that if collateral secures its own purchase price as well as the purchase price of other goods, the purchase money security interest existing prior to the "add on" contract *919 is transformed into a nonpurchase money security interest. See In re Pristas, 742 F.2d 797, 800 (3d Cir.1984). The transformation rule, however, is typically applied in cases where neither the consolidated contract, nor state statute, allocates payments between the various debts. The policy underlying the transformation rule is to prevent over-reaching creditors from retaining title to all items covered under the consolidated contract until the last item purchased is paid for. See In re Manuel, 507 F.2d 990, 992 (5th Cir.1975); In re Norrell, 426 F.Supp. 435, 436 (M.D.Ga.1977); In re Kelley, 17 B.R. 770, 772 (Bkrtcy.E.D.Tenn. 1982); In re Krulik, 6 B.R. 443, 446 (Bkrtcy.M.D.Tenn.1980).
The dual status rule states that the existence of a nonpurchase money security interest in goods does not terminate a purchase money security interest in those goods, to the extent that the collateral continues to secure its own price. See In re Pristas, supra, at 801; In re Moore, 33 B.R. 72, 74 (Bkrtcy.D.Ore.1983); In re Breakiron, 32 B.R. 400 (Bkrtcy.W.D.Pa. 1983); In re Gibson, 16 B.R. 257, 269 (Bkrtcy.D.Kan.1981). The rationale behind the dual status rule comes from the language of U.C.C. § 9-107, which allows a purchase money security interest in goods "to the extent" that it secures the purchase price of the goods. The policies underlying U.C.C. § 9-107 are to encourage security agreements that benefit both buyer and seller, and to facilitate the sales of consumer goods. See In re Pristas, supra, at 801; In re Gibson, supra, at 267-68.
The policies underlying both the dual status rule and the transformation rule are served when the dual status rule is properly applied. Application of the dual status rule requires the court to determine the extent to which goods secure their own purchase price and the extent to which those goods secure other purchases. In re Pristas, supra, at 801; In re Gibson, supra, at 268-69. If the allocation can be made, the purchase money security interest will remain intact to the extent that the collateral continues to secure its own price. Purchase money security interests that secure other goods will be deemed nonpurchase money only to the extent that they secure the other goods.
The allocation of payments between the various purchases may be made by agreement, mandated by statute, or provided by the court. In re Gibson, supra, at 269. One method of allocation that serves the policies of both the transformation rule and the dual status rule is the "first-in first-out" (FIFO) method. A FIFO system assigns the payments to debts as they occurred chronologically. Older debts are the first paid.
A FIFO system allows a seller to retain a purchase money security interest in an item until the purchase price is fully paid. The FIFO system also prevents creditors from retaining title to, or a purchase money security interest in, goods for which the purchaser has completely paid. See J. White & R. Summers, Uniform Commercial Code § 23-7, at 922-23.
In this case, the language of the contract provides a FIFO method of allocation. The contract states that payments will be "allocated to sales as they occurred and security interest of seller is released with respect to any goods paid for." Since the contract allocates the payment equitably under a FIFO system, the Court holds that the Nevada Uniform Commercial Code permits a seller to retain a purchase money security interest in goods that also secure later purchases, to the extent that they secure their own purchase price. The purchase money security interest in the jewelry is not avoidable under 11 U.S.C. § 522(f)(2)(A).
The case of In re Matthews, 724 F.2d 798 (9th Cir.1984), is not applicable here. The Matthews decision addressed the issue of whether a purchase money security interest in household goods is lost when the debt giving rise to the security interest is refinanced. In Matthews, the refinancing loan was given to pay off the existing loan, to pay insurance, and advance money to the debtor, not to purchase goods. The Matthews *920 Court concluded that the purchase money security interest was lost and that the lien would be avoided under § 522(f)(2). In the present case, however, the earlier debt and security interest were not paid off or extinguished in the later transaction. Rather, the two loans were consolidated for accounting purposes, with a clear allocation of the payments to the respective purchases using the FIFO method. The debtor retained the right to a release of the security interest in the earlier purchase upon payment of the earlier debt.
The Court must now determine whether the debt is nondischargeable. Code section 523(a)(6) states that "A discharge under § 727 . . . does not discharge an individual debtor from any debt . . . (6) for willful and malicious injury by the debtor to another entity or to the property of another entity."
The term "willful and malicious", as used in § 523(a)(6), does not necessarily mean ill will, spite, or personal hatred. An act injuring the property interests of another is willful and malicious for § 523(a)(6) purposes if it is without knowledge or consent, intentional, and unjustified or unexcused. See In re Singleton, 37 B.R. 787, 792 (Bkrtcy.D.Nev.1984); Matter of Graham, 7 B.R. 5, 7 (Bkrtcy.D.Nev.1980).
When a debtor intentionally and knowingly sells collateral without the knowledge or consent of the secured creditor, the sale constitutes a willful and malicious act. The debt which the collateral secured then becomes nondischargeable under § 523(a)(6). See In re Cardillo, 39 B.R. 548, 551 (Bkrtcy.D.Mass.1984); In re Thomas, 36 B.R. 851, 853 (Bkrtcy.W.D.Ky. 1984); In re Clark, 30 B.R. 685, 687 (Bkrtcy.W.D.Ok.1983); In re Howard 6 B.R. 256, 258 (Bkrtcy.M.D.Fla.1980).
In this case, the debtor was aware of Bond's security interest in the jewelry. Nevertheless, the debtor sold it intentionally and without the creditor's knowledge or consent causing injury to Bond's interest in the jewelry. The debt, therefore, is nondischargeable.
The foregoing shall constitute findings and conclusions. Plaintiff shall submit a form of judgment for entry by the Court. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552849/ | 48 B.R. 165 (1985)
In re Paul E. CRABB and Joan E. Crabb, d/b/a "The Gallery" Debtors.
Bankruptcy No. 83-1384-L.
United States Bankruptcy Court, D. Massachusetts.
April 3, 1985.
*166 Michael S. Kalis, Dedham, Mass., for debtor, Paul E. Crabb.
Brian G. Killian, Sherin and Lodgen, Boston, Mass., for SSC Corp.
Gerrard F. Kelley, Boston, Mass., U.S. Trustee.
MEMORANDUM DECISION ON DEBTORS' MOTION FOR AUTHORITY TO ASSUME EXECUTORY CONTRACT
THOMAS W. LAWLESS, Chief Judge.
The debtors have moved this court for authority to assume a lease entered into with SSC Corporation. SSC Corporation objected to the motion arguing that because the debtors failed to timely exercise an option to extend the lease there is no executory contract or unexpired lease to assume.
FACTS
The facts are basically undisputed and are as follows. The debtors filed a Chapter 11 petition on October 5, 1983. On April 16, 1982, SSC Corporation ("SSC" or "landlord") and the debtor, Paul S. Crabb ("lessee") had entered into a lease for premises located in North Attleboro, Massachusetts for a term expiring on May 31, 1984 ("lease"). Provided the lease was not in default, the lessee was granted an option to extend the lease term for an additional two years by giving written notice to SSC of his intent to do so by December 1, 1983. The lessee failed to timely exercise this option. Instead, by letter dated July 16, 1984, the lessee notified SSC that he intended to exercise the option. This was over seven months after the option had lapsed and over one month after the lease had expired by its terms. The lease also granted the lessee an option to purchase the premises at any time up to January 31, 1984. This option, too, was never timely exercised.
While in possession, the lessee expended over $100,000 to improve the premises. At the time the debtors' motion was argued, approximately $10,000 in post-petition use and occupancy charges remained unpaid. In addition, there is money due and owing for pre-petition rent. The debtors claim they stand ready to cure, by prompt payment, any and all post-petition arrearage and are prepared to satisfy SSC's concern as to future performance. The debtors further argue that they are in a position to propose a Chapter 11 plan of reorganization *167 but a necessary prerequisite for same is the existence and viability of the lease.
DISCUSSION
Section 365(a) of the Bankruptcy Code ("Code") permits a trustee or debtor in possession (who has the same rights as a trustee under 11 U.S.C. § 1107) to assume "any . . . unexpired lease of the debtor." Landlord argues, however, that the lease in question is not "unexpired." Rather, due to lessee's failure to timely exercise the option to extend, the lease expired by its own terms on May 31, 1984. I agree.
It is a well-settled principle of bankruptcy law that once a lease is terminated, there is nothing for a debtor in possession to assume. In Re Maxwell, 40 B.R. 231, 236-37 (N.D.Ill.1984); In re Players' Pub, Inc., 45 B.R. 387, 394 (Bankr.D. Mass.1985). Although there is no question that lessee had an assumable interest in the lease as of the date of filing, this interest expired pursuant to the terms of the lease on May 31, 1984. In re Nashville White Trucks, Inc., 5 B.R. 112, 116 (Bankr. M.D.Tenn.1980) ("a contract may be assumed subject to all its limitations, one of which is obviously the expiration date.").
Nor did the intervening filing of a petition for relief give the lessee a right to extend the contract beyond its original terms. In re Intermet Realty Partnership, 26 B.R. 383, 388 (Bankr.E.D.Pa.1983) (filing of petition for reorganization does not expand rights of debtor under option agreement). "The Bankruptcy Code neither enlarges the rights of a debtor under a contract, nor prevents the termination of a contract by its own terms." In re Advent Corp., 24 B.R. 612, 614 (1st Cir.B.A.P. 1982). See also In re Anne Cara Oil Co., Inc., 32 B.R. 643, 647 (Bankr.D.Mass.1983) ("The bankruptcy court cannot create an interest for the debtor where none exists"). Thus, the filing of the within petition did not stay the running of the option period.
The Court finds support for its position in the case of In re Intermet Realty Partnership, supra. In that case, the debtor was assigned rights in two option contracts which terminated automatically if payment were not made by a certain date. The debtor filed its Chapter 11 petition five days before the termination date. The debtor then moved to assume the contracts pursuant to § 365, arguing that this section had operated to extend the terms of the agreement. The court disagreed, holding that ". . . the Court finds the agreement to have expired [on the termination date]. There is no interest which could be termed an executory contract and assumed by the debtor." Id. at 388. Similarly, in In re Good Hope Refineries, Inc., 602 F.2d 998 (1st Cir.1979), cert. denied, 444 U.S. 992, 100 S. Ct. 523, 62 L. Ed. 2d 421 (1979), the court held that options held by the debtor could not be resurrected by a bankruptcy court once they had expired by their own terms. See, e.g. In re Continental Properties, 15 B.R. 732 (Bankr.D.Haw.1981) (where contract to sell hotel permitted buyer to purchase until a certain date and debtor filed chapter 11 petition on the expiration date, the court found the agreement had terminated and all rights under it were extinguished); In re Beck, 5 B.R. 169, 170 (Bankr.D.Haw.1980) (license agreement terminated post-petition; neither § 362 nor § 365 provided extension).
Lessee argues that 11 U.S.C. § 362(a) automatically stayed the expiration of the option period. The automatic stay provisions of § 362 have no effect on the running of the option. This section applies to judicial and quasi-judicial proceedings to "recover a claim against the debtor" or enforce a pre-petition "judgment against the debtor" or similar acts. Section 362 does not stop the clock on the provisions of contractual agreements. See Players Pub, supra, at 392-93; Bank of the Commonwealth v. Bevan, 13 B.R. 989, 993 (E.D.Mich.1981) ("§ 362(a) . . . does not effect the running of specific time periods . . ."); In re Markee, 31 B.R. 429, 431 (Bankr.D.Idaho 1983) ("[S]ection [362(a)] enjoins acts taken by creditors; it does not concern the tolling of time.").
*168 Lessee further argues that because the option period lapsed post-petition, the time within which the renewal option could be exercised was automatically extended by 11 U.S.C. § 108(b). Authority is divided on the issue of whether an expired option is subject to § 108(b). See In re Good Hope Refineries, Inc. v. Benevides, supra (an expired option is not a contractual default and therefore not subject to § 108(b); In re Santa Fe Dev. and Mortgage Corp., 16 B.R. 165 (B.A.P. 9th Cir.1981) (majority applied § 108 to allow the debtor 60 days to assume a land purchase agreement). However, it is unnecessary in the instant case to reach this issue. Section 108, if applicable, would have given lessee the right to exercise the option to renew by the later of: (i) the time provided in the lease, December 1, 1983, or (ii) 60 days after entrance of the order of relief, e.g., December 4, 1983. Lessee attempted to exercise the option by letter dated July 16, 1984, by which time any grace period granted by § 108 had long expired.
Lessee's appeal to equity does not lead me to reach a different result. It is well established that equitable considerations do not play a part where a lease has been validly terminated. "Courts will not revive a terminated lease simply because of the lease's importance to the reorganization efforts." In re Maxwell, supra, at 238; Players' Pub, supra at 394; In re Fidelity American Mortgage Co., 19 B.R. 568, 573 (Bankr.E.D.Pa.1982); In re Intermet Realty Partnership, supra at 388.
Accordingly, the relief requested by the debtor must be denied and the automatic stay imposed by Section 362 of the Code lifted to enable SSC to regain possession of the premises. Because the lease provided that lessee's equipment and fixtures were the property of the lessee and lessee is entitled to remove them, lessee is given 3 weeks from the date of this Order to remain upon the premises in order to effect the removal of said fixtures and equipment.
See attached Order.
ORDER
In accordance with the above, the relief requested in the debtor's motion for authority to assume executory contract is DENIED. Debtor is given 3 weeks to vacate the premises. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552850/ | 48 B.R. 877 (1985)
In re Michael T. DAHOWSKI, Debtor.
The CLIENT'S SECURITY FUND OF the STATE OF NEW YORK, Plaintiff,
v.
Michael T. DAHOWSKI, Defendant.
Bankruptcy No. 83-30437, Adv. No. 84-7062.
United States Bankruptcy Court, S.D. New York.
February 15, 1985.
*878 Robert Abrams, Atty. Gen. of the State of New York, Albany, N.Y., by Stephan A. Boiko, Asst. Atty. Gen., for the Clients' Security Fund of the State of New York/plaintiff.
Lawrence M. Klein, Cornwall-on-Hudson, N.Y., for debtor/defendant.
JEREMIAH E. BERK, Bankruptcy Judge.
MICHAEL T. DAHOWSKI ("debtor" or "defendant") moves herein pursuant to Fed.R.Bankr.P. ("FRBP") 7012(a) and (b), Fed.R.Civ.P. ("FRCP") 12(b)(4), FRBP 7041 and FRCP 41(b) to dismiss the complaint of THE CLIENTS' SECURITY FUND OF *879 THE STATE OF NEW YORK ("CSF" or "plaintiff") on the grounds that CSF failed to comply with FRBP 7004(f) regarding timely service of a summons and complaint and failed to prosecute its action. Respondent CSF denies movant's assertions and argues that its actions were both timely and consistent with the applicable rules.
FINDINGS OF FACT
1. The debtor, an attorney at law, filed a voluntary Chapter 11 bankruptcy petition on October 14, 1983 and on March 13, 1984 the case was converted to one under Chapter 7.
2. The debtor listed CSF on Schedule A-3, filed December 1, 1983, as an unsecured creditor with a "subordination claim" in an unstated amount.
3. Pursuant to an Order of this Court the last day for the filing of complaints objecting to the dischargeability of debts was fixed as June 15, 1984.
4. On June 15, 1984, CSF timely filed a complaint under Bankruptcy Code § 523(a)(4) to declare certain debts nondischargeable.
5. Upon the filing of plaintiff's complaint, the Clerk of this Court issued a summons pursuant to FRBP 7004(a) and FRCP 4(a) dated June 15, 1984 setting a pre-trial conference for August 16, 1984 at 10:00 A.M.
6. Plaintiff never served the summons issued on June 15, 1984, and did not serve the complaint (and reissued summons) until August 21, 1984.
7. Plaintiff did not appear at the scheduled pre-trial conference on August 16, 1984. Since the summons and complaint had not yet been served, plaintiff requested that another pre-trial conference be scheduled.
8. Upon plaintiff's request, on August 16, 1984 the Clerk issued to plaintiff a second summons setting a pre-trial conference for September 20, 1984 at 10:00 A.M.
9. On August 21, 1984 plaintiff served by mail the complaint that was filed on June 15, 1984, and the reissued summons, upon the debtor and the debtor's attorney. The delay in service was not intentional or the result of improper motive or bad faith.
10. In lieu of filing an answer to the complaint, the debtor filed the instant motion pursuant to FRBP 7012(a) and (b), FRCP 12(b)(4), FRBP 7041 and FRCP 41(b) on September 4, 1984, with an amendment thereto on September 19, 1984. Plaintiff filed a reply affidavit on September 20, 1984 to the debtor's motion. Oral argument on the motion to dismiss was heard. Subsequently, plaintiff and defendant filed memoranda of law on the issues raised by the motion.
ARGUMENTS OF COUNSEL
Defendant has moved for dismissal of plaintiff's complaint alleging the following grounds:
I. Plaintiff's failure to serve the summons issued June 15, 1984 and complaint violates FRBP 7004(f) which states that the summons and complaint "shall" be delivered or mailed within ten days following issuance of the summons. Only where a summons issued by a Bankruptcy Court cannot be served within ten days from issuance should a summons be reissued. Plaintiff could have timely served the first summons issued, but inexcusably neglected to do so. Therefore, plaintiff was not entitled to receive a second summons and the filing of the complaint should be deemed untimely. FRBP 7004(f); Advisory Committee Note to former FRBP 704(e); Katchen v. Landy, 382 U.S. 323, 86 S. Ct. 467, 15 L. Ed. 2d 391 (1966) (purpose of bankruptcy laws is to secure prompt administration of estate within limited period); In re Lowther, 33 B.R. 586 (Bankr.N. D.Ohio 1983), aff'd, 38 B.R. 332 (N.D.Ohio W.D.1984) (plaintiff who filed complaint under § 523(c) shortly before last day to file complaints assumed risk of service discrepancies); Matter of Anderson, 5 B.R. 43 (Bankr.N.D.Ohio 1980) (plaintiff shall serve summons within ten days following issuance); Matter of Kanfer, 1 B.R. 91 (Bankr.N.D.Ga.1979) (where delay in service *880 and reissuance of summons were result of excusable neglect, complaint would not be dismissed); and 13 Collier on Bankruptcy ¶ 704.08, at 7-97, 98 (14th ed. 1967).
II. Plaintiff's failure to appear at the pre-trial conference duly scheduled and noticed in plaintiff's first summons for August 16, 1984, constitutes a failure to prosecute and as such is sufficient reason to dismiss plaintiff's complaint. (Matter of Davis, 36 B.R. 88 (Bankr.E.D.Ark.1984) (plaintiff's unexcused non-appearance at "hearing" set by summons was reason to dismiss complaint for failure to prosecute)).
Plaintiff argues in response that:
I. Unsuccessfully attempting to effect service of a summons is not a precondition to reissuance of another summons since FRBP 7004(f) merely states that, ". . . if a summons is not timely delivered or mailed another summons shall be issued and served." (In re Vadnais, 15 B.R. 575 (Bankr.D.R.I.1981); In re Stewart-Brown, 8 B.R. 593 (Bankr.N.D.Ga.1981); In re Kanfer, 1 B.R. 91 (Bankr.N.D.Ga.1979)).
II. Failure to complete service within ten days following issuance of the summons is not a fatal defect requiring dismissal of the action. (In re Vadnais, supra).
III. The date on which the complaint is filed is the controlling date to determine the timeliness of the complaint rather than the date the summons was reissued. (FRBP 4007(c); In re Stewart-Brown, supra; In re Brown, 7 B.R. 486 (Bankr.N.D. Ga.1980); and In re Vadnais, supra).
IV. Plaintiff properly served the timely filed complaint and reissued summons unlike the situation in In re Lowther, supra, cited by defendant, where the summons and complaint had yet to be served when the motion to dismiss the complaint was heard.
V. Plaintiff is not arguing excusable neglect as to the failure to serve the first summons and is not seeking to extend the time to file or serve its complaint, thus making Matter of Anderson, 5 B.R. 43 (Bankr.N.D.Ohio 1980) and In re Breining, 6 B.R. 837 (Bankr.S.D.N.Y.1980) inapplicable.
VI. Plaintiff did not appear at the pretrial conference scheduled August 16, 1984 because it had requested that it be rescheduled. The failure to serve the summons and complaint left the Court without personal jurisdiction over the defendant and thus made a pre-trial conference pointless at that time.
DISCUSSION
As defendant correctly states, the purpose of the bankruptcy laws is to secure the prompt administration of a debtor's estate within a limited period of time. To that end, FRBP 4007(c) provides that a complaint under Code § 523(c) "shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a)." Further, under FRBP 4007(c), the time for filing such a complaint can be extended only for cause on a motion made before the time has expired.
FRBP 7004(f) would appear to advance the purpose of expediting the administration of debtors' estates by limiting the time for service of the summons and complaint. The rule states as follows:
(f) SUMMONS: TIME LIMIT FOR SERVICE. If service is made pursuant to Rule 4(d)(1)-(7) it shall be made by delivery of the summons and complaint within 10 days following issuance of the summons. If service is made by any authorized form of mail, the summons and complaint shall be deposited in the mail within 10 days following issuance of the summons. If a summons is not timely delivered or mailed, another summons shall be issued and served. (emphasis added)
FRBP 7004(f), however, contains a troubling inherent ambiguity. Although the rule requires that service be made within 10 days after issuance of the summons, it also appears to allow for the issuance of infinitely many summonses given a continuing failure by the plaintiff to effect timely service. The rule provides no guidance *881 on the issues of (1) how many summonses a plaintiff is entitled to receive, and (2) the time by which service must be perfected before the underlying complaint may be dismissed.
The issuance of the summons is an administrative act performed by the Clerk of the Court. Since the Clerk cannot determine from FRBP 7004(f) how many times a summons may be reissued on a single complaint, and since the defendant presumably has no knowledge of the action because the papers have not been served, the process of summons issuance and reissuance can continue indefinitely without the matter being brought before the Court. In view of the strict time limit set out in FRBP 4007(c) for the filing of complaints objecting to the dischargeability of debts in bankruptcy, it would be abusive for the reissuance of summonses to be allowed to continue indefinitely under FRBP 7004(f).
Since FRBP 7004(f) itself is unclear on these issues, it is useful to compare this rule with its predecessor, former FRBP 704(e) as well as to the current FRCP 4(j), which state as follows: FRBP 704(e)
Time of Service. Service under subdivision (b) shall be made within 10 days after the issuance of the summons. If service is made under subdivision (c), the summons, complaint, and notice of trial or pre-trial conference shall be deposited in the mail within 10 days after the issuance of the summons. Service under subdivision (d) or (i) shall be made within the time fixed by the court. If a summons is not timely served in accordance with the foregoing provisions, another summons shall be issued and served and a new date set for trial. (emphasis added)
FRCP 4(j)
Summons: Time Limit for Service. If a service of the summons and complaint is not made upon a defendant within 120 days after the filing of the complaint and the party on whose behalf such service was required cannot show good cause why such service was not made within that period, the action shall be dismissed as to that defendant without prejudice upon the court's own initiative with notice to such party or upon motion. This subdivision shall not apply to service in a foreign country pursuant to subdivision (i) of this rule. (emphasis added)
As can be seen, former FRBP 704(e) and FRBP 7004(f) are virtually identical except that FRBP 704(e) provided for the setting of a new date for trial. However, the focus of former FRBP 704(e) and current FRBP 7004(f) is quite different from that of FRCP 4(j). The time by which service must be made in the District Courts under FRCP (4)(j) is "within 120 days after the filing of the complaint," while the time for service in the Bankruptcy Courts under FRBP 7004(f) is "within 10 days following issuance of the summons" (emphasis added). Accordingly, the time to serve an answer under FRCP 12(a) is "20 days after the service of the summons and complaint," while the time to answer under FRBP 7012(a) is "within 30 days after the issuance of the summons" (emphasis added). The FRCP count time from both the filing of the complaint and from the service of the summons and complaint, while the FRBP count time only from the issuance of the summons. The FRCP contemplate ideally that both the complaint and answer will have been served within 140 days of the filing of the complaint, while the FRBP contemplate the service of both complaint and answer ideally within 30 days of the filing of the complaint, given that the Clerk of the Court issues the summons on the same day the complaint is filed.
On the distinction between FRCP 4(j) and FRBP 7004(f), the "Editors' Comment" to 6 Norton Bankr.L. & Prac., Rule 7004(f), at page 354 (1984) states:
The Federal Rule provides for dismissal if service is not effected within 120 days after the filing of the complaint. The Bankruptcy Rule, on the other hand, is concerned with the time within which the person served must act. The time periods run from the issuance of the summons *882 under Rule 7012. This accounts for the provision that if service is not effectuated within 10 days, either by delivery or mailing, a new summons must be issued and served.
Because the summons fixes a trial or pre-trial conference date in advance, it is necessary that service be made as early as possible. The Advisory Committee Note to former FRBP 704(e) indicates the reason as follows:
"Since the date for trial is set under subdivision (a) before the issuance of the summons and the time allowed for filing responsive pleadings under Rule 712 starts to run with the issuance of the summons, it is imperative that service under the rule be made with dispatch . . . "
In 1976, former FRBP 704(e) was amended to extend the time for service from 3 days to 10 days. See 13 Collier on Bankruptcy ¶ 704.08 at page 7-97 (14th ed. 1977). The Advisory Committee Note to the 1976 Amendment explains the reason for the extension.
The time allowed for service of a summons is increased from 3 days to 10 days. It is frequently necessary for the summons to be sent by mail from the office of the bankruptcy judge who issues it to the office of the attorney for the plaintiff who serves it or arranges for it to be served. The shortness of the period allowed for service has resulted in the reissuance of an inordinate number of summonses with new dates of trial. As a result of the change of the period from 3 to 10 days, intermediate Saturdays, Sundays, and legal holidays are counted in the computation. Rule 6(a) of the Federal Rules of Civil Procedure, made applicable in bankruptcy cases by Rule 906(a), excludes such intermediate days from the computation of all periods of time of less than 7 days. (emphasis added)
The cases cited by defendant are not instructive on the issue of how to reconcile the conflicting provisions within FRBP 7004(f) or its predecessor FRBP 704(e). Indeed, no cases have been cited that apply FRBP 7004(f). In considering former FRBP 704(e), some courts have relied on the "excusable neglect" standard of former FRBP 906(b)(2) to determine whether the time to file complaints objecting to discharge or dischargeability, fixed by former FRBP 404(a) and 409(a)(2), should be retroactively enlarged where service of the summons and complaint had not been accomplished by the complaint filing deadline. See Matter of Kanfer, 1 B.R. 91 (Bankr.N. D.Ga.1979) (summons reissued and filing of complaint held timely on showing of excusable neglect); Matter of Anderson, 5 B.R. 47 (Bankr.N.D.Ohio 1980) (complaint dismissed); and In re Lowther, 33 B.R. 586 (Bankr.N.D.Ohio W.D.1983) aff'd, 38 B.R. 332 (N.D.Ohio W.D.1984) (complaint dismissed), all cited by defendant herein. Of these cases, only Lowther and Kanfer are of some value since in Anderson the complaint was never properly filed.
In Lowther, plaintiff had failed to serve the summons by the time defendant moved to dismiss, which was after the time to file complaints objecting to dischargeability had expired. The Bankruptcy Court could not find excusable neglect under former FRBP 906(b)(2) for the delay in service and consequently dismissed the complaint stating that "[b]y filing so close to the deadline the Plaintiff assumed the risk of any service discrepancies." Id., 33 B.R. at 588. Although the Bankruptcy Court in Lowther mentions former FRBP 704(e), it does not discuss the provision of that rule which requires that "[i]f a summons is not timely served in accordance with the foregoing provisions, another summons shall be issued and served and a new date set for trial," and for this reason the case is not helpful herein. The District Court affirmed the decision of the Bankruptcy Court without further analysis.
The court in Kanfer approached the matter differently. That court found that (1) plaintiff's failure timely to serve the first summons was sufficient reason under FRBP 704(e) for the clerk to reissue a summons since that rule requires that "another *883 summons shall be issued" where the previous summons was not timely served; and (2) since plaintiff's failure to serve the first summons was due to "excusable neglect" under FRBP 906(b)(2), the timeliness of the filing of the complaint was not invalidated by service of the reissued summons after the last day for filing complaints. The Kanfer court at page 92 formulated the issue as follows:
Thus having found that the Summons and Complaint in question were timely served under Rule 704(e), the only question still pending before the Court is whether or not the completion of that act, having taken place subsequent to June 15 (the final date set for filing complaints concerning dischargeability of debts), invalidated the timeliness of the filing of plaintiff's Complaint on June 15, 1979.
However, in applying the "excusable neglect" standard of former FRBP 906(b)(2) to determine whether the delay in service invalidated the timeliness of the complaint filing, Kanfer did not address the impact of former FRBP 409(a)(2) which fixed the deadline for filing complaints. The date on which the complaint is filed should be the controlling factor in determining the timeliness of a complaint, not the date on which the summons and complaint are served. In re Stewart-Brown, 8 B.R. 593 (Bankr.N.D.Ga.1981). The neglect of the plaintiff, excusable or not, is simply irrelevant on this issue.
Plaintiff develops its position from another line of cases interpreting former FRBP 704(e). The essence of plaintiff's argument is that the actual filing date controls the timeliness of the complaint without regard to when service is perfected so long as the summons and complaint are served within ten days of the issuance or reissuance of the summons.
In Stewart-Brown, supra, plaintiff properly served a reissued summons (under former FRBP 704(e)) and complaint on both defendant and defendant's counsel. The court quashed plaintiff's first attempt at service, since the papers were served on the defendant's attorney only, but allowed service of the reissued summons and complaint to stand. The complaint had been filed on the last day for filing complaints fixed by former FRBP 409(a)(2) as June 23, 1980. The first summons having been served improperly, plaintiff received a second summons on July 29, 1980 which he properly served within ten days thereafter. Defendant's argument that the date of the reissued summons is the controlling date for determining the timeliness of the complaint was not accepted by the court.
The Court cannot agree with Defendant's argument. Rule 409(a)(2) refers to a deadline for the filing of a complaint not for the issuance of a summons or the attainment of proper service. Therefore the filing date is the controlling factor in determining the timeliness of a complaint to determine dischargeability or to object to the discharge of a debtor. Plaintiff's complaint was filed within the time period set by the Court for the filing of such complaints and is therefore timely. Stewart-Brown, supra, at 595.
The Stewart-Brown court did not apply the "excusable neglect" standard found in former FRBP 906(b)(2). Rather, it focused on former FRBP 409(a)(2) which fixed the complaint filing bar date without regard to the attainment of proper service.
Plaintiff also relies on In re Vadnais, 15 B.R. 575 (Bankr.D.R.I.1981). Plaintiff in Vadnais had accomplished service of the summons and complaint five days after the ten-day period allowed under former FRBP 704(e) had expired. Rather than dismiss the complaint, the court focused on that part of former FRBP 704(e) which provides for the automatic reissuance of a summons when the previous summons is not timely served. The court held that plaintiff's failure to complete service within the time allowed by former FRBP 704(e) was not a fatal defect requiring dismissal.
In Kanfer, Stewart-Brown and Vadnais no showing of excusable neglect was required as a precondition to reissuance of a summons. In Kanfer, however, excusable neglect had to be shown to establish the timeliness of the complaint where service *884 was not perfected until after the last day for filing dischargeability complaints had passed. Stewart-Brown simply relies on the strict language of former FRBP 409(a)(2), the predecessor to FRBP 4007(c), to determine timeliness. Vadnais cites to both Kanfer and Stewart-Brown, and, in not requiring a showing of excusable neglect, the Vadnais analysis generally follows that of Stewart-Brown.
The approach set out in Stewart-Brown seems correct and most closely adheres to the express language of the Bankruptcy Rules. Accordingly, this Court finds as follows: (1) FRBP 4007(c) clearly fixes the time by which a complaint under Code § 523(c) must be filed (it "shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a)"); (2) FRBP 7004(f) does not fix a time after which no further summons shall be reissued; and (3) the standard of "excusable neglect" found in FRBP 9006(b)(2) has no bearing on the timeliness of the complaint since that deadline is fixed by FRBP 4007(c).
The Stewart-Brown court did not suggest a method by which to resolve the issue of how many summonses a plaintiff is entitled to receive or how to fix the outside time by which the plaintiff absolutely must have served the summons and complaint. This Court is concerned that FRBP 7004(f) allows for a potentially infinite period for service and thus invites abuse. A plaintiff could receive reissued summonses and fail to serve each ad infinitum. Such potentially endless delay would obviously be abusive to the debtor as well as to the bankruptcy process.
A possible solution to the problem of fixing an outside date by which service must have been completed and no further summonses shall issue is suggested by the "Editors' Comment" to 6 Norton Bankr.L. & Prac., Rule 7004(f), at page 354 (1984):
Where there has been substantial delay in the service of the summons and complaint, the appropriate procedure under the Bankruptcy Rules is to file a motion to dismiss under Federal Rule of Civil Procedure 41(b). Thus, if the plaintiff delayed more than 120 days, even though the Bankruptcy Rules do not pick up Federal Rule 4(j) which mandates a dismissal, the court has discretion to do so under Rule 41(b).
This suggestion in the Norton treatise seems logical under the circumstances. Where the Bankruptcy Rules insufficiently outline procedures to be followed, it is appropriate to look to the Federal Rules of Civil Procedure to fill the void. This Court will, therefore, use FRCP 4(j) as a guide to establish the outside date for service as 120 days after the filing of the complaint. Although 120 days appears to be a long time in view of the relatively brief period allowed for filing complaints under Code §§ 523(c) and 727(c), as fixed by FRBP 4007(c) and 4004(a), this Court sees no alternative except to create new procedural law ex nihilo. It should be noted, however, that any substantial delay in service will be examined in light of the motive and the good or bad faith of the plaintiff. Obviously an intentional delay in service of the summons and complaint should not be condoned and, if established, will support a motion to dismiss within the 120-day period.
As to defendant's argument that plaintiff failed to prosecute his action by not appearing at the first scheduled pre-trial conference, the Court cannot agree. Plaintiff did not simply fail to appear at the pre-trial conference, he notified the Court prior thereto, requested another summons and asked that a new conference be scheduled. These actions cannot be considered a failure to prosecute.
CONCLUSION
1. Plaintiff's complaint was timely filed under FRBP 4007(c). In re Stewart-Brown, 8 B.R. 593 (Bankr.N.D.Ga.1980); In re Vadnais, 15 B.R. 575 (Bankr.D.R.I. 1981).
2. Plaintiff's service by mail of the reissued summons and the complaint was proper and, although accomplished after the time to file complaints under Code § 523(c) had expired, did not affect the timeliness of the complaint. In re Stewart-Brown, supra; In re Vadnais, supra.
*885 3. Plaintiff has not failed to prosecute his action. Plaintiff's delay in service did not violate FRBP 7004(f) because although the rule requires that a summons be served ten days from issuance, the rule also states that if a summons is not timely served another shall be issued and served. Plaintiff's first summons was not timely served; thus, another was issued and that summons was properly served within 120 days after the filing of the complaint. FRBP 7004(f); FRCP 4(j); "Editors' Comment" to 6 Norton Bankr.L. & Prac., Rule 7004(f) at page 354 (1984).
4. Plaintiff did not simply fail to appear at the first scheduled pre-trial conference. He notified the Court of the circumstances and requested a new summons and new pre-trial conference date. Defendant has failed to demonstrate any harm due to plaintiff's request that a new pre-trial conference be scheduled.
5. The motion to dismiss is denied. The proceeding will be set down for trial. Defendant shall serve and file his answer to the complaint within ten (10) days from entry thereof.
SO ORDERED. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552877/ | 48 B.R. 401 (1985)
In the Matter of A & B HEATING AND AIR CONDITIONING, INC., Debtor.
A & B HEATING AND AIR CONDITIONING, INC., Plaintiff,
v.
UNITED STATES of America, Defendant.
Bankruptcy No. 84-424, Adv. No. 84-277.
United States Bankruptcy Court, M.D. Florida, Tampa Division.
January 15, 1985.
*402 Shirley Arcuri, Tampa, Fla., for plaintiff.
Marika Lancaster, Dept. of Justice, Washington, D.C., for defendant.
MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS a Chapter 11 case and the matter under consideration is a Complaint filed by A & B Heating and Air Conditioning (A & B Heating). The Complaint seeks a permanent injunction against the Internal Revenue Service (IRS) prohibiting the IRS from undertaking any further steps in its attempt to collect taxes from the principal of A & B Heating, taxes assessed against the principal of A & B Heating, a non-debtor, pursuant to the penalty provisions of the Internal Revenue Code 26 U.S.C. § 6672(a). Shortly after the filing of the Complaint, the Debtor sought an emergency hearing in order to obtain an immediate injunction.
The government promptly responded by filing a Motion and challenged the right to relief sought by A & B Heating contending that the Internal Revenue Code (IRC, 26 U.S.C. § 7421(a)) prohibits any action to restrain the assessment or collection of taxes. The Court having considered the Government's Motion and authorities cited in support of and in opposition to the respective positions of the parties, initially concluded that the apparent conflict between the anti-injunction provisions of 26 U.S.C. § 7421(a) and the overall policy aims of the Bankruptcy Code should be resolved in favor of the Bankruptcy Code. Based on that conclusion this Court denied the Motion to Dismiss. 48 B.R. 397. This Court also concluded that the Debtor was not entitled to the emergency relief it sought because the request presented was procedurally defective, but held that the Debtor should be given an opportunity to establish by competent, persuasive proof that an injunction is essential in order to prevent irreparable harm to the estate; that its chances to achieve rehabilitation is destroyed; and, that the interest of the Government is adequately protected and it will not suffer any injury if the injunctive relief is granted.
The proof presented in support of the relief sought at the final evidentiary hearing reveals the following:
A & B Heating is a closely held corporation. Mr. Clement, a non-debtor, is its president and is the sole stockholder. A & B Heating has four employees including Mr. Clement. A & B Heating is engaged in installing and servicing air conditioning *403 systems primarily in commercial buildings. According to the financial statement of A & B Heating (Pl's Exh. 1), as of August 31, 1984, it had a job income of $130,747.08. While there is some evidence in the record that because of its poor cash position it is unable to purchase additional updated equipment necessary to increase its business, such as a duct machine and a truck, there is no specific evidence in this record to indicate that any assets of Mr. Clement are actually devoted, or will be devoted in the future, to the acquisition of these items, either by sale or by refinancing some of his personal assets. While there is some evidence that he has substantial equity in his marital home, owned by him and his wife jointly as tenants by the entireties, there is no evidence of any serious attempt to sell this property at this time. Mrs. Clements has no tax liability and is not subject to the collection efforts of the IRS.
It is without dispute that by virtue of the assessment made by the IRS, Mr. Clements is liable for fiduciary taxes based on the 100% assessment, in the total amount of $25,127.63. The notice of assessment by the Government was mailed June 18, 1984. The Petition of A & B Heating for Relief under Chapter 11 was filed on February 7, 1984. Thus, it is without dispute that the 100% penalty assessment against Mr. Clements was made after the commencement of the Chapter 11 case. The record reveals that A & B Heating is currently furnishing adequate protection to the Government by a monthly payment of $500. In spite of this, the agent of the IRS made it clear that the IRS intends to pursue its collection efforts against Mr. Clements by requesting financial information from him and a disclosure of his assets in order to levy on those assets. This, of course, would entail a series of time-consuming activities by Mr. Clements because it would require a compilation of financial records, responding to subpoenas and submitting to personal interviews with the agents of the IRS.
As noted earlier, A & B Heating has only four employees, including Mr. Clements, who devotes his full time not only to the conduct of the day-to-day business of A & B Heating, but also is the only person who does the bookkeeping work for A & B Heating. In addition to running the business, he assists counsel for A & B Heating in preparation of a disclosure statement and formulation of a plan of reorganization. He also prepares the financial data required by the Order which authorized A & B Heating to continue to operate its business.
Basically, this is the factual background established by the record, germane to the resolution of the matter under consideration and which is determinative of A & B Heating's right to the relief sought.
It should be noted at the outset that the automatic stay imposed by § 362 does not protect non-debtors and was designed only to protect a Debtor who seeks relief under any operating chapter of the Bankruptcy Code. Chapter 11, unlike Chapter 13, contains no provision to protect non-debtors who are jointly liable on a debt with the debtor. Nevertheless, there are respectable authorities which hold that under specific circumstances non-debtors may be protected, albeit temporarily, if such protection is essential to the efforts of a Debtor to achieve rehabilitation. Otero Mills, Inc. v. Security Bank and Trust (In re Otero Mills), 25 B.R. 1018 (D.N.M. 1982); Old Orchard Investment Co. v. A.D.I. Distributors, Inc. (In re Old Orchard Investment Company), 31 B.R. 599, 10 BCD 1200 (W.D.Mich.1983); In re Johns-Manville Corp., 26 B.R. 420 (Bankr.S.D. N.Y.1983).
However, it is equally clear that before injunctive relief can be granted, the party seeking the protection must make a very clear case that the relief, if granted, would not damage the other party. Landis v. North American Company, 299 U.S. 248, 255, 57 S. Ct. 163, 166, 81 L. Ed. 153 (1936).
A Chapter 11 proceeding is equitable in nature, it being a rehabilitation chapter. In re Ware Spaces, 5 B.R. 204 (Bankr.D.Hawaii 1980). At the beginning of the reorganization process, the Court *404 must work with less evidence than might be desirable and should resolve issues in favor of the reorganization, where the evidence is conflicting. In re Heatron, Inc., 6 B.R. 493 (Bankr.W.D.Mo.1980). As noted earlier, this case was filed in February, 1984 and A & B Heating is yet to submit a Disclosure Statement and Plan of Reorganization.
In order to dilute the persuasiveness of A & B Heating's contention that the Government is adequately protected, Government urges that the obligation owed by Mr. Clements to the Government is distinct not only in amount, but also in character, from the obligation owed by A & B Heating. This is so, contends the Government, because the obligation of A & B Heating is based upon the non-payment of taxes whereas the obligation imposed by law on Mr. Clements is limited to the fiduciary portion of those taxes and is based on the 100% penalty provision of the IRC. The logic of the argument advanced by the Government is not persuasive, is based on a distinction without real difference and has little bearing on the ultimate question, which is, whether or not Mr. Clements is entitled to receive a temporary respite from the collection efforts of the Government so that he may devote his full time and energy to the work necessary to achieve the rehabilitation of A & B Heating.
The proof presented by the Debtor concerning the need to immunize the assets of Mr. Clements is less than adequate and will not carry the time of day. The real property owned by Mr. Clements is not subject to the claim of the Government since it is held by Mr. Clements together with his wife as tenants by the entireties and there is no evidence in this record to indicate that the 100% penalty assessment was made against his spouse. In addition, the alleged efforts of Mr. Clements to use the equity in his marital home, either through a sale or refinancing, in order to acquire funds needed for the acquisition of additional equipment was unpersuasive. However, considering the totality of the evidence presented, this Court is satisfied that Mr. Clements is entitled to limited temporary protection against the collection efforts of the Government so that he may devote his full time and energy to the rehabilitation of A & B Heating under Chapter 11 of the Code. In light of the fact that the Government is receiving adequate protection payments and in light of the fact that this Chapter 11 case should be given an opportunity to succeed, the relief sought by the Complaint is warranted.
Considering all the foregoing, it appears that the president of A & B Heating, Mr. Clements, is entitled to at least temporary protection from the collection efforts of the IRS unless the anti-injunction provision of 26 U.S.C. § 7024 presents an absolute bar and prohibits the granting of the relief sought. This Court considered this matter initially in the context of the Motion to Dismiss filed by the Government. In denying the Government's Motion, this Court concluded that the seemingly irreconcilable conflict between the policy aims of the IRC and the Bankruptcy Code must be resolved in favor of the rehabilitation policy of the Bankruptcy Code under the special circumstances of this particular case. There is nothing in this record which would require a different result.
A separate final judgment will be entered in accordance with the foregoing. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552857/ | 48 B.R. 263 (1984)
In re Sidney GREENWALD d/b/a Maple Leaf Nursing Home, debtor in possession, Debtor.
Sidney GREENWALD d/b/a Maple Leaf Nursing Home, debtor in possession, Plaintiff-Appellant,
v.
David AXELROD, M.D., as Commissioner of the New York State Department of Health, Barbara Blum, as Commissioner of the New York State Department of Social Services, C. Mark Lawton, as Budget Director of the State of New York, James Krauskopf, as Commissioner of New York City Department of Social Services, Charles Bates, as Commissioner of the Westchester County Department of Social Services, Joseph D'Elia, as Commissioner of the Nassau County Department of Social Services, Shirley Harvey-Cook, as Commissioner of the Orange County Department of Social Services, John Battistoni, as Commissioner of the Dutchess County Department of Social Services, and Noah Weinberg, as Commissioner of the Rockland County Department of Social Services, Defendants-Appellees.
No. 84 Civ. 0083 (RLC).
United States District Court, S.D. New York.
October 29, 1984.
*264 *265 *266 Marvin L. Tenzer, P.C., New York City, for plaintiff-appellant; Marvin L. Tenzer, Scott B. Lunin, David J. Larkin, Jr., New York City, of counsel.
Robert Abrams, Atty. Gen. of the State of N.Y., New York City, for defendants-appellees; Melvyn R. Leventhal, Deputy First Asst. Atty. Gen., Maryellen Weinberg, Gerald Slotnik, Asst. Attys. Gen., New York City, of counsel.
OPINION
ROBERT L. CARTER, District Judge.
Plaintiff, Sidney Greenwald, doing business as Maple Leaf Nursing Home, seeks additional reimbursement from the New York State Department of Health ("DOH") under Medicaid, Title XIX of the Social Security Act, 42 U.S.C. §§ 1396a-1396p.[1] He also seeks a declaration that defendants' failure to reimburse him properly violated his due process and equal protection rights as well as federal (Medicaid) and New York (Public Health) laws. Both plaintiff and defendants have filed motions for summary judgment.
The bankruptcy court heard these motions pursuant to an Emergency Resolution promulgated in this District,[2]see Emergency Resolution § (b), N.Y.L.J., Sept. 30, 1982 at 36, col. 1, and plaintiff now appeals from the Bankruptcy Court's decision, 33 B.R. 607, rehearing denied, 34 B.R. 952. Id. at § (c)(3). The main issue is whether plaintiff can maintain his action or whether, as defendants contend, it must be dismissed due to plaintiff's failure to pursue appropriate administrative remedies and to bring this suit in a timely manner. As explained below, this issue is resolved in plaintiff's favor. He has stated a valid cause of action pursuant to 42 U.S.C. § 1983, thus overcoming defendants' arguments for dismissal. However, summary judgment is granted in part to defendants on the constitutional claims. It is denied to both parties on the statutory claim as material issues of fact remain with respect to the merits of that claim.
The Salary Appeal
1. Background
The complaint embodies claims that plaintiff first raised in 1975. By letter, in December of that year, plaintiff filed an administrative appeal with DOH requesting an increase in his reimbursement rates under Medicaid for labor cost increments incurred in 1975.[3] (Complaint ¶ 69). These costs had not been considered by DOH when it initially set the reimbursement rate. Although, as a result of the appeal, *267 DOH eventually confirmed that $250,000[4] was owed to plaintiff-debtor, it determined that reimbursement should be withheld pending completion of two audits covering plaintiff's 1973-74 and 1975-76 cost reports.[5] This decision was communicated to plaintiff by letter in 1978. (Gormley Affidavit-Exh. H).
After a delay of two years, plaintiff brought suit in this court, alleging that defendants' refusal to complete the processing of plaintiff's 1975 salary appeal deprived plaintiff of rights to property without due process. Greenwald v. Axelrod, 80 Civ. 2396 (May 29, 1981). Judge Sand dismissed the complaint without prejudice. He found that "in the absence of bad faith or dilatoriness . . . the procedure of consolidating the salary appeal and the base year audits [was] reasonable under the circumstances of this case. . . ." Slip op. at 4-5.
In June, 1981, DOH completed the 1973-74 audit and bureau review. Plaintiff appealed the audit, requesting an administrative hearing pursuant to 10 NYCRR § 86-2.7(d). November, 1982, marked the completion of the 1975-79 bureau audit, and plaintiff also sought an administrative appeal on this audit. To date, these appeals remain undecided.
In this suit, plaintiff urges the court to find "bad faith and dilatoriness" on the part of DOH so that consolidation of the salary and audits can no longer be characterized as "reasonable" within the meaning of Judge Sand's decision. Plaintiff also charges defendants with violating the Medicaid statute and the supremacy and due process clauses of the federal constitution.[6] In its motion for summary judgment, DOH highlights plaintiff's failure to exhaust administrative remedies and accuses plaintiff of being uncooperative, thereby himself generating the delays in reaching a final adjudication. Defendants apparently maintain the position that the salary appeal should only be considered in conjunction with the audits.
2. Discussion
As the bankruptcy court reasoned, the lapse of more than two years since Judge Sand warned about further delays in the audit proceedings has eroded the "reasonableness" of a consolidation of those proceedings with the salary appeal. Severance of the salary appeal from the uncompleted audits, therefore, now replaces consolidation as the proper and reasonable remedy.
Defendants' 11th amendment immunity defense and its exhaustion argument, moreover, are rejected as bars to plaintiff's claim for the contested salary funds. In filing a proof of claim[7] for over-payments against debtor-plaintiff, DOH (Health Care Financing Administration) waived its immunity: the debtors' claim to $250,934.00, the unpaid reimbursement for 1975, is expressly allowable under the Bankruptcy Code, 11 U.S.C. § 106(b), as an offset against the state's claim. With respect to the exhaustion defense, the Bankruptcy court concluded, and the court agrees, that plaintiff had exhausted the administrative steps available when he appealed from the 1975 reimbursement rate. Administrative procedures were only revived by the consolidation, which when dissolved, terminated the availability of the additional proceedings. Accordingly, plaintiff is entitled to offset the amount previously awarded by DOH ($250,934.00) *268 against the state's claim filed against the estate.
Plaintiff urges the court to decide whether the state, in filing a proof of claim against plaintiff which, plaintiff alleges, arises out of the same transaction or occurrence as plaintiff's claim, has also waived its 11th amendment immunity as to plaintiff's claim for affirmative recovery against the state. 11 U.S.C. § 106(a). There is no need to address this issue at this juncture. It appears likely, however, that the state will establish substantial overpayments as a result of the various audits still in process. (Gormley Aff. ¶ 25-26). To minimize the exchange of debts between the state and plaintiff and decrease the risk that one side will come up short in the final tally, it seems wiser, at this point, to await final determinations on the audits and plaintiff's second claim (relating to recoupment of start-up costs) before making a final determination on plaintiff's affirmative claim on its salary appeal. Therefore, the court declines to hold that plaintiff is entitled to judgment on its affirmative claim at this time. See Matter of Fahey v. Whalen, 84 Misc. 2d 1040, 376 N.Y.S.2d 819 (Sup.Ct. Onondaga Co.1975), aff'd, 54 A.D.2d 1097, 388 N.Y.S.2d 960 (4th Dep't.1976).
The court will not, however, allow additional unjustified delay in the audit process to bar plaintiff's recovery of the additional salary payments. Should such delay occur, plaintiff may reapply to the court for consideration of its claim for affirmative recovery on the salary appeal.
Start-up costs
1. Background
Start-up costs[8] and cost carry forward claims form the basis of the remaining five of the complaint's eight causes of action. Plaintiff's main allegation is that he is entitled to certain expenditures, approximately $661,000.00 (Complaint ¶ 46), made during the period between the point when the facility was licensed and began admitting patients and the point when it was approved for operation at its full capacity; DOH permitted plaintiff to capitalize only start-up costs incurred prior to the admission of the facility's first patient.[9]
The dispute arose as a result of defendants' policy of requiring new facilities to limit their initial admissions so as to gradually phase-in operations. (Complaint ¶ 21). When plaintiff opened his facility in January, 1973, it was approved for operation as a 40-bed unit, although it had been certified and licensed as a 120-bed residential health care facility ("RHCF") earlier that month. In accordance with the phase-in policy, DOH approved the operation of an 80-bed unit in February, and in March, plaintiff received approval to operate at full capacity. Plaintiff admitted patients in accordance with these limitations and the facility reached 90% of its full capacity in April, 1973. Plaintiff maintains that defendants incorrectly limited their calculation of plaintiff's start-up during the phase-in period since it was a time in which the facility was developing its ability to furnish patient care.
The dispute, concretely, is over the 1975 reimbursement rate established by DOH; the cost report filed by plaintiff for 1973 formed the basis of the 1975 rate. By letter dated October 10, 1977, plaintiff filed an administrative appeal of the 1975 rate seeking revision. (Gormley Aff.-Exhibit 5, *269 ¶ 45). That appeal was denied by letter in October, 1978. DOH found, as a matter of law, that plaintiff was not entitled to the relief sought. In June, 1980, plaintiff commenced an action in this district challenging DOH's failure to reimburse plaintiff for its start-up costs and cost carry forward claims.
Defendants moved for a judgment on the pleadings in that action on the grounds that plaintiff failed to exhaust administrative remedies,[10] failed to commence the action within the four month statute of limitations,[11] and was barred by the 11th amendment. Judge Sand dismissed the case without prejudice. Greenwald v. Axelrod, 80 Civ. 3079 (May 27, 1981). An affidavit made out by plaintiff's reimbursement consultant stated that, although the start-up claim had been denied, DOH was permitting plaintiff to raise the claim in connection with a pending audit appeal. Judge Sand wrote that:
in view of the pendency of this issue before the state administrative agency, intervention . . . would be inappropriate at this time, and consideration of plaintiffs' constitutional claims would be premature. After completion of these administrative proceedings, the policy which plaintiffs challenge as violative of the Social Security Act and United States Constitution will be ripe for judicial challenge.
slip op. at 3-4.
It is now clear that the start-up cost appeal was never considered in the audit proceedings. The present complaint raises issues very similar to those pressed before Judge Sand. It alleges that plaintiff has been deprived of property without due process and that defendants have violated the New York State plan and the federal medicaid statute as a result of DOH's failure to resolve plaintiff's start-up costs and cost carry forward claims during the 1973-74 audit review. (Complaint ¶ 52, 54). Also allegedly in violation of the New York State plan and the Medicaid statute was defendants' refusal to permit plaintiff to carry forward for five successive reporting periods unreimbursed costs claimed for the period of its initial operation. (Complaint ¶ 58). Further, plaintiff asserts that in denying the start-up costs and carry forward claims, defendants have failed to reimburse plaintiff in accordance with "rates reasonably related to the cost of efficient production of services," in violation of New York Public Health Law § 2807. (Complaint ¶ 66). Finally, an equal protection claim is made based upon cost recoveries by recipients of Article 28-A loans. (Complaint, ¶ 64).
2. Discussion
Before the bankruptcy court and on appeal from its decision here, defendants emphasize two of the defenses raised in the previous suit as bars to this action: plaintiff's failure to exhaust administrative remedies and his failure to pursue, within the limitations period, the appropriate judicial remedy. Defendants assert that plaintiff has no cause of action under 42 U.S.C. § 1983 and cannot avoid either exhaustion of appropriate administrative remedies or the four-month statute of limitations on that basis.
a. Exhaustion of Administrative Remedies
There can be little doubt, as the bankruptcy court found, that plaintiff has failed to exhaust his administrative remedies. Subsequent to Judge Sand's decision, it became apparent that the affidavit submitted by plaintiff (averring that the start-up cost issue was before a state administrative *270 agency), was not grounded in fact.[12] Thus plaintiff's start-up cost claim never actually proceeded beyond the first level review, which resulted in its denial.
Judge Sand's determination that the start-up cost claim was pending before the administrative agency cannot be given res judicata effect. Under the principles of res judicata, a final judgment on the merits bars a subsequent action between the same parties (or those in privity with them), upon the same claim or demand. National Labor Relations Bd. v. United Technologies Corp., 706 F.2d 1254, 1259 (2d Cir.1983). But because the doctrine has broad effectboth issues actually decided in determining the claim asserted in the first action and issues which could have been raised in that action are precluded from subsequent litigation, id., its application is carefully conditioned. The previous judgment must have been a final judgment on the merits in order to be given preclusive effect. That requirement has not been met. A dismissal without prejudice is not a final determination on the merits of a claim. Fannie v. Chamberlain Mfg. Corp., Derry Div., 445 F. Supp. 65, 74 (W.D.Pa. 1977), citing Sack v. Low, 478 F.2d 360 (2d Cir.1973); see Rodriguez v. Compass Shipping Co., Ltd., 456 F. Supp. 1014, 1017-18 (S.D.N.Y.1978) (Carter, J.), aff'd, 617 F.2d 955 (2d Cir.1980), aff'd, 451 U.S. 596, 101 S. Ct. 1945, 68 L. Ed. 2d 472 (1981). There can be no doubt that Judge Sands' dismissal of plaintiff's complaint proceeded on this basis. Cf. Weston Funding Corp. v. Lafayette Towers, Inc., 410 F. Supp. 980, 983-84 (S.D.N.Y.1976) (Carter, J.), aff'd, 550 F.2d 710 (2d Cir.1977).
b. Section 1983
Nevertheless, plaintiff's contention that his claim is not barred by an exhaustion requirement succeeds since plaintiff has asserted a valid cause of action pursuant to 42 U.S.C. § 1983 and exhaustion of administrative remedies is not, therefore, required.
In 1980, it became clear for the first time that, as the Supreme Court put it, 42 U.S.C. § 1983[13] "means what it says." It provides a private cause of action for violation of federal statutory law by state and local officials. Maine v. Thiboutot, 448 U.S. 1, 4, 100 S. Ct. 2502, 2504, 65 L. Ed. 2d 555 (1980).[14] While the Court has subsequently set limits on its pronouncement in Thiboutot; see Pennhurst State School & Hosp. v. Halderman, 451 U.S. 1, 101 S. Ct. 1531, 67 L. Ed. 2d 694 (1981); Middlesex Country Sewerage Auth. v. National Sea Clammers Ass'n, 453 U.S. 1, 101 S. Ct. 2615, 69 L. Ed. 2d 435 (1981),[15] suits brought pursuant to § 1983 challenging a state's Medicaid reimbursement practices and regulations are not, in general, affected by these limitations. See, e.g., Randall v. Lukhard, 709 F.2d 257 (4th Cir.1983), aff'd in part, rev'd in part on other grounds, 729 F.2d 966 (4th Cir.1984) (eligibility for Medicaid determined by "transfer of assets" rule); Curtis v. Taylor, 625 F.2d 645, modified on other grounds, reh. denied, 648 F.2d 946 (5th Cir.1980) (reimbursement for only three physician visits per month); Illinois Hosp. Ass'n v. Illinois Dep't. of Public Aid, 576 F. Supp. 360 (N.D.Ill.1983) (reimbursement for inpatient hospital services); Thomas v. Johnston, 557 F. Supp. 879 (W.D.Tex.1983) (reimbursement rate for Texas intermediate care facility); Quakertown *271 Hosp. Ass'n. v. O'Bannon, 1983 Medicare and Medicaid guide (CCH) ¶ 33,629 (E.D.Pa.1983).
Plaintiff challenges the state's compliance with 42 U.S.C. § 1396a(a)(13)(A), which provides that the state agency administering Medicaid, DOH, must make payments to providers such as plaintiff,
which the state finds, and makes assurances satisfactory to the Secretary, are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities in order to provide care and services in conformity with applicable state and federal laws. . . .
Id. In disallowing certain start-up costs, plaintiff maintains, the state failed to compensate plaintiff for the actual reasonable costs of the services he provided. (Plaintiff's supplemental brief at 3). Defendants counter that they were required by federal law and regulations to disallow the contested expenditures. (Gormley Aff. ¶ 41).
The provision highlighted by both parties to justify their contentions is section 2132 of the Medicare Reimbursement Manual 15 (HIM-15). The relevant paragraph is set out in the margin.[16] Plaintiff points to the portion of HIM-15 which refers to start-up costs incurred when a facility opens on "piecemeal basis." He argues that HIM-15 provides the controlling principles for Medicaid reimbursement in this case because DOH regulations so provide. Defendants underline the first segment of the applicable HIM-15 paragraph, arguing that start-up costs are defined to include only expenses incurred prior to "the time the first patient, whether Medicare or non-Medicare, is admitted." (Gormley Affidavit ¶ 41). More importantly, they argue, Medicare principles do not apply to determinations of either start-up or cost carry forward claims since the application of Medicare reimbursement principles to Medicaid rate setting in New York is "wholly within the discretion" of DOH. (Gormley Aff. ¶ 40). With that contention the court agrees. However, there is a standard which places limits on the state's discretion.
Initially, the Medicaid law did not include any specific requirements regarding the methods of payment to be used to reimburse skilled nursing ("SNF") or intermediate care facilities ("ICF") for services. Consequently, states were permitted to develop their own payment methods, subject to the general requirement that payments not exceed reasonable charges consistent with efficiency, economy and quality of care. In 1973, however, Medicaid was amended to require that each state Medicaid plan provide for reimbursements on a "reasonable cost related basis." The amendment was enacted with an eye on the Medicare model but, nevertheless, provided states with somewhat greater flexibility than did Medicare due to the difficulty of applying that standard to long term care facilities. See Massachusetts General Hosp. v. Weiner, 569 F.2d 1156, 1158-59 (1st Cir.1978). In 1980, the requirement that states pay for SNF and ICF services on a reasonable cost-related basis was removed altogether. The successor is current law, 42 U.S.C. § 1396a(a)(13)(A), set out above.
The Senate Finance Committee reports noted that state officials had complained that complex federal regulations implementing the 1972 amendments had unduly fettered their discretion and forced them to rely on Medicare principles of reimbursement, which were inherently inflationary *272 and contained no incentives for efficient performance. The 1980 provision would, the reports stated, allow states to establish rates without regard to Medicare reimbursement principles. According to the report, it would also minimize the administrative burden placed on the states with regard to the states' provision of accountability assurances to the Secretary.[17]
The Senate Report also stated, however, that "the flexibility given the states is not intended to encourage arbitrary reduction in payment that would adversely affect the quality of care." 46 Fed.Reg. 47964-67 (Sept. 30, 1981); see S.Rep. No. 96-471, 96th Cong.2d Sess., reprinted in 4 Medicare and Medicaid Guide, ¶ 24,407 at 5780-81 (CCH) (1981). The conference report accompanying the 1980 amendment also set a cautious tone. While agreeing with the discretion bestowed upon states, the conferees noted that the methods and standards on which the states based rates of reimbursement were ultimately subject to review by the Secretary of Health and Human Services. They noted "their intent that a state not develop rates under [42 U.S.C. § 1396a(a)(13)(A)] solely on the basis of budgetary appropriations. In determining whether the rates proposed by a state are reasonable and adequate to meet the costs which must be incurred by efficiently and economically operated facilities, the Secretary is not expected to approve a rate lower than the applicable legal requirements would mandate." H.Conf.Rep. No. 96-1479, 96th Cong.2d Sess. 154, reprinted in 1980 U.S.Code Cong. & Ad.News 5526, 5594.
In sum, according to its legislative history, the Medicaid statute grants states considerable leeway in fashioning Medicaid reimbursement rates.
States need not apply Medicare reimbursement principles in setting Medicaid rates. Nor must states reimburse providers on an actual cost basis. But the statute falls short of abdicating federal standards and control. "[I]t manifestly imposes a substantive limitation on state governmental actionthat rates determined by state Medicaid agencies must be high enough to compensate efficiently and economically operated providers for costs necessarily incurred in providing the type of care for their residents that conforms to all applicable state and federal laws and requirements. . . ." Thomas v. Johnston, supra, 557 F.Supp. at 909. Although HIM-15 is not law with regard to the setting of reimbursement rates, the state's denial of certain start-up costs must still be reasonable. Plaintiff states a colorable claim under § 1983 in alleging that defendants abused the discretion granted them pursuant to the federal Medicaid statute by refusing to allow for start-up costs incurred during the required phase-in of the nursing facility's operations. See Hagans v. Lavine, 415 U.S. 528, 543, 94 S. Ct. 1372, 1382, 39 L. Ed. 2d 577 (1974).[18]
Once this conclusion is reached, plaintiff's failure to exhaust available administrative remedies does not bar this action. Exhaustion of administrative remedies is not a prerequisite to an action pursuant to § 1983. Patsy v. Board of Regents of the State of Florida, 457 U.S. 496, 102 S. Ct. 2557, 73 L. Ed. 2d 172 (1982). Importantly, Medicaid, unlike Medicare, 42 U.S.C. § 1395ii, contains no administrative *273 exhaustion prerequisite restricting judicial review for claims arising under the Act. See Heckler v. Ringer, ___ U.S. ___, ___ -___, 104 S. Ct. 2013, 2021-22, 80 L. Ed. 2d 622 (1984); Rhode Island Hosp. v. Califano, 585 F.2d 1153, 1161 (1st Cir.1978).
c. Statute of Limitations
No federal limitations period controls a § 1983 action. Borrowing from the analogous state law provision, see Board of Regents v. Tomanio, 446 U.S. 478, 483-84, 100 S. Ct. 1790, 1794-95, 64 L. Ed. 2d 440 (1980), this Circuit has adopted a three year limitation for § 1983 actions pursuant to CPLR § 214(2). Keating v. Carey, 706 F.2d 377, 381-82 (2d Cir.1983); Pauk v. Board of Trustees of the City University of New York, 654 F.2d 856, 866 (2d Cir.1981), cert. denied, 455 U.S. 1000, 102 S. Ct. 1631, 71 L. Ed. 2d 866 (1982).[19] Although the filing of the § 1983 action concerning start-up and cost carry forward claims before Judge Sand in June, 1980, did not toll the three year period, see Gutierrez v. Vergari, 499 F. Supp. 1040, 1049 (S.D.N.Y.1980) (Ward, J.), which commenced to run when plaintiff was notified that these claims had been denied on administrative appeal (October 24, 1978), the period was extended under the Bankruptcy Code, 11 U.S.C. § 108(a) and, therefore, plaintiff's action, filed in June, 1982, was timely. The Code affords a trustee in Bankruptcy a two year extension of a limitations period applicable to any cause of action it may have if the limitation period has not expired on the date of the filing of the debtor's petition.[20] Plaintiff's petition was filed on July 1st, and, therefore, the limitations period extended to August 12, 1983.
d. Summary judgment
Summary judgment for defendants is appropriate on plaintiff's constitutional claims. There is no merit to plaintiff's contention that he was deprived of due process of law. He had available to him various levels of administrative appeal and was afforded adequate notice regarding these opportunities to be heard. Likewise, his equal protection claim is implausible. That claim is based on the differences between "reimbursement" to voluntary facilities for mortgage payments on Article 28-A loans and the reimbursement rates set under Medicaid. However, capital expenses reimbursement for Article 28-A facilities differs from capital cost reimbursement for other voluntary facilities, proprietary facilities and public facilities for the purpose of stimulating construction of non-profit facilities. The differences in the "reimbursement" methodologies have, without question, a rational basis.
On plaintiff's statutory claim, summary judgment is premature. Neither party, with defendants' omissions the more glaring, provides the court with adequate facts supporting or rejecting the argument that defendants are not in compliance with the Medicaid statute. Plaintiff's reference to Overlook Nursing Home, Inc. v. United States, 556 F.2d 500, 214 Ct. Cl. 60 (1977) (allowing start-up costs pursuant to HIM-15 [§ 2132.1] on facts almost identical to those present here) casts doubt on the reasonableness of the state's denial of such costs. However, as explained earlier, construction of Medicare regulations is not dispositive here, and independent facts concerning the reasonableness of defendants' challenged decision must be presented. See Quakertown Hosp. Ass'n v. O'Bannon, *274 supra, Medicare and Medicaid Guide (CCH) ¶ 33,629.
The court must note, as did the court in Quakertown, that plaintiff bears a heavy burden in making his case because of the broad discretion which the federal statute confers upon the states. In addition, a deferential standard governs the court's review of the actions of state agencies and their officials and a presumption of validity attaches to the action of administrative agencies. Thomas v. Johnston, supra, 557 F.Supp. at 901, citing Illinois Council for Long Term Care v. Miller, 503 F. Supp. 1091, 1094 (N.D.Ill.1980).
Nevertheless, the court must reject defendants' suggestion that the start-up costs issue be remanded to DOH "to permit the State Commissioner to consider whether or not to continue to apply the Medicare reimbursement principles embodied in § 2132 of HIM-15 in light of the interpretation of that section contained in Overlook Nursing Home, Inc. v. United States, supra, 556 F.2d 500." (Supp. Brief at 8). The question for remand, as posed, seems incorrect. More to the point, however, are the court's doubts regarding the utility and efficiency of a remand here. This case is not short on delay. Were the question above, or one similar to it, submitted to the Commissioner, there are no guarantees that the case would not reappear here, reiterating the current issues. The case is properly before the court now and should proceed here as expeditiously as possible.
Conclusion
The bankruptcy court's determination with regard to plaintiff's salary appeal is affirmed. Its conclusions regarding plaintiff's start-up costs appeal are substantially revised. Plaintiff is not barred from bringing his action pursuant to § 1983. Summary judgment is granted to defendants on plaintiff's constitutional claims and denied, as to both parties on plaintiff's statutory challenge.
IT IS SO ORDERED.
NOTES
[1] Named as defendants in this action are David Axelrod, as Commissioner of the New York State Department of Health, Barbara Blum as Commissioner of the New York State Department of Social Services, C. Mark Lawton, as Budget Director of the State of New York. Plaintiff contends that defendants are the chief state officials responsible for reimbursement to Medicaid providers participating in the Medicaid program. Medicaid was designed as a joint state and federal program to provide medical care to those who would not otherwise be able to afford such care. Under the terms of the Medicaid statute, the federal government provides a percentage participation in the funding. In New York, responsibility for the remaining monies is divided between the state and local governments. (Gormley Aff. ¶ 4).
[2] On July 1, 1981, an involuntary petition in bankruptcy was filed against plaintiff, which proceedings were thereafter converted to proceedings under Chapter 11 of the Bankruptcy Code. An order for relief under Chapter 7 was entered on August 12, 1981.
[3] Pursuant to Part 86 of the rules and regulations of the Department of Health ("DOH"), 10(a) NYCRR, reimbursement rates for a residential health care facility rendering services to Medicaid-eligible patients are computed on a prospective basis utilizing "allowable costs" incurred by the facility during a prior period (i.e., a base period), which are limited by cost ceilings computed by DOH and are then "trended" forward to account for projected inflation. (Complaint, ¶ 20; Gormley Aff. ¶ 5).
[4] Initially DOH found it owed plaintiff approximately $265,298.00, but this figure was later adjusted downward as a result of an audit disallowing a certain portion of the 1973 base year costs. It appears that the figure is not the subject of serious dispute here. (Gormley Aff. ¶ 19).
[5] The 1975-76 audit was later broadened to cover plaintiff's 1977-79 base year costs. (Gormley Aff. ¶ 24). Base year cost reports are subject to audit by the DOH pursuant to Public Health Law § 2803(1)(b)(ii) and 10 NYCRR 86-2.7 (and predecessor regulations). (Gormley Aff. ¶ 10).
[6] Complaint, ¶¶ 86, 88, 90. See discussion infra.
[7] The state filed a proof of claim for $911,549.00 based on downward adjustment in plaintiff's Medicaid reimbursement for 1975-76 ($83,549.00) and 1977-81 ($828,000.00.). (Gormley Aff. ¶ 25).
[8] Start-up costs are those expenditures incurred during the time a facility is developing its ability to furnish patient care. Pursuant to the Medicare Provider Reimbursement Manual, Part I, § 2132, a facility is permitted to capitalize these costs as deferred charges and to amortize them over a number of benefitting periods. In addition, pursuant to § 2614, Part I of the Provider Reimbursement Manual, under certain conditions, arguably present here, a facility may carry forward its unreimbursable reasonable costs for succeeding reporting periods.
[9] Plaintiff was reimbursed on a "group average" basis during its initial period of operation. The group average rate is based on an average of the operational rate reimbursements issued to other residential health care facilities (RHCFs) of similar size in the same geographic region. (Gormley Aff. ¶ 39). Plaintiff seeks reimbursement of the costs he incurred in excess of the group average payments.
[10] Plaintiff did not request a hearing to review defendants' denial of the 1975 reimbursement rate appeal pursuant to 10 NYCRR § 86-2.14(b)(1). Retroactive rate adjustments resulting from an audit are final unless the RHCF requests a "bureau review" within 30 days of its receipt of the audit report pursuant to 10 NYCRR § 86-2.7(e).
[11] Plaintiff did not pursue what defendants claim was the appropriate judicial remedy, Article 78 proceedings, which carry a four-month limitation period. NYCPLR § 217.
[12] It seems likely that plaintiff was not solely responsible for the "misinformation" supplied to the court. State defendants raised no objections to the statements made in the affidavit, and there is no indication that the affidavit was submitted in bad faith.
[13] 42 U.S.C. § 1983 provides:
Every person who, under color of any statute, ordinance, regulation, . . . of any state . . . subjects, or causes to be subjected, any citizen . . . to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable . . . in an action at law, suit in equity, or other proceeding. . . .
[14] In Thiboutot, the Court allowed welfare recipients to bring suit under § 1983 to challenge a denial by state officials of federal social security benefits.
[15] See, Note, Making the Old Federalism Work: Section 1983 and the Rights of Grant-in-Aid Beneficiaries, 92 Yale L.J. 1001 (1983).
[16] "Start-up costs are incurred from the time preparation begins on a newly constructed or purchased building, wing, floor . . . to the time the first patient, whether Medicare or nonMedicare, is admitted for treatment. . . . If a provider intends to prepare all portions of its . . . facility at the same time, start-up costs for all portions of the facility should be accumulated in a single deferred charge account and should be amortized when the first patient is admitted. . . . However, if a provider intends to prepare portions of its facility on a piecemeal basis . . ., start-up costs should be capitalized and amortized separately for the portion(s) of the provider's facility prepared during different time periods. . . ." Reprinted in CCH Medicare and Medicaid Guide, ¶ 5964.
[17] The Omnibus Reconciliation Act of 1981, Pub.L. 97-35, forced the Department of Health and Human Services to issue regulations implementing the 1980 amendments. See 42 C.F.R. §§ 447.250-447.272.
[18] Defendants cite Klein v. Axelrod, 81 A.D.2d 935, 439 N.Y.S.2d 510 (3d Dep't.1981) in making the argument that plaintiff has not asserted a legitimate § 1983 action. That case is readily distinguishable from this one. Plaintiff there presented no more than a challenge to the rate set for his facility; there is no indication that he alleged that the rates set did not comply with the federal statutory requirements, and no constitutional issues were raised. The court in Klein found, therefore, that plaintiff was relegated to pursuing his administrative remedies as an Article 78 appeal.
[19] As in Pauk, defendants suggested that the appropriate limitations period is the four-months provided by CPLR 217 for proceedings brought pursuant to Article 78. The court's comments in that case apply here with equal force.
The brevity of . . . [the four-month period] makes it singularly inappropriate for § 1983 actions. Moreover, even if an Article 78 proceeding is available for appellant's constitutional challenge to the denial of his tenure, there is no reason to believe that New York regards this procedure as the exclusive means for pursuing such a claim.
654 F.2d at 863.
[20] A debtor in possession has most of the rights and powers of a Chapter 11 trustee. 11 U.S.C. § 1107(a). | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552918/ | 48 B.R. 641 (1985)
In re Joseph L. CUNNINGHAM, Debtor.
Edward BRUNSWICK, Plaintiff,
v.
Joseph L. CUNNINGHAM, Defendant.
Bankruptcy No. 84-11006, Adv. No. 85-0034.
United States Bankruptcy Court, W.D. Tennessee, E.D.
April 26, 1985.
*642 Lloyd A. Utley, Jackson, Tenn., for debtor-defendant.
William C. Bell, Jr., Jackson, Tenn., for plaintiff.
MEMORANDUM OPINION AND ORDER
WILLIAM B. LEFFLER, Bankruptcy Judge.
In this adversary proceeding the Plaintiff, Edward Brunswick, holder of an Eight Hundred Thousand Dollar ($800,000.00) judgment against the Debtor, Joseph L. Cunningham, seeks to have his judgment declared nondischargeable pursuant to 11 U.S.C. §§ 523(a)(6) and 523(a)(9).
Upon consideration of the testimony and exhibits at trial, and the entire record, the Court makes the following findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052(a).
FINDINGS OF FACT
The Plaintiff holds an Eight Hundred Thousand Dollar ($800,000.00) judgment entered against the Debtor in the Circuit Court of Obion County, Tennessee on October 16, 1984 pursuant to a jury verdict. The Plaintiff's cause of action was based upon injuries received as a result of an automobile accident in which the Debtor was driving his car at an unsafe speed while intoxicated. The facts surrounding the accident are not in dispute.
On Sunday, October 3, 1982 the Debtor and a friend purchased three six-packs of beer and proceeded to drive around Obion County and drink. The friend drove and the Debtor was a passenger. Between the hours of two o'clock P.M. and ten o'clock P.M. the Debtor and his drinking partner consumed all eighteen beers, sharing the beer equally. After the young men finished the beer they continued to drive around town and talk. At about eleven-thirty P.M. the Debtor and his friend parked the friend's car and got into the Debtor's new Trans-Am automobile. Shortly thereafter the Debtor and his friend encountered the Plaintiff and his fianceé. The Plaintiff and his fianceé got in the back seat of Debtor's automobile and the Debtor drove; they traveled out a rural road in Obion County, Tennessee. Sometime near midnight Debtor turned south on Pleasant Hill Road and traveled for about one mile at which point he turned around and proceeded to travel in a northern direction from whence he just came. For some unknown reason the Debtor increased the speed of his automobile to about sixty miles per hour, an unsafe speed considering that it was a foggy night and they were traveling on a dark rural road. Debtor did not stop at the intersection, nor did he reduce the speed of his automobile as he approached the intersection. Debtor drove his automobile through the intersection, across the road, and into a dirt embankment. The accident caused serious and permanent injuries to the Plaintiff and less serious injuries to the other passengers. By virtue of the accident, the Plaintiff is permanently paralyzed from the waist down and he is confined to a wheelchair.
After the Debtor drove through the intersection and crashed into the dirt embankment the investigating police officers charged the Debtor with the criminal offense of driving while intoxicated ("DWI") and indicated in the Arrest Report that the Debtor had a strong odor of alcohol on his breath. As a result of that charge the *643 Debtor pled guilty to DWI in the General Sessions Court of Obion County, Tennessee, on December 1, 1982. The Debtor was fined Two Hundred Fifty Dollars ($250.00), plus costs, and sentenced to serve forty-eight (48) hours in the county jail. Additionally, as a result of that guilty plea, the Court suspended the Debtor's driving privileges for a period of one (1) Year.
On August 24, 1983 the Plaintiff instituted the civil action against the Debtor. The Complaint in the state court action alleged that the Debtor operated his motor vehicle in violation of Tenn.Code Ann. § 55-10-401, which makes it unlawful for any person to drive an automobile while under the influence of an intoxicant. The Complaint additionally set forth that the accident was a direct result of the Debtor's operation of his automobile recklessly and negligently and that he intentionally drove his automobile while under the influence of alcohol.
In the civil proceeding in state court the Debtor never denied that he was intoxicated at the time of the accident. His defense was based upon contributory negligence and assumption of the risk on the part of the Plaintiff. The essence of the defense was that the Plaintiff knew that the Debtor was drunk when he got in the car with him.
On November 7, 1984 the Debtor filed a Chapter 7 Petition in Bankruptcy. The Plaintiff has been listed as an unsecured creditor in the amount of $790,000.[1]
In the instant proceeding the Debtor takes the position that he was not intoxicated at the time of the accident and that the accident was merely a result of Debtor's negligence, therefore, neither section 523(a)(9), nor section 523(a)(6) is applicable and a debt based on mere negligence is dischargeable pursuant to 11 U.S.C. § 727.
The Debtor put into evidence a copy of the hospital report showing that Debtor's blood alcohol level was .05 when Debtor was treated at the hospital after the accident. In rebuttal, the Plaintiff pointed out that the accident occurred after midnight on a Sunday on an isolated rural road and that it is not noted on the hospital record what time the blood test was performed.
The Debtor also challenges the voluntariness of his guilty plea in state court to DWI. This claim is without merit. Debtor's attempt to overturn the guilty plea must be pursued in state court.
The Plaintiff's position is that the Debtor's state court guilty plea should be given collateral estoppel effect in the dischargeability proceeding under 11 U.S.C. § 523.
CONCLUSIONS OF LAW.
Section 523(a)(6) states as follows:
(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.
A split of authority exists on the question of the dischargeability of an indebtedness arising from an automobile accident caused by a debtor while intoxicated. Maxwell Trucking, Inc. v. Davis, 26 B.R. 589 (Bkrtcy.D.R.I.1983); Clair v. Oakes, 24 B.R. 766 (Bkrtcy.N.D.Ohio 1982); Matter of Morgan, 22 B.R. 38 (Bkrtcy.D.Neb. 1982); Williams v. Bryson, 3 B.R. 593 (Bkrtcy.N.D.Ill.1980); In re Maney, 23 B.R. 61 (Bkrtcy.W.D.Ok.1982); Gunther v. Kuepper, 36 B.R. 680 (Bkrtcy.E.D.Wis. 1983) (cases holding the debt dischargeable); Cf. Long v. Greenwell, 21 B.R. 419 (Bkrtcy.S.D.Ohio 1982); Prosch v. Wooten, 30 B.R. 357 (Bkrtcy.N.D.Ala.1983); Tobler v. Carey, 35 B.R. 894 (Bkrtcy.E.D.Tn.1983); Burns v. Cloutier, 33 B.R. 18 (Bkrtcy.D. Ma.1983); Hartford Insurance Group v. Galvan, 39 B.R. 663 (Bkrtcy.D.Col.1984) (cases holding the debt nondischargeable).
The division of authority seems to have been resolved by the recently enacted Bankruptcy Amendments of 1984.
Section 523 was amended by adding paragraph (a)(9), that states as follows:
*644 (a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt
(9) to any entity, to the extent that such debt arises from a judgment or consent decree entered in a court of record against the debtor wherein liability was incurred by such debtor as a result of the debtor's operation of a motor vehicle while legally intoxicated under the laws or regulations of any jurisdiction within the United States or its territories wherein such motor vehicle was operated and within which such liability was incurred;
...
When dealing with the question of dischargeability of an indebtedness arising from an automobile accident caused by a debtor while intoxicated under section 523(a)(6) the Court had to determine whether the actions by a debtor were "willful" and "malicious", since these terms are not defined by the Bankruptcy Act. This problem does not exist under Section 523(a)(9). Section (a)(9) allows the court to rely on state laws or regulations in determining whether a debtor was legally intoxicated at the time of the accident.
It seems obvious from the plain language of the statute that Section 523(a)(9) was meant to apply to situations exactly like the one that is now before this Court. Although the legislative history regarding Section 523(a)(9) is sparse, there are references to the effect that the amended paragraph was added in order to clear up the above mentioned problems relating to 523(a)(6):
Judgments against drunk drivers for personal injuries ... could be discharged in bankruptcy like any other judgment; now that is prohibited. Just a number of distinct improvements. 130 Cong.Rec.H 7492 (daily ed. June 29, 1984) (statement by Rep. Sawyer).
... this bill provides important new protections ... reforms in the law of bankruptcy as it treats claims against drunk drivers, to ensure that victims of the drunk driver do not have their judgments against the drunk driver discharged in bankruptcy... 130 Cong.Rec. § 8890 (daily ed. June 29, 1984) (statement by Sen. Dole).
In the case at bar, all the requirements to except a debt from discharge under Section 523(a)(9) are present. The Plaintiff has a valid judgment against the Debtor, the liability was incurred by the Debtor as a result of the Debtor driving his automobile while legally intoxicated under Tennessee law, as evidenced by the guilty plea entered by the Debtor in the state court. Therefore, this Court holds that the $790,000.00 debt in question is nondischargeable pursuant to 11 U.S.C. § 523(a)(9).
NOTES
[1] The Debtor had $10,000 worth of insurance. This amount was paid to the Plaintiff, leaving the Debtor liable for the remaining portion of the judgment. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1552932/ | 48 B.R. 422 (1985)
In re Cathlyne Ellen Camp FRYE, Debtor.
Jay M. JORDAN and Patsy L. Jordan, Plaintiffs,
v.
Cathlyne Ellen Camp FRYE, Defendant.
Bankruptcy No. 84-00674, Adv. No. 84-0079.
United States Bankruptcy Court, M.D. Alabama.
February 28, 1985.
*423 Karl B. Benkeith, Jr., and J. Fairley McDonald, III, Montgomery, Ala., for Jay M. Jordan and Patsy L. Jordan.
Earl Gillian, Jr., Montgomery, Ala., for Cathlyne Ellen Camp Frye.
A. Pope Gordon, Montgomery, Ala., Trustee.
OPINION ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT
RODNEY R. STEELE, Bankruptcy Judge.
On September 10, 1984, the plaintiffs filed a complaint to have this court determine the dischargeability of a debt in the amount of $40,364.00 interest and costs, based upon a judgment obtained in the Chancery Court of Hamilton County, Tennessee, Case No. 59-918 on May 21, 1984.
The complaint alleges that the defendant's debt to the plaintiff ought not to be discharged because it was a debt incurred in violation of Title 11, United States Code, Section 523(a)(2) and 523(a)(6). Under these sections it is asserted that the debtor/defendant had obtained property by false pretense, false representation or actual fraud, and that the defendant had further incurred a debt for wilful and malicious injury by the debtor to these plaintiffs or the property of these plaintiffs.
The matter came on for hearing on Monday, January 21, 1985, at Montgomery. Present were the defendant and her attorney, and the plaintiffs and their attorney. Testimony was taken from Dr. Frye, from Ms. Lois Ramsey, a real estate agent in Chattanooga, Tennessee, and from Mr. Jay Jordan.
The defendant joined issue generally, and further defended on the grounds that the plaintiffs had acted in bad faith vexatiously, wantonly or for oppressive reasons.
FACTS
The facts in this case may be summarized briefly as follows: Dr. Cathlyne Ellen Camp Frye is a 1971 graduate of the University of California with a Bachelor of Science degree, and a graduate of the Baylor College of Medicine in 1978. She served at the University of Texas, Galveston Medical School in that year, and her specialty is obstetric anesthesiology. She was a resident at San Antonio at the Health Center for a while, and later worked at the Scott White Clinic in Temple, Texas, with a salary of $68,000 per year.
At some time during 1978, or thereafter, she married Kevin Frye, and in March or April of 1982, she and her husband filed a Chapter 13 bankruptcy in Waco, Texas. The plan was approved, and she undertook to pay $1,000 per month under the plan until she was paid out. Mr. Frye apparently had and has no income of his own.
In May of 1982, Dr. Frye decided to move to Chattanooga, Tennessee, where she had been offered a job at the Erlanger Clinic, at a salary of $100,000 per year, plus some commissions, which she estimated to amount to about $25,000 per year. *424 She and her husband came to Chattanooga for the interview, and at the same time contacted Ms. Ramsey, a realtor, about a place to live. They were shown a home on Signal Mountain, but the offer to purchase fell through, and Dr. Frye and her husband returned to Texas. Sometime in June, they were notified of the availability of the Jordan home, which was some 15 miles from Chattanooga, and were very enthusiastic. They told Ms. Ramsey that they would purchase the home, sight unseen. Mr. Jordan, however, would not sell under those circumstances, and sometime in June or early July, the Fryes came back to Chattanooga and were shown the Jordan home. They immediately agreed to purchase it. The purchase price was $125,000. Dr. Frye offered $500 down payment, which Mr. Jordan declined. She represented to him that she could not offer more, since she had not earned sufficient income from the Erlanger Clinic to offer more. She offered to pay the $500 cash, plus a $5,000 note. Mr. Jordan accepted this, and the contract for purchase of the home (Plaintiff's Exhibit 1) was executed by Dr. Frye and her husband.
That contract provided for delivery of possession by July 16, 1982. The contract was executed on July 10, 1982. The Jordans thereupon vacated and possession was delivered in accordance with the contract. The purchasers were to pay to the Jordans $1,000 per month, $500 of which was to go toward the purchase price. The other $500 was rental.
The parties agreed to a delayed closing, that is, a closing in early January of 1983.
Dr. Frye commenced her duties at Erlanger Clinic.
After the Fryes moved in, Mr. Jordan, who had moved to Florida, got the first monthly installment in August, but it was only for $500. He called Kevin Frye, who told him they were just getting started in Chattanooga, and he would send the balance at a later time. Later in August, the balance of the $1,000 was supplied. In September, $1,000 was paid to Mr. Jordan. Then in October, only $500 was received.
Jordan then called Kevin Frye in October, and was told that Dr. and Mr. Frye were backing out of the purchase. Kevin Frye told Mr. Jordan at that time that since they were backing out, they only owed for rent, and that the contract was not binding, and that Jordan could not make them pay for the home.
Payments stopped thereafter. Mr. Jordan obtained the services of a lawyer in Tennessee to try to enforce the contract.
Dr. Frye testified that she notified Ms. Ramsey that they were dissatisfied with the house because of some structural defects on the lower level floor, and that the drive into Chattanooga was too far. She testified at trial that her husband, Kevin, was also not returning home at night from Chattanooga, which was of some concern to her.
The Fryes then undertook to locate another home in Chattanooga, and located one on Oak Street. They made arrangements to purchase that property, and paid $10,000 in cash as a down payment. This purchase took place in October or November of 1982. The purchase price was $98,000. It was owner financed. They moved out of the home purchased from the Jordans in December of 1982. Payments on the Oak Street property were $1,500 per month.
From the uncontradicted testimony, and from pictures put in evidence, the house was left in considerable disrepair. In some instances, it appears to have been abused. The swimming pool was not properly winterized, and suffered considerable damage.
Mr. and Mrs. Jordan and Ms. Ramsey, on behalf of her real estate company, then filed suit in Chancery Court of Hamilton County, Tennessee against Mr. and Mrs. Frye to require them to comply with the contract of purchase. This litigation resulted in a decree entered on June 22, 1983, nunc pro tunc to June 8, 1983, which required specific performance by the defendant and imposed a judgment for attorney's fees and expenses in the amount of $7,500.
*425 After the specific performance decree was entered, the Fryes sought to obtain conventional financing for the Jordan home. It does not appear, however, that they tried to obtain such financing until they were again brought to court in May of 1984, on a contempt citation. All of their applications for conventional financing were rejected. Nor had they made any payments under the decree of June 22 towards payment of attorney's fees before the contempt citation in May of 1984. During this time, the Fryes were represented by two or three different lawyers.
In an effort to show good faith, the Fryes then proffered to the court the sum of $3,000 towards the payment of the attorney's fees, and represented to the court that they had made efforts to obtain conventional financing.
The Chancery Court in Tennessee in May of 1984 then converted the specific performance decree to a decree and judgment for money in the amount of $40,364.
The Chancery Court at that time released the property from the specific performance decree, and the Jordans sought another purchaser and have found one.
During the time when Dr. Frye and her husband were under a decree of specific performance, and in January of 1984, before the contempt citation, the debtor and her husband removed to Montgomery, Alabama. She became employed by a private firm of anesthesiologists at Jackson Hospital at a salary of $125,000 per year. She paid the monthly payments on the Oak Street property in Tennessee until May of 1984, at which time she and her husband separated.
Dr. Frye filed a Chapter 7 bankruptcy proceeding in Montgomery, Alabama on June 1, 1984, apparently while the Chapter 13 proceeding in Texas was still pending.
The real estate sales agreement, which was signed by Dr. Frye and Mr. Frye provided in paragraph 2 that the agreement was subject to the purchaser's securing a conventional loan. The rest of this provision relating to obtaining a conventional loan is not filled out.
Dr. Frye and Kevin Frye, her husband, did not divulge to Ms. Ramsey or the Jordans or the Tennessee Court that they were in bankruptcy in Texas until May of 1984, when they were cited for contempt. Nor did she obtain, from aught that appears, permission of the Bankruptcy Court in Waco to incur this debt.
CONCLUSION
The facts in this case are more than sufficient to support a finding that the debtors were guilty of having obtained money or property by false pretense or false representation.
Title 11, United States Code, Section 523(a)(2) requires the finding that a debt was incurred for money or property, and that the property or money was obtained by false pretense or false representation or actual fraud.
In this case, there is no question about the debt. It was incurred when the real estate sales agreement and the $5,000 note were signed, and became liquidated and noncontingent by reduction to judgment on August 21, 1984, in the Chancery Court of Hamilton County, Tennessee.
It was a debt for property, that is the premises at 6623 Ramsey Road, Hamilton County, Tennessee, the subject of the sales contract executed on July 10, 1982.
The remaining question is whether the property was obtained by false pretense or false representations or actual fraud. And such false pretense or false representation must occur at the time the property was obtained and the debt incurred.
A number of factors in this case demonstrate that the debtor in this case, Dr. Frye, was guilty of false pretense and false representation, if not actual fraud, when she and her husband signed the contract for the purchase of this property.
1. First and most important of all, the debtor concealed the fact that she was a debtor in a Chapter 13 proceeding in Texas. She had an obligation to divulge *426 that fact to persons who were dealing with her for such large sums of money. 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). See In re Maier, (B.C.D. Minn.1984) 38 B.R. 231, 233; In re Weinstein, (B.C.E.D.N.Y.1983) 31 B.R. 804, 809.
Dr. Frye testified that she never divulged the fact of her bankruptcy in Texas to any person, involved in this case, until she was brought to court on a contempt citation in 1984 in Tennessee.
2. Dr. Frye never sought a conventional loan for the purchase of this property. We think it is clear that although the contract is conditioned upon the purchaser's securing a conventional loan and not upon their seeking a conventional loan, that the necessary premise of such an undertaking as this is that they would seek a conventional loan for the Ramsey Road property. Dr. Frye never sought such a loan until the contempt proceedings in Tennessee in 1984. She was then refused such loans.
3. Dr. Frye declined the aid of Ms. Ramsey to seek conventional or other financing. This testimony by Ms. Ramsey lends color to the plaintiff's assertion that the debtors never intended to purchase this property.
4. Dr. Frye offered only $500 down to Mr. Jordan, and when this was refused, she offered $500 down and a $5,000 note as down payment, and then never paid the note.
5. Dr. Frye paid only $500 the next month and thereafter told Jordan through her husband when Mr. Jordan called, that they were not yet established, but would send the rest of the funds when they did become available. But Dr. Frye knew at this time that $500 of the $1,000 per month payment was for rent, and the other $500 on the purchase price. The amount of money which was actually sent as monthly payments, when spread out over the number of months which they actually occupied the premises, shows that they paid only about $500 per month, an equivalent of rent for the months they occupied the premises: another indicia that they did not intend to purchase.
6. Dr. Frye and her husband found fault with the house after they moved in when, according to Ms. Ramsey who visited the house immediately after such complaint, there were only minor problems. There were no major faults with the house, and the Chancery Court in Tennessee found that the house had not changed or altered at all since the Fryes moved into it in July.
7. When Dr. and Mr. Frye defaulted in October of 1982, by sending only $500, they responded to Mr. Jordan's telephone call by telling him that they were not bound by the contract and could move at any time they wanted to, and there was nothing he, Jordan, could do about it.
8. Dr. Frye and her husband moved out and left the house uncared for in December of 1982. It was, in effect, to them a rental house.
9. Dr. Frye and her husband paid $10,000 cash down payment on another home on Oak Street in Chattanooga, Tennessee, when they had paid only payments of approximately $3,000 on the Ramsey Road property. They were thus in a position financially to pay Mr. Jordan and his wife for the Ramsey Road property.
10. Dr. Frye and her husband refused to comply with the specific performance decree of the Tennessee court for almost a year, from June 22, 1983, to May 21, 1984. They also left the jurisdiction of that court without any effort to comply and removed to Montgomery, Alabama.
11. Dr. Frye had a salary plus commissions during the time she worked for the Erlanger Clinic of approximately $125,000 per year, and during all this time, she refused to obey the Chancery Court decree of June 22, 1983, and May 21, 1984, to make payment of attorney's fees and costs to Mr. Jordan and Ms. Ramsey.
12. Dr. Frye filed a Chapter 7 bankruptcy proceeding in Montgomery, Alabama, while she was still apparently subject to *427 the jurisdiction of the Texas Bankruptcy Court in Chapter 13.
The crucial element in all of these factors above listed revolves around the fraudulent or false intent of Dr. Frye. Direct proof of intent is, of course, often impossible to obtain. But the circumstances as outlined above, infers the necessary intent. Intent to deceive may be inferred when the totality of circumstances presents a picture of the deceptive conduct by the debtor. Representations and conduct are sufficient to permit a court to make inferences as to the requisite intent. See In re Leger, (B.C.D.E.Mass.1983), 34 B.R. 873, 877.
The above circumstances clearly show that Dr. Frye and her husband never intended to go through with the purchase contract when they signed it. They misrepresented their intentions at least, in executing the contract, inducing the Jordans to remove from the home and to seek another place to live in Florida, and to lose the proceeds of the sale which were desperately needed by the Jordans for other mortgage debts which they had previously incurred and which would have been liquidated by the payments made by this debtor.
But Dr. Frye is also guilty of a wilful and malicious injury to the property of Mr. and Mrs. Jordan on Ramsey Road in Chattanooga.
Under Title 11, United States Code, Section 523(a)(6), a debt may be excepted from discharge upon a showing that there was a wilful and malicious injury by the debtor to another entity or to the property of another entity. In this case, the property in question, the house at 6623 Ramsey Road in Chattanooga, was, according to the pictures and according to the testimony of Ms. Ramsey, abused and left exposed without any protection or insurance. The pool was left unprotected during winter months. The new purchasers from the Jordans in 1984 have been required to expend some $2,600 in repairs, and additional sums will be needed to make the house habitable. We think the wilful and malicious elements required here may be inferred from the "don't-care" attitude shown by these facts. Moreover, Dr. Frye refused or neglected to abide by the specific performance decree of the Hamilton County Chancery Court, which adds additional color to the abandonment of the premises. We are, moreover, impressed that additional color may be taken from the fact that, as found above, there was a clear misrepresentation of intention and concealment of important facts from the Jordans and from Ms. Ramsey.
There was, moreover, a wilful and malicious injury to another entity, namely, these plaintiffs, when the debtor abused the house knowing that the plaintiffs had vacated early and were still making mortgage payments to others and they never intended to purchase the house.
All of these factors lead us to the inescapable conclusion that Dr. Frye is guilty of a violation of Title 11, United States Code, Sections 523(a)(2) and 523(a)(6). The debt, liquidated in the Chancery Court of Hamilton County, Tennessee, is therefore a nondischargeable debt in the amount of $40,364, interest and costs. An appropriate order will enter in these proceedings. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1553344/ | 57 B.R. 389 (1986)
In re Daniel A. SAVIDGE, Debtor.
Bankruptcy No. 85-334-JRR.
United States District Court, D. Delaware.
January 31, 1986.
Jeffrey M. Weiner, of Bayard, Handelman & Murdoch, Wilmington, Del., for appellee, Associates Commercial Corp.
Jeffrey M. Goddess, of Saul, Ewing, Remick & Saul, Wilmington, Del., for appellant, ITT Indus. Credit.
OPINION
ROTH, District Judge.
This is an appeal from a decision of the Bankruptcy Court which sustained an objection by Associates Commercial Corporation ("Associates") to the claimed status of appellant ITT Industrial Credit Company ("ITT") as a secured creditor of debtor Daniel A. Savidge ("Savidge"). Matter of Daniel Savidge, 49 B.R. 429 (Bankr., D.Del., 1985).
The facts relevant to the appeal commence on August 3, 1983, when ITT instituted an action against Savidge and Commercial Transportation Systems, Inc. ("CT") in the Superior Court of the State of Delaware. ITT claimed in this action that CT and Savidge were both in default of *390 installment notes payable to ITT. ITT further claimed that CT and Savidge had each unconditionally guaranteed payment to ITT of the other's note.
The Sheriff of New Castle County was unable to serve Savidge personally with ITT's complaint. Therefore, in order to compel defendant Savidge's appearance, ITT on August 29, 1983, pursuant to 10 Del.C. § 3501,[1] moved in Superior Court for a writ of domestic attachment against the interest of Savidge in real estate located at 3212 Sapphire Drive. The motion was granted that same day and on September 8, 1983, the Sheriff levied on Savidge's interest in the real estate. On September 28, 1983, Savidge and CT filed an Answer in the Superior Court in which Savidge denied personal liability to ITT.
A year later, on September 10, 1984, Savidge filed a voluntary Petition for Bankruptcy.[2] As of that date, ITT had not recovered judgment against Savidge in the Superior Court action. On October 4, 1984, ITT filed a proof of claim in the amount of $29,902.43 in the Savidge bankruptcy case. ITT asserted secured status for this amount as a result of the domestic attachment. Savidge received a discharge by order of the Bankruptcy Court on January 4, 1985. The real estate at 3212 Sapphire Drive remained in the bankruptcy estate.
After September 8, 1983, when the Sheriff had levied on Savidge's real estate by the writ of domestic attachment, Associates obtained a judgment lien against Savidge. On March 6, 1985, Associates, as a secured creditor, objected to the secured status of ITT's claim. The Bankruptcy Court sustained the objection and ITT instituted the present appeal.
In reviewing the decision of the Bankruptcy Court in this case, it is not necessary to address findings of fact because there is no dispute concerning material issues of fact. The role of the district court is then to make an independent determination on the legal issues. Prudential Insurance Co. of America v. Colony Square, 29 B.R. 432 (W.D.Pa., 1983). The specific legal issue presented here is whether domestic attachment, unperfected by judgment before the filing of a bankruptcy petition, is a sufficient lien to create secured status for the creditor making that attachment. We agree with the Bankruptcy Court that it is not and affirm its decision.
In order to illustrate the reasons for which we affirm, it is helpful first to spell out the arguments made by appellant. Appellant ITT contends that a creditor, who obtains a valid domestic attachment against real property of a debtor, has a lien against that property which survives the filing of a bankruptcy petition by the debtor. ITT argues that it can perfect its lien after termination of the automatic stay[3] or abandonment of the property[4] by proceeding to judgment in the Superior Court action. ITT cites the rule, recognized in Delaware, that a lien by domestic attachment, once it has been perfected by judgment, goes back and holds the property as of the date of the attachment. 2 Woolley on Delaware Practice § 1256. ITT then reasons that, although it cannot collect its debt as a personal liability of Savidge, it can still proceed after his discharge to try to obtain judgment in the Superior Court action and, if successful, enforce against the real estate its lien, originated by domestic attachment and now perfected by judgment and relating back to September 8, 1983, the date of the attachment.
*391 ITT relies on Section 546(b)[5] of the Bankruptcy Code to permit perfection of its lien after Savidge's filing for bankruptcy. We do not agree. Section 3501, the Domestic Attachment Statute, is intended to enable the Court to secure jurisdiction. Beneficial Consumer Discount Co. v. Church, Del.Super., 359 A.2d 185 (1976). We hold that this type of unperfected lien, created by ITT's writ of domestic attachment in order to compel the appearance of the defendant and wholly dependent upon the subsequent recovery of a judgment on the attachment process, is not the type of "interest in property" which can be perfected under Section 546(b) after the debtor files for bankruptcy.
ITT does not claim that its disputed claim would have survived bankruptcy if Savidge had been served personally. It contends, however, that because by chance Savidge could not be found by the Sheriff but had to be brought into the Superior Court action by a writ of domestic attachment, ITT should acquire the status of a secured creditor. ITT claims this status even though litigation would still be necessary after the filing of bankruptcy to establish whether or not Savidge was, in fact, liable to ITT and, if so, in what amount.
The fact that ITT would have had a lien dating back to the date of the attachment, if it had obtained a judgment against Savidge before he filed for bankruptcy, does not create secured status for ITT when, in fact, Savidge filed for bankruptcy prior to ITT's lien being perfected by a judgment. A lien, created by a domestic attachment, is conditional upon the subsequent recovery of a judgment. If judgment cannot be obtained, then the conditional lien is dissolved. 2 Woolley on Delaware Practice § 1256.
ITT was prevented by the automatic stay provisions of Section 362 from proceeding to judgment in the Superior Court action against Savidge personally after he filed for bankruptcy. When Savidge filed, ITT's claim was a disputed one of the kind dischargeable in bankruptcy. As the Bankruptcy Court held, the date of Savidge's filing for bankruptcy determined the nature of ITT's claim against him. Savidge's personal obligation to ITT was dischargeable in bankruptcy and could no longer be recovered by judgment. Similarly, ITT's lien against his property could no longer be perfected by judgment against Savidge. It must be held then to have dissolved. 2 Woolley on Delaware Practice § 1256.
ITT cites the case of In re Andrews, 22 B.R. 623 (Del., 1982) for the proposition that a discharge in bankruptcy does not discharge valid liens. ITT argues that Andrews is authority to support ITT's contention that it is a secured creditor possessing a lien that will survive the discharge. We do not agree.
In the Andrews case, the debtor's residence was exempted from the bankruptcy estate. After the exemption, creditor Penco attempted to execute on pre-bankruptcy judgment liens it held on the residence. The Bankruptcy Court held that Penco's action did not violate the automatic stay provisions of the Code or the permanent injunction of the discharge order because Penco held valid pre-bankruptcy judgment liens against the residential property. The Andrews case differs from the present one in that ITT had not obtained judgments against Savidge at the time Savidge filed for bankruptcy. We cannot equate a judgment, duly entered in the Superior Court, with a domestic attachment, conditional on a judgment which has not been entered.
*392 Finally, ITT contends that Associates does not have standing to avoid ITT's lien on Savidge's property. We do not find this issue raised in ITT's brief before the Bankruptcy Court in opposition to Associates' objection to ITT's status as a secured creditor; nor is this issue specifically raised in the Notice of Appeal. We will nevertheless deal with it briefly.
The Bankruptcy Code provides that:
A claim or interest . . . is deemed allowed, unless a party in interest . . . objects. 11 U.S.C. § 502(a).
Is a creditor a "party in interest"? In theory, certainly, one should be.
[T]he right of a creditor to object to the allowance of another creditor's claim should be undisputed on principle.
3 Collier on Bankruptcy, 15th Ed., § 502.01[2], p. 502-13. However, when a trustee has been elected and qualified, most jurisdictions have adopted the rule that no general creditor has standing to contest another general creditor's claim. The needs of orderly administration of the bankrupt's estate mandate that objections be voiced by general creditors through the trustee, unless the trustee, upon application, refuses to object. In re Meade Land & Development Co., Inc., 1 B.R. 279 (Bankr., E.D.Pa., 1979).[6]
Associates, the objector here, is not, however, a general creditor. It is a secured creditor. The rule that general creditors should object through the trustee does not apply to secured creditors whose security interests are directly at stake. Henry Ansbacher Co. v. Klebanow, 362 F.2d 569 (2d. Cir., 1966). In re Parker Montana Co., 47 B.R. 419 (D.Mont., 1985). Associates' position as a secured creditor was directly affected by ITT's claim also to be a secured creditor. We hold, therefore, that Associates was a proper party to object to ITT's claim of secured status.
NOTES
[1] § 3501 Domestic attachment; when writ may be issued.
A writ of domestic attachment may be issued against an inhabitant of this State upon proof satisfactory to the court that the defendant cannot be found, or that the defendant is justly indebted to the plaintiff in a sum exceeding $50, and has absconded from his usual place of abode or is about to leave the State or has gone out of the State with intent to defraud his creditors or to elude process.
[2] CT had filed for bankruptcy in the District of Delaware in 1983.
[3] 11 U.S.C. § 362.
[4] 11 U.S.C. § 554.
[5] § 546 Limitations on avoiding powers. . . .
(b) The rights and powers of a trustee under sections 544, 545, and 549 of this title are subject to any generally applicable law that permits perfection of an interest in property before the date of such perfection. If such law requires seizure of such property or commencement of an action to accomplish such perfection, and such property has not been seized or such action has not been commenced before the date of the filing of the petition, such interest in such property shall be perfected by notice within the time fixed by such law for such seizure or commencement.
[6] In In re Meade Land & Development Co., Inc., the Bankruptcy Court permitted an objection by an unsecured creditor, who had not requested the trustee to act on his behalf, because of the extent of the time, money and effort already expended by the parties on the issue of the objection. | 01-03-2023 | 10-30-2013 |
https://www.courtlistener.com/api/rest/v3/opinions/1553335/ | 57 B.R. 511 (1986)
In the Matter of Jackie Ray HAGUE, Debtor.
Ruth Ann HAGUE, Plaintiff,
v.
Jackie Ray HAGUE, Defendant.
Bankruptcy No. 85-03051-SJ, Adv. No. 85-0655-SJ.
United States Bankruptcy Court, W.D. Missouri, St. Joseph Division.
January 10, 1986.
Hugh A. Miner, St. Joseph, Mo., for plaintiff.
John Manring, St. Joseph, Mo., for defendant.
ORDER DENYING PLAINTIFF'S "MOTION FOR PARTIAL RECONSIDERATION OF COURT'S ORDER OF DECEMBER 17, 1985, GRANTING JUDGMENT OF DISMISSAL WITHOUT PREJUDICE TO STATE COURT PROCEEDINGS"
DENNIS J. STEWART, Bankruptcy Judge.
Formerly, on December 17, 1985, this court dismissed the plaintiff's complaint for a decree of nondischargeability with respect to alleged obligations in the nature of alimony, support or maintenance without *512 prejudice to state court proceedings. The same order granted the plaintiff relief from the automatic stay to initiate and prosecute such state court proceedings. One of the grounds for dismissal was that it was not alleged that any prepetition debt had accumulated. Now, however, the plaintiff timely moves for "partial reconsideration" of the judgment of December 17, 1985, stating that, in fact, some $1,123.70 in past due maintenance had built up prior to the filing of the debtor's bankruptcy petition. It is now said that such payments as a "phone bill for August," a "cable TV bill for August," "house insurance," "transportation," "medication," and "one-half of house payments," have not been made and these constitute a form of maintenance which is not dischargeable in bankruptcy. It is neither stated nor shown that these payments are unambiguously characterized by the state court decree as alimony, support, or maintenance. Thus, were the action to be tried in this court, its first function would be to "ascertain whether the state court or the parties to the divorce intended to create an obligation to support." In re Calhoun, 715 F.2d 1103, 1109 (6th Cir.1983) (Emphasis in original.) Under such circumstances, it appears that it would be more convenient for the parties to try the case in a state court. The ground of dischargeability vel non which is in issue in this matter is not one which is in the sole and exclusive jurisdiction of the bankruptcy court. Rather, the ground which is made the basis of this action arises under section 523(a)(5) of the Bankruptcy Code, which is not one of the exceptions to discharge which is placed within the exclusive jurisdiction of the bankruptcy court by the provisions of section 523(c) of the Bankruptcy Code. Accordingly, a state court may adjudge, not only the underlying liability, but also the dischargeability question. "(S)tate courts of general jurisdiction have the power to decide cases involving federal . . . rights where . . . neither the Constitution nor statute withdraws such jurisdiction." Boston Stock Exch. v. State Tax Com'n, 429 U.S. 318, 319, n. 3, 97 S. Ct. 599, 602, n. 3, 50 L. Ed. 2d 514 (1977). Although states may, by Constitution or statute, refuse to entertain actions arising in bankruptcy, and the federal legislature may restrict actions arising under the federal laws to resolution in federal courts, there appear to be no such restrictions imposed to prevent adjudication of this action in the state courts of Missouri. The law of Missouri specifically provides for the enforcement of separation agreements and dissolution decrees "by all remedies available for the enforcement of a judgment, and the court may punish any party who willfully violates its decree to the same extent as is provided by law for contempt of court in any suit or proceeding cognizable by the court." Section 452.325(5) RSMo; Buttrey v. Buttrey, 622 S.W.2d 708 (Mo.App.1981). In that proceeding, the defendant may intervene by filing a motion to quash execution and garnishment, Buttrey v. Buttrey, supra, or may otherwise contend that the award sought to be enforced is dischargeable in bankruptcy. Southern v. Southern, 614 S.W.2d 313, 314 (Mo.App.1981). The state court will then make the determination of the issue of dischargeability vel non, employing federal standards in so doing. Southern v. Southern, supra; Henson v. Henson, 366 S.W.2d 1 (Mo.App.1963); Matter of Kakolewski, 32 B.R. 494, 496 (Bkrtcy.W.D.Mo.1983). When it is, as in the case at bar, not plain on the face of the complaint that the enforcement sought is of an award of alimony, support or maintenance, it would be better for the determination to be made, at least in the first instance, by the state dissolution court in the manner above described.
It is therefore
ORDERED that the plaintiff's "motion for partial reconsideration of court's order of December 17, 1985, granting judgment of dismissal without prejudice to state court proceedings" be, and it is hereby, denied. | 01-03-2023 | 10-30-2013 |
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